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Pay tax on central excise refund: ITAT
December, 03rd 2009

In a decision that could impact companies with operations in the north-east, Jammu & Kashmir and Himachal Pradesh, a tax tribunal in Amritsar has ruled recently that such entities will be liable to pay tax on Central excise duty refunds.

The November 26 decision by the Income-tax Appellate Tribunal (ITAT), Amritsar will enable income-tax authorities to claim nearly Rs 500 crore from companies operating in these regions.

Companies, such as Balaji Alloys, Raven Bhel and Pee Ell Alloys, moved the income tax appellate tribunal (ITAT) against an income-tax department notice that asked them to cough up the tax. However, the ITAT dismissed their plea late last month. Other companies awaiting an ITAT decision on the issue include Sun Pharma, Kashmir Udyog and Avita Mobile Industries.

Central excise duty refunds are part of a government package to promote industrial development in J & K, northeast states and Himachal Pradesh. Under this scheme, central excise duty a tax on manufacturing paid by the companies is refunded to them.

At the same time, these companies in the region are given exemptions from income-tax too. Section 80 IB of the Income-tax Act provides for exemptions from taxation on profits derived from industrial activity in backward areas. In Jammu & Kashmir, Section 80 IB will continue to operate till 2012. In other areas, 100 % exemption is granted for five years after the setting up of an industry and only 25% of the profit derived from industrial profit is taxed for the next five years. Thereafter the profit is taxed according to the prevalent rate.

The tribunal, in an order on November 26, accepted the argument of the I-T department that central excise duty refund is liable to be taxed, even though the companys profit is exempt from taxation under 80 IB.

The department drew a fine line between excise refund and profit generated through industrial activities in these areas. It said Central excise refund cannot be construed as profit derived from industrial activity. The refunds are in fact a benefit derived from a government scheme and distinct from profit derived from industrial activity. Therefore, refunds are not eligible for deductions under Section 80 IB of the Income-tax Act.

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