Income Computation and Disclosure Standard
VI : Relating to the effects of changes in foreign exchange rates
NOTIFICATION NO. 32/2015, DATED: 31-03-2015
ICDS (INCOME COMPUTATION AND DISCLOSURE STANDARD) NOTIFIED BY CENTRAL GOVERNMENT FOR THE PURPOSE OF SECTION 145
EFFECTIVE FROM 01.04.2015.
S.O. 892 (E) In exercise of the powers conferred by sub-section (2) of section 145 of the Income-tax Act, 1961 (43 of 1961) and in supersession of the notification of the Government of India in the Ministry of Finance, Department of Revenue, published in the Gazette of India, Part II, Section 3, Sub-section (ii), vide number S.O 69(E) dated the 25th January, 1996, except as respects things done or omitted to be done before such supersession, the Central Government hereby notifies the income computation and disclosure standards as specified in the Annexure to be followed by all assessees, following the mercantile system of accounting, for the purposes of computation of income chargeable to income-tax under the head “Profit and gains of business or profession” or ” Income from other sources”. This notification shall come into force with effect from 1st day of April, 2015, and shall accordingly apply to the assessment year 2016-17 and subsequent assessment years.
[See Notification No.32/2015, F. No. 134/48/2010-TPL, dated 31st March, 2015]
Income Computation and Disclosure Standard
VI : Relating to the effects of changes in foreign exchange rates
This Income Computation and Disclosure Standard is applicable for computation of income chargeable under the head “Profits and gains of business or profession” or “Income from other sources” and not for the purpose of maintenance of books of accounts.
In the case of conflict between the provisions of the Income-tax Act, 1961 (‘the Act’) and this Income Computation and Disclosure Standard, the provisions of the Act shall prevail to that extent.
1. This Income Computation and Disclosure Standard deals with:
(a) treatment of transactions in foreign currencies;
(b) translating the financial statements of foreign operations;
(c) treatment of foreign currency transactions in the nature of forward exchange contracts.
2. (1) The following terms are used in this Income Computation and Disclosure Standard with the meanings specified:
(a) “Average rate” is the mean of the exchange rates in force during a period.
(b) “Closing rate” is the exchange rate at the last day of the previous year.
(c) “Exchange difference” is the difference resulting from reporting the same number of units of a foreign currency in the reporting currency of a person at different exchange rates.
(d) ” Exchange rate” is the ratio for exchange of two currencies.
(e) “Foreign currency” is a currency other than the reporting currency of a person.
(f) “Foreign operations of a person” is a branch, by whatever name called, of that person, the activities of which are based or conducted in a country other than India.
(g) “Foreign currency transaction” is a transaction which is denominated in or requires settlement in a foreign currency, including transactions arising when a person:—
(i) buys or sells goods or services whose price is denominated in a foreign currency; or
(ii) borrows or lends funds when the amounts payable or receivable are denominated in a foreign currency; or
(iii) becomes a party to an unperformed forward exchange contract; or
(iv) otherwise acquires or disposes of assets, or incurs or settles liabilities, denominated in a foreign currency.
(h) “Forward exchange contract” means an agreement to exchange different currencies at a forward rate, and includes a foreign currency option contract or another financial instrument of a similar nature;
(i) “Forward rate” is the specified exchange rate for exchange of two Currencies at a specified future date;
(j) “Indian currency” shall have the meaning as assigned to it in section 2 of the Foreign Exchange Management Act, 1999 (42 of 1999);
(k) “Integral foreign operation” is a foreign operation, the activities of which are an integral part of the operation of the person;
(l) “Monetary items” are money held and assets to be received or liabilities to be paid in fixed or determinable amounts of money. Cash, receivables, and payables are examples of monetary items;
(m) “Non-integral foreign operation” is a foreign operation that is not an integral foreign operation;
(n) “Non-monetary items” are assets and liabilities other than monetary items. Fixed assets, inventories, and investments in equity shares are examples of non-monetary items;(o) “Reporting currency” means Indian currency except for foreign operations where it shall mean currency of the country where the operations are carried out.
(2) Words and expressions used and not defined in this Income Computation and Disclosure Standard but defined in the Act shall have the meaning assigned to them in the Act.
Foreign Currency Transactions Initial Recognition
3. (1) A foreign currency transaction shall be recorded, on initial recognition in the reporting currency, by applying to the foreign currency amount the exchange rate between the reporting currency and the foreign currency at the date of the transaction.
(2) An average rate for a week or a month that approximates the actual rate at the date of the transaction may be used for all transaction in each foreign currency occurring during that period. If the exchange rate fluctuates significantly, the actual rate at the date of the transaction shall be used.
Conversion at Last Date of Previous Year
4. At last day of each previous year:—
(a) foreign currency monetary items shall be converted into reporting currency by applying the closing rate;
(b) where the closing rate does not reflect with reasonable accuracy, the amount in reporting currency that is likely to be realised from or required to disburse, a foreign currency monetary item owing to restriction on remittances or the closing rate being unrealistic and it is not possible to effect an exchange of currencies at that rate, then the relevant monetary item shall be reported in the reporting currency at the amount which is likely to be realised from or required to disburse such item at the last date of the previous year; and
(c) non-monetary items in a foreign currency shall be converted into reporting currency by using the exchange rate at the date of the transaction.
Recognition of Exchange Differences
5. (i) In respect of monetary items, exchange differences arising on the settlement thereof or on conversion thereof at last day of the previous year shall be recognised as income or as expense in that previous year.
(ii) In respect of non-monetary items, exchange differences arising on conversion thereof at the last day of the previous year shall not be recognised as income or as expense in that previous year.
Exceptions to Paragraphs 3, 4 and 5
6. Notwithstanding anything contained in paragraph 3, 4 and 5; initial recognition, conversion and recognition of exchange difference shall be subject to provisions of section 43A of the Act or Rule 115 of Income-tax Rules, 1962, as the case may be.
Financial Statements of Foreign Operations Classification of Foreign Operations
7. (1) The method used to translate the financial statements of a foreign operation depends on the way in which it is financed and operates in relation to a person. For this purpose, foreign operations are classified as either “integral foreign operations” or “non-integral foreign operations”.
(2) The following are indications that a foreign operation is a non-integral foreign operation rather than an integral foreign operation:—
(a) while the person may control the foreign operation, the activities of the foreign operation are carried out with a significant degree of autonomy from the activities of the person;
(b) transactions with the person are not a high proportion of the foreign operation’s activities;
(c) the activities of the foreign operation are financed mainly from its own operations or local borrowings;
(d) costs of labour, material and other components of the foreign operation’s products or services are primarily paid or settled in the local currency;
(e) the foreign operation’s sales are mainly in currencies other than Indian currency;
(f) cash flows of the person are insulated from the day-to-day activities of the foreign operation;
(g) sales prices for the foreign operation’s products or services are not primarily responsive on a short-term basis to changes in exchange rates but are determined more by local competition or local government regulation;
(h) there is an active local sales market for the foreign operation’s products or services, although there also might be significant amounts of exports.
Integral Foreign Operations
8. The financial statements of an integral foreign operation shall be translated using the principles and procedures in paragraphs 3 to 6 as if the transactions of the foreign operation had been those of the person himself.
Non-integral Foreign Operations
9. (1) In translating the financial statements of a non-integral foreign operation for a previous year, the person shall apply the following, namely:—
(a) the assets and liabilities, both monetary and non-monetary, of the non-integral foreign operation shall be translated at the closing rate;
(b) income and expense items of the non-integral foreign operation shall be translated at exchange rates at the dates of the transactions; and
(c) all resulting exchange differences shall be recognised as income or as expenses in that previous year.
(2) Notwithstanding anything stated in sub-paragraph 1, translation and recognition of exchange difference in cases referred to in section 43A of the Act or Rule 115 of Income-tax Rules, 1962 shall be carried out in accordance with the provisions contained in that section or that Rule, as the case may be.
Change in the Classification of a Foreign Operation
10. (1) When there is a change in the classification of a foreign operation, the translation procedures applicable to the revised classification should be applied from the date of the change in the classification.
(2) The consistency principle requires that foreign operation once classified as integral or non-integral is continued to be so classified. However, a change in the way in which a foreign operation is financed and operates in relation to the person may lead to a change in the classification of that foreign operation.
Forward Exchange Contracts
11. (1) Any premium or discount arising at the inception of a forward exchange contract shall be amortised as expense or income over the life of the contract. Exchange differences on such a contract shall be recognised as income or as expense in the previous year in which the exchange rates change. Any profit or loss arising on cancellation or renewal shall be recognised as income or as expense for the previous year.
(2) The provisions of sub-para (1) shall apply provided that the contract:
(a) is not intended for trading or speculation purposes; and
(b) is entered into to establish the amount of the reporting currency required or available at the settlement date of the transaction.
(3) The provisions of sub-para (1) shall not apply to the contract that is entered into to hedge the foreign currency risk of a firm commitment or a highly probable forecast transaction. For this purpose, firm commitment, shall not include assets and liabilities existing at the end of the previous year.
(4) The premium or discount that arises on the contract is measured by the difference between the exchange rate at the date of the inception of the contract and the forward rate specified in the contract. Exchange difference on the contract is the difference between:
(a) the foreign currency amount of the contract translated at the exchange rate at the last day of the previous year, or the settlement date where the transaction is settled during the previous year; and
(b) the same foreign currency amount translated at the date of inception of the contract or the last day of the immediately preceding previous year, whichever is later.
(5) Premium, discount or exchange difference on contracts that are intended for trading or speculation purposes, or that are entered into to hedge the foreign currency risk of a firm commitment or a highly probable forecast transaction shall be recognised at the time of settlement.
12. (1) All foreign currency transactions undertaken on or after 1st day of April, 2015 shall be recognised in accordance with the provisions of this standard.
(2) Exchange differences arising in respect of monetary items or non-monetary items, on the settlement thereof during the previous year commencing on the 1st day of April, 2015 or on conversion thereof at the last day of the previous year commencing on the 1st day of April, 2015, shall be recognised in accordance with the provisions of this standard after taking into account the amount recognised on the last day of the previous year ending on the 31st March,2015 for an item, if any, which is carried forward from said previous year.
(3) The financial statements of foreign operations for the previous year commencing on the 1st day of April, 2015 shall be translated using the principles and procedures specified in this standard after taking into account the amount recognised on the last day of the previous year ending on the 31st March, 2015 for an item, if any, which is carried forward from said previous year.
(4) All forward exchange contracts existing on the 1st day of April, 2015 or entered on or after 1st day of April, 2015 shall be dealt with in accordance with the provisions of this standard after taking into account the income or expenses, if any, recognised in respect of said contracts for the previous year ending on or before the 31st March, 2015.
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