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* IN THE HIGH COURT OF DELHI AT NEW DELHI
9.
+ ITA 459/2015
RIVIERA HOME FURNISHING ..... Appellant
Through: Mr. Ved Jain and Mr. Pranjal
Srivastava, Advocates.
versus
ADDL. COMMISSIONER OF INCOME
TAX RANGE 15 ..... Respondent
Through: Mr. Ashok Manchanda, Senior Standing
counsel.
CORAM:
JUSTICE S. MURALIDHAR
JUSTICE VIBHU BAKHRU
ORDER
% 19.11.2015
S. Muralidhar, J.:
1. The present appeal by the Appellant Assessee under Section 260A of the
Income Tax Act (`Act') is directed against the impugned order dated 27 th
February 2015 passed by the Income Tax Appellate Tribunal (`ITAT') in
ITA No.1191/Del/2012 for the Assessment Year (`AY') 2008-09.
2. Admit.
3. The following questions of law are framed for consideration:
"(i) Whether in the facts and circumstances of the case, ITAT
is correct in law in not allowing the exemption of
Rs.28,27,224/-, on account of customer claim, ignoring the
ITA No.459/2015 Page 1 of 12
express provision of Section 10B (4) of the Act, whereby
profit of business of the undertaking are eligible for deduction.
(ii) Whether in the facts and circumstances of the case, ITAT
is correct in law in not allowing the exemption of
Rs.29,24,405/- on account of freight subsidy, ignoring the
express provision of section l0B(4) of the Act, whereby profit
of business of the undertaking are eligible for deduction.
(iii) Whether in the facts and circumstances of the case, ITAT
is correct in law in not allowing the exemption of Rs.43,287/-,
on account of interest on FDR, ignoring the express provision
of section 10B (4) of the Act, whereby profit of business of the
undertaking are eligible for deduction."
4. The Assessee is a private limited company engaged in the business of
manufacture and sale of home furnishings such as rugs, bath mats, blankets
etc. The Assessee set up a 100% Export Oriented Undertaking ('EOU')
which was an 'eligible unit' for the purposes of deductions under Section
10B of the Act. The Assessee commenced operations on 1st October 2002.
The Assessee filed its return of income for AY 2008-09 on 27th September
2008 declaring an income of Rs. 10,34,24,340. Inter alia, the Assessee
claimed deduction in respect of the income earned from the following
receipts:
(a) Deemed Export Drawback (Export Incentives) Rs. 1,22,25,214/-
(b) Customer Claims Rs. 28,27,224/-
(c) Freight Subsidy Rs. 29,24,405/-
(d) Interest on Fixed Deposit Receipts (FDRs) made for business purposes:
Rs.43,287/-.
ITA No.459/2015 Page 2 of 12
5. The return of the Assessee was picked up for scrutiny and notice under
Section 143(2) was issued. The Assessing Officer (`AO') by order dated 3rd
December 2010 excluded the above receipts from the computation of
eligible income under Section 10B (4) of the Act. The AO was of the view
that the above receipts did not fall within the expression `profit derived'
from the export of articles.
6. The appeal of the Assessee was dismissed by the Commissioner of
Income Tax (Appeals) [`CIT (A)'] on 11th January 2012. The Assessee
thereafter filed an appeal before the ITAT which came to be decided by the
impugned order.
7. The ITAT in the impugned order agreed with the contention of the
Assessee as regards the deemed export drawback forming part of the income
eligible for deduction under Section 10B of the Act. However, as regards
other three items, viz., customer claims, freight subsidy and interest on
FDRs made for business purposes, the ITAT concurred with the view of the
AO and the CIT (A). This is how the Assessee is in appeal before this Court.
8. This Court has heard the arguments of Mr. Ved Jain, learned counsel for
the Assessee and Mr. Ashok Manchanda, Senior standing counsel for the
Revenue.
9. The question as to what can constitute as profits and gains derived by a
100% EOU from the export of articles and computer software came for
consideration before the Karnataka High Court in CIT v. Motorola India
ITA No.459/2015 Page 3 of 12
Electronics Pvt. Ltd. (2014) 46 Taxmann.com 167 (Kar).The said appeal
before the Karnataka High Court was by the Revenue challenging an order
passed by the ITAT which held that the interest payable on FDRs was part
of the profits of the business of the undertaking and therefore includible in
the income eligible for deduction Sections 10A ad 10B of the Act. There the
Assessee had earned interest on the deposits lying in the EEFC account as
well as interest earned on inter-corporate loans given to sister concerns out
of the funds of the undertaking. There was a restriction on the Assessee in
that case from making pre-payment of its external commercial borrowings
(`ECB'). It could repay only to the extent of 10% of the outstanding loan in
a year. This made the Assessee temporarily park the balance funds as
deposits or with various sister concerns as inter corporate deposits until the
date of repayment. The Assessee contended that the interest derived from
the business of the industrial undertaking was eligible for exemption within
the meaning of Section 10B and applied the formula under Section 10B (4)
of the Act for determining the profits from exports. The Assessee's
contention that the expression "profits of the business of the undertaking" in
Section 10B (4) was wider than the expression "profits and gains derived
by" the Assessee from a 100% EOU occurring in Section 10 B (1) was
accepted by the ITAT. The ITAT noticed that unlike Section 80 HHC,
where there was an express exclusion of the interest earned from the `profits
of business of undertaking', there was no similar provision as far as Sections
10A and 10B were concerned.
10. In CIT v. Motorola India Electronics Pvt. Ltd. (supra) reference was
made to the decision of the Supreme Court in Pandian Chemicals Ltd. v.
ITA No.459/2015 Page 4 of 12
Commissioner of Income Tax (2003) 262 ITR 278 which dealt with Section
80HH and Liberty India v. Commissioner of Income Tax (2009) 317 ITR
218, which interpreted Section 801B of the Act. Reference was also made
to the decision of CIT v. Sterling Foods (1999) 237 ITR 579 (SC), which
interpreted Section 80HH and the decision of the Madras High Court in CIT
v. Menon Impex P Ltd. (2003) 259 ITR 403(Mad.) which interpreted
Section 10A of the Act. The Karnataka High Court in CIT v. Motorola
India Electronics Pvt. Ltd. (supra), after noticing the above decisions, held
that "it is clear that, what is exempted is not merely the profits and gains
from the export of articles but also the income from the business of the
undertaking". Specific to the question of interest earned by the EOU on the
FDRs placed by it and interest earned from the loans given to sister
concerns, it was held that although it did not partake the character of profit
and gains from the sale of an article "it is income which is derived from the
consideration realized by export of articles."
11. The decision of the Karnataka High Court in CIT v. Motorola India
Electronics Pvt. Ltd. (supra) was followed by this Court in its decision in
CIT v. Hritnik Exports Pvt. Ltd. (decision dated 13th November 2014 in
ITA Nos. 219 and 239 of 2014). This Court also referred to its earlier
decision dated 1st September 2014 in ITA No. 438 of 2014 (CIT v. XLNC
Fashions). While declining to frame a question of law in the Revenue's
appeal, this Court in CIT v. Hritnik Exports Pvt. Ltd. (supra) quoted with
approval the observations of the Special Bench of the ITAT in Maral
Overseas Ltd. v. ACIT (decision dated 20th March 2012) on the
interpretation of Section 10B (4) of the Act as under:
ITA No.459/2015 Page 5 of 12
"79. Thus, sub-section (4) of section 10B stipulated that
deduction under that section shall be computed by apportioning
the profits of the business of the undertaking in the ratio of
turnover to the total turnover. Thus, not-with-standing the fact
that sub-section (1) of section 10B 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 sub-section
(4) of section 10B 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. Sub-section (4) 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 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 10B to exclude the
same from the eligible profits. The mode of determining the
eligible deduction u/s 10B is similar to the provisions of section
80HHC inasmuch as both the sections mandates 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 "profits 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 of the Act 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 assessee, the same cannot be
excluded from the eligible profits for the purpose of computing
deduction u/s 10B 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. I.T.A.T.,
ITA No.459/2015 Page 6 of 12
Special Bench in the case of International Research Park
Laboratories v. ACIT, 212 ITR (AT) 1, 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; 284 ITR 584 had approved the principle laid down
in the Special Bench decision in International Research Park
Laboratories v. ACIT (supra). In the assessee's own case the
I.T.A.T. in the preceding years, after considering the decision in
the case of Liberty India held that provisions of section 10B are
different from the provisions of section 80IA wherein no
formula has been laid down for computing the eligible business
profit."
12. Recently, in a decision dated 6th October 2015 in ITA NO. 392 of 2015
(Principal Commissioner of Income Tax v. Universal Precision Screws ),
this Court had occasion to again consider whether interest earned on fixed
deposits kept by an Assessee which was eligible under Section 10B of the
Act, as a condition for utilization of letter of credit and bank guarantee
limits, would qualify for deduction. That question was decided in favour of
the Assessee and against the Revenue. The Court held as under:
"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:
ITA No.459/2015 Page 7 of 12
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
Taxmann.com 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 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 computation of the profits derived from export by
applying formula under Section 10B(4) of the Act"
13. Mr. Ashok Manchanda, learned Senior standing counsel for the Revenue,
urged that none of the earlier decisions of the High Courts have considered
the effect of Sections 80I, 801A and 801B of the Act which occur in Chapter
VIA of the Act. He referred in particular to Section 80A (4) of the Act,
which reads as under:
"4) Notwithstanding anything to the contrary contained in section
10A or section 10AA or section 10B or section 10BA or in any
ITA No.459/2015 Page 8 of 12
provisions of this Chapter under the heading "C--Deductions in
respect of certain incomes", where, in the case of an assessee,
any amount of profits and gains of an undertaking or unit or
enterprise or eligible business is claimed and allowed as a
deduction under any of those provisions for any assessment year,
deduction in respect of, and to the extent of, such profits and
gains shall not be allowed under any other provisions of this Act
for such assessment year and shall in no case exceed the profits
and gains of such undertaking or unit or enterprise or eligible
business, as the case may be."
14. Mr. Manchanda's attempt was to show that Section 80A (4), which inter
alia stated that any deduction allowable under Section 10B cannot in any
case "exceed the profits and gains of such undertaking or unit or enterprise
or eligible business, as the case may be" made it clear that a unit seeking
deduction under Section 10B would be eligible to do so only in so far as
such income was directly attributable to the business of export. Any income
that might be merely incidental to the business of the undertaking, not
directly related to the activity of export, would not be eligible for such
deduction. He also took the Court again through the decision of the Supreme
Court in Liberty India (supra) and submitted that the earlier decisions of this
Court in Hritnik Exports (supra) and Universal Precision Screws (supra)
might require to be reconsidered. When a question was posed to him as to
whether the Revenue had challenge the aforementioned decisions of this
Court, and of the ITAT in the present case to the extent it has allowed the
plea of the Assessee as regards `deemed export drawback', Mr. Manchanda
stated that the Revenue ought to have challenged the above decisions as well
as the impugned order of the ITAT in the present case and perhaps he would
advise it to do so hereafter. He has also handed over a written note of
ITA No.459/2015 Page 9 of 12
submissions, reiterating the above submissions.
15. In the considered view of the Court, the submissions made on behalf of
the Revenue proceed on the basic misconception regarding the true purport
of the provisions of Chapter VIA of the Act and on an incorrect
understanding of Section 80A (4) of the Act. The opening words of Section
80A (4) read "Notwithstanding anything to the contrary contained in section
10A or section 10AA or section 10B or section 10BA or in any provisions of
this Chapter.....". What is sought to be underscored, therefore, is that Section
80A, and the other provisions in Chapter VIA, are independent of Sections
10A and 10B of the Act. It appears that the object of Section 80A (4) was to
ensure that a unit which has availed of the benefit under Section 10B will not
be allowed to further claim relief under Section 80IA or 80IB read with
Section 80A (4). The intention does not appear to be to deny relief under
Section 10B (1) read with Section 10B (4) or to whittle down the ambit of
those provisions as is sought to be suggested by Mr. Manchanda. Also, he is
not right in contending that the decisions of the High Courts referred to
above have not noticed the decision of the Supreme Court in Liberty India.
The Karnataka High Court in CIT v. Motorola India Electronics Pvt. Ltd.
(supra) makes a reference to the said decision. That decision of the
Karnataka High Court has been cited with approval by this Court in Hritnik
Exports (supra) and Universal Precision Screws (supra). In Hritnik
Exports (supra) the Court quoted with approval the observations of the
Special Bench of the ITAT in Maral Overseas Ltd. (supra) that "Section
10A/10B of the Act is a complete code providing the mechanism for
computing the `profits of the business' eligible for deduction u/s 10B of the
ITA No.459/2015 Page 10 of 12
Act. Once an income forms part of the business of the income of the eligible
undertaking of the assessee, the same cannot be excluded from the eligible
profits for the purpose of computing deduction u/s 10B of the Act."
16. This then brings us to the questions framed for consideration in the
present case and the decision of the ITAT in not accepting the Assessee's
plea in regard to `customer claims' `freight subsidy' and `interest on fixed
deposit receipts' even while it accepted the Assessee's case as regards
`deemed export drawback'.
17. The contention of the Assessee as regards customer claims was that it
had received the claim of Rs. 28,27,224 from a customer for cancelling the
export order. Later on the cancelled order was completed and goods were
exported to another customer. The sum received as claim from the customer
was non-severable from the income of the business of the undertaking. The
Court fails to appreciate as to how the ITAT could have held that this
transaction did not arise from the business of the export of goods. Even as
regards freight subsidy, the Assessee's contention was that it had received
the subsidy in respect of the business carried on and the said subsidy was
part of the profit of the business of the undertaking. If the ITAT was
prepared to consider the deemed export draw back as eligible for deduction
then there was no justification for excluding the freight subsidy. Even as
regards the interest on FDR, the Court has been shown a note of the balance
sheet of the Assessee [which was placed before the AO] which clearly states
that "fixed deposit receipts (including accrued interest) valuing Rs.15,05,875
are under lien with Bank of India for facilitating the letter of credit and bank
ITA No.459/2015 Page 11 of 12
guarantee facilities." In terms of the ratio of the decisions of this Court both
in Hritnik Exports (supra) and Universal Precision Screws (supra), the
interest earned on such FDR ought to qualify for deduction under Section
10B of the Act.
18. Accordingly, the questions are answered in favour of the Assessee and
against the Revenue. The impugned order of the ITAT to the extent it
answered the said questions against the Assessee is hereby set aside.
19. The appeal is allowed in the above terms, but with no order as to costs.
S. MURALIDHAR, J
VIBHU BAKHRU, J
NOVEMBER 19, 2015
mg
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