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Foreign cos can claim tax deduction for forex losses: SC
September, 08th 2008

The Supreme Court has held that foreign companies can claim tax deductions for foreign exchange losses on account of currency fluctuations. A bench headed by Justice S H Kapadia while dismissing the Income tax department's petition held that the loss arising on account of "foreign currency translation" was allowable as deduction and the gains on the same account were also liable to be taxed in India.

The now bankrupt Enron Oil & Gas had along with Reliance Industries and state-run Oil and Natural Gas Corp (ONGC) had been awarded the Panna/Mukta and Tapti oil and gas fields off the Mumbai coast. Enron has since sold off its stake to BG Group of UK. According to the court, Enron, which was the operator of the field, made capital investments and proceeds from oil sales were used to recoup the operational costs and capital investment.
While stating that the oil used for this purpose was termed as "cost oil," Justice Kapadia said that often a company obtained profit not just from the "profit oil" but also from "cost oil."

"Such profits cannot be ascertained without taking into account translation (currency fluctuation) losses. Moreover, taxes are embedded in the profit oil. If these concepts are kept in mind then it cannot be said that translation losses under the production sharing contract are illusory losses," the judgement stated. The court also rejected the I-T department's argument that exchange losses on loans or other financing would not be admissible for deduction. "Cash call is not a loan. It is a contribution made into the account of the operator by each co-venturer in USD (dollars)," it added.

Enron and Reliance had 30 per cent stake each in the fields while the remaining 40 per cent was with ONGC.
Under Notification dated March 8, 1996, each co-venturer was liable to be assessed for his own share of income.
Enron had filed income tax returns for assessment year 1999-00 declaring its taxable income of more than Rs 71 crore under Section 115JA of the Income Tax Act. The assessing officer had disallowed the loss of more than Rs 38 crore on the ground that no loss was incurred by Enron and this was a mere book entry. However, Both CIT (A) and Income Tax Appellate Tribunal while allowing the loss of more than Rs 38 crore as deduction to the foreign company had held that just as foreign exchange gain was taxable so was loss allowable as deduction.

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