2025 (1) TMI 196 - HC - GST

Foreign exchange rate fluctuation benefits constitute taxable turnover under GST requiring tax liability

M/s. BHARAT HEAVY ELECTRICALS LIMITED Versus STATE OF KERALA ERNAKULAM

Kerala HC held that differential amounts received due to foreign exchange rate fluctuations constitute turnover under KGST Act. The court determined that ... Levy of GST - differential amount received by the petitioner due to foreign exchange rate fluctuation constitutes 'turnover' or not - entitlement for deductions from turnover - HELD THAT:- While it may be a fact that the differential amount that is sought to be taxed by the Revenue in fact represents the benefit of an upward exchange rate fluctuation that accrued to the petitioner, it does not detract from the fact that what was received by the petitioner was nothing but the consideration for the sale of equipment’s that it had contracted to supply. Under the KGST Act, the word “turnover” means the aggregate amount for which goods are either bought or sold, supplied or distributed by a dealer, either directly or through another, on his own account or on account of others, whether for cash or for deferred payment or other valuable consideration, provided that the proceeds of the sale by a person of agricultural or horticultural produce, grown by himself or grown on any land in which he has an interest whether as owner, usufructuary mortgagee, tenant, or otherwise, shall be excluded from his turnover. Explanation (1A) to the definition makes it clear that the turnover in respect of a works contract shall be the aggregate amount received or receivable by the dealer for the transfer of goods (whether as goods or in some other form) involved in the execution of such contract. Whether, on account of the exchange rate fluctuation, the benefit of which accrued to the petitioner, the receipt in the hands of the petitioner partook of a nature different from turnover for the purposes of taxation? - HELD THAT:- What accrued to the petitioner was nothing but a realisation in Indian Rupees of the turnover attributable to the works contract performed by it, which was expressed in US Dollars. Further, insofar as the permissible deductions under the KGST Act and Rules have already been granted to the petitioner, the differential amount in the hands of the petitioner represents differential turnover that has not been subjected to tax. Conclusion - Exchange rate fluctuations affecting the sale price in foreign currency do not alter the nature of the amount as turnover under the KGST Act. The statutory definition of turnover encompasses such amounts when converted to Indian Rupees. Revision dismissed. 1. ISSUES PRESENTED and CONSIDEREDThe core legal questions considered in this judgment are:Whether the differential amount received by the petitioner due to foreign exchange rate fluctuation constitutes 'turnover' under the Kerala General Sales Tax Act (KGST Act) and is thus liable to tax.Whether the petitioner is entitled to any deductions from its turnover beyond those explicitly provided under the KGST Act and Rules.2. ISSUE-WISE DETAILED ANALYSISIssue 1: Taxability of Differential Amount Due to Exchange Rate FluctuationRelevant legal framework and precedents: The KGST Act defines 'turnover' as the aggregate amount for which goods are bought, sold, supplied, or distributed by a dealer. Explanation (1A) specifies that for a works contract, turnover includes the aggregate amount received or receivable for the transfer of goods involved in the contract.Court's interpretation and reasoning: The court held that the differential amount received by the petitioner, attributed to exchange rate fluctuation, still constituted part of the turnover. The court reasoned that the amount received in US Dollars, when converted to Indian Rupees, retained its nature as turnover under the works contract.Key evidence and findings: The petitioner argued that the differential amount was not turnover but rather a gain due to exchange rate fluctuation. The court found that the invoices and payments were consistent with the contract terms, and the differential amount was indeed part of the consideration for the sale of goods.Application of law to facts: The court applied the KGST Act's definition of turnover to the facts, concluding that the differential amount was part of the turnover subject to tax, as it was a realization of the contractually agreed sale price, albeit in a different currency.Treatment of competing arguments: The petitioner's argument that the differential amount was not turnover was rejected. The court emphasized that the nature of the amount as consideration for the contract did not change due to currency conversion.Conclusions: The court concluded that the differential amount due to exchange rate fluctuation was taxable turnover under the KGST Act.Issue 2: Entitlement to Additional DeductionsRelevant legal framework and precedents: The KGST Act and Rules provide specific deductions permissible for works contracts, mainly amounts on which subcontractors have discharged tax liability.Court's interpretation and reasoning: The court found that the petitioner had already received permissible deductions for amounts paid to the subcontractor, on which tax was discharged. No additional deductions were warranted.Key evidence and findings: The court noted that the petitioner did not dispute the deductions already granted but sought to exclude the differential amount from turnover, which was not permissible under the KGST Act.Application of law to facts: The court applied the statutory provisions to affirm that the deductions claimed by the petitioner were not supported by the KGST Act.Treatment of competing arguments: The petitioner's claim for additional deductions was dismissed, with the court emphasizing adherence to statutory provisions.Conclusions: The court concluded that the petitioner was not entitled to any additional deductions beyond those already granted.3. SIGNIFICANT HOLDINGSPreserve verbatim quotes of crucial legal reasoning: 'Under the KGST Act, the word 'turnover' means the aggregate amount for which goods are either bought or sold, supplied or distributed by a dealer, either directly or through another, on his own account or on account of others, whether for cash or for deferred payment or other valuable consideration.'Core principles established: The court established that exchange rate fluctuations affecting the sale price in foreign currency do not alter the nature of the amount as turnover under the KGST Act. The statutory definition of turnover encompasses such amounts when converted to Indian Rupees.Final determinations on each issue: The court dismissed the revision petitions, affirming that the differential amount was taxable turnover and that no further deductions were permissible. The questions of law were answered against the assessee and in favor of the Revenue.