Feedback   New User   Login      
Tax Management India. Com TMI - Tax Management India. Com
Home Acts / Rules Notifications Circulars Tariff/ ITC HSN Forms Case Laws Manuals Short Notes Articles News Highlights
Extracts
Home List
← Previous Next →

M/s. Ballarpur Industries Ltd. Versus The Commissioner of Income Tax, Vidarbha, Nagpur

2017 (8) TMI 378 - BOMBAY HIGH COURT

Royalty - exchange gain - Income attributable to royalty and interest remitted from Malaysia after retaining in Malaysia for sometime - Taxability in India - Indo-Malaysian DTAA - system of accounting followed - Conversion of Malaysian currency into Indian currency - Held that:- Revenue has correctly placed reliance upon the Accounting Standard AS11 issued by the Institute of Chartered Accountants of India which indicates that any benefit derived on account of currency fluctuation after the year .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

the rate prevailing on the last date of the accounting year. - The income has been earned in Malaysia on account of royalty and interest but the same is retained there and not brought repatriated to India immediately on the same accruing to the Appellant/assessee. This leads to a gain/loss in foreign exchange valuation. This gain/loss on account of foreign exchange variation would not bear the character of income on account of royalty and interest earned in Malaysia. This is so as the gain/l .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

om Malaysia on account of royalty and interest in the year in which it arose/accrued at the rate prevailing then as one head of income and the income gained on account of exchange rate variation due to passage of time at the time of conversion as the other head of income. The Revenue would bring to tax the later gain arising on account of exchange rate variation to tax as income arising from a different source. The amount attributable to royalty and interest received from Malaysia on the basis o .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

t Mr.Anand Parchure, Advocate with Mr.S.N.Bhattad, Advocate for the Respondent JUDGMENT ( Per M. S. Sanklecha, J ) 1. By this reference under Section 256(1) of the Income Tax Act, 1961 (the Act), the Income Tax Appellate Tribunal (the Tribunal) seeks our opinion on the following questions of law : 1. Whether in the facts and circumstances of the case and in law the difference in exchange rate amounting to ₹ 24,81,922/does not partake the same character of royalty derived from Malaysia as p .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

al that Royalty and interest income from Malaysia fall under exemption method, the provisions of AADT should be construed to apply to such income only at accrual stage and should not apply at the receipt stage in respect of exchange fluctuation ? 2. This Reference relates to Assessment Year 1991-1992. 3. The facts set out in the statement of case for our consideration are as under : 2. The Assessee is a Public Limited Company. In respect of accounting year ended 31.3.1991, relevant to Assessment .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

any had in the earlier years credited in its books, the income by way of royalty and interest from the Malaysian company on accrual basis. 3. In the relevant Assessment Year, the Assessee/Company had received the royalty and interest which were accounted in the earlier years on accrual basis. Though the Malaysian Company remitted the same foreign currency, as a difference in exchange rate, the assesseecompany received more than what was earlier accounted in terms of Indian Rupees. There was no c .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

rlier years had retained its original nature as royalty and interest and accordingly should be exempt from tax. The Assessing Officer in his order dated 30.3.1994 has held as under : The royalty and interest which were not repatriated from Malaysia of the earlier years were held on a revenue account and not on any capital account. It is said in law that income arising on account of exchange fluctuation in respect of foreign currency held abroad on revenue account is a trading receipt and is liab .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

wed the claim of the AssesseeCompany and he had held that : admittedly the amount which was received by the assessee this year from Malaysia had been earned by it as income in the earlier years. The amount was obviously held on revenue account and not as a capital asset. Therefore, as per the decision of the Supreme Court in the case of CIT vs. Sutlej Cotton Mills Ltd. (116 ITR 1), the profit arising to the appellant on account of appreciation in the value of foreign currency held by it has to b .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

e Double Taxation Avoidance Agreement this would have been charged to tax in the assessee's hands. The said income was treated as exempt only because it was covered by the Double Taxation Avoidance Agreement. That the agreement, however, does not cover the amounts accrued to the assessee as a result of exchange rate fluctuations. Moveover, the amount of ₹ 26,11,142/had arisen in India as the conversion took place in India. The said amount is, therefore, held to be taxable in the hands .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

able thereon in Malaysia. Undisputedly, the amounts attributable to royalty and interest is not taxable in India. The conversion of the above Malaysian currency into Indian currency cannot be subjected to tax, as it is not even the case of the Revenue that the appellant is engaged in activity of trading in foreign exchange. (b) The Revenue does not dispute that the exchange gain upto the close of the Accounting Year emanating from foreign exchange realisation on the amount received from Malaysia .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ollows a mercantile system of accounting amounts received on account of royalty and interest cannot be partly subjected to tax. The exigibility to tax under cash or mercantile system of accounting cannot be different; and (iv) The amount received on foreign exchange fluctuation in respect of export turnover is eligible for benefit of deduction under Section 80HHC of the Act as export receipts. In support, reliance is placed upon the decision of this Court in CIT vs. Amber Exports (India) Ltd. (I .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

he subject Assessment Years, but for earlier years. The amount attributable to royalty and interest under the AADT was duly accepted for the year in which it had accrued at the foreign exchange rate then prevailing. The receipt of the royalty and interest and conversion of Malaysian currency into Indian rupees later will be a benefit/income arising from a subsequent transaction in a different year and not related to the origin/source of the receipts. There is no continuation in the manner of the .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

of the Apex Court in CIT vs. Woodward Governor India (P) Ltd., (2009) 312 ITR 254 in favour of the Revenue. 7. We have considered the rival submissions. It is clear from the Statement of the case sent by the Tribunal that the amounts which were received by the Assessee this year from Malaysia on account of royalty and interest income had been earned and shown as it's income in the earlier years. At that time no tax on the same was paid in view of AADT entered into between Malaysia and India .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

and India. These amounts/income for the earlier years which have now been repatriated from Malaysia has been brought to tax only to the extent of gain made on account of difference in foreign exchange rate prevailing on the last date of the financial year in which the aforesaid income had been recorded in the Appellant's Books of Account (taxable in that year but for AADT) and gain made on account of foreign exchange variation at the time when the amounts were received from Malaysia in Mala .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

rom Malaysia is not exigible to tax in India. This is so as it has already been subjected to tax in Malaysia. It is submitted that the mere fact that subsequent to the end of the previous year relevant to the Assessment year the amount have been received and gain has been made on foreign exchange variation, will not change the character of income being on account of royalty and interest earned in Malaysia. This income, according to the Appellant, is not taxable in India as it would stand exclude .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

ognized as income or as expense in the period in which they arise, except as stated in paragraphs 10 and 11 below. 10.Exchange differences arising on repayment of liabilities incurred for the purpose of acquiring fixed assets, which are carried in terms of historical cost, should be adjusted in the carrying amount of the respective fixed assets. The carrying amount of such fixed assets should, to the extent not already so adjusted or otherwise accounted for, also be adjusted to account for any i .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

usted in the manner described in paragraph 10 above. However, such adjustment should not result in the net book value of a class of revalued fixed assets exceeding the recoverable amount of assets of that class, the remaining amount of the increase in liability, if any, being debited to the revaluation reserve, or to the profit and loss statement in the event of inadequacy or absence of the revaluation reserve. 12. An exchange difference results when there is a change in the exchange rate betwee .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

source of income. 10. We further find that the Apex Court in Woodward Governor India (P) Ltd. (supra) approved the applicability of AS-11 to determine the taxability in similar situation by observing as under : 17. Having come to the conclusion that valuation is a part of the accounting system and having come to the conclusion that business losses are deductible under s. 37(1) on the basis of ordinary principles of commercial accounting and having come to the conclusion that the Central Governm .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

fixed amounts, e.g., cash, receivables and payables. The word paid is defined under s. 43(2). This has been discussed earlier. Similarly, it is important to note that foreign currency notes, balance in bank accounts denominated in a foreign currency, and receivables/payables and loans denominated in a foreign currency as well as sundry creditors are all monetary items which have to be valued at the closing rate under AS11. Under para 5, a transaction in a foreign currency has to be recorded in t .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

sing the closing rate. In case of revenue items falling under s. 37(1), para 9 of ASII which deals with recognition of exchange differences, needs to be considered. Under that para, exchange differences arising on foreign currency transactions have to be recognized as income or as expense in the period in which they arise, except as stated in para 10 and para 11 which deals with exchange differences arising on repayment of liabilities incurred for the purpose of acquiring fixed assets, which top .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

reatment on the balance sheet date. Therefore, an enterprise has to report the outstanding liability relating to import of raw materials using closing rate of exchange. Any difference, loss or gain, arising on conversion of the said liability at the closing rate, should be recognized in the P&L account for the reporting period. (emphasis supplied) Thus, the Apex Court placed reliance upon AS11 to hold that gain or loss made on account of rate difference in foreign exchange post the date of b .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

nt/assessee. This leads to a gain/loss in foreign exchange valuation. This gain/loss on account of foreign exchange variation would not bear the character of income on account of royalty and interest earned in Malaysia. This is so as the gain/loss on account of foreign exchange variation is not a part of royalty and interest nor is it any accretion to it. In this case, it is the generation of further income which is taxable in the subject assessment year when the variation in foreign exchange ha .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

the Assessee followed the Mercantile System of Accounting, an amount received on exchange conversion on account of royalty and interest is being partly subjected to tax. This exigibility to tax under the Cash or Mercantile system of Accounting cannot be different. 13. This submission on the part of the Appellant/assessee overlooks the fact that although the Revenue would in cash system of accounting record the income only on receipt of the same, yet for the purposes of taxation it would split th .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

aysia on the basis of foreign exchange rate existing on the last date of the Accounting year in which this income would be receivable by the Applicant/Assessee as a different head of receipt excluded from tax by ADTT. Thus, we do not accept the above submission made on behalf of the appellant as the source of receipt is different and two fold. 14. Lastly, the Applicant/Assessee placed reliance upon the decision of this Court in Amber Exports (India) Ltd. (supra), the Gujarat High Court in the ca .....

X X X X X X X

Extract - Part text only
Click here to Access Full Contents

X X X X X X X

 

 

 

 

 

Forum
what is new what is new
  ↓     bird's eye view     ↓  


|| Home || About us || Feedback || Contact us || Disclaimer || Terms of Use || Privacy Policy || TMI Database || Members ||

© Taxmanagementindia.com [A unit of MS Knowledge Processing Pvt. Ltd.] All rights reserved.

Go to Mobile Version