Sections. 40(a)(i), 195, the Act – additional payment pursuant to rupee depreciation is not subject to tax deduction because under section 195 point of time for deduction is earlier of, credit or payment; once deduction is made on credit, further deduction on payment is not required.
Facts: The taxpayer was an Indian company. During the year under consideration, the taxpayer had acquired technical know-how in respect of certain automobile models. The taxpayer capitalised the amount of Rs 141.48 crore as ‘Intangible asset’ and claimed depreciation thereon. Between the date of credit of amount and the date of actual payment, on account of depreciation of rupee, the taxpayer suffered forex loss of Rs. 5.22 crore. Hence, the taxpayer stepped-up the cost of acquisition to Rs.146.70 crore.
The AO observed that the taxpayer deducted tax at source u/s 195 of the Act only on Rs.141.48 crore. The taxpayer contended that no tax at source was required to be deducted on liability arising from fluctuation in exchange rate. However, invoking section 40(a)(i) of the Act, the AO disallowed depreciation on forex loss of the Rs. 5.22 crore.
Held:
Juxtaposition of section 40(a)(i) and section 195 shows that: there should be income on which tax is deductible at source; and the taxpayer has failed to deduct tax on such income. Section 195 provides that tax should be deducted “at the time of credit of such income to the account of the payee or at the time of payment … …, whichever is earlier”. Thus, deduction of tax is contemplated at the earlier of credit or payment, but not at both the stages. If credit occurs first and tax is deducted at the time of credit, there is no question of again deducting tax at the time of payment, whether in full or in part. This position is also clear from Rule 26 of Income-tax Rules, 1962 which bears the heading ‘Rate of exchange for the purpose of deduction of tax at source on income payable in foreign currency’2.
If the contention of the Revenue is taken to its logical conclusion, every payment in convertible foreign exchange would require deduction of tax at source, firstly, at the time of credit and secondly, at the time when additional liability is fastened on it due to unfavourable rate of exchange.
Further, a peculiar situation would arise if exchange fluctuation results in forex gain for the taxpayer. As per the contention of the Revenue, Revenue would become liable to refund excess tax deducted at source at the time of credit.
In both the situations, i.e., whether there is a forex loss or gain, deduction of tax at source u/s 195 is contemplated only at the first stage, whether it is credit to the account of the payee or payment to the payee.
