IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH

Transcription

ITA NO.5635/DEL/2010 &
1191/Del/2012
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH “F”, NEW DELHI
BEFORE SHRI N.K. SAINI, ACCOUNTANT MEMBER
AND
SHRI H.S. SIDHU, JUDICIAL MEMBER
I.T.A. No. 5635/Del/2010
A.Y. : 2007-08
M/s Riviera Home Furnishing (P) Ltd., Vs. ACIT, RANGE-15,
Block-A, Pocket-I/83, Sector-8,
NEW DELHI
Rohini, New Delhi
(PAN: AAACR4448J)
(APPELLANT)
(RESPONDENT)
AND
I.T.A. No. 1191/DEL/2012
A.Y. : 2008-09
M/s Riviera Home Furnishing (P) Ltd., Vs. ACIT, RANGE-15,
501, 5th floor, Aggarwal Corporate
NEW DELHI
Heights, Netaji Subhash Place,
District Centre, Wazirpur,
Delhi
(APPELLANT)
(RESPONDENT)
Assessee by
:
Department by
:
Sh. Ajay Vohra, Adv. &
Ms. Bhavita Kumar, Advocates
Sh. Vikram Sahay, Sr. DR
Date of Hearing : 17-2-2015
Date of Order :
27-2-2015
ORDER
PER H.S. SIDHU : JM
These appeals filed by the
Assessee against the two separate
Orders dated 20.10.2010 and 11.1.2002 passed by the Ld. CIT(A)-XVIII,
New Delhi pertaining to assessment years 2007-08 & 2008-09.
2.
The
grounds raised in the ITA NO. 5635/Del/2010 (A.Y. 2007-08)
read as under:-
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ITA NO.5635/DEL/2010 &
1191/Del/2012
1.
That the appellant denies its liability to be
assessed at income of Rs. 6,65,88,930/- and accordingly
denies its liability to pay tax demanded thereon.
2.
That having regard to the facts and circumstances
of the case, Ld. COMMISSIONER Of INCOME TAX
(APPEALS)-xviii has erred in law and on facts in not
granting the benefit of exemption uls 10B fully as
claimed by the assessee in the return of income filed
and has further erred in observing that incentive profits
are not profit derived from export business and has
erred in making the addition of Rs.71,05,171/- on
account Deemed Duty drawback (Being Duty Remission
scheme).
2A That in any case and in any view if the matter, action
of Ld. COMMISSIONER OF INCOME TAX (APPEALS)-XVIII
in making of Rs. 71, 05,171/- is contrary to law and facts
and deserves to be detected.
3.
of the case Ld. COMMISSIONER OF INCOME TAX
(APPEALS)-XVIII has erred in law and on facts in making
addition of Rs.21,239/- on account of interest by
observing that there is no direct nexus with export.
4.
That in any case and in any view of the matter,
action of, Ld. COMMISSIONER OF INCOME TAX
(APPEALS)-XVIII
in
making
aggregate
additions/
disallowances of Rs. 71,26,410/- and in framing the
impugned assessment is bad in law, illegal, unjustified
and contrary to facts and law, by recording incorrect
facts and finding, in violation of principals of natural
justice and the same deserves to be quashed.
5.
That in any case and in any view of the matter
action of, Ld. COMMISSIONER OF INCOME TAX
(APPEALS)-XVIII in framing the impugned assessment
order is contrary to law and facts, void ab initio, beyond
jurisdiction and the same is not sustainable on various
legal and factual grounds.
6.
of the case, Ld. COMMISSIONER OF INCOME TAX
(APPEALS)-XVIII has erred in law and on facts in charging
interest u/s 234A,234B, and 234C of the income Tax Act,
1961.
7.
That the appellant craves the leave to add,
modify, amend or delete any of the grounds of appeal at
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ITA NO.5635/DEL/2010 &
1191/Del/2012
the time of hearing and all the above grounds are
without prejudice to each other.
3.
The grounds raised in the ITA NO. 1191/Del/2012 (A.Y. 2008-09)
read as under:1.
That the appellant denies its liability to be
assessed
at
income
of
Rs.12,24,21,029/and
accordingly denies its liability to pay tax demanded
thereon.
2.
(APPEALS}-XVIII has erred in law and on facts in
confirming the action of Ld. AO for not granting the
benefit of exemption u/s 1OB fully as claimed by the
assessee in the return of income filed and has further
erred in observing that Deemed Duty Drawback is not
the profit derived from export business and hence not
granting relief of RS.1,22,25,214/- on account Deemed
Duty drawback (Being Duty Remission scheme).
2A. That in any case and in any view of the matter, Ld.
COMMISSIONER OF INCOME TAX (APPEALS}-XVIII has
erred in law and on facts in confirming the action of Ld.
AO and not granting relief of RS.1,22,25,214/- is
contrary to law and facts and deserves to be deleted.
3.
(APPEALS)-XVIII has erred in law and on facts in
confirming the action of Ld. AO in not granting relief of
Rs.43,287/- on account of Interest by observing that
there is no direct nexus with export.
4. That having regard to the facts and circumstances of
the case, Ld. COMMISSIONER OF INCOME TAX
(APPEALS)-XVIII. has erred in law and on facts in
confirming the action of Ld. AO in not granting the
benefit of exemption u/s 1OB fully of Rs.28,27,224/- on
account of Customer Claim by observing that the same
has no direct nexus with export.
5.
(APPEALS)-XVIII has erred in law and on facts in not
granting the benefit of exemption u/s 10B fully by
confirming the action of Ld. AO of making addition of
Rs.29,24,404/- on account of Freight Subsidy by
observing that there is no direct nexus with export.
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ITA NO.5635/DEL/2010 &
1191/Del/2012
6.
confirming the action of Ld. AO in making addition of
Rs. 10,93,584/- (Rs 20,72,016/- before passing Order u/s
154 by A.O.) u/s 14A read with rule 80 on account of
expenses relating to investments.
7.
That in any case and in any view of the matter,
action
of,
Ld.
COMMISSIONER
OF
INCOME
TAX
(APPEALS)-XVIII in confirming the action of Ld. AO in
making impugned aggregate additions/disallowances of
Rs. 1,91,13,714/- and framing the impugned assessment
order by recording incorrect facts and finding is bad in
law, illegal, unjustified and contrary to facts and law, in
violation of principals of natural justice and the same
deserves to be quashed.
8.
That in any case and in any view of the matter
action of Ld. COMMISSIONER OF INCOME TAX(APPEALS)XVIII has erred in law and on facts in framing impugned
assessment order is contrary to law and facts, void ab
initio,
beyond
jurisdiction
and
the
same
is
not
sustainable on various legal and factual grounds.
9.
charging interest u/s 234A, 234B, and 234C of the
Income Tax Act, 1961.
10.
That the appellant craves the leave to add,
modify, amend or delete any of the grounds of appeal at
the time of hearing and all the above grounds are
without prejudice to each other.
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ITA NO.5635/DEL/2010 &
1191/Del/2012
Assesse’s Appeal No. 5635/Del/2010 (A.Y. 2007-08)
4.
The brief facts of the case are that the Assessee filed its return of
income on 18.10.2007 at the income of Rs. 5,89,94,426/- having net
payable tax at Rs. 1,97,51,171/-. The assessee is engaged in the absence
of manufacturing
and export of home furnishings such as Rugs,
Mats Blankets etc.
19.8.2009.
issued
to
AO issued notices u/s. 143(2) on 16.9.2008 and
Notices u/s. 143(1) alongwith the Questionnaire was
the
Bath
assessee.
In
response
to
the
same
also
Authorised
Representative appeared from time to time and filed all the necessary
supporting the claim of assessee alongwith the books of accounts. After
examining the profit and loss account of 100% EOU show that there are
two other incomes in addition to export sales i.e. interest received Rs.
21,239/- and Export Incentive Amount of Rs. 71,05,177/-. The AO asked
the assessee that these income cannot be considered to be gain derived
by 100% undertaking from the Export of Articles and things. In reply the
assessee stated that these amounts are also eligible for exemption u/s.
10B of the I.T. Act as they are derived from business of the undertakings.
After considering the reply filed by the assessee and the provisions of law,
the AO has held that the profit derived by way of such incentives do not
fall within the expression of profit derived from and thus not eligible for
deduction u/s. 10B of the I.T. Act and he made the addition on account of
Export Incentive
to the extent of Rs. 71,05,177/- and Rs. 21,239/- on
account of interest income. The AO has also held that interest income is
also not having the direct nexus with the export as desired by use of term
‘derived from’ in the section. Therefore, interest income of Rs. 21,239/to the income of the assessee and made other additions (which is not in
dispute in the present appeal) and completed the assessment u.s, 143(3)
on 21.12.2009 for the asstt. year 2007-08.
5.
Aggrieved by the assessment order dated 21.2.2009, assessee filed
the Appeal before the Ld. CIT(A) who vide impugned order dated
20.10.2010 for the asstt. year 2007-08 upheld the assessment order
dated 21.12.2009 by dismissing the Appeal filed by the assessee.
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ITA NO.5635/DEL/2010 &
1191/Del/2012
6.
Ld. Counsel of the assessee stated that the issue involve in both the
appeals
vide Ground No. 2 to 2A have already been adjudicated and
decided by the ITAT, Special Bench, in favor of the assessee in the case of
Maral Overseas Ltd. vs. ACIT 136 ITD 177.
He filed the Written
Submissions by way of Synopsis and the copy of the same was given to
the Ld. DR.
Ld. DR also wants to file the Written Submissions on the
Synopsis filed by the assessee’s counsel and for the same
allowed to the parties.
time was
Ld. DR has also filed the Written Submissions,
controverted the arguments advanced by the Ld. Counsel of the assessee.
For the sake of convenience the Synopsis/Written Submissions filed by the
Ld. Counsel for the assessee as well the Written Submissions filed by the
Ld. DR, are reproduced below:-
SYNOPSIS / WRITTEN SUBMISSIONS
COUNSEL
FILED BY THE ASSESSEE’S
“In pursuance to the permission granted by the Hon'ble Bench at
the time of hearing held on 05.02.2015, the appellant seeks to file
the following synopsis and rejoinder to the submissions filed by the
Department on the issue of claim of exemption under section 1OB of
the Income Tax Act, 1961 ('the Act') in respect of 'deemed duty
drawback'.
It is respectfully submitted as under:
The appellant is engaged in the business of manufacture and sale of
home furnishings such as rugs, bath mats, blankets etc. The
appellant set up a 100% Export oriented undertaking (hereinafter
referred
to
as
'EOU'
or
'eligible
commenced operations on 01.04.2006
and
unit'),
which
was eligible for
exemption under section 1OB of the Act. In the previous year
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ITA NO.5635/DEL/2010 &
1191/Del/2012
relevant to assessment year 2007-08, the applicant, it is submitted,
claimed exemption under that section by including "deemed export
drawback" in the profits of the eligible unit.
The aforesaid 'deemed export drawback' was, it is further'
submitted, received by the appellant, in terms of Chapter 6.11 (a) of
the Indian Export Import Policy ("Exim Policy"). In terms of the said
clause, supplies made from the Domestic Tariff Area("DTA") to EOU
are regarded as "deemed export" and the supplier is eligible for
entitlements as specified in Chapter 8 of the Pal icy. Further, in case
the supplier decides not to avail
the entitlement by giving a
disclaimer, the EOU would be eligible to the entitlement specified in
Chapter 8 of the policy.
In the assessment year under consideration, the appellant, it is
submitted,
received
deemed
export
drawback,
which
were
disclaimed by the DTA suppliers and was calculated on the basis of
rebate of duty chargeable on any imported material or excisable
material used in the manufacture of such goods in India at the
prescribed
rates.
Accordingly,
the aforesaid
incentives
were
separately recognized as income by the appellant in the profit and
loss account for the said year.
Case of the Assessing officer
In the assessment of the appellant for the assessment year 200708, the aforesaid export incentives alongwith the amount of interest
received on fixed deposits were, it is submitted, excluded from the
eligible profits of the unit while computing exemption under section
1OB of the Act, even though the same were assessed as 'business
income'.
The assessing officer held that export benefits and interest income
are not profits derived from the industrial undertaking and
therefore, do not qualify for exemption under the said section. In
this regard, the assessing officer has relied upon the decision of the
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ITA NO.5635/DEL/2010 &
1191/Del/2012
Punjab and Haryana High Court in the case of Liberty India and
others vs. CIT: 293 ITR 520, which has been affirmed by the
Supreme Court in the case of Liberty India and others vs. CIT: 317
ITR 218, rendered in the context of section 801A/801B of the Act
wherein their Lordships have held that the duty drawback receipts
and DEPB benefits were not income derived from the industrial
undertaking and thus not entitled to relief under that section.
Proceedings before CIT(Appeals)
On appeal, the CIT(A) has affirmed the finding of the assessing
officer by merely relying on the decision of the apex Court in the
case of Liberty India(supra) and held that the amounts earned on
account of deemed duty drawback and interest would not qualify as
profits derived from export of articles or things for the purpose of
exemption under section 1OB of the Act.
Legal Contentions
The limited issue for consideration before the Hon'ble Bench is
whether exemption under section 1OB of the Act is available on the
deemed export drawback and interest income, included in the
profits and gains of the 100% EOU unit.
The provisions of Section 1OB of the Act, to the extent relevant to
the issue at hand is reproduced hereunder:
"1OB Special provision in respect of newly established
hundred percent export oriented undertakings.
(1) Subject to the provisions of this section, a deduction of such
profits and gains as are derived by a hundred per cent exportoriented undertaking from the export of articles 'or things or
computer software for a period of ten consecutive assessment years
beginning with the assessment year relevant to the previous year in
which undertaking begins to manufacture or produce articles or
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ITA NO.5635/DEL/2010 &
1191/Del/2012
things or computer software, as the case may be, shall be allowed
from the total income of the assessee…………………….
(4) For the purposes of sub-sections (1) and (1 A), the profits
derived from export of articles or things or computer software shall
be the amount which bears to the profits of the business of tile
undertaking, the same proportion as the export turnover in respect
of such articles or things or computer software bears to the total
turnover of the business carried on by the undertaking.
(5) The deduction under this section shall not be admissible for any
assessment year beginning on or after the 1st day of April, 2001,
unless the assessee furnishes in the prescribed form, along with the
return of income, the report of an accountant, as defined in the
Explanation below sub-section (2) of section 288, certifying that the
deduction has been correctly claimed in accordance with the
provisions of this section.
...................... " (emphasis supplied)
On perusal of the above, it may be noted that sub-section (I) of
section 1OB of the Act provides for deduction in respect of profits
derived from the business of export of articles or things. Sub-section
(4) of section 1OA of the Act further provides that deduction under
that section shall be computed by apportioning the profits of the
business of the undertaking in the ratio of export turnover to the
total turnover as under:
Profits of the business of the undertaking x Export
turnover
Total turnover of the business carried on by the
undertaking
Thus, it may be important to note that even though sub-section (1)
of section 1OB of the Act refers to profits and gains as are derived
by a 100% EOU, the manner of determining such eligible profits has
been statutorily defined in sub-section (4) of that section.
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ITA NO.5635/DEL/2010 &
1191/Del/2012
Further, as per the aforesaid formula, the entire profits of the
business are to be taken which are further multiplied by the ratio of
the export turnover to the total turnover of the business. The said
sub-section does not require an assessee to establish a direct nexus
with the business of the undertaking. Once an income forms part of
the business of the undertaking.
As a corollary to the aforesaid, once an income forms part of the
business of the eligible undertaking, there is no further mandate in
the provisions of section 1OB to exclude the same from the eligible
profits.
It may, in this regard, be noted that there is no provision which
requires any exclusion of income which forms part of business
income, for computing deduction under section 1OB of the Act. This
is in contradistinction to the provisions of section 80HHC of the Act,
which similarly allows deduction in respect of profits from the
business of export. The said section, however, contains a specific
mandate in terms of Explanation (baa) thereto for exclusion of
various incomes from the 'profits of the business'. There is,
however, no such similar provision mandating exclusion of an
income, which forms part of business income, for computing
deduction under section 1OB of the Act. On the basis of the
aforesaid distinction, it is submitted, that sub section (4) of section
1OB of the Act is a complete code providing the mechanism for
computing "profits of the business" eligible for deduction under that
section which, in our submission, has to be strictly adhered to.
In the present case, there is no dispute that all the aforesaid
incomes (i.e., export incentive and interest) are 'business income' of
the appellant, in so far as the assessing officer has himself admitted
that the same represent' ancillary profits' of the undertaking. Thus,
once the said receipts qualify as 'business income' of the eligible
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ITA NO.5635/DEL/2010 &
1191/Del/2012
unit, then there is no further requirement stipulated in section 1OB
to exclude the same for the purpose of determination of exemption.
Decision relied upon by the Revenue distinguishable - Liberty India
(supra)
The decision of the Supreme Court in the case of Liberty
India(supra), which has been heavily relied upon by the assessing
officer and CIT(A) is not at all applicable to the facts of the present
case as elaborated hereunder:
In the aforesaid case, the issue before the Supreme Court was with
regard to the eligibility of claim of deduction under section
80IA/80fB of the Act in respect of duty drawback. The Supreme
Court, making a reference to its own decision in the case of Sterling
Foods: 237 ITR 579, held that duty drawback could not be held to be
income "derived from" the specified business and was therefore, not
eligible for deduction under section 801B of the Act.
However, there is, as stated supra, no similar formula prescribed in
sections 80lA/80IB to arrive at the profits derived from the business
of eligible undertaking and therefore, the aforesaid decision
rendered in context of section 80IB would not be applicable in case
of deduction under sections IOA/1OB of the Act.
Issue stands covered by decision of Special Bench
It is respectfully submitted, that the issue of allowability of
exemption under section 1OB of the Act on duty drawback is
covered by the decision of the Special Bench of the Tribunal in the
case of Maral Overseas vs. ACIT: 136 ITD 177 (Ind).
In the aforesaid decision, which was specifically rendered in context
of section lOB of the Act, the Special Bench of the Tribunal made the
following pertinent observations:
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ITA NO.5635/DEL/2010 &
1191/Del/2012
"77
…..It is clear from the plain reading of section 10B(1) of
the Act that the said section allows deduction in respect
of profits and gains as are derived by a 100% EOU.
Further, section 10B(4) of the Act stipulates specific
formula for computing the profit derived by the
undertaking from export. Thus, the provisions of
subsection (4) of section 1OB of the Act mandate that
deduction under that section shall be computed by
apportioning
the
profits
of
the
business
of
the
undertaking in the ratio of export turnover by the total
turnover. Thus, even though subsection (1) of section
1OB refers to profits and gains as are derived by a 100%
EOU, the manner of determining such eligible profits has
been statutorily defined in sub-section (4) of that
section. Both sub- sections (1) and (4) are to be read
together while computing the eligible deduction 10B of
the Act, We cannot ignore sub-section (4) of section 1OB
which provides specific formula for computing the
profits derived by the undertaking from export. As per
the formula so laid down, the entire profits of the
business are to be determined which are further
multiplied by the ratio of export turnover to the total
turnover of the business. In case of Liberty India (supra),
the Hon'ble Supreme Court 80-IA has dealt with the
provisions of section 80IA of the Act wherein no formula
was laid down for computing the profits derived by the
undertaking which has specifically been provided under
sub section (4) of section 10B while computing the
profits derived by the undertaking from the export.
Thus, the decision of the Hon’ble Supreme Court is of no
help to the revenue in
determining the claim of
deduction u/s. 10B in respect of export incentives.
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ITA NO.5635/DEL/2010 &
1191/Del/2012
78. Section 1OB of sub-section (l) allows deduction in respect
of profits and gains as are derived by a
100% EOU.
Section 1OB (4) lays down special formula for computing
the profits derived by the undertaking from export. The
formula is as under:
79.
Thus, sub-sec/ion (4) of section lOB stipulated that
apportioning
the
profits
of
the
business
of
the
undertaking in the ratio of turnover to the total turnover.
Thus, notwithstanding the fact that sub-section (l) of
section 1OB refers the profits and gains as are derived
by a 100% EOU, yet the manner of determining such
eligible profits has been statutorily defined in subsection (I) of section 1OB of the Act. As per the formula
stated above, the entire profits of the business are to
be taken which are multiplied by the ratio of the export
turnover to the total turnover of the business. Subsection (4) does not require an assessee to establish
direct nexus with the business of the undertaking and
once an income forms part the business of the
undertaking, the same would be included in the profits
of the business of the undertaking. Thus. once an
income forms part of the business of the eligible
undertaking. there is no further mandate in the
provisions of section 1OB to exclude the same from the
eligible profits. The mode o( determining the eligible
deduction uls lOB is similar to the provisions of section
80HHC inasmuch as both tile sections mandates
determination of eligible profits as per tile formula
contained therein. The only difference is that section
80HHC contains
a
further
mandate
in
terms
of
Explanation (baa) (or exclusion of certain income from
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ITA NO.5635/DEL/2010 &
1191/Del/2012
the "profits o( the business" which is, however.
conspicuous by its absence in section lOB. On tile basis
of
the
aforesaid
distinction.
subsection
(4)
of
section10A/10B o(the Act is a complete code providing
the mechanism for computing the "profits of the
business" eligible Is: deduction u/s lOB of the Act. Once
an income forms part of the business of the income
o(the eligible undertaking o(the assessee, the same
cannot be excluded from the eligible profits (or the
purpose o( computing deduction u/s 1OB of the Act. As
per the computation made by the Assessing Officer
himself, there is no dispute that both these incomes
have been treated by the Assessing Officer as business
income. The CBDT Circular No. 564 dated 5th July, 1990
reported in 184 ITR (St.) 137 explained the scope and
ambit of section 80HHC and the mode of determination
of profits derived by an assessee from the export of
goods. ITA], Special Bench in the case of International
Research Park Laboratories Ltd. (supra), after following
the aforesaid Circular, held that straight jacket formula
given in sub-section (3) has to be followed to determine
the eligible deduction. The Hon'ble Supreme Court in the
case of P.R. Prabhakar v. CfT [2006) 284 ITR 5841154
Taxman 503 had approved the principle laid down in the
Special Bench decision in International Research Park
Laboratories Ltd. (supra). In the assessee's own case the
1. TA. T in the preceding years, after considering the
decision in the case of Liberty India (supra) held that
provisions of section 10B are different from the
provisions of section 80lA wherein no formula has been
laid down for computing the eligible business profit.
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ITA NO.5635/DEL/2010 &
1191/Del/2012
80. In view of the above discussion, question No. 2 is
answered in affirmative and in favour of the assessee.
Accordingly, the assessee is eligible [or claim of deduction on
export incentive received by it in terms o( provisions o(
section 10B(1) read with section 10B(4) o(the Act. "(emphasis
supplied)
In the aforesaid case, the Hon'ble Special Bench has, on
the question of whether export incentives are "derived"
from the undertaking and are eligible for deduction
under section lOB of the Act, held that though section
IOB(I) refers to profits "derived" by the EOU, the manner
of determining such eligible profits has to be done as
per the formula prescribed in section 10B(4), which does
not require an assessee to establish a direct nexus with
the business of the undertaking and thus, once an
income forms part of the business of the undertaking,
the same would be included in the profits of the
business
of
the undertaking
and be
eligible for
deduction.
In the case of lTO vs. M/s Hritnik Export (P.) Ltd.: ITA No.
2111/Del/2013, the Hon'ble Delhi Tribunal has, following
the decision of the Special Bench (supra) categorically
held that sub-section (4) of section lOB of the Act does
not require an assessee to establish a direct nexus with
the business of the undertaking and once an income
forms part of the business of the undertaking, the same
would be included in the eligible profits of the business
of the undertaking.
The aforesaid decision, has been affirmed by the
Jurisdictional Delhi High Court in ITA Nos. 219 &
239/2014.
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ITA NO.5635/DEL/2010 &
1191/Del/2012
Further, in the case of Arts & Crafts Exports vs. ITO: 66
DTR 69, the Mumbai Bench of the Tribunal has, in
context of section 1OBA of the Act, which is paramateria to section lOB, held that DEPB receipts were
profit derived from export business for purpose of
computing deduction under section I OBA of the Act.
The aforesaid decision of the Tribunal has been affirmed
by the Bombay High Court, reported in 246 CTR 463.
To the same effect are the following decisions, which
have been rendered subsequent to the decision of the
Special Bench in the case of Maral Overseas (supra),
wherein it has been consistently held that direct nexus
is not require to be established for the purpose of
claiming exemption under section 1 OB/l OBA of the Act.
ITO vs. Smt. Shashi Sadh: ITA No. 3746/De1l20 13 (Del)
M/s Suraj Exports India and Others vs. ITO: ITA No.
336/Jodh./20 1 I (Jodh).
Kadam
Exports
vs.
ITO:
ITA
No.
2890/Ahmd./2011(Ahmd.)
ITO vs. Shri Ghanshyam Agarwal: ITA No. 255/De1.l20
13 (Jodh.)
ITO vs. Kumbhat Exports: IT A No. 332/Jodh./20 13
(Jodh.)
M/s Handicrafts vs. ITO: ITA No. 18/Jodh./20 12 (Jodh.)
Mls Suncity Art Exporters and Others vs. ACIT and
Others: 2014 (I) TMI 645 (Jodh.)
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ITA NO.5635/DEL/2010 &
1191/Del/2012
For the aforesaid reasons, it is respectfully prayed that the
undertaking is eligible for deduction on export incentive received by
it in terms of provisions of section lOB of the Act.
Re: Denial of exemption on Interest Income
It is respectfully submitted that the action of the assessing
officer/CIT(A) in excluding the amount of interest income from the
profits for computing deduction under section lOB of the Act is not
sustainable in law for the reasons submtted hereunder:
As already elaborated above, the provisions of section lOB of the Act
are widely worded and takes into account not only 'profits and
gains' derived by the undertaking from export, but also all income
that arise during the course of business of the undertaking.
In the instant case, the interest income is earned on temporary
deposit of funds generated in the course of business and is thus in
the nature of business income. In support, reliance is placed on the
following decisions:
Sham Progetti vs Addn CIT: 10 Taxman 86 (Delhi)
CIT vs Tirupati Wollen Mills Ltd.: 193 ITR 252 (Calcutta)
CIT vs Punit Commercial Ltd. : 245 ITR 550 (Bombay)
CIT vs Paramount Premises (P) Ltd.: 190 ITR 259 (Bombay)
CIT vs. Tamil Nadu Dairy Development Corpn Ltd : 216 ITR 535
(Mad)
CIT vs. Madras Refineries Ltd.: (1997) 228 ITR 354 (Mad)
United Commercial Bank Ltd. vs. CIT (1957) 32 ITR 688 (SC)
State of West Bengal v. Ghusick and Muslia Collieries Ltd.: 163 ITR
592 (SC)
CIT & Am. vs. Motorola India Electronics (P) Ltd. : 265 CTR 94 (Kar)
17
ITA NO.5635/DEL/2010 &
1191/Del/2012
Mercer Consulting (India) Pvt. Ltd.: ITA No.966/Del/2014 (Del)
Hindustan Gum & Chemicals Ltd. v. Income-tax Officer: 23 SOT 143
(Kol)
In view of the above, it is respectfully submitted that the aforesaid
interest income being inextricably I inked with the business, has to
be included in 'profits of the business of the undertaking' while
computing deduction under section lOB of the Act.
Brief Rebuttal to Comments of Departmental Representative:
The specific arguments raised by the learned Departmental
Representative('Ld. Senior DR') during the appellate proceedings
and brief rebuttal thereto is provided as under:
It is at the outset submitted, that in the introductory paragraphs of
the submission filed by the Ld. DR, the principles laid down by the
Special Bench of the Tribunal in the case of Maral Overseas (supra)
and decisions of various other Tribunals (following Maral Overseas)
has been explained and in a way, the Ld. OR has himself conceded
to the position of law on the issue of allow ability of exemption
under section lOB of the Act as it stands as on date.
Be that as it may, each of the specific argument/contention raised
by the Ld. OR is rebutted as under:
S.No.
1.
Contention/Argument
of
the
Departmental Representative
Proposition I: Section lOB provides for
exemption and not deduction.
In this proposition, the Ld. DR has
contended that since section 10B is an
exemption provision, thus only profits of
the eligible undertaking would qualify for
exclusion from total income and not any
other source of income, whether under
18
Rejoinder/Comments
As
elaborately
explained supra, subexemption and not
deduction section (1) of
section 1OB of the Act
provides for exemption
in respect of 'profits' of
the undertaking as a
ITA NO.5635/DEL/2010 &
1191/Del/2012
the head ‘profits and gains from whole and does not
business or profession’ or otherwise.
provide
for
any
demarcation in respect
of
the
'nature of
income'
earned
by
such undertaking nor
stipulates
any
condition for exclusion
of any specific incomes
which do not have
direct nexus with the
business
of
the
undertaking.[Refer
Maral
Overseas
(supra)]
Thus, once an income
forms a part of the
business
of
the
undertaking,
then
there is no further
requirement stipulated
in section lOB to
exclude the same for
the
purpose
of
determination
of
exemption.
In the given case, the
assessing officer has
himself treated the
amount
of
export
incentive and interest
income received by the
eligible
unit
as
'business
income'.
Thus, the question of
excluding such amount
for the purpose of
allowing
exemption
does not arise at all.
Further, the appellant
fails to comprehend
how the
issue of
"exemption
versus
deduction" has any
relevance to the issue
in question.
19
ITA NO.5635/DEL/2010 &
1191/Del/2012
2.
Proposition II : Section 10B excludes This issue has been
incomes
specified
under
sections dealt elaborately by
28(iiia)-(iiid), including duty drawback.
the Special Bench in
the case of Maral
In this
proposition, the ld. DR has Overseas
(supra),
contended that the term ‘derived’ used wherein the decision of
in section 10B(1) of the Act connotes the apex Court in the
‘first degree nexus’ and does not case of Liberty India
contemplate receipts other than export and Sterling Food has
proceeds.
been
specifically
distinguished, which
For this proposition, the Ld. DR has again has
also
been
placed reliance on the decision of the discussed
in
the
Apex court in the case of Liberty India synopsis above. The
(Supra) and sterling Foods : 237 ITR 597 same has not been reproduced here for the
sake of brevity.
Further,
even
the
decisions which have
been relied upon bythe
Ld. DR (at , pages 6 to
8 of the submission)
have
been rendered
prior to the decision of
I the Special Bench
(some of which I have
also been dealt with)
and hence
stand
impliedly overruled as
on date.
3.
Proposition III: For
the purpose of
section 10B, interest income is not ‘profit
derived’ by the EOU.
In this proposition, the Ld. DR has again
reiterated that incomes which do not
have ‘direct nexus’ with the eligible
business of the undertaking would not
be eligible for exemption under section
10B of the Act.
20
Thus, the contention
raised by the Ld.
DR should be excluded
from consideration.
As
already
stated
above, the provisions
of section lOB of the
Act are widely worded
and takes into account
not only 'profits and
gains' derived by the
undertaking
from
export, but also all
income that arise I
ITA NO.5635/DEL/2010 &
1191/Del/2012
during the course of
business
of
the
undertaking. [Refer CIT
& Anr. vs. Motorola
India Electronics (P)
Ltd. : 265 CTR 94 (Kar)]
Further, the decisions
which have been relied
upon by the Ld. DR (at
pages 8 to 11 of the
submission) are again
rendered prior to the
decision of the Special
Bench
and
the
Karnataka High Court
in the case of Motorola
(supra)
and
hence
should be ignored from
consideration.
4.
Proposition IV & V : Provisions of sub- As
elaborately
section (4) of section 10B cannot explained
in
the
override sub-section (1) of that section.
synopsis above, subsection (4) of section
In this
proposition, the Ld. DR has lOB
of
the
Act
contended that the provisions of sub- mandates
that
section (4) of section 10B should be read deduction under that
in the context of sub-section (1) and thus section
shall
be
the requirement of establishing a first computed
by
degree nexus of the receipts with the apportioning the profits
eligible business of the undertaking of the business of the
becomes inevitable.
undertaking in the ratio
of export turnover to
The ld. DR has further held in this the
total
turnover.
regard that sub-section (1) of section Thus, even though sub10B determines the nature of income section (1) of section
eligible for exemption whereas sub- lOB of the Act e refers
section (4) of that section only provides to profits and gains as
the mechanism / formula for computing are derived by a 100%
the profits.
EOU, the manner of
determining
such
eligible
profits
has
been
statutorily
defined in sub- section
(4) of that section,
which has to be given
effect to.
Thus,
21
as
per
the
ITA NO.5635/DEL/2010 &
1191/Del/2012
formula prescribed in
sub-section (4) of the
said section, the entire
profits of the business
are to be taken which
are further multiplied
by the ratio of the
export turnover to the
total turnover of the
business. The said subsection
does
not
require an assessee to
establish a direct nexus
with the business of
the undertaking.
The aforesaid position
has been upheld by the
Special Bench of the
Tribunal in the case of
Maral
Overseas
(supra).
Further, the decisions
relied upon by the Ld.
DR to buttress the
point that first degree
nexus is required to be
established in terms of
sub-section
(I)
of
section lOB of the Act
has already been dealt
with
in
reply
to
proposition I & II above.
5.
Proposition VI: Meaning of ‘profits of the
business of the undertaking’ as provided
in section 80HHC is similar to section
10B of the Act.
In this proposition, the Ld. DR has
argued that the formula prescribed in
section 10B(4) of the Act is similar to
section 80HHC of the Act and hence the
principles laid down by the Apex court in
the case of Liberty India (Supra) would
apply directly and the requirement of
establishing first degree nexus would
kick in.
22
In this regard, it is
submitted that the
mode of determining
the eligible deduction
in section lOB is similar
to the provisions of
section 80HHC of the
Act inasmuch as both
the sections mandate
determination
of
eligible profits as per
the formulae contained
therein.
The
only
difference
is
that
ITA NO.5635/DEL/2010 &
1191/Del/2012
section
80HHC
contains
a
further
specific mandate in
terms of Explanation
(baa) thereto
for
exclusion of certain
incomes
from
the
'profits
of
the
business', which is,
however, conspicuous
by its absence in
section lOB of the Act.
Thus, in the absence of
such similar provisions
mandating exclusion of
an
income,
which
forms part of business
income, there can, in
our
respectful
submission,
be
no
exclusion from
the
business income for
computing
deduction
under section lOB of
the Act.
The aforesaid position
has been categorically
affirmed by the Special
Bench in the case of
Maral
Overseas
(supra).
Further,
even
the
findings of the Jodhpur
Bench of the Tribunal
in the case of Suraj
Exports (supra), which
has been relied upon
by the Ld. DR is
extraneous,
since
ultimately, the Bench
has concluded that the
benefit of exemption
under section 10BA
should be allowed in
respect
of
duty
drawback.
23
ITA NO.5635/DEL/2010 &
1191/Del/2012
Thus, in view of the
above, contention of
the Ld. DR has no
to stand.
6.
Proposition VII: Exemption claimed in In the case of the
respect of ‘deemed duty drawback’ and appellant, the ‘deemed
not ‘duty drawback’.
export drawback' was,
it
is
submitted,
In this proposition, the Ld. DR has held received in terms of
that
the
appellant
has
claimed Chapter 6.11 (a) of the
exemption in respect of ‘deemed duty Indian Export Import
drawback’as against ‘duty draw back’ Policy ("Exim Policy").
and thus, the ratio of the decisions which
have been relied upon by the appellant Further, the deemed
would not apply strictly.
export drawback, If
which was disclaimed
by the DTA suppliers
was calculated on the
basis of rebate of duty
chargeable
on
any
imported material or
excisable I material
used
in
the
manufacture of such
goods in India at the
prescribed rates.
Thus, in essence, what
has been received is
duty drawback and
merely because the
incentive was received
in
pursuance
of
disclaimer given by the
DTA supplier would
not, in our submission,
alter the character of
the receipt.
Further,
even
otherwise and strictly
without prejudice to
the above, it is
submitted that deemed
export drawback would
be merely in the nature
of
abatement/
24
ITA NO.5635/DEL/2010 &
1191/Del/2012
reimbursement/
compensation against
part of the cost of
goods/
raw-material
purchased from the
DTA supplier and such
incentive
would,
therefore, go to reduce
the cost of the goods/
raw-material purchased
from the DTA supplier
and such
Thus, the
amount so received
should not, therefore,
be regarded as income,
but must be offset
against the cost of the
goods purchased. Thus,
in essence, what has
been received is 'duty
drawback' and merely
because the incentive
was
received
in
pursuance
of
disclaimer given by the
DTA
supplier
and
such
incentive would not, in
our submission, alter
the character of the
receipt.
7
Proposition VIII: Decision of Special Since each of the
Bench in Maral Overseas (Supra) not to aforesaid
arguments
be applied.
raised by the Ld. DR in
propositions I to VII has
In this proposition, the Ld. DR has been deal with in detail
merely summarized the arguments that above, the same is not
have been elaborated in Propositions I repeated for the sake
to VII above.
of brevity.
Further
even
otherwise,
it
is
respectfully submitted
that it is well settled
principle
that
the
25
ITA NO.5635/DEL/2010 &
1191/Del/2012
Bench of the Tribunal
must be held to be a
binding precedent for
division benches, akin
to High Court decision,
else the very purpose
of constituting Special
Bench(es)
will
get
frustrated.
It
may
also
be
pertinent to note in this
regard, that there is
not a single ruling of
the Tribunal against
the appellant, after the
Bench in the case of
Maral
Overseas
(supra).
The
case
of
the
appellant,
it
is
submitted, is on a
much better footing, in
so far as the issue
under consideration is
also covered by the
decision
of
the
jurisdictional Delhi High
Court in Hritnik Exports
(supra)
and
the
Bombay High Court in
the case of Arts &
Crafts (supra).
26
ITA NO.5635/DEL/2010 &
1191/Del/2012
In view of the above, it is respectfully submitted that the
aforesaid contentions / propositions of the Ld. DR do not, in any way
advance the case of the Respondent and deserve to be ignored.
To reiterate, for the detailed arguments / submissions
canvassed by the appellant, the appellant should be allowed to
claim exemption under section 10B of the Act
in respect of its
entire business income.”
WRITTEN SUBMISSIONS FILED BY THE LD. DR
“Analysis of case laws cited by the Appellant in respect of DEPB/DDB
(i) Maral Overseas vs ACIT 136 ITD – Special Bench of Indore Tribunal
177 (28.03.2012)
In this case, the Hon’ble ITAT has taken the following view while
holding that income from special import licence is eligible for
deduction u/s 10B :
(a) While sub-section (1) of section 10B refers to profits
derived by 100% EOU, the decision of the Apex Court in
the case of Liberty India would not be applicable since
under 10B (4) formula for computing the deduction has
been provided for, while no such formula is provided in
section 80 IB;
(b) Notwithstanding the fact that sub-section (1) refers to
profits derived by the 100% EOU, the manner of
determining the deduction has to been defined under subsection (4);
(c) Sub-section (4) does not require an assessee to establish a
27
ITA NO.5635/DEL/2010 &
1191/Del/2012
direct nexus with the business of the undertaking;
(d) Once an income forms part of the business of the
undertaking, there is no further mandate to exclude the
same from the eligible profits;
(e) The mode of determining the eligible deduction u/s 10B is
similar to that envisaged u/s 80HHC (3), except that while
under 80HHC, Explanation (baa) further mandates for
exclusion of certain incomes from the profits of the
business (including 28 (iiia)-(iiid), rent, interest, etc.), such
exclusion is not mandated under 10B (4)
(f)
Thus, once an income forms part of the business of the
undertaking, the same cannot be excluded from the
eligible profits for the purpose of computing deduction u/s
10B.
(ii) Suraj Exports India & Ors vs ITO & Ors, ITAT, Jodhpur Bench – ITA
No. 336/Jodh?2011 dated 31.01.2013
In this case, the Hon’ble Tribunal allowed the claim of the
assessee for deduction u/s 10BA in respect of duty drawback
received by the asssessee. While allowing the claim, the Hon’ble
ITAT took note of the decision of the Special Bench of Indore, ITAT
in the case of Maral Overseas Ltd, the decision of the Hon’ble
ITAT, Ahmadabad Bench in the case of Kadam Exports (which in
turn had followed the decision of the Special Indore Bench of ITAT
in the case of Maral Overseas), and the decision of the Hon’ble
ITAT, Mumbai Bench in the case of Arts & Crafts Exports vs ITO 66
DTR 69. The Hon’ble ITAT gave an important set of findings as
under :
(a) Under Section 10B (4) as it stands amended by Finance
Act, 2001, the profits of the business of the undertaking
only has to be considered for working out the profits as are
28
ITA NO.5635/DEL/2010 &
1191/Del/2012
derived by the undertaking from export out of India of
eligible articles or things;
(b) The profits and gains of business of the undertaking has to
be worked out as per provisions of section 28(i); this does
not include profits under sub-sections (iiia) – (iiid), etc
(including Duty Drawback);
(c) Profit on account of Duty Drawback or on transfer of DEPB
will not form part of the profits and gains of business or
profession carried out by the undertaking;
(d) Plain reading of section 10B makes it clear that such profits
as are ‘derived from’ the export out of India shall be only
allowed for exemption from the total income;
(e) Sale proceeds of DEPB cannot be considered as part of
total turnover as it is not the sale proceeds of the article or
things manufactured and sold by the assessee;
(f)
Profit on DEPB cannot be treated as profit derived by the
undertaking from the export out of India
Having made the above significant findings, the Hon’ble ITAT held
the view that “exemption provisions in section 10BA have to be
liberally interpreted unless the credit of DEPB and DDP is
expressly taken away. Accordingly we are left with no option but
to decide the impugned common issue in favour of the
Appellant/Assessee.”
(iii) Handicrafts Vs ITO, ITAT, Jodhpur – ITA No. 18, Jodhpur/ 2012
dated 31.07.2013
In this case the Hon’ble ITAT allowed the deduction on income
from Duty Drawback u/s 10BA of the Act. While so deciding the
Hon’ble ITAT followed the decision of the Hon’ble ITAT, Jodhpur
Bench in the case of Suraj Exports
29
ITA NO.5635/DEL/2010 &
1191/Del/2012
(iv) ITO vs Haritnik Exports (P) Ltd, ITAT, Delhi Bench in ITA No.
2111/Del/2013 dated 24.10.2013
In the aforementioned case the Hon’ble ITAT allowed the deduction
u/s 10B on Duty Drawback receipts by following the order of the
Indore Special Bench in the case of Maral Overseas.
(v) ITO vs Kumbhat Exports, ITAT, Jodhpur Bench in ITA No.
332/Jodhpur/2013 dated 10.12.2013
In the aforementioned case, the Hon’ble ITAT has allowed
deduction on DEPB u/s 10BA following its own order in the case of
Suraj Exports
(vi) CIT vs Arts & Crafts Exports, Bombay High Court 246 ITR 463
The Hon’ble Bombay High Court has held as under :
“The counsel for the Revenue fairly states that though the
question has been raised by relying upon the decision of the
apex
court
in
the
case
of
Liberty
India
vs.
CIT
MANU/SC/1585/2009: (2009) 225 CTR (SC) 233: (2009)28 DTR
(SC) 73: (2009)31717R218 (SC). The said decision has no
relevance to the facts of the present case. In this view of the
matter, the third question raised by the revenue cannot be
entertained. In the result, we see no reason to entertain the
appeal. Accordingly, the appeal is dismissed, as question of law
is not involved."
From the above analysis it is clear that the various decisions of the
Tribunals have followed the decision of the Special Bench of the
ITAT, Indore in the case of Maral Overseas. More importantly, the
30
ITA NO.5635/DEL/2010 &
1191/Del/2012
Delhi ITAT has in the case of ITO vs Haritnik Exports (P) Ltd has
followed the decision of ITAT, Jodhpur Bench in the case of Suraj
Exports, which in turn had followed the decision of the Special Bench of
ITAT, Indore in the case of Maral Overseas.
Proposition I : Section 10B provides for exemption (income which is
not included in total income) and not deduction
1.1
Section 10B forms part of Chapter III of the Income Tax Act,
1961 titled “Incomes which do not form part of total Income”. This is
significant since income u/s 10B would not form part of gross total
income while computing the total income of an assessee under
various heads of income. This is in contra-distinction to deductions
provided under Chapter VI of the Act, such as 80HHC, 80IA, 80IB,
80IC, etc, where an income source forms part of the gross total
income, and thereafter deduction under Chapter VI is provided
under its various provisions, subject of course to the amount of
Gross total income.
1.2
The Hon’ble Delhi High Court in the case of CIT vs TEI
Technologies Pvt Ltd [ITA nos. 347/2011 & 2067/2010] dated 27th
August, 2012 has held that section 10A is a provision exempting a
particular kind of income even in its present form, that is to say,
even after being amended by the Finance Act, 2000 w.e.f.
1.04.2001.
1.3
Accordingly, income exempt under section 10B has to be
treated in the same way as any other income under Chapter III, such
as agricultural income [section 10(1)]. Section 10B provides for
exemption of such income, being profits and gains as is derived by a
100% EOU from export of articles or things or computer software,
subject to various conditions specified in that section. Sub-section
(1) of the section contains the substantive provisions of section 10B
31
ITA NO.5635/DEL/2010 &
1191/Del/2012
insofar as it defines the nature of profits which would be exempt
and would not form part of total income. Any other source of
income, whether under the head ‘profits and gains of business or
profession” or under any other head, which is not provided for under
sub-section (1) would not be entitled to exemption under section
10B. Thus, sources of business income, such as those specified
under section 28(iiia) – (iiid), would be taxed as business income
and by virtue them being under section 28, cannot form part of
Chapter III, and cannot be excluded from the total income of an
assessee. Similarly, income from bank interest, whether included
under the head ‘business income’ or ‘income from other sources’
would be taxed accordingly, and cannot form part of Chapter III.
Proposition II : For the purposes of sub-section (1) of section 10B,
incomes specified under sections 28 (iiia)-(iiid), including duty
drawback, are not profits derived by 100% EOU unit from the export
of article or things
2.1
Section 10B of the IT Act, 1961, starts with the words :
"subject to the provision of this section, any profit and gain
derived by the assessee from a 100% export oriented under
taking....". The word used here is 'derived'. Same word has been
used in section 80HHC and also in section 80IB of the I. T Act. This
issue is squarely covered in favour of the revenue by the decision of
Hon'ble Supreme Court in the case of Liberty India 3171TR 218 (SC)
wherein Hon'ble Supreme Court defined the term 'derived' in para 14
and said that word 'derived from' is narrower in connotation as
compared to the words 'attributable to'. In other words by using the
expression 'derived from' Parliament intended to cover sources not
beyond the first degree. In para 18, the lordship observed that
DEPB/Duty drawback are incentive which flow from the scheme
framed by Central Government or from section 75 of Custom Act,
1962. Hence incentives are not profit derived from the eligible
32
ITA NO.5635/DEL/2010 &
1191/Del/2012
business u/s 80IB.
2.2
The expression `profit and gains derived by .an undertaking'
used in Section 80IB is akin to the 'profit and gains derived by an,
undertaking' used in section 10B. Essentially therefore, after the
judgment rendered by Apex Court in the case of Liberty India Vs.
CIT (2009) 28 DTR (SC) 73, the issue under consideration becomes
no longer res Integra. Accordingly, the amount of DEPB credit and
duty drawback receipts being an incentive bestowed under the
scheme framed by Central Government or from s. 75 of Customs Act,
1962, are not to be taken as profits and gains derived by an
industrial undertaking from the export out of India of eligible
articles or things. The amount of DEPB credit/duty drawback
receipts as such would not, therefore, enter into profits and
gains derived by an industrial undertaking from the export out
of India of eligible articles or things for the purpose of section
10B, even though the same are ancillary profits of such undertaking
assessable under the head "Income from business". Under the facts
and circumstances and keeping in view aforesaid position of law,
amount of DEPB benefits/duty drawback receipts do not from profits
and gains derived by an industrial undertaking from the export out
of India eligible articles or things and as such the same shall not be
allowed to be deducted from the total income of the assesses.
2.3
Further, the issue of import license sale was considered by
Hon'ble Apex Court in Sterling foods 237 ITR 579 (SC) and it was
decided that same cannot form part of export turnover for
calculation of deduction u/s 80HHC, because source of import
entitlement is the
import
promotion
scheme
of
Central
Government and not the industrial undertaking. It is a well
settled fact that the deduction U/s 80HHC is admissible to profits
derived from business activities related to export as held in case of
V.T. Joseph (Ker) 225 ITR 731 and also in case of A.M. Moose 224 ITR
33
ITA NO.5635/DEL/2010 &
1191/Del/2012
735 (Ker). This section is akin to section 10B of the Act as both have
common objective to boost export of India. Para 11 in case of A.M.
Moosa states that;-,
"We find that statutory provision that the amount in regard
to which exemption is sought must be relatable to. an
industrial undertaking as the amount which could be
understood to be 'derived from' is more than settled not
only by the two decisions of this Court, the decision of the
Supreme Court in Cambay Electric Supply Industrial Co. Vs
C1T-4-13 ITR 84 (SC) as well as of the Privy Council, in CIT Vs.
Raja Bahadur Kamakhya Naraiy Sinsh & Co. 14 ITR 738. What
is on record is only an order of enquiry relating to the aspects
which-are required to be considered obviously as statutory
requirements. There is no unsettled position and a reference
because of diversion of judicial decisions of other Courts could
not be appreciated to be a ground for reference in a situation
where the question is decided by this Court as well as by the
Supreme Court and by the Privy Council, as stated above"
2.4
When Hon'ble Apex Court has repeatedly defined the term
'derived from' in the same fashion as in Liberty India, it is not
possible to define it in any other way. By this definition one would
say that Hon'ble Supreme Court has given a well reasoned
decision discussing each of the relevant issues in case of Liberty
India, where all the issues namely word "derived", and nature of
export incentives is discussed in details & therefore, it is binding
precedent under Article 141 of the Constitution.
2.5
Mention is also required of the case of Topman Exports ITAT
Special Bench, Mumbai 318 ITR 87 (AT) which is a decision on
whether DEPB entitlement is a benefit under section 28 (iiid)
wherein it is held that "though DEPB is post-export incentive, but
its objective is to counterbalance effect of customs duty included
34
ITA NO.5635/DEL/2010 &
1191/Del/2012
in the cost of purchases. It cannot be seen as an incentive
detached from cost of goods purchased. It is only on making an
application for DEPB that assessee acquires the right to receive
the DEPB and income accrues at that stage.” Further in this
order following was observed in para 62:"Thus the incentives though a relevant consideration and
initiative in the decision as to the making of exports,
cannot be categorized as derived from export of goods
or merchandize. At the same time, it is equally true that
such incentives and export of goods of merchandize
cannot be said to be foreign to each other. The relation
between the two albeit not immediate is indirect. In that
sense the export incentives can be held to be attributable
to export"
2.6
Hence the aforesaid decision is in fact against the assessee
because it holds that export incentives are not "derived from" export
activity. The word used in section 10B as also in section 80HHC &
section 10B is "derived from" and not "attributable to". Besides as held
in para 14 in order of Liberty India by Hon'ble Apex Court words
'derived from' are narrower in connotation as compared to the
words "attributable to". In para 18 they further said "we hold that
profit derived by way of such export incentives do not fall within the
expression "profit derived from industrial undertaking under section
801B."
2.7
Reference is also invited to the decision in the case of
Tricom India Ltd. by the ITAT Mumbai 'E' Bench (2010) 36 SOT
302 (Mumbai) in the context of deduction u/s 10B in which interalia the following was observed':"Para 13:- We further find that similar view has been taken by
the Hon'ble Supreme Court again in the case of Liberty India. In
this case the question was whether profit from Duty Entitlement
35
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1191/Del/2012
Pass Book Scheme (DEPB) and Duty Draw Back Scheme could be
said to be profit derived from business of Industrial
undertaking eligible for deduction under s. 80-1B of the if Act,
1961. It can be seen that DEPB and duty drawback etc., are
covered by cl. (iiib) to s. 28 which means necessarily they have to
be treated as business income under the provisions of the Act,
still the deduction was denied under s. 80-1/80-IA/80-1B because
these items were held to be not derived from the business of
industrial undertaking/export activity."
2.8
In the case of Kiri Dyes and Chemicals (P) Ltd vs ITO in ITA No.
813 & 1035/AHD/2010 (order dated 7.03.14), the Hon’ble ITAT has,
following the decision of the Apex Court in the case of Liberty India,
agreed with the stand of the revenue that income from DEPB, Duty
Drawback are not eligible for deduction u/s 10B of the IT Act.
Similarly, the Hon’ble ITAT, Chennai in the case of Tochelungee
Stationary Mgf. Co. vs ITO 5 SOT 428 (dated 21st June, 2004) has
held that income from special import license is not eligible for
deduction under section 10B of the Act. Relevant extract of the
decision is reproduced as under :
“17. Now coming to the special import. license, the assessee
received this special import license because of the scheme
framed by the Government of India to encourage the export
business. It may be a business income because of s. 28 (iiid) of the
IT Act. For the purpose of claiming deduction under s. 10B, the
income should be derived from export business and form part of
export turnover. The immediate source for special import
license may be the scheme framed by the Government of India
and not the export. As held by the Madras High Court in the
case of Menon Impex (P) Ltd. 259 ITR 403 (Mad), the income
should be derived from the export business. In view of the
above, we do not find any infirmity in the order of the first
36
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1191/Del/2012
appellate authority. Accordingly, we confirm the same."
2.9
Reference is also invited to the decision of the ITAT, Jodhpur
Bench in the case of ITO vs. V.J. HOME (P) LTD. & ORS., 17th
September, 2009 (2009) 125 TTJ (Jd) 215 : (2009) 28 DTR 495
wherein the Hon’ble Bench had disallowed claim of deduction u/s
10BA in respect of income from DEPB/DDB. The relevant extract of
the order is as under:
Perusal of the aforesaid provision reveals that the profits and
gains that are derived by an industrial undertaking from the
export out of India of eligible articles shall be deducted from
the total income of the assessee. Contending the provisions of
s. 80-IB of IT Act to be similar with that of s.10BA of IT Act on
the
issue
under
consideration,
the
respondents
made
emphasis to decide the issue by following judgment rendered
by High Court of judicature of Rajasthan at Jodhpur in Saraf
Seasoning Udyog vs. ITO (supra). It has come to our notice
that Hon'ble apex Court of India by its order dt. 31st Aug.,
2009 in the case of Liberty India vs. CIT in SLP(C) No. 5827 of
2007, reported in (2009) 28 DTR (SC) 73 considered the
similar question as to whether—profit from Duty Entitlement
Passbook Scheme (DEPB) and Duty Drawback Scheme could
be said to be profits derived from the business of the
industrial undertaking eligible for deduction under s. 80-IB of
IT Act, 1961 (1961 Act)? After discussing the issue in detail it
was laid down that duty drawback receipt/DEPB benefits do
not form part of the net profits of eligible industrial
undertaking for the purpose of s. 80-I/80-IA/80-IB of the 1961
Act.
The view entertained by the Hon'ble Apex Court in the
aforesaid judgment at its various paras in the judgment
relevant to the issues under consideration are reproduced as
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under :
"From para 14 The words 'derived from' is narrower in
connotation as compared to the words 'attributable to'.
In other words, by using the expression 'derived from',
Parliament intended to cover sources not beyond the
first degree. In the present batch of cases, the
controversy which arises for determination is : whether
the DEPB credit/duty drawback receipt comes within the
first degree sources ? According to the assessee(s),
DEPB credit/duty drawback receipt reduces the value of
purchases (cost neutralization), hence it comes within
first degree source as it increases the net profit
proportionately. On the other hand, according to the
Department, DEPB credit/duty drawback receipt do not
come within first degree source as the said incentives
flow
from
Incentive
Schemes
enacted
by
the
Government of India or from s. 75 of the Customs Act,
1962. Hence, according to the Department in the
present cases, the first degree source is the incentive
scheme/provisions
of
the
Customs
Act.
In
this
connection, Department places heavy reliance on the
judgment of this Court in Sterling Foods (supra).
Therefore, in the present cases in which we are required
to examine the eligible business of an industrial
undertaking, we need to trace the source of the profits
to manufacture [see CIT vs. Kirloskar Oil Engines Ltd.
(1985) 44 CTR (Bom) 98 : (1986) 157 ITR 762 (Bom)].
Para 16 DEPB is an incentive. It is given under the Duty
Exemption Remission Scheme. Essentially, it is an
export incentive. No doubt, the object behind DEPB is to
neutralize the incidence of customs duty payment on
the import content of export product. This neutralization
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is provided for by credit to customs duty against export
product. Under DEPB an exporter may apply for credit as
percentage of FOB value of exports made in freely
convertible currency. Credit is available only against the
export product and at rates specified by DGFT for import
of raw material, components etc. DEPB credit under the
scheme has to be calculated by taking into account the
deemed import content of the export product as per
basic customs duty and special additional duty payable
on such deemed imports. Therefore, in our view,
DEPB/duty drawback are incentives which flow from the
schemes framed by Central Government or from s. 75 of
the Customs Act, 1962 hence, incentives profits
Para 18 Analyzing the concept of remission of duty
drawback and DEPB, we are satisfied that the remission
of duty is on account of the statutory/policy provisions in
the Customs Act/Scheme(s) framed by the Government
of India. In the circumstances, we hold that profits
derived by way of such incentives do not fall within the
expression 'profits derived from industrial undertaking'
in s. 80-IB. From para 22 That duty drawback, DEPB
benefits, rebates etc. cannot be credited against the
cost of manufacture of goods debited in the P&L a/c for
purposes of ss. 80- IA/80-IB as such remissions (credits)
would constitute independent source of income beyond
the first degree nexus between profits and the industrial
undertaking."
The expression "profits and gains derived by an undertaking"
used in s. 80-IB of IT Act is akin to the "profits and gains
derived by an undertaking" used in s. 10BA of IT Act.
Essentially therefore, after the judgment rendered by Hon'ble
39
ITA NO.5635/DEL/2010 &
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apex Court in the case of Liberty India vs. CIT (supra), the
issue under consideration becomes no longer res integra.
Accordingly the amount of DEPB credit and duty drawback
receipts being an incentive bestowed under the scheme
framed by Central Government or from s. 75 of Customs Act,
1962, are not to be taken as profits and gains derived by an
industrial undertaking from the export out of India of eligible
articles or things. The amount of DEPB credit/duty drawback
receipts as such would not, therefore, enter into profits and
gains derived by an industrial undertaking from the export out
of India of eligible articles or things for the purpose of sub-s. (1)
r/w sub-s. (4) of s. 10BA of IT Act, even though the same are
ancillary profits to such undertaking assessable under the head
"Income from business". Article 141 of Constitution of India lays
down that the law declared by Hon'ble Supreme Court shall be
binding on all Courts within the territory of India. We, therefore,
having regard to the judicial discipline instead being bound by
the judgment in the case of Saraf Seasoning Udyog (supra) by
the High Court of judicature of Rajasthan at Jodhpur are bound
to follow the law declared by the Hon'ble Supreme Court in the
case of Liberty India (supra).
Proposition III : For the purposes of sub-section (1) of section 10B,
interest income is not profits derived by the EOU unit from the export
of article or things as it has no direct nexus with the undertaking
3.1
The Hon’ble Madras High Court in the case of CIT vs Memon
Impex P Ltd (2003) 259 ITR 403 (Mad) has held that in respect of
interest received by the assessee on deposits made in the bank, it
was the deposit which was the source of interest income. The mere
fact that the deposit was made for the purpose of obtaining letters of
credit which were in turn used for the purpose of the business of the
industrial undertaking did not establish a direct nexus between the
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ITA NO.5635/DEL/2010 &
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interest and the industrial undertaking and, therefore, the assessee
was not entitled to get the benefit of section 10A in relation to
interest. While arriving at this decision, the Hon’ble Court referred to
the decision of the Apex Court in the case of CIT vs Sterling Exports
in which the Court observed that (headnote) :
“the word ‘derive’ is usually followed by the word ‘from’ and it
means : ‘get, to trace from a source; arise from, originate in,
show the origin, or formation of’. It was pointed out that
unless the source of income is from an industrial undertaking,
such income cannot be regarded as ‘derived from’ industrial
undertaking. It was held that income derived from sale of
import entitlements could only be said to be the export
promotion scheme and not the industrial undertaking. It was
also observed by the court that where nexus between profits
and gains and the industrial undertaking was not direct, but
incidental, such income could not have been regarded as
having been derived from industrial undertaking.”
3.2
Similar view was expressed by the ITAT, Chennai in the case of
Orchid Chemicals and Pharmaceuticals Ltd vs JCIT (2005) 97 CTD 277
(order dated 19th July, 2005) in the context of section 10B. In para 8,
the Hon’ble ITAT has held as under :
“8. Now coming to the proposition that this interest is earned
on deposits with the bank and there is no nexus to show that
the profits and gains are derived from the hundred per cent
export-oriented undertaking to which this section applies that
the deposits have nothing to do with the manufacture or
production of any article or thing. The interest income earned
from deposits with the bank is not connected with profits and
gains which are derived from hundred per cent exportoriented undertaking or from manufacturing any article or
41
ITA NO.5635/DEL/2010 &
1191/Del/2012
thing. The expression, ‘any profits or gains’ derived by the
assessee from a hundred per cent export-oriented undertaking
to which this section is applied as used in section 10B of the Act
has a distinct but narrow meaning and it cannot receive a
flexible or wider concept. The assessee is entitled to claim
deduction of the amount which it derives as direct profit by
export of manufactured goods in its newly established hundred
per cent export-oriented undertaking. Any indirect or incidental
profit cannot be regarded as profit earned out of the main
business activity. The ratio of the decision of the Hon’ble Apex
Court in the cases of Panidan Chemicals Ltd. (supra) and
Cambay Electric Supply Industrial Co. Ltd. (supra) has finally
settled this issue. It is clear from the provision itself that
deduction of such profits and gains deprived from hundred per
cent export-oriented undertaking must be understood as
something which direct and inextricably linked to the
asseesee’s industrial undertaking. But in this case, the
interest is earned on margin money deposited for letter of
credit for import of raw materials which has no connection
with the profits and gains derived from hundred per cent
export-oriented
undertaking.
Respectfully
following
the
decisions of the Hon’ble Apex Court in the cases of Panidan
Chemicals (supra), Sterling Foods (supra), Cambay Electric
Supply Industrial Co. Ltd. (supra) etc, we confirm the orders of
the lower authorities.
3.3
Similar view was also expressed by the ITAT, Chennai in the
case of Tocheunglee Stationary Mfg. Co. vs CIT (2006) 5 SOT 428
(dated 21st June, 2004) in the context of exemption u/s 10B of the IT
Act. The Hon’ble ITAT in paras 12 – 14 have held as under :
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ITA NO.5635/DEL/2010 &
1191/Del/2012
“12. We have also carefully gone through the provisions of
section 10B. Sub-clause (4) of section 10B says that profit
derived from the export of article or thing shall be the amount
which bears to the profits of the business of the undertaking,
the same proportion as the export turnover in respect of such
article or thing bears to the total turnover of the business
carried on by the undertaking. We find a similar provision in
section 10A(4). Section 10A relates to special deduction in
respect of newly established undertakings in free trade zone.
Section 10B relates to special deduction in respect of newly
established hundred per cent export-oriented undertakings.
We find the language employed in sections 10A and 10B are
similar
as
submitted
by
the
learned
Departmental
Representative Section 10A says that a deduction shall be
allowed from the total income of the assessee in respect of
profit and gains derived by an undertaking from the export of
article or thing or computer software. Section 10B also speaks
of deduction from the total income of the assessee in respect
of profit and gain derived by hundred per cent export-oriented
unit from the export of article or thing. Sub-clause (4) in both
sections 10A and 10B says the method of computation. The
languages used in both the sections are identical and same.
The Madras High Court considered section 10A in the case of
Menon Impex (P.) Ltd (supra). After referring to the judgment
of the Supreme Court in the case of CIT v. Sterling Foods
(1999) 237 ITR 579 (SC), the Madras High Court held that the
interest received by the assessee on deposit made for the
purpose of obtaining letters of credit which letters of credit
would in turn used for the purpose of business of the assessee
does not establish a direct nexus between the interest and
industrial undertaking. In this case also, the assessee has
obtained bank guarantee in favour of Government of India for
the purpose of importing goods without duty. In other words
43
ITA NO.5635/DEL/2010 &
1191/Del/2012
the assessee has made the deposit for the purpose of getting
bank guarantee for the purpose of its business. The bank
guarantee was used in the business of the assessee. in our
view, the facts before the Madras High Court in the case of
Alenon Impex (P) Ltd. (supra) are identical as that of one
before us. Therefore, the judgment of the Madras High Court
is squarely applicable to the facts of the present case.
Therefore, in our view, the interest received by the assessee
from the deposit made for the purpose of bank guarantee
does not establish nexus between the interest and the
industrial unit of the assessee.
13. We have also carefully gone through the judgment of the
Supreme Court in the case of Karnal Co-operative Sugar Mills
Ltd. (supra). The Supreme Court confirmed the judgment of
the Punjab and Haryana High Court which held that the
interest received by the assessee from the deposit made to
obtain the letter of credit for the purpose of machinery
directly relatable to the activity of acquiring an asset,
therefore, the interest earned by the assessee shall go to
reduce the cost of asset acquired out of such transaction.
Section 10B is a special provision for granting deduction in
respect of 100 per cent export oriented units. Therefore,
section 10B has to be interpreted as per the language
employed in that provision. The interest received by the
assessee may be a business income. The question is whether
it has direct nexus with that of' the industrial unit. The
Supreme Court in the case of Karnal Co-operative Sugar Mills
Ltd. (supra) has not considered the provisions of sections 10A
and 10B. However, the Madras High Court considered section
10A which is almost similar in section 10B and also taking
note of the judgment of the Apex Court in the case of Sterling
Foods (supra), found that the interest received from a similar
44
ITA NO.5635/DEL/2010 &
1191/Del/2012
deposit does not establish a direct nexus between the interest
and the industrial undertaking. Therefore, in our view, the
judgment of the Madras High Court and also the Apex Court in
the case of Sterling Foods (supra) would be applicable since
the identical facts are concerned.
14. We have also carefully gone through the judgment of the
Madras High Court in the case of N.S.C. Shoes (supra). The
Madras High Court held that the term 'derived from' is
narrower than the term 'attributable'. Insofar as section
80HHC is concerned, the Madras High court held the interest
received by the assessee from the bank deposit has been
included in the computation and assessed as income from
profits and gains of the business. Therefore, this has to be
regarded as having been derived from the export effected by
the assessee. In this case, the Madras High Court has not
considered the judgment of the Supreme Court in the case of'
Sterling Foods (supra). In the case of Menon Impex (P) Ltd.
(supra), the Madras High Court after considering the judgment
of the Apex Court in the case of Carnbay Electric Supply
Industrial Co. Ltd. v. CIT (1978) 113 ITR 84 (SC) and also the
judgment of the Apex court in the case of Sterling Foods
(supra), came to the conclusion that the interest received by
the assessee does not establish direct nexus between the
interest and industrial undertaking. Furthermore, the language
of section 1OA is similar and identical when compared to
section 10B. Therefore, in our view, we are bound to follow the
judgment of the Madras High Court in the case of Menon
Impex (P.) Ltd. (supra). Since Madras High Court held that the
interest income received from bank deposit is not eligible for
deduction under section 10A, by respectfully following the said
judgment, we hold that the interest received by the assessee
on the deposit made for the purpose of getting bank guarantee
45
ITA NO.5635/DEL/2010 &
1191/Del/2012
in favour of Government of India is also not eligible for
deduction under section 10B. In view of the above discussion,
we do not find any infirmity in the order of the lower authority.
3.4
In the case of Tricom India Ltd, Mumbai vs ACIT (2010) 36 SOT
302 (Mum) the Tribunal held that the action of the Assessing Officer
in denying exemption u/s 10B on interest on fixed deposits,
miscellaneous income, etc was in accordance with law as such
income was not derived from the export of article or things.
Proposition IV : Purpose of sub-section (4) to section 10B is to provide
a formula for computing the amount of exemption referred to in subsection (1) of section 10B, and not to expand the scope and meaning
of the profits referred to in sub-section (1)
4.1
Sub-section (4) starts with the phrase, ‘For the purpose of sub-
section (1)…’. Clearly, sub-section (4) is to provide a formula to
arrive at the amount of deduction which is to be allowed to an
assessee under sub-section (1) on the profits derived from the
business of export of article or thing of a 100% EOU. The formula is
necessary because even though the undertaking is a 100% EOU,
entire profits derived by it may not be exempt from tax for various
reasons, including the following :
(i)
All its exports may not be realized in convertible foreign
exchange;
(ii) The convertible foreign exchange from the export of article
or thing has not been received within a period of six months
from the end of the previous year (sub-section (3);
(iii) Certain percentage of the turnover of the unit is sold in the
DTA, against which no foreign exchange is receivable.
4.2
It is for the aforesaid reasons that sub-section (4) has been
46
ITA NO.5635/DEL/2010 &
1191/Del/2012
provided to compute the amount of profits that would be exempt
from the total income under sub-section (1). The phrase “profits and
gains as are derived by a hundred percent export-oriented
undertaking from the export of article or things or computer
software” in sub-section (1) has the same meaning as the phrase
“profits of the business of the undertaking” mentioned in subsection (4), and sub-section (4) does not contemplate to include
within its ambit any source of business profit which is not referred to
in sub-section (1), i.e. any profit which is not derived by a 100% EOU
from the export of article or thing. To that extent, sub-section (4)
needs to read in the context of sub-section (1), and not as a
provision independent of sub-section (1). It is not a complete code in
itself and cannot be read by ignoring the substantive provisions
contained in sub-section (1). Courts have already held that unless
there is a first degree nexus between the income source and the
undertaking, such income source is not a profit derived by the
undertaking. In such an event, where an income source does not
enter sub-section (1), it also cannot enter sub-section (4).
Proposition V : Sub-section (1) of section 10B determines the nature
and extent exemption under that section, and while sub-section (4)
gives the formula for computing the profits, it cannot ignore or
override the provisions of sub-section (1)
5.1
The ITAT, Delhi Bench “B” has in the case of Convergys India
Services Pvt. Ltd vs DCIT in ITA No. 4021/Del/2010 in its order dated
27.05.2011 while examining the claim of deduction u/s 10A with
regard to income from foreign exchange fluctuation held that such
income is not derived from the export activity of the assessee. It
further held that ‘the assessee’s reliance in this regard on section
10A (4) does not come to its rescue, as the said sub-section only
provides the formula for computing the profits derived from the
export activity. Firstly, the income or gain has to be derived from
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ITA NO.5635/DEL/2010 &
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export activity, only then the computation formula can be applied.”
5.2
Accordingly, section 10B (4), which is similar to section 10A
(4) cannot override or ignore the provisions of section 10B (1), and
therefore only such profits as are derived by the 100% EOU unit
would enter the formula under section 10B (4). The ITAT, Mumbai
Bench in the case of Tricom India Ltd vs ACIT in ITA No. 1924/Mum/08
dated 1st December, 2009 has while dealing with deduction u/s 10B
held that merely because an income has been assessed as business
income will not automatically confer the benefits of a particular
deduction once there is a rider provision that income should be
derived from the particular source. Relevant extracts of the order are
reproduced as under :
‘19
We are unable to agree with the submission of the
learned counsel for the assessee that after insertion of section
10B (4) by the Finance Act 2000 with effect from 2011, the
decision in the case of Menon Impex (supra) would not be
applicable. This is so, because, section 10B (4) merely gives the
formula to make the deduction proportionate. Say if there is
export turnover of Rs 50 and total turnover is also Rs 100/- then
the total business profit has to be divided 50/100, because the
total turnover (i.e. export turnover + domestic turnover). But
the expression ‘derived from’ cannot be ignored in section 10B
(1) because the expression involves only those items of profit
eligible for deduction which are derived from the industrial
undertaking.’
Proposition VI : The meaning of ‘profits of the business of the
undertaking” under sub-section (4) of section 10B is the same as that
provided under sub-section (3) of section 80HHC read with
Explanation (baa)
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ITA NO.5635/DEL/2010 &
1191/Del/2012
6.1
In the various decisions of the ITAT cited by the appellant, the
decision of the Apex Court in the case of Liberty India has been
distinguished and held to be not applicable on the grounds that (a)
the Apex Court decision was in the context of section 80 IB and not
in respect of 10B; and (b) while section 10B has a formula for
arriving at the deduction, viz. sub-section (4), no such formula is
there in section 80 IB. Further, while dealing with the formula in subsection 10B(4), it has been held that this formula is similar to that
provided for in section 80 HHC (3), ‘in as much as both the sections
mandate determination of eligible profits as per the formula
contained therein. The only difference is that section 80HHC
contains a further mandate in terms of Explanation (baa) for
exclusion of certain income from the ‘profit of the business’ which
is, however, conspicuous by its absence in section 10B. On the basis
of the aforesaid distinction, sub-section (4) of section 10A/10B is a
complete code providing the mechanism for computing the ‘profits
of the business’ eligible for deduction u/s 10B of the Act. Once an
income forms part of the business of the income of the eligible
undertaking of the assess, the same cannot be excluded from the
eligible profits for the purpose of computing deduction u/s 10B of
the Act.[Special Bench of Indore Tribunal in Maral Overseas vs ACIT
136 ITD 177]
6.2
In this regard it is respectfully submitted that under section
10B (4), as it stands after its amendment by the Finance Act 2001,
what is determinate is the profits of the business of the undertaking
as percentage of export turnover to total turnover of the
undertaking. The phrase ‘of the undertaking’ is significant since
prior to its amendment by Finance Act, 2001, the phrase ‘of the
undertaking’ was not provided for. The purpose of this amendment
was to provide that deduction has to be given in relation to only the
profits of the business of the undertaking and not for any other
business income. In fact in the case of Suraj Exports India and others
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ITA NO.5635/DEL/2010 &
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vs ITO and Ors [ITA No. 336/Jodh/2011], the Hon’ble ITAT has held
that the profits and gains of business of the undertaking has to be
worked out as per the provisions of section 28(i), which does not
include profits of other items under section 28, including under subsections (iiia) – (iiid). Thus, under section 10B (4), profits of the
business of the undertaking would have a restrictive scope to
include only profits of the business of the undertaking derived from
the export of article or thing and not of any other source of business
profit.
6.3
In section 80HHC (3), on the other hand, ‘profits of the
business’, as per Explanation (baa) means the profits of the
business under section 28 as reduced by 90% of sums referred to in
sub-sections (iiia)-(iiid), or any receipts by way of rent, interest, or
any such other charges or receipts of a similar nature included in
such profits.
6.4
The interpretation of "Profits of the business of undertaking"
was decided by Hon'ble Apex Court in case of K. Ravinderanathan
Nair (2007) 295 ITR 228 (SC) wherein the Hon'ble SC held as under:"Para-17:- Therefore, it is only 'Profits derived from exports'
which become the basis for working out the said formula in s.
80HHC(3) of the Act. Similarly, by Finance Act, 1991 w.ef ?April,
1992, for the first time, the expression 'profit of the
business' stood defined to mean the 'profits of the business'
as computed under the head 'Profit and gains of business'.
Para 18:- The above discussion indicates that the formula in s.
80 HHC (3) of the IT Act provided for a fraction of export
turnover divided by total turnover to be applied to business
profits calculated after deducting 90 percent of the sums
mentioned in cl. (baa) to the said Explanation. That, profit
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ITA NO.5635/DEL/2010 &
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incentives and items like rent, commission, brokerage, charges
etc. though formed part of gross total income had to be
excluded as they were 'independent income' had no element
of export turnover. That, the said items distorted the figure of
export profits."
6.5
Even the formula for computation of deduction u/s 80HHC
(3) was elaborately discussed in this order where in para 21
Lordship held:"Therefore, in the above formula, we have to read all the
four variables. On reading all the variables it becomes clear
that every receipt may not constitute sale proceeds from
Exports."
6.6
In para 22 it was held that 90% of processing charges are to
be excluded from "profit of the business" but they were includible in
"total turnover". Therefore this is a direct decision of Hon'ble Apex
Court which says that profit incentives mentioned in sub section (iiia),
(iiib), (iiic) of section 28 or any other receipts of similar nature
though formed part of gross total income had to be excluded from
"profits of the business" as they were "independent income" which
had no element of "export turnover". It is well established fact that
section 80HHC is similar to section 10B therefore this judgment is
directly applicable in present case.
6.7
It is clearly given in the formula of section 10B(4) of IT. Act,
which is similar to section 80HHC (3), that the "profits of the
business of undertaking" will not include income from export
incentives coming under (iiia), (iiib) or (iiic) of section 28
because these are independent incomes which have no element
of export turnover. Here decision of Hon'ble Apex Court in case of K.
Ravindranathan Nair (2007) 295 ITR 228 (SC) and Liberty India 317ITR
51
ITA NO.5635/DEL/2010 &
1191/Del/2012
218 (SC) are directly applicable.
Proposition VII : The income in the case of the appellant is deemed
export drawback, referred to in Chapter 6 and 8 of the Foreign Trade
Policy 2004-09, and is not covered under the items of business
income referred to in sub-sections 28 (iiia)-(iiid)
7.1
From the submissions made by the appellant, it is apparent
that Rs 71.05 lakh declared by the assessee under the title ‘export
incentive’ is not Duty Drawback under section 75 of the Customs
Act (section 28(iiic), but deemed export drawback under chapters
6 & 8 of the Foreign Trade Policy (2005-09) of the Govt. of India.
Under the extant policy, deemed export drawback is made
available to the person who has made deemed exports, including
supplies made by the DTA supplier to the 100% EOU. However,
the Policy provides that the DTA supplier may, instead of claiming
the duty export drawback on the deemed exports may issue a
disclaimer in favour of the 100% EOU. Only, on such disclaimer
would the 100% EOU be eligible for claim if deemed export
drawback. This is significant, since in the various cases cited by
the appellant, the issue under discussion has been the DDB/DEPB
referred to in 28(iiia)-(iiid). The item of income in case of the
appellant is not 28(iiia)-(iiid), but a totally different income source
which is available to the assessee not because it was available to
it by virtue of the export of article or things, but because of a
disclaimer issued by a DTA supplier to the appellant. Accordingly,
this source of income is not only not derived from the export of
article or thing, it’s source is contingent upon the decision taken
by a third party, viz. the DTA supplier.
Proposition VIII : The decision of the Special Bench, ITAT, Indore in
the case of Maral Overseas may not be applied
52
ITA NO.5635/DEL/2010 &
1191/Del/2012
From the above analysis, it is respectfully submitted that the
decision of the Special Bench, ITAT, Indore in the case of Maral
Overseas may not be applied for the following reasons:
(i)
Section 10B provides for exemption (and not deduction) of
the profits of the 100% EOU derived from the export of an
article or thing, and accordingly, only that income which is
covered under section 10B (1) can be excluded from the
total income. Any other source of income, including
business income, which is not covered under section 10B (1)
cannot be excluded from the total income of the assessee
for the purpose of section 10B. Clearly, business income
referred to in sub-sections 28(iiia)-(iiid), etc. and interest
income do not form part of Chapter III of the Act and would
therefore cannot be treated as exempt income.
(ii)
In the case of Maran Exports, the Hon’ble Special Bench has
held that the decision of the Apex Court in the case of
Liberty India cannot be applied because the Apex Court
decision was in the context of section 80 IB while the instant
case is in respect of section 10B. In this regard it is
respectfully submitted that Section 10B of the IT Act, 1961,
starts with the words : "subject to the provision of this
section, any profit and gain derived by the assessee
from a 100% export oriented under taking....". The word
used here is 'derived'. Same word has been used in section
80HHC and also in section 80IB of the I. T Act. This issue is
squarely covered in favour of the revenue by the decision of
Hon'ble Supreme Court in the case of Liberty India 3171TR
218 (SC) wherein Hon'ble Supreme Court defined the term
'derived' in para 14 and said that word 'derived from' is
narrower
in
connotation
as
compared
to
the
words
'attributable to'. In other words by using the expression
53
ITA NO.5635/DEL/2010 &
1191/Del/2012
'derived from' Parliament intended to cover sources not
beyond the first degree. In para 18, the lordship observed
that DEPB/Duty drawback are incentive which flow from the
scheme framed by Central Government or from section 75 of
Custom Act, 1962. Hence incentives are not profit derived
from the eligible business u/s 80IB. When Hon'ble Apex
Court has repeatedly defined the term 'derived from' in the
same fashion as in Liberty India, it is not possible to define it
in any other way. By this definition one would say that
Hon'ble Supreme Court has given a well reasoned
decision discussing each of the relevant issues in case of
Liberty India, where all the issues namely word "derived",
and nature of export incentives is discussed in details &
therefore, it is binding precedent under Article 141 of the
Constitution.
(iii) In light of the decision of the Apex Court in the case of
Liberty India and Sterling Foods, and the various decisions
cited above, interest income and income from DDB/DEPB,
etc are not derived from the business of 100% EOU from
export of an article or thing. This view has been held by :
(a) ITAT, Mumbai in the case of Tricom India Ltd (36 SOT
302),
(b) ITAT, Ahmadabad in the case of Kiri Dyes and Chemicals
(P) Ltd vs ITO in ITA No. 813 & 1035/2010,
(c) ITAT, Chennai in the case of Tochelungee Stationary Mfg
Co vs ITO 5 SOT 428;
(d) ITAT, Jodhpur Bench in the case of ITO vs VJ Home (P) Ltd
(2209) 28 DTR 495
(e) CIT vs Memom Impex (P) Ltd (2003) 259 ITR 403 (Mad);
(f) ITAT, Chennai in the case of Orchid Chemicals and
Pharmaceuticals Ltd vs JCIT (2005) 97 CTD 277
54
ITA NO.5635/DEL/2010 &
1191/Del/2012
(iv) In the
decisions cited
above, the main reason for
disallowance of the claim of deduction was that interest
income and income from DEPB/DDP, import licences, etc.
were not derived from the undertaking, having no direct
nexus with the business of the undertaking and hence,
following various decisions, including of the Apex Court in
Liberty India and Sterling Foods, such income was not
eligible for deduction is 10A/10B. It has been inter alia held
that in the absence of a direct nexus between such income
source and the business of the undertaking, the deduction
cannot be allowed.
(v)
In view of the above, the view taken by the Special Bench in
the case of Maral Exports, that the decision of the Apex
Court in Libert India, is not applicable to section 10B, may
not be accepted.
(vi) In the case of Maran Overseas, the Special Bench ITAT has
ignored the binding decision of the Apex Court on the
grounds that the decision of the Apex Court was in the
context of 80 IB where no formula for determination of
profits was given, as against sub-section (4) given in 10B.
While so doing, the ITAT has completely ignored the
provision of sub-section (1) by holding that sub-section (4) is
a complete code in itself. On the other hand, the Delhi ITAT
has in the case of Convergys India Services Pvt. Vs DCIT in
ITA No. 4021/Del/2010 has held that sub-section (4) of
section 10A is only a formula; firstly the income or gain has
to be derived from the export activity, only thereafter the
formula can be applied. This was also the view taken by the
ITAT, Mumbai Bench in the case of Tricom India Ltd. It has
been held that the expression ‘derived from’ cannot be
55
ITA NO.5635/DEL/2010 &
1191/Del/2012
ignored in sub-section (1) because the expression involves
only those items of profit eligible for deduction which are
derived from the industrial undertaking.
(vii) In the case of Maral Exports, the ITAT has while drawing a
corollary between 10B (4) and 80HHC (3) regarding
determination of profits held that while in view of
Explanation (baa) under section 80 HHC, specific items of
income (28 (iiia)-(iiid), rent, etc) have been excluded, no
such exclusion is present under sub-section (4) of section
10B. It was on this reasoning that the Hon’ble Bench
allowed the inclusion of DEPB/DDB in the profits of the
business of the undertaking for determination of the
deduction under sub-section (1). In this regard, it may be
mentioned that after its amendment by the Finance Act,
2001, sub-section (4) would include only the business of the
undertaking (and not any business source). It is for this
reason that in the case of Suraj Exports, the ITAT, Jodhpur
Bench had given the finding that ‘profits of the business of
the undertaking’ would be that u/s 28(i) and not any other
business source such as 28 (iiia)-(iiid), etc, including
DEPB/DDB. Thus, the profits of the business of the
undertaking would have a restrictive scope to include only
those profits as derived by the 100% EOU from the export of
article or things. In any case, as has been held by the
Hon’ble Delhi Bench of the ITAT in the case of Convergys
India Services Pvt. Vs DCIT, unless the profits are derived
from the 100% EOU from the export of article or things
referred to in sub-section (1), it cannot enter into the
determination of the deduction u/s 10B (4), which is only a
formula.
56
ITA NO.5635/DEL/2010 &
1191/Del/2012
(viii) Further,
the
Supreme
Court
in
the
case
of
K.
Ravinderanathan Nair (2007) 295 ITR 228 (SC) has interpreted
the meaning of the term ‘profits of the business of the
undertaking’ in the context of section 80 HHC (3) and has held
that it is only ‘profits derived from exports’ which would
become the basis for working out the formula under that subsection. Accordingly, even under sub-section (4) of section 10B,
‘profits of the business of the undertaking’ would be the profits
derived from the export of article or things.
(ix) Hon'ble Supreme Court in the case of Liberty India and many
other cases have decided the nature of incentives i.e.
DDB/DEPB at length, and accordingly held that the incentive
profits are not profits derived from the eligible business
undertaking. It has been further held that DEPB/DDB
belongs to the category of ancillary profits of such
undertakings and constitute independent source of income
beyond the first degree nexus between profits and the
industrial
undertaking.
In
view
of
these
facts
brief
observations of the Hon'ble ITAT Benches as well as Hon'ble
Bombay High Court cannot be deemed to be law declared to
have a binding effect as contemplated by article 141 of the
constitution (held by SC in the case of S. Shamughyel Nadar
263 ITR 658) and cannot overtake the clear-cut finding
given by the Hon'ble Supreme Court in the case of Liberty
India, which has been held after considering the facts of
the another 25 cases on similar issue.”
7.
We have heard both the parties and perused the relevant records,
especially the orders of the revenue authorities on the issue in dispute
alongwith the documentary evidence filed by the assessee and the
Written Submissions filed by both the parties.
As regard the common
issue involve in both the Appeals i.e. in ITA No. 5635//Del/2010 (A.Y. 2007-
57
ITA NO.5635/DEL/2010 &
1191/Del/2012
08) and ITA No. 1191/Del/2012 (A.Y. 2008-09) i.e. whether exemption u/s.
10B of the I.T. Act is available on the Deemed Export Draw Back included
in the profits and gains of the 100% EOU unit or not.
After going through
the order of the Revenue Authorities alongwith the Written submissions
filed by both the parties as well as the case laws relied upon by them, we
are of the considered view that this issue has already been adjudicated
and decided in favor of the assessee by the decision of the ITAT, Special
Bench, Indore in the case of Maral Overseas Ltd. vs. ACIT 136 ITD 177.
The said decision of the ITAT, Special Bench, Indore specifically rendered
in context of section 10B of the I.T. Act. For the sake of convenience the
relevant paragraphs of the Special Bench, Indore decision, as aforesaid
are reproduced hereunder:-
"77
…..It is clear from the plain reading of section 10B(1) of
the Act that the said section allows deduction in respect
of profits and gains as are derived by a 100% EOU.
Further, section 10B(4) of the Act stipulates specific
formula for computing the profit derived by the
undertaking from export. Thus, the provisions of
subsection (4) of section 1OB of the Act mandate that
apportioning
the
profits
of
the
business
of
the
undertaking in the ratio of export turnover by the total
turnover. Thus, even though subsection (1) of section
1OB refers to profits and gains as are derived by a 100%
EOU, the manner of determining such eligible profits has
been statutorily defined in sub-section (4) of that
section. Both sub- sections (1) and (4) are to be read
together while computing the eligible deduction 10B of
the Act, We cannot ignore sub-section (4) of section 1OB
which provides specific formula for computing the
profits derived by the undertaking from export. As per
the formula so laid down, the entire profits of the
58
ITA NO.5635/DEL/2010 &
1191/Del/2012
business are to be determined which are further
multiplied by the ratio of export turnover to the total
turnover of the business. In case of Liberty India (supra),
the Hon'ble Supreme Court 80-IA has dealt with the
provisions of section 80IA of the Act wherein no formula
was laid down for computing the profits derived by the
undertaking which has specifically been provided under
sub section (4) of section 10B while computing the profits
derived by the undertaking from the export. Thus, the
decision of the Hon’ble Supreme Court is of no help to the
revenue in determining the claim of deduction u/s. 10B
in respect of export incentives.
78. Section 1OB of sub-section (l) allows deduction in
respect of profits and gains as are derived by a 100%
EOU. Section 1OB (4) lays down special formula for
computing the profits derived by the undertaking from
export. The formula is as under:
79. Thus, sub-sec/ion (4) of section lOB stipulated that
apportioning
the
profits
of
the
business
of
the
undertaking in the ratio of turnover to the total turnover.
Thus, notwithstanding the fact that sub-section (l) of
section 1OB refers the profits and gains as are derived
by a 100% EOU, yet the manner of determining such
eligible profits has been statutorily defined in subsection (I) of section 1OB of the Act. As per the formula
stated above, the entire profits of the business are to
be taken which are multiplied by the ratio of the export
turnover to the total turnover of the business. Subsection (4) does not require an assessee to establish
direct nexus with the business of the undertaking and
once an income forms part the business of the
59
ITA NO.5635/DEL/2010 &
1191/Del/2012
undertaking, the same would be included in the profits of
the business of the undertaking. Thus. once an income
forms part of the business of the eligible undertaking.
there is no further mandate in the provisions of section
1OB to exclude the same from the eligible profits. The
mode o( determining the eligible deduction uls lOB is
similar to the provisions of section 80HHC inasmuch as
both tile sections mandates determination of eligible
profits as per tile formula contained therein. The only
difference is that section 80HHC contains a further
mandate in terms of Explanation (baa) (or exclusion o(
certain income from the "profits o( the business" which is,
however. conspicuous by its absence in section lOB. On
tile basis of the aforesaid distinction. subsection (4) of
section10A/10B o(the Act is a complete code providing
the mechanism for computing the "profits of the
business" eligible Is: deduction u/s lOB of the Act. Once
an income forms part of the business of the income o(the
eligible undertaking o(the assessee, the same cannot be
excluded from the eligible profits (or the purpose o(
computing deduction u/s 1OB of the Act. As per the
computation made by the Assessing Officer himself,
there is no dispute that both these incomes have been
treated by the Assessing Officer as business income.
The CBDT Circular No. 564 dated 5th July, 1990 reported
in 184 ITR (St.) 137 explained the scope and ambit of
section 80HHC and the mode of determination of profits
derived by an assessee from the export of goods. ITA],
Special Bench in the case of International Research Park
Laboratories Ltd. (supra), after following the aforesaid
Circular, held that straight jacket formula given in subsection (3) has to be followed to determine the eligible
deduction. The Hon'ble Supreme Court in the case of
60
ITA NO.5635/DEL/2010 &
1191/Del/2012
P.R. Prabhakar v. CIT [2006) 284 ITR 5841154 Taxman
503 had approved the principle laid down in the Special
Bench
decision
in
International
Research
Park
Laboratories Ltd. (supra). In the assessee's own case the
ITAT in the preceding years, after considering the
decision in the case of Liberty India (supra) held that
provisions of section 10B are different from the
provisions of section 80lA wherein no formula has been
laid down for computing the eligible business profit.
80. In view of the above discussion, question No. 2 is
answered in affirmative and in favour of the assessee.
Accordingly, the assessee is eligible [or claim of
deduction on export incentive received by it in terms o(
provisions o( section 10B(1) read with section 10B(4)
o(the Act. "(emphasis supplied)”
7.1
Keeping in view of the aforesaid decision rendered by the aforesaid
ITAT, Special Bench, Indore on the question of whether the Export
Incentive are derived from undertaking
are eligible for deduction u/s.
10B of the Act. It is held by the aforesaid Special Bench that though
section IOB(I) refers to profits "derived" by the EOU, the manner of
determining such eligible profits has to be done as per the formula
prescribed in section 10B(4), which does not require an assessee to
establish a direct nexus with the business of the undertaking and thus,
once an income forms part of the business of the undertaking, the same
would be included in the profits of the business of the undertaking and be
eligible for deduction.
7.2
Keeping in view of the Written Submissions filed by both parties, we
are of the view that the decision as aforesaid of the Special Bench, ITAT,
Indore has been followed by the ITAT, Delhi Bench in the case of lTO vs.
M/s Hritnik Export (P.) Ltd. in ITA No. 2111/Del/2013, which has been
upheld by the Hon’ble Jurisdictional High Court in ITA No. 219 & 239/2014.
61
ITA NO.5635/DEL/2010 &
1191/Del/2012
7.3
It is further seen that the ITAT, Mumbai Bench has also taken the
exactly the similar view in the case of Arts & Crafts Exports vs. ITO : 66
DTR 69 which has also been upheld by the Hon’ble Mumbai High court
reported in 246 CTR 463.
8.
Keeping in view of the aforesaid discussion, we are of the
considered view that undertaking is eligible for deduction on export
incentive received by it, in terms of the provisions of section 10B of the
Act. Respectfully following the decision of the ITAT, Special Bench, Indore
in the case of Maral Overseas vs. ACIT (Supra) as well as the decision of
the
ITAT, Delhi Bench in the case of ITO vs. Hritnik Export Pvt. Ltd.
(Supra) in which the Delhi Bench has followed the decision of the Special
Bench, ITAT (Supra) which has been upheld by the Hon’ble High Court in
ITA No. 219 & 239/2014.
The issue raised in Ground No. 2 & 2A in both
the appeals i.e whether exemption u/s. 10B of the I.T. Act is available on
the deemed export draw back included profit and gain of 100% EOU Unit,
is decided in favor of the assessee and we delete the addition in dispute
for both the assessment years i.e. 2007-08 & 2008-09.
9.
As regards the another issue regarding addition of Rs. 21239/- on
account of interest for the asstt. year 2007-08 mentioned in ground no. 3
and Rs. 43,287/- mentioned in ground no. 3 for the asstt. year 2008-09.
After hearing both the parties and perusing the relevant records,
especially the orders of the revenue authorities on the issue in dispute
alongwith the documentary evidence filed by the assessee and the
Written Submissions filed by both the parties regarding denial of
exemption on interest income,
we find that Ld. AR has argued before the
Ld. CIT(A) that the interest of Rs. 21,239/- was earned on Fixed Deposit
made for the purpose of business and not as investment of surplus funds,
accordingly, the amount of Rs. 21,239/- should be allowed for deduction
u/s. 10B.
We have gone through the contention raised by the Assessee
before the Revenue Authorities as well as before us and the case laws
relied upon by the assessee as well as Ld. DR on the issue in dispute, we
are of the view that interest income earned by the assesee in the asstt.
62
ITA NO.5635/DEL/2010 &
1191/Del/2012
years in dispute is not derived from export business and is an income
from other sources.
Our view is supported by the decision of the Hon’ble
Supreme court in the case
of Tuticorin Alkali Chemicals and Fertilizers
Ltd. vs. CIT [1997] 227 ITR 172 (SC); CIT vs. Pandian Chemicals Ltd.
[1998] 233 ITR 497 (Mad.) and Pandian Chemicals Ltd. vs. CIT [2003] 262
ITR 278 (SC).
Keeping in view of the facts and circumstances of the
present case, we are of the view that interest income on FDR, earned as
income
from
other
sources,
on
the
basis
of
facts
and
judicial
pronouncements, cannot be held to be admissible for deduction u/s. 10B,
therefore, the ground no. 3 in both the Appeals are rejected and decided
against the assessee. In view of the above, we do not find any infirmity in
the well reasoned order passed by the Ld. CIT(A) on this issue, hence, we
uphold the impugned order on this issue.
9.1
Since there are only two issues involving in ITA No. 5635/Del/2010,
which we have decided as above, therefore, this Appeal is partly allowed.
ITA NO. 1191/Del/2012
10.
As regards Ground no. 1 in which the assessee has challenged the
total taxability which need not be adjudicated here. But as regards the
issue involved in Ground No. 2, 2A and 3 in both the Appeals, we have
decided the issues by passing a detailed order in ITA No. 5635/Del/2010
(A.Y. 2007-08), as above, in which Ground 2, 2A is decided in favor of
the Assessee
by
respectfully following the order of the ITAT, Special
Bench, Indore in the case of Maral Overseas vs. ACIT 136 ITD 177 and
Ground No. 3 is decided against the Assessee on the basis of the
judgment of the Hon’ble Supreme Court in the case of Tuticorin Alkali
Chemicals and Fertilizers Ltd. vs. CIT [1997] 227 ITR 172 (SC); CIT vs.
Pandian Chemicals Ltd. [1998] 233 ITR 497 (Mad.) and Pandian Chemicals
Ltd. vs. CIT [2003] 262 ITR 278 (SC).
11.
With regard to issue no. 4 regarding not granting the benefit of
exemption u/s. 10B fully of Rs. 28,27,224/- on account of Customer Claim
63
ITA NO.5635/DEL/2010 &
1191/Del/2012
by observing that the same has no direct nexus with export is concerned,
we find that
Ld. CIT(A) has consider the assessment order and the
submission made by the Ld. AR.
We
further find that Ld. CIT(A) has
observed that the scope of income which is admissible for deduction u/s.
10B is limited to that income which is derived from the export of articles
or things. In this case, the assessee has received a sum of Rs. 28,27,224/as a result of compensation for cancellation of order, to compensate for
the cost of raw
material and other inputs incurred by him.
These
receipts may be in foreign exchange but is not on account of export of
articles or things and the amount received by the assessee is only to
cover the expense already incurred by it. The receipt cannot be said to be
such profit and gains derived by the undertaking from export of article or
thing and on the basis of facts and judicial pronouncement of the ITAT,
Delhi Bench in the case of Sony India Pvt. Ltd. vs. DCIT (114 ITD 448),
cannot be held to be admissible for deduction u/s. 10B. Therefore, Ld.
CIT(A) has rightly confirmed the addition of Rs. 28,27,224/-. In view of the
above, we do not find any infirmity in the well reasoned order passed by
the Ld. CIT(A) on this issue, hence, we uphold the impugned order on this
issue.
12.
With regard to issue no. 5 regarding not granting of exemption u/s.
10B fully by confirming the action of the AO of making addition of
Rs. 29,24,405/- on account of Freight Subsidy by observing that there is
no direct nexus with export is concerned, we find that
64
Ld. CIT(A) has
ITA NO.5635/DEL/2010 &
1191/Del/2012
considered the assessment order and the submission made by the Ld. AR
and elaborately discussed the issue and adjudicated the issue as under:“8.1 I have carefully considered the assessment order and
the submission made by the Id. AR. As already discussed
above, the exemption under section 10B of the Income-tax
Act, 1961, is allowable only in respect of profits and gains
derived by the assessee from a hundred per cent export
oriented unit and not in respect of each and every item of
income assessable as business income. In sub-section (1) of
section BOHHC, the deduction is allowable in respect of the
profits derived from exports while in sub-section (3) profits
derived from export has been defined by enlarging its natural
meaning. Where the Legislature wanted to give a larger
meaning to the expression "derived from" it has defined such
expression. According to this sub-section, such profits would
amount to profits and gains computed under the head "Profits
and gains of business or profession". But there is no such
definition for the purpose of section 10B. Therefore, the
expression "derived from" in section 10B is to be construed in
the restricted sense. Thus, the term profit derived by an
industrial undertaking from export of articles has a limited
connotation and it is much narrower in its field of operation
and income other than that derived from export do not fall
within
its
specifically
purview.
used
The
the
legislature
phrase
has
'derived
in
its
from'
wisdom
and
not
'attributable to' while framing the provisions u/s 1OB and on
this basis has limited the income/receipts which are covered
under the provisions of this section i.e. on which the appellant
has the right to claim deduction. The appellant has quoted the
decision of ITAT, Chandigarh in the case of Income Tax Officer
Vs. Kiran Enterprises (2005) 92 TTJ 104. However, the decision
65
ITA NO.5635/DEL/2010 &
1191/Del/2012
has been reversed by Hon'ble Himachal Pradesh High Court
[2010] 327 ITR 0520- wherein it has held as under:
It is evident that section 80-1B of the Income-tax Act,
1961, provides for deduction in respect of profits and gains
derived from the eligible business. The words “derived from”
are narrower in connotation as compared to the words
"attributable to". In other words, by using the expression
"derived from", Parliament intended to cover sources not
beyond the first degree. It is only the profits generated, i.e.,
operational profits which are entitled to the benefit under
section 80-lA. In Sterling Foods [1999] 237 ITR 579the
Supreme Court has also laid down a test as to what is the
source of income.
In the State of Himachal Pradesh, there was scarcity of
rail
network.
A
scheme
had
been
framed
by
Central
Government whereby freight/transport subsidy was provided
to industries set up in remote areas where rail facilities were
not available and some percentage of the transport expenses
incurred by the industrial undertakings to transport raw
material to the factory and to transport finished goods from
their industries was subsidized by the Central Government.
The Tribunal held that the freight subsidy had to be included
as profits derived from the industrial undertaking. On appeal
to the High Court. Held, allowing the appeal, that the transport
subsidy received by the assessee was not a profit derived
from business since it was not an operational profit. The
source of the subsidy was not the business of the assessee
but the scheme of the Central Government. It could not be
treated as profits of the undertaking for purposes of section
8O-IA. - Liberty India v. CIT [2009] 317 ITR, 218(SC) and CIT v
Sterling Foods [1999] 237 ITR 579 (SC) applied.
66
ITA NO.5635/DEL/2010 &
1191/Del/2012
The receipt of freight subsidy thus cannot be said to be
such profit and gains derived by the undertaking and on the
basis of facts and judicial pronouncements, cannot be held to
be admissible for deduction u/s 10B. The addition of Rs.
29,24,405/- is, therefore, confirmed and this ground of appeal
is rejected.”
12.1
In the background of the aforesaid discussions and precedent
relied upon by the Ld. CIT(A), we are of the view that the receipt of freight
subsidy thus cannot be said to be such profit and gains derived by the
undertaking, cannot be held to be admissible for deduction u/s 10B.
Hence, Ld. CIT(A) has rightly confirmed the addition of Rs. 29,24,405/-. In
view of the above, we do not find any infirmity in the well reasoned order
passed by the Ld. CIT(A) on this issue, hence, we uphold the impugned
order on this issue.
13.
With regard to issue no. 6 regarding confirming the action of the AO
in making the addition of Rs. 10,93,584/- (Rs. 20,72,016/- before passing
order u/s. 154 by AO) u/s. 14A read with Rule 8D on account of expenses
relating to investments is concerned, we find that
Ld. CIT(A) has
considered the assessment order and the submission made by the Ld. AR
and elaborately discussed the issue and adjudicated the issue as under:“10.1 I have carefully considered the
assessment order and
the submissions made by the Ld. AR. On careful examination
of the matter, I find that any income, whether exempt or not,
can
only
be
earned
after incurring
some expenditure.
However, usually such expenditure is not segregated in the
accounts of the assessee and remains clubbed with overall
administrative/financial and other expenses of the business as
a whole. If any income is exempt from tax because it is not
included in the total income by virtue of section 10 of the
Income-tax Act, 1961, section 14A of the Act prohibits
allowance of any expenditure incurred in relation thereto.
67
ITA NO.5635/DEL/2010 &
1191/Del/2012
Income from deployment of funds in shares earned by way of
dividend is not included in total income by virtue of the
provisions contained in section 10(34) of the Act, whether the
shares are held as stock-in-trade or as investment. As
dividend income does not form part of total income under the
Act, the provisions of section 14A are applicable. The
allowance of expenditure in relation to dividend income is thus
not admissible in computing the income of an assessee
whether the shares are held as investment or they are held on
trading account as stock-in-trade.
When the expenditure of interest is incurred in relation
to income which does not form part of total income,
disallowance is made irrespective of the fact whether any
income is earned by the assessee or not as Section 14A does
not envisage any such exception. The provisions of section
14A, controls the computation Of income under the provisions
of the Act and has overriding effect over other provisions.
Therefore, even if the expenditure is allowable under any
other provision of the Act, disallowance is made because of
the overriding effect of section 14A of the Act.
10.2 The Legislature by using the expression "expenditure in
relation to income which does not form part of the total
income" in section 14A of the Act, in no way indicates that it
does not encompass disallowance of expenditure incurred in
relation to the income in the absence of actual receipt of
income during the relevant previous year. On the contrary,
the term "in relation to" is wide enough to include in its sweep
expenditure both "for making
or earning income" and
"incurred wholly and exclusively for the purposes of business
carried on by the assessee".
68
ITA NO.5635/DEL/2010 &
1191/Del/2012
When there is no income, it cannot form part of
anything and certainly it does not, in any case form part of
total income. When dividend is not taxable at all, the interest
pertaining to that would also not be allowable because there
is no taxable income of the assessee against which such
interest can be allowed.
10.3 Further, sub-section (2) of section 14A empowers the AO
to determine the amount of expenditure incurred in relation to
exempt income in accordance with the method as may be
prescribed. The
method has
since been prescribed by
insertion of rule 8D of the I.T. Rules, 1962 w.e.f. 24.03.2008.
Sub-section (3) of section 14A mandates that the above
provisions of sub-section (2) shall also apply to a case where
an assessee claims that no expenditure has been incurred by
him in relation to exempt income. The constitutional validity of
section 14A read with sub-sections (1), (2) and (3) thereof has
since been upheld by the Hon'ble Bombay High Court vide its
order dated 12.08.2010 in the case of Godrej & Boyee Mfg.
Co. Ltd. vs. DCIT In ITA No. 626 of 2010 and writ petition no.
758 of 2010 after dwelling on the above issue in great details
and considering decisions of various Courts and Tribunals on
the matter including that of Hon'ble ITAT, Mumbai (Special
Bench) in the case of ITO vs. Oaga Capital Management Pvt.
Ltd. (2009) 117 ITO 169. The Hon'ble High Court has also
upheld the validity of Rule 8D, although it has held that the
above Rule 80 notified w.e.f. 24.03.2008 shall apply w.e.f. AY
69
ITA NO.5635/DEL/2010 &
1191/Del/2012
2008-09. The relevant portion of the aforesaid order of the
Hon'ble High Court is reproduced hereunder:
"Conclusion:
74.
Our conclusions in this judgment are as follows:
i.
Dividend income and income from mutual funds falling
within the ambit of Section 10(33) of the Income Tax Act
1961, as was applicable for Assessment Year 2002-03 is
not includible in computing the total income of the
assessee. Consequently, no deduction shall be allowed
in respect of expenditure incurred by the assessee in
relation to such income which does not form part of the
total income under the Act, by virtue of the provisions of
Section 14A(1);
ii)
The payment by a domestic company under section
115O(1) of additional income tax on profits declared,
distributed or paid is a charge on a component of the
profits of the company. The company is chargeable to
tax on its profits as a distinct taxable entity and it pays
tax in discharge of its own liability and not on behalf of
or as an agent for its shareholders. In the hands of the
shareholders as the recipient of dividend, income by
way of dividend does not form part of the total income
by virtue of the provisions of Section 10(33). Income
from mutual funds stands on the same basis;
iii)
The provisions of sub section (2) and (3) of Section 14A
of the Income Tax Act 1961 are constitutionally valid;
iv)
The provisions of Rule 8D of the Income Tax Rules as
inserted by the Income Tax (Fifth Amendment) Rules
2008 are not ultra vires the provisions of Section 14A,
70
ITA NO.5635/DEL/2010 &
1191/Del/2012
more particularly sub section (2) and do not offend
Article 14 of the Constitution;
v)
The provisions of Rule 8D of the Income Tax Rules which
have been notified with effect from 24 March 2008 shall
apply with effect from Assessment Year 2008-09;"
10.4
However,
the
appellant
has not objected
to
the
applicability of rule 8D for the year under consideration and
has
only
pointed
out
the
mistake
in
computation
of
disallowance by applying rule 8D read with section 14A of the
Act. This objection has also been withdrawn during the course
of
appellate
proceeding
vide
order
sheet
entry
dated
09.01.2012, as the AO has rectified the calculation mistake.
Considering the above the impugned addition made by the AO
by applying rule 8D read with section 14A of the Act is
confirmed.“
13.1 We have gone through the orders passed by the AO as well as Ld.
CIT(A) on the issue in dispute. We find that the assessment order as well
as the appellate order, is not clear on the quantification of the expenditure
incurred by the assessee on the exempt income.
Keeping in view of the
facts and circumstances of the case, we are of the view that the matter
requires re-consideration at the level of the AO with the direction to
quantify the expenditure on the basis of exempt income, after giving
adequate opportunity of being heard to the assessee and pass a fresh
order on the issue. Accordingly, the Ground No. 6 is remitted back to the
file of the AO with the above directions.
71
ITA NO.5635/DEL/2010 &
1191/Del/2012
14.
In the result, Assessee’s Appeal No. 5635/Del/2010 (A.Y. 2007-08) is
partly allowed and Appeal No. 1191/Del/2012 (A.Y. 2008-09) is partly
allowed for statistical purposes.
Order pronounced in the Open Court 27-2-2015.
Sd/-
Sd/-
[N.K. SAINI]
ACCOUNTANT MEMBER
[H.S. SIDHU]
JUDICIAL MEMBER
Date 27/2/2015
“SRBHATNAGAR”
Copy forwarded to: 1.
2.
3.
4.
5.
Appellant Respondent CIT
CIT (A)
DR, ITAT
TRUE COPY
By Order,
Assistant Registrar,
ITAT, Delhi Benches
72
ITA NO.5635/DEL/2010 &
1191/Del/2012
73

IN THE INCOME TAX APPELLATE TRIBUNAL DELHI BENCH

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