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| Foreign Exchange Fluctuation losses are allowable on accrual basis |
| The Supreme Court laid down the following important principles regarding additional liability on account of foreign exchange fluctuation as at the year-end: |
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| In respect of loans taken for revenue purposes, the additional liability arising on account of fluctuation in the rate of exchange is allowable deduction under section
37(1) of the Income-tax Act (the ‘IT Act’) in the year of fluctuation in the rate of exchange and not in the year of repayment of such loans. For that purpose, the accounts and the accounting method followed by an assessee continuously for a given period of time needs to be presumed to be correct till the assessing officer comes to the conclusion for reasons to be given that the system does not reflect true and correct profits. |
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| The actual cost of imported assets acquired in foreign currency is entitled to be adjusted under section
43A (prior to the assessment year
2003-04), on account of fluctuation in the rate of exchange at each balance sheet date, pending actual payment of the varied liability. |
|
| The amendment to section
43A, w.e.f. April
1, 2003, providing for varying the actual cost of asset with reference to the liability arising on account of foreign exchange fluctuation only at the time of payment, is not clarificatory and applies from assessment year
2003-04. |
|
| CIT vs.Woodward Governor:
223 CTR 1
(SC) |
|
 |
| Deduction of Tax at Source |
| In the above case, the issue before the Supreme Court was with regard to liability of Indian employer to withhold tax due on payment of salary received by the expatriate employees outside India from another legal entity. In addition the Supreme Court was also concerned with the levy of penalty under section
271C for the alleged default of non-deduction of tax at source under section
192 of the IT Act out of the foreign salary. |
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|
The Supreme Court held that the provisions relating to chargeability of tax contained in section
9(1)(ii) and the deduction of tax at source (’TDS’) provisions under section
192 of the IT Act relating to income under the head “salaries” are not independent of each other; the charging provisions and the computation provisions go hand in hand.
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It was held where the expatriate employee is exclusively working in India and the salary received abroad is only for the services rendered in India, then, the employer is obliged to take into account the salary received for computing TDS under section
192 of the IT Act. Failure to do so will trigger consequences under sections
201(1) and
201(1A) of the IT Act.
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With regard to levy of penalty under section
271C of the IT Act, the Supreme Court upheld that the order of the High Court deleting the penalty, observing that since the issue involved was nascent, the employer could harbor a bona fide belief that tax was not required to be deducted at source on the foreign salary.
|
|
| CIT v.
Eli Lilly &
Company Pvt.
Ltd.:
223 CTR
20
(SC) |
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| Disclaimer |
| This is not advice. The recipient should not act solely on the basis of the material contained herein. Contents herein are general in nature and do not constitute or convey advice per se. Also, changes in legislation may occur quickly. The material herein is issued as a helpful guide to the reader, for their private information. Therefore it should be regarded as confidential and not be made available to any person without our prior approval. We therefore recommend that our formal advice be sought by contacting the following address before acting in any of the areas: |
|
| Carvalho Associates |
| Chartered Accountants |
| 2B, Park Centre, |
| 25, Venkatanarayana Road, |
| T.Nagar, Chennai - 600 017 |
|
| Phone : +91 - 44 - 4212 6808 |
| Email : mail@carvalho-associates.com |
|
