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The Income Tax Officer, Company Ward 5 (1) , 121, Chennai Versus M/s. Reynolds Pens India Pvt. Ltd.

2016 (9) TMI 398 - ITAT CHENNAI

Claim u/s. 10B - Held that:- Reversion of excess provisions and Exchange gain - Admittedly the foreign exchange gain arisen out of the import of rawmaterials or export of finished goods and not interest from external commercial borrowings. The issue regarding taxability of gain or deduction of loss arising on account of fluctuation in rate of foreign exchange has been subject matter of the decision in the case of CIT v. Woodward Governor India P Ltd. [2007 (4) TMI 118 - DELHI HIGH COURT ] and al .....

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sing Officer to amend the order. - With regard to scrap sale, export entitlements, discount received, fixed charges recovery, the ld. CIT(A) has directed the Assessing Officer to amend the order by including all the above receipts while computing deduction under section 10B of the Act. - Reversion of excess provisions if it is allowed as deduction in earlier assessment year while computing the business income of the assessee and consequently reversing the same in the assessment year unde .....

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ri, Accountant Member and Shri Duvvuru RL Reddy, Judicial Member For The Appellant : Shri A.V. Sreekanth, JCIT For The Respondent : Shri S. Balakrishnan, C.A. ORDER PER DUVVURU RL REDDY, JUDICIAL MEMBER: This appeal filed by the Revenue is directed against the order of the ld. Commissioner of Income Tax (Appeals) 3, Chennai dated 15.09.2015 relevant to the assessment year 2012-13. The Revenue has raised the following grounds: 1. The order of the Commissioner of Income Tax (Appeals) is contrary t .....

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s has direct nexus with the business of the assessee, when the Apex Court in the case of Liberty India has held that these are not profits derived from eligible business but are only ancillary profits. 5. For these and other grounds that may be adduced at the time of hearing, it is prayed that the order of the Commissioner of Income Tax(Appeals) may please be set aside and that of the Assessing Officer restored. 2. The brief facts of the case are the assessee is engaged in the business of manufa .....

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nation of Arm s Length Price in respect of the international transactions was made vide his letter dated 30.04.2010. However, no adjustment has been made by the TPO vide his order dated 26.11.2012. After considering the submissions of the assessee, the Assessing Officer has completed the assessment under section 143(3) on 8.3.2013 determining the total income of the assessee at ₹.5,54,19,240/- by making various additions. 3. The assessee carried the matter in appeal before the ld. CIT(A). .....

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tion 10B of the Act with regard to the following incomes aggregating to ₹.3,32,46,741/- from the profits of the business while computing the deduction: (i) Reversion of excess provisions of ₹.99,32,474/- (ii) Sale of scrap of ₹.33,48,471 (iii) Export entitlements of ₹.8,88,380/- (iv) Discount received of ₹.9,41,087/- (v) Fixed charges recovery of ₹.9,15,000/- (vi) Exchange gain of ₹.1,72,21,329/-. The Assessing Officer held that the above items of income .....

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nadjusted exchange gain pertaining to exports which form manufacturing activity of the EOU and hence ought to be included in the profits of the undertaking while computing deduction under section 10B of the Act. Reliance was placed on the decision of DCIT v.Wipro Ltd 34 DTR 493 wherein it was held that exchange fluctuation was to be considered as a part of the undertaking eligible for deduction under section 10A of the Act. The Assessing Officer rejected the claim of the assessee based on the de .....

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on of the Hon'ble Delhi High Court in the case of CIT v. Woodward Governor India P Ltd. 294 ITR 451 and also the Hon'ble Supreme Court in 312 ITR 254. In terms of the above said judgments the effect of exchange difference in the case of revenue item has to be taken into account in the P&L a/c. As the foreign exchange fluctuation in the case of the assessee relates to import of raw material and export of finished goods the same cannot be excluded and have to be taken in to account whi .....

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en that the scrap is directly related to the production process. Therefore, the profits from sale thereof cannot be excluded from the profits of business. 5.4 With regard to (iii) export entitlements, the assessee company recognizes the Duty Entitlement Pass Book (DEPB) credits and the same was shown as Export Entitlements under other income in the profit and loss account. With regard to (iv) discount receipt, the assessee has received discounts from the supplier of materials purchased and the s .....

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d from export entitlement should be included as income earned out of the export for the purpose of deduction under section 10B of the Act. 5.5 Therefore, with regard to scrap sale, export entitlements, discount received, fixed charges recovery, the ld. CIT(A) has directed the Assessing Officer to amend the order by including all the above receipts while computing deduction under section 10B of the Act. 5.6 The provisions as contained under section 10B(1) of the Act provides for deduction of such .....

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d out by the Hon'ble Supreme Court in the case of Liberty India CIT 317 ITR 218. As reiterated here the word derived from is narrower as compared to that of words "attributable". By using the expression "derived from" in section 10B(1) of the Act the Legislature intended to cover sources not beyond the first degree. Therefore, what is to be seen is as to whether the gain bears a direct nexus and was on account of the assessee s export activities. 5.7 In the case of MPS Lt .....

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n exchange gain is inextricably connected with the sales and therefore the same should be considered as part of export turnover. He places reliance on the decision of the Hon ble jurisdictional High Court in the case of CIT vs. Pentasoft Technologies Ltd. (347 ITR 578) and co-ordinate Bench decision in the case of Changepond Technologies (P) Ltd. Vs. ACIT (22 SOT 220). 12. In the alternative, the counsel submits that such foreign exchange gain which was excluded from export turnover has to be ex .....

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authorities and the decisions relied on. Insofar as grounds 3.5.1 to 3.5.5 are concerned, i.e. in respect of foreign exchange gain, whether it should be taken as part of export turnover or not, we find that the Hon ble jurisdictional High Court in the case of CIT Vs. Pentasoft Technologies Ltd. (supra) has held that gains due to fluctuation in foreign exchange is directly related to export sales of the assesseeand therefore, it cannot be treated as other than part of profit from export. Similar .....

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llowing the same analogy, foreign exchange loss cannot be considered as part of export turnover for the purpose of section 10B of the Act 15. With regard to the alternative submission of the counsel for the assessee that foreign exchange loss having excluded from export turnover it has to be excluded from the total turnover also, applying the Special Bench decision of this Tribunal in the case of Sak Soft Ltd., (supra) we are of the view that the ratio of the Special Bench decision has no applic .....

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: 8. In the instant case, the assessee is a 100% EOU, which has exported software and earned the income. A portion of that income is included in EEFC account. Yet another portion of the amount is invested within the country by way of fixed deposits, another portion of the amount is invested by way of loan to the sister concern which is deriving interest or the consideration received from sale of the import entitlement, which is permissible in law. Now the question is whether the interest receive .....

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, the assessee is entitled to the benefit of exemption of the said amount as contemplated under Section 10B of the Act. Therefore, the Tribunal was justified in extending the benefit to the aforesaid amounts also. We do not find any merit in these appeals. Therefore, the first substantial question of law raised in IT A No.428/2007 is answered in favour of the revenue and against the assessee and the first substantial question of law in ITA No.447/2007 is answered in favour of the assessee and ag .....

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upra), we are of the opinion that the assessee is entitled to the benefit of exemption of the said amount as contemplated under section 10B of the Act. Further, in the case of Renaissance Jewellery (P.) Ltd. v. ITO 101 ITD 380, the Mumbai Benches of the Tribunal has also held that the profit on account of foreign exchange gain is directly referable to the articles and things exported by the assessee and such profits are, therefore, in the same nature as the sale proceeds and there is no reason w .....

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