9911796707
TMI Blog2006 (5) TMI 116X X X X Extracts X X X X X X X X Extracts X X X X ..... escribed rate on WDV of the block of assets with actual cost at the asset determined at the rate of exchange prevailing on the date of acquisition of the asset. 3. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in deleting the disallowance made in term of the second proviso to s. 32(1)(ii) of the IT Act without appreciating that the use of plant and machinery in India was for a period of less than 180 days during the relevant previous year. 4. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in deleting disallowance out of claim for depreciation allowance amounting to Rs. 54,46,21,124. 5. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in deleting disallowance of expenditure of Rs. 9,35,477 incurred on providing accommodation in the nature of guest house to the employees of the assessee company for the relevant assessment year." 2. The facts in brief are that the assessee M/s Hollandsche Aammening Maatschappij is a corporation incorporated in Netherlands. The non-resident assessee is engaged in drilling and dredging activities in Indian waters in term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n India for less than 180 days by invoking second proviso to s. 32(1) of the IT Act, 1961. 3. The CIT(A) accepted the contention of the assessee that exchange rate as on the last day of the accounting period would be applied to the cost estimated by the valuer of the assessee and, thus, deleted the addition made by the AO. He was also of the view that the second proviso to s. 32(1) can be invoked only when assets were acquired during the current financial year and also put to use simultaneously. The second proviso would not be applicable if assets were acquired earlier but put to use in the current year. In the present case, the vessels were acquired by the assessee company prior to the accounting year as admitted by the AO also. Therefore, question of applying 50 per cent rate of admissible rates of depreciation does not arise. Another issue decided by the CIT(A) in favour of the assessee was guest house expenses which were treated as revenue expenditure by him allowable under s. 37 of the IT Act, 1961. 4. The Revenue is in appeal against these two deletions. Regarding claim of depreciation: 5. The AO while applying exchange rate of 1985 to the cost estimated by the valuer obse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er cent depreciation, i.e., full deduction of actual cost, where actual cost is less than Rs. 5,000. It was indicated that actual cost has to be converted into rupee even if the assets were acquired abroad in foreign currency. (9) Sec. 288A of the IT Act provides for the amount of income computed as per the provisions of the Act to be rounded off to the nearest multiple of ten rupees. There was no provision in the Act for rounding off for a currency other than rupees. 6. Before the CIT(A), the counsel for the assessee submitted as under: (1.A) The judicial opinion expressed in the case of Calcutta Electric Supply Corporation will not be applicable. In that case, the assessee was a sterling company carrying on business exclusively in India and all fixed assets located in India were acquired out of its rupee resources in India. The business receipts of that company were in Indian currency and its books of accounts were maintained in India in Indian currency. The appellant was a Dutch company carrying on majority of its business as a dredging contractor in several countries around the world and not only in India. The foreign currency assets relocated to India were acquired by the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hes to facilitate transactions in foreign currencies to be expressed in rupees in order to prepare the financial statement of the Indian enterprise. Therefore, AS-11 will not be applicable to the appellant, it being a foreign company. (6.A) As regards the IAS-21 quoted by the AO, the same will apply to assets purchased in India by the appellant and not assets acquired by the appellant in Netherlands. (7.A) Article 3(2) of the DTAA provides that when an item is not defined in the agreement, it shall have the meaning as assigned to it by the Act in relation to income taxable in India. Article 3(2) nowhere stipulates that the appellant has to determine its taxable income in India and tax liability thereon by preparing a statement of income in Indian currency. Sec. 32 of the IT Act provides for allowance of depreciation in the case of any block of assets at such percentage of WDV as prescribed. Rule 5 of the IT Rules provides that depreciation shall be calculated at the percentage specified in Appendix 1 to the rules on the WDV of the block of assets computed as per s. 43(6) of the Act. Sec. 32, as well as s. 43(6) do not provide that rate of depreciation can be applied on a WDV expr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erlands, maintained its accounts in Dutch guilders (NLGs). The impugned assets had not been acquired in India. These were acquired outside India in Netherlands and in the books their historical cost was recorded in Dutch guilders. The assessee was not required to record the historical cost in rupees. These assets owned by the assessee, 'actual cost' of which were recorded in Dutch guilders, were mobilized from all over the world and relocated to sites in India for business operations undertaken by its PE in India. The business operations of such PE, apart from rupee revenues and rupee expenses, also generated foreign currency revenues and foreign currency expenses. The assessee was required to record those revenues and expenses, including the rupee revenues and expenses, in Dutch guilders in its books of accounts for world-wide operations. Conversions to rupee was necessary only for the purpose of taxation of income in India attributable to its PE in India in terms of the DTAA between India and Netherlands, r/w s. 90(2) of the IT Act. Rule 115 of the IT Rules of India provided the procedure for computing foreign currency income. It is to be noted that r. 115 uses the word 'income' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... percentage. It is permissible to do so. It has not used current market price in foreign currency which will be much higher and is also impermissible. (Hi) The depreciation allowed in this year will reduce the WDV for the years following and consequent quantum of depreciation in following years will be less. (iv) The situation has arisen because value of rupee has gone down considerably with respect to western currency over the years. Had the rupee NLGs parity remained same, there would not have been any difference. If the appellant was a tax-resident of another country whose currency has weakened with respect to rupee (for example, in present context, one of the South East Asian countries), the effect would have been opposite. (v) The AO has 'estimated' the 'actual cost' of the assets by converting the historical cost in NLGs by using rupee -NLG exchange rate of Rs. 4.34 = 1 NLG as on 31st Dec., 1985. Such action has been sought to be justified on the ground that the appellant could not produce the relevant evidence in respect of exact date of acquisition of these assets in the form of invoices, etc. But then, the appellant was not required to retain such past records such that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of r. 115 of IT Rules would be squarely applicable to the case of the assessee. Its income has to be computed in the foreign exchange, in which its accounts are maintained and thereafter exchange rate as existing on the last date of accounting year has to be applied. There is no option available either to the assessee or to the Department. According to the learned Authorised Representative for the assessee, the question of cost of vessels is not in dispute because the Department has accepted such cost at NLG 159,282,030. The AO has by an arbitrary means applied the conversion rate at 1 NLG = Rs. 4.34 and arrived at the cost of the vessels at Rs. 69,12,84,010 as against claim of the assessee to apply the exchange rate at 1 NLG = Rs. 19.88 with which the cost was worked out at Rs. 33,16,65,26,756. Thus, the valuation done by the chartered accountants of the assessee, M/s Moret Ernst & Young at NLG 159,282,030 has been accepted by the Department. There1ore, this valuation could not be in dispute. The ownership and use of the assets is also not in dispute because the AO has allowed depreciation. The dispute is only on quantification of such depreciation. It is also not in dispute th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 97 (Bom), wherein it was held as under: "19. There is yet another angle to this question. That is the application of the provisions of r. 115 of the rules. The rule is reproduced below: 'The rate of exchange for the calculation of the value in rupees of any income accruing or arising or deemed to accrue or arise to the assessee in foreign currency or received or deemed to be received by him or on his behalf in foreign currency shall be the telegraphic transfer buying rate of such currency as on the specified date.' Now, this rule postulates that the rate of exchange has to be applied only after determining the 'income accruing or arising to the assessee in foreign currency.' The exchange rate is to be considered only after the income has been determined. The 'income' necessarily means income as defined in s. 2(24) of the Act. That can be arrived at after allowing for all deductions permissible under the Act. This includes deduction by way of depreciation under s. 32. So, the application of the rule, i.e., conversion of foreign currency to Indian rupee, would be the last step. Therefore, the determination of the depreciation has to be only in terms of foreign currency only, that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce documents so as to show the dates of acquisition of the assets, the AO presumed that by and large it must have been acquired in and around 1985 and therefore, determined the actual cost accordingly. According to the assessee, it was not mandatory under Dutch law to preserve the documents therefore, they were not preserved and could not be produced. Whatever documents were available were furnished to the AO. Accordingly, following documents were furnished: - Copies of original invoices for all assets purchased by the assessee in India during the asst. yr. 1994-95. - Copies of original invoices for site equip merit of Rs. 43,59,345 purchased by the assessee outside India during financial year 1994-95. - Certificates from the worldwide auditors of the assessee, i.e., Moret Ernst & Young certifying ownership and original cost of the vessels and plant and machinery imported into India during financial year 1994-95. - Certificates of registration and sea-worthiness for two vessels (Geopotes 15 and Schedrecht 35). - A log of period of use of the assets. - Arrival report and customs declaration as attested by Indian Customs official in respect of certain vessels. - Auditors certi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ------------------------------------------ AP 39 23,000 457,240 99,820 ------------------------------------------------------------ WP5 24,750 492,030 104,415 ------------------------------------------------------------ WP6 24,750 492,030 107,415 ------------------------------------------------------------ Stern 271,000 5,387,480 1,176,140 ------------------------------------------------------------ HAM 922 1,180,000 23,458,400 5,121,200 ------------------------------------------------------------ HAM 924 1,495,000 29,720,600 6,488,300 ------------------------------------------------------------ Geopotes 15 86,717,000 1723,933,960 376,351,780 ------------------------------------------------------------ HAM 218 28,967,000 284,920,160 125,716,780 ------------------------------------------------------------ HAM 910 1,549,000 30,794,120 6,722,660 ------------------------------------------------------------ HAM 1508 344,000 6,838,720 1,492,960 ------------------------------------------------------------ Ham 1400 700,000 15,307,600 3,314,800 ------------------------------------------------------------ HAM 1206 & 16,678,244 331,563,490 426,748 others -------------------------------------- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e last day of the month immediately preceding the month in which the capital asset is transferred: Provided that the specified date, in respect of income referred to in sub-cls. (a) to (f) payable in foreign currency and from which tax has been deducted at source under r. 26 shall be (the date on which the tax was required to be deducted) under the provisions of the Chapter XVII-B. (2) Nothing contained in sub-r. (1) shall apply in respect of income referred to in cl. (c) of the Explanation to sub-r. (1) where such income is received in, or brought into India by the assessee or on his behalf before the specified date in accordance with the provisions of the Foreign Exchange Regulation Act, 1973 (46 of 1973)." The implication of r. 115 has been considered by the Hon'ble Supreme Court in CIT vs. Chowgule & Co. Ltd. (1996) 131 CTR (SC) 108 : (1996) 218 ITR 384 (SC). According to the Hon'ble apex Court, this rule merely lays down the rule for calculation of the value in rupees of any income accruing or arising or deemed to accrue or arise to the assessee in foreign currency or received or deemed to be received by him or on his behalf in foreign currency, then the rate of exchange sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of business or profession" shall be computed in accordance with the provisions' contained in ss. 30 to 43D. Sec. 28 provides as under: "28. The following income shall be chargeable to income-tax under, the head 'Profits and gains of business or profession'- (i) the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year; ...................." Sec. 32 is therefore, part and parcel of computation of income under the head "Income from profits and gains of business or profession". Thus, the main r. 115 prescribes conversion of "income" accruing or arising or deemed to have accrued or arisen in foreign currency and then convert it by applying telegraphic rate of such currency as on the specified date. It only refers to the income as computed in accordance with ss. 30 to 43D. No other meaning can be assigned to the word 'income' used in r. 115. It is also not the case of the Revenue that the income under r. 115 means 'receipt' and not 'income' as computed under the head "Profits and gains of business or profession" as per ss. 30 to 43D. We are, therefore, of the considered view that only the income as computed accor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntaining accounts in England, it converted the rupees into sterling at appropriate rate of exchange for incorporation of the results of the business in the accounts maintained in the UK. In the present case, the assessee is earning foreign exchange and spending foreign exchange for the purposes of its business carried out in India. 15. Thus, when income is computed in foreign exchange then depreciation has to be allowed at the cost valued by their chartered accountants. As already said, this valuation is not disputed by the AO. 16. As a result, only cost determined by the chartered accountant will get converted into Indian rupee only at the current exchange rate, i.e., exchange rate on the specified date. From this point of view the working done by the assessee is correct. Even otherwise, in our considered view, even if all the receipts and expenditures are converted into Indian rupee and income is computed thereafter, i.e., r. 115 is not invoked, still then depreciation can be allowed to the assessee on cost worked out at the exchange rate on the specified date. The vessels are brought into India in the current financial year relevant to the asst. yr. 1995-96. There is no materi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... plicable to 'incomings', then it shall be applicable to 'outgoings' as well including allowance as provided under IT Act. Thus, the word 'income' in r. 115 refers only to net income arrived at after giving all deductions and allowances. 17. There is one more reason for coming to this conclusion. The term 'business profits' has not been defined under DTAA. However, art. 3(2) of the DTAA stipulates that where any term has not been defined in the convention, the same shall have the meaning which it has under the law of that State concerning the taxes to which the convention applies. As per art. 7, for the purpose of determining the profits attributable to the "PE", such "PE" will be deemed to be a distinct and separate enterprise entity dealing wholly and independently with the enterprise of which it is a PE. As a result, following consequences shall follow: (i) The impugned assets will be deemed to have been acquired by the PE from the parent enterprise viz., the assessee company on the date of import to India, i.e., during the previous year 1994-95. (ii) The cost of acquisition of the assets in the hands of the PE for the purpose of determining the claim of deprecation will be th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se furnish your estimate and support it with evidence as you may have." The concept of taxing 'PE' as separate distinct entity has been considered by many authorities. In Ostime (Inspector of Taxes) vs. Australian Mutual Provident Society (1960) 38 ITR 35 (CA), it is held that where an enterprise of one of the territories is engaged in trade or business in the other territory through a "PE" situated therein, there shall be attributed to that PE the industrial or commercial profits, which it might be expected to derive in that other territory, if it were an independent enterprise engaged in the same or similar activities and its dealings with the enterprise of which it is a PE were dealings at arm's length with that enterprise or an independent enterprise and the profits so attributed shall be deemed to be income derived from sources in that other territory. Similar views were followed in another case under the same title reported in Ostime (Inspector of Taxes) vs. Australian Mutual Provident Society (1960) 39 ITR 210 (HL). The Hon'ble Madras High Court in CIT vs. VR. S.R.M. Firm & Ors. (1994) 120 CTR (Mad) 427 : (1994) 208 ITR 400 (Mad) held that where an enterprise carries on bus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e company registered in Netherlands for the purpose of computing its income in India. In view of this the actual cost as worked out by the assessee by applying current exchange rate would be proper and therefore, computation of depreciation thereon as done by it would also be proper. We, therefore, reject the Revenue's contention that exchange rate of 1985 has to be applied on the valuation done by the chartered accountants and not the exchange rate as on the specified date of the financial year relevant to the asst. yr. 1995-96. Thus, we confirm the order of the CIT(A). Grounds of the Revenue in this regard are therefore, rejected. 17.1 The next issue in this connection, as to whether, the assessee is entitled to 50 per cent of depreciation in view of second proviso to s. 32(1). That proviso reads as under: "Provided also that where any asset falling within a block of assets is acquired by the assessee during the previous year and is put to use for the purposes of business or profession for a period of less than one hundred and eighty days in that previous year, the deduction under this clause in respect of such asset shall be restricted to fifty per cent of the amount calculate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be applied to the present case. Hence, depreciation cannot be restricted to 50 per cent of the normal depreciation." 19. Thus, for restricting the depreciation to 50 per cent both the conditions should be cumulatively satisfied because the legislature has used the word "and" in between these two conditions. We, therefore, reject this contention of the Revenue that only 50 per cent depreciation should be allowed and approve the order of the CIT(A) in this regard. 20. The contention of the Revenue that on one hand, the assessee is applying exchange rate during financial year 1994-95 for determining the actual cost and on the other hand, it is claiming that it acquired assets prior to financial year 1994-95, and therefore, this is contradictory stand and could not be accepted. There is no dispute on the facts that the vessels were acquired in 1985 or in earlier years because the AO has accepted the same and also certified by the chartered accountants. Therefore, we cannot accept this contention of the Revenue that the assessee acquired the assets in financial year 1994-95 simply because conversion rate of financial year 1994-95 was applied. Conversion rate of 1994-95 is applied for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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