Loading judgment…
No AI summary yet for this case.
Income Tax Appellate Tribunal, MUMBAI BENCHES “E”, MUMBAI
Before: Shri Joginder Singh, & Shri Ashwani Taneja
आदेश / O R D E R
Per Ashwani Taneja: This appeal has been filed by the Assessee against order of Ld. Commissioner of Income Tax(Appeals), Mumbai-12 (in short ‘CIT(A)’}, dated 11.03.2014 passed order against u/s 143(3) of the Act, dated 27.12.2006 for Assessment Year 2004- 05 on the following Grounds:
2 Maersk Global Service Centres
During the course of hearing none appeared on behalf of the assessee. It is noted that the case was fixed last time on 08.08.2006. On the said date, petition dated 5th August, 2016 was filed for seeking adjournment and the case was adjourned from 19.12.2016. The date of hearing was noted by one Mr. Sandeep, who had filed adjournment application. Earlier to that also adjournments were granted on more than three occasions at the request made on behalf of the assessee. Despite these facts, none has appeared today despite the fact that today’s date was fixed as last opportunity. Under these circumstances, we have no other option but to hear and dispose this appeal ex-parte qua the assessee on merits, on the basis of material held on record.
Ground No.1: In this ground the assessee is aggrieved with the action of lower authorities in denial of benefit of deduction u/s 10B in respect of income arising from liabilities/provisions written back amounting to Rs.1,96,76,819/-. 3.1. The brief background is that the assessee had filed its return claiming benefit of deduction u/s 10B which was denied by the AO in the assessment order passed u/s 143(3). The AO denied the benefit of deduction u/s 10B in respect of income arising from liabilities/provisions written back by observing as under: “The assessee’s service centre income is Rs.14,35,10,728/- which included export sales (service charges received in foreign convertible income including unrealized amount of Rs.77,32,574/- i.e. the amounts not realized within 6 months from the end of the financial year) of Rs.13,15,70,612/- and local sale of Rs.1,19,40,116/-. The assessee had other income of Rs.1,96,85,662/- which included the written off
3 Maersk Global Service Centres liability/provisions of Rs.1,96,76,8191- also. The assessee claimed deduction u/s. 108 on above written off liability also. The assessee was asked to give the details of liability, the year to which it pertains and also the explanation why deduction u/s. 10B claimed on above other income should not be disallowed. The assessee did not give the full details of above liability/provision. It was stated to be pertaining to the year 2002 and 2003. Out of this 1,08,25,314/- was stated to be pertaining to the year 2003. About the claim of deduction. u/s. 10B, M/s. BSR & Co., CAs vide their letter dt. 11/9/2006 stated that above amount forms part of business income and has been included under the provisions of section 41 of the Act and therefore the deduction u/s. 10B is claimed on it. The assessee's authorized representative's explanation is not acceptable. The assessee has stated that the above liability pertain to the year 2002 and 2003. The assessee company as mentioned earlier purchased the SSC division of Maersk India Pvt. Ltd. on 1/1/2004. Thus, the liability which were written off by the assessee were not the liability/provision made by the assessee but by the company from whom the SSC division was purchased. Factually also the explanation given by the assessee does not appear to be correct. The liability/provision was stated to be for the year 2002 and 2003. The A.Yrs. for these years will be A.Yrs. 2003-04 and 2004-05 i.e. the liability/provision for the current year also. The liability/provision cannot be made and written off a/so in the same year. Thus, the year mentioned by the assessee does not appear to be correct. It was also notice that the liability/provision was made by Maersk India Pvt. Ltd. (MIPL). MIPL had not claimed the deduction under section 1OB upto A. Y. 2002-03. It was claimed by it for the first time in A. Y. 2004- 05.thus, by making the provision/liability in earlier years MIPL suppressed its tax income in those years. Further, the deduct/on u/s. 10B is admissible on the profits or derived from export of article or things or computer software whose sale proceeds is received within 6 months from the end of the financial year. In 4 Maersk Global Service Centres the instant case, the other income of Rs.1,96,76,8191- is not the proceeds of computer software out of India nor the same is receive foreign convertible exchange. In view of the facts mentioned above, the deduction claimed u/s. 10B on above other income of Rs.1,96,76,819/- is disallowed and added to assessee’s total income.” 3.2. Being aggrieved, the assessee filed an appeal before the Ld. CIT(A), wherein following submissions were made: The income of Rs. 1,96,76,819 arising from the liabilities / provisions written back is credited to the Profit & Loss A/c of the appellant for the captioned year. In the Tax Audit Report (TAR) of the appellant for the captioned year, this income of Rs. 1,96,76,819 is considered as taxable business income under Section 41(1) of the Act. Accordingly, the income of Ps. 1,96,76,819 arising from the liabilities / provisions written back is also claimed as 'profits of the business of the undertaking" and "total turnover of the business carried on by the undertaking" as envisaged in Section 108(4) of the Act while computing the deduction under Section 10B of the Act for the captioned year. In response to the queries raised, it was explained to the AO during the course of assessment proceedings for the captioned year that: • Maersk India Private Limited (MIPL) had created a provision during the calendar years 2002 and 2003 towards global online costs such as MCS cost, international lease line charges, global data processing charges and global data communication charges, for operation of its SSC undertaking. •As MIPL vide Agreement dated 16 December 2003 sold its SSC undertaking on a slump sale basis to the appellant with effect from 31 December 2003, all the properties, assets, benefits, liabilities and obligations of SSC undertaking were transferred from MIPL to the appellant. •Accordingly, the provision towards global online charges, which formed part of the current liabilities of SSC undertaking of MIPL, was also taker; over by the 5 Maersk Global Service Centres appellant on acquisition of SSC undertaking from MIPL for a lump Sum consideration (i. e. on a slump sale basis). •The appellant has reversed / written hack in its books of account during the captioned 'year the sum of Ps. 1,96, 76,819 representing the excess of provision towards global online charges, which was taken over from MIPL. The AO as per notice dated 4 August 2006 fixed the next hearing on 21 December 2006 and asked the appellant to furnish the details of liabilities / provisions of Ps. 1,96,76,819 written back during the captioned year along with the nature of these liabilities / provisions and the years to which they pertain. The appellant received the said notice on 18 December 2006. The appellant vide letter (Ref.: TB-M: 4885) dated 21 December 2006 submitted that the provisions were made towards global online costs such as MCS cost, international lease line charges, global data processing charges and global data communication charges, for the calendar years 2002 and 2003. Subsequently, the appellant reversed the excess provision of Rs. 1,96,76,819 during the captioned year in its books of account. During the course of hearing on 21 December 2006, the AO asked the appellant to submit item-wise chart on write back of provision of Rs. 1,96,76,819 and re- fixed the hearing on 26 December 2006. The appellant vide letter dated 26 December 2006 submitted the chart giving full details of liabilities / provisions written back to the AO. The chart depicted the following information in a greater detail: 1. The provision for global online costs pertaining to SSC undertaking for calendar years 2002 and 2003 created in the books of MIPL; 2. The aggregate provision in respect of global online costs pertaining to SSC undertaking standing in the books of MIPL as on 31 December 2003 and taken over by the appellant pursuant to slump sale of SSC undertaking by MIPL; 3. The aggregate amount actually payable in respect of global online costs attributable to SSC undertaking as worked out based on invoices received; and 4. The excess provision written back i.e. difference
6 Maersk Global Service Centres between 2 and 3 above. Thereafter, the AO telephoned the authorized representative (AR), M/s. BSR & Co., Chartered Accountants, of the appellant on 27 December 2006 at around 5.00 p.m. and asked to furnish the chart of liabilities / provisions written hack on a financial year basis rather than calendar year basis. The AR, at the outset, volunteered to visit the AO's office to once again explain the chart already submitted on 26 December 2006. However, the AO informed the AR that she is passing the assessment order and therefore, she requested to fax the chart of liabilities / provisions written back on a financial year basis. Accordingly, the AR of the appellant faxed the requested chart to the AO, which also depicted the above information in a greater detail on a financial year basis. In the impugned assessment order, the AO did not accept the submissions made by the appellant from time to time on write back of excess liabilities provisions mounting to Rs.1,96,76,819. The AO denied the appellant's claim of deduction cinder Section 10B of the Act in respect of income of Rs. 1, 96,76,819 arising from the liabilities / provisions written back based cu' the following contentions: • The liabilities / provisions written off by the appellant were not the liabilities / provisions made by the appellant, but by the company (i. e. MIPL) from whom the SSC undertaking was purchased. The liabilities / provisions were stated to be for the years 2002 and 2003 (i.e. for Assessment Years 2003-04 and 2004-05). Thus, the liabilities provisions also include the current year. The liabilities / provisions cannot be made and written off in the same year. • MIPL suppressed its taxable income by making the provisions in those years when it was not claiming deduction under Section 108 of the Act. The income of Rs. 1,96,76,819 is not the sale
7 Maersk Global Service Centres proceeds of computer software out of India not the same is received in convertible foreign exchange. 3.3. During the course of hearing before Ld. CIT(A), the assessee filed written submissions and details. But, the CIT(A) was not satisfied with the submissions of the assessee, and therefore, he confirmed the order of the AO by observing as under: “8.2. I have carefully considered the order of the assessing officer and submission of the appellant and I find that 1. in respect of considering income from iiabilities/provision written back which the appellant has taken into consideration for calculating the deduction under section 10 B of the Income Tax Act, I find that the order of the AO carries weight. The AO has very clearly brought to record, as detailed in his order, as to why the concerned liability cannot be considered. It is a well-known fact that deduction under Section 10 B of the Income Tax Act is only allowable to an appellant on profits and gains of export business. This would mean that only income which has a direct and proximate relation with the activities offered by EOU are to be considered. Not all income assessable as business income will fall under this category. The excess provision of earlier years written back in the books under section 41 (1) it is seen are not derived from export business and have no link with the export turnover. Therefore deduction under section 10 B is not allowable on this amount even though this amount is taken to be the income of the appellant for the year. Reliance here is placed on the order of the: Honourable Chennai Tribunal in the case of Tocheunglee Stationery Manufacturing Company (P) Ltd versus ITO (2006) 5 SO T4213 (Chennai - Tribunal). In this case it is seen that the appellant has also considered liabilities and provisions written
8 Maersk Global Service Centres back for calculating deduction u/s. 10B. Besides this, the appellant has considered liabilities not made by it but by the SSC division it purchased and it is also seen that these liabilities are current. These liabilities even if allowed to be written back will not form a part of the export business: of the EOU to get the benefit of deduction u/s.10B. Under the circumstances, I am in agreement with the assessing officer wherein he has denied the deduction under section 10B of the Income Tax Act to the appellant respect of income from liabilities/provisions written back.”
3.4. We have gone through the orders passed by the AO as well as Ld. CIT(A). The assessee was aggrieved with the action of the AO wherein the AO had denied the benefit of deduction u/s 10B on the amount of liabilities/provisions written back by the assessee which were considered by the assessee for computing deduction u/s 10B. It has been held by Ld. CIT(A) that benefit of deduction u/s 10B would be allowable only on the profits derived from export business. It was also held that amount of liabilities/ provisions of earlier year written back in the books cannot be said to be derived from export business. Nothing has been brought before us to negate factual findings recorded by the lower authorities. There is nothing on record to show any linkage between the export activity and amount added in the profit and loss account in the form of liabilities/provisions of earlier years. No details whatsoever are available in this regard. Under these circumstances, in absence of any details having been brought before us to negate the factual analysis made by the lower authorities, we find that Ld. CIT(A) has rightly upheld the action of AO in denying
9 Maersk Global Service Centres the benefit of deduction u/s 10B on the impugned amount. Thus, Ground no. 1 is hereby dismissed.
Ground No.2: In this ground, the assessee is aggrieved with the action of lower authorities in denying benefit of deduction u/s 10B in respect of income arising from realized foreign exchange gains on export sale amounting to Rs.25,82,367/-. It is noted that AO had denied benefit of deduction on the said amount by observing as under: “The assessee in the computation of deduction u/s 10B Rs.25,82,367/- to the export turnover on the ground that same was exchange gain. However, the profit and loss account was not found to have been credited with any such amount. On the contrary the profit and loss account was debited with exchange loss of Rs. 8,49,701/-. The assessee was therefore asked to explain why the above alleged exchange gain of Rs.25,82,3671- added to the export turnover should not be disallowed. In reply to it M/s. BSR & Co., CAs vide their letter dt. 11/9/2006 stated that the assessee received exchange gain of Rs.25,82,367/- and therefore the same is added to the export turnover. They in the same letter also admitted the net result of exchange was loss of Rs.8,49,701/- and the same is debited to the profit and loss account. Since the net result of exchange gain was loss the alleged exchange gain of Rs.25,82,367/- added to the export turnover for- working out the deduction u/s. 10B is disallowed.” 4.1. During the course of hearing before Ld. CIT(A), the assessee filed written submissions to contest the said disallowance as under: “The appellant has included a sum of Rs.25,82,367/- representing realized foreign exchange gains on export sales in 'total turnover' and 'export turnover' as envisaged in Section 1OB(4) of the Act while computing the deduction under Section l0B of the Act for the captioned year.
10 Maersk Global Service Centres In response to the queries raised, it was explained to the AO during the course of assessment proceedings for the captioned year that the realized foreign exchange gains on export sales amounting to Rs. 25,87,367 form part of exchange loss (net) of Rs. 8,4 9, 701 debited to the Profit & Loss A/c of the captioned year in Schedule J pertaining to 'Operating, administrative and other expenses' The exchange loss of Rs. 8,49,701 is arrived at after netting off the realized foreign exchange gains on export sales of Rs. 25,82,367 from the total foreign exchange loss of Rs. 34,32,068 suffered in other business transactions during the captioned year. In view of this, it is clear that the realized foreign exchange gains on export sales amounting to Rs. 25,82,367 has already been credited to the Profit & Loss A/c of the appellant for the captioned year. In the impugned assessment order, the AO took a view that as the net result of exchange.- was a loss, the exchange gain of Ps. 2,82,367 added to the export turnover for working out the deduction under Section 10B of the Act is disallowed. 4.2. Ld. CIT(A) examined the issue in detail. But he was not satisfied with the submissions of the assessee and upheld the action of the AO by observing as under: “The appellant has included foreign exchange fluctuation gain in respect of export proceeds in the profit of the business. This gain is a result of the depreciation in the value of Indian rupee. The reason for the gain is said to be the appreciation in the value of advance available in the books of the appellant as on 31 March 2004 that was pending adjustments regarding services rendered and invoices raised accordingly. The advance that was appearing in the schedule G of the audited financial statement for the year under concern was taken to be as Rs. 62855166 as against Rs. 60272812 representing a realization in the exchanae gain. According to the appellant this amount represents profit regarding the export sales as seen in section 10 B (4) of the Income Tax Act. However it is seen that as noticed by the assessing
11 Maersk Global Service Centres officer it is clear that this amount had not been treated as an income by the appellant at all. Instead the appellant has debited an exchange loss in its profit and loss account. I find that the AO's order on observation carries weight regarding this issue. I find that this exchange gain has found no mention in the profit and loss account of the appellant at all. As per the submission of the appellant before the assessing officer it has been claimed by them that the net result of the exchange transactions was a loss as debited in the profit and loss account. It is also for consideration that this exchange fluctuation has arisen not on account of any export activity of the appellant. No proximate or direct nexus with export transaction can be established. This exchange fluctuation has occurred because the appellant has maintained an advance in its books of accounts. The appellant was not obliged to do so. But as per the accounting principles it had the facility to do so and chose to do so. The export transaction will only be completed on the receipts of proceeds and not on account of mere fluctuations of foreign exchange value maintained as an advance in the books of accounts. There is no actual export activity as long all amount remains an advance. Therefore any exchange fluctuation that takes place will not be taken to be received as a result of export business. This amount will also not qualify as business incorrect income from other sources. If the exchange fluctuation had occurred on account of delay in realisation of export proceeds of goods actually" exported then the situation would have been different and the amount so realised would have been treated as export proceeds. Reliance here is placed on the principle behind the order in the case of CIT versus Shah Original pronounced by the Honourable Court, Mumbai by their order dated 22/4/2010 in IT Appeal No. 431 of 2008. Benefit under section 105 is allowable only to profits and gains of business. Therefore any income that is treated as income from other sources cannot be taken into consideration for deduction under section 12 Maersk Global Service Centres 10B of the I.T. Act. This deduction is not allowable in respect of each and every item of income assessable as business income also even if one considers the gain as income from a business activity. Therefore I am in agreement with the assessing officer where it has been stated that this amount of Rs.25,82,367/- cannot form a part of the profits for calculation of deduction under section 10B of the Income Tax Act.
4.3. It is noted that Ld. CIT(A) has analysed all the facts wherein it was noted that assessee was not able to establish proximate or direct nexus of the exchange fluctuation with the export transaction activity done by the assessee. It was also noted that the exchange fluctuation was accounted for on the amount of ‘advance’ in its books of accounts, and there was no actual export activity. Under these circumstances, the exchange fluctuation gain cannot be said to have been earned as a result of export business. If the exchange fluctuation had occurred on account of delay in realisation of export proceeds of goods actually exported, then the situation would have been different and the amount so realised may have been treated as part of export proceeds. But, the facts involved here are different as discussed in detail by the Ld. CIT(A). Nothing was brought before us to point out any error in the factual and well reasoned findings of the Ld. CIT(A). Therefore, order of Ld. CIT(A) on this issue is upheld. Ground No.2 is dismissed.
13 Maersk Global Service Centres
In the result, the appeal of the assessee is dismissed.
Order pronounced in the open court on 6th January, 2017.