COBRA INSTALACIONES Y SERVICIOS SA, NEW DELHI V. DCIT, CIRCLE- 1(1)(1), INTL. TAXATION, NEW DELHI

ITA 2391/DEL/2018

• Counselvise Citation: [2018] 121 COUNSELVISE.COM (IT) 5825 (ITAT-DELHI)
• Duration Of Justice: 2 month(s) 22 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 28-06-2018
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: B
• Assessment Year: 2014-2015
• Appeal Filed On: 06-04-2018
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Capital asset; Depreciation; Double taxation relief; Rule of consistency; Permanent establishment; Revenue expenditure
• Section: 143(3); 37(1)

Judgement Text

//FIT FOR PUBLICATION// SD/- SD/- A.M. J.M. IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCHES B : DELHI BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER AND SHRI L.P. SAHU, ACCOUNTANT MEMBER ITA.NO.2391/DEL./2018 ASSESSMENT YEAR 2014-2015 M/S. COBRA INSTALACIONES Y SERVICIOS SA, 2 ND FLOOR, MALHAN ONE SUNLIGHT COLONY, PART-2 NEAR JEEVAN HOSPITAL, ASHRAM, DELHI PIN-110014.PAN AAACC3459Q VS THE DCIT, CIRCLE-1(1)(1), INTERNATIONAL TAXATION, NEW DELHI 110 002. (APPELLANT) (RESPONDENT) FOR ASSESSEE : SHRI HIREN MEHTA, C.A. AND SHRI NIRBHAY MEHTA, ADVOCATE FOR REVENUE : SHRI SATPAL GULATI, CIT - D.R. DATE OF HEARING : 05.06.2018 DATE OF PRONOUNCEMENT : 28.06.2018 ORDER PER BHAVNESH SAINI, J.M. THIS APPEAL BY ASSESSEE HAS BEEN DIRECTED AGAINST THE ORDER OF THE LD. CIT(A)-42, NEW DELHI, DATED 16 .02.2018, FOR THE A.Y. 2014-2015, CHALLENGING THE UPHOLDING OF TH E ADDITION OF RS.16,10,71,640/- ON ACCOUNT OF EXCHANGE FLUCTUA TION LOSS. 2 ITA.NO.2391/DEL./2018 M/S. COBRA INSTALACIONES Y SERVICIOS SA 2. THE FACTS OF THE CASE ARE THAT THE ASSESSEE-COM PANY FILED ITS RETURN OF INCOME FOR THE ASSESSMENT YEAR UNDER APPEAL DECLARING NIL INCOME. THE ASSESSEE IS A NON RESIDEN T COMPANY. THE ASSESSEE IS A COMPANY INCORPORATED IN SPAIN AND IS ENGAGED IN PROVIDING SERVICES OF CONSULTANCY IN PRO JECTS, ENGINEERING AND ELECTRICAL CONTRACTORS AND SUPPLIER S. THE ASSESSEE-COMPANY WAS CARRYING OUT BUSINESS OPERATIO NS FROM ITS PROJECT OFFICE AT DELHI (INDIA). THE ASSESSEE-C OMPANY HAS EARNED INCOME FROM SALE OF GOODS AND PROVISIONS OF SERVICES FROM VARIOUS PROJECTS EXECUTED DURING THE YEAR UNDE R ASSESSMENT. THE ASSESSEE-COMPANY HAS A PE IN INDIA AND DOING BUSINESS IN INDIA THROUGH ITS PROJECT OFFICE. A PER USAL OF PROFIT AND LOSS ACCOUNT OF THE PE REVEALS THAT ASSESSEE-CO MPANY HAS DEBITED AN AMOUNT OF RS.16,10,71,640/- IN ITS PROFI T AND LOSS ACCOUNT UNDER THE HEAD 'EXCHANGE FLUCTUATION LOSS'. THE ASSESSEE-COMPANY WAS ASKED TO EXPLAIN AS TO HOW THE SAME IS ALLOWABLE AS A REVENUE EXPENDITURE. THE ASSESSEE-CO MPANY FILED THE WRITTEN SUBMISSIONS WHICH ARE REPRODUCED IN THE ASSESSMENT ORDER IN WHICH THE ASSESSEE-COMPANY BRIE FLY 3 ITA.NO.2391/DEL./2018 M/S. COBRA INSTALACIONES Y SERVICIOS SA EXPLAINED THAT IT IS A FOREIGN COMPANY CARRYING ON ITS BUSINESS ACTIVITIES IN INDIA THROUGH VARIOUS PROJECTS OFFICE S AT DIFFERENT SITES ON THE BASIS OF WORK AWARDED TO THE ASSESSEE-COMPANY. THE ACTIVITIES EXECUTED BY THE ASSESSEE-COMPANY IS FINANCED BY EIT HER THE CLIENT, WHICH AWARDED AT WORK, ON WHICH, IT CHARGES INTERES T ON THE. ADVANCE AVAILED AT THE RATE AS STIPULATED IN THE CONTRACT O R THE CONTRACT IS FINANCED BY THE HEAD OFFICE AT SPAIN IN FOREIGN CUR RENCY. HEAD OFFICE OF THE ASSESSEE-COMPANY ADVANCES THE MONEY TO THE P ROJECT OFFICE IN INDIA IN FOREIGN CURRENCY AS PER RESERVE BANK OF INDIA GUIDELINES TO CARRY OUT ITS OPERATIONS AND THE MONEY SO RECEIV ED STAND OUTSTANDING TOWARDS THE HEAD OFFICE UNTIL THE WHOLE CONTRACT IS ACCOMPLISHED. IT WAS FURTHER SUBMITTED THAT THE MON EY SO RECEIVED IS REVENUE IN NATURE BECAUSE THE AMOUNT IS UTILIZED IN DAY-TO-DAY OPERATIONS I.E. WORKING CAPITA! REQUIRED FOR EXECUT ION OF THE PROJECT AND TO OBTAIN MATERIAL AS PER THE TERMS OF THE CONT RACT WITH THE CLIENT. MOREOVER, UTILIZATION OF THE ADVANCE MONEY DOES NOT BRING ANY CAPITA! ASSET INTO EXISTENCE AND THE AMOUNTS SO UTILIZED HA S BEEN USED TO INCUR THE OPERATING COSTS AND THE SAME IS BILLED TO THE INDIAN CLIENT FOR THE WORK SO UNDERTAKEN DURING THE YEAR UNDER AS SESSMENT. 4 ITA.NO.2391/DEL./2018 M/S. COBRA INSTALACIONES Y SERVICIOS SA OWING TO THE DEPRECIATION IN THE RUPEE PRICES IN TH E INTERNATIONAL MARKET IN THE YEAR UNDER CONSIDERATION, THE ASSESSE E-COMPANY HAS CLAIMED THE FOREIGN EXCHANGE FLUCTUATION LOSS ON TH E AMOUNT OUTSTANDING IN FOREIGN CURRENCY TOWARDS HEAD OFFICE WHICH CONSISTS OF THE ADVANCE PAYMENT MADE BY THE HEAD OFFICE TOWA RDS THE EXECUTION OF THE PROJECTS AND THE AMOUNT OF ENGINEE RING CHARGES BILLED IN THEIR HOME CURRENCY BY THE HEAD OFFICE TO WARDS THE SERVICES PROVIDED. THEREFORE, THE AMOUNT, IN ESSENCE, REFLEC TS THE CHARACTER OF SUNDRY PAYABLES TO THE HEAD OFFICE AND HENCE, IS A REVENUE ACCOUNT AND THE LOSS REPRESENTS THE REVENUE LOSS. THE ASSES SEE-COMPANY FURTHER SUBMITTED THAT PE IS SEPARATELY ASSESSABLE TO TAX IN INDIA AS A DIFFERENT AND DISTINCT ENTITY DIFFERENT FROM ITS FOREIGN COMPANY IN SPAIN. THE P.E. HAS NOT AVAILED ANY BORR OWING FACILITIES FROM ANY BANK IN INDIA FOR THE EXECUTION OF PROJECTS AWARDED BY VARIOUS INDIAN CLIENTS, WHICH REQUIRES W ORKING CAPITA! FUNDS FOR EXECUTION OF SUCH TURNKEY PROJECT . IT WAS EXPLAINED THAT ONLY UPON REACHING THE CERTAIN MILES TONE AS PER TERMS OF CONTRACT, THE PERMANENT ESTABLISHMENT IS E NTITLED TO RAISE INVOICE AND RECEIVE ITS PAYMENT. WHILE REACHI NG SUCH 5 ITA.NO.2391/DEL./2018 M/S. COBRA INSTALACIONES Y SERVICIOS SA MILESTONE, EXPENSES HAS TO BE INCURRED FOR SUPPLY A ND ERECTION, FOR WHICH, FUNDS HAVE BEEN BORROWED FROM HEAD OFFIC E IN SPAIN. IT WAS POINTED OUT THAT NO INTEREST IS PAID ON SUCH FUNDS BORROWED FROM SPAIN. ALL THESE BORROWINGS HAVE BEEN MADE IN EURO AND THE FUNDS RECEIVED IN EURO HAVE BEEN CONVE RTED INTO INR ON THE DATE OF ITS RECEIPT. HOWEVER, AT THE TIM E OF PAYMENT, THE PE IS LIABLE TO REPAY THE AMOUNT IN EUROS. AT T HE BEGINNING OF THE ASSESSMENT YEAR I.E. 01.04.2013, THE EXCHANG E RATE BETWEEN INR TO EURO WAS 69.54. AT THE END OF THE AS SESSMENT YEAR I.E. ON 31.03.2014. THE EXCHANGE RATE WAS 82.5 8. THUS, THERE WAS A DEVALUATION OF INDIAN CURRENCY BY AN AM OUNT OF APPROXIMATELY 18.75% FOR THE PERIOD UNDER CONSIDERA TION. ALL THE OPENING BALANCES RECEIVED FROM HEAD OFFICE FOR EXECUTION OF VARIOUS PROJECTS WERE RESET ON 31.03.2014 AS PER TH E PREVAILING EXCHANGE RATE ON THAT DATE, WHICH RESULTED IN FLUCT UATION LOSS AGGREGATING TO RS.16.10 CRORE. THE DETAILS OF LOAN ACCOUNTS WERE FILED TO PROVE FLUCTUATION LOSS. THE ENTIRE AMOUNT OF LOAN AVAILED FROM HEAD OFFICE IN FOREIGN CURRENCY HAVE BEEN UTIL IZED ONLY FOR THE PURPOSE OF EXECUTING CONTRACTS. IT WAS, THEREFO RE, A WORKING 6 ITA.NO.2391/DEL./2018 M/S. COBRA INSTALACIONES Y SERVICIOS SA CAPITAL REQUIREMENT. THEREFORE, FLUCTUATION LOSS IS OF REVENUE IN NATURE. THE ACCOUNTS OF THE PE ARE MAINTAINED ON AC CRUAL SYSTEM OF ACCOUNTING AND HENCE, YEAR END ENTRY FOR FLUCTUATION LOSS AND RESETTLEMENT OF ASSET LIABILITY HAVE TO BE NECESSARILY MADE AND THE SAME IS ALLOWABLE ON ACCRUAL BASIS AS HELD BY THE HONBLE SUPREME COURT IN THE CASE OF CTT VS. WOODWA RD GOVERNOR INDIA (P) LIMITED [2009] 312 ITR 254 (SC). 3. THE A.O. HOWEVER NOTED THAT THE AMOUNTS RECEIVE D BY PROJECT OFFICE IS NOT A LOAN BUT A CAPITAL CONTRIBU TION AND THOUGH IT IS A LIABILITY IN THE BALANCE SHEET OF THE PROJE CT OFFICE, IT CANNOT BE CALLED A DEBT INCURRED DURING THE COURSE OF BUSI NESS. THE AMOUNT OF REMITTANCE TO THE PROJECT OFFICE IS A CAP ITAL CONTRIBUTION BY SOMEONE IN ITS OWN BUSINESS. LOAN I S TAKEN FROM A THIRD PARTY. DURING ASSESSMENT PROCEEDINGS, THE ASSESSMENT IS MADE IN RESPECT OF THE TOTAL INCOME O F FOREIGN COMPANY WHICH ACCRUED OR ARISEN TO IT FROM A BUSINE SS CONNECTION IN INDIA OR THROUGH AN ASSET OR SOURCE SITUATED IN INDIA. A PERMANENT ESTABLISHMENT IS NEVER ASSESSED AS AN 7 ITA.NO.2391/DEL./2018 M/S. COBRA INSTALACIONES Y SERVICIOS SA INDEPENDENT ENTITY. ONLY INCOME OF IT IS COMPUTED A S IF IT IS SEPARATE AND DISTINCT ENTITY. THE A.O. BY EXAMINING THE FINANCIAL REPORT OF THE ASSESSEE-COMPANY NOTED THAT THE AMOUNT HAS BEEN TREATED AS REMITTANCE IN THE PROJECT OFFIC E ACCOUNTS. IT HAS NOT BEEN SHOWN AS LOAN FROM HEAD OFFICE AND ANY CLAIM THAT THIS AMOUNT IS LOAN FROM HEAD OFFICE TO PROJECT OFFICE IS ONLY AN AFTERTHOUGHT. THE A.O. RELIED UPON THE DECI SION OF HON'BLE CALCUTTA HIGH COURT IN THE CASE OF BETTS HA RTLEY HUETT AND CO. LTD. VS. CIT, 116 ITR 425 IN WHICH IT WAS H ELD THAT NO QUESTION OF PROFIT OR LOSS CAN ARISE AS NO PERSON C AN ENTER INTO A CONTRACT WITH ONESELF. IF A COMPANY HAS OPENED A PROJECT OFFICE IN INDIA WITH THE PURPOSE OF DOING BUSINESS, IT WIL L HAVE TO REMIT/INVEST SOME AMOUNT OF MONEY FOR THE FUNCTIONI NG OF THE BUSINESS. SUCH MONEY CANNOT BE CALLED AS LOAN GIVEN TO THE PROJECT OFFICE. THE A.O. ALSO REFERRED TO PROVISION S OF ARTICLE 7(3) OF INDIA-SPAIN DTAA WHICH READS AS UNDER : 3. IN THE DETERMINATION OF THE PROFITS OF A PERMANENT ESTABLISHMENT, THERE SHALL BE ALLOWED AS DEDUCTIONS 8 ITA.NO.2391/DEL./2018 M/S. COBRA INSTALACIONES Y SERVICIOS SA EXPENSES WHICH ARE INCURRED FOR THE PURPOSES OF THE PERMANENT ESTABLISHMENT, INCLUDING EXECUTIVE AND GE NERAL ADMINISTRATIVE EXPENSES, RESEARCH AND DEVELOPMENT EXPENSES, INTEREST AND OTHER SIMILAR EXPENSES SO IN CURRED, WHETHER IN THE STATE IN WHICH THE PERMANENT ESTABLI SHMENT IS SITUATED OR ELSEWHERE, IN ACCORDANCE WITH THE PR OVISIONS OF AND SUBJECT TO THE LIMITATIONS OF THE TAXATION L AWS OF THAT STATE. HOWEVER, NO SUCH DEDUCTION SHALL BE ALLOWED IN RESPECT OF AMOUNTS, IF ANY, PAID (OTHERWISE THAN TOWARDS REIMBURSEMENT OF ACTUAL EXPENSES) BY THE PERMANENT ESTABLISHMENT TO THE HEAD OFFICE OF THE ENTERPRISE OR ANY OF ITS OTHER OFFICES, BY WAY OF ROYALTIES, FEES OR OTHER SIMILAR PAYMENTS IN RETURN FOR THE USE OF PATENTS, KNOWHOW OR OTHER RIGHTS, OR BY WAY OF COMMISSION OR OTHER CHARGES, FOR SPECIFIC SERVIC ES PERFORMED OR FOR MANAGEMENT, OR, EXCEPT IN THE CASE OF A BANKING ENTERPRISE, BY WAY OF INTEREST ON MONE YS LENT TO THE PERMANENT ESTABLISHMENT. LIKEWISE, NO ACCOUNT SHALL BE TAKEN, IN THE DETERMINATION OF THE PROFITS 9 ITA.NO.2391/DEL./2018 M/S. COBRA INSTALACIONES Y SERVICIOS SA OF A PERMANENT ESTABLISHMENT, FOR AMOUNTS CHARGED (OTHERWISE THAN TOWARDS REIMBURSEMENT OF ACTUAL EXPENSES), BY THE PERMANENT ESTABLISHMENT TO THE HE AD OFFICE OF THE ENTERPRISE OR ANY OF ITS OTHER OFFICE S, BY WAY OF ROYALTIES, FEES OR OTHER SIMILAR PAYMENTS IN RETURN FOR THE USE OF PATENTS, KNOW-HOW OR OTHER RIGHTS, OR BY WAY OF COMMISSION OR OTHER CHARGES FOR SPECIFIC SERVICES P ERFORMED OR FOR MANAGEMENT, OR, EXCEPT IN THE CASE OF A BANK ING ENTERPRISE, BY WAY OF INTEREST ON MONEYS LENT TO TH E HEAD OFFICE OF THE ENTERPRISE OR ANY OF ITS OTHER OFFICE S. 3. THE A.O. ACCORDINGLY NOTED THAT ABOVE A RTICLE SPECIFICALLY PROHIBITS ANY DEDUCTION OF EXPENSES RELATING TO HEA D OFFICE, EXCEPT REIMBURSEMENT TOWARDS ACTUAL EXPENDITURE. AC CORDING TO THE ABOVE ARTICLE, IT IS EVIDENT THAT ONLY ACTUA L AND REAL EXPENDITURE HAS TO BE ALLOWED WHILE COMPUTING BUSIN ESS INCOME OF THE P.E. NO NOTIONAL EXPENDITURE/LOSS TOW ARDS HEAD OFFICE IS ALLOWABLE AS DEDUCTION. THE ASSESSEE-COMP ANY ALSO CLAIMED THAT IT HAS NOT CHARGED ANY INTEREST ON THE LOAN 10 ITA.NO.2391/DEL./2018 M/S. COBRA INSTALACIONES Y SERVICIOS SA RECEIVED FROM THE HEAD OFFICE, IS ALSO BECOMES INFR UCTUOUS IN THE LIGHT OF THE CLEAR PROVISION THAT SUCH INTEREST IS NOT ALLOWABLE TO P.E. THE A.O. ACCORDINGLY DISALLOWED T HE CLAIM OF EXCHANGE FLUCTUATION LOSS TO THE ASSESSEE-COMPANY A ND MADE THE ADDITION OF RS.16,10,71,640/-. 4. THE ASSESSEE-COMPANY CHALLENGED THE ADDITION BEFORE THE LD. CIT(A). THE WRITTEN SUBMISSIONS OF THE ASSE SSEE- COMPANY IS REPRODUCED IN THE APPELLATE ORDER, IN WH ICH, THE ASSESSEE-COMPANY MORE OR LESS REITERATED THE SAME F ACTS. IT WAS ALSO SUBMITTED THAT FOR EXECUTION OF VARIOUS PROJEC TS, THE ASSESSEE-COMPANY BEING P.E. IS DEPENDENT UPON ITS F OREIGN COMPANY FOR PROVIDING FUNDS, WHICH ARE PRIMARILY UTILIZED BY THE P.E. AS WORKING CAPITAL. THE TOTAL OUTSTANDING PAYABLE TO THE HEAD OFFICE AS ON 31.03.2014 INCREASED TO RS.154,38,08,645/- AS COMPARED TO RS.142,13,94,340/ - AS ON 31.03.2013. THE AMOUNT RECEIVED FROM THE HEAD OFFIC E HAVE BEEN SHOWN AS A LIABILITY OF THE P.E. OUT OF WHICH, ALMOST HALF OF THE AMOUNT RECEIVED HAS BEEN REMITTED BACK TO TH E HEAD 11 ITA.NO.2391/DEL./2018 M/S. COBRA INSTALACIONES Y SERVICIOS SA OFFICE. THE ASSESSEE P.E. IS NOT AN INCORPORATED EN TITY BUT A PROJECT OFFICE, FOR WHICH, PERMISSION GRANTED BY TH E RESERVE BANK OF INDIA. THEREFORE, BY NO STRETCH OF IMAGINAT ION, THE REMITTANCES FROM HEAD OFFICE TO P.E. CAN BE TREATED AS CAPITAL CONTRIBUTION. IT MAY BE APPRECIATED THAT ASSESSEE-C OMPANY BEING AN UNINCORPORATED ENTITY, CANNOT RECEIVE ANY SHARE CAPITAL. IT IS ALSO FALLACIOUS ON THE PART OF THE A .O. TO SAY THAT NO ONE CAN GIVE OR TAKE LOAN TO/FROM ONESELF. IT MA Y BE APPRECIATED THAT THE TRANSACTION HAS TAKEN PLACE WH EREBY, FUNDS REQUIRED FOR THE PURPOSE OF BUSINESS BY THE P .E. HAVE BEEN REMITTED BY THE HEAD OFFICE. THE P.E. HAS PREP ARED ITS ACCOUNTS ON THE BASIS OF MERCANTILE SYSTEM OF ACCOU NTING AND THEREFORE, DEBITED FOREIGN EXCHANGE FLUCTUATION GAI N/LOSS ON THE OUTSTANDING BALANCES AT THE END OF THE YEAR. THE LE DGER ACCOUNT SHOWS THE COMPLETE DETAILS OF FLUCTUATION. THE REMI TTANCES RECEIVED FROM THE HEAD OFFICE ARE RECEIVED IN EURO AND HAVE BEEN REPAID IN EURO. THEREFORE, AT THE END OF THE Y EAR, IF THERE IS RUPEE DEVALUATION, THE DIFFERENCE BETWEEN AMOUNT REPAYABLE IN RUPEES AS COMPARED TO THE AMOUNT RECEIVED IN RUP EE, HAVE 12 ITA.NO.2391/DEL./2018 M/S. COBRA INSTALACIONES Y SERVICIOS SA BEEN CORRECTLY TREATED AS FOREIGN EXCHANGE FLUCTUAT ION LOSS BY THE ASSESSEE-COMPANY. THE A.O. HAS MISINTERPRETED T HE PROVISIONS OF LAW, DTAA AND THE JUDGMENT OF THE HON BLE CALCUTTA HIGH COURT IN THE CASE OF BETTS HARTLEY HU ETT AND CO. LTD., VS. CIT (SUPRA). AS PER ARTICLE 7(3) OF DTAA AS REFERRED TO BY THE A.O, THE BAR ON EXPENDITURE WHERE THE TRANSA CTION INVOLVES HEAD OFFICE, IS ONLY WITH RESPECT TO ROYAL TY, FTS OR BY WAY OF COMMISSION OR OTHER CHARGES FOR SPECIFIC SER VICES PERFORMED BY THE HEAD OFFICE. IN FACT. ARTICLE-7(3) ALLOWS AS DEDUCTION EXPENSES WHICH ARE INCURRED FOR THE PURPO SE OF THE PERMANENT ESTABLISHMENT, INCLUDING EXECUTIVE AND GE NERAL ADMINISTRATIVE EXPENSES, RESEARCH AND DEVELOPMENT E XPENSES, INTEREST AND OTHER SIMILAR EXPENSES. IT WAS FURTHER SUBMITTED THAT IN PRECEDING A.YS. 2012-2013 AND 2013-2014, TH E A.O. PASSED THE ASSESSMENT ORDER UNDER SECTION 143(3) OF THE I.T. ACT AND THE SIMILAR CLAIM OF THE ASSESSEE-COMPANY F OR FLUCTUATION LOSS HAVE BEEN ALLOWED IN FAVOUR OF THE ASSESSEE- COMPANY. THEREFORE, RULE OF CONSISTENCY SHOULD BE F OLLOWED BY THE INCOME TAX AUTHORITIES. IN SUPPORT OF THE ABOVE 13 ITA.NO.2391/DEL./2018 M/S. COBRA INSTALACIONES Y SERVICIOS SA PROPOSITION, ASSESSEE-COMPANY RELIED UPON DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF RADHASWAMY SAT SANG VS. CIT 193 ITR 321, GENDAMAL HAZARILAL 263 ITR 679 (M. P.) AND HONBLE JURISDICTIONAL DELHI HIGH COURTS JUDGMENT IN THE CASE OF CIT VS. ARJ SECURITY PRINTERS 264 ITR 276 (DEL.) . 5. THE LD. CIT(A), HOWEVER, DID NOT ACCE PT THE CONTENTION OF THE ASSESSEE-COMPANY AND NOTED THAT AS PER PROVI SIONS OF FEMA, THE PROJECT OFFICE LOCATED IN INDIA DOES NOT COME UNDER THE LIST OF ELIGIBLE BORROWERS, THEREFORE, THE PROJ ECT OFFICE IS NOT ELIGIBLE FOR EXTERNAL COMMERCIAL BORROWINGS. THEREF ORE, ASSESSEE-COMPANY CANNOT TAKE ANY LIABILITY WHICH HA S TO BE REPAID. THE AMOUNT REMITTED TO A PROJECT OFFICE IN INDIA BY A FOREIGN COMPANY TO DO BUSINESS CANNOT BE TAKEN AS LOAN/EXTERNAL COMMERCIAL BORROWING IN THE HANDS O F PROJECT OFFICE. THE LD. CIT(A) ALSO NOTED THAT A.O. HAS RIG HTLY INVOKED ARTICLE 7(3) OF INDIA-SPAIN DTAA SINCE THE SAME DOE S NOT ALLOW ANY NOTIONAL EXPENDITURE/LOSS AS DEDUCTION. APPEAL OF ASSESSEE WAS ACCORDINGLY DISMISSED. 14 ITA.NO.2391/DEL./2018 M/S. COBRA INSTALACIONES Y SERVICIOS SA 6. THE LEARNED COUNSEL FOR THE ASSESSEE REITERA TED THE SAME SUBMISSIONS MADE BEFORE THE AUTHORITIES BELOW. HE HAS SUBMITTED THAT ASSESSEE-COMPANY RECEIVED LOAN FROM THE HEAD OFFICE FOR COMPLETION OF THE PROJECT IN EURO, WHICH IS REPAID IN EURO, AND AMOUNT HAVE BEEN MENTIONED AS LOAN/LIABIL ITY IN THE BALANCE SHEET. THE FLUCTUATION LOSS WAS CLAIMED AS DEDUCTION. THE CAPITAL OF ASSESSEE-COMPANY IS NIL. NO EXPENSES HAVE BEEN CLAIMED, AS WHATEVER AMOUNTS WERE RECEIVE D IN EURO WAS REPAID IN EURO. ARTICLE 7(3) OF DTAA BETWE EN INDIA- SPAIN DO NOT APPLY IN THE CASE OF THE ASSESSEE-COMP ANY. THE DECISION OF THE HONBLE CALCUTTA HIGH COURT IN THE CASE OF BETTS HARTLEY HUETT AND CO. LTD., VS. CIT (SUPRA), RELIED UPON BY THE A.O. IS NOT APPLICABLE TO THE FACTS OF THE CASE. PB -123 IS THE DETAILS OF FOREIGN EXCHANGE GAIN/LOSS CLAIMED BY AS SESSEE- COMPANY. HE HAS SUBMITTED THAT IN A.YS. 2012-2013 A ND 2013- 2014, ASSESSEE-COMPANY HAS MADE CLAIM OF EXCHANGE FLUCTUATION LOSS ON IDENTICAL FACTS, WHICH HAVE BEE N ALLOWED BY THE A.O. IN SCRUTINY ASSESSMENT UNDER SECTION 143(3 ). COPIES OF THE ASSESSMENT ORDERS ARE FILED AT PAGES 113 TO 118 OF THE PAPER 15 ITA.NO.2391/DEL./2018 M/S. COBRA INSTALACIONES Y SERVICIOS SA BOOK. HE HAS FURTHER SUBMITTED THAT IN SUBSEQUENT A .Y. 2015- 2016 ASSESSEE-COMPANY HAS EXCHANGE FLUCTUATION GAIN DUE TO DIFFERENCE IN THE RATE OF THE EURO IN A SUM OF RS.13,37,29,120/-, WHICH HAVE BEEN DECLARED AS INCO ME IN A.Y. 2015-2016. COPY OF THE P & L A/C FOR A.Y. 2015-2016 IS FILED AT PAGES 127 AND 128 OF THE PAPER BOOK TO SHOW THAT IN COME WAS DECLARED ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION IN AFORESAID AMOUNT. LEARNED COUNSEL FOR THE ASSESSEE SUBMITTED THAT WHEN IN PRECEDING ASSESSMENT YEAR, SIMILAR CLAIM HAVE BE EN ALLOWED AND ASSESSEE-COMPANY HAS PAID TAX ON FOREIGN EXCHAN GE FLUCTUATION GAIN IN SUBSEQUENT YEAR ON THE SAME FAC TS, THE CLAIM OF ASSESSEE-COMPANY SHOULD NOT HAVE BEEN DISALLOWED BY THE AUTHORITIES BELOW. PB-48 IS BALANCE-SHEET FOR ASSES SMENT YEAR UNDER APPEAL TO SHOW THAT SHARE CAPITAL IS NIL AND HEAD OFFICE AMOUNT ON LIABILITIES SIDE HAVE BEEN SHOWN AT RS.154,38,08,645/-. HE HAS SUBMITTED THAT THE FACTS HAVE NOT BEEN DISPUTED WITH REGARD TO THE AMOUNT RECEIVED IN EURO AND REPAID THE AMOUNT IN EURO TO HEAD OFFICE. THEREFORE , FOREIGN EXCHANGE FLUCTUATION LOSS SHOULD HAVE BEEN ALLOWED AS 16 ITA.NO.2391/DEL./2018 M/S. COBRA INSTALACIONES Y SERVICIOS SA DEDUCTION IN FAVOUR OF THE ASSESSEE-COMPANY. NO CAP ITAL WAS EMPLOYED BY ASSESSEE-COMPANY. PB-6 AND 7 ARE THE FR EQUENTLY ASKED QUESTIONS BY THE PARTIES FROM RESERVE BANK OF INDIA, IN WHICH, IT IS REPLIED THAT THE CREDITS TO THE ACCOUNT SHOULD REPRESENT THE FUNDS RECEIVED FROM HEAD OFFICE THROU GH NORMAL BANKING CHANNEL FOR MEETING THE EXPENSES OF THE OFF ICE AND/OR TO RUPEE THE AMOUNT RECEIVABLE, IF ANY, UNDER THE C ONTRACT AND NO OTHER AMOUNTS SHOULD BE CREDITED WITHOUT PRIOR P ERMISSION OF RESERVE BANK OF INDIA. HE HAS REFERRED TO ACCOUNTING STANDARD-11, WHICH ALSO PERMITS EXCHANGE DIFFERENCE EITHER SHOULD BE RECOGNIZED AS INCOME OR EXPENSES. HE HAS RELIED UPON THE DECISION OF THE HONBLE SUPREME COURT IN THE CA SE OF CIT VS. WOODWARD GOVERNOR INDIA P. LTD., (2009) 312 ITR 254 (SC) IN WHICH IT WAS HELD THAT LOSS SUFFERED BY ASSESSEE ON ACCOUNT OF FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE AS ON T HE DATE OF THE BALANCE- SHEET IS AN ITEM OF EXPENDITURE UNDER SECTION 37(1) OF THE INCOME TAX ACT, 1961. HE HAS SUBMITTED THAT LOAN RAISED BY P.E. FROM ITS HEAD OFFICE ARE VERY OLDER AND PRIOR TO 2013. FIRST , SUCH LOAN 17 ITA.NO.2391/DEL./2018 M/S. COBRA INSTALACIONES Y SERVICIOS SA FROM HEAD OFFICE WAS RECEIVED AT THE TIME OF STARTI NG OF THE PROJECT OFFICE IN INDIA IN THE YEAR 1995. HE HAS SU BMITTED THAT NO ACTION UNDER FEMA HAVE BEEN TAKEN AGAINST THE AS SESSEE- COMPANY. 7. ON THE OTHER HAND, LD. D.R. RELIED UPON T HE ORDER OF THE A.O. 8. WE HAVE CONSIDERED THE RIVAL SUBMISSIONS AND PERUSED THE MATERIAL AVAILABLE ON RECORD. IN THIS C ASE, ASSESSEE- COMPANY IS A P.E. OF FOREIGN-COMPANY. WHATEVER INCO ME HAS ACCRUED OR ARISEN, HAVE BEEN ASSESSED IN INDIA AGAI NST THE P.E. THE ASSESSEE-COMPANY EXPLAINED THAT FOR COMPLETING THE PROJECT IN INDIA, EITHER THE ADVANCE RECEIVED FROM THE CLIE NT, OR THE ADVANCE/LOAN HAVE BEEN RECEIVED FROM THE HEAD OFFIC E SITUATED IN SPAIN. THE LOANS ARE ADMITTEDLY RECEIVED FROM HE AD OFFICE IN EURO AND HAVE BEEN REPAID IN EURO AS PER RBI GUIDEL INES TO CARRY OUT OPERATIONS IN INDIA AND WAS OUTSTANDING I N BALANCE- SHEET. IT IS ALSO NOT IN DISPUTE THAT THE MONEY SO RECEIVED FROM THE HEAD OFFICE IS REVENUE IN NATURE BECAUSE THE AM OUNT OF THE 18 ITA.NO.2391/DEL./2018 M/S. COBRA INSTALACIONES Y SERVICIOS SA LOAN IS UTILIZED IN DAY-TO-DAY OPERATIONS I.E., WOR KING-CAPITAL REQUIRED FOR PROJECT EXECUTION AND TO OBTAIN MATERI AL AS PER THE TERMS OF THE CONTRACT. THE UTILIZATION OF THE AMOUN TS RECEIVED FROM HEAD OFFICE DID NOT BRING ANY CAPITAL ASSET IN TO EXISTENCE. THEREFORE, THE AMOUNTS SO RECEIVED FROM THE HEAD OF FICE HAVE BEEN UTILIZED TO INCUR THE OPERATING COST. THE ASSE SSEE-COMPANY HAS FILED COPY OF THE BALANCE-SHEET TO SHOW THAT TH E AMOUNT IN QUESTION HAVE BEEN SHOWN AS LIABILITY IN ASSESSMENT YEAR UNDER APPEAL. THE OUTSTANDING PAYABLE TO THE HEAD OFFICE AS ON 31.03.2014 INCREASED TO RS.154,38,08,645/- AS COMPA RED TO RS.142,13,94,340/- AS ON 31.03.2013. THEREFORE, THE CONTENTION OF ASSESSEE-COMPANY IS CORRECT THAT FOR THE PURPOSE OF COMPLETING THE TURN-KEY PROJECT, THE FUNDS ARE R EQUIRED, WHICH HAVE BEEN PROVIDED BY THE HEAD OFFICE. IT IS ALSO EXPLAINED THAT FOR RECEIVING SUCH FUNDS FROM THE HE AD OFFICE, RESERVE BANK OF INDIA PERMISSION HAVE ALSO BEEN OBT AINED. THOUGH THE LD. CIT(A) REFERRED TO FEMA ACT, BUT, NO PROVISIONS HAVE BEEN HIGHLIGHTED WHICH ASSESSEE-COMPANY HAS VI OLATED. THE LD. CIT(A) NOTED THAT PROJECT OFFICE LOCATED IN INDIA DOES NOT 19 ITA.NO.2391/DEL./2018 M/S. COBRA INSTALACIONES Y SERVICIOS SA COME UNDER THE LIST OF ELIGIBLE BORROWERS, THEREFOR E, PROJECT OFFICE IS NOT ELIGIBLE FOR EXTERNAL COMMERCIAL BORR OWINGS. ASSESSEE-COMPANY, HOWEVER, EXPLAINED THAT IT HAS RE CEIVED LOANS FROM HEAD OFFICE AND ASSESSEE-COMPANY BEING P .E. OF FOREIGN COMPANY, IS NOT ENTITLED TO RAISE LOANS THR OUGH ECB AS ECB CAN ONLY BE RAISED BY INDIAN BORROWERS. FINDING S OF LD. CIT(A) ARE, THEREFORE, NOT RELEVANT TO POINT IN ISS UE. THE ASSESSEE-COMPANY HAS BEEN RECEIVING THE FUNDS IN EU RO FOR THE LAST SO MANY YEARS FROM THE HEAD OFFICE AND HAV E BEEN ADMITTEDLY REPAYING THE AMOUNTS TO THE HEAD OFFICE IN EURO AND SUCH CLAIM OF ASSESSEE-COMPANY OF FOREIGN EXCHA NGE FLUCTUATION LOSS IN A.YS. 2012-2013 AND 2013-2014 P RECEDING TO ASSESSMENT YEAR UNDER APPEAL, HAVE BEEN ACCEPTED BY THE A.O. UNDER SECTION 143(3) OF THE I.T. ACT, 1961. N O MATERIAL HAVE BEEN BROUGHT ON RECORD, IF ASSESSEE-COMPANY HA S VIOLATED ANY PROVISIONS OF FEMA LAW OR ANY OTHER ACT, FOR RE CEIVING SUCH FUNDS FROM THE HEAD OFFICE. THEREFORE, MERELY REFER RING TO FEMA IS NOT ENOUGH TO DISALLOW THE CLAIM OF ASSESSEE-COM PANY. IT IS ALSO NOT IN DISPUTE THAT DUE TO DEPRECIATION IN THE RUPEE PRICES 20 ITA.NO.2391/DEL./2018 M/S. COBRA INSTALACIONES Y SERVICIOS SA IN THE INTERNATIONAL MARKET IN THE YEAR UNDER CONSI DERATION, ASSESSEE-COMPANY HAS CLAIMED FOREIGN EXCHANGE FLUCT UATION LOSS ON THE AMOUNT OUTSTANDING IN FOREIGN CURRENCY TOWARDS HEAD OFFICE WHICH CONSISTS OF ADVANCE PAYMENT MADE BY THE HEAD OFFICE TOWARDS EXECUTION OF THE PROJECT AND TH E AMOUNT OF ENGINEERING CHARGE BILLED IN THEIR HOME CURRENCY BY THE HEAD OFFICE TOWARDS THE SERVICES PROVIDED. THEREFORE, TH E CHARACTER OF THE SUNDRY PAYABLE TO THE HEAD OFFICE IS IN THE NAT URE OF PAYABLES/LIABILITY. THEREFORE, IT IS, ON ACCOUNT OF REVENUE ACCOUNT AND THE LOSS REPRESENTS THE REVENUE LOSS. T HE ASSESSEE- COMPANY FURTHER EXPLAINED THAT IT HAS NOT PAID ANY INTEREST ON THE FUNDS BORROWED FROM HEAD OFFICE. SINCE, THERE I S NO DISPUTE THAT AMOUNT RECEIVED FROM THE HEAD OFFICE WAS IN EU RO AND REPAID IN EURO, THEREFORE, DIFFERENCE IN INR AND EU RO WAS CORRECTLY CLAIMED AS FOREIGN EXCHANGE FLUCTUATION L OSS. THE DECISION OF THE HONBLE CALCUTTA HIGH COURT RELIED UPON BY THE A.O. IN THE CASE OF BETTS HARTLEY HUETT AND CO. LTD ., VS. CIT 116 ITR 425 (SUPRA), IS DISTINGUISHABLE FROM THE FACTS OF THE CASE BECAUSE IN THE PRESENT CASE, NO PROFIT HAVE BEEN EA RNED BY THE 21 ITA.NO.2391/DEL./2018 M/S. COBRA INSTALACIONES Y SERVICIOS SA SAME PERSON. THE ARTICLE 7(3) OF INDIA-SPAIN DTAA I S NOT APPLICABLE IN THIS CASE BECAUSE NOTHING IS PAID BY THE ASSESSEE- COMPANY TO THE HEAD OFFICE ON ACCOUNT OF LOSS AND N O DEDUCTION CLAIMED. THE ITEMS OF EXPENSES SPECIFIED IN DTAA AR E NOT APPLICABLE IN CASE OF ASSESSEE. IT WAS A DIFFERENTI AL AMOUNT ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION LOSS THAT A SSESSEE- COMPANY SUFFERED WHICH WAS CLAIMED AS DEDUCTION IN THE P & L A/C. THE ASSESSEE-COMPANY HAS NOT VIOLATED ANY TERM S OF ARTICLE 7(3) INDIA-SPAIN DTAA AS REPRODUCED ABOVE B ECAUSE WHATEVER BAR HAVE BEEN PROVIDED IN THIS ARTICLE ARE NOT APPLICABLE TO THE CASE OF THE ASSESSEE-COMPANY. THE ASSESSEE- COMPANY BEING P.E. OF FOREIGN COMPANY IN INDIA COUL D NOT OBTAIN ANY BORROWINGS FROM ANY BANK IN INDIA, THERE FORE, WORKING CAPITAL WAS REQUIRED TO COMPLETE THE TURNKE Y PROJECTS. THE FACTS AND CIRCUMSTANCES OF THE CASE AS MENTIONE D ABOVE AND CONSIDERING THE ASSESSMENT ORDERS PASSED BY THE A.O. IN PRECEDING A.YS. 2012-2013 AND 2013-2014 CLEARLY SHO W THAT THE AMOUNT RECEIVED BY THE ASSESSEE-COMPANY FROM TH E HEAD OFFICE IS A LOAN. THEREFORE, AUTHORITIES BELOW W ERE NOT JUSTIFIED 22 ITA.NO.2391/DEL./2018 M/S. COBRA INSTALACIONES Y SERVICIOS SA IN HOLDING IT TO BE CAPITAL REMITTANCE. THE ASSESSE E-COMPANY DID NOT CLAIM ANY NOTIONAL EXPENSES. THEREFORE, FIN DINGS OF THE AUTHORITIES BELOW ARE WHOLLY UNJUSTIFIED. IT MAY AL SO BE NOTED HERE THAT IN SUBSEQUENT A.Y. 2015-2016, THE ASSESSE E-COMPANY HAS EARNED FOREIGN EXCHANGE FLUCTUATION GAIN ON THE SAME SET OF FACTS IN A SUM OF RS.13,37,29,120/- WHICH HAVE B EEN DECLARED AS INCOME. IF THE A.O. IS OF THE OPINION T HAT ASSESSEE- COMPANY IS NOT ENTITLED FOR DEDUCTION ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATION LOSS, HE SHOULD NOT HAVE ACCEP T THE SIMILAR CLAIM OF ASSESSEE-COMPANY IN PRECEDING ASSESSMENT Y EARS AND SHOULD HAVE REFUNDED THE AMOUNT OF TAX PAID ON THE FOREIGN EXCHANGE CAPITAL GAIN SHOWN IN SUBSEQUENT ASSESSMEN T YEAR. IT IS WELL SETTLED LAW THAT RULE OF CONSISTENCY DO APP LY TO THE INCOME TAX PROCEEDINGS. THEREFORE, ON THE SAME SET OF FACTS, THE A.O. CANNOT TAKE A DIFFERENT VIEW IN THE ASSESSMENT YEAR UNDER APPEAL. WE MAY NOTE HERE THAT THE HONBLE SUPREME C OURT IN THE CASE OF CIT VS. WOODWARD GOVERNOR INDIA P. LTD. , (SUPRA) HELD THAT THE LOSS SUFFERED BY THE ASSESSEE ON AC COUNT OF FLUCTUATION IN THE RATE OF FOREIGN EXCHANGE AS ON T HE DATE OF THE 23 ITA.NO.2391/DEL./2018 M/S. COBRA INSTALACIONES Y SERVICIOS SA BALANCE-SHEET IS AN ITEM OF EXPENDITURE UNDER SECTI ON 37(1) OF THE I.T. ACT, WHICH, CLEARLY SUPPORT OUR FINDINGS T HAT ASSESSEE- COMPANY IS ENTITLED FOR DEDUCTION ON ACCOUNT OF FOR EIGN EXCHANGE FLUCTUATION LOSS. IT IS AN UNDISPUTED FACT THAT ASSESSEE-COMPANY RECEIVED THE AMOUNT FROM HEAD OFFI CE IN EURO AND REPAID TO HEAD OFFICE IN EURO, THEREFORE, EVEN IF THE AMOUNT MAY BE CALLED BY ANY NAME I.E., LOAN, BORROW ING OR OTHERWISE, BUT THE ASSESSEE-COMPANY HAS SUFFERED FO REIGN EXCHANGE FLUCTUATION LOSS ON ACCOUNT OF AMOUNT RECE IVED FROM HEAD OFFICE IN EURO AND REPAID IN EURO ON ACCOUNT O F DIFFERENTIAL VALUE IN INR, THEREFORE, SUCH FLUCTUAT ION LOSS IS ALLOWABLE AS DEDUCTION IN FAVOUR OF THE ASSESSEE-CO MPANY. CONSIDERING THE TOTALITY OF THE FACTS AND CIRCUMSTA NCES OF THE CASE, WE ARE OF THE VIEW THAT ASSESSEE-COMPANY IS E NTITLED FOR DEDUCTION ON ACCOUNT OF FOREIGN EXCHANGE FLUCTUATIO N LOSS. WE, ACCORDINGLY, SET ASIDE THE ORDERS OF THE AUTHORITIE S BELOW AND DELETE THE ENTIRE ADDITION. 24 ITA.NO.2391/DEL./2018 M/S. COBRA INSTALACIONES Y SERVICIOS SA 9. IN THE RESULT, APPEAL OF THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT. SD/- SD/- (L.P. SAHU) (BHAVNESH SAINI) ACCOUNTANT MEMBER JUDICIAL MEMBER DELHI, DATED 28 TH JUNE, 2018 VBP/- COPY TO 1. THE APPELLANT 2. THE RESPONDENT 3. CIT(A) CONCERNED 4. CIT CONCERNED 5. D.R. ITAT B BENCH 6. GUARD FILE // BY ORDER // ASST. REGISTRAR : ITAT DELHI BENCHES : DELHI.