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Income Tax Appellate Tribunal, MUMBAI BENCH “G”, MUMBAI
Before: SHRI C.N. PRASAD, HONBLE & SHRI N.K. PRADHAN, HONBLE
O R D E R PER C.N. PRASAD 1. This appeal if filed by the Revenue against the order of Learned Commissioner of Income Tax (Appeals)- 13 Mumbai dated 08.01.2016 for the Assessment Year 2011-12 and the only grievance of the Revenue in its appeal is whether the Ld.CIT(A) was right in holding that sale of scrap, Labour charges recovered and sundry provisions written back should be treated as income derived for the purpose of section 10B of the Act.
(A.Y: 2011-12) M/s. Gala Precision Technology Pvt. Ltd 2. Briefly stated the facts are that, assessee company is engaged in manufacturing of engineering goods, filed return of income on 30.11.2011 declaring income of ₹.1,71,74,260/-. The assessment was completed u/s.143(3) on 28.02.214 determining the income at ₹.2,14,50,300/-. While completing the assessment the Assessing Officer excluded the sale of scrap of ₹.28,00,918/-, Labour charges of ₹.2,37,325/- recovered from customers and sundry provision written back of ₹.12,09,699/- from the profits of the undertaking of the assessee while computing the deduction u/s. 10B of the Act holding that these incomes are not derived from the export of articles by the assessee. On appeal the Ld.CIT(A) allowed the claim of the assessee.
Ld. DR vehemently contended that the scrap sales, Labour charges recovered from customers and sundry provisions written back cannot be considered as income for the purpose of computing deduction u/s. 10B of the Act. Ld. DR vehemently supported the orders of the Assessing Officer.
On the other hand, the Ld. Counsel for the assessee supported the orders of the Ld.CIT(A) and further relied on the decisions of the Hon'ble Karnataka High Court in the cases of GE BE (P.) Ltd., v. ACIT [371 ITR 32 (Kar.)] and CIT v. Motorola India Electronics (P.) Ltd., [265 CTR 94 (Kar.)] and the decision of the Ahmedabad Bench of the ITAT in ITA.No.
(A.Y: 2011-12) M/s. Gala Precision Technology Pvt. Ltd 2665 & 2720/AHD/2011 dated 01.01.2016 and submitted that in these decisions it has been held that scrap sales, interest income have been derived from business for the purpose of computing deduction allowable u/s. 10B of the Act. Ld. Counsel for the assessee further referring to sub- section (4) of section 10B submitted that the wording in the sub-section (4) refers to profits of the business of the undertaking and therefore the assessee need not derive income from the export of the articles but it should be profits of the business of the undertaking. The Learned Counsel for the assessee submitted that the scrap sale is derived in the process of manufacture of goods, , Labour charges were recovered by the assessee from its customers and regarding the sundry provisions written back it was submitted that the assessee claim expenditure in earlier years and the same was now returned back during the year in the process of carrying on its business and therefore all these incomes shall form part of profits of the undertaking for the purpose of computing deduction allowable u/s. 10B of the Act.
We have heard the rival submissions, perused the orders of the authorities below and the case laws relied on. The Assessing Officer denied the deduction u/s. 10B of the Act on scrap sales, Labour charges recovered and sundry provisions written back holding that these incomes are not derived from export of articles. The Ld.CIT(A) on analyzing the (A.Y: 2011-12) M/s. Gala Precision Technology Pvt. Ltd facts and the case laws on the subject, accepted the contention that assessee is eligible to claim deduction u/s. 10B of the Act on these incomes as they are incomes derived from the business of the assessee observing as under: -
5.3 Decision - The appellant is a company engaged in the manufacture of engineering goods. During the previous year relevant to the assessment year under consideration it had three items of income by way of sale of scrap of ₹.28 lakhs, miscellaneous income of ₹.2.37 lakhs and sundry provisions written back of ₹.12.09 lakhs, none of which were from outright export of engineering goods. According to the AO, this renders these items ineligible for inclusion in the computation of deduction of section 10B of the Act. He chose to rely on a case- law in the matter of section 80HH and not section 10B of the Act viz. Pandian Chemicals v. CIT (supra). On the other hand, the very same issue had been dealt with recently by the Hon'ble High Court of Karnataka in the case of GE BE (P) Limited v. ACIT (supra) in the context of section 10B of the Act. According to the Hon'ble Karnataka High Court, the term used in section 10B of the Act would be 'derived from' as in profits derived from a 100% export oriented undertaking. After discussing the ambit of the term 'derived from', the Hon'ble High Court observed that though the assessee was not in the business of export of scrap, scrap came about as a part of the manufacturing process. Though not exported it would be eligible for the benefit available under section 10B of the Act as it was derived from the 100% export-oriented unit. The relevant portion of the order of the Hon'ble High Court is extracted herewith.
10. The Apex Court in the case of the CIT v. Sterling Foods [1999] 237 ITR 579 / 104 Taxman 204 (SC) while dealing with the deductions under section 80HH explained the meaning of the word "derived from" held as under: The use of the word "derived from" suggests that the original sources of the product has to be found. As a matter of plain English, when it is said that one word is derived from another, often in another language what is meant that the source of that word is another word, often in another language. As an illustration, the word, "democracy" is derived from the Greek work "Demos", the people and most dictionaries will so state. That is the ordinary meaning of the word "derived from" and there is no reason to depart from that ordinary meaning here. There must be, for the application of the words "derived from", a direct nexus between the profits and gains and the industrial undertaking.”
Keeping in mind the principle laid down by the Apex Court, no doubt the assessee is not in the business of export of scrap but is in the business of export of X-ray equipment’s, high voltage tanks and detectors used in CT scanners and after manufacturing these products, they are exported. In the process of manufacturing, the unutilized raw materials form part of the scrap and that scrap also has value. But it is not exported and is hence eligible for the benefit under (A.Y: 2011-12) M/s. Gala Precision Technology Pvt. Ltd section 10B of the Act. The assessee should have earned profits and gains from such export of articles or things. The said articles or things should have been manufactured or produced by the assessee. The section does not require that the profits and gains derived should be from the articles or things which are exported only. It is the profits and gains derived by a 100% export-oriented undertaking from the export of articles. Therefore, when the assessee undertakes a manufacturing activity or a production activity and in the process it results in any scrap, the said scrap attracts the nexus between the profits and gains derived from the assessee from export business. Therefore, it satisfies the requirements of section 10B and the Tribunal has rightly held that the assessee is entitled to the benefit of section 10B even in respect of the profits earned out of sale of scrap material within the country. In that view of the matter, we do not see any infirmity in the order passed by the Tribunal. Accordingly, the third substantial question of law is answered in favour of the assessee and against the Revenue." 5.3.1 From a simple reading of the above extract, it would become clear that there is a decision available insofar as inclusion of income by way of sale of scrap in the computation of income of deduction under section 10B of the Act is concerned. Accordingly, there would be no need to refer to yet another provision under section 80HH of the Act which deals with a completely different issue viz. profits of the newly established industrial undertakings, as has been done by the AO. To this extent, the AO's reliance on the decision in the case of Pandian Chemicals v. CIT (supra) is clearly misplaced. Respectfully following the decision of the Hon'ble Karnataka High Court in the case of GE BE (P) Limited v. ACIT, the income from sale of scrap is held to be includible in the computation of deduction under section 10B of the Act. Coming to the other two items viz. miscellaneous income and sundry provisions written back, it would become clear that the same rationale would equally apply as both these items in that though they are part of the profits derived from a 100% export-oriented undertaking, they are not specifically derived from exports per se. Accordingly, both the miscellaneous income as well as the sundry provisions written back are held to be includible in the computation of deduction under section 10B of the Act. To sum up, the AO is directed to include income from sale of scrap of ₹.28,00,9187-, miscellaneous income of ₹.2,37,3257- and sundry provisions written back of ₹.12,09,6997- while computing the deduction under section 10B of the Act. Ground no. 2 is accordingly allowed.”
Further, in the case of CIT v. Motorola India Electronics (P.) Ltd., (supra) the Hon'ble Karnataka High Court considered the following question of law for consideration and held that interest income is part of total income for the purpose of computing deduction u/s. 10A & 10B of the Act.
(A.Y: 2011-12) M/s. Gala Precision Technology Pvt. Ltd “1. Whether the appellant authorities committed an error in holding that the interest income deposited out of surplus funds in banks and sister concerns and EEFC account should be treated as part of the total income for the purpose of computing deduction u/s. ss. 10A and 10B of the IT Act?”
7. Hon'ble Karnataka High Court decided the above question in favour of the assessee observing as under: - “6. Learned counsel for the Revenue in support of his contentions relied on several judgments, which are as under: The apex Court in the case of Pandian Chemicals Ltd. vs. CIT (2003) 183 CTR (SC) 99: (2003) 262 ITR 278 (SC), while dealing with s. 80HH of the Act has held as under: "6. ............... The word 'derived' is not a term of art. Its use in the definition indeed demands an enquiry into the genealogy of the product. But the enquiry should stop as soon as the effective source is discovered. In the genealogical tree of the interest land indeed appears in the second degree, but the immediate and effective source is rent, which has suffered the accident of non-payment. And rent is not land within the meaning of the definition.
7. This definition was approved and reiterated in 1955 by a Constitution Bench of this Court in the decision of Mrs. Bacha F. Guzdar vs. CIT (1955) 27 ITR 1 (SC) at p.
7. It is clear, therefore, that the word 'derived from' in s- 80HH of the IT Act, 1961, must be understood as something which has direct or immediate nexus with the appellant's industrial undertaking. Although electricity may be required for the purposes of the industrial undertaking, the deposit required for its supply is a step removed from the business of the industrial undertaking. The derivation of profits on the deposit made with Electricity Board cannot be said to flow directly from the industrial undertaking itself." The apex Court in the case of Liberty India vs. CIT (2009) 225 CTR (SC) 233: (2009) 28 DTR (SC) 73: (2009) 317 ITR 218 (SC), while interpreting s. 80-IB of the Act, which also allowed deduction in respect of profits and gains derived from eligible business has held as under: "14. ............ The words 'derived from' are narrower in connotation as compared to the words 'attributable to'. In other words, by using the expression 'derived from', Parliament intended to cover sources not beyond the first degree." That is the distinction between the words "derived from industrial undertaking" as against "profits attributable to industrial undertaking". The apex Court in the case of CIT vs. Sterling Foods (1999) 153 CTR (SC) 439: (1999) 237 ITR 579 (SC), while dealing with s. 80HH has held as under: "There must be, for the application of the words 'derived from', a direct nexus between the profits and gains and the industrial undertaking."
(A.Y: 2011-12) M/s. Gala Precision Technology Pvt. Ltd In the case of CIT vs. Menon Impex (P) Ltd. (2003) 180 CTR (Mad) 40: (2003) 259 ITR 403 (Mad), the Court while dealing with exemption under s. 10A of the Act, has held as under: "It was pointed out that unless the source of the income is from an industrial undertaking, such income cannot be regarded as 'derived from' industrial undertaking. It was held that the income derived from sale of import entitlement could only be said to be the export promotion scheme and not the industrial undertaking." Following the aforesaid judgments, the Madras High Court in the case of CIT vs. The Madras Motors Ltd. (2002) 174 CTR (Mad) 221: (2002) 257 ITR 60 (Mad) has held that the interest which is earned by the assessee from the bank deposits would not have a direct nexus with the industrial undertaking of the assessee and would only be incidental income thereto and, therefore, such interest has to be ignored from the allowable profits under s. 80HH. Following the aforesaid judgments, the Division Bench of this Court in the case of Anil Dang vs. ITO (2011) 55 DTR (Kar) 349: (2012) 344 ITR 143 (Kar) has held that the primary condition to claim deduction under s. 80HHC would be that the assessee should have derived profits from export of goods or merchandise and bailee. The assessee would not be allowed to compute the total income by deducting profits derived from export. The Bombay High Court in the case of CIT vs. Shah Originals (2010) 232 CTR (Bom) 228: (2010) 39 DTR (Bom) 145: (2010) 327 ITR 19 (Bom) has held that 'an assessee who is an exporter, is not under an obligation of law to maintain the export proceeds in EEFC account but, this is a facility which is made available by the RBI. The transaction of export is complete in all respects upon the repatriation of the proceedings. It lies within the discretion of the exporter as to whether the export proceeds should be received in a rupee equivalent in the entirety or whether a portion should be maintained in convertible foreign exchange in the EEFFC account. The exchange fluctuation that arises, it must be emphasized, is after the export transaction is complete and payment has been received by the exporter. Upon the completion of the export transaction, what the seller does with the proceeds, upon repatriation, is 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-s. (l)of s. 80HHC.
Relying on these judgments, it was contended that the interest received or the consideration received from sale of import entitlement has no direct nexus with the profits and gains derived from the export of software and therefore, the assessee is not eligible for exemption. All the judgments were rendered prior to the amendment in the year 2001 and therefore, there cannot be any quarrel with the law laid down in these cases. All the judgments are rendered in the context of s. 80HHC. Therefore, the judgment of the Tribunal for the asst. yr. 1998-99, where it has declined the benefit to the assessee cannot be found fault with. But there is change in the law for the asst. yr. 2001-02. Sec. 10B(1) and (4) reads as under : "Sec. 10B. Special provisions in respect of newly established hundred per cent EOU.—(I) Subject to the provisions of this section, a deduction of such profits and gains as are derived by a hundred per cent EOU from the export of articles or things or computer software for a period of ten consecutive assessment years beginning with the assessment year relevant to the previous year in which the undertaking begins to manufacture or produce articles or things or computer software, as the case may be, shall be allowed from the total income of the assessee :
(A.Y: 2011-12) M/s. Gala Precision Technology Pvt. Ltd Provided that where in computing the total income of the undertaking for any assessment year, its profits and gains had not been included by application of the provisions of this section as it stood immediately before its substitution by the Finance Act, 2000, the undertaking shall be entitled to the deduction referred to in this sub-section only for the unexpired period of aforesaid ten consecutive assessment years : Provided further that for the assessment year beginning on the 1st day of April, 2003, the deduction under this sub-section shall be ninety per cent of the profits and gains derived by an undertaking from the export of such articles or things or computer software : Provided also that no deduction under this section shall be allowed to any undertaking for the assessment year beginning on the 1st day of April, 2012 and subsequent years: Provided also that no deduction under this section shall be allowed to an assessee who does not furnish a return of his income on or before the due date specified under sub-s. (1) of s. 139. (4) For the purposes of sub-s. (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." By Finance Act, 2001, w.e.f. 1st April, 2001, the present sub-s. (4) is substituted in the place of old sub-s. (4). No doubt sub-s. 10(B) [sic-sub-s. (1)] speaks about deduction of such profits and gains as derived from 100 per cent EOU from the export of articles or things or computer software. Therefore, it excludes profits and gains from export of articles. But sub-s. (4) explains what is the profit derived from export of articles as mentioned in sub-s. (1). The substituted sub-s. (4) says that 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 and not the profits and gains from export of articles. Therefore, profits and gains derived from export of articles are different from the income derived from the profits of the business of the undertaking. The profits of the business of the undertaking include the profits and gains from export of the articles as well as all other incidental incomes derived from the business of the undertaking. It is interesting to note that similar provisions are not there while dealing with computation of income under s. 80HHC. On the contrary, there is specific provisions like s. 80HHB which expressly excludes this type of income. Therefore, in view of the aforesaid provisions, 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.”
In the instant case, the assessee is a 100 per cent 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 partake the character of a profit and gain 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 (A.Y: 2011-12) M/s. Gala Precision Technology Pvt. Ltd in sub-s. (4), the assessee is entitled to the benefit of exemption of the said amount as contemplated under s. 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 Appeal No. 428 of 2007 is answered in favour of the Revenue and against the assessee and the first substantial question of law in IT Appeal No. 447 of 2007 is answered in favour of the assessee and against the Revenue.”
8. In view of the above, we do not see any infirmity in the order passed by the Ld.CIT(A) in allowing the claim of the assessee.
In the result, appeal of the Revenue is dismissed.
Order pronounced in the open court on the 20th June, 2018.