Commissioner Of Income-Tax vs Phillips Petroleum ...
2004 Latest Caselaw 350 Del

JUDGMENT

B.C. Patel, C.J.

1. At the instance of the Revenue under Section 256(2) of the Income-tax Act, 1961, the following two questions have been referred by the Income-tax Appellate Tribunal :

"1. Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that the expenditure of Rs. 77,986 incurred by the non-resident assessed in converting its rupee earnings into foreign currency for remittance abroad under the terms of the agreement with its Indian collaborators is an admissible business expenditure?

2. Whether, on the facts and in the circumstances of the case, the Tribunal is correct in law in holding that the expenditure incurred by the assessed for remittance abroad of income earned in India is laid out wholly and exclusively for the purpose of its business and is an admissible deduction under Section 37 of the Income-tax Act ?"

2. The assessed is a non-resident corporation having its headquarters in the Republic of Panama and a branch office at New Delhi. The assessed entered into a technical service agreement on February 26, 1969, with Cochin Refineries Ltd. According to the agreement, the assessed was entitled for fees in Indian rupees equivalent to 2.6 US cents per barrel of crude oil produced by the Indian company. Out of the technical fees received, a part was converted into US dollars and remitted abroad to the account of the assessed. Though, according to the technical service agreement, the assessed was paid fees in Indian rupees equivalent to 2.6 US cents per barrel of crude oil, the assessed purportedly incurred loss in getting the rupees converted into dollars for the purpose of remittance. The assessed claimed a loss of Rs. 77,986 and claimed the same as exchange loss by way of business expenditure. However, the Income-tax Officer denied the same against which, the appeal was preferred by the assessed before the Appellate Assistant Commissioner. The Appellate Assistant Commissioner deleted the addition of Rs. 77, 986, against which the Revenue preferred an appeal before the Income-tax Appellate Tribunal (for short "the ITAT"). By order dated February 8, 1979, the Income-tax Appellate Tribunal upheld the said deduction and confirmed the order made by the Appellate Assistant Commissioner.

3. On behalf of the Revenue, it is contended that the exchange loss is capital in nature as it arose after income was already received in India. As per the agreement, the amount was paid in Indian rupees equivalent to 2.6 US cents per barrel. It is after receipt of the amount the same was converted into US dollars. The contract provided for the payment, however, the same was to be made in Indian rupees. The agreement is also clear that the amount is to be paid in Indian rupees equivalent to 2.6 US cents per barrel. Thus the amount was paid keeping in mind the exchange rate, on the date of payment.

4. The assessed may in the course of its trading transaction, such as purchase of goods abroad, which involves as a necessary incidence of the transaction itself as also the purchase of currency of foreign country concerned and, in such a case, profit resulting from appreciation or loss resulting from depreciation of the foreign currency embarked in the transaction would prima facie be a trading profit or a trading loss. It is required to be noted that the amount which was received is in the nature of capital, then there is no question of claiming the loss. If the loss is suffered in converting rupees into US dollars and if the same is not connected with the business of the assessed then there is no question of considering the same as revenue expenditure. The assessed received the amount from Cochin Refineries Ltd., in rupees equivalent of 2.6 US cents per barrel and when the amount was paid to the assessed in India, it became its income. It was on this amount, the tax was to be levied. Whatever the expenditure allowable under the Income-tax Act was incurred in receiving this income can be the subject matter of deduction. However, if the income is received and later on is transmitted to the Republic of Panama and on account of fluctuation there is a loss, then the same cannot be treated as an expenditure by way of trading loss or business expenditure. Where profit and loss arose on account of appreciation or depreciation in the value of foreign currency held by the assessed on conversion into another currency, such profit or loss would ordinarily be trading profit or loss, if the foreign currency is held by the assessed on revenue account or as a trading asset or as part of circulating capital embarked in the business. On the other hand, if the income which is already received by the assessed is held as a capital asset and for converting the same in foreign currency if there is profit or loss, the same would be treated as capital in nature. If the amount is held as a capital asset, then there is no question of considering the same towards trading loss.

5. It is also required to be noted as held by the apex court in the case of Sutlej Cotton Mills Ltd. v. CIT ARI 1979 SC 5 if there is any loss on account of depreciation of the currency which is embarked or adventured in the business and is part of the circulating capital, it would be a trading loss, but depreciation on fixed capital on account of alteration in exchange rate would be capital loss. If the amount in foreign currency is utilised or is intended to be utilised in the course of business or for a trading purpose or for effecting a transaction on revenue account, loss arising from depreciation in its value on account of alteration in the rate of exchange would be a trading loss.

6. In the instant case, as pointed out above, the amount was to be paid in India in Indian currency and that too by way of fee and the moment the amount is paid in this fashion, that would become capital of the assessed. As indicated earlier, if there is a fluctuation in exchange value and the amount is used for the purpose of business, the matter would be different.

7. A Division Bench of this court in the case of Jain Tube Co. Ltd. v. CIT [2002] 254 ITR 570 had an occasion to consider an almost similar situation. In the opinion of the court, in view of the agreement, the Government of India was to use its good offices in obtaining approvals for seeking approval for remittances only. The Appellate Assistant Commissioner has clearly pointed out that the contract provides for a calculation of the payments in US currency yet the payment is stipulated to be made in Indian rupees. It was agreed by the assessed to accept the fees in Indian rupees equivalent to US dollars, i.e., to say, the date on which fees were received considering the market rate of exchange for US dollar into rupees. The amount was received in rupees. Therefore, it is incorrect to say that the amount which was transmitted is to be treated as revenue receipts as part of the appellant's business activities and incidental to its trading. In the opinion of the court when Cochin Refineries Ltd., paid in rupees the equivalent of 2.62 US cents per barrel to the assessed in India, the amount so received became its income. Thereafter the amount is converted and transmitted, as a result of which on account of fluctuation if there is loss, it cannot be treated as a business expenditure. If, on the same date the amount was transmitted, there may not be question of any loss but if the assessed for reasons best known to it has kept the amount in Indian currency and has suffered a loss, the same cannot be considered as business expenditure. The court is required to consider the assessed's taxable income when it is1 received. The exchange loss was not connected with the royalty and, therefore, cannot be treated as a business expenditure.

8. The Tribunal has also erred in coming to the conclusion that when the 8 assessed transferred part of its income from India, it was transferring only a part of the circulating capital; the income earned by the assessed in India did not assume the character of a capital asset or fixed capital. In what manner, the income earned in India after its receipt at the head office was to be utilised, had to be determined by the head office and this could be done only after the amount from India was converted into dollars and received there. When the Tribunal proceeded with the observation that the assessed transferred a part of its income from India, it ought not to have assumed that it was transferring part of the circulating capital. Income earned in India was to be taxed and not income which company's head office would have earned abroad.

9. After the income is received, it becomes capital and for transferring the 9 same on account of fluctuation in exchange rate, the loss occasioned cannot be treated as business expenditure. In view of what is stated hereinabove, question No. 1 is required to be answered in favor of the Revenue and against the assessed.

10. As we have answered question No. 1 in favor of the Revenue, question 10 No. 2 is not required to be examined.

11. The reference is disposed of accordingly.