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Income Tax Appellate Tribunal, MUMBAI BENCH “H”, MUMBAI
Before: SHRI G.S.PANNU & SHRI SANJAY GARG
IN THE INCOME TAX APPELLATE TRIBUNAL MUMBAI BENCH “H”, MUMBAI BEFORE SHRI G.S.PANNU, ACCOUNTANT MEMBER AND SHRI SANJAY GARG, JUDICIAL MEMBER ITA No.122/Mum/2013 (Assessment Year 2009-10) The DCIT, Range 8(2), R.No.209, 2nd Floor, Aaykar Bhavan, MK Road, Mumbai 400 020 ...... Appellant Vs. M/s. Health Prime Services (India) Pvt. Ltd. 303, Akruti Trade Centre, Road No.7, Marol, MIDC, Andheri (East), Mumbai 400093 PAN: AABCH 3697Q .... Respondent
Appellant by : Shri Mohhamed Rizwan Respondent by : Dr. K.Shivram & Ms. Neelam Jadhav Date of hearing : 21/10//2016 Date of pronouncement : 18/11/2016
ORDER PER G.S.PANNU,A.M:
The captioned appeal filed by the Revenue pertaining to assessment year 2009-10 is directed against an order passed by CIT(A)-17, Mumbai dated 30/10/2012, which in turn, arises out of an order passed by the Assessing Officer under section 143(3) of the Income Tax Act, 1961 (in short ‘the Act’) dated 06/07/2011.
The Grounds of appeal raised by the Revenue read as follows:-
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CIT(A) erred in deleting the disallowance of un realized foreign exchange loss of Rs.1,35,46,050/- in respect of the SEZ unit without appreciating that the said loss had been claimed by the assessee by mere reinstatement of the ECB loan in foreign currency which had been admittedly taken (or se ting up the SEZ unit and hence was not allowable under section 37(1) of the Act as per the ratio of the decision of the Hon'ble Supreme Court in the case of CIT Vs. M/s. Woodward Governor India Ltd. 294 ITR 451 (SC) since the ECB loan had been taken for capital expenditure and not for revenue purposes." 2. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the disallowance of unrealized foreign exchange loss of Rs.1 ,35,46,050/ - in respect of the SEZ unit on the ground that section 43A deals with cases wherein the asset had been acquired from a country outside India whereas in the instant case the asset had been acquired in India, without appreciating that even as per the provisions of section 43A un realized foreign exchange loss is not allowable on reinstatement of the loan and is allowable only on actual payment thereof and therefore by the said analogy also unrealized foreign exchange conversion loss was rightly disallowed by the Assessing Officer as being a contingent liability on capital account and hence not allowable under 3. "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in allowing the assessee deduction of foreign exchange loss due to fluctuation in rates at the time of repayment of ECB loan for the STPI unit amounting to Rs. 73,83,330/- as revenue expenditure holding that the AO was not justified in applying section 43A as the assets were not imported, without appreciating at though the assets were not imported, they had been acquired through External Commercial Borrowings and therefore the expenditure being in the capital field was rightly capitalized by the AO at par with section 43A of the Act since the said expenditure was not allowable u/s 37(1) of the Act." "On the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in holding that the loss of the SEZ unit should not have been set off against the profits of the STPI unit before allowing deduction under section 1OA In resl2ect of the STPI unit on the ground that each unit is a separate unit and separately eligible or otherwise for deduction u/s 1OA of the Act without inter se the set off of losses, without appreciating that though section 1OA forms part of Chapter III of the Act, the same is a deduction section and governed by Chapter VIA i.e. sections 80A & 80AB thereunder and therefore the total income eligible for deduction under section 1OA has to be computed after setting off the losses of the various units." 3. In so far as Grounds of appeal No.1 to 3 are concerned, they deal with a common issue relating to the loss on exchange rate fluctuation.
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In order to appreciate the controversy, the relevant facts can be understood as follows. The respondent assessee is a company incorporated under the provisions of the Companies Act, 1956 and is, inter-alia, engaged in the business of providing I.T. enabled services. The assessee is having a STPI unit since 01/01/2005 engaged in the business of Business Process Outsourcing (BPO) and data processing services for health care industry. The said unit is eligible for deduction under section10A of the Act. Further, during the year under consideration i.e. w.e.f. 01/10/2008, assessee has also set-up a unit in SEZ, which is eligible for the claim of deduction under section. 10AA of the Act. In the course of assessment proceedings the Assessing Officer disallowed foreign exchange loss of Rs.1,35,46,050/- pertaining to the SEZ Unit and Rs.73,83,330/- pertaining to the STPI Unit. In so far as the loss in relation to SEZ Unit is concerned, the Assessing Officer has noted that it relates to the reinstatement of the External Commercial Borrowings (ECB) at the end of the year. According to the Assessing Officer such a loss was contingent in nature as it was only a notional loss liable to change at the time of subsequent actual payment in foreign currency. In relation to the loss of Rs.73,83,330/- of STPI Unit, the Assessing Officer had disallowed the same on the ground that the same related to the repayment of ECB loans taken for setting-up of STPI unit and was capital in nature. Further, in relation to STPI Unit, the Assessing Officer also observed that as the loan was used to purchase assets, any loss on account of exchange fluctuation in the course of repayment of loan is a part of cost of asset in terms of section 43A of the Act. Both the disallowances made by the Assessing Officer has since
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been deleted by the CIT(A). As per CIT(A), loss arising due to reinstatement of the ECB loans at the year end could not be considered as contingent or notional in nature following the judgement of the Hon’ble Supreme Court in the case of CIT vs. Woodward Governor India Ltd., 294 ITR 451(SC). Further, with regard to the plea of the Assessing Officer that the ECB loan in relation to the STPI unit was used for purchase of asset and, therefore, it was required to be capitalized under section 43A of the Act , the CIT(A) held it to be not tenable because section 43A relates to assets which have been acquired from a country outside India, whereas in the instant case, the asset has been acquired from within India itself. On the basis of the aforesaid reasoning, the CIT(A) has deleted the disallowance, against which Revenue is in appeal before us.
At the time of hearing, Ld. Departmental Representative has primarily reiterated the reasoning of the Assessing Officer, which we have already adverted to in the earlier paras and is not being repeated for the sake of brevity. Though Revenue has canvassed before us that the ratio of the judgment of the Hon’ble Supreme Court in the case of Woodward Governor India Ltd.,(supra) is not attracted in this case yet, there is no cogent distinction in law or on facts has been brought out. Even with regard to the decision of the CIT(A) regarding non- application of section 43A of the Act relating to the loss of Rs.73,83,330/-, the factual matrix to the effect that the assets have been purchased from within India has not been controverted by the Ld. Departmental Representative.
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On the other hand, Ld. Representative for the assessee has relied upon the finding of the CIT(A) in support of the case of the assessee.
We have considered the rival submissions. The crux of the controversy before us arises from the action of the Assessing Officer in disallowing a loss resulting on account of fluctuation in foreign exchange rate on the closing date of the year under consideration, primarily on the ground that it was a contingent liability and notional in nature. The aforesaid stand of the Assessing Officer is clearly in contrast to the decision of the Special Bench of the Tribunal in the case of Oil & Natural Gas Corporation Ltd. vs. DCIT , 261 ITR 1,(SB)(Del). Moreover, the CIT(A) has also relied upon the judgment of the Hon’ble Supreme Court in the case Woodward Governor India Ltd.,(supra) to say that loss arising on reinstatement of foreign currency loss utilized for the purposes of business could not be construed as contingent or notional in nature. It is also not disputed in the present case that assessee is following mercantile system of accounting and under these situation, in our view, the CIT(A) made no mistake in treating such loss as revenue in nature. The other plea of the Assessing Officer that since loss related to raising of foreign currency loans for acquiring an asset, such loss on account of rate fluctuation should go to add to the cost of the asset in terms of section 43A of the Act is also not tenable. Quite clearly, section 43A of the Act deal with an asset acquired by the assessee “from a country outside India” and in the present case it has been found by the CIT(A) that the asset acquired by the assessee by utilizing the foreign currency loans was from within India. Therefore, considering the entirety of facts and circumstances of the case, the
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CIT(A) made no mistake in allowing the claim of the assessee with respect to the foreign exchange loss of Rs.1,35,46,050/- in respect of SEZ unit and of Rs.73,83,330/- in respect of STPI Unit. Thus, so far as the Grounds of appeal No.1 and 3 are concerned, the same are dismissed.
Now we may take up Ground of appeal No.4 raised by the Revenue with regard to the determination of deduction under section 10A of the Act in relation to the STPI unit. In brief, the relevant facts are that during the year under consideration assessee had shown total profits of the STPI unit at Rs.2,19,41,802/- and computed the deduction allowable under section 10A of the Act at Rs.2,18,49,802/-. Since the STPI unit of the assessee has been set-up in 2005, this was the 4th year of the claim of deduction under section 10A of the Act . In principle, the Assessing Officer has not disputed assessee’s claim for deduction under section 10A of the Act. The Assessing Officer noticed that while assessee had profits from STPI unit, assessee had incurred a loss of Rs.4,07,75,879/- in its SEZ unit. The assessee was show caused as to why the profit derived from the STPI unit should not be first adjusted with the loss of the SEZ unit before allowing deduction under section 10A of the Act. In response, assessee pointed out that so far as the loss incurred in the SEZ unit was concerned, no deduction under section 10AA of the Act was claimed and such loss was carried forward to subsequent years. According to the assessee, SEZ unit was an independent unit and, therefore, the losses were carried forward. The Assessing Officer disagreed with the assessee and he restricted the deduction under section 10A of the Act in relation to the STPI unit to
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the extent of profit available after reducing the loss of SEZ unit. As a consequence, assessee’s claime for deduction under section 10A of the Act was restricted to Rs.16,45,572/-
The assessee carried the matter in appeal before the CIT(A)who has held that the two units are to be considered as separate and independent units and the loss of SEZ could not be set-off against the profits of STPI unit for the purposes of computing deduction under section 10A of the Act. In coming to such conclusion, the CIT(A) has relied on the following decisions of the Tribunal:
(i) I-Gate Global Solutions Ltd. vs. ACIT, 112 TTJ 1001(Bang)
(ii) FCI Technology Services Ltd. vs. ACIT, ITA No.616/Coch/2008 dated 4/6/2010.
Against such a decision of the CIT(A), Revenue is in appeal before us.
At the time of hearing, Ld. Representative for the assessee pointed out that the said controversy is now covered by the judgment of the Hon'ble Bombay High Court in the case CIT VS Black And Veatch Consulting Pvt. Ltd. (2012) 348 ITR 72 (Bom), which is further affirmed by the Hon’ble Bombay High Court in the case of CIT vs. Techno Trap and Polymers Pvt. Ltd., ITA No.2134 of 2013, dated 5th December, 2015.
In so far as the stand of the Revenue is concerned, the same is to the effect that though section 10A of the Act forms part of Chapter-III of the Act, but it being a deduction, its allowability is to be governed by Chapter VIA of the Act and considered in that light, Chapter-VI relating to the provisions of set-off and carry forward of losses be taken into
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account while computing the deduction allowable under section 10A of the Act.
We have considered the rival submission. At the outset, we may say that there is enough merit in the plea of the respondent-assessee that the said controversy is to be governed by the judgments of the Hon'ble Bombay High Court in the case of Black And Veatch Consulting Pvt. Ltd. (supra) as well as Techno Trap and Polymers Pvt. Ltd.(supra). The fact-situation in the case of Black And Veatch Consulting Pvt. Ltd. (supra) was that the Assessing Officer had computed the deduction under section 10B of the Act after reducing the brought forward loss of earlier years. The Hon'ble Bombay High Court disapproved the action of the Assessing Officer and the following discussion:-
“Section 10A is a provision which is in the nature of a decision and not an exemption. This was emphasised in a judgment of a Division Bench of this court, while construing the provisions of section 10B, in Hindustan Uniliver Ltd. vs. Deputy CIT (2010) 325 ITR 102 (Bom) at paragraph 24. The submission of the Revenue placed its reliance on the literal reading of section 10A under which a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment years is to be allowed from the total income of the assessee. The deduction under section 10A, in our view, has to be given effect to at the stage of computing the profits and gains of business. This is anterior to the application of the provisions of section 72 which has been made by the Legislature while incorporating the provisions of Chapter VI-A. Section 80A(1) stipulates that in computing the total income of an assessee, there shall be allowed from his gross total income, in accordance with and subject to the provisions of the Chapter the deductions specified in sections 80C to 80U. Section 80B(5) defines for the purposes of Chapter VI-A “gross total income” to mean the total income computed in accordance with the provisions of the Act, before making any deduction under the Chapter. What the Revenue in essence seeks to attain is to telescope the provisions of Chapter VI-A in the context of the deduction which is allowable under section 10A, which would not be permissible unless a specific statutory provisions to that effect were to be made. In the absence thereof, such an approach cannot be accepted. In the circumstances, the decision of the Tribunal would have to be affirmed since it is plain and evident that the deduction under
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section 10A has to be given at the stage when the profits and gains of business are computed in the first instance.”
11.1 6.4.2 Quite clearly, as per the Hon’ble High Court, the deduction envisaged under section 10A of the Act is to be given effect at the stage of computing profits and gains of business, which is anterior to the application of the provisions to section 72 of the Act , which deals with the carry forward and set-off of business losses. In fact, the plea of the Revenue before us has been addressed and repelled by the Hon'ble Bombay High Court in the aforesaid decision. The Hon’ble High Court recognized that the provisions of section 10A of the Act are akin to a deduction available to the assessee and it is to be given effect to at the stage of computing profit and gains of business. The Hon’ble High Court noted that the attempt of the Revenue to telescope the provisions of Chapter VIA, in the context of the deduction under section 10A of the Act would be impermissible unless “a specific statutory provision” to that effect is made. In our view, the aforesaid observations of the Hon'ble Bombay High Court clearly answer the objections raised by the Revenue before us. Further, the judgment of the Hon'ble Bombay High Court in the case of Techno Trap and Polymers Pvt. Ltd.(supra) is also relevant, wherein the question of law before the Hon’ble Court was as under:-
“(i) Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that the brought forward unabsorbed loss/depreciation of the assessee’s 10B unit was not liable for set off against the current year’s profit of the same 10B unit.”
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11.2 The Hon’ble High Court answered the said question against the Revenue and the following discussion is relevant to reproduce:-
“4. Mr. Suresh Kumar, learned Counsel for the Revenue does not dispute that the question as framed is covered by the decision of this Court in Black & Veatch Consulting (P) Ltd. (supra) & “Ganesh Polychem Ltd. vs. ITO”(supra). However, he submits that the question as framed would require consideration as the contrary view taken by Karnataka High Court in “CIT vs. Himatasingike Seide Ltd.[(2006) 156 Taxman 151 (Kar)]”has now been upheld by the Apex Court in its order dated 19 September 2013 as under:- “1. We have heard the learned Counsel for the parties to the lis. 2. Having perused the records and in view of the facts and circumstances of the case, we are of the opinion that the Civil Appeal being devoid of any merit deserves to be dismissed and is dismissed accordingly. Ordered accordingly” 5. We find that the decision of Karnataka High Court in Himatasingike Seide Ltd. (supra) which was undisturbed by the Apex Court was in respect of Assessment Year 1994-95. Thus, it dealt with the provisions of Section 10B of the Act as existing prior to 1 April 2001 which was admittedly different from Section 10B as in force during Assessment Year 2009-10 involved in this appeal. Section 10B of the Act as existing prior to 1 April 2001 provided for an exemption in respect of profits and gains derived from export by 100% Export Oriented Undertaking and now it provides for deduction of profits and gains derived from a 100% Exported Oriented Units.. 6. In any view of the matter, the decision of the Karnataka High Court in Himatasingike Seide Ltd. (supra) which was undisturbed by the Apex Court dealt with the provision of law different from that which was dealt with in the impugned Order. A decision has to be considered in the context of the law as arising for consideration and a change in law would render the decision under the old law inapplicable while considering the amended law. 7. The issue as raised stands concluded by the decision of this Court in Black & Veatch Consulting (P) Ltd.(supra) and “Ganesh Polychem Ltd. vs. ITO” against the Revenue. Therefore, the question of law as proposed for our consideration does not give rise to any substantial question of law.”
11.3 As a consequence, having regard to the judgments of the Hon'ble Bombay High Court in the cases of Black And Veatch Consulting Pvt. Ltd. (supra) and Techno Trap and Polymers Pvt. Ltd.(supra), we find no error on the part of the CIT(A) in directing the Assessing Officer to
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determine the deduction under section 10A of the Act before reducing the loss of the other unit. Thus, Revenue fails on this Ground also.
In the result, appeal of the Revenue is dismissed.
Order pronounced in the open court on 18/11/2016
Sd/- Sd/- ( SANJAY GARG) (G.S. PANNU) JUDICIAL MEMBER ACCOCUNTANT MEMBER Mumbai, Dated 18/11/2016 Vm, Sr. PS Copy of the Order forwarded to : 1. The Appellant , 2. The Respondent. 3. The CIT(A)- 4. CIT 5. DR, ITAT, Mumbai 6. Guard file. BY ORDER, //True Copy// (Dy./Asstt. Registrar) ITAT, Mumbai