Surplus due to foreign exchange rate fluctuation part of export turnover u/s 80HHC – High Court

Surplus due to foreign exchange rate fluctuation part of export turnover u/s 80HHC in the year of receipt if brought to India within prescribed  time

ABCAUS Case Law Citation:
ABCAUS 3312 (2020) (05) HC

Important case law relied upon by the parties:
RaghunathExport (P) Ltd. v. Commissioner of Income-Tax
Commissioner ofIncome-Tax v. Amba Impex

In the instant case the question raised by the appellant company was as to whether extra realization made in rupees for export sale proceeds in foreign exchange due to adverse exchange rate of rupee would be part of the export turnover in the year of receipt?

The appellant/assessee had received an order from an foreign company for export. The terms of payment by the foreign company to the assessee was that an advance payment of 10 percent of the total value and balance 90 per cent would be paid in twelve equal half yearly instalments commencing two years from the mean date of shipment. The Reserve Bank of India (RBI) had granted approval in respect of such export on deferred payment terms.

The assessee booked sales in its accounts at the time of raising the export invoice applying the prevailing exchange rate.

The foreign company paid the 10 per cent advance and thereafter, two half yearly installments . Subsequently, it wished to pay off the balance amount at one go which was permitted by RBI.

At the time of payments by the foreign company, the dollar was dearer vis-à-vis Indian rupee compared to what it was as on the date of raising of invoice by the assessee. Due to such exchange rate fluctuations, the assessee received an excess/surplus amount in Indian rupee.

The assessee treated the said surplus as part of its export turnover for the purpose of computing deduction under Section 80-HHC of the Income Tax Act (the Act) for the relevant assessment year.

The Assessing Officer (AO) was of the opinion that the surplus could not be   treated as export turnover as defined in Explanation (b) to Section 80-HHC  read with sub-section (2)(a) thereof. In his view, after receipt of the full amount from bank in Indian rupees in respect of the export to the  importer, the matter relating to that particular export came to an end and  any income arising thereafter which could not be anticipated earlier, could not be treated as income from such export or related to such export sale.

Being of such view, the AO held that any application for permission from the Commissioner of Income Tax/Chief Commissioner of Income Tax with retrospective effect cannot revalidate and/or legitimise the assessee’s claim.

The AO also rejected the alternative submission of the assessee that the amount in question should be treated as export turnover for the years of export. He held that if the amount did not qualify as export turnover in one year, it could not be treated as export turnover in any other year since the statutory provisions were the same.

Accordingly, The AO completed assessment by rejecting the assessee’s claim for deduction u/s 80-HHC of the Act and treated the said surplus as business income of the assessee.

The first appeal from the Assessing Officer’s order was dismissed by the CIT(A). The second appeal from the order of the CIT was also dismissed by the Tribunal.

Surplus due to foreign exchange rate fluctuation part of export turnover

The Hon’ble High Court observed that it was not disputed that the inflow of foreign exchange into India had resulted from the export that the appellant made.  The excess realization was inextricably linked to the export made by the assessee. Had the export not been made, the foreign exchange would not have come into India and no question of realization or excess realization would have arisen.

Relying on the decisions of the coordinate Bench and other High Courts, the Hon’ble High Court opined that in principle, the said excess realization should be treated as part of the export turnover of the assessee.

However, the Hon’ble High Court noted that as per definition of “export  turnover” in the Act, before an amount received by an exporter can be treated as part of the export turnover, it must also be shown that the  convertible  foreign  exchange  was received in or brought into India within prescribed time or time as extended by the competent authority.

The Hon’ble High Court noted that the AO had held that any subsequent income which could not be visualized at the time of export could not be said to be related to that particular export.  This view was upheld both by the CIT and the Tribunal.  The Court rejected this view and opined that it was not possible for the appellant to know as on the date of export as to the manner in which exchange rate may fluctuate in the future. The subsequent excess realization in Indian rupees due to adverse exchange rate of rupee could not be said to be unrelatable to the particular export.

The Hon’ble High Court opined that the object of incorporating Section 80-HHC was clearly to grant incentive to the exporters who earn  valuable foreign exchange for the country. Such legislation must be interpreted as liberally as possible in favour of the exporter/assessee. It is trite law that if a particular taxing provision is liable to two interpretations, one   favouring the assessee and the other favouring the department, the former interpretation ought to be accepted.

The Hon’ble High Court opined that income arising from export taking place not necessarily in the previous year relevant to the assessment year but also exports taking place in earlier years could qualify for deduction under Section 80-HHC provided that the foreign exchange came into India within the time specified in the statute. The Commissioner (the then competent authority) never dealt with the appellant’s application for extension of time period so as to enable the appellant to treat the receipt in question as part of its export turnover.

The Hon’ble High Court further noted that in view of amendment RBI becoming the competent authority for  the  purpose  of allowing/ disallowing extension of time to bring in the foreign exchange,  the appellant had made an application to RBI and the RBI had held that no further extension was required it had approved the original deferred payment terms as well as the subsequent preponement of payment  in  lumpsum. 

The Hon’ble High Court opined that that extra made in rupees for export  sale proceeds in foreign exchange due to adverse exchange rate of  rupee  would  be part of the export turnover in the year of receipt subject to the foreign exchange coming into the country within the statutorily  prescribed  time  period. 

The Hon’ble High Court also held that export sale proceeds received in  accordance with and in terms of the export contract and with approval of RBI could not be ignored for the  purpose of relief under Section 80-HHC  of  the Act. 

Accordingly the Hon’ble High Court remanded the matter to the Tribunal for fresh consideration taking into account the subsequent development including the order of the RBI.

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