ULKA SEAFOODS P.LTD,MAHARASHTRA vs. DCIT (OSD) 3(1), MUMBAI

and/or to add the additional grounds of Appeal before or at the time of hearing.” (A.Y 2009-10) –

1. The learned Assistant Commissioner of Income Tax Circle 3(3) erred in not considering the Receipt of Rs.11,30,19,938/- towards DEPB Income for the purpose of allowing deduction u/s 80IB and that 3 M/s. Ulka Seafoods Pvt. Ltd. to 4906/Mum/2013 & 5259 to 5262/Mum/2013 the learned Commissioner of Income Tax (Appeals) – 7 erred in confirming the same.

2. The learned Assistant Commissioner of Income Tax Circle 3(3) erred in not considering the Receipt of Rs.2,53,94,126/- towards License Sale Income for the purpose of allowing deduction u/s 80IB and that the learned Commissioner of Income Tax (Appeals) – 7 erred in confirming the same.

3. The Appellant craves leave to alter and/or to modify and/or to delete and/or to amend the above grounds of appeal

and/or to add the additional grounds of Appeal before or at the time of hearing.” (A.Y 2010-11) –

1. The learned Deputy Commissioner of Income Tax (OSD)-3(1) erred in not considering the Receipt of Rs.9,70,51,430/- towards DEPB Income for the purpose of allowing deduction u/s 80IB and that the learned Commissioner of Income Tax (Appeals) – 7 erred in confirming the same.

2. The learned Deputy Commissioner of Income Tax (OSD)- 3(1) erred in not considering the Receipt of Rs.12,14,56,190/- towards License Sale Income for the purpose of allowing deduction u/s 80IB and that the learned Commissioner of Income Tax (Appeals) – 7 erred in confirming the same.

3. In all the 4 aforementioned appeals filed by the assessee, grounds relating to receipt towards Duty Drawback income for the purpose of allowing deduction u/s 80IB of the Income Tax Act, 1961 (referred as “the Act” in short) is common, therefore, we decided to 4 M/s. Ulka Seafoods Pvt. Ltd. to 4906/Mum/2013 & 5259 to 5262/Mum/2013 deal with this ground taking into consideration all the 4 appeals. Since the factual and legal points involved in this ground are identical for all the 4 appeals, except for the figures, therefore, same are disposed of by this common order by taking the facts and figures from A.Y 2007- 08.

4. The brief facts of the case are that the assessee filed its return of income for A.Y 2007-08 on 1.11.2007 declaring total income at Rs.3,74,499/-. Later on, the case was selected for scrutiny assessment u/s 143(3) of the Act which was completed on 17.11.2009 determining the total income at Rs.29,75,475/- under normal provisions and Book Profit at Rs.3,63,17,364/- u/s 115JB of the Act. In this case, the Ld. CIT(A)-3, Mumbai passed an order u/s 263 of the Income Tax Act, 1961 on 14.3.2012, wherein he has directed to make fresh assessment in respect of claim of deduction u/s 80IB of the Act. Therefore, after serving statutory notice and seeking reply, the Assessing Officer found that the assessee is not eligible for deduction u/s 80IB as the receipts from/ towards duty drawback income are not considered as income derived from the eligible undertaking. Aggrieved by the order of the Assessing Officer, assessee preferred appeal before the Ld. CIT(A) and Ld. CIT(A) by taking into consideration the judgment rendered by the Hon'ble Supreme Court in Liberty India (supra) and other judicial pronouncements partly allowed the appeal filed by the assessee. Aggrieved by the order of Ld. CIT(A), assessee has filed the present appeals before us on the grounds mentioned hereinabove.

5. We heard the counsels for both the parties, perused the materials placed on record as well as the orders passed by the lower authorities. This ground has been dealt with by the Ld. CIT(A) as 5 M/s. Ulka Seafoods Pvt. Ltd. to 4906/Mum/2013 & 5259 to 5262/Mum/2013 ground no. 1 in operating paragraph 4.3 & 4.4 of his order which is reproduced hereinbelow.

“4.3 I have considered the A.O.'s order as well as the appellant's submission. Having considered both, I find that with regard to the duty drawback the Delhi High Court of Delhi in the case of CIT vs. Ritesh Industries Ltd. (2005) 274 ITR 324 (Del), wherein their Lordships applying the decision of apex Court in the case of CIT vs. Sterling Foods (supra) and referring to CIT vs. Jameel Leathers & Uppers (2000) 246 ITR 97 (Mad), CIT vs. Viswanathan & Co. (2003) 181 CTR (Mad) 335 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. On the raw materials utilized as inputs the assessee pays duty and on the total component of costs the assessee adds his profit component to arrive at the sale price. It is this profit which is included in the expression 'profits and gains derived from an industrial undertaking'. Merely because under the scheme to encourage exports the duty is refunded subsequently by way of 'duty drawback', it cannot be regarded as the profit or gain 'derived' from the industrial undertaking. It may constitute profits or gains of the business by virtue of s. 28 of the IT Act, 1961, but, it cannot be construed as profits or gains ‘derived’ from the industrial undertaking for, its immediate and proximate source is not the industrial undertaking but the scheme for duty drawback. Hence, the amount of duty drawback cannot be regarded as income derived from an industrial undertaking so as to entitle the assessee to a deduction under s. 80-I."

The Hon'ble Supreme Court in Liberty India v/s CIT, (2009) 317 ITR 218 (SC), held as follows:-

6 M/s. Ulka Seafoods Pvt. Ltd. to 4906/Mum/2013 & 5259 to 5262/Mum/2013

"Duty drawback receipts and DEPB benefits do not form part of the net profits of eligible industrial undertakings for the purpose of the deduction under section 80-I / 80-IA /80-IB of the Income-tax Act, 1961. The Income- tax Act, 1961, broadly provides for two types of tax incentives, viz., investment-linked incentives and profit-linked incentives. Chapter VI-A of the Act which provides for incentives in the form of deductions essentially belongs to the category of "profit-linked incentives". Therefore, when section 80- IA/80-IB refers to profits derived from eligible business, it is not the ownership of that business which attracts the incentives: what attracts the incentives under section 80- IA/80-IB is the generation of profits (operational profits). It is for this reason that Parliament has confined deduction of profits derived from eligible businesses mentioned in sub-sections (3) to (11A). Each of the businesses mentioned in sub-sections (3) to (11A) constitutes a stand- alone item in the matter of computation of profits. Sections 80-IB and 80-IA are a code by themselves as they contain both substantive as well as procedural provisions. Section 80-IB provides for the allowing of deduction in respect of profits and gains derived from the eligible business. The connotation of the words "derived from," is narrower as compared to that of the words "attributable to". By using the expression "derived from" Parliament intended to cover sources not beyond the first degree. Sections 80-I, 80-IA and 80-lB are to be read as having a common scheme. Subsection (5) of section 80-lA (which is required to be read into section 80-lB) provides for the manner of computation of the profits of an eligible business. Such profits are computed as if such eligible business is the only source of income of the assessee. Therefore, devices adopted to reduce or inflate the profits of the eligible business have to be rejected in view of the overriding provisions of section 80-IA(5). Sections 80-I, 80-IA and 80-IB provide for incentives in the form of deductions which are linked to profits and not investment. On analysis of sections 80-IA and 80-IB it becomes clear

7 M/s. Ulka Seafoods Pvt. Ltd. to 4906/Mum/2013 & 5259 to 5262/Mum/2013 that any industrial undertaking which becomes eligible on satisfying sub-section (2) would be entitled to deduction under sub-section (1) only to the extent of profits derived from such industrial undertaking after the specified date. Apart from eligibility, sub-section (1) purports to restrict the quantum of deduction to a specified percentage of the profits. This is the importance of the words "derived from an industrial undertaking" as against ''profits attributable to an industrial undertaking".

4.4 Thus, DEPB/Duty drawback are incentives which flow from the schemes framed by the Central Government or from section 75 of the Customs Act, 1962. Incentive profits are not profits derived from eligible business under section 80-IB: Thus, they belong to the category of ancillary profits of such undertaking. Profits derived by way of incentives such as DEPB/Duty drawback cannot be credited against the cost of manufacture of goods debited in the profit and loss account and they do not fall within the expression "profits derived from industrial undertaking” under section 80-IB of the Act.”

After considering the arguments as well as the orders passed by the Ld. CIT(A), we find that the Ld. CIT(A) has decided the issue in question by relying upon the judgment rendered by the Hon'ble Supreme Court in the case of Liberty India v. CIT (2009), 317 ITR 218 (SC). The Ld. CIT(A) has also taken into consideration that the DEPB/Duty Drawback are incentives which flow from the scheme framed by the Central Government or from the provisions of the Customs Act, and since the incentive profits are not profits derived from eligible business u/s 80IB, therefore, they belong to the category of ancillary profits of such undertaking. The Ld. AR appearing on behalf of the assessee also admitted that this issue raised by him is squarely covered by the judgment of the Hon'ble Supreme Court in the case of Liberty India v. CIT (2009), 317 ITR 218 (SC). In addition, no 8 M/s. Ulka Seafoods Pvt. Ltd. to 4906/Mum/2013 & 5259 to 5262/Mum/2013 new material or circumstances have been brought before us to controvert or rebut the judicious and well-reasoned findings recorded by the Ld. CIT(A), therefore, we so no reason to interfere or deviate from the findings recorded by the Ld. CIT(A). Therefore, we dismiss this ground raised by the assessee and uphold the order of Ld. CIT(A).

“5.11 Therefore in view of foregoing, the A.O is directed to allow the deduction u/s 80IB on foreign exchange gain of Rs.5,86,29,593/- and also on the processing and freezing charges of Rs.40,31,673/-, as the aforesaid income are directly derived from the activity of industrial undertaking and has direct nexus with the business of the appellant company. While the disallowance made on DEPB at Rs.11,30,19,938/- and sale of Licence of Rs.2,53,94,126/- is confirmed, as these expenses bears no direct relationship with the activity of industrial undertaking. These are incentives provided by the government regardless of the business activity. In view of the same, this ground of appeal is partly allowed.”

After considering the arguments of both parties and after analyzing detailed orders passed by the Ld. CIT(A), we are of the considered view that the Ld. CIT(A) has taken into consideration the facts of the present case and also relied upon judicial pronouncements of Hon'ble

9 M/s. Ulka Seafoods Pvt. Ltd. to 4906/Mum/2013 & 5259 to 5262/Mum/2013 Supreme Court. The Ld. DR representing the Revenue has also relied upon the judgment passed by the Hon'ble Supreme Court in CIT v. Sterling Foods, 237 ITR 579 (SC), wherein it has been held as under :-

“Section 80HH of the Income Tax Act, 1961 – Deduction – Profits and gains from industrial undertakings in backward areas – Assessment Year 1979-80 – Whether there must be, for application of words ‘derived from’ as used in section 80HH, a direct nexus between profits and gains and industrial undertaking – Held, yes – Assessee industrial undertaking exported processed sea food and under Export Promotion Scheme was entitled to import entitlements which it could sell – Whether receipt from sale of import entitlement could not constitute profit and gain derived from assessee’s undertaking and same could not be included in income of assessee for computing deduction under section 80HH – Held, yes.”

“12. We do not think that the source of the import entitlements can be said to be the industrial undertaking of the assessee. The source of the import entitlements can, in the circumstances, only be said to be the Export Promotion Scheme of the Central Government where under the export entitlements become available. There must be, for the application of the words ‘derived from’, a direct nexus between the profits and gains and the industrial undertaking. In the instant case the nexus is not direct but only incidental. The industrial undertaking exports processed sea food. By reason of such export, the Export Promotion Scheme applies. There under, the assessee is entitled to import entitlements, which it can sell. The sale consideration there from cannot, in our view, be held to constitute a profit and gain derived from the assessee’s industrial undertaking.”

Co-joining the facts of the present case as well as the orders passed by the Ld. CIT(A), we find that this ground is squarely covered by the judgment of the Hon'ble Supreme Court in the case of CIT v. Sterling

10 M/s. Ulka Seafoods Pvt. Ltd. to 4906/Mum/2013 & 5259 to 5262/Mum/2013 Foods (supra). Further, no new material or circumstances have been brought before us to controvert or rebut the finding recorded by the Ld. CIT(A), therefore, we are of the considered view that the Ld. CIT(A) has passed a well-reasoned and judicious order while confirming the disallowance of Rs.2,53,94,126/- on account of sale of licence on the ground that this income bears no direct relationship with the activity of industrial undertaking as the incentive is provided by the Government regardless of the business activity. Therefore, we so no reason to interfere or deviate from the finding recorded by the Ld. CIT(A). Accordingly, we dismiss this ground raised by the assessee and uphold the order of Ld. CIT(A).

ITA No. 5262/Mum/2013 (A.Y 2010-11) -

1. Whether on the facts and in the circumstances of the case and in law the Ld. CIT(A) erred in holding the amount of Rs.37,95,981/- as processing & freezing charges, other income of Rs.1,07,437/- & sundry balances written off Rs.3,07,210/- repacking charges or Rs.13,791/- & storage charges of Rs.19,629/- eligible for deduction u/s 80IB without appreciating the fact that assessee’s industrial undertaking cannot be allowed deduction on these receipts as the same are not derived from the manufacturing activity of the assessee’s business.

2. The appellant prays that the order of CIT(A) on the above ground be set aside and that of the Assessing Officer be restored.

3. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary.” (A.Y 2008-09) - “1. Whether on the facts and in the circumstances of the case and in law the Ld. CIT(A) erred in holding the amount of Rs.59,23,858/- as processing & freezing charges, other income of Rs.1,676/- & sundry balances written off Rs.3,07,210/- eligible for deduction u/s 80IB without appreciating the fact that assessee’s industrial undertaking cannot be allowed deduction on these receipts as the same are not derived from the manufacturing activity of the assessee’s business.

12 M/s. Ulka Seafoods Pvt. Ltd. to 4906/Mum/2013 & 5259 to 5262/Mum/2013

2. The appellant prays that the order of CIT(A) on the above ground be set aside and that of the Assessing Officer be restored.

3. The appellant craves leave to amend or alter any ground or add a new ground which may be necessary.” (A.Y 2009-10) - “1. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs.23,38,455/- made on account of disallowance claimed @ 100% on opening WDV in respect of effluent treatment plant without appreciating the fact that 100% depreciation on the asset is allowable in the year it is put to use and depreciation claimed on opening WDV in respect assets purchased in the earlier years is not allowable.

2. Whether on the facts and in the circumstances of the case and in law the Ld. CIT(A) erred in holding the amount of Rs.40,31,673/- as processing & freezing charges & foreign exchange gain of Rs.5,86,29,593/- eligible for deduction u/s 80IB without appreciating the fact that assessee’s industrial undertaking cannot be allowed deduction on these receipts as the same are not derived from the manufacturing activity of the assessee’s business.

3. Whether on the facts and in the circumstances of the case and in law, the Ld. CIT(A) erred in deleting the addition of Rs.28,78,220/- u/s 40a(ia) and Rs.65,800/- u/s 40A(3) without appreciating the fact that provisions of sec. 194C are clearly attracted for supply of labour and sec 40A(3) for making payment above Rs.20,000/- in cash.

13 M/s. Ulka Seafoods Pvt. Ltd. to 4906/Mum/2013 & 5259 to 5262/Mum/2013

“4.5 As regards to other income, commission & brokerage, repacking charges and storages charges are concerned, it is evident that this includes receipts, which the appellant company received in the ordinary course of business of industrial undertaking. Hence the same has direct nexus with the business of the appellant company. Regarding sundry balance written off, I find that these are the balances written off in sundry creditors/sundry receivables accounts, which duly reflects the net income on this account. The appellant’s such income derived from the purchases booked and accordingly adjusted on final settlement. Therefore these receipts have direct nexus with the business of the appellant company.

4.6 Therefore in view of foregoing, the A.O is directed to allow the deduction u/s 80IB on the processing and freezing charges, other income, commission & brokerage, repacking charges, sundry balance written off and storage charges as the aforesaid income are directly derived from the activity of industrial undertaking and has direct nexus with the business of the appellant company. While the disallowance made on DEPB is confirmed, as these expenses bears no direct relationship with 14 M/s. Ulka Seafoods Pvt. Ltd. to 4906/Mum/2013 & 5259 to 5262/Mum/2013 the activity of industrial undertaking. These are incentives provided by the government regardless of the business activity. In view of the same, this ground of appeal is partly allowed.”

15. After hearing both the counsels, we find that the assessee has failed to establish that receipt of amount on account of other income is from industrial undertaking. The only argument submitted by the Ld. AR is that this income includes miscellaneous income in the ordinary course of business of industrial undertaking, therefore, these receipts have been derived from eligible business of the undertaking. As such, same are eligible for deduction u/s 80IB of the Act. However, the Ld. AR failed to establish any direct nexus to prove that the receipt of income claimed by him has got any direct nexus to and is derived from the eligible industrial activity. Therefore, we are of the considered view that the Ld. CIT(A) fell in error while accepting this ground as receipt of said income are incidental to the business of the assessee and is not directly related to and derived from the eligible business activity carried out by the assessee. Therefore, we reverse the orders of the Ld. CIT(A) and uphold the orders of the Assessing Officer while disallowing deduction of amount of other income u/s 80IB of the Act.

16. As far as the sundry balances written off and processing & freezing charges are concerned, we heard the counsels for both the parties, perused the materials placed on record as well as the orders passed by the lower authorities. We find that the Ld. CIT(A) has rightly come to the conclusion that the aforesaid income are directly derived from the activity of industrial undertaking and has direct nexus with the business of the assessee company and, therefore, we uphold the orders of the Ld. CIT(A) on this count, i.e., processing & freezing

15 M/s. Ulka Seafoods Pvt. Ltd. to 4906/Mum/2013 & 5259 to 5262/Mum/2013 charges and sundry balances written off. Therefore, these grounds of appeal are partly allowed.

17. As regards deduction on account of surcharges, repacking charges and foreign exchange gains, we heard the counsels for both the parties, perused the materials placed on record as well as the orders passed by the lower authorities. The Ld. CIT(A) has dealt with these issues in detail and after considering the same, we find that the Ld. CIT(A) has rightly come to the conclusion that the income on account of repacking charges, surcharges and foreign exchange gains are directly derived from the activities of industrial undertaking and has direct nexus with the business of the assessee company. No new material or circumstances have been brought before us to controvert or rebut the findings recorded by the Ld. CIT(A). Therefore, the orders passed by the Ld. CIT(A) after considering the case of both the parties and by relying upon the judicial pronouncements are held to be well- reasoned and judicious. Therefore, we uphold the orders of the Ld. CIT(A) with regard to deduction on account of surcharges, repacking charges and foreign exchange gains.

19. Ground no. 1 raised by Revenue in A.Y 2009-10 relates to deletion of addition made on account of disallowance claimed @ 100% of opening WDV in respect of effluent treatment plant. We have heard counsels for both the parties and perused the material placed on record as well as the order passed by the lower authorities. This issue has been decided by the Ld. CIT(A) in paragraph 4.3 of his order which is reproduced below.

“4.3 I have considered the A.O’s order as well as the appellant’s A/R submission. Having considered both, I find that the reasoning given by the A.O for making the disallowance of the depreciation are not correct. Undoubtedly there is no dispute as to the fact that, the appellant treatment plant are eligible for 100% deduction of depreciation as per section 32 read with IT Rules. However it is a matter of fact that the appellant’s in earlier year had claimed only 15% depreciation and not claimed the depreciation @ 100%. It is also not in dispute that it was the duty of the A.O to allow the correct rate of depreciation on the appellant treatment plant in the year,

17 M/s. Ulka Seafoods Pvt. Ltd. to 4906/Mum/2013 & 5259 to 5262/Mum/2013 when it was purchased. Be as it may be the fact remains that the depreciation of 100% was eligible on the effluent plant which the appellant had claimed in the year under consideration. Hence, I am at a loss to understand why the appellant should suffer for the inaction on the part of the department and for the matter of his earlier mistake, which was duly allowable to the appellant under the provisions of law by the A.O. In view of the foregoing, I consider it proper and appropriate to hold that the A.O was not correct in his action, accordingly the addition so made by the A.O is deleted. Thus, this ground of appeal is allowed.”

After hearing the arguments as well as perusing the order passed by the Ld. CIT(A), we are of the considered view that the Ld. CIT(A) has taken into consideration all the facts of the present case as well as the judicial pronouncements. The Ld. CIT(A) has rightly held that there is no dispute as to the fact that the assessee’s treatment plant is eligible for 100% deduction of depreciation as per Sec. 32 read with I.T Rules. It was also taken into consideration by the Ld. CIT(A) that, as a matter of fact, the assessee in earlier years had claimed only 15% depreciation and not claimed the depreciation @ 100%. Since the assessee had claimed only 15% depreciation in the earlier year, this point also does not curtail the right of the assessee when the assessee is entitled to claim depreciation @ 100% as it is a settled law that there is no applicability of estoppels against statute. No new material or circumstances have been brought before us to controvert or rebut the findings recorded by the Ld. CIT(A). The Ld. CIT(A) has rightly held that the fact remains that the depreciation @ 100% was eligible on effluent plant which the assessee had claimed in the year under consideration. Therefore, the order passed by the Ld. CIT(A) is well- reasoned and judicious and we see no reason to deviate from the 18 M/s. Ulka Seafoods Pvt. Ltd. to 4906/Mum/2013 & 5259 to 5262/Mum/2013 order passed by the Ld. CIT(A). Therefore, this ground of appeal raised by the Revenue is dismissed.

20. Ground no. 3 raised in Revenue’s appeal for A.Y 2009-10 relates to deletion of addition of Rs.28,78,220/- u/s. 40a(ia) and Rs. 65,800/- u/s. 40A(3) of the Act. We heard the counsels for both the parties and perused the material placed on record as well as the order passed by the lower authorities. This ground has been dealt with by the Ld. CIT(A) in paragraph 6.3 of his order. After hearing the parties and perusing the order passed by the Ld. CIT(A), we are of the considered view that the Ld. CIT(A) has passed a well-reasoned and judicious order by taking into consideration that had the employees been on sub-contract with labour contractor, then, in that eventuality, it was not incumbent upon the assessee to pay for their ESIC and PF. The Ld. CIT(A) has also taken into consideration that the only point of reference is payment which undoubtedly has been routed through E.B. Jiju for which he is getting professional fee on which TDS has already been deducted by the assessee. The Ld. CIT(A) appreciating the facts, has rightly come to the conclusion that routing of payment of wages to the labourers through E.B. Jiju, for which he is getting professional fee, is not sole consideration to establish that he is a sub-contractor. Therefore, Ld. CIT(A) has rightly held that payment made to E.B. Jiju does not attract the provisions of Sec. 194C of the Act and not liable for deduction of TDS and Ld. CIT(A) has rightly deleted the addition made by the Assessing Officer of Rs.28,78,220/- and Rs. 65,800/- on account of payment made to E.B. Jiju. Therefore, this ground raised by the Revenue stands dismissed.

19 M/s. Ulka Seafoods Pvt. Ltd. to 4906/Mum/2013 & 5259 to 5262/Mum/2013 21. Ground nos. 2 & 3 in A.Ys 2007-08 & 2008-09 and ground nos. 4 & 5 in A.Y 2009-10 are general in nature and do not require adjudication.