TMI Blog2006 (5) TMI 116X X X X Extracts X X X X X X X X Extracts X X X X ..... s with actual cost at the asset determined at the rate of exchange prevailing on the date of acquisition of the asset. 3. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in deleting the disallowance made in term of the second proviso to s. 32(1)(ii) of the IT Act without appreciating that the use of plant and machinery in India was for a period of less than 180 days during the relevant previous year. 4. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in deleting disallowance out of claim for depreciation allowance amounting to Rs. 54,46,21,124. 5. On the facts and in the circumstances of the case and in law, the learned CIT(A) has erred in deleting disallowance of expenditure of Rs. 9,35,477 incurred on providing accommodation in the nature of guest house to the employees of the assessee company for the relevant assessment year." 2. The facts in brief are that the assessee M/s Hollandsche Aammening Maatschappij is a corporation incorporated in Netherlands. The non-resident assessee is engaged in drilling and dredging activities in Indian waters in terms of contracts executed with Port Depa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... king second proviso to s. 32(1) of the IT Act, 1961. 3. The CIT(A) accepted the contention of the assessee that exchange rate as on the last day of the accounting period would be applied to the cost estimated by the valuer of the assessee and, thus, deleted the addition made by the AO. He was also of the view that the second proviso to s. 32(1) can be invoked only when assets were acquired during the current financial year and also put to use simultaneously. The second proviso would not be applicable if assets were acquired earlier but put to use in the current year. In the present case, the vessels were acquired by the assessee company prior to the accounting year as admitted by the AO also. Therefore, question of applying 50 per cent rate of admissible rates of depreciation does not arise. Another issue decided by the CIT(A) in favour of the assessee was guest house expenses which were treated as revenue expenditure by him allowable under s. 37 of the IT Act, 1961. 4. The Revenue is in appeal against these two deletions. Regarding claim of depreciation: 5. The AO while applying exchange rate of 1985 to the cost estimated by the valuer observed as under: (1) In terms of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... full deduction of actual cost, where actual cost is less than Rs. 5,000. It was indicated that actual cost has to be converted into rupee even if the assets were acquired abroad in foreign currency. (9) Sec. 288A of the IT Act provides for the amount of income computed as per the provisions of the Act to be rounded off to the nearest multiple of ten rupees. There was no provision in the Act for rounding off for a currency other than rupees. 6. Before the CIT(A), the counsel for the assessee submitted as under: (1.A) The judicial opinion expressed in the case of Calcutta Electric Supply Corporation will not be applicable. In that case, the assessee was a sterling company carrying on business exclusively in India and all fixed assets located in India were acquired out of its rupee resources in India. The business receipts of that company were in Indian currency and its books of accounts were maintained in India in Indian currency. The appellant was a Dutch company carrying on majority of its business as a dredging contractor in several countries around the world and not only in India. The foreign currency assets relocated to India were acquired by the appellant in past in Neth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ansactions in foreign currencies to be expressed in rupees in order to prepare the financial statement of the Indian enterprise. Therefore, AS-11 will not be applicable to the appellant, it being a foreign company. (6.A) As regards the IAS-21 quoted by the AO, the same will apply to assets purchased in India by the appellant and not assets acquired by the appellant in Netherlands. (7.A) Article 3(2) of the DTAA provides that when an item is not defined in the agreement, it shall have the meaning as assigned to it by the Act in relation to income taxable in India. Article 3(2) nowhere stipulates that the appellant has to determine its taxable income in India and tax liability thereon by preparing a statement of income in Indian currency. Sec. 32 of the IT Act provides for allowance of depreciation in the case of any block of assets at such percentage of WDV as prescribed. Rule 5 of the IT Rules provides that depreciation shall be calculated at the percentage specified in Appendix 1 to the rules on the WDV of the block of assets computed as per s. 43(6) of the Act. Sec. 32, as well as s. 43(6) do not provide that rate of depreciation can be applied on a WDV expressed only in Indi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ained its accounts in Dutch guilders (NLGs). The impugned assets had not been acquired in India. These were acquired outside India in Netherlands and in the books their historical cost was recorded in Dutch guilders. The assessee was not required to record the historical cost in rupees. These assets owned by the assessee, 'actual cost' of which were recorded in Dutch guilders, were mobilized from all over the world and relocated to sites in India for business operations undertaken by its PE in India. The business operations of such PE, apart from rupee revenues and rupee expenses, also generated foreign currency revenues and foreign currency expenses. The assessee was required to record those revenues and expenses, including the rupee revenues and expenses, in Dutch guilders in its books of accounts for world-wide operations. Conversions to rupee was necessary only for the purpose of taxation of income in India attributable to its PE in India in terms of the DTAA between India and Netherlands, r/w s. 90(2) of the IT Act. Rule 115 of the IT Rules of India provided the procedure for computing foreign currency income. It is to be noted that r. 115 uses the word 'income' and not any of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge. It is permissible to do so. It has not used current market price in foreign currency which will be much higher and is also impermissible. (Hi) The depreciation allowed in this year will reduce the WDV for the years following and consequent quantum of depreciation in following years will be less. (iv) The situation has arisen because value of rupee has gone down considerably with respect to western currency over the years. Had the rupee NLGs parity remained same, there would not have been any difference. If the appellant was a tax-resident of another country whose currency has weakened with respect to rupee (for example, in present context, one of the South East Asian countries), the effect would have been opposite. (v) The AO has 'estimated' the 'actual cost' of the assets by converting the historical cost in NLGs by using rupee -NLG exchange rate of Rs. 4.34 = 1 NLG as on 31st Dec., 1985. Such action has been sought to be justified on the ground that the appellant could not produce the relevant evidence in respect of exact date of acquisition of these assets in the form of invoices, etc. But then, the appellant was not required to retain such past records such that same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of r. 115 of IT Rules would be squarely applicable to the case of the assessee. Its income has to be computed in the foreign exchange, in which its accounts are maintained and thereafter exchange rate as existing on the last date of accounting year has to be applied. There is no option available either to the assessee or to the Department. According to the learned Authorised Representative for the assessee, the question of cost of vessels is not in dispute because the Department has accepted such cost at NLG 159,282,030. The AO has by an arbitrary means applied the conversion rate at 1 NLG = Rs. 4.34 and arrived at the cost of the vessels at Rs. 69,12,84,010 as against claim of the assessee to apply the exchange rate at 1 NLG = Rs. 19.88 with which the cost was worked out at Rs. 33,16,65,26,756. Thus, the valuation done by the chartered accountants of the assessee, M/s Moret Ernst Young at NLG 159,282,030 has been accepted by the Department. There1ore, this valuation could not be in dispute. The ownership and use of the assets is also not in dispute because the AO has allowed depreciation. The dispute is only on quantification of such depreciation. It is also not in dispute that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 7 (Bom), wherein it was held as under: "19. There is yet another angle to this question. That is the application of the provisions of r. 115 of the rules. The rule is reproduced below: 'The rate of exchange for the calculation of the value in rupees of any income accruing or arising or deemed to accrue or arise to the assessee in foreign currency or received or deemed to be received by him or on his behalf in foreign currency shall be the telegraphic transfer buying rate of such currency as on the specified date.' Now, this rule postulates that the rate of exchange has to be applied only after determining the 'income accruing or arising to the assessee in foreign currency.' The exchange rate is to be considered only after the income has been determined. The 'income' necessarily means income as defined in s. 2(24) of the Act. That can be arrived at after allowing for all deductions permissible under the Act. This includes deduction by way of depreciation under s. 32. So, the application of the rule, i.e., conversion of foreign currency to Indian rupee, would be the last step. Therefore, the determination of the depreciation has to be only in terms of foreign currency only, tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... produce documents so as to show the dates of acquisition of the assets, the AO presumed that by and large it must have been acquired in and around 1985 and therefore, determined the actual cost accordingly. According to the assessee, it was not mandatory under Dutch law to preserve the documents therefore, they were not preserved and could not be produced. Whatever documents were available were furnished to the AO. Accordingly, following documents were furnished: - Copies of original invoices for all assets purchased by the assessee in India during the asst. yr. 1994-95. - Copies of original invoices for site equip merit of Rs. 43,59,345 purchased by the assessee outside India during financial year 1994-95. - Certificates from the worldwide auditors of the assessee, i.e., Moret Ernst Young certifying ownership and original cost of the vessels and plant and machinery imported into India during financial year 1994-95. - Certificates of registration and sea-worthiness for two vessels (Geopotes 15 and Schedrecht 35). - A log of period of use of the assets. - Arrival report and customs declaration as attested by Indian Customs official in respect of certain vessels. - A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 200,880 ------------------------------------------------------------ AP4 50,000 994,000 217,000 ------------------------------------------------------------ AP 39 23,000 457,240 99,820 ------------------------------------------------------------ WP5 24,750 492,030 104,415 ------------------------------------------------------------ WP6 24,750 492,030 107,415 ------------------------------------------------------------ Stern 271,000 5,387,480 1,176,140 ------------------------------------------------------------ HAM 922 1,180,000 23,458,400 5,121,200 ------------------------------------------------------------ HAM 924 1,495,000 29,720,600 6,488,300 ------------------------------------------------------------ Geopotes 15 86,717,000 1723,933,960 376,351,780 ------------------------------------------------------------ HAM 218 28,967,000 284,920,160 125,716,780 ------------------------------------------------------------ HAM 910 1,549,000 30,794,1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... previous year of the assessee; (d) in respect of income chargeable under the head 'Profits and gains of business or profession' in the case of a non-resident engaged in the business of operation of ships, the last day of the month immediately preceding the month in which such income is deemed to accrue or arise in India; (e) in respect of income by way of dividends, the last day of the month immediately preceding the month in which the dividend is declared, distributed or paid by the company; (f) in respect of income chargeable under the head 'Capital gains', the last day of the month immediately preceding the month in which the capital asset is transferred: Provided that the specified date, in respect of income referred to in sub-cls. (a) to (f) payable in foreign currency and from which tax has been deducted at source under r. 26 shall be (the date on which the tax was required to be deducted) under the provisions of the Chapter XVII-B. (2) Nothing contained in sub-r. (1) shall apply in respect of income referred to in cl. (c) of the Explanation to sub-r. (1) where such income is received in, or brought into India by the assessee or on his behalf before the specified d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed to apply r. 115 only to receipt, then legislature would have used the word "receipt" in place of "income" in this rule. Further as per s. 9(1), what is taxable is income accruing or arising directly or indirectly or deemed to have accrued or arisen to the assessee. The "income" as defined in s. 2(24) reads as under: "(24) income includes- (i) profits and gains; (ii) dividend.........." Profits and gains under the head "Income from business and profession" are computed in accordance with s. 29, which provides that income referred to in s. 28, being "Profits and gains of business or profession" shall be computed in accordance with the provisions' contained in ss. 30 to 43D. Sec. 28 provides as under: "28. The following income shall be chargeable to income-tax under, the head 'Profits and gains of business or profession'- (i) the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year; ...................." Sec. 32 is therefore, part and parcel of computation of income under the head "Income from profits and gains of business or profession". Thus, the main r. 115 prescribes conversion of "income" ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions to cl. (a) of sub-s. (1) of s. 48 of the Act. Similarly, reliance of the AO on the decision of Calcutta High Court in the case of Calcutta Electric Supply Corporation Ltd. vs. Asstt. CIT which is subsequently affirmed by Hon'ble Supreme Court in CESC Ltd. vs. CIT (1998) 150 CTR (SC) 607 : (1998) 233 ITR 50 (SC) would not help the Revenue because the facts in that case were entirely different than the facts of the present case. In that case, the operations of the company were confined to India and the revenue expenses were also in Indian currency. For the purposes of maintaining accounts in England, it converted the rupees into sterling at appropriate rate of exchange for incorporation of the results of the business in the accounts maintained in the UK. In the present case, the assessee is earning foreign exchange and spending foreign exchange for the purposes of its business carried out in India. 15. Thus, when income is computed in foreign exchange then depreciation has to be allowed at the cost valued by their chartered accountants. As already said, this valuation is not disputed by the AO. 16. As a result, only cost determined by the chartered accountant will get ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng exchange rate on the specified date. This will make computation of income by reducing outgoings from incomings and also allowance therefrom impossible. On the one hand, we will have 'incomings' in foreign exchange converted into Indian rupee but we will have 'outgoings' actually incurred in foreign exchange but could not be converted into Indian rupee in absence of appropriate provision in the Rules, if we accept the interpretation given by the Revenue. Such interpretation, which makes the machinery of computation of income unworkable cannot be accepted. Therefore, if r. 115 is applicable to 'incomings', then it shall be applicable to 'outgoings' as well including allowance as provided under IT Act. Thus, the word 'income' in r. 115 refers only to net income arrived at after giving all deductions and allowances. 17. There is one more reason for coming to this conclusion. The term 'business profits' has not been defined under DTAA. However, art. 3(2) of the DTAA stipulates that where any term has not been defined in the convention, the same shall have the meaning which it has under the law of that State concerning the taxes to which the convention applies. As per art. 7, for th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nary process of accountancy, assessee was requested to furnish various information to ascertain the book value/fair market value and the accounting method recorded in the books of foreign company for transfer of the above mentioned vessels and equipment to India. The various information called for vide this office letter dt. 9th March, 1998 were as under: (7) I would also like to ascertain the market value of the assets in India as on the date of import to India. Accordingly, if you wanted to purchase these assets in the market, what value you would have had to pay. In respect of this, please furnish your estimate and support it with evidence as you may have." The concept of taxing 'PE' as separate distinct entity has been considered by many authorities. In Ostime (Inspector of Taxes) vs. Australian Mutual Provident Society (1960) 38 ITR 35 (CA), it is held that where an enterprise of one of the territories is engaged in trade or business in the other territory through a "PE" situated therein, there shall be attributed to that PE the industrial or commercial profits, which it might be expected to derive in that other territory, if it were an independent enterprise engaged in th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... distinct entity dealing independently of its permanent company, the actual cost of the assets is to be determined at what it costs to the PE. Thus, when vessels are being brought into India, they have certain values in Dutch Guilders, then their cost to the PE would be the one which is determined at the current exchange rate rather on the basis of historical exchange rate, i.e., exchange rate of 1985. The computation of income of PE cannot be confused with the computation of income of parent company. The assessee company has to be deemed to be in India as PE as independent and distinct from the company registered in Netherlands for the purpose of computing its income in India. In view of this the actual cost as worked out by the assessee by applying current exchange rate would be proper and therefore, computation of depreciation thereon as done by it would also be proper. We, therefore, reject the Revenue's contention that exchange rate of 1985 has to be applied on the valuation done by the chartered accountants and not the exchange rate as on the specified date of the financial year relevant to the asst. yr. 1995-96. Thus, we confirm the order of the CIT(A). Grounds of the Revenue ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee and there is no material on the record to hold to the contrary. It is also seen from the order of the assessment that this asset was brought to India on 2nd April, 1994 from the foreign country, which also shows that the asset was not acquired by the assessee in this year. We are also of the view that there cannot be two years of acquisition, i.e., one for the purpose of global taxation and another for the purpose of Indian taxation. Therefore, on the facts of the case, we hold that the asset was not acquired in the year under consideration and consequently, the second proviso cannot be applied to the present case. Hence, depreciation cannot be restricted to 50 per cent of the normal depreciation." 19. Thus, for restricting the depreciation to 50 per cent both the conditions should be cumulatively satisfied because the legislature has used the word "and" in between these two conditions. We, therefore, reject this contention of the Revenue that only 50 per cent depreciation should be allowed and approve the order of the CIT(A) in this regard. 20. The contention of the Revenue that on one hand, the assessee is applying exchange rate during financial year 1994-95 for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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