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TMI Blog2018 (7) TMI 122X X X X Extracts X X X X X X X X Extracts X X X X ..... epaid in EURO on account of differential value in INR, therefore, such fluctuation loss is allowable as deduction in favour of the assessee-company. Assessee-company is entitled for deduction on account of foreign exchange fluctuation loss. We, accordingly, set aside the orders of the authorities below and delete the entire addition. - Decided in favour of assessee. - ITA.No.2391/Del./2018 - - - Dated:- 28-6-2018 - SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI L.P. SAHU, ACCOUNTANT MEMBER For The Assessee : Shri Hiren Mehta, C.A. and Shri Nirbhay Mehta, Advocate For The Revenue : Shri Satpal Gulati, CIT-D.R. ORDER PER BHAVNESH SAINI, J.M. This appeal by assessee has been directed against the order of the Ld. CIT(A)-42, New Delhi, dated 16.02.2018, for the A.Y. 2014-2015, challenging the upholding of the addition of ₹ 16,10,71,640/- on account of exchange fluctuation loss. 2. The facts of the case are that the assessee-company filed its return of income for the assessment year under appeal declaring NIL income. The assessee is a Non Resident Company. The assessee is a Company Incorporated in Spain and is engaged in providing services of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ists of the advance payment made by the Head Office towards the execution of the Projects and the amount of engineering charges billed in their home currency by the Head Office towards the services provided. Therefore, the amount, in essence, reflects the character of sundry payables to the Head Office and hence, is a revenue account and the loss represents the revenue loss. The assessee-company further submitted that PE is separately assessable to tax in India as a different and distinct entity different from its foreign company in Spain. The P.E. has not availed any borrowing facilities from any bank in India for the execution of projects awarded by various Indian clients, which requires working capita! funds for execution of such turnkey project. It was explained that only upon reaching the certain milestone as per terms of Contract, the permanent establishment is entitled to raise invoice and receive its payment. While reaching such milestone, expenses has to be incurred for supply and erection, for which, funds have been borrowed from Head Office in Spain. It was pointed out that no interest is paid on such funds borrowed from Spain. All these borrowings have been made in Euro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fterthought. The A.O. relied upon the decision of Hon'ble Calcutta High Court in the case of Betts Hartley Huett and Co. Ltd. vs. CIT, 116 ITR 425 in which it was held that no question of profit or loss can arise as no person can enter into a contract with oneself . If a Company has opened a Project Office in India with the purpose of doing business, it will have to remit/invest some amount of money for the functioning of the business. Such money cannot be called as loan given to the Project Office. The A.O. also referred to provisions of Article 7(3) of India-Spain DTAA which reads as under : 3. In the determination of the profits of a permanent establishment, there shall be allowed as deductions expenses which are incurred for the purposes of the permanent establishment, including executive and general administrative expenses, research and development expenses, interest and other similar expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere, in accordance with the provisions of and subject to the limitations of the taxation laws of that State. However, no such deduction shall be allowed in respect of amounts, if any, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 154,38,08,645/- as compared to ₹ 142,13,94,340/- as on 31.03.2013. The amount received from the Head Office have been shown as a liability of the P.E. out of which, almost half of the amount received has been remitted back to the Head Office. The assessee P.E. is not an incorporated entity but a Project Office, for which, permission granted by the Reserve Bank of India. Therefore, by no stretch of imagination, the remittances from Head Office to P.E. can be treated as capital contribution. It may be appreciated that assessee-company being an unincorporated entity, cannot receive any share capital. It is also fallacious on the part of the A.O. to say that no one can give or take loan to/from oneself. It may be appreciated that the transaction has taken place whereby, funds required for the purpose of business by the P.E. have been remitted by the Head Office. The P.E. has prepared its accounts on the basis of mercantile system of accounting and therefore, debited foreign exchange fluctuation gain/loss on the outstanding balances at the end of the year. The ledger account shows the complete details of fluctuation. The remittances received from the Head Office are receiv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earned Counsel for the Assessee reiterated the same submissions made before the authorities below. He has submitted that assessee-company received loan from the Head Office for completion of the Project in EURO, which is repaid in EURO, and amount have been mentioned as loan/liability in the balance sheet. The fluctuation loss was claimed as deduction. The capital of assessee-company is NIL. No expenses have been claimed, as whatever amounts were received in EURO was repaid in EURO. Article 7(3) of DTAA between India- Spain do not apply in the case of the assessee-company. The decision of the Hon ble Calcutta High Court in the case of Betts Hartley Huett and Co. Ltd., vs. CIT (supra), relied upon by the A.O. is not applicable to the facts of the case. PB-123 is the details of foreign exchange gain/loss claimed by assessee- company. He has submitted that in A.Ys. 2012-2013 and 2013- 2014, assessee-company has made claim of exchange fluctuation loss on identical facts, which have been allowed by the A.O. in scrutiny assessment under section 143(3). Copies of the assessment orders are filed at pages 113 to 118 of the paper book. He has further submitted that in subsequent A.Y. 2015- 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . On the other hand, Ld. D.R. relied upon the order of the A.O. 8. We have considered the rival submissions and perused the material available on record. In this case, assessee- company is a P.E. of Foreign-Company. Whatever income has accrued or arisen, have been assessed in India against the P.E. The assessee-company explained that for completing the Project in India, either the advance received from the client, or the advance/loan have been received from the Head Office situated in Spain. The loans are admittedly received from Head Office in EURO and have been repaid in EURO as per RBI guidelines to carry out operations in India and was outstanding in balance- sheet. It is also not in dispute that the money so received from the Head Office is revenue in nature because the amount of the loan is utilized in day-to-day operations i.e., working-capital required for Project execution and to obtain material as per the terms of the Contract. The utilization of the amounts received from Head Office did not bring any capital asset into existence. Therefore, the amounts so received from the Head Office have been utilized to incur the operating cost. The assessee-company has filed copy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ure of payables/liability. Therefore, it is, on account of revenue account and the loss represents the revenue loss. The assessee- company further explained that it has not paid any interest on the funds borrowed from Head Office. Since, there is no dispute that amount received from the Head Office was in EURO and repaid in EURO, therefore, difference in INR and EURO was correctly claimed as foreign exchange fluctuation loss. The decision of the Hon ble Calcutta High Court relied upon by the A.O. in the case of Betts Hartley Huett and Co. Ltd., vs. CIT 116 ITR 425 (supra), is distinguishable from the facts of the case because in the present case, no profit have been earned by the same person. The Article 7(3) of India-Spain DTAA is not applicable in this case because nothing is paid by the assessee- company to the Head Office on account of loss and no deduction claimed. The items of expenses specified in DTAA are not applicable in case of assessee. It was a differential amount on account of foreign exchange fluctuation loss that assessee- company suffered which was claimed as deduction in the P L A/c. The assessee-company has not violated any terms of Article 7(3) India-Spain DTA ..... X X X X Extracts X X X X X X X X Extracts X X X X
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