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TMI Blog2017 (8) TMI 378X X X X Extracts X X X X X X X X Extracts X X X X ..... ng year. The income has been earned in Malaysia on account of royalty and interest but the same is retained there and not brought repatriated to India immediately on the same accruing to the Appellant/assessee. This leads to a gain/loss in foreign exchange valuation. This gain/loss on account of foreign exchange variation would not bear the character of income on account of royalty and interest earned in Malaysia. This is so as the gain/loss on account of foreign exchange variation is not a part of royalty and interest nor is it any accretion to it. In this case, it is the generation of further income which is taxable in the subject assessment year when the variation in foreign exchange has resulted in further income in India to the Appellant/assessee. Although the Revenue would in cash system of accounting record the income only on receipt of the same, yet for the purposes of taxation it would split the amount received from Malaysia on account of royalty and interest in the year in which it arose/accrued at the rate prevailing then as one head of income and the income gained on account of exchange rate variation due to passage of time at the time of conversion as the other h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessment u/s.143(3) of the Income Tax Act assessing the loss at ₹ 15,99,11,740/. During the relevant Assessment year, the Assessee/Company derived its income from manufacturing and sale of paper, stationery, glass, caustic soda, salt etc. besides income by way of royalty and interest from a joint venture Company viz. M/s. JG Containers (Malaysia) Sdn. Bhd., Malaysia. The Assessee/ Company had in the earlier years credited in its books, the income by way of royalty and interest from the Malaysian company on accrual basis. 3. In the relevant Assessment Year, the Assessee/Company had received the royalty and interest which were accounted in the earlier years on accrual basis. Though the Malaysian Company remitted the same foreign currency, as a difference in exchange rate, the assesseecompany received more than what was earlier accounted in terms of Indian Rupees. There was no change in the income in terms of Malaysian Currency. 4. The Assessing Officer in his Assessment Order dated 30.3.1994 has allowed the royalty and interest credited in the accounts on accrual basis as income exempt from tax in view of Double Taxation Avoidance Agreement with Malaysia. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nly because it was covered by the Double Taxation Avoidance Agreement. That the agreement, however, does not cover the amounts accrued to the assessee as a result of exchange rate fluctuations. Moveover, the amount of ₹ 26,11,142/had arisen in India as the conversion took place in India. The said amount is, therefore, held to be taxable in the hands of the assessee . 4. It is on the above facts, that the Tribunal has at the instance of the applicant/assessee referred the above questions to us for our opinion. 5. Mr.K.P.Dewani, learned Counsel appearing for the applicant/assessee in support of this reference submits as follows : (a) In terms of Articles 12 and 13 of the IndoMalaysian AADT Income attributable to royalty and interest remitted from Malaysia is not exigible to tax in India. The aforesaid amount has already discharged the tax payable thereon in Malaysia. Undisputedly, the amounts attributable to royalty and interest is not taxable in India. The conversion of the above Malaysian currency into Indian currency cannot be subjected to tax, as it is not even the case of the Revenue that the appellant is engaged in activity of trading in foreign exchange. (b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... indicates that any benefit derived on account of currency fluctuation beyond the year of receipt cannot be correlated to the original amount received. This benefit is on independent source of income; and (c) The entire issue is no longer resintegra as it stands concluded by the decision of the Apex Court in CIT vs. Woodward Governor India (P) Ltd., (2009) 312 ITR 254 in favour of the Revenue. 7. We have considered the rival submissions. It is clear from the Statement of the case sent by the Tribunal that the amounts which were received by the Assessee this year from Malaysia on account of royalty and interest income had been earned and shown as it's income in the earlier years. At that time no tax on the same was paid in view of AADT entered into between Malaysia and India. Further the income on account of royalty and interest which arose in Malaysia and had accrued to the appellant was accounted in the very year of accrual at the foreign exchange rate prevailing on the last day of that financial year. On the aforesaid income, on account of royalty and interest from Malaysia as valued on the last date of the earlier years was not subjected to any tax. This was so as it wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted in the carrying amount of the respective fixed assets. The carrying amount of such fixed assets should, to the extent not already so adjusted or otherwise accounted for, also be adjusted to account for any increase or decrease in the liability of the enterprise, as expressed in the reporting currency by applying the closing rate, for making payment towards the whole or a part of the cost of the assets or for repayment of the whole or a part of the monies borrowed by the enterprise from any person, directly or indirectly, in foreign currency specifically for the purpose of acquiring those assets. 11.The carrying amount of fixed assets which are carried in terms of revalued amounts should also be adjusted in the manner described in paragraph 10 above. However, such adjustment should not result in the net book value of a class of revalued fixed assets exceeding the recoverable amount of assets of that class, the remaining amount of the increase in liability, if any, being debited to the revaluation reserve, or to the profit and loss statement in the event of inadequacy or absence of the revaluation reserve. 12. An exchange difference results when there is a change in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion. Para 7(a) inter alia states that on each balance sheet date monetary items, enumerated above, denominated in a foreign currency should be reported using the closing rate. In case of revenue items falling under s. 37(1), para 9 of ASII which deals with recognition of exchange differences, needs to be considered. Under that para, exchange differences arising on foreign currency transactions have to be recognized as income or as expense in the period in which they arise, except as stated in para 10 and para 11 which deals with exchange differences arising on repayment of liabilities incurred for the purpose of acquiring fixed assets, which topic falls under s. 43A of the 1961 Act. At this stage, we are concerned only with para 9 which deals with revenue items. Para 9 of AS11 recognises exchange differences as income or expense. In cases where, e.g., the rate of dollar rises visavis the Indian rupee, there is an expense during that period. The important point to be noted is that AS11 stipulates effect of changes in exchange rate vis-a-vis monetary items denominated in a foreign currency to be taken into account for giving accounting treatment on the balance sheet date. Therefore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eceipt of the same, yet for the purposes of taxation it would split the amount received from Malaysia on account of royalty and interest in the year in which it arose/accrued at the rate prevailing then as one head of income and the income gained on account of exchange rate variation due to passage of time at the time of conversion as the other head of income. The Revenue would bring to tax the later gain arising on account of exchange rate variation to tax as income arising from a different source. The amount attributable to royalty and interest received from Malaysia on the basis of foreign exchange rate existing on the last date of the Accounting year in which this income would be receivable by the Applicant/Assessee as a different head of receipt excluded from tax by ADTT. Thus, we do not accept the above submission made on behalf of the appellant as the source of receipt is different and two fold. 14. Lastly, the Applicant/Assessee placed reliance upon the decision of this Court in Amber Exports (India) Ltd. (supra), the Gujarat High Court in the case of Amba Impex (supra) and the Calcutta High Court in Raghunath Exports (P) Ltd. (supra) to contend that any amount gained on ..... X X X X Extracts X X X X X X X X Extracts X X X X
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