EGGER PUMPS INDIA PVT LTD.,COIMBATORE vs. ITO, COIMBATORE

आदेश / O R D E R

PER CHANDRA POOJARI, ACCOUNTANT MEMBER:

2. The assessee raised the following grounds for adjudication.

1. For that the order of the Commissioner of Income Tax (Appeals)”CIT (A)” is contrary to the Law, facts and circumstances of the case and is opposed to the principal of equity, natural justice and fair play.

2. For that the CIT(A) erred in disallowing the revenue expenditure on foreign exchange fluctuations debited in the profit and loss account.

4. For that the CIT(A) failed to appreciate that the addition is against the principles laid in the Accounting Standard 16 issued by the Institute of Chartered Accountants of India in treating the loss on account of foreign Exchange.

5. For that the CIT(A) did not take into consideration the submissions made by the Assessee.

3. The brief facts of the case are that the assessee had charged to the P&L A/c a sum of `31,12,150/- under the head “Foreign Exchange Fluctuation”. It was stated that the foreign exchange loss claimed on account of difference in foreign exchange rate arises primarily due to the restatement of the “External Commercial Borrowing (ECB) loan” from the parent company on 21.09.2011 just prior to the conversion of the loan into equity shares. It was observed that the parent Emile Egger & CIE SA, Switzerland had advanced the money during the period i.e. between February and November, 2006. The total remittance amounting to `3,24,982.65 Euros was said to be External Commercial Borrowing in the FIRCs of the banker M/s.Kotak Mahindra Bank. The total inward remittances amounting to `1,78,84,580/- in Indian rupees. The loan remains outstanding has remained static right through the balance sheets of the earlier years and no interest was charged on the restatement of loan at `2,15,79,998/-, which was converted fully into 1739 equity shares of face value of `10,000/- with premium of `2,409/- per share. Though the ld. Assessing Officer wanted to disallow the entire amount of `31,12,150/- and it was clarified by the assessee that only `11,69,999/- was debited to the P&L A/c on this restatement of the liability and the same was disallowed by the AO on the reason that amount was received by the assessee at the time of pre- commencement of business to fund the factory building and in the purchase of indigenous plant and machinery. Accordingly, the ld. Assessing Officer was of the opinion that the parent company advanced the money to the assessee to infuse the capital to the assessee company so as to purchase the capital asset and it is a loss on restatement of the loan was considered as a capital nature and a sum of `11,69,999/- was disallowed. Aggrieved by the order of ld. Assessing Officer, the assessee carried the appeal before the Ld.CIT(A). On appeal, Ld.CIT(A) endorsed the view of the ld. Assessing Officer. Against the order of Ld.CIT(A), now the Assessee is in appeal before us.

“The ECB loan/advance was an old one and treatment of the foreign exchange fluctuation especially in case of increase for all the previous years was taken to be on the revenue side, hence it is implied that the revenue accepted that the foreign exchange amounts amounted to income and proceeded to deal with it as such.”

“reversing the decision of the High Court, proceeding on the basis that the purpose of the loan taken by the assessee was to finance the purchase of plant and machinery, and on the facts of this case, that it could not be said that the rollover charges had nothing to do with the fluctuation in the rate of foreign exchange. Since the court was concerned with capitalisation of foreign exchange difference in respect of acquisition of fixed assets from abroad, rollover charges relating thereto had to be debited/credited to the asset in respect of which liability was incurred. Rollover premium charges were not allowable under section 36(1)(iii) . Explanation 3 to section 43A , as it stood prior to its amendment in 2002, would apply to such roll over charges.”

6.1 Further in the case of C.I.TVs. Claimate Systems P Ltd. 90CCH 40(Del.) wherein it was held as follows:-

“8. Decision of the Delhi High Court in Woodward Governor India Pvt. Ltd. (supra) has been affirmed by the Supreme Court in decision reported as Commissioner of Income Tax, Delhi Vs. Woodward Governor India Pvt. Ltd. [2009] 312 ITR 254. It has been, inter alia, held that the expression “expenditure” in Section 37(1) of the Act connotes “what is paid out” and what has gone irretrievably. But the word “expenditure” used in context of Section 37(1) would also cover ,,loss? even though the said amount had not gone out from the pocket of the assessee. The said provision was a residuary provision extending the allowance to items of business expenditure, not covered by Section 30 to 36 of the Act. Reference was made to Section 28 and 29 read with Section 145(1) of the Act, and it was observed that accounts maintained in the normal course of business should be taken as correct unless there were strong and sufficient reasons for their unreliability. Thus, the profits and gains? of the previous year were required to be computed with regard to the relevant Accounting Standards. The reference also made to Accounting Standard-11, which deals with the effects of foreign exchange fluctuations, and it was accordingly observed as under: “21. In conclusion, we may state that in order to find out if an expenditure is deductible the following have to be taken into account (I) whether the system of accounting followed by the assessee is mercantile system, which brings into debit the expenditure amount for which a legal liability has been incurred before it is actually disbursed and brings into credit what is due, immediately it becomes due and before it is actually received; (ii) whether the same system is followed by the assessee from the very beginning and if there was a change in the system, whether the change was bona fide; (iii) whether the assessee has given the same treatment to losses claimed to have accrued and to the gains that may accrue to it; (iv) whether the assessee has been consistent anc definite in making entries in the account books in respect of losses and gains; (v) whether the method adopted by the assessee for making entries in the books both in respect of losses and gains is as per nationally accepted accounting standards; (vi) whether the system adopted by the assessee is fair and reasonable or is adopted only with a view to reducing the incidence of taxation”.

Thereafter, reference was made to Section 43A of the Act, both as the provision stood prior to 01.04.2003 and thereafter. However, we need not to go further into the said issue as the Supreme Court in Woodward Governor India Pvt. Ltd. (supra) had dealt with the unamended Section 43A of the Act.”

6.2 Further in the case of Mettler Toledo India (P.) Ltd.Vs. ITO reported in [2013] 56 SOT 498 (ITAT[Mum]) wherein it was held as follows:-

“13. We have perused the records and considered the rival contentions carefully. The dispute is regarding allowability of loss on account of foreign exchange fluctuation in respect of foreign currency loan taken by the assessee. The assessee had been restating foreign exchange loan liability on the balance-sheet date which resulted into loss which has been claimed as deduction. The loss/gain on account of foreign exchange fluctuation on restatement of the loan liability on the balance-sheet date is required to be taken into account in computation of income if the loan is on revenue account or is a working capital loan. Loss is allowable as deduction under section 37(1) as held by the hon'ble Supreme Court in the case of Woodward Governor India (P.) Ltd. (supra). The loan in this case had been taken as working capital loan as is clear from the loan agreement wherein the purpose of the loan is clearly mentioned to use it as a working capital to finance the activities of the company. As held by the hon'ble Supreme Court in the case of Sutlej Cotton Mills Ltd. v. CIT [1979] 116 ITR 1, foreign currency fluctuation loss is allowable as deduction if the foreign currency is held on revenue account or as trading asset or as part of circulating capital employed in the business. As regards the year of allowability, the claim has to be allowed on the basis of restatement of the liability on the balance- sheet date as held by the hon'ble Supreme Court in the case of Woodward Governor India (P.) Ltd. (supra). Thus the claim of the assessee is allowable. In case there is gain in a year and the assessee has not offered it to tax, the Revenue is free to take action under law. In these years, admittedly there is loss which is allowable as deduction. We, therefore, set aside the order of the Commissioner of Income-tax (Appeals) and allow the claim of the assessee.”

6.3 Further Sutlej Cotton Mills Ltd. in (1979) 116 ITR 1(SC) wherein held that:

“Loss on devaluation of currency is a trading loss if it is a loss arising to assessee on conversion of foreign currency into another currency held as part of circulating capital.”

6.4 Further in the case of Likproof India (P.) Ltd. Vs. ACIT in 74 Taxmann.com 229(Mum.Trib.)

“10. We have considered the rival contentions and also perused the material available on record including case laws relied upon by both the parties. We have observed that the assessee company has incorporated an associated company (AE) in UAE in Emirates of Dubai namely Likproof Construction LLC for undertaking construction work. Memorandum and Article of Association of said foreign AE i.e. UAE company Likproof Construction LLC filed by the assessee company is placed in the file. The assessee company has granted loans denominated in foreign currency to the said foreign AE and also charged interest from the foreign AE of which interest income is offered for taxation as business income which is accepted by Revenue. The assessee company has advanced the loan denominated in foreign currency to said foreign AE and the foreign exchange loss amounting to Rs. 15.66 lacs was debited to its P&L account which arose on account of adverse fluctuation in foreign exchange rates as on 31-03-2008 calculated on the outstanding value of the said loans denominated in foreign currency advanced by the assessee company to its foreign AE as on 31-03-2008. We have observed that the assessee company is not able to bring on record cogent material/evidences in support of its claim that business/trade advances/loans were extended by the assessee company to its foreign AE which has been in-fact actually utilized by its foreign AE for business purposes .The copies of Financial Statements of the said foreign AE or any other cogent material/evidences are not placed on records to prove and demonstrate that the assessee company extended trade/business advances to its foreign AE in Emirates of Dubai in UAE and the same were in-fact actually utilized towards business purposes by its foreign AE while consistent finding of fact is recorded by authorities below that the assessee company is not able to demonstrate and prove its contentions that the said interest bearing loans/advances denominated in foreign currency were granted by the assessee company to its foreign AE in UAE for business purposes and its actual utilization by its foreign AE in UAE for business purposes. No such evidences has been placed before us by the assessee company to support its contention of having advances loans denominated in foreign currency to its foreign AE in UAE for business/trade purposes and its further actual utilization by its foreign AE in UAE for business purposes. The primary onus was on the assessee company to have led cogent evidences to substantiate its plea of grant of said loans to its foreign AE for purposes of trade/business and its actual utilization by foreign AE for business purposes, which the assesse company except for making bald statement could not led cogent evidences to substantiate its above stated contentions. The assessee company on the other hand is charging interest on these loans granted to foreign AE and presumption will arise unless rebutted that that the said loans are in-fact granted on capital field rather than being trading/business advances. In our considered view, this notional loss which arises owing to adverse fluctuation in foreign currency rates as on 31-03-2008 which led to restatement/revaluation of interest bearing loans denominated in foreign currency extended by the assessee company to its foreign AE in UAE and which could not be proved by the assessee company to have been extended for trade/business purposes, the presumption ‘all arise that loan is on capital field until the same is rebutted by the assessee company and hence the Said notional loss arising on restatement/revaluation of foreign currency loans as on the date of Balance Sheet as on 31-03-2008 due to adverse foreign exchange fluctuations cannot be allowed as deduction u/s. 3 7(1) of the Act while computing income of the assessee chargeable to tax under the Act. The decision of Hon’ble Supreme Court in the case of Woodward Governor India (P.) Ltd. (supra) and decision of Mumbai Tribunal in ETP International (P.) Ltd. (supra) relied upon by the assessee company are of no help to the assessee company. The Hon’ble Supreme Court in Woodward Governor India (P.) Ltd. (supra) held that losses on account of fluctuation of foreign exchange rates owing to reinstatement of liability arisen for stock-in-trade were held to be allowable u/s. 37(1) of the Act, while for post amendment to Section 43A of the Act w.e.f 01-04-2003 by Finance Act 2002, the adjustment to cost of capital asset acquired out of borrowings in foreign currency for acquisition of capital asset is to be adjusted on payment of foreign exchange liability and not to be adjusted on notional basis merely on fluctuation of foreign exchange rates on the date of Balance Sheet. Similarly, in ETP International (P.) Ltd. (supra), the Tribunal recorded a finding of fact that the money was advanced by tax-payer for business purposes which has been used by foreign AE for the purposes of business and hence relying on the decision of Hon’ble Supreme Court in the case of SA Builders Ltd. v. CIT (Appeals) 120071 288 ITR 1/158 Taxnian 74 such losses were allowed by the Mumbai Tribunal based on the facts of the case, while in the instant case the assessee company is not able to demonstrate that the loans/advances granted by the assessee company to its foreign AE in Emirates of Dubai in UAE was in the nature of trade/business advances for the purposes of business of the assessee company which has been in-fact actually utilized by its foreign AE for its business purposes. Hence keeping in view the peculiar facts and circumstances of the case as set out above, we dismiss the appeal filed by the assessee company. We order accordingly.”

by the assessee is rejected.

8. In the result, the appeal of the assessee is dismissed. Order pronounced in the open court on 01st September, 2017.