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Income Tax Appellate Tribunal, AMRITSAR BENCH, AMRITSAR
Before: DR. M. L. MEENA & SH. ANIKESH BANERJEE
the assessee against the order of the Ld. Commissioner of Income Tax (Appeals)-1, Jalandhar dated 09.06.2015 in respect of different assessment years.
2. In revenue appeals the department has raised the following grounds of appeal:
In ITA No. 477/Asr/2015:
“1. That on the facts and in the circumstances of the case the Ld. CIT(A) has erred in law in deleting the addition of Rs.18,92,129/- made by the A.O. on 4 & CO 32/Asr/2015 & Ors Asstt. CIT v. Broadways Overseas Ltd. & Ors account of disallowance of exemption u/s 10B of the Income Tax Act claimed on income arising out of export incentives.
2. That Ld. CIT(A) has erred in facts as well as law by ignoring the findings of the TPO and holding that LIBOR, rate should be applied on interest advanced to Associate Enterprises in US and thereby deleting the addition of Rs. 1,48,40,164/- on account of interest on loan advanced to the AE.
3. That the Ld.CIT(A) has erred in facts as well as law by ignoring the findings of the TPO and holding that LIBOR rate should be applied on interest on receivables for excess period granted to AE in US thereby deleting an addition of Rs.76,45,292/- on account of interest on receivables for excess period granted to AE.
4. It is prayed that the order of the Ld.CIT(A) be set-aside and that of the Assessing Officer restored.
5. That the appellant requests for leave to add or amend or alter the grounds of appeal before the appeal is heard and disposed off.”
“1. That on the facts and in the circumstances of the case the Ld. CIT(A) has erred in law in deleting the addition of Rs.50,90,686/- made by the A.O. on account of disallowance of exemption u/s 10B of the Income Tax Act claimed on income arising out of export incentives.
2. That Ld. CIT(A) has erred in facts as well as law by ignoring the findings of the TPO and holding that LIBOR rate should be applied on interest advanced to Associate Enterprises in US and thereby deleting the addition of Rs. 1,12,37,130/- on account of interest on loan advanced to the AE.
3. That on the facts and in the circumstances of the case, the Ld.CIT(A) has erred in law in deleting the addition of Rs.21,943/- made by the A.O. on account of disallowance u/s 14A of the Income Tax Act, 1961 by ignoring that the facts of the relied upon judgments are clearly distinguishable and the Revenue has not accepted the relied upon judgments on merits and, therefore, SLP against Hon’ble High Court’s order in the case of CIT vs. Hero Cycles Ltd., 323 JTR 518 has been admitted and pending for adjudication by the Hon’ble Apex Court.
5 & CO 32/Asr/2015 & Ors Asstt. CIT v. Broadways Overseas Ltd. & Ors 4. It is prayed that the order of the Ld.CIT(A) be set-aside and that of the Assessing Officer restored. 5. That the appellant requests for leave to add or amend or alter the grounds of appeal before the appeal is heard and disposed off.
In ITA No. 47/Asr/2016
“1. That on the facts and in the circumstances of the case the Ld. CIT(A) has erred in law in deleting the addition of Rs. 10,99,639/- made by the A.O. on account of disallowance of exemption u/s 10B of the Income Tax Act claimed on income arising out of export incentives.
2. That Ld. CIT(A) has erred in facts as well as law by ignoring the findings of the TPO and holding that LIBOR rate should be applied on interest advanced to Associate Enterprises in US and thereby deleting the addition of Rs. 1,12,30,672/- on account of interest on loan advanced to the AE.
3. It is prayed that the order of the Ld. CIT(A) be set-aside and that of the Assessing Officer restored.
4. That the appellant requests for leave to add or amend or alter the grounds of appeal before the appeal is heard and disposed off.”
In ITA No. 48/Asr/2016
“1. That on the facts and in the circumstances of the case the Ld. CIT(A) has erred in law in deleting the addition of Rs.35,62,192/- made by the A.O. on account of disallowance of exemption u/s 10B of the Income Tax Act claimed on income arising out of export incentives.
2. That Ld. CIT(A) has erred in facts as well as law by ignoring the findings of the TPO and holding that LIBOR rate should be applied on interest advanced to Associate Enterprises in US and thereby deleting the addition of Rs.1,97,22,434/- on account of interest on loan advanced to the AE.
3. It is prayed that the order of the Ld.CIT(A) be set-aside and that of the Assessing Officer restored.
6 & CO 32/Asr/2015 & Ors Asstt. CIT v. Broadways Overseas Ltd. & Ors 4. That the appellant requests for leave to add or amend or alter the grounds of appeal before the appeal is heard and disposed off.”
In ITA No. 49/Asr/2016
“1. That on the facts and in the circumstances, of the case the Ld. CIT(A) has erred in law in deleting the addition of Rs.91,76,693/- made by the A.O. on account of disallowance of exemption u/s 10B of the Income Tax Act claimed on income arising out of export incentives.
2. That Ld. CIT(A) has erred in facts as well as law by ignoring the findings of the TPO and holding that LIBOR rate should be applied on interest advanced to Associate Enterprises in US and thereby deleting the addition of Rs. 1,32,53,985/- on account of interest on loan advanced to the AE.
3. It is prayed that the order of the Ld. CIT(A) be set-aside and that of the Assessing Officer restored.
4. That the appellant requests for leave to add or amend or alter the grounds of appeal before the appeal is heard and disposed off.”
In ITA No. 345/Asr/2016
“1. That the Ld. CIT(A) has erred in facts as well as law by ignoring the findings of the TPO and holding that LIBOR rate should be applied on interest advanced to AE in US and thereby deleting an addition of Rs.1,76,30,906/- on account of interest on loan advanced to the AE.
2. That the Ld. CIT(A) has erred in facts as well as law by ignoring the findings of the TPO and holding that LIBOR rate should be applied on interest on receivable excess period granted to AE in US thereby deleting an addition of Rs.2,54,82,409 on account of interest on receivables for excess period granted to AE.
3. It is prayed that the order of the Ld. CIT(A) be set-aside and that of the Assessing Officer restored.
4. That the appellant requests for leave to add or amend or alter the grounds of appeal before the appeal is heard and disposed off.”
“1. That on the facts and circumstances of the case and in law, Ld. CIT(A) erred in confirming the action of Ld. AO/TPO in treating the outstanding debtors balance at the year-end as an "international transaction" and thereby computing arm's length price by making addition of notional interest.
2. That Ld. CIT(A) failed to appreciate and ought to have held that the continuing debit balance with the Associate Enterprise ("AE") emanating from export sales made to AE does not constitute an "international transaction" as defined u/s 92B of the Income Tax Act, 1961.
3. Without prejudice to the above and without admitting that continuing debit balance with the AE is an "international transaction", Ld. CIT(A) has erred in – a) not appreciating that there is no delayed realization of export proceeds as all invoices have been realized within the period allowed as per Agreement and therefore, there can be no question of charging of any interest as a separate transfer pricing adjustment.
b) ignoring the fact that though the TPO states that CUP method has been adopted there is no mention as to how CUP method has been selected as Most Appropriate Method and moreover, there is no mention of any comparable uncontrolled transaction to substantiate the stand that such method has been adopted. c) not holding that even if outstanding receivables constitutes an international transaction, no further adjustment on account of notional interest is called far because ratio of Operating Profit to Operating expenses of the appellant is much higher than the ratio of Operating Profit to Operating expenses of the comparable cases. d) ignoring the ratio laid down by the Hon'ble Delhi High Court in the case of Pr. CIT Vs. Kusum Health Care Pvt. Ltd., wherein it has been held that when Assessee has already factored in the impact of the receivables on the working capital and thereby on its 8 & CO 32/Asr/2015 & Ors Asstt. CIT v. Broadways Overseas Ltd. & Ors pricing/profitability vis-a-vis that of its comparables, any further adjustment only on the basis of the outstanding receivables is clearly impermissible in law. e) ignoring the ratio laid down by the Hon’ble ITAT, Ahmedabad in the case of Micro Link Ltd. Vs. ACIT, wherein it has been held that when the arm's length price of exports has been benchmarked on the basis on TNMM, the very conceptual of debtors is devoid of foundation for separate adjustment for delayed realization legally sustainable merits. f) rejecting the case of the appellant by observing that decision of Hon'ble ITAT, Delhi in the case of Kusum Health Care Pvt. Ltd. has been distinguished by subsequent order of Hon'ble ITAT Delhi. g) rejecting the case of the appellant by not considering the reasons and objections submitted by the appellant in totality.
The appellant submits that each of the above grounds/sub-grounds are independent and without prejudice to one another. The appellant craves leave to add, alter, vary, omit, substitute or amend the above grounds of appeal, at any time before or at the time of hearing of the appeal so as to enable the Hon'ble ITAT to decide the appeal according to law.”
Grounds of appeal in CO No. 32/Asr/2015
“1. That Ld. CIT(A) ought to have accepted the objection of the assessee company that Ld. DCIT had no jurisdiction to make reference to Transfer Pricing Officer for determination of arm's length price.
2. That Ld. CIT(A) ought to have held that in any case, reference made to Transfer Pricing Officer without demonstrating as to why it was necessary and expedient to do so is bad in law.
3. That Ld. ClT(A) is not justified in rejecting the objection of the assessee company citing provisions of section 92CA(2B) that assuming but not admitting that excess period of credit allowed by the assessee company on sales made to the subsidiary company is to be treated as an independent international transaction, Ld. Transfer Pricing Officer could not have taken cognizance suo moto of any international transaction for adjustment in the arm's length price u/s 92CA of the Income Tax Act, 1961 because no reference was made for the aforesaid transaction
9 & CO 32/Asr/2015 & Ors Asstt. CIT v. Broadways Overseas Ltd. & Ors 4. That the appellant craves leave to amend, alter or add to the above grounds of cross objection, before the appeal is heard or disposed off.”
Grounds of appeal in CO No. 06/Asr/2016
“1. That Ld. CIT(A) ought to have held that Ld. DCIT had no jurisdiction to pass the assessment order because earlier assessment order, which got set aside by the Ld. CIT, was passed by Ld. Addl.CIT and therefore, Ld. CIT(A) ought to have quashed the assessment order passed by Ld. DCIT.
2. That Ld. CIT(A) ought to have held that reference made without demonstrating as to why it was necessary and expedient to do so is bad in law.
3. That the appellant craves leave to amend, alter or add to the above grounds of appeal, before the appeal is heard or disposed off.”
Grounds of appeal in CO No. 07/Asr/2016
“1. That the Ld. CIT(A) has failed to appreciate that there was no material on record to prove that any income has escaped and Ld. CIT(A) was not justified in holding that proceedings u/s 147 are sustainable in law and on the facts and circumstances of the case.
2. That Ld. CIT(A) ought to have held that reference made without demonstrating as to why it was necessary and expedient to do so is bad in law.
3. That the appellant craves leave to amend, alter or add to the above grounds of appeal, before the appeal is heard or disposed off.”
Grounds of appeal in CO Nos. 08 & 09/Asr/2016
“1. That Ld. CIT(A) ought to have held that reference made without demonstrating as to why it was necessary and expedient to do so is bad in law.
2. That the appellant craves leave to amend, alter or add to the above grounds of appeal, before the appeal is heard or disposed off.”
10 & CO 32/Asr/2015 & Ors Asstt. CIT v. Broadways Overseas Ltd. & Ors Grounds of appeal in CO No. 17/Asr/2016
1. That Ld. CIT(A) ought to have held that reference made without demonstrating as to why it was necessary and expedient to do so is bad in law.
2. That Ld. CIT(A) ought to have held that as export sale proceeds have been realized within the credit period allowed to AE in the export invoices, question of charging of interest on receivables outstanding beyond the period stipulated in the invoice doesn’t arise at all.
3. That the appellant craves leave to amend, alter or add to the above grounds of appeal, before the appeal is heard or disposed off.”
4. Since, the bunch of appeals of department and the corresponding CO’s of the appellant arising out of these appeals involve identical issues on similar facts and these are being decided by the ld. CIT(A) by a common order and hence, the bunch of appeals were heard together and adjudicated by this consolidated order for the sake of brevity. The facts are discussed from being taken as a lead case.
5. The department has challenged the impugned order in deleting the addition on the issue of disallowance of exemption u/s 10B of the Income Tax Act claimed on income arising out of export incentives; the addition of on account of interest on loan advanced to the AE and addition on account of interest on receivables for excess period granted to AE.
The facts of the case are taken from in respect of the Assessment Year 2008-09 of the revenue appeal as a lead case to engaged in the business of manufacturing and export of fence fittings made of iron steel and aluminum. It has e-filed its return of income for the year under consideration on 27.09.2008 declaring therein an income of Rs. 1,58,45,829/- after claiming deduction under section 80IB of the Act at Rs.56,37,834/- on the profits of the Unit-1 (factory premises) of the assessee company situated at G.T. Road, Suranussi, Jalandhar and under section 10B of the Act at Rs.5,09,67,748/- on the profits of Unit-11 (factory premises) of the assessee company situated at A-12, Focal Point, Jalandhar. The return was processed under section 143(1) of the Act at the same income vide order dated 21.03.2009. During the course of assessment proceedings, the Assessing Officer has noticed that International Transactions of the assessee company with its Associate Enterprise during the year under consideration exceeds Rs. 15,00,00,000/- and hence, it required reference to Transfer Pricing Officer for the purpose of determination of Arm’s Length Price in respect of International Transactions entered into by the assessee company with its Associate Enterprise in USA. Accordingly, the Assessing Officer referred the said International Transactions of the assessee company to Transfer Pricing Officer (in short ‘the TPO’) on 21.12.2010 for computation of the Arm’s sent it to the Assessing Officer for necessary action at his end. The order/report of the TPO was received by the Assessing Officer on 28.10.2011. On receipt of the order/report from the TPO, on 28.10.2011, the Assessing Officer (“The AO”, in short) issued notice to the assessee company under section 142(1) of the Act on 14.11.2011 along with questionnaire.
6.1 The AO being not satisfied with the submission of the appellant assesse, has completed the assessment vide order under section 143(3)/144C of the Act dated 02.02.2012 at an assessed income of Rs.4,20,04,589/-.
7. The assesse being aggrieved with the Assessment Order, went in appeal before the Ld. CIT(A) who has granted major relief to the assessee by observing as under:
“8.2 I have considered the observations of the Assessing Officer as made by him in the assessment order. I have also considered the written submissions filed by the Ld. AR of the assessee company vide letters dated 24.01.2014 and 09.06.2015 in connection with the issue under reference. I have further considered various judicial pronouncements relied upon by the Ld. AR of the assessee company which find mention in the written arguments as reproduced above. On careful consideration of the rival contentions, it has been noticed that the Assessing Officer had denied the deduction under section 10B of the Act to the assessee company on export incentives by holding that there should be a 13 & CO 32/Asr/2015 & Ors Asstt. CIT v. Broadways Overseas Ltd. & Ors .direct nexus between the receipt & the process of manufacture i.e. the receipt should not be incidental to the manufacturing process but should be a direct outcome of the manufacturing process. On the other hand, the Ld. AR of the assessee company has submitted that the deduction has been correctly claimed as is as per provisions of the Act. On careful consideration of the rival contentions, it has been noticed that the Honourable Delhi High Court in the case of CIT Vs. XLNC Fashions and CIT Vs. Hrintnik Exports Pvt. Ltd. (supra); Honourable Karnataka High Court in the case of CIT Vs. Motorola India Electronics (P) Ltd. (supra); and Honourable ITAT, Special Bench Indore in the case of M/s Maral Overseas Ltd. vs. Addl.CIT (supra) have held after analyzing the provisions of section 10B(1)/10B(4) of the Act that deduction under section 10B of the Act has to be allowed on income from business of the eligible undertaking which includes export incentive. Respectfully following the aforesaid judgments, I am inclined to direct the Assessing Officer to allow deduction under section 10B of the Act to the assessee company on the income from business of the eligible undertaking which will also include export incentive. The Assessing Officer is directed accordingly. In the result, ground No. 4 of appeal taken by the assessee company is allowed.”
“10.4 I have considered the observations of the Assessing Officer/TPO as made by them in the assessment order/transfer pricing order as well as their comments on the submissions of the assessee dated 24.01.2014. I have also considered written submissions of the assessee company filed vide letter dated 24.01.2014 as well its counter comments on the report of the Assessing Officer. I have further considered various judicial pronouncements relied upon by the Assessing Officer as well as by that of the Ld. AR of the assessee company as well as other material placed on record. On careful consideration of the rival contentions, I am of the opinion that the two issues involved are with regard to transfer pricing adjustments for interest on loan advanced to AE in foreign currency and interest on outstanding receivables in the account of AE. The TPO had benchmarked the interest rate against the expected return from investment from bonds and made adjustment of Rs. 1,48,40,164/- to the income of the assessee whereas the case of the appellant is that loan has been advanced to AE in USA in US $ and being an international transaction, interest rate should be benchmarked against LIBOR. I find that in various decisions of Honourable ITATs relied upon by the Ld. AR of the assessee company, have accepted LIBOR as comparable uncontrolled transaction and as the most suitable bench mark for judging Arm’s length price in case of foreign currency loan. The Honourable Delhi High Court, in a recent decision in the case of CIT Vs. Cotton Naturals (I) Pvt. Ltd. (supra) has rejected all the contentions being raised by 14 & CO 32/Asr/2015 & Ors Asstt. CIT v. Broadways Overseas Ltd. & Ors TPO and has upheld in para 39 & 40 of the judgment that LIBOR should have been used for benchmarking interest rate on loan advanced to Associate Enterprise in foreign currency. I further find that in the case of assessee for A.Y. 2004-05 to 2006-07, TPO has benchmarked the interest on loan advanced to AE against LIBOR and no adjustment was made on account of interest on loan advanced to AE in these years. Respectfully following the judgment of Honourable Delhi High Court, I am no hesitation in holding that that the TPO has erred in benchmarking the interest rate against the expected return from investment in bonds and loan advanced to AE in foreign currency should have been benchmarked by using LIBOR. As such, the addition of Rs. 1,48,40,164/- made by the Assessing Officer to the income of the assessee company by way of Arms Length Price adjustments in respect of interest on loan in foreign currency is directed to be deleted. 10.5 As far as the other adjustment in respect of excess period credit in respect of receivables is concerned, the TPO after treating the outstanding receivables in the account of AE as an international transaction made adjustment of Rs. 76,45,292/- to the income of the assessee being the interest on excess period of credit on receivables allowed by the assessee whereas the case of the appellant is that the outstanding receivables beyond the normal credit period is not an international transaction per se; Outstanding receivables beyond normal credit period have not arisen out of loan transaction; and outstanding Receivables is not a distinct activity and Transfer Pricing Officer ought to have considered TNMM method. I find that the credits in the account of AE have arisen out of export sale made by the assessee company to the AE and therefore, receivables arising from such transactions are undoubtedly inextricable connected. Further. TPO has applied interest rate of 17.26% which has been applied by the TPO to compute Arms length interest on loan advanced to AE without any comparable. The Honourable ITAT, Mumbai in the case of ACIT Vs. Nimbus Communications Ltd. (supra) (relied upon by the TPO and the Ld. AR) has held that even when an ALP is made in respect of excessive credit period allowed under CUP method, the comparable has to dues recoverable from a debtor not a borrower. In this case, even the adjustment made by TPO by adopting interest @ 2.19% LIBOR was deleted by the Honourable ITAT. I further find that assessee has earned very high net profit as compared to the comparables and on account of high margin no adjustment would have been made by the TPO on export sale made by the assessee company to its AE. The Honourable ITAT, Delhi in the case of Kusum Healthcare Pvt. Ltd. Vs. ACIT (supra) has held that if the pricing/profitability of the assessee are more than the working capital adjusted margin of the comparables, then additional imputation of interest on the outstanding
15 & CO 32/Asr/2015 & Ors Asstt. CIT v. Broadways Overseas Ltd. & Ors receivables is not warranted. Respectfully following the judgment of the Honourable ITAT, Mumbai and Honourable ITAT, Delhi, I also delete the addition of Rs76,45,292/- made by the Assessing Officer to the income of the assessee being the interest on excess period of credit on receivables. In the result, grounds No. 6, 7 and 8 of appeal taken by the assessee company are allowed.”
8. The Ld. CIT (DR) for the department submitted that on the facts and in the circumstances of the case the Ld. CIT(A) has erred in law in deleting the addition of Rs.18,92,129/- made by the A.O. on account of disallowance of exemption u/s 10B of the Income Tax Act claimed by the appellant on income arising out of export incentives. The Ld. DR heavily relied on the assessment order. In support, on the addition of Rs.18,92,129/- made by the A.O., on account of disallowance of exemption u/s 10B of the Income Tax Act claimed on income arising out of export incentives, he placed reliance on Apex Court Judgement in the case of M/s.
Saraf Exports Vs. Commissioner of Income Tax-III, in Civil Appeal No. 4822 of 2022 [@SLP (C) No.17539 of 2016] rendered on the provisions of section 80IB, affirming their view earlier taken in the case of Liberty India 317 ITR 218 (SC) : 225 CTR (SC) 233 for allowing deduction u/s 80IB. The Ld. DR referred to the following paras of the judgement:
“7.3 After taking into consideration the DEPB and Duty Drawback Schemes, ultimately, it is observed and held in the case of Liberty India (supra) that DEPB/ Duty Drawback Schemes are incentives which flow from the schemes framed by the Central Government or 16 & CO 32/Asr/2015 & Ors Asstt. CIT v. Broadways Overseas Ltd. & Ors from Section 75 of the Customs Act, 1962 and, hence, incentive profits are not profits derived from the eligible business under Section 80-1B. It is observed that they belong to the category of ancillary profits of such undertakings. 7.4 Similar view was also expressed with respect to the Duty Drawback. Thereafter, in paragraph 43 of the above decision, it is observed and held that duty drawback, DEPB benefits, rebates, etc. cannot be credited against the cost of manufacture of goods debited in the profit and loss account for purposes of Sections 80-IA/80-IB as such remissions (credits) would constitute an independent source of income beyond the first degree nexus between profits and the industrial undertaking. Thus, it is observed and held that duty drawback receipts / DEPB benefits do not form part of the net profits of eligible industrial undertakings for the purpose of Section 80-IB of the Act, 1961.” “7.6 Therefore, following the law laid down by this Court in the case of Sterling Foods, Mangalore (supra) and Liberty India (supra) as such, no error has been committed by the High Court in holding that on the profit from DEPB and Duty Drawback claims, the assessee shall not be entitled to the deductions under Section 80-IB as such income cannot be said to be an income “derived from” industrial undertaking and even otherwise as per Section 28(iiid) and (iiie), such an income is chargeable to tax. 7.7 Insofar as reliance placed by the learned counsel for the assessee upon the subsequent decision of this Court in the case of Meghalaya Steels Limited (supra) is concerned, at the outset, it is required to be noted that in the case of Meghalaya Steels Limited (supra), it was a case of three subsidies, namely a) Transport Subsidy, b) Interest Subsidy, and c) Power Subsidy and in that context this Court observed and held that since these subsidies directly affect the cost of manufacturing, they have a direct nexus with the profits and gains of the undertaking and since these subsidies have a direct nexus, they can be said to be derived from the industrial undertaking. It is to be noted that in the case of Meghalaya Steels Limited (supra), this Court did take note of the decision in the case of Liberty India (supra), however, this Court specifically observed that the case of Liberty India (supra) was concerned with an export incentive, which is very far removed from reimbursement of an element of cost. While dealing with the decision in the case of Liberty India (supra), this Court distinguished
17 & CO 32/Asr/2015 & Ors Asstt. CIT v. Broadways Overseas Ltd. & Ors Duty Entitlement Pass Book and Duty Drawback Schemes and specifically observed that the DPEB / Duty Drawback Scheme is not related to the business of an industrial undertaking for manufacturing or selling its products and the DEPB entitlement arises only when the undertaking goes on to export the said product, that is, after it manufactures or produces the same. In paragraph 20, in the case of Meghalaya Steels Limited (supra), while distinguishing the profit derived from DEPB / Duty Drawback, it is observed and held as under:- “20. Liberty India [Liberty India v. C/T, (2009) 9 SCC 328] being the fourth judgment in this line also does not help the Revenue. What this Court was concerned with was an export incentive, which is very far removed from reimbursement of an element of cost. A DEPB drawback scheme is not related to the business of an industrial undertaking for manufacturing or selling its products. DEPB entitlement arises only when the undertaking goes on to export the said product, that is, after it manufactures or produces the same. Pithily put, if there is no export, there is no DEPB entitlement, and therefore its relation to manufacture of a product and/or sale within India is not proximate or direct but is one step removed. Also, the object behind DEPB entitlement, as has been held by this Court, is to neutralise the incidence of customs duty payment on the import content of the export product which is provided for by credit to customs duty against the export product. In such a scenario, it cannot be said that such duty exemption scheme is derived from profits and gains made by the industrial undertaking or business itself.” Thus, from paragraph 20 of the said decision, it can be seen that this Court did not disapprove of the decision of this Court in the case of Liberty India (supra). Even in the case of Meghalaya Steels Limited (supra), this Court did not consider the earlier decision in the case of Sterling Foods, Mangalore (supra). Thus, the decision of this Court in the cases of Liberty India (supra) and Sterling Foods, Mangalore (supra), which as such are on DEPB / Duty Drawback Schemes clinch the issue at hand. It cannot be said that the decision taken in the case of Meghalaya Steels Limited (supra) is contrary to the decisions in the case of Sterling Foods, Mangalore (supra) and Liberty India (supra). On the 18 & CO 32/Asr/2015 & Ors Asstt. CIT v. Broadways Overseas Ltd. & Ors contrary, the observations made in paragraph 20 can be said to be in favour of the Revenue and against the assessee.
8. In view of the above and for the reasons stated above, the High Court has rightly held that the respondent - assessee is not entitled to the deductions under Section 80-IB on the amount of DEPB as well as Duty Drawback Schemes. We hold that on the profit earned from DEPB / Duty Drawback Schemes, the assessee is not entitled to deduction under Section 80-IB of the Act, 1961. Any contrary decision of any High Court is held to be not good law.
9. The CIT (DR) prayed that on the issue of 10B challenged, the order of the Ld. CIT(A) be set-aside and that of the Assessing Officer be restored.
10. Per contra, the defendant Ld. Counsel vehemently supported the impugned order and reiterated the submission made before the Ld. CIT with the support of written submissions. The Ld. AR argued that the judgment of Hon’ble Supreme Court in the case of Saraf Exports Vs. CIT in Civil Appeal No. 4822 of 2022 relied by the Ld. DR is rendered on the provisions of section 80IB of the Income Tax Act, 1961, where the Hon’ble Apex Court has affirmed the view earlier taken in the case of Liberty India 317 ITR 218 (SC) : 225 CTR (SC) 233 for allowing deduction u/s 80IB. The ld. AR argued that it is not applicable to issue contested on the deduction u/s 10B of the Act. The counsel has defended the issue of claim of deduction with the support of written synopsis which reads as under:
19 & CO 32/Asr/2015 & Ors Asstt. CIT v. Broadways Overseas Ltd. & Ors Your Honour, above referred decision of Hon’ble Supreme Court in the case of Saraf Exports (supra) relied upon by the Ld. D.R., has been rendered as per provisions of section 80IB of the Income Tax Act, 1961. In the case of Saraf Exports (supra), Hon’ble Supreme Court has affirmed the view earlier taken in the case of Liberty India 317 ITR 218 (SC) : 225 CTR (SC) 233 for allowing deduction u/s 80IB. Whereas, Section 10B of the Income Tax Act, 1961 is a special provision and complete code in itself and deal with profits and gains as are derived by 100per cent Export Oriented Undertaking (EOUs.) from the export of articles or things.
Comparative chart of provisions of Section 80IB and Section 10B entitling deduction are as under:-
Section 80IB Section 10B Section 80IB. (1) Where the gross 10B. (1) Subject to the enabling total income of an assessee provisions of this section, a deduction includes any profits and gains deduction of such profits and gains derived from any business as are derived by a hundred referred to in sub-sections (3) percent export-oriented to (11), (11A) and (11B) undertaking from the export of (such business being articles or things or computer hereinafter referred to as the software for a period of ten eligible business), there shall, consecutive assessment years in accordance with and beginning with the assessment subject to the provisions of year relevant to the previous year this section, be allowed, in in which the undertaking begins to computing the total income of manufacture or produce articles or the assessee, a deduction things or computer software, as the from such profits and gains of case may be, shall be allowed from an amount equal to such the total income of the assessee.” percentage and for such number of assessment years as specified in this section. Section 80IB. (3) The amount of 10B. (4) For the purposes of sub- providing deduction in the case of an section (1), the profits derived from method of industrial undertaking shall export of articles or things or computation be twenty-five per cent (or computer software shall be the and amount thirty per cent where the amount which bears to the profits of 20 & CO 32/Asr/2015 & Ors Asstt. CIT v. Broadways Overseas Ltd. & Ors of assessee is a company), of the business of the undertaking, the deduction the profits and gains derived same proportion as the export from such industrial turnover in respect of such articles undertaking for a period of or things or computer software ten consecutive assessment bears to the total turnover of the years (or twelve consecutive business carries on by the assessment years where the undertaking assessee is a co-operative society) beginning with the initial assessment year
2. Your Honour, as per Section 10B(4), deduction has been provided on profits of the business of the undertaking. Whereas, as per Section 80IB(3), deduction has been provided on profits and gains derived from eligible industrial undertaking..
3. Your Honours, sub section (4) provides the quantum of deduction which can be availed by an assessee. The quantum of deduction is dependent upon the total turnover of the business of the undertaking and the export turnover of the undertaking. Once these two figures are available, one has to divide the total turnover by the export turnover in order to work out the percentage of the export turnover, vis-a-vis the total turnover. Suppose total turnover is Rs. 1000 and total export turnover is for Rs 900, then the export turnover is 90 per cent of the total turnover. Then one has to find out the total profit of the business of the undertaking. Suppose the total profit of the business of the undertaking is Rs. 100, in that case, deduction available to the assessee under sub section (1) of Section 10B shall be 90 per cent of Rs. 100, i.e. to say Rs. 90. This is the formula which has been provided by sub section (4) for the purpose of working out the benefit or deduction under sub section. (1). 4. Your Honour, Legislature has not provided for excluding the amount of export incentive from profits of the business while calculating deduction u/s 10B. The position is somewhat akin or close to Section 80HHC of the Income Tax Act, 1961, which also prescribes a formula for computation of deduction in respect of exports. Legislature has specifically provided to reduce to certain receipts from profit and gains for computing deduction u/s 80HHC. Explanation (baa) to Section 80HHC reads thus:
21 & CO 32/Asr/2015 & Ors Asstt. CIT v. Broadways Overseas Ltd. & Ors “(baa) profits of the business" means the profits of the business as computed under the head "Profits and gains of business or profession" as reduced by— (1) ninety per cent of any sum referred to in clauses (iiia), (iiib) , (iiic) (iiid) and (iiie) of section 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits; and (2) the profits of any branch, office, warehouse or any other establishment of the assessee situate outside India” Your Honour, Legislature has specifically provided to exclude certain receipts forming part of business income for computing deduction u/s 80HHC but has not provided to exclude such receipts for computing deduction u/s 10B.
While framing the assessment, Ld. AO has denied deduction u/s 10B on export incentive of Rs.18,92,129/- of eligible Industrial Undertaking. The reasons stated by the Ld. AO for denying deduction u/s 10B on export inventive in para 5.2 of the assessment order are as under:-
“In order to claim benefits u/s 10B there should be direct nexus between the receipt & process of manufacture i.e. the receipt should not be incidental to the manufacturing process but should be a direct outcome of the manufacturing process. Though the DEPB is in the nature of a benefit extendable by the Govt. to encourage exports & would constitute profits & gains of the business of the assessee, the same would not amount to profits & gains derived from the undertaking & hence would not be eligible receipt for the purpose of computation of exemption u/s 10B. Accordingly, the claim of exemption on DEPB receipt is disallowed.”
6. Your Honour, ITAT, Special Bench Indore in the case of Maral Overseas Ltd. vs. Addl.CIT (2012) 146 TTJ (Ind) (SB) 129 : (2012) 016 ITR (Trib) 565 (Indore) has held that the assessee is eligible for claim of deduction on export incentive received by it in terms of provisions of section 10B(1) read with section 10B(4) of the Income Tax Act, 1961. Relevant para 79 and 80 of the judgment reads thus:
“79. Thus, sub-s. (4) of s. 10B stipulated that deduction under that section shall be computed by apportioning the profits of the business of the undertaking in the ratio of export turnover to the total turnover. Thus, notwithstanding the fact that sub-s. (1) of s. 10B refers the profits and gains as are derived by a 100 per cent EOU, yet the manner of determining such eligible profits has been statutorily defined in sub-s. (4) of s. 10B of the Act. As per the formula stated above, the entire profits of the business are to be taken which are multiplied by the ratio of the export turnover to the total turnover of the business. Sub-s. (4) does not 22 & CO 32/Asr/2015 & Ors Asstt. CIT v. Broadways Overseas Ltd. & Ors require an assessee to establish a direct nexus with the business of the undertaking and once an income forms part of the business of the undertaking, the same would be included in the profits of the business of the undertaking. Thus, once an income forms part of the business of the eligible undertaking, there is no further mandate in the provisions of s. 10B to exclude the same from the eligible profits. The mode of determining the eligible deduction under s. 10B is similar to the provisions of s. 80HHC in as much as both the sections mandate determination of eligible profits as per the formula contained therein. The only difference is that s. 80HHC contains a further mandate in terms of Expln. (baa) for exclusion of certain income from the "profits of the business" which is, however, conspicuous by its absence in s. 10B. On the basis of the aforesaid distinction, sub-s. (4) of s. 10A/10B of the Act is a complete code providing the mechanism for computing the "profits of the business" eligible for deduction under s. 10B of the Act. Once an income forms part of the business income of the eligible undertaking of the assessee, the same cannot be excluded from the eligible profits for the purpose of computing deduction under s. 10B of the Act. As per the computation made by the AO himself, there is no dispute that both these incomes have been treated by the AO as business income. The CBDT Circular No. 564, dt. 5th July, 1990 reported in (1990) 85 CTR (St) 53 : (1990) 184 ITR (St) 37 explained the scope and ambit of s. 80HHC and the mode of determination of profits derived by an assessee from the export of goods. Tribunal, Special Bench in the case of International Research Park Laboratories Ltd. vs. Asstt. CIT (supra), after following the aforesaid circular, held that straight jacket formula given in sub-s. (3) has to be followed to determine the eligible deduction. The Hon’ble Supreme Court in the case of P.R. Prabhakar vs. CIT (2006) 204 CTR (SC) 27 : (2006) 284 ITR 548 (SC) had approved the principle laid down in the Special Bench decision in International Research Park Laboratories vs. Asstt. CIT (supra). In the assessee’s own case the Tribunal in the preceding years, after considering the decision in the case of Liberty India (supra) held that provisions of s. 10B are different from the provisions of s. 80-IA wherein no formula has been laid down for computing the eligible business profit.
In view of the above discussion, question No. 2 is answered in affirmative and in favour of the assessee. Accordingly, the assessee is eligible for claim of deduction on export incentive received by it in terms of provisions of s. 10B(1) r/w s. 10B(4) of the Act.”
7. Your Honour, Hon’ble Delhi High Court has also held in the case of CIT Vs. XLNC Fashions in ITA 438/2014 dated 01.09.2014 that the duty draw back or duty benefits would be deemed to be a part of the business income and will be treated as profit derived from business of the undertaking. These cannot be 23 & CO 32/Asr/2015 & Ors Asstt. CIT v. Broadways Overseas Ltd. & Ors excluded while computing deduction u/s 10B. Hon’ble Delhi High Court has held as under:- “The issue in question in this appeal which pertains to the Assessment year 2009- 10, relates to duty draw back in the form of DEPB benefits. As per section 28, clause (iii-c), any duty of customs or excise repaid or repayable as drawback to a person against exports under Custom and Central Excise Duties Draw Back Rules, 1971 is deemed to be profits and gains of business or profession. The said provision has to be given full effect to and this means and implies that the duty draw back or duty benefits would be deemed to be a part of the business income. Thus, it will be treated as profit derived from business or profession. These cannot be excluded. Even otherwise, when we apply Sub-section (4) to Section 10B, the entire amount received by way of duty draw back would not become eligible for deduction/exemption. The amount qualified as per the formula would be eligible and qualify for deduction/exemption. The position is somewhat akin or close to Section 80HHC of the Act, which also prescribes a formula for computation of deduction in respect of exports.”
8. Your Honour, Hon’ble Delhi High Court has again held in the case of CIT Vs. Hrintnik Exports Pvt. Ltd. in ITA 219/2014 and 239/2014 dated 13.11.2014 that export incentive forms part of profits of business while computing deduction 10B of the Income Tax Act, 1961.
Your Honour, Hon’ble Karnataka High Court in the case of CIT Vs. Motorola India Electronics (P) Ltd. (2014) 46 taxmann.com 167 (Karnataka), after noticing the decision of Hon’ble Supreme Court in Liberty India (supra) has held in para 7 & 8 of the judgment that:
“7.………………………………………………………………………………… By Finance, Act, 2001, with effect from 01.04.2001, the present Sub- section (4) is substituted in the place of old Sub-section (4). No doubt Sub-section 10(B) speaks about deduction of such profits and gains as derived from 100% EOU from the export of articles or things or computer software. Therefore, it excludes profit and gains from export of articles. But Sub-section (4) explains what is (4) says that profits derived from export of articles or things or computer software shall be the account which bares 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 is different from the income derived from the profits of the business of the undertaking. The profits of the business of the undertaking includes the profits and gains from export of the articles as well as all other 24 & CO 32/Asr/2015 & Ors Asstt. CIT v. Broadways Overseas Ltd. & Ors 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 Section 80HHC. On the contrary there is a specific provision like Section 80HHB which expressly excludes this type of incomes. Therefore, in view of the aforesaid provisions, it is clear that, what is exempted is not merely the profits and gain from the export of articles but also the income from the business of the undertaking.” “8. 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 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.” Your Honours, Hon’ble Karnataka High Court has clearly held in above stated para 8 of the judgement that there is a direct nexus between interest received/consideration received by sale of import entitlement and the income of the business of the undertaking.
Your Honours, Hon’ble Delhi High Court has again held in the case of Riviera Home Furnishing Vs. Addl.CIT (2016) 237 Taxman 520 that once income form part of business of income of eligible undertaking of Assessee, same could not be excluded from eligible profits for computing deduction u/s 10B of the Income Tax Act, 1961. Hon’ble Delhi High Court has also observed in para 15 of the aforesaid order that Revenue is not right in contending that decisions of the Motorola India and Hrintnik Exports referred above have not noticed the decision of Hon’ble Supreme Court in Liberty India.
25 & CO 32/Asr/2015 & Ors Asstt. CIT v. Broadways Overseas Ltd. & Ors “15. In the considered view of the Court, the submissions made on behalf of the Revenue proceed on the basic misconception regarding the true purport of the provisions of Chapter VI-A of the Act and on an incorrect understanding of s. 80A(4) of the Act. The opening words of s. 80A(4) read "Notwithstanding anything to the contrary contained in s. 10A or s. 10AA or s. 10B or s. 10BA or in any provisions of this chapter.....". What is sought to be underscored, therefore, is that s. 80A, and the other provisions in Chapter VI-A, are independent of ss. 10 and 10B of the Act. It appears that the object of s. 80A(4) was to ensure that a unit which has availed of the benefit under s. 10B will not be allowed to further claim relief under s. 80-IA or 80-IB r/w s. 80A(4). The intention does not appear to be to deny relief under s. 10B(1) r/w s. 10B(4) or to whittle down the ambit of those provisions as is sought to be suggested by Mr. Manchanda. Also, he is not right in contending that the decisions of the High Courts referred to above have not noticed the decision of the Supreme Court in Liberty India (supra). The Karnataka High Court in CIT vs. Motorola India Electronics (P) Ltd. (supra) makes a reference to the said decision. That decision of the Karnataka High Court has been cited with approval by this Court in Hritnik Exports (supra) and Universal Precision Screws (supra). In Hritnik Exports (supra) the Court quoted with approval the observations of the Special Bench of the Tribunal in Maral Overseas Ltd. (supra) that, "Sec. 10A/10B of the Act is a complete code providing the mechanism for computing the ‘profits of the business’ eligible for deduction under s. 10B of the Act. Once an income forms part of the business of the income of the eligible undertaking of the assessee, the same cannot be excluded from the eligible profits for the purpose of computing deduction under s. 10B of the Act."
11. Your Honours, Full bench of Karnataka High Court in the case of CIT & Anr. Vs. Hewlett Packard Global Soft Ltd. (2017) 299 CTR (Kar)(FB) 118 : (2018) 403 ITR 453 ( Kar)(FB) has affirmed and agreed with the view expressed by the first division bench of Karnataka High Court in the case CIT Vs. Motorola India Electronics (P) Ltd. (Supra) and has held that the interest income earned incidentally cannot be de-linked from its profits and gains derived by the undertaking engaged in the export of articles as envisaged under ss. 10A or 10B of the Act and cannot be taxed separately under s. 56 of the Act. Relevant para 36 to 39 of the judgment reads thus: “37. On the above legal position discussed by us, we are of the opinion that the respondent-assessee was entitled to 100 per cent exemption or deduction under s. 10A of the Act in respect of the interest income earned by it on the deposits made by it with the banks in the ordinary course of its business and also interest earned by it from the staff loans and such interest income would not be taxable as 'income from other sources' under 26 & CO 32/Asr/2015 & Ors Asstt. CIT v. Broadways Overseas Ltd. & Ors s. 56 of the Act. The incidental activity of parking of surplus funds with the banks or advancing of staff loans by such special category of assessees covered under s. 10A or 10B of the Act is integral part of their export business activity and a business decision taken in view of the commercial expediency and the interest income earned incidentally cannot be de- linked from its profits and gains derived by the undertaking engaged in the export of articles as envisaged under ss. 10A or 10B of the Act and cannot be taxed separately under s. 56 of the Act.
38. We therefore affirm and agree with the view expressed by the first Division Bench of this Court in the case of Motorola India Electronics (P)Ltd. (supra) and we do not agree with the view taken by the subsequent Division Bench on 10th April, 2014 in the present case.
Both the questions thus framed above are answered in favour of the respondent-assessee and against the Revenue in the terms indicated above and the matter is sent back to the Division Bench for deciding this appeal in accordance with the aforesaid opinion.
12. Your Honour, Ld. AO has denied deduction on export incentives on the basis that export incentives have not been derived from the undertaking. Whereas, Section 10B(4) provides deduction u/s 10B on profits of the business of the undertaking. Ld. AO while denying deduction on export incentives has admitted that export incentives would constitute profits & gains of the business of the assessee. In view of the judgment of Hon’ble Karnataka High Court in the case of Motorola India Electronics (P) Ltd. (supra) and other various judgments, it is submitted that deduction u/s 10B has been rightly claimed by the assessee company on export incentive which forms part of profits of business of the undertaking as export incentives have direct nexus with the income of the business of the undertaking.
Your Honours, Judgement of Hon’ble Supreme Court in the cases of Liberty India (supra) and Saraf Exports (supra) have been rendered as per provisions Section 80IB wherein the deduction is provided on profits and gains derived from eligible industrial undertaking. Whereas, under section 10B the deduction has been provided on profits of the business of the undertaking. As such, it is humbly submitted that judgement of Hon’ble Supreme Court in the case of Saraf Exports (supra) relied upon by the Ld. D.R. is distinguishable and has no application for computing deduction u/s 10B of the Income Tax Act, 1961.
27 & CO 32/Asr/2015 & Ors Asstt. CIT v. Broadways Overseas Ltd. & Ors Ld. AO has, therefore, wrongly reduced the export incentive from profits of business while computing deduction 10B of the Income Tax Act, 1961 and Ld. CIT(A) has rightly allowed deduction u/s 10B on export incentives forming part of profits of business.”
We have heard rival contentions, perused the material on record, impugned order, written submission and case law cited before us. The assessee company is engaged in the business of manufacturing and export of wooden handicraft, fence fittings made of iron steel and aluminum.
Admittedly, the assessee filed its return on 30.09.2008 declaring its income as nil, claiming deduction of Rs. 70,197/- on account of receipt under DEPB and of Rs. 76,27,636/- under the Duty Drawback u/s 10B of the Act after crediting the said receipts of the aforesaid amounts into the Profit & Loss Account under Sections 28(iiic) and 28(iiib) of the Act. The AO disallowed the aforesaid claim of deduction under section 10B of the Act following the Hon’ble Apex Court Judgement in “Liberty India Vs. Commissioner of Income Tax”, (2009) 9 SCC 328: (2009) 317 ITR 218 (SC) and “Commissioner of Income Tax, Karnataka Vs. Sterling Foods”, Mangalore (1999) 4 SCC 98, rendered on the issue of claim of deduction on export incentives u/s 80IB of the Act. The Ld. DR has supported the view of the AO relying on the later judgement rendered by the Hon’ble Apex Court in the case of “M/s. Saraf Exports Vs. Commissioner of Income Tax-III”, in provisions of section 80IB, affirming their view earlier taken in the case of Liberty India 317 ITR 218 (SC): 225 CTR (SC) 233 on the claim of deduction u/s 80IB of the Act. The Ld. DR contended that the AO had rightly denied the deduction under section 10B of the Act to the assessee company on export incentives by holding that there should be a direct nexus between the receipt and the process of manufacture i.e. the receipt should not be incidental to the manufacturing process but should be a direct outcome of the manufacturing process.
The Ld. AR argued that provisions of section 10B and 80IB are provided under the act with specific purpose and with good intention to provide benefit to the business entrepreneur. He contended that as per the provisions of section10B(1) a deduction of such profits and gains as are derived by a hundred percent export-oriented undertaking 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 assesse and that section 10B (4) further clarify for the purposes of sub-section (1), the profits derived from 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 carries on by the business undertaking whereas under the provisions of section 80IB(1) the gross total income of an assessee includes any profits and gains derived from any business referred to in sub-sections (3) to (11), (11A) and (11B) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to such percentage and for such number of assessment years as specified in this section where the section 80IB(3) provides for the amount of deduction in the case of an industrial undertaking shall be twenty-five per cent (or thirty per cent where the assessee is a company), of the profits and gains derived from such industrial undertaking for a period of ten consecutive assessment years (or twelve consecutive assessment years where the assessee is a co- operative society) beginning with the initial assessment year. He contended that appellant company export incentive forms part of profits of business of the business of the said undertaking.
13. In our view, these two set of provisions u/s 80IB and 10B of the Act, provided under the law for specific purpose with the intention to benefit and promote industrial growth and export promotion respectively under the act.
Accordingly, it would not be justified to interpret or apply same yards sticks or ratio of judgement for deciding the claim of deduction under the provision of these two independent sections of the Act.
The Ld. CIT(A) following the Honourable Delhi High Court in the case of “CIT Vs. XLNC Fashions”, and “CIT Vs. Hrintnik Exports Pvt. Ltd. (supra); Honourable Karnataka High Court in the case of CIT Vs. Motorola India Electronics (P) Ltd. (supra); and Honourable ITAT, Special Bench Indore in the case of M/s Maral Overseas Ltd. vs. Addl.CIT (supra) have held that after analyzing the provisions of section 10B(1)/10B(4) of the Act that deduction under section 10B of the Act has to be allowed on income from business of the eligible undertaking which includes export incentive.
From above, it is evident that the AO has denied deduction on export incentives on the basis that export incentives have not been derived from the business of undertaking. However, the Section 10B(4) provides undertaking from the export of articles or things or computer software of the business of the undertaking. Without prejudice to the above, the AO while denying deduction on export incentives has admitted that export incentives would constitute profits & gains of the business of the assessee.
The Judgement of Hon’ble Supreme Court in the cases of Liberty India (supra) and Saraf Exports (supra) relied by the Ld. DR have been rendered as per provisions Section 80IB wherein the deduction is provided on profits and gains derived from eligible industrial undertaking from any business. Whereas, under section 10B the deduction has been provided on profits of the business of the undertaking by a hundred percent export- oriented undertaking. Thus, the Judgement of Hon’ble Supreme Court in the cases of Liberty India (supra) and Saraf Exports (supra) relied by the Ld. DR are distinguishable on peculiar facts of the present case and hence, it has no application for claim of deduction u/s 10B of the Income Tax Act, 1961.
Following the judgement of higher judicial forums in the case of “CIT Vs. Motorola India Electronics (P) Ltd. (supra); and M/s Maral Overseas Ltd. vs. Addl.CIT (supra) and others on the peculiar facts of the instant CIT(A) was justified in granting relief to the appellant assessee in allowing deduction u/s 10B of the Act. Thus, the ground no. 1 of the revenue on the issue of deleting addition of Rs.18,92,129/- on account of disallowance under section 10B is rejected.
In the next issue, revenue has challenged that CIT(A) has ignored the findings of the TPO and applied LIBOR, for rate on interest advanced to Associate Enterprises in US and thereby deleting the addition of Rs. 1,48,40,164/- on account of interest on loan advanced to the AE and addition of Rs.76,45,292/- on account of interest on receivables for excess period granted to AE.
The Ld. CIT(DR) submitted that the CIT(A) has erred in ignoring the findings of the TPO in holding that LIBOR, rate should be applied on interest advanced to Associate Enterprises in US and thereby deleting the addition of Rs. 1,48,40,164/- on account of interest on loan advanced to the AE and that the Ld. CIT(A) has erred in facts as well as law by ignoring the findings of the TPO and holding that rate should be applied based on LIBOR for interest on receivables for excess period granted to AE in US thereby deleting an addition of Rs.76,45,292/- on account of interest on of the Assessing Officer in making reference to the Transfer Pricing Officer and thereafter making total addition of Rs.2,24,85,456/- (Rs. 1,48,40,164/- + Rs.76,45,292/-) on account of Arms Length Adjustments in respect of interest on loans and excess period of credit was as per law and prayed that the assessment order may be restored on this issue.
Per contra, the Ld. AR supported the impugned order. He contended that the Ld. CIT(A) was justified in holding the interest rate based on LIBOR for calculating interest on loan advanced by the Assessee Company to its wholly owned subsidiary i.e. Associate Enterprise (AE) located in USA and that Interest on receivables in the account of AE arising out of export sales made by the Assessee Company to AE in USA. Export sales to AE have been benchmarked by using TNMM by the Assessee Company in TP study. TPO has accepted the TP study of the Assessee Company with regard to export sales to AE and has not proposed any transfer pricing adjustment on export sales in his transfer pricing Order. In support, on the Ground of Appeal relating to the issue “Whether LIBOR is the appropriate Interest rate on loan advanced to AE in foreign currency which is also repayable in foreign currency”, the ld. AR, filed brief synopsis which reads as under:
34 & CO 32/Asr/2015 & Ors Asstt. CIT v. Broadways Overseas Ltd. & Ors 1. Ld. TPO computed adjustment of Rs. 1,48,40,164/- on loan advanced by Assessee Company in foreign currency viz. US $ to its AE (100% owned subsidiary company) in USA by observing that since the tested party is tax payer, prevalent interest that could have been earned by the taxpayer by advancing a loan to unrelated party in India has to be considered. Ld. TPO applied interest rate of 17.26% which is based on average yield for ‘BB’ rated bond for 5 Year or more term.
Assessee Company had advanced unsecured loans to wholly owned subsidiary in USA in earlier years. Loan of US $ 25.00 lakh at interest rate of 6% p.a. and US $ 4.00 lakh at interest rate of 7 % p.a. was outstanding at the yearend. Details of loans advanced by the Assessee company to the AE are at Page 17 of the Paper Book.
Your Honors, aforesaid adjustment of Rs. 1,48,40,164/- computed by the Ld. TPO was objected by the Assessee Company on the following reasons:- a) Under the CUP method, identification of ‘prevalent interest that could have been earned by the taxpayer by advancing a loan to unrelated party in India’ as comparable uncontrolled transaction by TPO is not in accordance with Rule 10B(l)(a)(i) and Rule 10B(2) of the Income Tax Rules, 1962. b) Loan to AE has been advanced in furtherance of business and not for earning interest only. c) Financial condition of the AE has been considered to be weak without any basis and material on record. d) Loan advanced to AE because of business considerations is distinct and separate transaction as compared to the loan transaction entered into by the Financial Institutions. e) CUP method is most appropriate method to determine the arm’s length rate of interest of the international transaction involving lending of money by the assessee company in foreign currency to its AE and LIBOR being Inter-bank Offer Rate fixed for the international transaction has to be adopted as arm’s length rate.
Yours Honours, though LIBOR has not been accepted as arm’s length rate for the year under reference by the TPO but LIBOR has been accepted by the TPO in AY 2004-05 to AY 2005-06 and accordingly no adjustment was proposed by TPO in AY 2004-05 to AY 2005-06. Copies of TPO’s Order for AY 2004-05 to AY 2005-06 are at Pages 38 to 46 of the Paper Book.
5. Ld. CIT(A) has held in para 10.4 of his appellate order that loan advanced by Assessee Company to its AE in foreign currency (US $) should have been benchmarked by using LIBOR and has deleted the adjustment of Rs. 1,48,40,164/- made by Ld. TPO/AO after following the judgment of Hon’ble Delhi High Court in the case of CIT Vs. Cotton Naturals (I)
35 & CO 32/Asr/2015 & Ors Asstt. CIT v. Broadways Overseas Ltd. & Ors Pvt. Ltd. 276 CTR 445 : 231 Taxmann 401, wherein it has been held that LIBOR should have been used for benchmarking interest rate on loan advanced to AE in foreign currency. Ld. CIT(A) has also considered the following judicial pronouncements while holding that LIBOR should have been used for benchmarking interest rate on loan advanced to AE in foreign currency :- a) V V F Ltd. Vs. DCIT (2010-TIOL-55-ITAT-MUM) b) Siva Industries & Holdings Ltd. Vs. ACIT in ITA No. 2148/Mds/2010 dated 20.05.2011 c) Perot Systems TSI (India) Ltd. Vs. DCIT (2010) 37 SOT 358 (2010) 5 ITR(Trib) 106 d) Tata Autocomp Systems Limited vs. ACIT(2012) 149 TTJ (Mumbai) 233 : (2012) 52 SOT 48 (Mumbai). Cotton Naturals (I) Pvt. Ltd. vs. DCIT (2013) 22 ITR (Trib) 438 e) (Delhi). f) Mahindra & Mahindra Ltd. vs. ACIT (2014) 29 ITR 95 (Mum.)(Trib.) g) Hinduja Global Solutions Ltd. vs. ACIT (2014) 98 DTR 266 (Mum.)(Trib.) h) Kohinoor Foods Ltd. vs. ACIT (Delhi)(Trib).
6. Your Honours, it has also been held in the following judgments that LIBOR should be used for benchmarking interest rate on loan advanced to AE in foreign currency. a) Varroc Engineering (P) Ltd. v. ACIT (2015) 168 TTJ 514 (Pune)(Trib.), where in it has been held that while benchmarking international transactions what has to be seen is comparison between related transactions, i.e., where assessee has advanced money to its associated enterprises and charged interest, then said transaction is to be compared with a transaction as to what rate assessee would have charged, if it had extended loan to third party in foreign country and in that case, international rates fixed being LIBOR + rates would have an application and domestic prime lending rates would not be applicable. b) Dy.CIT vs. The Indian Hotels Company Ltd. (2015) 167 TTJ 0377 (Mumbai) wherein it has been held that as regards the issue relating to arm’s length rate of interest charged by the assessee company to its AE on the outstanding interest, it is observed that the same is squarely covered by the decision of co-ordinate Bench of this Tribunal rendered in the case of Hinduja Global Solutions Ltd. Vs. ACIT vide its order dtd. 5th June, 2013 in ITA No. 254/mum/2013 wherein it was held, following the decision of 36 & CO 32/Asr/2015 & Ors Asstt. CIT v. Broadways Overseas Ltd. & Ors Delhi Bench of this Tribunal in the case of Cotton Naturals (I) P. Ltd. Vs. DCIT, that the CUP method is the most appropriate method to determine the arm’s length rate of interest of the international transaction involving lending of money by the assessee company in foreign currency to its AE and LIBOR being inter-bank rate fixed for the international transaction has to be adopted as arm’s length rate. Respectfully following this decision of the co-ordinate Bench of this Tribunal, we uphold the impugned order of the Id. CIT(A) deleting the addition made by the A.O./TPO in respect of international transaction involving interest charged by the assessee on outstanding interest from its AE.
Your Honours, Hon’ble Bombay High Court in the case of CIT Vs. Aurionpro Solutions Ltd. 99 CCH 0070 has also held that LIBOR has to be considered to determine Arm’s Length Price for loan advanced in foreign currency. Copy of the judgement is attached Page 1 to 4 with Synopses dated 22.11.2018 (Date of hearing 27.11.2018)
Your Honours, during the the assessment proceedings for A.Y.2013-14 in the case of Assessee Company itself, TPO in para 6 of his Show Cause Notice dated 23.09.2016 asked the Assessee Company to prove that Loan to AE has been given in foreign currency and if not, asked to explain as to PLR may not be applied. Copy of the Show Cause Notice is at page 8 to 10 with written submissions dated 25.01.2017. In response to the aforesaid Show Cause Notice Assessee Company furnished its reply dated 30.09.2016 and proved that loan has been advanced in foreign currency viz. US $. Copy of the reply is at page 11 to 21 with written submissions dated 25.01.2017.
Thereafter, Ld. TPO has not proposed adjustment on account of interest on loan advanced in foreign currency by the Assessee Company to its AE in USA in its Order dated 30.09.2016 u/s 92CA(3) of the Income Tax Act, 1961. Copy of the TPO’s Order dated 30.09.2016 is at page 22 to 44 with written submissions dated 25.01.2017.
Your Honours, this shows that Revenue has accepted the legal position as laid down by the Hon’ble Delhi High Court in the case of CIT Vs. Cotton Naturals (I) Pvt. Ltd. (supra): Hon’ble Bombay Hingh Court in the case of CIT Vs. Aurionpro Solutions Ltd. (supra) and also laid down by the various benches of Hon’ble ITATs that LIBOR should be used for benchmarking interest rate on loan advanced to AE in foreign currency.
37 & CO 32/Asr/2015 & Ors Asstt. CIT v. Broadways Overseas Ltd. & Ors Your Honours, in view of the above submissions, it is submitted that Ld. CIT(A) has rightly held in para 10.4 of his appellate order that loan advanced by Assessee Company to its AE in foreign currency (US $) should have been benchmarked by using LIBOR and has rightly deleted the adjustment of Rs. 1,48,40,164/- made by Ld. TPO/AO.”
Heard rival contentions, perused the material on record, impugned order, written submission and case law cited before us. Admittedly, there are two issues involved with regard to transfer pricing adjustments for interest on loan advanced to AE in foreign currency and interest on outstanding receivables in the account of AE. The Ld. CIT(A) has discussed that the TPO had benchmarked the interest rate against the expected return from investment in bonds and made adjustment of Rs. 1,48,40,164/- to the income of the assessee whereas the case of the appellant is that loan has been advanced to AE in USA in US $ and being an international transaction, interest rate should be benchmarked against LIBOR. The Ld. CIT(A) relied upon the various decisions of ITATs cited by the Ld. AR of the assessee company, where they have accepted LIBOR as comparable uncontrolled transaction and as the most suitable bench mark for judging Arm’s length price in case of foreign currency loan.
In a recent Judgement, the Honorable Delhi High Court, in the case of CIT Vs. Cotton Naturals (I) Pvt. Ltd. (supra) has rejected all the judgment that LIBOR should have been used for benchmarking interest rate on loan advanced to Associate Enterprise in foreign currency.
It is further noted that in the appellant assesses own case, for Assessment Year 2004-05 to 2006-07, TPO itself has benchmarked the interest on loan advanced to AE against LIBOR and no adjustment was made on account of interest on loan advanced to AE in these years.
Meaning thereby that on principle of consistency, interest rate ought to have been applied based on LIBOR. Thus, following the judgment of Honorable Delhi High Court, the Ld. CIT(A) was justified in holding that the TPO has erred in benchmarking the interest rate against the expected return from investment in bonds and loan advanced to AE in foreign currency should have been benchmarked by using LIBOR.
In view of that matter, we find no infirmity or adversity in the impugned order to the facts on record, in deleting the addition of Rs. 1,48,40,164/- made by the Assessing Officer to the income of the assessee company by way of Arms Length Price adjustments in respect of interest on loan in foreign currency. in respect of receivables is concerned, it is seen that the TPO treated the outstanding receivables in the account of AE as an international transaction and made adjustment of Rs. 76,45,292/- to the income of the assessee against the interest on excess period of credit on receivables allowed by the assessee. Whereas the case of the appellant is that the outstanding receivables beyond the normal credit period were not an international transaction per se, because the outstanding receivables beyond normal credit period have not arisen out of loan transaction; that the outstanding Receivables are not a distinct activity and that the TPO ought to have considered TNMM method. In our view, the credits in the account of AE had arisen out of export sale made by the assessee company to the AE and therefore, receivables arising from such transactions are undoubtedly inextricably connected.
From Transfer Pricing Assessment, it is evident that the TPO has applied interest rate of 17.26% to compute Arms length interest on loan advanced to AE without any comparable, and thus the view of the AO based on the aforesaid TPO report would not be justified. The CIT(A) has relied on the ITAT, Mumbai in the case of ACIT Vs. Nimbus Communications Ltd. (supra), also relied upon by the TPO and the Ld. AR) credit period allowed under CUP method, the comparable has to dues recoverable from a debtor not a borrower. In this case, even the adjustment made by TPO by adopting interest @ 2.19% LIBOR was deleted by the Honorable ITAT.
The Ld. CIT(A) has categorically discussed the fact that assessee has earned very high net profit as compared to the comparables and on account of high margin no adjustment would have been made by the TPO on export sale made by the assessee company to its AE. He followed the order of Honourable ITAT, Delhi in the case of Kusum Healthcare Pvt. Ltd. Vs. ACIT (supra) where it has been held that if the pricing/profitability of the assessee are more than the working capital adjusted margin of the comparables, then additional imputation of interest on the outstanding receivables is not warranted. Meaning thereby, the Ld. CIT(A) was justified in following the judgment of the Honorable ITAT, Mumbai and Honorable ITAT, Delhi, in deleting the addition of Rs76,45,292/- made by the Assessing Officer to the income of the assessee being the interest on excess period of credit on receivables. Thus grounds No. 2 and 3 of appeal taken by the department are rejected. perversity in the order of the Ld. CIT(A) to the fact on record and therefore, the impugned order is sustained on the issues raised by the department in ITA No. 477/Asr/2015.
The department objected to the decision of the CIT(A) challenging that the Ld.CIT(A) has erred in law in deleting the addition of Rs.21,943/- made by the A.O. on account of disallowance u/s 14A of the Income Tax Act, 1961 by ignoring that the facts of the relied upon judgments are clearly distinguishable and the Revenue has not accepted the relied upon judgments on merits and, therefore, SLP against Hon’ble High Court’s order in the case of CIT vs. Hero Cycles Ltd., 323 JTR 518 has been admitted and pending for adjudication by the Hon’ble Apex Court.
It is evident from the record that the appellant has no exempt income.
It is settled law that in the case of no exempt income, there would be no disallowance under section 14A of the Act out of the other income. The CIT(DR) contention that SLP against Hon’ble High Court’s order in the case of CIT vs. Hero Cycles Ltd., 323 JTR 518 has been admitted and pending for adjudication by the Hon’ble Apex Court is not acceptable. Mere question of Law admitted. Accordingly, we find no error or infirmity in the decision of the Ld. CIT(A) in deleting the addition made u/s 14A of the Act.
Thus, this ground of appeal of revenue is rejected.
On parity of facts and identical issue, our finding and observation given in in respect of the Assessment Year 2008-09 shall be applicable to other appeal of the department in ITA Nos. I.T.A.
Nos. 46 to 49/Asr/2016 and in respect of the Assessment Years 2007-08; 2009-10 to 2011-12 and 2012-13 respectively, in mutatis mutandis.
Since, the appeals of the department are being rejected on merits, as above and hence, the Cross Objections of the assessee arising out of these appeals are dismissed as infructuous.
In ITA No. 123/Asr/2018:
The grounds no. 1 to 3 are inter-linked to each other whereby, the Appellant objected to the finding of the Ld. CIT (A) in confirming the action of Ld. AO/TPO in treating the outstanding debtors balance at the year-end as an "international transaction" and thereby computing arm's length price by making addition of notional interest without appreciating the facts and Enterprise ("AE") emanating from export sales made to AE does not constitute an "international transaction" as defined u/s 92B of the Income Tax Act, 1961.
The Ld. AR Argued that Ld. CIT(A) has not appreciated that there is no delayed realization of export proceeds as all invoices have been realized within the period allowed as per Agreement and therefore, there can be no question of charging of any interest as a separate transfer pricing adjustment; that he ignored the fact that though the TPO states that CUP method has been adopted there is no mention as to how CUP method has been selected as Most Appropriate Method and moreover, there is no mention of any comparable uncontrolled transaction to substantiate the stand that such method has been adopted; that even if outstanding receivables constitutes an international transaction, no further adjustment on account of notional interest is called for because ratio of Operating Profit to Operating expenses of the appellant is much higher than the ratio of Operating Profit to Operating expenses of the comparable cases. The counsel argued that the CIT(A) has even ignored the ratio laid down by the Hon'ble Delhi High Court in the case of “Pr. CIT Vs. Kusum Health Care Pvt. Ltd.”, (Supra) wherein it has been held that when Assessee has thereby on its pricing/profitability vis-a-vis that of its comparables, any further adjustment only on the basis of the outstanding receivables is clearly impermissible in law. He has also ignored the ratio laid down by the Hon’ble ITAT, Ahmedabad in the case of “Micro Link Ltd. Vs. ACIT”, (Supra) wherein it has been held that when the arm's length price of exports has been benchmarked on the basis on TNMM, the very conceptual of debtors is devoid of foundation for separate adjustment for delayed realization legally sustainable on merits.
It is noted that the Ld. CIT(A) has rejected the contention of the appellant by observing that decision of Hon'ble ITAT, Delhi in the case of Kusum Health Care Pvt. Ltd.; although this decision has been distinguished by subsequent order of Hon'ble ITAT Delhi. In our view, the decision of the Ld. CIT(A)’s rejection of the case of the appellant by not appreciating the facts on merits and considering the reasons and objections of the appellant is not justified.
The Ld. CIT(DR) stands by the impugned order, however, he could not rebut to the contention of the Ld. AR on merits that the continuing debit balance with the Associate Enterprise ("AE") emanating from export sales 92B of the Income Tax Act, 1961.
Considering the factual matrix of the case and judicial intricacies of law, we hold the order of the Ld. CIT(A) is infirm in law to the facts on record in confirming the action of Ld. AO/TPO in treating the outstanding debtors balance at the year-end as an "international transaction" and thereby computing arm's length price by making addition of notional interest. Accordingly, the decision on this issue of the CIT(A) is reversed.
Thus, the addition confirmed is deleted.
In the backdrop of the aforesaid discussion, the captioned appeals of the department and the assessee are disposed of in the terms indicated as above.