Income Tax Appellate Tribunal - Mumbai
Inter Classic Jewellery (I) (P) Ltd. vs Income Tax Officer on 30 August, 2007
Equivalent citations: (2008)114TTJ(MUM)402
ORDER
G.E. Veerabhadrappa, Vice President
1. This appeal filed by the assessee is directed against the Order dt. 14th July, 2004 of the CIT (A)-VIII, Mumbai for the asst. yr. 2001-02. The following grounds are taken by the assessee:
1. The learned CIT (A) erred in upholding the action of the AO in treating the service charges received as income not qualifying for exemption Under Section 10A.
2. The learned CIT (A) erred in upholding the action of the AO in not allowing exemption as per the provisions of Sub-section (1) r/w Sub-section (4) of Section 10A. He ought to have directed the AO to treat and include the amount of service charges receipts as forming part of total turnover and allowed exemption in accordance with the formula given in Sub-section (4) of Section 10A of the IT Act.
3. The learned CIT(A) erred in not allowing reasonable expenses against service charges receipts as he has allowed expenses only at 10 per cent of the receipts leaving the balance 90 per cent liable to tax which is totally unrealistic and unreasonable.
2. The assessee is a manufacturer and exporter of studded jewellery having its factory in, SEEPZ, Mumbai and is eligible for exemption underSection10A of the Act. During the year under appeal, apart from manufacturing jewellery for its own export sales, it also undertook manufacturing activities for others and received charges of Rs. 3,57,492 there from. As a result, the same was excluded from the export turnover. The lower authorities held that the service charges income earned by the assessee cannot be held to be income attributable to manufacturing activity and therefore exemption Under Section 10A was not available to this income. Further, the manner of computation of the profits derived from export of Articles provided in Sub-section (4) of Section 10A is to be looked into in conjunction with the provisions of Sub-section (3) thereof and not in isolation. When both the Sub-sections are read together, it is very clear that Sub-section (4) becomes applicable only in respect of export turnover in convertible foreign exchange and not in respect of the domestic turnover as well. Aggrieved the assessee is in appeal.
3. The learned Counsel for the assessee argued that the service charges received by the assessee are part of its operational income. There is no difference between the activities relating to export business carried on by the assessee and the process carried on by it for manufacturing jewellery for others under job work contracts. The activities of labour job involved use of machinery, labour and material which were also forming part of the activity of manufacturing jewellery for its own export sales. The processing charges earned was by using the entire undertaking of the Assessee which also manufactured jewellery for its own export. sales and which processing charges were earned by incurring expenditure of the factory like wages, electricity charges, etc. debited to the P&L a/c. Thus he vehemently contended that the amount of Rs. 3,57,492 received as service charges is in fact operational income earned from business and the expenditure for earning this income is included in several items of expenditure debited to the P&L a/c. He argues that Section10A, unlike Section 80HHC. 80HHE and 80IIHF, does not define profits of the business of the undertaking. Considering this, the exclusions specified in Section 80HHC, 80HHE and 80HHF do not have relevance while computing the eligible profits Under Section10A. Further, in these three Sections; i.e., 80HHC, 80HHE and 80HHF the base figure or the starting point is profits as computed under the head "Profits and gains of business or profession" and not profits of the eligible undertaking as in Section 10A. Therefore, eligible profits should be computed applying the general provisions applicable for computation of income from any business source. Thus, the eligible profits for the purposes of Section10A should be computed applying provisions contained in Chapter 1VD dealing with computation of income from profits and gains of business. Further under Section 10A(1), the deduction is allowed in respect of profits and gains "derived from export" of Articles or things or computer software, i.e., export profits. Section 10A(4) provides for the method of computation of such export profits Section 10A(4) provides that to compute the export profits, profits of the business of the eligible undertaking shall be taken in the ratio of export turnover to the total turnover. Thus, the word "derived" in Section 10A(1) qualifies profits from the export and not profits of the business of the eligible undertaking. Emphasis is on the profits derived from exports which are also required to be computed in the manner provided in Section 10A(4). Therefore, the term "derived from" does hot have the same significance as it has in Section 80HH and 80-1, etc. Accordingly, once there is a direct and proximate connection between a receipt and the business of the eligible undertaking, the receipt should form part of the eligible profits. It will include all receipts pertaining to the eligible undertaking which are chargeable to tax under the head "Profits and gains of business". The learned Counsel relied on the Board's Circular No. 794 dt. 9th Aug., 2000 . With regard to the computation of exemption, the learned Counsel contended that the learned CIT (A) was not justified in not directing the AO to treat and include the amount of service charges receipts as forming part of total turnover and allowed exemption accordingly. The learned Departmental Representative on the other hand has strongly supported the Orders of the authorities below.
4. We have considered the rival submissions and perused the material available on record. We find force in the contention of the assessee that the service charges received by the assessee are operational income of the assessee there is little difference between the activities relating to export business carried on by the assessee and the process carried on by the assessee for manufacturing jewellery for others under job work contracts. The Hon'ble jurisdictional High Court in the case of CIT v. Bangalore Clothing Co. held that "the Tribunal has recorded a finding of fact that the job work activity of the assessee was linked to the manufacturing activity and there was no difference between the activities relating to the export business carried on by the assessee and the processes carried on under job work contracts". Though the decision rendered in relation to deduction Under Section 80HHC, still, the ratio laid down in this judgment is squarely applicable to the case of the assessee. In this view of the matter we hold that the authorities below were not justified in denying exemption Under Section10A in respect of service charges of Rs. 3,57,492.
5. However, ground No. 2 of the assessee we are not in agreement with the finding of the CIT (A) that Sub-section (4) of Section 10A becomes applicable only in respect of export turnover in convertible foreign exchange and not in respect of the domestic turnover as well. When there is a direct and proximate connection between a receipt and the business of the eligible undertaking is established and the receipt is held to be eligible profits of the business and can essentially form part of the export turnover, there is no scope for excluding the same from the total turnover. In the case on hand the service charges are earned from job work contract. If this receipt cannot find a place in the total turnover of the assessee, we are at a loss to understand the logic of the authorities. It is therefore we have to hold that the total turnover of the assessee also would include the service charges receipt from job work. This ground of the assessee also succeeds.
6. Since we have allowed ground Nos. 1 and 2 of the assessee the third ground becomes redundant. The same is dismissed.
In the result, the appeal of the assessee is treated as allowed, for statistical purpose.