Ita/535/2009 Of Apollo Tyres Limited, Kochi-31 v. Asst. Commr.of Income Tax, New Delhi

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT THE HONOURABLE MR.JUSTICE P.R.RAMACHANDRA MENON & THE HONOURABLE MR.JUSTICE N.ANIL KUMAR WEDNESDAY,THE 13TH DAY OF MARCH 2019 / 22ND PHALGUNA, 1940 ITA.No. 535 of 2009 AGAINST THE ORDER IN ITA 6177/1996 of I.T.A.TRIBUNAL,COCHINBENCH DATED 28-03-2007 APPELLANT: APOLLO TYRES LIMITED, 6TH FLOOR, CHERUPUSHPAM BUILDING, SHANMUGHAM ROAD, KOCHI-31. BY ADVS.SRI. JOSEPH MARKOSE, SC, SRI.BINU MATHEW, SRI.B.J.JOHN PRAKASH SRI.JOSEPH KODIANTHARA (SR.) SRI.MATHEWS K.UTHUPPACHAN SRI.TERRY V.JAMES SRI.TOM THOMAS (KAKKUZHIYIL) SRI.V.ABRAHAM MARKOS RESPONDENTS: THE ASSISTANT COMMISSIONER OF INCOME TAX, CENTRAL CIRCLE 11, NEW DELHI - PRESENTLYTHE ASSISTANT COMMISSIONER OF INCOME TAX,CIRCLE 1(1), RANGE - 1, ERNAKULAM BY ADV. SRI. JOSE JOSEPH, SC, FOR INCOME TAX SRI. CHRISTOPHER ABRAHAM, SC THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON26.02.2019, THE COURT ON 13.03.2019 DELIVERED THEFOLLOWING: I.T.A. No. 535 of 2009 JUDGMENT Ramachandra Menon , J. This appeal is at the instance of the assessee,challenging the verdict passed by the Income TaxAppellate Tribunal based on the finding given by theSpecial Bench on the question as to whether the gainsearned on cancellation of the foreign exchange forwardcontract are 'capital receipts' or 'revenue receipts'and if it is capital receipt, whether the same couldbe reduced from the cost of plant and machinery inconnection with which forward contracts were enteredinto. There is an incidental question as well. 2. The assessee is engaged in the manufactureand sale of automotive tyres and tubes having twoplants; one at Baroda in Gujarat and the other one atPerambra in Kerala. In respect of the assessmentyear 1993 - '94 [in relation to the previous financialyear ended on 31.03.1993], the assessment was finalized as per Annexure A order passed by the I.T.A. No. 535 of 2009 : 3 : Assessing Officer which was detrimental to theinterest of the assessee. On challenging the samebefore the Commissioner of Appeals [Income Tax], itwas partly allowed as per Annexure B order, which wassought to be challenged further by filing an appealbefore the Tribunal. Since the revenue was aggrievedto some extent, they also approached the Tribunal byfiling a separate appeal. The Tribunal held that, byvirtue of the importance of the issue, the matterrequired to be considered by a Special Bench and itwas accordingly referred to the President of theIncome Tax Appellate Tribunal for constitution of aSpecial Bench. 3. After hearing, the Special Bench passedAnnexure D order [produced along with I.A. No. 1 of2019] which was incorporated as part of Annexure Corder passed by the Tribunal. As per the said order,the Tribunal accepted the version of the assessee thatit was a 'capital receipt' and not a revenue receipt,thus answering the question in favour of the assessee I.T.A. No. 535 of 2009 : 4 : and against the Revenue. But, as to the furthercourse of action, the Tribunal held that the saidcapital receipt should be reduced from the 'cost ofplant and machinery' in connection with which theforward contracts were entered into. To the said extent, the assessee is stated as aggrieved and hencethe appeal. 4. Though the appeal was admitted on 03.08.2009, no substantial question of law is seen framed. Theassessee however has suggested two questions, asinvolving substantial questions of law, which areextracted below : “1. Whether on the facts and circumstances of the case, thegains on the cancellation of forward contracts, held to be capitalreceipt, were liable to be set off against the cost of acquisitionof imported plant and machinery ? : 4 : and against the Revenue. But, as to the furthercourse of action, the Tribunal held that the saidcapital receipt should be reduced from the 'cost ofplant and machinery' in connection with which theforward contracts were entered into. To the said extent, the assessee is stated as aggrieved and hencethe appeal. 4. Though the appeal was admitted on 03.08.2009, no substantial question of law is seen framed. Theassessee however has suggested two questions, asinvolving substantial questions of law, which areextracted below : “1. Whether on the facts and circumstances of the case, thegains on the cancellation of forward contracts, held to be capitalreceipt, were liable to be set off against the cost of acquisitionof imported plant and machinery ? 2. Whether the royalty expenses of Rs.49 lakhs could bedisallowed as not relation to the previous year ended 31.03.1993relevant to the assessment year 1993 - 94” 5. We heard Sri. Joseph Markos, the learned senior counsel appearing for the appellant and I.T.A. No. 535 of 2009 : 5 : Sri.Christopher Abraham, the learned standing counselappearing for the Revenue. 6. The finding of the Tribunal that it is acapital receipt and not the revenue receipt has becomefinal as there is no challenge at the instance of theRevenue. With regard to the further course of action,i.e. the necessity to have it reduced from the cost ofplant and machinery in connection with which forwardcontracts were entered into, the matter has beendiscussed by the Special Bench of the Tribunal inparagraph 24 [which is paragraph No. 14 in AnnexureC]. The said paragraph is reproduced below : “24. Forward foreign exchange contracts entered into bythe assessee are clearly covered under the aforesaid Explanationand, therefore, it would need to be read in conjunction with theprovision enacted under section 43A(1). Section 43A (1) speaks ofincrease or reduction in the liability of the assessee as expressedin Indian currency for making payments towards the whole or partof the cost of the asset or for repayment of the whole or part ofthe money borrowed .by him from any person in any foreigncurrency. Since the assessee has entered into forward contracts,as per the provisions of Explanation 3, increase or reduction of theliability of the assessee in repayment of the loan are liable to be “24. Forward foreign exchange contracts entered into bythe assessee are clearly covered under the aforesaid Explanationand, therefore, it would need to be read in conjunction with theprovision enacted under section 43A(1). Section 43A (1) speaks ofincrease or reduction in the liability of the assessee as expressedin Indian currency for making payments towards the whole or partof the cost of the asset or for repayment of the whole or part ofthe money borrowed .by him from any person in any foreigncurrency. Since the assessee has entered into forward contracts,as per the provisions of Explanation 3, increase or reduction of theliability of the assessee in repayment of the loan are liable to be ascertained on the basis of the forward contracts. That part ofthe foreign liability for repayment of the loan which is coveredunder the forward contract would be determined on the basis ofthe exchange rate of the foreign currency into the Indiancurrency as specified in the contract. Any increase or reduction inthe liability being the difference in the Rupee equivalent oforiginal liability as well as the liability on the basis of the forwardcontract would be capitalized towards the actual cost of theassessee in consonance with the provisions of section 43A. Thus,gains arising on cancelling of the forward contracts in the case ofthe assessee represent the reduction of the liability forrepayment of the foreign loan which is liable to be adjusted in thecost of the asset as per section 43A (1). We are not persuaded toaccept the argument of the Id. Counsel for the assessee that theforward contracts have been cancelled by the assessee and arenot covered under Explanation 3 to Section 43A. As we havealready mentioned above, forward contracts have been initiallyentered into by the assessee against repayment of foreign loan inSterling as well as US Dollars and have been rolled over upto30.4.1992 when the same were cancelled in pursuance of relaxationof restriction against cancellation by the Reserve Bank of India.The fact that contracts were not rolled over beyond 30.4.1992and the assessee consciously decided not to extend the securitycover on maturity of the contracts would not by itself take thesecontracts out of the purview of Explanation 3. Admitted facts arethat these contracts have been entered into for providing the assessee with foreign currency on or after a stipulated futuredate at the fixed exchange rate. The contracts are thus fully inconformity with the letter and spirit of Explanation 3. If theassessee has not opted for roll over of the contracts, this wouldnot ipso facto make Explanation 3 inapplicable. The language ofExplanation 3 does not contain any such qualification. Theinterpretation suggested by Id. Counsel would require the additionof the words “and the contract has been rolled over to the date ofactual payment of instalment for foreign liability” after the words“to enable him to meet the whole or any part of the liabilityaforesaid” in the Explanation. There is nothing in the presentlanguage of the Explanation which makes it inapplicable to a casewhere the contracts have not been rolled over to the date ofactual repayment of the liability. We are unable to accept theinterpretation suggested by the Id. Counsel which in fact wouldcause grave violence to the language of the provision. Any suchinterpretation would be contrary to well-accepted principles ofinterpretation, namely, rule of literal interpretation as well as ruleof purposive interpretation. It is an elementary principle ofinterpretation of statutes, reiterated by Courts time and againthat the Court cannot read anything into a statutory provisionwhich is plain and unambiguous. In our consideration opinion, thegain arising from cancellation of forward contracts which areconnected with the foreign loans raised for purchase ofmachinery are capital in nature and are liable to be capitalizedtowards the cost of the machinery by virtue of section 43A (1) I.T.A. No. 535 of 2009 read with Explanation 3 thereto.” 7. In this context, it will be quite appropriateto make a reference to Explanation No. 3 of Section43A relied on by the Tribunal and hence it isextracted below : “43A Special provisions consequential to changes inrate of exchange of currency - …............. Explanation 3 - Where the assessee has enteredinto a contract with an authorised dealer as defined insection 2 of the Foreign Exchange Management Act,1999 (42 of 1999), for providing him with a specifiedsum in a foreign currency on or after a stipulated futuredate at the rate of exchange specified in the contractto enable him to meet the whole or any part of theliability aforesaid, the amount, if any, to be added to, ordeducted from, the actual cost of the asset or theamount of expenditure of a capital nature or, as the casemay be, the cost of acquisition of the capital asset underthis section shall, in respect of so much of the sumspecified in the contract as is available for dischargingthe liability aforesaid, be computed with reference tothe rate of exchange specified therein.” 8. The legal position stands settled by virtue of I.T.A. No. 535 of 2009 : 9 : the law declared by the Apex Court in Oil and NaturalGas Corporation Ltd. Vs. Commissioner of Income Tax[(2010) 322 ITR 180 (SC)]. The relevant portion, ascontained in paragraphs 14 to 16, is as given below : “14. On the question whether an assessee is entitled toadjust the actual cost of imported assets acquired in foreigncurrency on account of fluctuation in the rate of exchange at eachbalance-sheet date, pending actual payment of the varied liabilitywith reference to unamended Section 43A of the Act, inWoodward’s case [2009] 312 ITR 254, the court observed thus(page 272 ) : “........ What triggers the adjustment in the actual cost of theassets, in terms of the unamended section 43A of the 1961 Act isthe change in the rate of exchange subsequent to the acquisition ofasset in foreign currency. The section mandates that at any timethere is change in the rate of exchange, the same may be giveneffect to by way of adjustment of the carrying cost of the fixedassets acquired in foreign currency. But for section 43A whichcorresponds to paragraph 10 of AS-II such adjustment in thecarrying amount of the fixed assets was not possible, particularly inthe light of section 43(1). The unamended section 43A nowhererequired as condition precedent for making necessary adjustment inthe carrying amount of the fixed asset that there should be actualpayment of the increased/decreased liability as a consequence ofthe exchange variation. The words used in the unamended section 43A were ’for making payment’ and not ’on payment’ which is nowbrought in by amendment to section 43A, vide the Finance Act,2002”. 15. Opining that the amendment of section 43A of the Act bythe Finance Act, 2002 with effect from April 1, 2003 is amendatoryand not clarificatory and would thus, apply prospectively, the courtexplained that under the unamended section 43A, adjustment to theactual cost takes place on the happening of change in the rate ofexchange, whereas under the amended Section 43A, the adjustmentin the actual cost is made on cash basis. In other words, under theunamended section 43A, ”actual payment” was not a conditionprecedent for making necessary adjustment in the carrying cost ofthe fixed asset acquired in foreign currency but under the amendedsection 43A with effect from April 1, 2003, such payment of thedecreased/enhanced liability on account of fluctuation in foreignexchange rate has been made a condition precedent for makingadjustment in the carrying amount of the fixed asset. 16. We are of the opinion that the decision of this court inWoodward’s case [2009] 312 ITR 254 settles the second issue aswell. We respectfully concur with the same and hold that all theassessment years in question being prior to the amendment insection 43A of the Act with effect from April 1., 2003 the assesseewould be entitled to adjust the actual cost of the imported capitalassets acquired in foreign currency, on account of fluctuation in therate of exchange at each of the relevant balance-sheet datespending actual payment of the varied liability? We are of the view that the idea and understanding ofthe assessee as to the scope of the provision isthoroughly wrong and misconceived. The coursepursued by the Tribunal is in conformity with thestatutory prescription and the law laid down by theApex Court. The first question is answered againstthe assessee and in favour of the Revenue. 9. Regarding the second question, it is inrespect of disallowance of royalty expenses of Rs. 49lakhs, as not relating to the previous year ended on31.03.1993 [which is relevant for the assessment year1993 - '94]. There is no dispute to the fact that theroyalty expenses payable to M/s General TiresInternational Co. USA for technical know-how based onthe technical collaboration agreement executed by theassessee was for the period from 26.01.1992 to31.03.1993. The entire expenditure of Rs. 261.53lakhs was disallowed by the Assessing Officer on theground that the Government approval for the royalty I.T.A. No. 535 of 2009 : 12 : agreement was obtained only much later, aftercommencement of the financial year 01.04.1993. In theappeal preferred by the assessee, the Commissionerupheld the disallowance to the extent of Rs.49 lakhs,being royalty expenses for the period from 26.01.1992to 31.03.1992 as related to the preceding assessmentyear. Admittedly, the assessee, instead of claimingthe said amount in the assessment year 1992 - '93claimed it as well in the year 1993 - '94, which wasnot correct or sustainable and hence disallowed. Thesaid finding of the Commissioner was upheld by theTribunal, which is under challenge in this appeal. 10. After hearing both the sides, we are of theview that there is nothing illegal or improper on thepart of the Commissioner or the Tribunal in havingdisallowed the royalty expenses of Rs. 49 lakhs, thesaid extent being attributable to the previous year1992 - '93, which could not have been claimed duringthe assessment year 1993 - '94. As it stands so, thesecond question also stands answered against the I.T.A. No. 535 of 2009 : 13 : assessee and in favour of the Revenue. This Courtfinds that there is no substantial question to callfor interference, invoking the power under Section260A of the Income Tax Act. Appeal fails and it isdismissed accordingly. sd/- P. R. RAMACHANDRA MENON, JUDGE sd/- N. ANIL KUMAR, JUDGE kmd