TaxTMI 
TaxTMI 
2018 (7) TMI 122
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....ia). The assessee-company has earned income from sale of goods and provisions of services from various projects executed during the year under assessment. The assessee-company has a PE in India and doing business in India through its Project Office. A perusal of profit and loss account of the PE reveals that assessee-company has debited an amount of Rs. 16,10,71,640/- in its profit and loss account under the head 'Exchange Fluctuation Loss'. The assessee-company was asked to explain as to how the same is allowable as a revenue expenditure. The assessee-company filed the written submissions which are reproduced in the assessment order in which the assessee-company briefly explained that it is a foreign company carrying on its business activities in India through various projects offices at different sites on the basis of work awarded to the assessee-company. The activities executed by the assessee-company is financed by either the client, which awarded at work, on which, it charges interest on the. advance availed at the rate as stipulated in the contract or the contract is financed by the Head Office at Spain in foreign currency. Head Office of the assessee-company advances....
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....ginning of the assessment year i.e. 01.04.2013, the exchange rate between INR to Euro was 69.54. At the end of the assessment year i.e. on 31.03.2014. the exchange rate was 82.58. Thus, there was a devaluation of Indian currency by an amount of approximately 18.75% for the period under consideration. All the opening balances received from Head Office for execution of various projects were reset on 31.03.2014 as per the prevailing exchange rate on that date, which resulted in fluctuation loss aggregating to Rs. 16.10 Crore. The details of loan accounts were filed to prove fluctuation loss. The entire amount of loan availed from Head Office in foreign currency have been utilized only for the purpose of executing contracts. It was, therefore, a working capital requirement. Therefore, fluctuation loss is of revenue in nature. The accounts of the PE are maintained on accrual system of accounting and hence, year end entry for fluctuation loss and resettlement of asset liability have to be necessarily made and the same is allowable on accrual basis as held by the Hon'ble Supreme Court in the case of CTT Vs. Woodward Governor India (P) Limited [2009] 312 ITR 254 (SC). 3. The A.O. however ....
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.... other similar payments in return for the use of patents, knowhow or other rights, or by way of commission or other charges, for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the permanent establishment. Likewise, no account shall be taken, in the determination of the profits of a permanent establishment, for amounts charged (otherwise than towards reimbursement of actual expenses), by the permanent establishment to the head office of the enterprise or any of its other offices, by way of royalties, fees or other similar payments in return for the use of patents, know-how or other rights, or by way of commission or other charges for specific services performed or for management, or, except in the case of a banking enterprise, by way of interest on moneys lent to the head office of the enterprise or any of its other offices." 3. The A.O. accordingly noted that above Article specifically prohibits any deduction of expenses relating to Head Office, except reimbursement towards actual expenditure. According to the above Article, it is evident that only actual and real expenditure has to be allowed wh....
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....e been correctly treated as foreign exchange fluctuation loss by the assessee-company. The A.O. has misinterpreted the provisions of Law, DTAA and the Judgment of the Hon'ble Calcutta High Court in the case of Betts Hartley Huett and Co. Ltd., vs. CIT (supra). As per Article 7(3) of DTAA as referred to by the A.O, the bar on expenditure where the transaction involves Head Office, is only with respect to royalty, FTS or by way of commission or other charges for specific services performed by the Head Office. In fact. Article-7(3) allows as deduction expenses which are incurred for the purpose of the Permanent Establishment, including executive and general administrative expenses, research and development expenses, interest and other similar expenses. It was further submitted that in preceding A.Ys. 2012-2013 and 2013-2014, the A.O. passed the assessment order under section 143(3) of the I.T. Act and the similar claim of the assessee-company for fluctuation loss have been allowed in favour of the assessee- company. Therefore, rule of consistency should be followed by the Income Tax Authorities. In support of the above proposition, assessee-company relied upon decision of the Hon'ble ....
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.... 2015-2016 is filed at Pages 127 and 128 of the paper book to show that income was declared on account of foreign exchange fluctuation in aforesaid amount. Learned Counsel for the Assessee submitted that when in preceding assessment year, similar claim have been allowed and assessee-company has paid tax on foreign exchange fluctuation gain in subsequent year on the same facts, the claim of assessee-company should not have been disallowed by the authorities below. PB-48 is balance-sheet for assessment year under appeal to show that share capital is NIL and Head Office amount on liabilities side have been shown at Rs. 154,38,08,645/-. He has submitted that the facts have not been disputed with regard to the amount received in EURO and repaid the amount in EURO to Head Office. Therefore, foreign exchange fluctuation loss should have been allowed as deduction in favour of the assessee-company. No capital was employed by assessee-company. PB-6 and 7 are the frequently asked questions by the parties from Reserve Bank of India, in which, it is replied that "the credits to the account should represent the funds received from Head Office through normal Banking Channel for meeting the expens....
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....ed to Rs. 142,13,94,340/- as on 31.03.2013. Therefore, the contention of assessee-company is correct that for the purpose of completing the turn-key Project, the funds are required, which have been provided by the Head Office. It is also explained that for receiving such funds from the Head Office, Reserve Bank of India permission have also been obtained. Though the Ld. CIT(A) referred to FEMA Act, but, no provisions have been highlighted which assessee-company has violated. The Ld. CIT(A) noted that Project Office located in India does not come under the list of eligible borrowers, therefore, Project Office is not eligible for external commercial borrowings. Assessee-Company, however, explained that it has received loans from Head Office and Assessee-Company being P.E. of foreign Company, is not entitled to raise loans through ECB as ECB can only be raised by Indian borrowers. Findings of Ld. CIT(A) are, therefore, not relevant to point in issue. The Assessee-Company has been receiving the funds in EURO for the last so many years from the Head Office and have been admittedly repaying the amounts to the Head Office in EURO and such claim of assessee-company of foreign exchange fluc....
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....om any Bank in India, therefore, working capital was required to complete the turnkey projects. The facts and circumstances of the case as mentioned above and considering the assessment orders passed by the A.O. in preceding A.Ys. 2012-2013 and 2013-2014 clearly show that the amount received by the assessee-company from the Head Office is a "loan". Therefore, authorities below were not justified Instalaciones Y Servicios SA in holding it to be capital remittance. The assessee-company did not claim any notional expenses. Therefore, findings of the authorities below are wholly unjustified. It may also be noted here that in subsequent A.Y. 2015-2016, the assessee-company has earned foreign exchange fluctuation gain on the same set of facts in a sum of Rs. 13,37,29,120/- which have been declared as income. If the A.O. is of the opinion that assessee- company is not entitled for deduction on account of foreign exchange fluctuation loss, he should not have accept the similar claim of assessee-company in preceding assessment years and should have refunded the amount of tax paid on the foreign exchange capital gain shown in subsequent assessment year. It is well settled Law that rule of co....