Income Tax Appellate Tribunal - Ahmedabad
Metal Link Alloys Ltd.,, Vapi vs Department Of Income Tax on 3 March, 2010
IN THE INCOME TAX APPELLATE TRIBUNAL AHMEDABAD BENCH "D" BEFORE SHRI BHAVNESH SAINI JUDICIAL MEMBER AND SHRI N.S. SAINI, ACCOUNTANT MEMBER Date of hearing:03/03/2010 Drafted on: 03/03/2010 ITA No.401/AHD/2007, ITA No.1742/Ahd/2007 & ITA No.1743/Ahd/2007 Assessment Year : 2003-04, 2002-03, 2004-05 Assistant Commissioner of Income Tax, Vapi Circle Vapi, Ajit Nagar, Vapi Vs. Metal Link Alloys Ltd. Plot No.67, Panchal Udyog Nagar, Bhimpore, Nani Daman. PAN/GIR No. : AAGFM5962K (APPELLANT) .. (RESPONDENT) Appellant by : ShriC.K.Mishra Sr. D.R. Respondent by: Shri S.N.Soprakar And Bandish Soparkar A.R. O R D E R PER N.S.SAINI , ACCOUNTANT MEMBER :-
These are the appeals filed by the Revenue against the separate order of the Learned Commissioner of Income Tax(Appeals), Valsad, dated 30.10.2006 for Assessment Year 2003-04, order dated 31.01.2007 for Assessment Year 2002-03 and 2004-05.
2. The ground No.1 in all the appeals read as under:-
"1. On the facts and circumstances of the case and in law, the Id. CIT(A) has erred in holding that the income from advance licence will be eligible for deduction U/s.8OIB of the Act even though the sales of advance licence is held to be export incentive and without considering the fact that it has not "derived from" the manufacturing activity of the assessee.
3. The Learned Commissioner of Income Tax(Appeals) has decided this issue as under:-
"8. The appellant company has raised the contention against exclusion of advance licenses to the tune of Rs. 3,37,77,042/- while granting deduction U/s. 80IB by treating the same as not admissible for deduction to the appellant company.
8.1 The appellant company submitted before me a detailed submission in this regard. I have perused the assessment order and the submission made before me by the appellant company. After examining the submission as made before me by the appellant company it is observed that the appellant company had earned the export income by way of utilization of advance license benefit. The assessing officer on the other hand in the assessment order observed the same as earned from duty draw back. Since there is an apparent different as regards the nature of export benefit earned by the appellant company as per the assessment order and submission made before me by the appellant company, a copy of the written submission filed by the appellant company was sent to the Assessing Officer for her comments by way of a remand report. The remand report of the Assessing Officer dated 12.10.2006 has been obtained and placed on record. The remand report of the assessing officer is reproduced herewith for the sake of convenience:-
" As per (he directions given by your honor, the submission filed by the assessee has been perused. In the submissions made before your honor, the assessee has reiterated the arguments and explanations made during the course of assessment proceedings. Same were duly considered while finalizing the assessment for the assessment year under consideration In view of the above facts, it is requested that the appeal may kindly be decided on merit and considering the discussion made in body of the assessment order."
8.2 The assessing officer has not commented about the additional details submitted before me by the appellant company. In the remand report the assessing officer has made a general observation with a request that the appeal may be decided on merits and the appellant company in its submission has reiterated the arguments and explanations made during the course of assessment proceedings and the same has been discussed by her in the body of assessment order.
8.3 I have considered the submissions made before me by the appellant company. The appellant company submitted before me the details of advance licenses. It has been submitted by the appellant company that under Chapter-VI of the EXIM Policy for the period from 1st April 2002 to 31s1 March 2007, benefits are intended for enabling the exporters to purchase raw materials and inputs at international prices free of domestic and national taxes, duties and levies. According to the appellant company, all the countries under various trade agreements facilitate the availability of tax neutral inputs for their exporters. In the opinion of the appellant company, export benefit receivable represents accounting of notional future benefits available to the company on account of various schemes notified by the Central government pursuant to the powers conferred under Rule 5 of the Foreign Trade (Development and Regulation) Act, 1992. While giving the ratio of the working for export benefit receivable, the appellant company submitted that the company has estimated the duty on raw material that can be imported based on the export performance of the company and credited the same as a notional income in the profit and loss account only to comply with prevailing generally accepted accounting principles and if the company were able to import raw materials in time within the accounting period, such notional entry would not have been reflected in the profit and loss account. However, according to the appellant company, if the raw material prices go up in the international market, the company may not import raw material and there may not be any benefit to the company on account of such liberalized policies. Thus, finally, the appellant company submitted that this credit represents a contingent income and in order to disclose a true and fair view, a notional entry was recorded in the books of accounts disclosing the notional benefit of customs duty element in probable future imports as current income. This accounting treatment reduces the cost of raw materials consumed to the extent of such benefit.
8.4 Besides the referred submission, the appellant company also placed reliance on the decision of Hon'ble IT AT Ahmedabad in the case of United Phosphorous Ltd. Vs. JCIT (2001) 73 TTJ (AHD) 404, wherein on similar set of facts, in ground No.XIII(8) Para (c) of the said order, the Hon'ble ITAT has held that such notional income when subject to tax shall be treated as eligible profit for granting deduction U/S.80IA.
8.5. The appellant company has submitted that under the Exim Policy, benefits are intended for enabling exporters who use duty paid raw materials to manufacture goods for export and the same results in tax neutralization of cost of manufacturing. According to the appellant company the receipt of export incentives does not constitute a separate source of income and also does not increase or decrease the quantum of profit derived from manufacturing included in the profit and loss account. The appellant company further referred to the findings of the assessing officer, who relied on the decision of Hon'ble Supreme Court of India in the case of CIT V/s Pandian Chemicals (supra) and also in the case of Sterling Foods (supra) to justify the exclusion of income from eligible profit and submitted that the decision relied upon by her are in regard to different issues / facts and are not applicable to the addition made by way of excluding advance licenses from income eligible for deduction u/s. 80HHC.
8.6. The appellant company further submitted that in the case of CIT Vs. India Gelatine and Chemicals Ltd. (2005) 275 ITR 284, the Honorable Gujarat High Court has adjudicated the meaning of terms "derived from" and "attributable to" in the context of deduction under old section 80J and the issue referred to before the Honorable 'High Court was, as under:
"Whether export incentives can be said to be derived from an industrial undertaking."
The appellant company further referred to the extract of the decision as contained in paragraph 26 & 28 of the said judgment and the same is reproduced below for the sake of clarity;
"26. We are of the view that the same distinction would apply while considering the various incentives being given to an industrial undertaking. If the incentives are like cash compensatory support and import entitlement, they are in the nature of general incentives though for determining the quantum of such incentives, the Government may take into consideration the export turnover of the industry. Hence, they are not derived from the industrial undertaking, but merely attributable to it. But when it comes to duty drawback, it is specifically to reduce the cost of manufacturing the goods. The very scheme of duty drawback is framed and embodied in the aforesaid statutory provisions in order to relieve the goods to be exported of the burden of custom duties and excise duties, as indicated above. The object of the duty drawback is to reimburse customs duties and excise duties paid by the 'assessee. As customs duties and excise duties are admittedly an integral part of the cost of production any receipts by way of reimbursement of such duties are inextricably linked with the cost of production, which has to be reflected in the profit and loss account of the assessee and, therefore, the Revenue's argument cannot be accepted.
In view of the above discussion, we are of the view that while cash compensatory support (cash assistance) received by the assessee would not constitute income "derived from" an industrial undertaking and, therefore, the same is not eligible for relief under section 80J of the Income-tax Act, 1961, in the case of duty drawback, the same is "derived from" the industrial undertaking and, therefore, eligible for relief under section 8OJ of the Income-tax Act, 1961."
8.7. After referring to the above referred findings of the Hon'ble court, the appellant company has stated that the said decision has been rendered after considering the decisions of Hon'ble apex court in the case of CIT V/s Sterling Foods 237 ITR 579 (1999) and CIT V/s P.J. Chemicals Ltd. (1994) 210 ITR 830 and finally in the light of the above decisions, submitted before me as under:-
" i. That in the case of the appellant value of advance licenses and special import license granted under the Import Export Policy with an avid object of reimbursing customs duties and excise duties paid for raw materials and other inputs shall be treated to have inextricable link with the cost of production which has to be reflected in the Profit and Loss Account ii. That owing to the above, deduction U/s. 80IB of the Act be granted to the appellant without making any adjustments and/or excluding such sums from the computed income of the appellant."
8.8. After considering the facts of the case, the findings of the Assessing Officer in the assessment order and also the detailed submission as made by the appellant company and the judicial rulings relied upon by them, the eligibility of the incomes for deduction U/s 80-1B in the form of utilization of advance license benefit will be adjudicated as given in the following paragraphs:
8.9. During the appellate proceedings, as referred above, the appellant company submitted about the nature of such receipts by stating that such benefits are intended for enabling the exporters to purchase raw materials and inputs at international prices free of domestic and national taxes, duties and levies and it represents accounting of notional future benefits available to the company on account of duty credits and licenses granted by the Central Government, pursuant to the powers conferred under rule 5 of the Foreign Trade (Development & Regulation) Act, 1992. It is seen that in support of its contention, the appellant company also relied upon the findings of various Court decisions, such as State Bank of India Vs. CIT 157 ITR 67 (SC), CIT V/s. Shoorji Valabhdas & Co. 46 ITR 144 (SC) and CIT V/s. India Discount Co. Ltd. 75 ITR 191 (SC) and on the basis of said decisions submitted that notional income is not subject to tax at all. However, it is further submitted that the Hon'ble ITAT Ahmedabad on similar set of facts in the case of United Phosphorus Ltd. Vs. JCIT 81 ITD 559 held that such benefits are taxable on account of accounting policy adopted by the appellant company. The appellant company further added that the Hon'ble IT AT in the above referred case has held that the deduction U/s.8OIA shall be granted on such income and accordingly pleaded that the disallowance made by the Assessing Officer while granting deduction U/s.8OIB may be deleted.
8.10. The appellant company submitted that the Legislature has amended Section 80HHC of the Act. The amendment has been carried out to clearly lay down the eligibility or otherwise of the income by way of profit on sale of DEPB, DFRC or other licenses available to an exporter for deduction U/s. 80HHC of the Act. The A.R. further contended that both the sections 801B and 80HHC grant deduction with reference to profits "derived from" business of manufacturing or industrial undertaking and hence the spirit of the amendment shall be made applicable to Section 80IB as welt.
8.11. The appellant company on the other hand contended that such benefits granted by the Central Government pursuant to the powers conferred under Foreign Trade (Development & Regulation) Act, 1992 do not result in an income even without considering the spirit of the above cited legislative amendment. It was argued on behalf of the appellant company that the principles enunciated by the Honorable Gujarat High Court in the case of CIT V/s. India Gelatine and Chemicals Ltd reported in 275 ITR 284 are directly applicable to the facts of the case of the appellant company. The incentives received by the appellant company in the form of advance license benefit was introduced by the Import Export Policy to reimburse the duty element in the cost of imported raw materials used for manufacturing by exporters.
8.12. The appellant company had also submitted extract of Import Export Policy in support of its view. The relevant portion from the Import Export Policy is reproduced hereunder;-
"OBJECTIVES 2.1 The principal objectives of (his Policy are:
(i) To accelerate the country's transition to a globally oriented vibrant economy with a view to derive maximum benefits from expanding global market opportunities.
(ii) To stimulate sustained economic growth by providing, access to essential raw materials, intermediates, components, consumables and capital goods required for augmenting production.
(iii) To enhance the technological strength and efficiency of Indian agriculture, industry and services, thereby improving their competitive Strength while generating new employment opportunities, and encourage the attainment of internationally accepted standards of quality.
(iv) To provide consumers with good quality products at reasonable prices 2.2 The objectives will be achieved through the coordinated efforts of all the departments of the government in general and the Ministry of Commerce and the Directorate General of Foreign Trade and its network of Regional Offices in particular, with a shared vision and commitment and in the best spirit of facilitation, in the interest of export promotion.
Duty Free Licence 7.2 Duty Free Licence includes Advance Licence, Advance Intermediate Licence and Special Imprest Licence. Import of raw materials, intermediates, components, consumables, parts, accessories, mandatory spares (not exceeding 5% of the cif value of the duty free licence), and packing material (hereinafter referred to as "inputs") may be permitted against a Duty Free Licence.
Advance Licence.
7.3 An Advance Licence is granted to a merchant-exporter or manufacturer-exporter for the import of inputs required for the manufacture of goods without payment of basic customs duty. However, such inputs shall be subject to the payment of additional customs duty equal to the excise duty at the time of import. The said additional customs duty shall be adjusted in the following manner:
(a) If the importer uses the inputs for production of export goods, which are otherwise liable to a duty of excise and eligible for Modvat, he may avail of Modval credit in respect of the additional customs duty so paid, immediately upon the said inputs entering his factory;
(b) If the importer uses the inputs for production of export goods, which are otherwise not excisable or not dutiable or not eligible for Modvat benefit, he may claim drawback in respect of the additional customs duty so paid at the time of export of goods in which such inputs have been used;
(c) If the importer uses the inputs for manufacture and sale in the DTA of excisable goods, he may claim Modvat in respect of the additional customs duty so paid, immediately upon the said inputs entering his factory;
(d) If the importer uses the inputs for manufacture and sale in the DTA of goods, which are not excisable or not dutiable or not eligible for Modvat benefit, he shall not be eligible to any rebate or adjustment of the additional customs duty so paid.
7.4 (i) Notwithstanding anything contained above, exemption from payment of additional customs duty shall be allowed in respect of Advance Licences, issued with actual user condition to;
(a) Manufacturer exporter
(b) Merchant exporter where the merchant exporter agrees to the endorsement of the name(s) of the supporting manufacturer (s) on the relevant DEEC Book, (ii) Such advance licences and/or materials imported thereunder shall not be transferable even after completion of export obligation.
Advance licences shall be issued in accordance with the Policy and procedure in force on the date of issue of licence and shall be subject to the fulfilment of a time bound export obligation and value addition as may be specified.
Transferability 7.19 (a) A duty free licence except Special Imprest Licence and/or materials obligation and endorsement of transferability by the licensing authority.
(b) Notwithstanding anything contained in the para (a) above,
(i)Advance Licences issued with Actual User condition under para 7.4 (i) and/or material imported against it shall not be transferable, sold or otherwise disposed off by the licence holder under any circumstances; and
(ii)Advance licences issued for the import of Acetic Anhydride, Ephedrine and Pseudo-ephedrine or such goods imported under a duty free licence shall not be transferable, sold or otherwise disposed off by the licence holder under any circumstances,"
8.13. The appellant company finally submitted that by virtue of the recent amendment affected by the Taxation laws (Second Amendment) Act, 2005, Act No, 55 of 2005 dated 28.12.2005, even the profit on sale of DEPB and DFRC has been treated as part of profit eligible for deduction U/s. 80HHC subject to certain conditions. The appellant company argued that though the amendment is relating to Section 80HHC, it is squarely applicable to Section 80-IB as well, since both the sections are drafted in a similar pattern and were enacted to foster economic development.
8.14. In the case of the appellant company, there are no profits on sale of DEPB Licenses during the year. The appellant company has earned export income by utilization of advance license to the tune of Rs. 3,37,77,042/- which has been credited as such under the head " advance licenses" in the Profit and Loss Account.
8.15. After the perusal of the submission made before me by the appellant company, it is seen that the appellant company laid emphasis on the fact that the export benefit receivable are in the form of advance licenses. It is seen that the benefits granted to the company by the Central Government are given with an object of importing raw materials without customs duty element. Such duty free imports enhance the appellant company's profit from manufacturing activities. As argued by the appellant company, export sales by a manufacturer imply manufacturing and selling the goods to a foreign buyer instead of a domestic buyer. The duty from import of raw materials reduced the cost of the manufactured product and hence can be said to result in an increase in manufacturing profits. It is also worthwhile to mention that the decision of Honorable Gujarat High Court in the case of CIT V/s. India Gelatine and Chemicals Ltd reported in 275 ITR 284 has also held that any incentive granted with a view to reimburse customs duty shall not be excluded for the purposes of calculating deduction U/s, 80) of the Income Tax Act by treating the same as being derived from the Industrial Undertaking.
8.16. With regard to the contention of the appellant relating to its claim under advance licenses amounting to Rs. 3,37,77,G42/-, the findings of the assessing officer and the submission of the appellant company during the appellate proceedings, before me have already been discussed above, On a careful reading of the findings of the Honorable Gujarat High court in this regard in the case of CIT v/s India Gelatine and Chemicals Ltd. (supra) as already referred to above, it is seen that after considering the findings of Hon'ble Supreme Court of India in the case of CIT v/s Sterling Foods (supra), the Hon'ble Gujarat high court has held that the receipt under the scheme of duty draw back is eligible for deduction u/s 80J by treating the same as derived from industrial undertaking. The Taxation laws (Second Amendment) Act, 2005 has fortified the contention of the appellant company by including profit on sale of DEPB licenses as eligible for deduction U/s. 80HHC. I, therefore, keeping in view the above discussed facts and law and also by following the findings of Honorable Gujarat High Court, accept the contention of the appellant company and allow its claim of deduction U/s.80IB of the Act on its receipts under advance licenses. The appellant company succeeds in this ground of appeal on this issue."
4. Learned Authorised Representative of the Assessee submitted that in view of the decision of the special Bench of the Tribunal in the case of Topman Exports Vs. ITO, (2009) 125 TTJ (Mum)(SB) 289, wherein it was held that Entire amount received on sale of DEPB entitlement is not profit chargeable under s. 28(iiid) but the face value of DEPB has to be deducted from the sale proceeds, the matter should be restored back to the file of the Learned Assessing Officer for fresh adjudication of the issue.
5. On the other hand, Learned Departmental Representative argued that the issue stands covered in favour of the revenue by the decision of the Hon'ble Supreme Court in the case of Liberty India Vs. CIT (2009) 317 ITR 218, wherein it was held that DEPB/duty drawback are incentives which flow from the Schemes framed by Central Government or from s. 75 of the Customs Act, 1962, hence, incentives profits are not profits derived from the eligible business and therefore, duty drawback receipt/DEPB benefits do not form part of net profits of the industrial undertaking for the purposes of s. 80-IA or 80-IB.
6. We have heard the rival submissions and perused the orders of the lower authorities and the materials available on record. In the instant case, the dispute is in respect of non allowance of deduction under section 80IB in respect of income derived from sale of advance licence. The submission of the Learned Authorised Representative of the Assessee is that the issue is covered by the decision of the Special Bench of the Tribunal in the case of Topman Exports Vs. ITO (2009) 125 TTJ (Mum)(SB) 289, whereas the contention of the Learned Departmental Representative was that the issue is covered by the decision of the Hon'ble Supreme Court in the case of Liberty India Vs. CIT (2009) 317 ITR 218 (SC). We find that the issue before the Hon'ble Special Bench in the case of Topman Exports (Supra) was in respect of deduction under section 80HHC of the Act whereas in the instant case the issue relates to deduction under section 80IB of the Act. The scope and language employed in section 80HHC is quite distinct and different from section 80IB of the Act. Under section 80IB only income which is derived from the newly established industrial undertaking qualifies for deduction whereas under section 80HHC the income derived from exports is to be computed in accordance with the manner prescribed under section 80HHC of the Act is to be deducted. Thus, the decision rendered in the context of section 80HHC shall not be applicable in computing deduction allowable under section 80IB of the Act. We find that the issue is squarely covered by the decision of the Hon'ble Supreme Court in the case of Liberty India (Supra) which is in the context of section 80IB of the Act and analogues provisions. We therefore, resepctfuly following the said decision of the Hon'ble Supreme Court find that income earned on sale of advance licence is not derived from the industrial undertaking and therefore, it is not eligible for deduction under section 80IB of the Act. We therefore, set aside the order of the Learned Commissioner of Income Tax(Appeals) on this issue and restore the order of the Learned Assessing Officer. Thus, this ground of appeal of the revenue is allowed.
7. Ground no.2 and 3 in all the appeals reads as under:-
2. On the facts and circumstances of the case and in law, the Id. CIT(A) has erred in holding that the excise duty and sales will not be included in the total turnover while calculating the deduction U/s.8OHHC of the Act without considering the fact that the issue in question is yet to be decided by the Highest Court of the Land.
3. On the facts and circumstances of the case and in law, the Id. C1T(A) has erred in relying the decision of M/s. Sudarshan Chemicals while giving relief to assessee without considering the fact that the said decision was delivered before the insertion of provisions of section 145A of the Act as per which valuation of purchase and sale has to be made after adding tax, duty, cess or fee etc.
8. The Learned Commissioner of Income Tax(Appeals) has decided this issue as under:
"5.1 As regards the inclusion of Excise Duty is concerned the observation made by the assessing officer is reproduced herewith for the sake of convenience:-
"The explanation of the assesses has been considered. The Hon'ble courts have held that sales tax as well as Excise Duty from part of trading receipt, irrespective of the method of accounting followed by the assessee i.e. even if the assesses is not crediting this tax as part of sales but is showing them separately. The aforesaid findings has been given by the Apex Court in the case of Chowringhee Sales Bureau P. Ltd. Vs. CIT [1997] 871TR 615, the Hon'ble Supreme Court has held that sales tax collected is part of trading receipt. The Hon'ble Supreme Court in the case of Me Dowell & Co. Ltd. Reported in 154 ITR 148 has held that the sales tax and excise duty etc. are part of trading receipt. Accordingly, the total turnover would obviously include the sales tax and excise duty.
It was contented by the assessee that in the business of export, the excise duty is not payable and accordingly the numerator does not include the excise and so logically, denominator should also not included the excise duty and sales tax. It may mentioned that Hon'ble Courts have repeatedly held that turnover includes sales tax, excise duty etc. It is in respect of export that the assessee is given the benefit /facility and excise duty as well as sales tax payable is NIL. Merely because the sale tax and excise duty is not payable by the exporter, it does not mean that these aforesaid items are excluded from the export turnover. In fact, the value of the sales tax and excise duty is NIL in respect of export. Accordingly, the logic so propounded by the assessee that numerator and denominator should contain the similar items is though correct but it will not tantamount to exclude sales tax and excise duty included in local sales and then consider total turnover. In fact, the numerator and denominator contain the same type and items i.e. export turnover and total turnover. In respect of export turnover, the assessee has benefit of not paying sales fax, excise duty etc. but by virtue of not paying (he aforesaid duty, it cannot be said that these are also to be excluded out of local sales to arrive at the total turnover. By doing so, it would only mean that we are not taking "total turnover" but taking reduced figure wherein the total turnover is reduced by sales tax and excise duty etc, which will be totally illogical. Accordingly, the excise duty of Rs. 3,13,02,429/- -will be included in the total turnover while calculating the deduction U/s. 80HHC of the Act.
Since the assessee has taken plea that an Ordinance has been proposed in the parliament for amendment in the provisions of section 80HHC regarding allowance of deduction U/s. 80HHC in the cases where there is negative profit, with out prejudice to the fact that no deduction U/s. 80HHC has been allowed to the assessee, in cane the ordinance becomes law, then this office proposes to include the sales-tax and excise duty to the total turnover while working out the deduction U/s. 80HHC of the Act."
5.2. Accordingly in view of the facts and circumstances as narrated by her in the assessment order the assessing officer has taken total turnover by including excise duty for the purpose of deduction U/s. 80HHC of the Income Tax Act.
5.3. I have perused the findings of the assessing officer in the assessment order. The assessing officer has relied upon the decision of Apex Court in the case of Chowringhee Sales Bureau Private Limited Vs. Learned Commissioner of Income Tax [1977] 87 ITR 542 and Synclaire Murray & Co. reported in 97 ITR 615. The assessing officer has also observed that sales tax and excise duty are part of trading receipts. She has relied upon the decision of Apex Court in the case of Me. Dowell & Co. Ltd. Reported in 154 ITR 148. The assessing officer is of the view that according to her the legislature did not intend to exclude excise duty and sales tax from the term total turnover and also observed that the legislature legislates for specific purposes and no words can be or shall be imported in the Income Tax Act.
5.4. In response to the same the A.R. of the appellant company placed before me a detailed submission and has relied on the following decisions of Honorable Mumbai High Court and the Gujarat ITAT on the issue a. Mumbai High Court in the case of Sudarshan Chemicals 245 1TR 769 b. Calcutta High Court in the case of Chloride India 256 ITR 625 c. Karnataka High Court in the case of Bharat Heavy Earth Movers 137 Taxman 421 d. Madras High Court in the case of Wheels India Limited 275 ITR 319.
e. ITAT Ahmedabad in the case of United Phosphorous Limited 81 ITD 559.
f. IFB Agro Industries Ltd, Vs. DCIT [2002] 083 ITD 0096S (Calcutta S B) g. Mahindra Sintered products ltd Vs. DCIT [2005] 279 ITR ( A.T.) 0001 5.5. The A.R. of the appellant company also brought to my notice a very recent decision of Honorable Jurisdictional ITAT in the case of ACIT Vs. Atlas Dye Chem Industries (IT Appeal No. 1274 (AHD) of 1998) in which the honorable ITAT has held that excise duty and sale tax should not be included in total turnover for the purpose of its computation U/s. 80HHC.
5.6. It was submitted by the A.R. of the appellant company that the definition of "export turnover" excluded freight and insurance while "total turnover" did not and with the result, in GIF transactions, while the export turnover was taken as FOB value, the total turnover included sale proceeds of exports at GIF value. With a view to remove this anomaly, it was proposed to clarify that the total turnover will also not include freight or insurance (see Circular No. 621 (see [1992] 195 ITR (St.) 154), dated December 19, 1991--Chaturvedi and Pithisaria, fifth edition, page 3535). He contended that the above position is also explained in the memorandum to the Finance (No. 2) Bill of 1991 (see [1991] 190 ITR (St.) 270, 300). He accordingly contended that the object of the amendment was to bring on par, the export turnover vis-a-vis the total turnover.
5.7. I have gone through the findings of the assessing officer in the assessment order and the submission and the judicial findings relied upon by the A.R carefully. In this regard I find merits in the contentions of the A.R. of the appellant company, who has argued more or less on the basis of observations made by the Mumbai High Court in the case of CIT Vs. Sudarshan Chemicals Industries Limited reported in [2000] 245 ITR 769. Extract of the observation given by the Honorable Mumbai High Court in the decision of Sudarshan Chemicals Industries Limited is reproduced herewith.
"We find merit in the contentions of the assessee. Under section 80HHC, (he Legislature intends that the profits from exports should not be taxed. For this purpose, a formula has been introduced whereby if the business is of composite nature then the proportionate profit relatable to the export business is to be found out by multiplying the profits of a business by the export turnover and dividing the product by the total turnover. This formula finds place in section 80HHC(3) as it stood at the relevant time. Under clause (b) of the Explanation to section 80HHC, export turnover is defined to mean sale proceeds received in India by the assessee in foreign exchange. Under the said definition, export turnover is defined to mean the sale proceeds of any goods which are exported out of India but which will not include freight or insurance. Clause (ba) defines total turnover to exclude freight or insurance. This clause (ba) explains the turnover in a negative manner so as to exclude freight or insurance. Therefore, a combined reading of the above two clauses shows that they include anything which has nexus with the sale proceeds. Correspondingly, they show that they exclude everything which has no nexus with the sale proceeds. Further, the meaning of export turnover in clause (b) of the Explanation to section 80HHC, therefore, clearly shows that export turnover did not include excise duty and sales tax. The export turnover is the numerator in the above formula whereas the total turnover is the denominator. The above formula has been prescribed to arrive at the profits from exports. In the circum-stances, the above two items, namely, sales tax and excise duty, cannot form part of the total turnover. In fact, if the denominator was to include the above two items and if the numerator excluded the above two items (hen the formula would become unworkable. In the circumstances, we are of the view that in order to ascertain the export pro/its, the above two items cannot be introduced to inflate the total turnover artificially in order to reduce the benefit which an assessee is entitled to. Ultimately, the object of section 80HHC is required to be kept in mind in order to encourage exports. The Legislature has applied the above formula in order to find out the profits derived from the exports. In this connection, section 80HHC(1) may also be noticed. Under section 80HHC(1), it is, inter alia, provided that where an assessee is engaged in the business of exports of any goods, there shall be allowed in computing the total income of the assessee, a deduction of the profits derived by the assessee from the export of such goods. In other words, in computing the total income of such an assessee, profits derived by the assessee from the exports are deductible. The above expression, namely, "profits derived from exports" also finds place in section 80HHC(3)(a). It says that where the export is of goods, the profits derived from such export shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the business. In fact, the earlier section 80HHC(3) consisted of two parts, namely, whether the assessee carried on a business as 100 per cent, exporter and secondly whether the assessee carried on a composite business. In the latter case, it was provided that the profits derived from exports shall be the amount which bears to the profits of the business as computed under the head "Profits and gains of business", the same proportion as the export turnover to the total turnover. The emphasis is on the words "profits derived from the exports". Therefore, weightage must be given to such profits. Such profits cannot be reduced artificially by including statutory levies in the denominator, namely, total turnover. Therefore, the turnover should be restricted to such receipts which have an element of profit in it. It is only the actual sale price which is relevant. Anything charged by the assessee by way of excise duty and sales tax cannot be taken into account as they do not have any element of profit. Even according to the accounting principles, such levies do not form part of the profit and loss account. In fact, they are shown as liability in the balance-sheet. In the circumstances, the above two items cannot be included in the total turnover. We prefer this interpretation as it advances the object sought to be achieved by the Legislature. Lastly, we are of the view that soles tax and excise duties are levied under the separate enactments which have different objects. We are concerned with section 80HHC which is a separate code by itself. Hence, the general definition of the word turnover or the case law dealing with the said definition under the Sales Tax Act which is a State levy, cannot be imported into section 80HHC of the income-tax Act. Hence, we do not find any merit in these appeals. "
5.8. Respectfully following the decision of Honorable Mumbai High Court and other judicial pronouncements as relied upon by the A.R. of the appellant company, I am of the considered opinion that Excise Duty should not be included as part of the total turnover while working of deduction U/s. 80HHC. Accordingly the appellant company succeeds in this ground of appeal."
9. At the time of the hearing, both the parties agreed that the issue now stands covered in favour of the assessee by the decision of the Hon'ble Supreme Court in the case of CIT Vs. Laxmi Machine Works 290 ITR 667(SC), wherein it was held that Excise duty and sales tax are not includable in the total turnover in the formula contained in section 80HHC(3). Therefore, these grounds of appeal of the revenue are dismissed.
10. Ground no. 4 of the appeal in Assessment Year 2004-05 reads as under:-
"4. On the facts and circumstances of the case and in law, the Learned Commissioner of Income Tax(Appeals) has erred in hiding that the payments of PF and ESIC amounting to Rs.29,274/- made before filing the return are eligible for deduction without considering the fact that the due dates in the respective Acts for the said payments is 15th and 21st of every month."
11. At the time of the hearing, both the parties agreed that this issue is covered in favour of the assessee by the decision of the Hon'ble Supreme Court in the case of CIT Vs. Alom Extrusions Ltd. (2009) 319 ITR 306 (SC), wherein it was held that amendment to section 43B made with effect from 1.04.2004 by which second proviso to section 43B as amended by Finance Act 1989 was deleted. Thus, the contribution to provident fund and ESI deposited by the Assessee before the due date of filing of return of income under section 139(1) of the Act was allowable deduction to the assessee. This amendment being curative in nature applied retrospectively w.e.f. 1.04.1988. Therefore, this ground of appeal of the revenue is also dismissed.
12. In the result, all appeals of the revenue are partly allowed as above.
Order signed, dated and pronounced in the court on 05.03.2010.
Sd/- Sd/-
(BHAVNESH SAINI) ( N.S. SAINI )
JUDICIAL MEMBER ACCOUNTANT MEMBER
Ahmedabad; Dated 05/03/2010
Paras#
Copy of the Order forwarded to :
1. The Appellant
2. The Respondent
3. The CIT Concerned
4. The ld. CIT(Appeals)
5. The DR, Ahmedabad Bench
6. The Guard File.
BY ORDER,
सत्यापित प्रति //True Copy//
(Dy./Asstt.Registrar), ITAT, Ahmedabad
ITA No.401, 1742, 1743 /Ahd/2007
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