M/S. HEALTHCARE GLOBAL ENTERPRISES LIMITED,BANGALORE vs. ASSISTANT COMMISSIONER OF INCOME TAX,, BANGALORE

The learned Authorised Representative filed the Paper Book with supporting evidences and judicial decision to substantiate that premium on forward contracts be considered as cost of acquisition of Capital Assets as per provisions of Sec. 43A of the Act. We consider proper to refer section 43A of the Act which is as under : “ 43A. Notwithstanding anything contained in any other provision of this Act, where an assessee has acquired any asset in any previous year from a country outside India for the purposes of his business or profession and, in consequence of a change in the rate of exchange during any previous year after the acquisition of such asset, there is an increase or reduction in the liability of the assessee as expressed in Indian currency (as compared to the (a) towards the whole or a part of the cost of the asset; or (b) towards repayment of the whole or a part of the moneys borrowed by him from any person, directly or indirectly, in any foreign currency specifically for the purpose of acquiring the asset along with interest, if any, the amount by which the liability as aforesaid is so increased or reduced during such previous year and which is taken into account at the time of making the payment, irrespective of the method of accounting adopted by the assessee, shall be added to, or, as the case may be, deducted from— (i) the actual cost of the asset as defined in clause (1) of section 43; or (ii) the amount of expenditure of a capital nature referred to in clause (iv) of sub-section (1) of section 35; or (iii) the amount of expenditure of a capital nature referred to in section 35A; or (iv) the amount of expenditure of a capital nature referred to in clause (ix) of sub-section (1) of section 36; or (v) the cost of acquisition of a capital asset (not being a capital asset referred to in section 50) for the purposes of section 48, and the amount arrived at after such addition or deduction shall be taken to be the actual cost of the asset or the amount of expenditure of a capital nature or, as the case may be, the cost of acquisition of the capital asset as aforesaid: Provided that where an addition to or deduction from the actual cost or expenditure or cost of acquisition has been made under this section, as it stood immediately before its substitution by the Finance Act, 2002, on account of an increase or reduction in the liability as aforesaid, the amount to be added to, or, as the case may be, deducted under this section from, the actual cost or expenditure or cost of acquisition at the time of making the payment shall be so adjusted that the total amount added to, or, as the case may be, deducted from, the actual cost or expenditure or cost of acquisition, is equal to the increase or reduction in the aforesaid liability taken into account at the time of making payment.”

In the present case, one of the main arguments advanced on behalf of the assessee before us was that s. 43A was not applicable because roll over charge stood paid to avoid increase or reduction in liability as a consequence of the change in the rate of exchange. According to the assessee, s. 43A, as it stood at the material time, applied only to cases where there existed a fluctuation in the rate of exchange and since the roll over charge was paid to the authorized dealer by the assessee to avoid increase or reduction in liability on account of such fluctuation, s. 43A r/w Expln. 3 thereto would not apply to such roll over charges. We find no merit in this argument advanced on behalf of the assessee. According to the assessee, the cost for carrying forward the contracted foreign currency, not immediately required for repayment, is called the roll over charge(s). As stated above, according to the assessee, s. 43A was not applicable in this case as there was no increase or reduction in liability because such roll over charges were paid to avoid increase or reduction in liability consequent upon change in the rate of exchange. To answer this submission, one needs to keep in mind that during the relevant assessment years s. 43A applied to the entire liability remaining outstanding at the year-end, and it was not restricted merely to the instalments actually paid during the year. Therefore, at the relevant time, the year-end liability of the assessee had to be looked into. Further, it cannot be said that roll over charge has nothing to do with the fluctuation in the rate of exchange. In the present case, the notes to the accounts for the year-ending 31st Dec., 1986 (Sch. 17) indicates adverse fluctuations in the exchange rate in respect of liabilities pertaining to the assets acquired. This note clearly establishes existence of adverse fluctuations in the exchange rate which made the assessee opts for forward cover and which made the assessee pay roll over charges. The word "adverse" in the note itself presupposes increase in the liability incurred by the assessee during the year-ending 31st Dec., 1986. In the circumstances, we find no merit in the contention of the assessee that roll over charges have nothing to do with the fluctuation in the rate of exchange. Lastly, in this case we are concerned with capitalization of exchange difference in respect of acquisition of fixed assets acquired from abroad. According to Indian Accounting Standards by Dolphy D’Souza, roll over charges are indicative of the increase or decrease in the liability of the company in the next specified period, generally of six months. Roll over charges represent the difference arising on account of change in foreign exchange rates. Roll over charges paid/received in respect of liabilities relating to the acquisition of fixed assets should be debited/credited to the asset in respect of which liability was incurred. However, roll over charges not relating to fixed assets should be charged to the P&L a/c (see p. 325).

Before concluding, we may state that this judgment is confined to the facts of the present case. We may also clarify that the judgments cited on behalf of the assessee concerning commitment charges, warranty charges, etc., do not apply to the present case. None of these judgments deal with roll over charges. Hence, it is not necessary to discuss those judgments. 12. An alternative argument was advanced on behalf of the assessee that in the event this Court holds that roll over charges are to be capitalized in Expln. 3 to s. 43A as it stood prior to asst. yr. 2003-04, then, in that event the Tribunal may be directed to grant depreciation allowance on the written down value of the asset not only for the concerned years but also for the subsequent years till the entire value of the asset is written off. According to the assessee, such a direction is required to be given because the depreciation, according to the assessee, is available even for the assessment years after asst. yr.1994-95. On behalf of the assessee it was further submitted, as and by way of alternative submission, that the Department may not be allowed to charge interest or penalty as the issue involved is debatable.”