Forex Loss on ECB Used to Buy Domestic Assets Allowable as Revenue Expense: ITAT Chennai

Alchymars ICM SM Pvt. Ltd. Vs DCIT (ITAT Chennai)

Summary: The Income Tax Appellate Tribunal, Chennai, considered an appeal filed by Alchymars ICM SM Pvt. Ltd., a company engaged in manufacturing and selling active pharmaceutical ingredients (APIs) and bulk drug intermediates, against the order of CIT(A)-1, Chennai, dated 14 February 2020, for Assessment Year 2012-13. The original assessment was completed under Section 143(3) read with Section 92CA of the Income-tax Act, 1961, on 16 February 2016. The appeal before the Tribunal was delayed by 186 days because of the COVID-19 pandemic. The assessee filed a condonation petition supported by an affidavit and relied on the Supreme Court’s directions extending limitation periods during the pandemic. Considering those directions, the Tribunal condoned the delay and admitted the appeal. The principal substantive dispute concerned the disallowance of ₹37,08,705 representing foreign exchange fluctuation loss on external commercial borrowings (ECB). The Assessing Officer treated the loss as capital expenditure because the borrowed funds had been utilised to acquire fixed assets for the company’s expansion project. The CIT(A) upheld the disallowance, reasoning that exchange fluctuations relating to foreign currency loans obtained for acquiring capital assets should receive capital treatment.

Before the Tribunal, the assessee submitted that the ECB had been obtained to partly finance its business expansion and that the entire loan amount was utilised for purchasing fixed assets from the domestic market. No machinery or other assets had been imported from outside India. The assessee contended that Section 43A of the Income-tax Act specifically deals with adjustments arising from changes in exchange rates where assets are acquired from outside India. Since the assets in the present case were purchased domestically, the assessee argued that Section 43A could not be applied to capitalise the exchange fluctuation loss. It further submitted that the loss arose from fluctuations in the exchange rate between the date of borrowing and the relevant repayment or accounting date and should therefore be treated as revenue expenditure. The assessee relied principally on the Supreme Court’s decision in Wipro Finance Ltd. v. CIT, Civil Appeal No. 6677 of 2008, along with the decisions in Cooper Corporation (P.) Ltd. v. DCIT and TVS Motor Co. Ltd. The Revenue supported the findings of the Assessing Officer and CIT(A).

The Tribunal examined the facts and accepted that the assessee had obtained external commercial borrowings to partly finance its expansion project and that all the fixed assets purchased using those funds had been acquired from the domestic market. It was undisputed that the company had not imported any assets using the borrowed funds. The Tribunal relied on the Supreme Court’s ruling in Wipro Finance Ltd. v. CIT, which distinguished the treatment of foreign exchange fluctuations connected with imported assets from those arising in other business transactions. In that decision, the Supreme Court had explained that Section 43A was not applicable where the assessee had not acquired assets from a country outside India for its business. Applying that principle, the Chennai Bench held that the exchange fluctuation gain or loss arising from the ECB used for domestic asset purchases was to be assessed on revenue account. Consequently, the Tribunal reversed the disallowance sustained by the CIT(A) and allowed the assessee’s claim of ₹37,08,705. The ruling turned on the factual distinction between assets acquired domestically and assets imported from outside India.

Cases Discussed

FULL TEXT OF THE ORDER OF ITAT CHENNAI

This appeal by the assessee is arising out of the order of Commissioner of Income Tax (Appeals)-1, Chennai, in ITANo.63/CIT(A)-1/2016-17 dated 14.02.2020. The assessment was framed by the DCIT (OSD), Corporate Range-1, Chennai for the assessment year 2012-13 u/s.143(3) r.w.s. 92CA of the Income Tax Act, 1961 (hereinafter the ‘Act’) vide order dated 16.02.2016.

2. At the outset it is noticed that this appeal is time barred by 186 days as the order of CIT(A) was received by assessee on 24.02.2020 and appeal was to be filed before Tribunal on or before 25.04.2020, instead the appeal was filed by assessee only on 27.10.2020 thereby delay of 186 days. The assessee has filed condonation petition along with affidavit and stated that the delay was due to Covid-19 pandemic. The ld.counsel for the assessee stated the Hon’ble Supreme Court in Miscellaneous Application No.665 of 2021 vide order dated 23.03.2020 has given directions that the delay are to be condoned during this period 15.03.2020 to 14.03.2021 and they have condoned the delay up to 28.02.2022 in Miscellaneous Application No.21 of 2022 vide order dated 10.01.2022. In term of the directions of Hon’ble Supreme Court, we condone the delay in filing of this appeal by assessee and admit the appeal for adjudication.

3. The first issue in this appeal of assessee is as regards to the order of CIT(A) confirming the disallowance of Rs.37,08,705/- being loss incurred in foreign currency exchange fluctuation on account of ECB loss holding the same as capital in nature. For this, assessee has raised following grounds:-

2. The Commissioner of Income tax (Appeals) erred in confirming the disallowance of Rs.37,08,705/- being loss incurred in foreign currency exchange fluctuation on account ECB loss on the ground that it is capital in nature.

2.1 The Commissioner of Income tax (Appeals) ought to have appreciated that the borrowings were for the purpose of business and hence cost relating thereof is an allowable deduction.

2.2 The Commissioner of Income tax (Appeals) ought to have appreciated that only in respect of transactions to which Section 43A applies, foreign exchange loss or gains should be adjusted against the cost of the assets. In respect of other transactions, the forex loss should be allowed as a revenue expenditure.

4. Brief facts are that the assessee is engaged in the business of manufacture and sale of API and bulk drug intermediates. The AO during the course of assessment proceedings noticed that the assessee had claimed loss of Rs.37,08,705/- arising out of foreign exchange fluctuation in respect of foreign loss obtained by assessee. The AO disallowed the loss claimed on the ground that the amounts were utilized for acquisition of assets and hence, capital in nature. Aggrieved, assessee preferred appeal before CIT(A). The CIT(A) after considering the submissions of the assessee noted that gain on fluctuations on account of foreign currency loan taken to acquire fixed capital asset will be treated as capital receipt. Hence, loss on fluctuation on account of foreign currency loans taken to acquire fixed capital assets will be a capital loss. Aggrieved, assessee came in appeal before the Tribunal.

5. Before us, the ld.counsel for the assessee explained that assessee has availed external commercial borrowing to part finance its expansion project. The loan was drawn down and utilized for purchase of fixed assets all of which were domestic assets. He contended that assessee did not use the loan to procure assets from abroad. Therefore he argued, that there has been fluctuation in exchange rate viz-a-viz the rate on which loan was availed. The differential or transactional difference has resulted in loss of Rs.37,08,705/- to the assessee. The ld.counsel explained that the AO as well as the CIT(A) has considered the application of provision of section 43A of the Act and disallowed the loss. The ld.counsel argued that section 43A of the Act has been inserted to provide that if an assessee incurs such a loss on account of an imported asset, then such exchange loss has to be adjusted with the cost of the respective asset and should not be considered as a revenue item. He argued that when there is a specific section for treatment of such loss for an imported asset, there is no such section for such loss incurred on account of domestic assets. There is no such section for such loss on account of domestic loss. He then took us through the provisions of section 43A of the Act and also relied on the decision of Hon’ble Supreme Court in the case of Wibro Finance Ltd., vs. CIT, Civil Appeal No.6677 of 2008, wherein this issue was considered and held that the provisions of section 43A of the Act will not apply where the assessee had not acquired any asset from any country outside India for the purpose of its business. The Hon’ble Supreme Court considered this asset in para 12 & 13 as under:-

12. Learned counsel for the department had also relied on the decision of this Court in Assistant Commissioner of Income Tax, Vadodara vs. Elecon Engineering Company Limited. This decision is on the question of application of Section 43A of the 1961 Act. Accordingly, the exposition in this decision will be of no avail to the fact situation of the present case. For, we have already noticed that the appellant had not acquired any asset from any country outside India for the purpose of his business.

13. In view of the above, this appeal ought to succeed. The impugned judgment and order of the High Court needs to be set aside and instead, the decision of the ITAT dated 3.6.2004 in favour of the appellant on the two questions examined by the High Court in the impugned judgment, needs to be affirmed and restored. We order accordingly. The ld.counsel for the assessee also relied on the decision of Co- ordinate Bench of Pune, in the case of Cooper Corporation (P) Ltd., vs. DCIT, in ITA No.866/PN/2014 and Chennai Bench in the case of TVS Motor Co. Ltd., in ITA No.1153/Mds/2016 & 1183/Mds./2016.

6. When these were pointed out to ld. Senior DR, he only relied on the assessment order and that of the CIT(A).

7. We have heard rival contentions and gone through facts and circumstances of the case. Admitted facts are that the assessee has availed an external commercial borrowing to part finance its expansion project. The loan was drawn down and utilized for the purpose of fixed assets all of which were purchased from domestic market i.e., domestic assets. The assessee did not use the loan for purchase of assets from abroad. Accordingly, fluctuation in the exchange rate viz-a-viz the rate at which loans was available, the transactional gain or loss is to be assessed as Revenue. Respectfully following the decision of Hon’ble Supreme Court in the case of Wipro Finance Ltd., supra, we allow the claim of assessee.

8. The next issue in this appeal of assessee is as regards to the order of CIT(A) confirming the action of AO in making disallowance of expenses relatable to exempt income by invoking the provisions of section 14A r.w.rule 8D of the Rules amounting to Rs.61,513/-.

8.1 We have heard rival contentions and gone through the facts and circumstances of the case. We noted that the assessee has received dividend income during the year to the tune of Rs.8,56,909/- and the disallowance is merely a sum of Rs.61,513/-. Before us, the ld.counsel for the assessee did not make any submission qua which limb of Rule 8D, disallowance is made, he could not brought out any submissions. Hence, we dismiss this ground of assessee.

9. In the result, the appeal filed by the assessee is partly allowed.

Order pronounced in the open court on 27th September, 2022 at Chennai.