DCIT, CIRCLE-1(2)(1) (INTERNATIONAL TAXATION), NEW DELHI vs. COBRA INSTALACIONES Y SERVICIOS S.A., NEW DELHI

Further, the assessee averred that all the funds provided by Head Office were received in Euro and were converted into INR on the date of its receipt, since the repayment is also to be made In Euro, the outstanding amounts were restated on the prevailing exchange rate as on the end of the year. The assessee claimed that a transaction has taken place whereby funds required for the purpose of business by the PE have been remitted by the HO and therefore debiting the foreign exchange fluctuation gain/ loss on the outstanding balance at the end of the year on the basis of Mercantile System of Accounting.

6. The AO has not allowed the notional foreign exchange loss on restating the outstanding amount to the head office. The AO took a position that capital remittance to establish and run a business through project office is not loan but capital contribution 'and though it is a liability in the balance sheet of the project office', it cannot be called a debt incurred during the course of business. In this regard, the AO drew support from the project office accounts wherein the amount in question has been treated as remittance. Accordingly, the AO observed that amount in question has not been shown as loan from head office and any claim that this amount is loan from head office to project office is only an afterthought.

7. Further, the AO placed reliance on the judgment of the Hon'ble Calcutta High Court in the case of Betts Hartley Huett and Co. Ltd. vs. CIT, 116 ITR 425 wherein it is held that (a) it is an elementary proposition that no person can enter into a contract with oneself (b)

Debiting or crediting one's account cannot alter this legal position and (c) no question of profit or loss can arise as no person can enter into a contract with oneself.

7(3) of the India-Spain DTAA. The relevant extracts of Article 7(3) are reproduced as under:-

“3. In the determination of the profits of a permanent establishment, thee shall be allowed as deductions expenses which - are incurred for the purposes of the permanent establishment, including executive and general administrative expenses, research and development expenses, interest and other similar expenses so incurred, whether in the State in which the permanent establishment is situated or elsewhere, in accordance with the provisions of and subject to the limitations of the taxation laws of that State. However, no such deduction shall be allowed in respect of amounts, if any, paid (otherwise than towards reimbursement of actual expenses) by the permanent establishment to the head office of the enterprise or any of its other office, 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 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.

9. The AO highlighted that the above Article specifically prohibits any deduction for expenses relating to head office except reimbursement towards actual expenditure. Further, only in case of banking company the expenses on money lent to the PE is allowed as deduction. Based on provisions of Article-7(3) of India-Spain DTAA, the AD held that any notional expenditure/loss toward head office is not allowable as deduction. drawing final accounts of enterprises, capital invested is not revalued at market price each year and only certain debts in foreign currency are re- stated at the end of the financial year. Accordingly, the AO disallowed the assessee's claim of foreign exchange loss on re-statement of such remittance which is not in the nature of debt.

11, The AO distinguished the decision of the Hon'ble Supreme Court in the CIT Vs. Woodward Governor India (P) Limited (Supra) on facts and circumstances because in the case cited by the assessee, the issue of re-statements of amount received or invested in one's own business was not involved.

Ld. CIT (A) reproduced the assessee’s submission and ITAT’s order in assessee’s own case after noting that CIT (A) in that year has decided the issue in favour of the Revenue by giving following observations :- • “The appellant highlighted that as per Annexure - 8 of the Audited Balance sheet, substantial amount of remittance has been received from HO for current expenses, suppliers' advances etc. out of which almost half the amount received has been remitted back to the HO. The appellant took a plea that if the argument of the AO to consider remittance is taken as infusion of capital, in that case, there was no need to return any amount back to the HO. • The appellant pointed out that a) the PE i.e. appellant herein is not an incorporated entity but a project office for which permission has ./2019 been granted by Reserve Bank of India. Therefore, by no stretch of imagination the remittances from HO to PE can be treated as capital contribution b) the appellant being an unincorporated entity cannot receive any share capital. • The judgment' of the Hon'ble Calcutta High Court in the case of Betts Hartley Huett and Co. Ltd. vs. CIT, 116 ITR 425 is not applicable to the facts of the case. In the present case, the question is completely different in as much as the foreign fluctuation loss has been incurred due to devaluation of INR vis-a-vis Euro, as a result of which at the time of repayment the amount required by the project office to buy equivalent Euros to be paid to an authorized dealer would be significantly more. This fluctuation loss is not accruing to the HO as income but as an outgo to be incurred by the project office while making payment to the authorized dealer. Therefore, the A.O. has misinterpreted the proposition laid down in the aforesaid citation and incorrectly applied it in the case of the appellant. • As regards reliance placed by the AO on Article - 7(3) of DTAA between Indian and Spain, it is abundantly clear that there is no bar on claim of fluctuation loss as expenditure. The bar on expenditure where the transaction involves HO is only with respect to royalty, FTS or by way of commission or other charges for specific services performed by the HO. In fact, Article - 7(3) allows as deductions 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. 5.12 It may be relevant to mention here that the similar issue was decided in the case of the assessee for AY 2014-15 by CIT(A)-42. The issue was decided against the appellant. The relevant extracts of the decision in this regard are reproduced as under:

"In the backdrop of the above facts and submission of the assessee, it may be relevant to note that as per FEMA, the Project Office located in India does not come under the list of eligible borrowers, therefore, the PO is not eligible for external commercial borrowings. In such a situation, it is evident that the remittances are not in the nature of borrowings and therefore, it cannot be taken as, liability which has to be repaid. I find that the amount 'remitted to a project office in India by (7 foreign company to do business can not be taken as 'loan'/external commercial borrowing in the hands of project office due to the provisions of FEMA. It is important to note that the head office has contributed in the capacity of parent and the risk and reward are associated with capital contribution as against fixed return for contribution by way of loan. The head office is free to pull out capital or contribute ./2019 additional capital at its own discretion and therefore, the question of restatement of remittances from the head at office at the prevailing foreign exchange is not required. Therefore, the decision of Hon'ble Supreme Court in the case of Woodword Governor is not applicable in this case because the cited case was regarding the notional exchange loss/gain due to restatement of loans at the end of the year if the loan is utilized on revenue account. However, as discussed above, this is not the issue in the present case.

5.14 Further, the AO has rightly invoked Article 7(3) of India- Spain DTAA since the same does not allow any notional expenditure/loss as deduction. Thus, the AO has rightly held that the capital remittance to establish and run a business through project office is in the nature of capital contribution and though it is a liability in the balance sheet of the project office, it cannot be called a debit incurred during the course of business."

5.13 However, the appellant took the matter for AY 2014-15 before Hon'ble ITAT, Delhi wherein the tribunal decided (ITA.No.2391/Del./2018}the issue in favour of the appellant with the following observations, which are reproduced as under:

“8. We have considered the rival submissions and perused the material available on record. In this case, assessee- Company is a P. E. of Foreign-Company. Whatever income has accrued or arisen, have been assessed in India against the P.E. The assessee- company explained that for completing the Project in India, either the advance received from the client, or the advance/loan have been received from the Head Office situated in Spain. The loans are admittedly received from Head Office in EURO and have been repaid in EURO as per RBI guidelines to carry out operations in India and were outstanding in balance- sheet. It is also not in dispute that the money so received from the Head Office is revenue in nature because the amount of the loan is utilized in day- to-day operations i.e., working-capital required for Project execution and to obtain material as per the terms of the Contract. The utilization of the amounts received from Head Office did not bring any capital asset into existence. Therefore, the amounts so received from the Head Office have been utilized to incur the operating cost. The assessee-company has filed copy of the balance-sheet to show that the amount in question have been shown as liability in assessment year under appeal. The outstanding payable to the Head Office as on 31.03.2014 increased to Rs.154,38,08,645/- as compared 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 ./2019 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 fluctuation loss in A Ys. 2012-2013 and 2013- 2014 preceding to assessment year under appeal, have been accepted by the AO under section143(3) of the I. T. Act, 1961. No material have been brought on record, if assessee-company has violated any provisions of FEMA Law or any other Act, for receiving such funds from the Head Office. Therefore, merely referring to FEMA is not enough to disallow the claim of assessee- company. It is also not in dispute that due to depreciation in the Rupee prices in the International Market in the year under consideration, assessee-company has claimed foreign exchange fluctuation loss on the amount outstanding in foreign currency towards Head Office which consists of advance payment made by the Head Office towards execution of the Project and the amount of Engineering charge billed in their home currency by the Head Office towards the services provided. Therefore, the character of the sundry payable to the Head Office is in the nature of payables/liability. Therefore, it is, on account of revenue account and the loss represents the revenue loss. The assessee- company further explained that it has not paid any interest on the funds borrowed from Head Office. Since, there is no dispute that amount received from the Head Office was in EURO and repaid in EURO, therefore, difference in INR and EURO was correctly claimed as foreign exchange fluctuation loss. The decision of the Hon'ble Calcutta High Court relied upon by the A O. in the case of Betts Hartley Huett and Co. Ltd., vs. CIT 116 ITR 425 (supra), is distinguishable from the facts of the case because in the present case, no profit have been earned by the same person. The Article 7(3) of India-Spain DTAA is not applicable in this case because nothing is paid by the assessee- company to the Head Office on account of loss and no deduction claimed. The items of expenses specified in DTAA are not applicable in case of assessee. It was a differential amount on account of foreign exchange fluctuation loss that assessee- company suffered which was claimed as deduction in the P & L A/c. The assessee-company has not violated any terms of Article 7(3) India-Spain DTAA as reproduced above because whatever bar have been provided in this Article are not applicable to the case of the assessee-company. The assessee- company being P.E. of foreign company in India could not obtain ./2019 any borrowings from 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.D. 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 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 AY 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 AO 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 consistency do apply to the Income Tax proceedings. Therefore, on the same set of facts, the A.D. cannot take a different view in the assessment year under appeal. We may note here that the Hon'ble Supreme Court in the case of CIT vs. Woodward Governor India P. Ltd., (supra) held that the "loss" suffered by the assessee on account of fluctuation in the rate of foreign exchange as on the date of the balance-sheet is an item of expenditure under section 37(1) of the I.T. Act, which, clearly support our findings that assessee- company is entitled far deduction on account of foreign exchange fluctuation loss. It is an undisputed fact that assessee-company received the amount from Head Office in EURO and repaid to Head Office in EURO, therefore, even if the amount may be coiled by any name i.e., loan, borrowing or otherwise, but the assessee- company has suffered foreign exchange fluctuation loss on account of amount received from Head Office in EURO and repaid in EURO on account of differential value in INR, therefore, such fluctuation loss is allowable as deduction in favour of the assessee- company. Considering the totality of the facts and circumstances of the case, we are of the view that assessee-company is entitled for deduction on account of foreign exchange fluctuation loss. We, accordingly, set aside the orders of the authorities below and delete the entire addition."