2008 (8) TMI 387 - AT - Income Tax

Exchange Rate Gains Considered Part of Export Turnover, Affecting Deductions u/s 80HHC for Export Year.

The Tribunal held that exchange rate gain is part of export turnover, not income from other sources. Deductions under Section 80HHC are admissible in the ... Inclusion of foreign exchange fluctuation in export turnover - Year of recognition for deduction under Section 80HHC - Interpretation of 'export turnover' read with Section 80HHC(2)(a) - Application of Rule 115 (translation of foreign currency) - Effect of Section 155(13) on subsequent receipts - Requirement under Section 80AB that qualifying income be included in gross total incomeInclusion of foreign exchange fluctuation in export turnover - Nature of income: export turnover vs income from other sources - Application of Rule 115 (translation of foreign currency) - The foreign exchange fluctuation gain arising on realization of export proceeds is part of the export turnover. - HELD THAT: - The Bench held that gain arising from fluctuation in foreign exchange is integral to the export proceeds and cannot be severed from the underlying export transaction merely because the rate changed after sale but before realisation. The translation of the invoice value into Indian rupees on realisation is attributable to the export; Rule 115 translations do not alter the character of the receipt. The Revenue's contention to treat the exchange difference as a separate 'income from other sources' was untenable both on merits and as an argument outside the scope of the assessment order, since the AO had not recharacterised the receipt. Decisions of other Benches accepting foreign exchange difference as part of export turnover were approved on this point. [Paras 10, 11, 12, 13]Exchange rate fluctuation gain is part of export turnover.Year of recognition for deduction under Section 80HHC - Interpretation of 'export turnover' read with Section 80HHC(2)(a) - Effect of Section 155(13) on subsequent receipts - Where sale proceeds (including exchange rate difference) relating to exports are received in convertible foreign exchange in India within the period of six months from the end of the previous year (or such further period as allowed), they form part of the 'export turnover' of the year in which the exports were made and not of the year of subsequent realisation. - HELD THAT: - A conjoint reading of the definition of 'export turnover' in Explanation (b) to Section 80HHC(4C) and Clause (a) of Section 80HHC(2) shows that export turnover comprises sale proceeds 'received in or brought into India' in convertible foreign exchange within six months from the end of the previous year (or such further period as allowed). The fact that part of the realisation (arising from exchange fluctuation) is reflected in the books after year end does not displace that amount from the export turnover of the year of export. The Bench relied on the reasoning in the Gujarat High Court's decision in Amba Impex to the effect that receipts realized within the statutory period are directly relatable to the exports. Section 155(13) was examined and held to apply to cases where deduction was earlier denied because proceeds were not brought into India (or required approval) and are subsequently brought in; it does not alter the position where proceeds are realized within the statutory six month period. Consequently, the CIT(A)'s direction to allow deduction in the year of receipt was held unsustainable. [Paras 17, 18, 19, 22, 23]Amount realised within the prescribed period is attributable to the year of export for computing deduction under Section 80HHC; the CIT(A)'s allowance in the year of receipt is overturned.Requirement under Section 80AB that qualifying income be included in gross total income - Adjustment of assessments under Section 80HHC - Where the assessee has included the exchange rate gain in the gross total income of the year of receipt, the AO must exclude that amount from the later year and include it in the earlier year in which the exports were made, and allow deduction in that earlier year in accordance with Section 80HHC. - HELD THAT: - Section 80AB requires that the income qualifying for deduction be included in the gross total income of the year in which deduction is claimed. Permitting deduction in a year different from the year in which the qualifying income is taken into account would be contrary to tax principles. Given the conclusion that the exchange difference is part of the export turnover of the year of export, the proper course is to shift the amount from the year of realisation to the year of export and compute the deduction there. The Bench therefore directed the AO to exclude the disputed exchange difference from the income of the year of receipt, include it in the income of the earlier year in which the exports were made, and allow deduction subject to statutory provisions. [Paras 24, 25, 26]Direct AO to transfer the disputed exchange difference to the year of export and allow deduction in that earlier year in accordance with Section 80HHC.Final Conclusion: The Special Bench allowed the Revenue's appeal: it held that foreign exchange fluctuation gain is part of export turnover but, where proceeds (including exchange difference) are received in convertible foreign exchange in India within the prescribed period, the amount pertains to the year of export for deduction under Section 80HHC. The CIT(A)'s direction to permit deduction in the year of receipt was set aside and the AO was directed to exclude the amount from the later year, include it in the year of export and allow deduction there in accordance with law. Issues Involved:1. Whether the exchange rate gain is part of export turnover or income from other sources.2. The year in which deduction is admissible under Section 80HHC for exchange rate gain.3. The effect of Section 155(13) on the computation of deduction.4. Computation of deduction under Section 80HHC.Issue-wise Detailed Analysis:A. Whether the exchange rate gain is part of export turnover or income from other sourcesThe learned Departmental Representative contended that the exchange rate difference pertaining to the exports made in the earlier year should be categorized under the head 'Income from other sources' and hence no deduction can be allowed on this amount. However, the Tribunal held that the gain due to fluctuation in the foreign exchange rate emanating from export is its integral part and cannot be differentiated from the export proceeds. The Tribunal emphasized that the entire amount realized in Indian rupees remains attributable to the exports made in foreign currency. It was noted that the AO had already accepted the exchange rate gain of Rs. 1,000 as part of export turnover but denied similar treatment to Rs. 2,000, which was inconsistent. Therefore, the foreign exchange fluctuation gain is part of export turnover.B. Year in which deduction is admissibleThe main question was whether the foreign exchange rate difference should be included in the export turnover for the purpose of deduction under Section 80HHC in the year of realization or the earlier year when export was effected. The Tribunal observed that the definition of 'export turnover' in Explanation (b) below Section 80HHC(4C) refers to the sale proceeds received in or brought into India by the assessee in convertible foreign exchange within a period of six months from the end of the previous year or within such further period as the competent authority may allow. The Tribunal concluded that the amount qualifying for 'export turnover' includes the amount realized during the financial year and the amount realized within six months from the end of the year. Thus, the exchange rate difference pertaining to the exports made in the earlier year is part of the export turnover of the year in which such export is made, provided the sale proceeds are realized within the prescribed period.C. Effect of Section 155(13)The learned Counsel for the assessee argued that the insertion of Sub-section (13) to Section 155 by the Finance Act, 1999, w.e.f. 1st June, 1999, required bifurcation of the year into two parts for the purpose of deduction. However, the Tribunal noted that Section 155(13) deals with cases where deduction was earlier denied due to non-receipt of convertible foreign exchange within the prescribed period and subsequently received. The Tribunal held that if the amount is realized within the statutory permissible period of six months from the end of the previous year, Section 155(13) would not apply. Therefore, the contention raised on behalf of the assessee was without merit.D. Computation of deductionThe Tribunal observed that Section 80AB and Section 80HHC(4B) require that the qualifying income must be included in the gross total income for the deduction to be allowed. The Tribunal held that the deduction is permissible in the year of export and not in the subsequent year of realization. Consequently, the AO was directed to exclude the disputed amount of foreign exchange fluctuation difference from the income of the current year and include it in the income of the immediately preceding year in which the exports were made, and allow deduction accordingly.Conclusion:The Tribunal concluded that the exchange rate gain is part of the export turnover and not income from other sources. The deduction under Section 80HHC is admissible in the year of export, provided the foreign exchange is realized within the prescribed period. Section 155(13) does not affect the computation of deduction in cases where the foreign exchange is realized within the statutory period. The AO was directed to adjust the computation of deduction accordingly. The appeal of the Revenue was allowed for statistical purposes.