S. 10B — Gain on account of foreign exchange rate fluctuation qua export proceeds credited/deposited in EEFC account of assessee in foreign exchange is export realisation which constitutes profits derived from export business eligible for exemption u/s.10

ITO v. Banyan Chemicals Ltd.

A.Y. 2001-02. Dated 29-12-2008

S. 10B — Gain on account of foreign exchange rate
fluctuation qua export proceeds credited/deposited in EEFC account of
assessee in foreign exchange is export realisation which constitutes profits
derived from export business eligible for exemption u/s.10B.

The assessee-company was a 100% EOU. For the relevant
assessment year, the Assessing Officer excluded the amount of net foreign
exchange gain which it received on account of gain on foreign exchange on
conversion of receipts from export sales. The learned CIT(A), by following the
decisions in the cases of K. Uttamlal Exports Ltd. v. Dy. CIT, (2003)
133 Taxman 196 (Mumbai) (Mag.) and Mohindra Impex v. Asstt. CIT, (2002)
121 Taxman 326 (Del.) (Mag.), allowed the claim of exemption u/s. 10B of the
Act. Since there was a difference of opinion between the Members, the matter
was referred to the Third Member u/s.255(4).

The Third Member held in favour of the assessee partly. The
Tribunal noted as under :

(1) The receipt of the sale consideration was in US
dollars. It was credited/deposited in the EEFC account of the assessee to be
retained in US dollars as per guidelines for operating this account. In this
account, the receipts may be kept in foreign currency instead of converting
it to Indian rupees.

(2) The gain on account of exchange fluctuation is part
of the receipt of foreign currency of export sales made by an assessee. It
is a part of the receipt of sale proceeds converted into Indian rupees.
There is no exception in S. 10B like that in Expln.(baa) to S. 80HHC.

(3) The gain accounted for by the assessee is the excess
rupee value of US dollars on the date of realisation of sale proceeds
credited. Therefore, the exchange gain on the date of deposit in the EEFC
account has to be treated as sales realised in US dollars on that date. The
exchange gain is thus sales realisation of the billed amount in US dollar
and would be an income derived from the export of goods and articles.

 

However, in respect of gains arising at the time of
withdrawal of amount from the EEFC account by way of difference in exchange
rates between the date of deposit into the account and the date of withdrawal
from the EEFC account, the Third Member noted adversely as under :

(1) Such gain would not be part of sales as once the sale
consideration is deposited in EEFC account, the exchange gain accrued
thereafter would not be a part of the turnover and, consequently, not a
profit arising from the export of goods.

The Third Member relied on the decisions in the following
cases :

(a) Smt. Sujata Grover v. Asst. CIT, (2002) 74
(Mumbai) TTJ (Del.) 347

(b) Renaissance Jewellery (P) Ltd. v. ITO, (2006)
104 TTJ (Mumbai) 382/(2006) 101 ITD 380 (Mumbai)

(c) Shah Originals v. Asst. CIT, (2007) 112 TTJ
(Mumbai) 754

(d) Priyanka Gems v. Asst. CIT, (2005) 94 TTJ (Ahd.)
557