No TDS on additional payment due to forex currency change if TDS is deducted at credit of payment

Provisions of section 195 provide that once tax is deducted at source at the time of credit of payment, there can be no question of deduction of tax at source on full or in part at the time of payment. Once tax was deducted at the first stage when the amount of income was credited to the account of payee, which was done by converting foreign currency into TT buying rate on that particular date, then the assessee could not be called upon to deduct tax at source on the additional liability arising due to foreign exchange fluctuation

FACTS

• The assessee acquired technical know-how in respect of some automobile models which was capitalized as an `Intangible asset' and depreciation was claimed thereon.

• The Assessing Officer observed that between the date of credit of acquisition price and the date of actual payment, the exchange rate of rupee and Japanese yen fluctuated, as a result of which the assessee suffered a forex loss of Rs.5.22 crore. The cost of acquisition of the said asset which was originally recorded at Rs.141.47 crore swelled toRs.146.70 crore, the incremental amount being the forex loss ofRs.5.22 crore. The Assessing Officer observed that the assessee deducted tax at source under section 195 only on the payment of Rs.141.47 crore and no tax atsource was deducted from the additional payment of Rs.5.22 crore on account of fluctuation in foreign exchange rate.He disallowed depreciation on the corresponding amount ofRs.5.22 crore, which resulted into disallowance of Rs.1.30 crore.

• The assessee is aggrieved against the disallowance made by the Assessing Officer.

HELD

• When we read section 40(a)(i) in juxtaposition of section 195, the position which follows for disallowance under section40(a)(i) is that there should be a sum on which tax is deductible at source and the assessee fails to deduct the same. The stage of deduction of tax at source has been set out by section itself. It clearly provides that the deduction should be made `at the time of credit of such income to the account of the payee or at the time of payment…, whichever is earlier.' Thus, it is clear that the deduction of tax at source on a single transaction is contemplated at the earlier of the dates of credit or payment to the payee. Itis not on both the occasions. Once deduction of tax at source has been made at the time of credit, which event occurs first, then there can be no question of once again making deduction of tax at source on full or in part at the time of payment.[Para 10]

• The tax is required to be deducted at the first stage when the amount of income is credited to the account of payee and, hence, deduction of tax at source is also contemplated at that stage alone which is to be done by converting foreign currency into TT buying rate at that particular date. There is no warrant for accepting the Revenue's contention that the deduction of tax at source should have been made at the later stage also onthe additional liability when the assessee made payment. In our considered opinion, the Act does not require two phased deduction of tax at source on one transaction, one at the time of credit and second at the time of actual payment. Deduction of tax at source is required to be made only on one occasion, which in the context of section 195 is, earlier of the time of credit or the time of payment. Under such circumstances, the assessee cannot be called upon to deduct tax at source on the additional liability arising because of foreign exchange loss. If we take the contention of the Revenue to a logical conclusion, then every case of payment in convertible foreign exchange would require deduction of tax at source, firstly, at the time of credit and secondly, at the time when additional liability is fastened on it due to unfavorable rate of exchange. A very peculiar situation would arise, if instead of the assessee suffering forex loss, gets forex gain on account of favourable rate of exchange at the time of payment. Going by the viewpoint of the Revenue, in that case, it would become liable to refund a part of the amount of excess tax deducted at source at the first instance at the time of credit to the account of the payee, which position is manifestly contrary to the legislative intent and prescription. The crux is that in both the situations, i.e., whether there is a forex loss or gain, deduction of tax at source under section 195 is contemplated only at the first stage of the credit of income to the account of the payee. The higher or lower liability due to foreign exchange loss or foreign exchange gain is inconsequential in so far as deduction of tax at source under section195 is concerned. Once there is no default on the part of the assessee in making deduction of tax at source on the additional amount paid due to foreign exchange loss, there can be no question of making any disallowance under section40(a)(i)
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