Applicability of year end rate for conversion of business income earned in foreign currency

This article summarizes ruling of the Delhi Income Tax Appellate Tribunal (ITAT) in the case of DCIT v Dolphin Drilling Pte. Ltd. (Taxpayer) [2009-TIOL-754- 1TAT-DEL]. The ITAT held that the conversion of business income earned in foreign currency into INR, in accordance with Rule 115 (Rule) of the Indian Tax Law (ITL), is to be made by adopting the conversion rate prevailing at the end of the tax year. It also held that the Taxpayer, a company incorporated in Singapore and engaged in the business of hiring out drill-ship in India, is entitled to claim depreciation on the value of the drill-ship.

Background and facts of the case

• As per the Rule, taxpayers earning income in foreign currency are required to convert such income into INR using the telegraphic transfer (TT) buying rate as on the specified date. The specified date is different for different sources of income. In respect of income chargeable under the head ‘house property’, ‘business and profession’ and ‘income from other sources’, the specified date is the last day of the relevant tax year.

• The Taxpayer, a company incorporated in Singapore, hired out its drill-ship to its sister concern in connection with the execution of the latter’s contract with an Indian entity. The income from hiring out was earned in USD by the Taxpayer.

• The Taxpayer declared the hiring income as business income. In its computation, the Taxpayer claimed deduction for depreciation on the cost of drill-ship which was incurred in USD. For earning the hiring income, the Taxpayer also incurred certain expenses in foreign currencies other than USD.

• Relying on the Rule, the Taxpayer converted revenue and expenses by adopting the conversion rate prevailing at the end of the tax year.

• In support of its claim for depreciation, the Taxpayer furnished the invoices, the auditor’s certificate certifying the actual cost, the certificate of registration and the valuation report from renowned valuers.

• The Tax Authority held that the method for conversion adopted by the Taxpayer was incorrect. The Tax Authority contended that the Taxpayer’s business income should be computed by first converting the business transactions in other currencies into USD by applying the rate on the date of such transaction. Thereafter, the net result in terms of USD should be converted to INR by adopting the rate prevailing at the end of the tax year.

• The Tax Authority also denied the claim of depreciation by contending that the Taxpayer had failed to substantiate the ownership of the drill-ship, as also the actual cost incurred for acquiring the drill-ship.

• The Tax Authority rejected the Taxpayer’s books of account for the above reasons and computed the income on a presumptive basis, with reference to its gross receipts.

• The first appellate authority accepted the Taxpayer’s contentions and approved the method adopted for conversion of income in terms of the Rule. It also held that the Taxpayer was entitled to depreciation on the drill-ship as it had adequately substantiated the proof of ownership and the actual cost.

• Aggrieved by the decision of the first appellate authority, the Tax Authority further appealed to the ITAT.

Contentions of the Tax Authority