September 2018
23. [2018] 96 taxmann.com 80 (Delhi – Trib.) Cobra Instalaciones Y Servicios SA vs. DCIT ITA NO.: 2391 (Delhi) of 2018 A.Y.: 2014-15 Date of Order: 28th June, 2018 Article 7 of India-Spain DTAA; Sections 9, 37(1) of the Act – Exchange fluctuation loss in respect of advance received by a PE from its HO was allowable as a deduction from income since the advance was received towards working capital for execution of project in India.
By GEETA JANI I DHISHAT B. MEHTA
Chartered Accountants
Facts
The Taxpayer was a Spanish company
engaged in the business of providing consultancy services for Projects,
Engineering and Electrical Contractors and Suppliers. In respect of the
projects being executed in India, the Taxpayer had established a project office
(also a PE) in India.
During the relevant year, the
Taxpayer had earned income from supply of goods and services from project being
executed by it. For executing the project in India, PE was utilising the
advance received from the customer or the advance received from the HO (i.e.,
the Taxpayer). In accordance with RBI guidelines, PE was receiving the advance
from the HO in Euro and was also repaying the same in Euro. During the relevant
year the PE claimed deduction under the head ‘Exchange Fluctuation Loss’ in
respect of the advances received and repayable in foreign exchange.
According to the AO, funds received
by the PE from the HO were actually capital contribution and not debt incurred
in the course of business. The AO noted that Article 7 of India-Spain DTAA
specifically prohibits any deduction of expenses relating to HO except
imbursement towards actual expenditure. Accordingly, the AO disallowed the
exchange fluctuation loss claimed by the PE.
The CIT(A) upheld the order of AO.
Held
- The loan received by the
PE was towards working capital for project execution. Hence, it did not bring
any capital asset into existence. Also, the PE had shown the amount as a
liability in its balance sheet.
- Nothing was brought on
record to show that the PE had contravened any provision of FEMA. The tax
authority has not disputed that depreciation of rupee has resulted in exchange
fluctuation loss in respect of the outstanding amount of advance received by
the PE.
- Since the advance was
received towards project execution, it was on revenue account and consequently,
the loss too was revenue loss. Also, the project office being a PE, it could
not borrow from banks in India for project execution. Further, the expenditure
was not a notional expenditure. It was to be noted that in subsequent year the
PE had earned exchange fluctuation gain and had accounted it as income. If, in
the opinion of the AO, exchange fluctuation loss is not deductible, exchange
fluctuation gain should not be taxed as income since the tax proceedings must
follow the rule of consistency.
- Accordingly, the PE was
entitled to claim deduction of exchange fluctuation loss from its income.
