Short overview  When External Commercial Borrowings (ECB) was utilized for purchase of capital assets in India by assessee, then, any change in the ECB value due to exchange fluctuation would not alter cost of fixed assets, therefore, the assessee deserved to be granted deduction towards foreign exchange fluctuation loss.

Assessee claimed foreign exchange fluctuation loss arising out of re-statement of External Commercial Borrowings (ECB) at the year end rates in accordance with Accounting Standard–11(AS-11) prescribed by Institute of Chartered Accountants of India (ICAI). AO made disallowance of foreign exchange loss by holding that it was capital expenditure and could not be allowed as deduction under section 37(1), which was confirmed by CIT(A).

It is that  The ECB had been utilized for purchase of capital assets in India by the assessee. Thereafter, any change in the ECB value due to exchange fluctuation would not alter the cost of fixed assets. It could be safely concluded that exchange loss had got absolutely no bearing/link with the cost of fixed asset. In that scenario, the only alternative was to treat the loss as loss incurred on the revenue field and the same was to be allowed as revenue expenditure. Therefore, the assessee deserved to be granted deduction towards foreign exchange fluctuation loss and the same was allowed.

Decision: In assessee’s favour

Referred: Radhasoami Satsang v. CIT (1992) 193 ITR 321 (SC) : 1992 TaxPub(DT) 0858 (SC); CIT v. M/s Woodward Governor India P. Ltd. (2009) 312 ITR 254 (SC) : 2009 TaxPub(DT) 1628 (SC); CIT v. Tata Iron & Steel Co. Ltd. (1998) 231 ITR 285 (SC) : 1998 TaxPub(DT) 1068 (SC).

 

IN THE ITAT, MUMBAI BENCH

M. BALAGANESH, A.M. & AMARJIT SINGH, J.M.

Pharmabase India (P) Ltd. v. Dy. CIT

ITA No. 7374/Mum/2016

A.Y. 2012-13

7 August, 2019

Assessee by : Reepal Tralshawala

Revenue by : Abi Rama Kartikeyan

M. Balaganesh, A.M.

This appeal in ITA No. 7374/Mum/2016 for assessment year 2012-13 arises out of the order by the learned Commissioner (Appeals)-21, Mumbai in Appeal No. CIT (Appeals)-21/DCIT-13(1)(2)/IT-17/2015-16 dt. 19-9-2016 (learned CIT (A) in short) against the order of assessment passed under section 143(3) of the Income Tax Act, 1961 (hereinafter referred to as Act) dt. 9-3-2015 by the learned Dy. CIT, Circle – 13(1)(2), Mumbai (hereinafter referred to as learned assessing officer).

2. The first issue to be decided in this appeal is as to whether the learned Commissioner (Appeals) was justified in confirming the disallowance of foreign exchange fluctuation loss of Rs. 2,92,79,250 arising out of re-statement of External Commercial Borrowings (ECB) at the year end rates in accordance with Accounting Standard – 11 (AS-11) prescribed by the Institute of Chartered Accountants of India (ICAI). The interconnected issue involved therein is as to whether the learned Commissioner (Appeals) was justified in confirming the disallowance of foreign exchange loss above by holding that it is capital expenditure and cannot be allowed as deduction under section 37(1) of the Act.

3. We have heard rival submissions. At the outset, we find that the assessee had borrowed ECB in earlier years and had restated the same at the exchange rate prevailing at the end of the year and had incurred exchange fluctuation loss thereon during the year in the sum of Rs. 2,92,79,250. This was debited to the profit and loss account by the assessee under the head “Finance Charges” as is evident in Note No.23 of the Balance Sheet as on 31-3-2012. In other words, since assessee is not paying any interest on the said ECB, in view of the huge exchange fluctuation risk undertaken by the assessee, the assessee pursuant to its renegotiation with its foreign lender had resorted to treat the exchange fluctuation loss as finance charges (i.e. interest). It is not in dispute that the foreign lender had also agreed to the fact of not charging any interest on the ECB advanced by them to the assessee. Hence, it could be safely concluded that the difference in exchange rate resulting in exchange fluctuation loss would partake the character of interest liability for the assessee. It is not in dispute that the ECB loan availed by the assessee was utilised for capital expenditure by the assessee. It is not in dispute that the loan has been utilised for the purpose of business of the assessee in the earlier years. During the year the only movement in the ECB is with regard to exchange fluctuation loss arising due to re-statement at the year end exchange rates in accordance with AS-11 issued by ICAI which is mandatorily to be complied with by the assessee as per section 211(3C) of the companies Act, 1956. The assessee had debited this exchange loss in its P & L account in the sum of Rs. 2,92,79,250 and claimed the same as deduction in the return of income. The learned assessing officer held that the ECB was used for capital purposes by the assessee, the exchange loss arising there from would also take the character of capital expenditure and accordingly disallowed the same under section 37(1) of the Act. The learned assessing officer had not granted depreciation of foreign exchange loss even though the same was treated as capital in nature. The learned assessing officer also applied the provisions of section 43A of the Act in support of his contentions. We find that the learned Commissioner (Appeals) had observed that the provisions of section 43A of the Act are not applicable to the facts of the instant case as admittedly the assets were purchased by the assessee only in India and not from abroad. We find that both the learned assessing officer as well as the learned Commissioner (Appeals) had observed that the exchange fluctuation loss arising due to re-statement of ECB loan at the year end exchange rates is only a notional loss and not actual loss. In this regard, we hold that it is mandatory on the part of the assessee company to comply with the requirements of AS-11 issued by ICAI which mandates re-statement of foreign currency assets and liabilities at the exchange rate prevailing at the end of the year and correspondingly debit/credit the exchange fluctuation loss/gain thereon, as the case may be, in the profit and loss account of the assessee company. We find that the assessee company had duly complied with AS-11 issued by ICAI in this regard. We also find from the tabulation furnished in page 72 of the paper book that assessee had been earning exchange gain and had been incurring exchange loss due to re-statement of ECB loan at the year end rates from assessment year 2007-08 onwards and the same had been routed through profit and loss account of the assessee company and income has been offered whenever exchange gain arises and deduction has been claimed whenever exchange loss arises. This treatment made by the assessee has been consistently accepted by the revenue in the earlier years in scrutiny proceedings as tabulated hereinbelow:-

3.1. Hence, going by the principle of consistency which has been upheld by the Hon’ble Supreme Court in the case of Radhasaomi Satsang (1992) 193 ITR 321 (SC) : 1992 TaxPub(DT) 0858 (SC), there is no reason for the learned assessing officer to take a divergent stand during the year under consideration by disallowing the foreign exchange loss, when there is no change in facts when compared to earlier years. Even otherwise, we find that this issue is also squarely covered by the decision of Hon’ble Supreme Court in the case of Woodward Governor India Ltd. (2009) 312 ITR 254 (SC) : 2009 TaxPub(DT) 1628 (SC) wherein, among other aspects, it was also held that compliance to AS-11 of ICAI is mandatory for all companies registered in India.

3.2. We also find that the ECB has been utilized for purchase of capital assets in India by the assessee company. Thereafter, any change in the ECB value due to exchange fluctuation would not alter the cost of fixed assets. Reliance in this regard is placed on the decision of the Hon’ble Supreme Court in the case of Tata Iron and Steel Company Ltd. (1998) 231 ITR 285 (SC) : 1998 TaxPub(DT) 1068 (SC). Hence, it could be safely concluded that exchange loss has got absolutely no bearing/link with the cost of fixed asset. In that scenario, the only alternative is to treat the said loss as loss incurred on the revenue field and hence, to be allowed as revenue expenditure. In view of the aforesaid observations, we find that the decisions relied upon by the revenue are not at all applicable to the facts of the instant case and the decisions relied upon by us herein supra hereinabove would rule the field. Hence, we hold that the assessee deserves to be granted deduction towards foreign exchange fluctuation loss for more than one reason as detailed hereinabove. Accordingly, the grounds raised by the assessee are allowed.

4. In the result, appeal of the assessee is allowed.