Foreign exchange fluctuation and brand-value apportionment disputes were resolved by linking deductions to actual cost and real business basis.

Foreign exchange fluctuation loss on repayment of external commercial borrowing is allowable only where it is linked to the actual cost of the relevant asset under Section 43A of the Income-tax Act; absent any finding that asset cost changed due to exchange variation, the loss was allowed. Advertisement and promotion expenditure incurred by a business licensee cannot be disallowed on a notional basis merely because it may incidentally enhance the foreign brand owner's value; in the absence of a concrete legal or factual basis for apportionment, the business deduction was upheld.

---

---

Issues: (i) Whether loss arising from foreign exchange fluctuation on repayment of external commercial borrowing was allowable to the assessee. (ii) Whether a proportion of advertisement and promotion expenditure could be disallowed as attributable to enhancement of the foreign brand owner's value.

Issue (i): Whether loss arising from foreign exchange fluctuation on repayment of external commercial borrowing was allowable to the assessee.

Analysis: The borrowing was for acquisition-related purposes and the governing rule under Section 43A of the Income-tax Act, 1961 required the fluctuation to be linked to the actual cost of the relevant asset. No finding was recorded that the asset cost had been increased or reduced on account of exchange variation. The earlier decision in Woodward Governor was held to govern the issue, and the later reliance on purpose-based treatment did not alter the result on the facts found.

Conclusion: The issue was decided against the revenue and in favour of the assessee.

Issue (ii): Whether a proportion of advertisement and promotion expenditure could be disallowed as attributable to enhancement of the foreign brand owner's value.

Analysis: The expenditure was incurred by the assessee in the course of its business as a licensee. Under Section 48 of the Trade Marks Act, 1999, the arrangement entitled the assessee to exploit the marks during its subsistence, and any incidental enhancement of the overseas owner's brand value did not justify a notional apportionment of deductible business . The disallowance was based on an artificial and speculative assumption rather than a demonstrated business basis.

Conclusion: The issue was decided against the revenue and in favour of the assessee.

Final Conclusion: The appellate challenge did not succeed, as both substantive questions were answered against the revenue and the assessee's deductions were upheld.

Ratio Decidendi: Foreign exchange fluctuation is governed by Section 43A where it affects the actual cost of the asset, and business expenditure cannot be disallowed on a merely notional attribution to brand value enhancement absent a concrete legal or factual basis.

---