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Income Tax Appellate Tribunal, DELHI BENCH ‘D’ : NEW DELHI
Before: SHRI N.K. BILLAIYA & SHRI KULDIP SINGH
PER KULDIP SINGH, JUDICIAL MEMBER :
The appellant, M/s. Dhir Global Industries Pvt. Limited (hereinafter referred to as ‘the assessee’) by filing the present appeal, sought to set aside the impugned order dated 03.09.2013 passed by Ld. CIT (Appeals)-XVII, New Delhi qua the assessment year 2008-09 on the grounds inter alia that :-
“1 (i). That on facts and circumstances of the case Ld. CIT(A) has erred in not allowing benefit of statutory deduction u/s 10B on Interest income of Rs.16,36,314/-. (ii). That the disallowance is in total disregard to the provisions of Sec. 10B as the interest income is earned on fixed deposits taken by the company for opening letter of credit with banks and as such it is incidental to the export business of the appellant. 2. That orders of the lower authorities are not justified on facts and same are bad in law.”
Briefly stated the facts necessary for adjudication of the controversy at hand are : The assessee company, a 100% Export Oriented Unit (EOU), is into the business of manufacturing of sale/ export of all types of readymade garments, claiming exemption under section 10B of the Income-tax Act, 1961 (for short ‘the Act’) for export profits. AO noticed that the assessee has earned interest income from bank FDR to the tune of Rs.16,36,314/- . AO while computing the business income of the assessee excluded interest income earned by the assessee for the purpose of exemption u/s 10B of the Act and treated the same as income from other sources and made addition thereof to the total income of the assessee.
Assessee carried the matter by way of appeal before the ld. CIT (A) who has partly allowed the appeal. Feeling aggrieved, the assessee has come up before the Tribunal by way of filing the present appeal.
We have heard the ld. Authorized Representatives of the parties to the appeal, gone through the documents relied upon and orders passed by the revenue authorities below in the light of the facts and circumstances of the case.
Undisputedly, the assessee is a 100% EOU, into business of manufacturing and sale of export of readymade garments entitled to exemption u/s 10B for export profit. It is also not in dispute that the interest income has been earned by the assessee company on margin money or fixed deposit taken by the company for opening Letter of Credit with the bank. It is also not in dispute that the AO has not brought on record any material to prove that the funds availed of by the assessee company has not been invested by the business parties.
In the backdrop of the aforesaid undisputed facts, arguments addressed by ld. Authorized Representatives to the appeals, orders passed by the lower Revenue authorities and case law relied upon, the short question arises for determination in this case is :-
“as to whether interest income earned by the assessee on margin money or fixed deposit taken for opening Letter of Credit with the bank forms part of business income for the purposes of section 10B of the Act?”
The ld. AR for the assessee to support his arguments relied upon the decision rendered by Hon’ble Karnataka High Court in CIT vs. Motorola India Electronics (P.) Ltd – (2014) 46 taxmann.com 167 (Karnataka), Hon’ble Delhi High Court in Pr.CIT vs. Universal Precision Screws – ITA 392 /2015 order dated 06.10.2015 and Riviera Home Furnishing vs. Addl. CIT – ITA 459/2015 order dated 19.11.2015. However, on the other hand, the ld. DR for the Revenue relied upon the decision rendered by Hon’ble Delhi High Court in CIT vs. Mereena Creations – (2011) 330 ITR 199 (Delhi) to support the assessment order as well as the order passed by ld. CIT (A).
When we examine the undisputed fact that the assessee is a 100% EOU eligible for deduction u/s 10B of the Act, the case law relied upon by the ld. AR for the assessee is squarely applicable.
Hon’ble Delhi High Court in Pr.CIT vs. Universal Precision Screws (supra) decided the identical issue in favour of the assessee by holding that interest income earned by the assessee on FDRs received on margin kept in the bank for utilization of Letter of Credit is having direct nexus to the business activities of the assessee and is to form the part of the “profit of business” of the undertaking. For ready perusal, the operative part of the judgment in case of Pr.CIT vs. Universal Precision Screws (supra) is extracted 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 & 239 of 2014), Section 10B(4) mandates the application of the formula for determining the profits derived from exports for the purposes of Section 10B(1). In other words, the formula would read thus: Profits derived = profits of the business x export turnover From export of the undertaking total turnover 9A. In terms of the above formula, the question that would arise is whether the interest on the FDRs could form part of the ‘profits of the business of the undertaking’. The attention of the Court has been drawn to the decision of the Karnataka High Court in CIT v. Motorola India Electronics Pvt. Ltd. (2014) 46 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 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.”
Hon’ble Karnataka High Court in CIT vs. Motorola India Electronics (P.) Ltd (supra) also dealt with the identical issue and decided in favour of the assessee by returning following findings :-
“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 received and the consideration received by sale of import entitlement is to be construed as income of the business of the undertaking. There is a direct nexus between this income and the income of the business of the undertaking. Though it does not par take the character of a profit and gains from the sale of an article, it is the income which is derived from the consideration realized by export of articles. In view of the definition of Income from Profits and Gains' incorporated in Sub-section (4), 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 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 against the revenue.”
In the given circumstances, the decision relied upon by the ld. DR for the Revenue in CIT vs. Mereena Creations (supra) is not applicable to the facts and circumstances of the case because the same pertains to deduction u/s 80HHC whereas the case of the assessee is with regard to exemption u/s 10B of the Act.
Moreover, the facts of the instant case go to prove that the entire exercise as to earning interest income on margin money or fixed deposit by the assessee company for opening Letter of Credit with the bank is having direct nexus with its business activities and the funds have been utilized for the requirement of business and this fact has not been disputed by the AO.
So, following the decision rendered by Hon’ble Delhi High Court in Pr.CIT vs. Universal Precision Screws and CIT vs. Motorola India Electronics (P.) Ltd (supra), we are of the considered view that the ld. CIT (A) has erred in denying the benefit of deduction u/s 10B on the interest income of Rs.16,36,314/- to the assessee. So, the interest income earned by the assessee is ordered to be treated as eligible for deduction u/s 10B of the Act. Consequently, appeal filed by the assessee is allowed. Order pronounced in open court on this 19th day of July, 2018.