Section 40(a)(i) – No disallowance of incremental amount due to foreign exchange rate fluctuation on account of non-deduction of TDS u/s 195 if the TDS is already deducted earlier at the time of credit.
Facts:
The assessee had entered into a research and know-how agreement with A.B. Sandvik Coromant, Sweden during AY 1991-92 in terms of which the assessee was liable to pay Swiss Kroner 38,58,000. In the assessment order for AY 1991-92, the AO held that since the duration of the agreement was five years, the appellant was entitled to deduction of 1/5th of the amount payable under the agreement (Swiss Kroner 7,71,600) in each assessment year for five years. However, the assessee had deducted TDS also and remitted the same to the exchequer, on the entire amount of fees payable as the assessee had credited the entire amount in the account books. Accordingly, in the year under consideration, assessee claimed deduction of Rs. 42,89,872 as fourth instalment of fee in its return of income. While remitting the instalment during the year, it suffered foreign exchange fluctuation loss of Rs. 8,82,234 which was comprised in its claim of Rs. 42,85,872. The CIT (A) noticed that deduction of earlier instalments have been allowed on actual payment basis and, hence, directed that even in this year deduction for exchange loss should be allowed. However, he directed the AO to check whether remittances are actually made subject to appropriate deduction of tax at source as per section 40(a)(i) of the Act.
Thereafter, AO passed an order denying the claim of deduction of foreign exchange fluctuation loss amounting to Rs. 8,82,234 on the ground that TDS was deducted in the initial year only with respect to the amount (Rs. 34,07,638) corresponding to Sw. Kr 7,71,600 (i.e. 1/5 of the amount payable) and not on the additional sum of Rs. 8,82,234 (foreign exchange loss) and was to be disallowed u/s 40(a)(i) of the Act. The CIT(A) upheld the disallowance.
Held:
Section 195(1) of the Act requires TDS either “at the time of credit” or “at the time of payment” of an income, whichever is earlier. When the assessee credited the income payable to the foreign concern as research and technical know-how in the earlier year, the provision so made on the basis of the exchange rate then existing was subjected to TDS u/s 195(1). Notably, section 195(1) of the Act prescribes TDS on a sum payable to non-resident either at time of credit or at the time of payment, whichever is earlier. Quite clearly, section 195(1) does not envisage TDS at both instances, i.e. at the time of credit as well as at the time of payment thereof.
Also, as per agreement, the assessee is to make a total payment of Swiss Kroner 38,58,000 and out of which, it was required to remit Swiss Kroner 7,71,600 during the year under consideration. In this year, the cost of remitting the amount to foreign concern has increased due to foreign exchange fluctuation and there is no additional amount payable to foreign concern. The transaction remained of Swiss Kroner 38,58,000 and the same having been subjected to TDS earlier at the time of credit, it would not again call for deduction of tax at source per section 195(1) of the Act.
Alternatively, out of the total claim of Rs. 42,89,872 as fourth instalment of research and know-how fee in this year, tax has been deducted in relation to a sum of Rs. 34,07,638 and, therefore, it is merely a case involving short deduction of tax at source and not a case for failure to deduct tax at source. In decisions of Chandabhoy & Jassobhoy [ITA No. 20/Mum/2010] and S.K. Tekriwal [ITA No. 1135/ Kol/2010], which have been rendered in the context of section 40(a)(ia) of the Act, it has been held that the disallowance envisaged in section40(a)(ia) can be invoked only in the event of non-deduction of tax, but not in cases involving short deduction of tax at source. The ratio of the decisions is squarely applicable in the present case also, inasmuch as the provisions of section 40(a)(ia) of the Act are akin to those of section 40(a)(i). On this count also, the sum of Rs. 8,82,234 cannot be disallowed u/s 40(a)(i).
