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2015 (6) TMI 572 - ITAT HYDERABAD

2015 (6) TMI 572 - ITAT HYDERABAD - [2015] 41 ITR (Trib) 712 (ITAT [Hyd]) - Non eligibility for exemption u/s 10B - foreign exchange gain derived - Held that:- The issue is squarely covered by the decision of CIT vs. Gem Plus Jewellery India Ltd (2010 (6) TMI 65 - BOMBAY HIGH COURT ) wherein the decision of CIT vs. Shah Originals (2010 (4) TMI 216 - BOMBAY HIGH COURT) has been clearly distinguished. However, the ld Counsel for the assessee submitted that foreign exchange gain before realization .....

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ded in favour of assessee for statistical purposes.

Exclusion of an amount adjusted by the foreign customer from the eligible turnover for the purpose of computation of exemption u/s 10B - Held that:- We find that ₹ 2,61,844/- has been equal to ₹ 4,132 Euros was reduced from the amount due to the assessee and the balance of the amount was remitted into India. We are of the opinion that ₹ 2,61,844 cannot considered as receipt into India as the amount was adjusted Foll .....

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f interest and decide this issue after giving an opportunity to the assessee.

Determining the deduction claimed u/s 80IC - whether the amount derived by sale of scrap; interest income and other income were not derived by the manufacturing unit and that the same are not eligible for deduction u/s 80IC? - Held that:- Sale of scrap has the effect of reducing the cost of production. Further, sale of scrap is eligible for deduction u/s 80IC. There cannot be any two opinions that manufactur .....

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ng heat treatment for which it had earned labour charges and job-work charges, it can thus be said that the appellant had done a process on the raw material which was nothing but a part and parcel of the manufacturing process of the industrial undertaking - Decided in favour of assessee.

Inclusion of profit on sale of assets as part of its export turnover - Held that:- The cost of the moulds is not separately billed and the payments have not been separately made. Hence, we agree with .....

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s also pertain to mould development only. Hence, we confirm the order of the CIT (A) that there was no justification for the adjustment to the deduction u/s 10B on account of amortization and development charges. - Decided against revenue.

Deduction u/s 10B pertains to freight and insurance - Held that:- CIT (A) found the claim to be factually correct on an examination of the ledger account. Since the receipt towards freight and insurance do not form part of the export turnover in the .....

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e ORDER Per Smt. Asha Vijayaraghavan, J. M. These are cross appeals by both the assessee and the Revenue against the separate orders of the CIT(A)-IV, Hyderabad, relating to A.Ys 2009-10 & 2010-11. ITA No.1156/Hyd/2013 (A.Y 2009-10) Assessee s Appeal: 2. Briefly stated, the assessee is a company in which public are not substantially interested. The assessee is carrying on the activity at three different units - at (1) B- 4 & B-5,;Phase-I, IDA Jeedimetla, Hyderabad; (2) D-17 & D-18, P .....

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ar amounted to ₹ 26,34,54,758/-. The income before tax of all the units amounted to ₹ 2,81,27,850/-. After adjustments, the gross total income before depreciation and tax amounted to ₹ 4,89,12,109. The assessee claimed deduction u/s 80IC of ₹ 1,63,08,828 and exemption u/s 10B of ₹ 1,05,60,996. The net profit after claiming deduction of depreciation amounted to ₹ 39,15,526. This was admitted in the return of income filed by the assessee. 3. The Assessing Office .....

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and deduction u/s 80IC to ₹ 1,53,28.227. It is against the said determination of income, the assessee filed the appeal before the CIT (A). 4. Before the CIT (A) it was submitted as follows: Exemption u/s l0B of the I.T.Act: The Assessing Officer accepted that the assessee is eligible for exemption u/s l0B of the I.T. Act. However, the Assessing officer is of the view that the following items of receipts are not eligible for exemption u/s l0B of the LT Act. The Assessing Officer accordingly .....

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included the amortization income of ₹ 23,04,841, profit on sale of assets of ₹ 12,1l,433 and development charges of ₹ 7,08,756. He arrived at a total turnover at ₹ 10,36,91,891. The proportionate amount eligible for exemption u/s 10B was arrived at ₹ 19,29,860 and the same was allowed by the Assessing officer. 6. With respect to non-inclusion of ₹ 44,83,952/- being the gain on fluctuation in foreign from the eligible profits and the export turnover: (i) The A .....

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reign exchange represents the gain relating to its manufacturing activity. The manufactured goods are exported and the sale consideration is received in foreign exchange. The provisions of Sec. 10B clearly stipulate that the sale consideration should be received m convertible foreign exchange into India. There is no stipulation as to when such foreign currency is to be withdrawn from the bank. The sale price is credited based on the rate of exchange at the time of raising the invoice. The amount .....

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the export turnover. In this regard the assessee relied on the following decisions. • The decision of the ITAT, Chennai B-Bench in the case of ACIT vs. P.S.Apparels reported in 101 TTJ 29 • The decision of Hon ble Karnataka High Court in the case of Motor Industries Co.Ltd., vs. CIT reported in 291 ITR 269. • The decision of ITAT, Mumbai-E Bench in the case of Shah Originals vs. ACIT reported in 112 TTJ 754. • The decision of ITAT, Chennai - A-Bench in the case of Changepond .....

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d as the income eligible for exemption u/s 10B and also as forming part of the export turnover. 8. The CIT (A) held as follows: 6.3 I have considered the facts on record and the submissions of the AR. In the case of Gem Plus Jewellery India Ltd., the court had held that the gain from foreign exchange fluctuations was derived from the export of goods. However, the court also referred to and distinguished the facts of this case from those of CIT v. Shah Originals (2010) 327 ITR 19 (Bom.) with the .....

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orters to maintain a certain proportion of the export proceeds in an EEFC account. The proceeds of the account are to be utilized for bonafide payments by the account holder subject to the limits and the conditions prescribed. An assessee who is an exporter is not under an obligation of law to maintain the export proceeds in the EEFC account, but, this is a facility which is made available by the Reserve Bank. The transaction of export is complete in all respects upon the repatriation of the pro .....

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a matter of his option. The exchange fluctuation in the EEFC account arises after the completion of the export activity and does not bear a proximate and direct nexus with the export transaction so as to fall within the expression derived by the assessee in sub-section (1) of section 80HHC . In the present case, the assessee has realized a larger amount in terms of Indian rupees as a result of a foreign exchange fluctuation that took place in the course of the export transaction . 6.4 The gains .....

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the appellant is not eligible for exemption u/s 10B of the I.T. Act. The ld CIT (A) ought to have seen that the said gain is a part of the turnover and is eligible for exemption u/s 10B of the Act. 3. The ld CIT (A) ought to have seen the fact that the amount received in foreign currency is deposited in the bank account and when the said amount was withdrawn, there was a gain and such gain is relatable to the exports and is eligible for exemption u/s 10B of the I.T. Act . 10. We heard both parti .....

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₹ 44,83,952 which we find from the account copy filed in the paper book. The foreign exchange gains/loss post receipt of sale is not income for the unit to be allowed deduction u/s 10B. In these circumstances, we set aside the issue to be examined by the AO and give an opportunity to the assessee to substantiate its claim. Hence, ground Nos.2 & 3 raised by the assessee are allowed for statistical purposes. 11. Ground No.4 raised by the assessee read as under: 4. The ld CIT (A) erred in .....

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No.E44/C39) was not received into India within the specified time, as given in the provisions of section 10B(3) of the Income Tax Act. Therefore, as per the stated provisions, since this amount is not received into India, the same is to be reduced from the export turnover . 13. It was submitted before the CIT (A) that the amount of ₹ 2,61,844/-equal to 4132 Euros was adjusted for purchase of Rotation drive unit of Duck cap from Lubecker who is the customer of the assessee. The said amount .....

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ntioned items. 15. The CIT (A) stated that issue relating to deduction u/s 10B pertains to a sum of ₹ 2,61,844 excluded from the export turnover by the AO since the amount was not received in India within the specified time. The CIT (A) observed that the AR has submitted that this sum was adjusted for purchase of rotation drive unit of duck cap from Lubeckert who is the customer of the assessee and the sale proceeds were remitted to the assessee after adjusting this amount. 16. The CIT (A) .....

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309 ITR 1(Kar.), though a liberal interpretation has to be given to a provision, the interpretation has to be as per the wording of the section and if the wording is clear and unambiguous, benefits which are not available under the section cannot be conferred by expanding or misinterpreting the words in the section. The CIT (A) stated that requirement of bringing the foreign exchange into India is basic and crucial to the provisions of section 10B and therefore, the assessee s claim in this rega .....

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.), wherein it has been held as follows: (iii) That the amount of commission or brokerage paid outside India was not received or brought into the country of the exporter. The amount spent on account of brokerage or commission was deducted from the price of the goods and the balance amount was received in the country in foreign exchange. Thus, the amount of commission or brokerage would be excludible from the export turnover . Following the decision in the case of CIT vs. McLeod Russel (India) Lt .....

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sessee humbly submitted that the Assessing Officer ought to have considered only the net amount of such interest while deducting the interest and not the gross interest received. 20. In view of the above, the assessee preferred appeal before the Commissioner of Income-Tax (Appeals) to allow the appeal as prayed for. 21. We heard both parties. We are of the opinion that once the income is assessed as business income, the corresponding expenditure is to be reduced and the balance to be excluded fo .....

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. 3. The ld CIT (A) erred in holding that the amount derived by sale of scrap; interest income and other income were not derived by the manufacturing unit and that the same are not eligible for deduction u/s 80IC of the Act . 2. Before the CIT (A) the AR submitted that the customer M/s Hindustan Unilever Ltd supplied the raw material and the required chemicals in drums and corrugated bags etc., to the assessee, that after use of the raw materials, these packing material were sold and the aggrega .....

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e the sale proceeds were shown to be realised partly in cash and partly through an adjustment from the scrap sale receipts. The CIT (A) held that since the sale proceeds were not shown to be partly in cash and partly through an adjustment from scrap sale receipts and in this case since the assessee has reduced the sale consideration itself in view of its other income from scrap sales , such receipts cannot be taken to be derived from the business of manufacture of shampoo. Hence, the CIT (A) hel .....

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ount of ₹ 20,43,698 was derived on account of sale of scrap. 5. It was further submitted that the customer Hindustan Uniliver Ltd supplied raw material and the required chemicals in drums and corrugated bags. After use of the material so supplied, the same were to be sold. Such sale price is credited to the scrap sales account and the aggregate of such amount is ₹ 20,43,698. This amount reduced the cost of production. When scrap sale is appropriated by the assessee, the party supplyi .....

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d in the decision in the case of CIT vs. Sterling Foods (SC) (237 ITR 579) which is not applicable to the facts of the assessee s case. In the said case, the Apex Court was considering the question whether the profit/gain derived from the sale of import entitlement would be eligible for exemption or not. 8. It was further argued that AO relied on the decision in the case of Liberty India vs. CIT (317 ITR 218). This judgment also is not applicable to the facts of the assessee s case as the said j .....

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e was a direct nexus with the manufacturing activity of the assessee i.e. manufacture of shampoo. 10. We heard both the parties. We find that the ld Counsel for the assessee had submitted a detailed note on the issue before us. It has been stated that the unit in Baddi (H.P) is engaged in the manufacture of shampoo for HUL (Hindustan Uniliver Ltd) on job work basis. During the F.Y 2009-10, scrap sale activity was entrusted to the assessee by their customer HUL by simultaneously corresponding red .....

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brought to our notice that during F.Y 2013- 14, HUL reverted its earlier decision and again took the scrap sale activity back to their account and simultaneously enhanced the rate of the job work. They had also enclosed the purchasing document of HUL for all products which indicates the increase in job work rates w.e.f. 1.7.2013 i.e. The date on which the scrap sale activity was withdrawn. The ld Counsel had also given a statement for FY 2009-10 showing the decrease in job work w.e.f. 12th Octob .....

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llows: The assessee's industrial undertaking was set up for the purpose of manufacture of steel, forging, transmission gears and parts, and accessories of motor vehicles. During the relevant assessment year, it claimed deduction under section 80-IB on its gross receipts which, apart from goods sales, also included scrap sales, labour charges and job work charges. The Assessing Officer held that the deduction under section 80-IB could not be allowed on sale of scrap, job work and labour charg .....

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duction on job work and labour charges, the Commissioner (Appeals) disallowed the appeal of the assessee and held that the job charges and labour charges not derived from the exports, were to be categorized as independent income and had to be deducted from gross profits to calculate profits derived from the exports. On second appeal, the Tribunal allowed deduction under section 80-IB on job work charges and labour charges also holding that job works/labour charges income received by the assessee .....

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rpose of manufacture of steel, forging, transmission gears and part, and accessories of motor vehicles and the scrap of those items was stated to be a bye-product of manufacturing process. The assessee explained in detail the process involved in forging and in that regard drew attention to the finding of the Tribunal based on the records that the assessee was involved in manufacturing of forging which involved purchase of steel, cutting the same, making of forging parts, giving heat treatment an .....

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ch processes doing for itself, there was no reason as to why it would not be entitled to so merely because the raw material component was being supplied by other customers for whom the assessee was doing the job. In fact, deduction under section 80-IB is given on the profits derived from the manufacturing process, being undertaken by the assessee which qualifies for deduction. [Para 9] The heat treatment is one of the processes through which the forgings are given the desired temperature and the .....

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bit of section 80-IB. It was immaterial that the assessee was doing the job of forging also for customers and was charging them on job-work basis or on the basis of labour charges. It would still be qualified as carrying eligible business under section 80-IB. [Para 12] Keeping in view the activities of the assessee in giving heat treatment for which it had earned labour charges and job-work charges, it could, thus, be said that the assessee had done a process on the raw material which was nothin .....

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. There cannot be any two opinions that manufacturing activity of the type of material being undertaken by the assessee would also generate scrap in the process of manufacturing. The receipts of sale of scrap being part and parcel of the activity and being proximate thereto would also be within the ambit of gains derived from industrial undertaking for the purpose of computing deduction under section 80-IB. [Para 13] 15. Since there is parity in the provisions of section 80IB and 80IC, the above .....

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e assessee had been granted permission by the Development Commissioner, Visakhapatnam SEZ to manufacture specified plastic articles and there was no license for production of moulds. Indeed, assessee had admittedly merely purchased these moulds and not manufactured them so that the sale of moulds was just a trading activity and not a manufacturing activity. AO therefore, held that the assessee was not eligible for exemption u/s 10B on the profit from its sale. 2. It was submitted by the ld AR of .....

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eration purchased moulds of the value of ₹ 46,71,344/-. Such amount spent is not separately received but forms part of the sale price. The cost of the moulds is not separately billed to the foreign buyers and is shown as a part of the sale consideration of the goods and the invoice clearly indicates that no such amount is separately billed. Such amount was shown in the books separately by bifurcating the invoice into two different items. The income for the purpose of Sec. 10B includes all .....

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tion u/s 10B of the I.T. Act. 3. The CIT (A) held as under: 7.3 It is seen from the copies of the invoices that the appellant is correct in its claim that the cost of moulds is not separately billed nor is the payment for it separately made. I therefore, agree with the appellant that the cost of the moulds has become a part of the expenditure of the business and the recovery of its cost from the customers and the resultant profit therefrom is part of the turnover of the export business. The appe .....

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nd development charges relating to manufacture of moulds are part of export turnover and hence eligible for deduction . 5. We find no infirmity in the order of the CIT (A). From the copies of the invoices we find that the cost of the moulds is not separately billed and the payments have not been separately made. Hence, we agree with the CIT (A) s view that the cost of moulds have become part of expenditure of the business and the entire amount of invoice price i.e sale consideration received rep .....

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he sale price was inclusive of amortization which represented the cost of mould apportioned on number of pieces likely to be produced from a particular mould and that similarly the development charges pertained to the mould development. The assessee further submitted that the sale price as reflected in the invoices included amortization and development charges but these amounts were separately recorded in the books for internal presentation and control. 7. AO did not accept this explanation and .....

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not form part of the turnover of the business activity, it should not have been added to the total turnover for the purpose of provisions of Sec. 10B of the I.T Act. Amortization income (mould) ₹ 23,04,841 Development charges (mould) ₹ 7,08,756 Profit on sale of mould ₹ 12,11,433 10. It was pointed out that the above three items are similar to profit on sale of assets and they also represent the cost of moulds, the cost of development of moulds included in the sale consideratio .....

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carrying on this activity for sake of deriving any profit on the sale of moulds or development expenses, but such activity is taken up to improve the marketing of the plastic products manufactured by the assessee company. 13. The CIT (A) held that from the invoices that the amounts are billed without reference to amortization and development charges whereas in the books of account, the invoice value is recorded after splitting into sales, amortization and development charges. The CIT (A) further .....

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y to be produced from a particular mould. Development charges also pertain to mould development only. Hence, we confirm the order of the CIT (A) and dismiss ground No.3 raised by the Revenue. 16. The 4th ground raised by the Revenue read as under: Ld CIT (A) erred in law by holding that the freight and insurance charges should not be deducted from export turnover while calculating the deduction u/s 10B . 17. This issue relating to deduction u/s 10B pertains to freight and insurance. The AO had r .....

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turnover as credited to the P&L a/c. 18. The ld AR also filed copies of its freight account to establish its claim before the CIT (A). The ld CIT (A) found the claim to be factually correct on an examination of the ledger account. Since the receipt towards freight and insurance do not form part of the export turnover in the first place, their deduction from the turnover is not justified. Hence, the CIT allowed this ground. 19. We find no infirmity in the order of the CIT (A). On an examinati .....

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