TMI Blog2015 (11) TMI 1190X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 (7) TMI 4 - SUPREME Court]; CIT vs. Pandian Chemicals Ltd. [1997 (4) TMI 38 - MADRAS High Court] and Pandian Chemicals Ltd. vs. CIT [2003 (4) TMI 3 - SUPREME Court]. 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 - Decided against assessee. Benefit of exemption u/s. 10B on account of Customer Claim - Held that:- In this case, the assessee has received a sum 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 judici ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anting 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 ₹ 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 ₹ 71, 05,171/- is contrary to law and facts and deserves to be detected. 3. 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 making addition of ₹ 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 ₹ 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o direct nexus with export. 5. 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 u/s 10B fully by confirming the action of Ld. AO of making addition of ₹ 29,24,404/- on account of Freight Subsidy by observing that there is no direct nexus with export. 6. 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 making addition of ₹ 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 ₹ 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the direct nexus with the export as desired by use of term derived from in the section. Therefore, interest income of ₹ 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. 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 time was allowed to the parties. Ld. DR has also filed the Written Submissions, controverted the arguments advanced by the Ld. Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2007- 08, 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 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 Libe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 provisi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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: 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 secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 expla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as been affirmed by the Jurisdictional Delhi High Court in ITA Nos. 219 239/2014. 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 Handicr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. Contention/Argument of the Departmental Representative Rejoinder/Comments 1. 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 the head profits and gains from business or profession or otherwise. As elaborately explained supra, subexemption ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 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 subsection (4) of section 10B cannot override sub-section (1) of that section. In this proposition, the Ld. DR has contended that the provisions of subsection (4) of section 10B should be read in the context of sub-section (1) and thus the requirement of establishing a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ifference is that 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. Thus, in view of the above, contention of the Ld. DR has no to stand. 6. Proposition VII : Exemption claimed in respect of deemed duty drawback and not duty drawback . In this proposition, the Ld. DR has held that the appellant h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rated. 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 decision of the Special 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). 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 IT ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns 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 insofar as it defines the nature of profits which would be exempt and would not form part of total income. Any other so ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed 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 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... come 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 Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erence 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y. 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 deg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lation 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 propos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... udgment of the Apex Court in the case of Sterling Foods (supra), found that the interest received from a similar 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 Cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ession 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) 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ' 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 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 m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 (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 Exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. (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 in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 78. Section 1OB of sub-section (l) allows deduction in respect of profits and gains as are derived by a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 87/- 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 ₹ 21,239/- was earned on Fixed Deposit made for the purpose of business and not as investment of surplus funds, accordingly, the amount of ₹ 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. 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. [1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 ₹ 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 ₹ 29,24,405/- on account of Freight Subsidy by observing that there is no direct nexus with export 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:- 8.1 I have carefully considered the assessment order and the submission made by the Id. AR. As already d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sh, 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. 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 b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 . When there is no income, it cannot form part of anything and certainly it does not, in any case form p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lity 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, 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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