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Income Tax Appellate Tribunal, MUMBAI BENCHES “C”, MUMBAI
Before: Shri Joginder Singh & Shri Rajendra
आदेश / O R D E R Per Bench The Revenue as well as the assessee is aggrieved, therefore, appeal has been preferred by the Revenue whereas, the assessee has preferred cross objection against the impugned order dated 28/03/2014 of the First Appellate Authority, Mumbai.
2. First, we shall take up the appeal of the Revenue, wherein, grounds number 1 to 3 are with respect to deleting
3 C.O. No.197/Mum/2015 M/s Perf ect Engineering Products Ltd. the addition of Rs.4,58,10,722/- on the ground that product development and research expenditure was not in the nature of intangible asset as envisaged in section 32 of the Act and thus the assessee is eligible for deduction u/s 35(1)(iv) of the Act.
During hearing, the ld. DR, Shri Ganesh Bare, advanced arguments which is identical to the ground raised by submitting that the Ld. Commissioner of Income Tax (Appeal) did not appreciate the fact that the assessee fail to substantiate its claim that the said capital expenditure was of the nature specified in section 35(1)(iv) of the Income Tax Act, 1961 (hereinafter the Act).
2.1. On the other hand, the ld. counsel for the assessee, Shri Ajay R. Singh, defended the conclusion arrived at in the impugned order by claiming that the issue under hand is covered by the decision of the Tribunal for Assessment year 2010-11 (ITA No.4604/Mum/2014) order dated 04/02/2016. This factual matrix was not controverted by the Revenue.
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2.2. We have considered the rival submissions and perused the material available on record. In view of the above, we are reproducing hereunder the relevant portion from the aforesaid order of the Tribunal dated 04/02/2016 for ready reference and analysis:-
“This appeal by the revenue is directed against the order dated 17-04-2014 of Commissioner of Income Tax (Appeals)-17, Mumbai (Hereinafter called as the CIT(A)) for assessment year 2010-11. The assessee has raised the following grounds of appeal:
1. “Whether on the facts and circumstances of the case and in law, the ld. CIT(A) erred in upholding the claim of the assesee of deduction u/s 35(1)(i) without appreciating that by its very nature such expenditure results in advantage of enduring nature to the assessee and is capital expenditure?”
2. “Whether on the facts and circumstances of the case and in law, the ld. CIT(A) erred in upholding the claim of the assesee of deduction u/s 35(1)(i) without appreciating that the assessee company itself had treated similar expenditure in the earlier years and claimed depreciation thereon?”
2. The common issue raised in ground no. 1 & 2 is against the upholding the claim of the asssessee u/s 35(1)(i) of the Act by ignoring the fact that said expenditure was capital in nature and also ignoring the fact that in the earlier years the assessee had treated the similar expenditure as capital asset and claimed depreciation @ 25% thereon. The brief facts of the case are that the assessee efiled its return of income on 14.10.2010 declaring a loss of Rs.94,65,190/- while computing the loss u/s 115JB of the Act at Rs.6,88,45,389/-. The assesee company during the year incurred Rs. 6,46,18,933/- which was shown under the head “intangible asssets’ i.e. development expenditure but while computing the total income , the same was claimed as deduction u/s 35(1)(i) of the Act as being R&D expenditure and thus written of fully during the year.
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3. The AO during the course of scrutiny proceeding observed that the assessee had claimed Rs.6,46,18,933/- as research and development expenditure and asked the assessee to justify its claim which was replied by the assessee vide letter dated 15.11.12 stating that the expenditure was incurred in connection with research and development and the same was rightly claimed u/s 35(1)(i) of the Act. It was also however stated that similar expenditure which included Raw material, stores, labour, power & fuel, processing charges and interest etc was treated as intangible asset in the earlier year depicting the same on the assets side of the balance sheet and depreciation at the rate of 25% accordingly in the that year and also during the year in respect of opening WDV. The assessee submitted that these expenses were of revenue in nature and were allowable u/s 35(1)(i),35(1)(iv) and 37(1) of the Act notwithstanding the fact the same were capitalized in the earlier year. The ld. AO rejected the contention of the assessee by coming to the conclusion that these expenditure had result in enduring benefit for longer a period. Thus, the benefit of the said expenditure would be accruing over and above current year and the claim of the assessee was not tenable. The ld. AO also observed that in the earlier year the similar expenditure was capitalized and depreciation at the rate of 25% on the same by referring to the assessment order for the AY 2009-10 in which the w.d.v of the R&D expenditure was worked out at Rs.15,21,60,264/-. The ld. AO treated the R&D expenditure as capital in nature and allowed the depreciation at the rate of 25% and the net disallowance made by the AO worked out at Rs.4,84,64,199/- accordingly.
4. The ld. AR submitted before us that the case of the assessee was covered by the order of the Tribunal in its own case in (A.Y.2007- 08 &2008-09) dated 21-08-13 and further argued that in view of the said order of the co-ordinate bench, the appeal of the revenue deserved to be dismissed by upholding the order of the CIT(A). The ld. DR per contra, was in agreement with the argument of the ld. AR qua the issue being covered by above ITA.
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We have heard the rival submissions and perused the material on record. We find from the copy of the judgment in (A.Y.2007-08 &2008-09) that the similar issue was decided by the Tribunal ‘C’ Bench Mumbai in favour of the assesee wherein it has been held that expenditure incurred on research was admissible u/s 35(1)(i) of the Act. The relevant para 6 is reproduced as under:
“In view of the foregoing, we have no hesitation in directing the A.O. to allow the assessee’s claim in respect of the scientific expenditure incurred on research expenses for the current year/s u/s.35(1)(iv); the assessee having itself considered it as capital expenditure. Consequently, no amount would survive for being carried over as the WDV of the relevant ‘block of assets’ u/s.43(6); the assesee having already secured all deduction for the immediately preceding year/s. the decisions of the tribunal are based the material on record as also, in no less measure, on the arguments advanced before it. Our order being at variance with that for AY 2007-07, we restrict the applicability of the same only to the years under appeal, so as not to prejudice the case of either party for any other year. We decide accordingly.”
We find that the facts of the assessee are fully covered by the decision of the Tribunal and we, therefore, respectfully following the decision of the co- ordinate bench uphold the order of the CIT(A) by dismissing the appeal of the revenue.
In the result, the Revenue’s appeal is dismissed.”
2.3. We find that the Tribunal has made an elaborate discussion on the issue in hand on identical fact in the own case of the assessee for Assessment year 2010-11 by following the decision of the Tribunal for Assessment year 2007-08 and 2008-09 order dated 21/08/2013 (ITA Nos.33 & 36/Mum/2012), wherein, the claim of the assessee with respect to scientific expenditure incurred on research u/s 7 C.O. No.197/Mum/2015 M/s Perf ect Engineering Products Ltd.
35(1)(iv) was considered as capital expenditure, consequently, no amount would survive for being carried over as WDV of the relevant “block of asset” u/s 43(6) of the Act, the assessee having already secured all deduction for the immediate preceding year/s. Considering the totality of facts and following the aforesaid decision of the Tribunal, we find no merit in the impugned ground, therefore, the stand of the Ld. Commissioner of Income Tax (Appeal) is affirmed.
Next grounds i.e. ground number 4 to 6 are with respect to treating the gain on Foreign Exchange Fluctuation as income “derived from” undertaking for the purposes of computing deduction u/s 10B of the Act. The ld. DR, defended the addition made by the Assessing Officer, whereas, the ld. counsel for the assessee defended the conclusion arrived at in the impugned order by contending that the deduction was allowed to the assessee after calling remand report from the Assessing Officer and placed reliance upon the decision from Hon’ble Bombay High Court in the case of CIT vs Gem Plus Jewellery India Ltd.(2011)
330 ITR 175(Bom.) by claiming that the amount is from sale
8 C.O. No.197/Mum/2015 M/s Perf ect Engineering Products Ltd. proceeds and bill discounting, therefore, it has been derived from industrial undertaking.
3.1. We have considered the rival submissions and perused the material available on record. We find that the remand report from the Assessing Officer was considered, wherein, he reworked the deduction u/s 10B of the Act at Rs.1,98,65,767/-. The assessee filed revised working of deduction u/s 10B, claiming deduction of Rs.3,83,93,259/-.
The assessee showed profit of the undertaking at Rs.15,85,74,673/- which included foreign exchange gain of Rs.6,65,23,615/- whereas, the Assessing Officer reduced foreign exchange gain and arrived at the figure of profit at Rs.8,20,51,058/-. The stand of the assessee right from assessment stage is that the foreign exchange gain is from realisation of export proceeds and from bill discounting, term loan for working capital, etc. We find that Hon’ble jurisdictional High Court has decided the issue in the case of CIT vs Gem Plus Jewellery India Ltd.(2011) 330 ITR 175(Bom.) by observing as under:-
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“14. The Tribunal has followed a decision of its Special Bench in coming to the conclusion that foreign exchange earned on the realization of export receipts in a year other than the year in which the goods were exported would have to be considered in the year of export for the purpose of exemption under Section 80HHC. The Tribunal has, however, directed the Assessing Officer, while granting a deduction to the assessee under Section 10A in the year of export to exclude the amount from the profits of the year under consideration simultaneously. This is to ensure that the assessee does not obtain a deduction twice over.
For the purposes of the appeal it has not been disputed on behalf of the Revenue that the foreign exchange was realized by the assessee within the period stipulated in law. The assessee realized a larger amount because of a foreign exchange fluctuation. The fact that this forms part of the sale proceeds would have to be accepted in view of the judgment of the Division Bench of this Court in Commissioner of Income Tax v. Amber Export (India) (ITA 1249 of 2007 decided on 18 February 2009).
The judgment of this Court in turn followed the decision of the Gujarat High Court in Commissioner of Income Tax v. Amba Impex5. The sole ground which has been urged on behalf of the Revenue in support of the appeal on this issue is based on the judgment of a Division Bench of this Court in Commissioner of Income Tax v. Shah Originals (ITA 431 of 2008 decided on 22 April 2010). The decision in Shah Originals is, however, distinguishable for the reason that the foreign fluctuation in that case arose after the export transaction had been completed and 5 (2006) 282 ITR 144 (Guj) after the export profits were deposited by the assessee in an EEFC Account. This is evident from the following observations :
"The assessee admittedly in the present case received the entire proceeds of the export transaction. The Reserve Bank of India, has granted a facility to certain categories of exporters to maintain a certain proportion of the export proceeds in an EEFC Account. The 10 C.O. No.197/Mum/2015 M/s Perf ect Engineering Products Ltd. proceeds of the account are to be utilized for bonafide payments by the account holder subject to the limits and the conditions prescribed. An assessee who is an exporter is not under an obligation of law to maintain the export proceeds in the EEFC Account but, this is a facility which is made available by the Reserve Bank.
The transaction of export is complete in all respects upon the repatriation of the proceeds. 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 EEFC 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 section (1) of Section 80HHC." (emphasis supplied) In the present case, the assessee has realized a larger amount in terms of Indian rupees as a result of a foreign exchange fluctuation that took place in the course of the export transaction.
For the aforesaid reasons, the question of law is answered against the Revenue and in favour of the assessee.”
3.2. In the light of the above decision/discussion, we are of the view that the foreign exchange gain arising out of the fluctuation in the rate of foreign exchange cannot be divested from the export business of the assessee. As noted, once export is made, due to variety of reasons, the remission
11 C.O. No.197/Mum/2015 M/s Perf ect Engineering Products Ltd. of the export sale consideration may not be made immediately. If during the same year of the export, the remission is also made, the difference in the rate recorded in the accounts of the assessee and that eventually received by way of remission either positive or negative, would be duly adjusted. May be the accounting standards require that the same may be recorded in separate foreign exchange fluctuation account. Nevertheless any deviation either positive or negative must have direct relation to the export actually made. Payment would be due to the assessee on account of the factum of export. Current price of the goods so exported would also be pre-decided in the foreign exchange currency. The exact remittance in Indian rupees would depend on the precise exchange rate at the time when the amount is remitted. This fluctuation and possibility of increase or decrease, in our opinion, can have no bearing on the source of such receipt. Primarily and essentially, the receipt would be on account of the export made. If this is so, any fluctuation thereof also must be said to have arisen out of the export business. Mere period of 12 C.O. No.197/Mum/2015 M/s Perf ect Engineering Products Ltd. time and the vagaries of rate fluctuation in international currencies cannot divest the income from the character of the income from assessee's export business. In that view of the matter, the Revenue's contention that such income cannot be said to have been “derived from” the export business must fail. If this is the position when the remittance is made during the same year of the export, we fail to see what material change can it bring about if within the time permitted under sub-section(2) of section 80HHC, the remittance is made but in the process accounting year has changed. To our mind mere change in the accounting year can have no real impact on the nature of the receipt.
The conclusion of the Assessing Officer that since the year during which such sale proceeds were received by the assessee export was not made, would not in any manner change the situation. The assessee being engaged in the business of export and having made the export, mere fact of the remittance being made after 31st of March of the year when export was made, would not change the situation insofar as, relation of such income to the assessee's export
13 C.O. No.197/Mum/2015 M/s Perf ect Engineering Products Ltd. business is concerned. Clause (baa) to the Explanation to section 80HHC provides for exclusion of certain incomes for computation of export profit under section 80HHC. Sub- clause (1) of clause (baa) thereof pertains to 90% of the sum referred to in clauses (iiia), (iiib),(iiic),(iiid) and (iiie) of section 28 or any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of similar nature included in such profits. The term "foreign exchange difference" is not specified in any of the categories specifically mentioned in the said clause. The Revenue, however, contended that the same must be included by necessary implication as part of other receipts.
Legislature, however, has used the term "any other receipt of similar nature". This expression "similar nature" would have considerable bearing on the ultimate conclusion that we arrive in this respect. What is to be excluded under the said sub-clause (1) of clause (baa) is any other receipt of a nature similar to the brokerage, commission, interest, rent or charges. The receipt by way of foreign exchange fluctuation not being similar to any of these receipts mentioned above,
14 C.O. No.197/Mum/2015 M/s Perf ect Engineering Products Ltd. application of clause (baa) must be excluded. Sub-rule (1) of rule 115 only provides for adopting the rate of exchange for calculation of value of rupee of any income accruing or arising in case of an assessee and provides that the same shall be telegraphic transfer of buying rate of such currency on the specified date. The term "specified date" has been defined in Explanation-2 to the said sub-rule (1). Rule 115 of the Income-tax Rules, 1962 thus has application for a specific purpose and has no bearing while judging whether foreign exchange rate fluctuation gain can form part of the deduction under section 80HHC of the Act. In the case of Commissioner of Income-tax and others vs. Chowgule and Co. Ltd. reported in [1996]218 ITR 384, the Court held that rule 115 does not lay down that all foreign currencies received by the assessee will be converted into Indian rupees only on the last date of the accounting period. Rule only fixed the rate of conversion of foreign currency. If there is no foreign currency to convert on the last date of accounting period, then no question of invoking rule 115 will arise. We are conscious that law permits hedging
15 C.O. No.197/Mum/2015 M/s Perf ect Engineering Products Ltd. of foreign exchange fluctuation risk to an importer or an exporter. The exporter may, therefore, take steps as found commercially prudent to safeguard himself against drastic foreign exchange rate fluctuations and in the process may also limit the possibility of gain in case of favourable currency rate trends. Nevertheless, the resultant gain in foreign exchange rate would still be due to the export made by the assessee. In the present appeal, there is no doubt that the gain out of export of goods and also the gain/loss out of foreign exchange fluctuation have “direct nexus” with the goods which were manufactured/exported were derived from the industrial undertaking. Clause (a) of the Explanation to section 80HHC coins a definition of the expression “convertible foreign exchange” so as to mean foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of Foreign Exchange Regulation Act 1973 and any rule made thereunder. Foreign exchange fluctuation gain is offshoot of the export made by the assessee, thus, it has direct nexus and can be said to be “derived from” the export
16 C.O. No.197/Mum/2015 M/s Perf ect Engineering Products Ltd. made by the assessee. If this issue is analyzed with respect to section 80IA of the Act, it speaks about total income of an assessee includes “any profit & gains” “derived by an undertaking” or an enterprise from “any business” referred to in sub-section(4)(such business being hereinafter refer to as eligible business) then a deduction of any amount equal to 100% of the profit & gains “derived from” such business for specified period, meaning thereby there should be direct nexus with the business of the assessee and it should be “derived from” the business of the assessee. As mentioned earlier, the gains from foreign exchange fluctuation is the result of income (export) derived from an industrial undertaking, therefore, we find no infirmity in the conclusion of the Ld. Commissioner of Income Tax (Appeal), thus, the impugned ground was rightly decided in favour of the assessee, resultantly, the impugned ground is dismissed.
So far as, the cross objection no.197/Mum/2015 is concerned, the cross objection has been raised by the assessee in support of ground no.1, raised by the Revenue,
17 C.O. No.197/Mum/2015 M/s Perf ect Engineering Products Ltd. in and since we have affirmed the stand of the Ld. Commissioner of Income Tax (Appeal) on the issue, therefore, this cross objection of the assessee has remained for academic interest only.
Finally, the appeal of the Revenue as well as the cross objection of the assessee are dismissed.
This order was pronounced in the open in the presence of ld. representatives from both sides at the conclusion of the hearing on 26/05/2016.