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Principal Commissioner Of Income Tax 21 Vs. Universal Precision Screws
December, 03rd 2015



+                         ITA 392/2015

       TAX ­ 21                                 ..... Appellant
                    Through: Mr Sanjay Kumar and Mr Dileep
                    Shivpuri, Advocates.


       UNIVERSAL PRECISION SCREWS                    ..... Respondent
                      Through: Mr Ved Jain and Mr Pranjal Srivastava,
       %              06.10.2015


1. This appeal by the Revenue is directed against the order dated 7 th January,
2015 passed by the Income Tax Appellate Tribunal (`ITAT') in ITA
No.2034/Del/2013 for Assessment Year (`AY') 2009-10.

2. The Assessee is engaged in the manufacture and export of Fasteners. It is
a 100 per cent export oriented unit. It filed a return of income for AY 2009-
10 on 23rd September, 2009 declaring a total income of Rs.1,71,91,590/-.
Thereafter, it filed a revised return revising its total income to

ITA 392/2015                                                          Page 1 of 5
Rs.1,59,35,040/-. The Assessee claimed deduction under Section 10B (1) of
the Act.

3. In the assessment order dated 19th December, 2011, the AO noted that the
Assessee had included as part of its income scrap sales of Rs.31,84,869/-,
exchange rate difference amounting to Rs.32,35,700/- and interest received
on Fixed Deposit Receipts (FDRs) amounting to Rs.1,60,11,996/-. The AO
was of the view that only those profits and gains would be exempted under
Section 10B which had direct and proximate relationship with activities
relatable to an EOU. It was held that interest from FDRs was not income
derived from the undertaking. The AO included the exchange rate difference
in the domestic sales. The scrap sale was treated as part of the domestic sale.
The AO recomputed the deduction under Section 10B of the Act on the
above basis.

4. In the appeal filed by the Assessee, the Commissioner of Income Tax
(Appeals) [CIT(A)] by order dated 28th February 2013 concurred with the
AO as regards the computation of the deduction under Section 10B of the

5. In allowing the Assessee's appeal by the impugned order, the ITAT held
that in terms of the judgment of the Supreme Court in CIT v. Punjab
Stainless Steel Industries (2014) 364 ITR 144 (SC) sale of scrap is not
includable in the total turnover since the Assessee was not engaged in the
business of scrap. Consequently, the impugned orders of the CIT (A) and
the AO treating the scrap amount as part of the domestic turnover was set

ITA 392/2015                                                          Page 2 of 5

6. On the above aspect, the Court finds no error committed by the ITAT as
the legal position has been made explicit by the decision of the Supreme
Court in CIT v. Punjab Stainless Steel Industries (supra). Consequently,
the Court declines to frame a question on this issue.

7. As regards the exchange rate fluctuation, the ITAT referred to the
decision of the Bombay High Court in CIT v. Gem Plus Jewellery India
Ltd. (2011) 330 ITR 175 (Bom.) which held that foreign exchange
fluctuations realized within the stipulated period forms part of the sale
proceeds and is directly related to the export activates. It was, accordingly,
held that this should be treated as income derived from export activities.
The above decision of the Bombay High Court was in the context of Section
10A of the Act. The learned counsel for the Assessee has also referred to the
decision of the Madras High Court in CIT v. M/s Pentasoft Technologies
Ltd. (2012) 342 ITR 578 (Mad.) where again that High Court has answered
the question likewise and in favour of the Assessee. Since the provisions of
Section 10A and 10B are more or less similar, the ITAT rightly held that for
the purposes of Section 10B, the foreign exchange fluctuation has to be
considered as part of the export turnover.

8. Again, on the above aspect, the Court finds no error committed by the
ITAT since its decision on this issue is based on the correct legal position as
explained in the above decisions.

ITA 392/2015                                                          Page 3 of 5
9. On the question of interest on the FDRs, the ITAT has referred to Section
10B (4) which states that for the purposes of Section 10B (1), 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 the 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.' As noted by this Court in CIT v. Hritnik Exports Pvt. Ltd.
(decision dated 13th November, 2014 in ITA No.219 & 239 of 2014),
Section 10B (4) mandates the application of the formula for determining the
profits derived from exports for the purposes of Section 10B(1). In other
words, the formula would read thus:

Profits derived = profits of the business x export turnover
from export       of the undertaking          total turnover

9A. In terms of the above formula, the question that would arise is whether
the interest on the FDRs could form part of the `profits of the business of the
undertaking'. The attention of the Court has been drawn to the decision of
the Karnataka High Court in CIT v. Motorola India Electronics Pvt. Ltd.
(2014) 46 167 (Kar.) which held that there was a direct
nexus between the interest received from the FDRs created by a similarly
placed Assessee from the amounts borrowed by it. The              High Court
approved the order of the ITAT in that case which held that the entire
profits of the business of the undertaking should be taken into consideration
while computing the eligible deduction under Section 10B of the Act by

ITA 392/2015                                                          Page 4 of 5
applying the mandatory formula.

10. In the present case, the Assessee has stated that the interest on FDRs was
received on "margin kept in the bank for utilization of letter of credit and
bank guarantee limits". In those circumstances, the decision of the ITAT
that such interest bears the requisite characteristic of business income and
has nexus to the business activities of the Assessee cannot be faulted. In
other words, interest earned on the FDRs would form part of the "profits of
the business of the undertaking" for the purposes of computa tion of the
profits derived from export by applying formula under Section 10B(4) of the

11. Consequently, no substantial question of law arises on this aspect as

12. The appeal is dismissed.

                                                    S. MURALIDHAR, J

                                                    VIBHU BAKHRU, J
OCTOBER 6, 2015

ITA 392/2015                                                         Page 5 of 5
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