Income Tax Appellate Tribunal - Bangalore
Asst. Commissioner Of Income Tax vs Motorola India Electronics (P) Ltd. on 28 November, 2006
Equivalent citations: (2007)112TTJ(BANG)562
ORDER
J. Sudhakar Reddy, Accountant Member
1. ITA Nos. 1152 & 1153/Bang/ 03 and 3134/Bang/04 are filed by the assessee for the Assessment Years 1997-98, 1998-99 & 2001-02 and ITA Nos. 1134 & 1139/Bang/03 are filed by the revenue for the Assessment Years 1998-99 A 2001-02. The assessee has filed cross objections against these appeals and they are 77/Bang/03 A 78/Bang/03.
2. The issues are arising out of the orders of Commissioner of Income Tax(Appeals)-III, Bangalore. Since common issues are involved in these appeals and C.Os, for the sake of convenience, they are heard together and disposed off by way of this common order.
3. ITA Nos. 1134 & 11153/Bang/03, the appeals are for the assessment year 1997-98.
4. In the ground Nos. 2 to 9, the main issue is as to whether the interest income is to be included while computing deduction under Sections 10A & 10B of the Income Tax Act, 1961.
5. The facts of this issue are as follows:
5.1 The assessee has earned interest income from the following sources:
i) Deposits lying in the EEFC Account and
ii) Advancing of inter-corporate loans out of the funds of the undertaking.
The assessee had to deposit in EEFC Account certain amount with the Bank. It is stated that RBI placed certain restrictions as to the maximum amount that can be held in EEFC Account.
5.2 Further the assessee had outstanding borrowings by way of External Commercial Borrowings (ECBs in short) obtained in earlier years. The appellant has to repay this borrowing only in accordance with the repayment schedule. It is stated that RBI has placed restriction on prepayment of instalments. The undisputed fact is that the borrowings were for the business of STP undertaking. Under the Exchange Control Regulation, the assessee is prohibited from any pre-payment of the ECBs. For any pre-payment of the loan, the assessee had to seek prior permission of the Central Government. In the year 1999, the Government had formulated a policy on pre-payment and the policy stated that approval of pre-payment would be granted only to the extent of 10% of the outstanding loan. Hence even after going through the regulation, the assessee would have to repay a small portion of its outstanding loans, though it had the liquidity to do so. Hence it is required to temporarily park the funds, until the date of repayment, and also keep paying the interest on the loans.
5.3 As the assessee had to hold these funds, and as it had to ensure that the funds were easily assessable for repayment when due, and at the same time to have a maximum possible return so as to enable it to mitigate the expense of borrowing, it took a business decision to place these funds with various sister concerns as inter-corporate deposits. The assessee claims that the interest income derived from deposits in the EEFC Account and the interest income earned on inter-corporate deposits, have to be assessed under the head 'income from business.' He further claimed that the interest income as derived from the business of export of articles or things or computer software, and that the same is eligible for exemption under Section 10A of the Act for the Assessment Years 1997-98 and 1998-99. For the Assessment Year 2001-02, he submits that the Act has undergone a change and the entire concept and basis of Section 10A have changed and thus as per the provisions of law as applicable to the Assessment Year 2001-02, the interest income forms part of profits from the business of industrial undertaking and once the formula is applied as specified in sub-section 4 of Section 10A, the assessee would be entitled for deduction. For the proposition that the income in question should be assessed under the head 'profits and gains of business', he relied on the following cases:
i) CIT v. Tirupati Woollen Mills Ltd. 193 ITR 253 (Cal)
ii) CIT v. Tamil Nadu Dairy Development Corporation Ltd. 216 ITR 535 (Mad)
iii) CIT v. Madras Refineries Ltd. 228 ITR 324 (Mad)
iv) United Commercial Bank Ltd. v. CIT 32 ITR 688 (SC)
v) CIT v. Paramount Premises (P) Ltd. 190 ITR 259 (Bom)
vi) Snam Proghetti S.P.A. v. Addl. CIT 132 ITR 70 (Del)
vii) State of West Bengal v. Ghusick and Muslia Collieries Ltd. 163 ITR 592 (SC) For the proposition that the entire income should be exempted, as the assessee is a 100% exporter, i.e. the entire business of the assessee consists of development and export of software, he relied on the decision of the Bombay High Court in the case of CIT v. Punit Commercial Ltd. 245 ITR 550.
5.4 For the Assessment Year 2001-02, he relied on the words in the section as well as a similar wordings in Section 80HHC and the Explanation given in the Memorandum explaining the provisions of Finance Bill (No.2), 1991 reported at 190 ITR 270) at page 300. He pleaded that the claim of the assessee should be allowed.
6. Learned Departmental Representative, on the other hand, controverted the arguments of the learned Counsel for assessee and submitted oral as well as written notes of arguments. His case is that only those profits and gains that are derived by are eligible undertaking from the export of article or thing of computer software are eligible for deduction for the Assessment Year 2001-02. He gave extracts from the CTR Encyclopaedia Tax Laws and emphasized the point that the term 'derived from' used in the section clearly states that the assessee's claim is not maintainable. He relied on the Hon'ble Madras High Court judgment in the case of CIT v. Pandian Chemicals Ltd. reported in 233 ITR 497 as well as the decision in the case of Sterling Foods v. CIT reported in 237 ITR 579. He further relied on the decision of this Bench of the Tribunal in the case of M/s. Synopsys (India) Pvt. Ltd., Bangalore v. ITO Ward 12(2), Bangalore 'A' Bench in ITA No. 1100/Bang/03 order dt. 23.12.2005 and submitted that the decision is in favour of the revenue and the same may be followed. For the proposition that interest receded by the assessee was on deposits made in the Bank and that such income cannot be considered as derived from industrial undertaking, he relied on CIT v. Memon Impex Pvt. Ltd. 259 ITR 403 (Mad) and thus the assessee was not entitled to Section 10A in relation to the interest. He further relied on the order of the Authority for Advance Ruling in the case of Shams Tabrez Vanti, In re 273 ITR 299, for the proposition that income earned from deposit is to be assessed under the head 'income from other sources.' He further filed copies of Encyclopedia of Indian Tax Laws as well as certain other articles in support of his argument.
7. We first consider the issue whether the interest income in question on the facts and circumstances of the case is to be assessed under the head 'income from business' or 'income from other sources.' This is for the reason that once it is decided that the income is to be assessed under head other sources, the question of grant of exemption under Section 10A/10B does not arise.
7.1 At para 5.3 at page 3 of the order of first appellate authority, it is observed as follows:
Most of the decisions relied on by the appellant are on the issue whether interest income is business income. Even though the interest income may be attributable to the business income of the appellant, the same cannot be said to have been derived from the export activities of the undertaking.
7.2 The CIT(A) has not given a firm decision on this issue. Considering the facts and circumstances of the case, as the interest in question arose on deposit which are held in EEFC Account from export profits and as the Government by regulation as stipulated and the maximum amount that can be held in EEFC Account and as the assessee had advanced amounts to sister concerns from out of monies available with him, for the reason that he was prevented by Govt. regulations from prepaying External Commercial Borrowings, the income in question can definitely be considered to have close nexus with the business activity of the assessee and thus assessable under the head 'income from business. In this regard, we draw support from the following decisions:
i) CIT v. Tirupati Woollen Mills Ltd. 193 ITR 252 (Cal)
ii) CIT v. Tamil Nadu Dairy Development Corporation Ltd. 216 ITR 535 (Mad)
iii) Snam Proghetti S.P.A. v. Addl. CIT 132 ITR 70 (Del)
iv) CIT v. Paramount Premises (P) Ltd. 190 ITR 259 (Bom) 7.3 The jurisdictional High Court in the case of Satishchandra and Co. v. CIT 234 ITR 70 (Kar), considering a similar situation has held as follows:
The assessee had to make deposit in the bank as a condition for obtaining bank guarantee to be filed before the excise authorities as required under the Excise Rules. The interest income which arose out of transactions was totally connected to the business of the assessee and so interest income was also part of business income. If the income is assessable as business income, then the mere circumstance that assessee had shown it as "income from other sources" or that it was assessed under the head "Income from other sources", should not be made the ground for denying the set off of the carried forward losses. In any case the assessee could not be precluded from establishing before the authorities that it was a business income. The predominant view of the various High Courts is that interest income arising from the transaction connected with the business would be interest (business) income.
(emphasis supplied)
8. The next issue is whether the assessee is eligible for grant of relief on interest income while computing deduction under Sections 10A & 10B of the I.T. Act, 1961. This issue would be dealt by us separately for each of the Assessment Years 1997-98 & 1998-99 and 2001-02.
8.1 For the Assessment Years 1997-98 & 1998-99, the issue has been decided against the assessee by the order of this Bench of the Tribunal in ITA No. 1100/Bang/03 in the case of M/s. Synopsis India Pvt. Ltd. (supra) order dt.20.08.2005. Respectfully following the same, we uphold the order of the first appellate authority on this issue.
8.2 Coming to the Assessment Year 2001-02, we find that the Act has undergone a change. The Section 10B(1) & (4) reads as follows:
10B(1) Subject to the provisions of this section, a deduction of such profits and gains as are derived by a hundred per cent 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 assessee.
10B(2)....
10B(3) ...
10B(4) For the purposes of Sub-section (1), the profits derived from export of articles or things or computer software shall be the amount which 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 carried on by the undertaking.
8.3 Other sub-sections of this section are not relevant for the issue in dispute. The above section supports the argument of the learned Counsel for assessee. The section has undergone a change. Earlier it was an exemption section and income from these undertakings which are covered by this section did not form part of total income. From this particular year, though the section appears in Chapter 3, which classifies income which do not form part of total income, a deduction from business income from the undertaking is granted by including the special provision. Another important feature is in Sub-section (4) is that the methodology of arriving at the export profits of the business of the undertaking is given in a formula, as in the case of 80 HHC and it shall be the same proportion as the export turnover bears to total turnover in respect of such articles or things or computer software. The word "shall" has been used to make it mandatory. Another important feature is that the terminology is used in Sub-section (4) is "profits of the business" of the undertaking in contradiction to the word "profits and gains derived by the assessee" from a 100% export oriented undertaking.
8.3 In Section 80 IA, the term profits and gains from the business has been used. Similar terminology has been used in many other sections such as 80JJ or 80JJA etc. Whereas under Section 801 and other sections the terminology used is "profits and gains derived from industrial undertaking". The term "from the business of" is much wider than the term "derived from industrial undertaking". Keeping this distinction in mind, we have to necessarily hold that the entire profits deriving from the business of undertaking should be taken into consideration, while computing the eligible deduction under Section 10B/10A of the Act, by applying the mandatory formula.
8.4 The issue becomes further clear when we look into the provisions of Section 80HHC which are similar, as far as the education of deduction is concerned. As the legislature wanted to specifically exclude receipts by way of brokerage, commission, rent, charges or any other receipt of similar nature, from "the profits of the business", in 80 Hon'ble High Court, it has specifically inserted Exp. (baa). If the legislature intended to exclude interest from the term "profit of business of undertakings" under Section 10A / 10B, a similar provision as in the case of section (baa) would have been inserted. No such explanation has been introduced in Section 10A/10B. For ready reference, we extract the following from the Memorandum explaining provisions of Finance (No.2) Act, 1991 which is reported in 190 ITR (ST) 300. With regard to Section 80HHC explanation (baa) where it is stated as follows:
The existing formula may also give a distorted figure of export profits when receipts like interest, commission, etc., which do not have an element of turnover are included in the profit and loss account.
It is, therefore, proposed to clarified that "profits of the business" for the purpose of Section 80HHC will not include receipts by way of brokerage, commission, interest, rent, charges or any other receipt of similar nature. A some expenditure might be incurred in earning these incomes, which in the generality of cases is part of common expenses, it is proposed to provide adhoc 10% deduction from such incomes to account for these expenses.
The decisions relied upon by the revenue i.e. the case of Menon Impex Pvt. Ltd. (supra) pertains to the Assessment Year 1985-86 as the law has undergone change. This view is in conformity with the following orders of the Tribunal:
i) ACIT v. Maxcare Laboratories Ltd. (2005) 92 ITD 11 (Cuttack)
ii) ITO v. Kiran Enterprises 92 TTJ 105
iii) M/s. DLF Power Limited v. ITO ITA No. 1l95/Del/2002 "C Bench Assessment Year 1988-89 order dt.17.2.2006.
8.5 Coming to the decision of Authority for Advance Ruling in the case of Sham Tabrez Vanti In re 273 ITR 299, that interest income is assessable as income from other sources, the same is not binding on this Bench. In any event, the jurisdictional High Court has taken a contrary view and the same is binding on us. The case of K.S. Subbiah Pillai and Co. (India) Pvt. Ltd. v. CIT 260 ITR 304 (Mad), is on Section 80HHC and does not apply to the case on hand and on the other hand, it recognized the facts that interest paid and claimed as deduction can be paid under the head "profits and gains of the business."
8.6 Thus in view of the above discussion, we agree with the submissions of the learned Counsel for assessee and direct the Assessing Officer to recompute the deduction under Section 10A & 10B of the Act on the lines indicated above for the Assessment Year 2001-02. In the result this ground of the assessee is allowed in the assessment year 2001-02.
8.7 Ground Nos. 10 & 11 for the Assessment Year 1997-98 and ground No. 6 for the Assessment Years 1998-99 and 2001-02 are regarding the allow/ability of interest expenditure on the interest income. We have already held interest income in this case has to be assessed under the head 'income from business.' While doing so, the Assessing Officer has to compute separately income earned by way of interest. To compute the interest income, all connected and related expenditure has to be allowed. In this case, the assessee had to necessarily hold the funds in deposits and advances due to embargo placed by the government, restricting pre-payment of the external commercial borrowing. The assessee has to necessarily hold on to the funds, which would otherwise have been utilised to repay the liability which would have reduced his liability to pay interest. Thus there is a clear nexus between the external commercial borrowings and the funds placed for short term deposits, and other deposits. Thus in our considered opinion, the relatable expenditure has to be deducted. In the result this ground of the assessee is allowed for the Assessment Years 1997-98 and 1998-99.
8.8 For the Assessment Year 2001-02, though the principle do not change, the ground of netting of interest is an alternative ground. As we have directed that due to change in law, deduction under Section 10A / 10B has to be granted on this business receipts, the ground becomes inf ructuous.
9. Coming to other issue, regarding allowing the deduction in respect of proportionate management expenses of earning of interest income for the Assessment Years 1997-98 (Ground No. 12), 1998-99 (Ground No. 7) and 2001-02, we hold as follows:
9.1 After hearing rival contentions, we find that the issue is already decided by this Bench in the case of M/s. Syn. Pvt. Ltd. (supra) wherein para 7, this Bench has held that 5% of expenses are to be treated as expenditure for earning the income. In this case, the Assessing Officer has restricted such allowance as 4%. The assessee claims that he has made a claim on a scientific basis. The assessee has not demonstrated his claim, with any further evidence.
9.2 Under the circumstances, consistent with the view taken earlier by this Bench, we direct that the expenses claimed by the assessee should be allowed as proportionate expenditure for earning this income subject to a maximum limit of 5%. In the result this ground of assessee is allowed to the extent indicated above.
9.3 For the Assessment Year 1997-98, the assessee has disputed the levy of interest under Section 234B. This is consequential in nature and in view of the decision of Hon'ble Supreme Court in the case of CIT v. Anjum M.H. Ghaswala and Ors. reported in 252 ITR 1, this ground of the assessee is rejected.
10. Coming to the department appeals in ITA Nos. 1134 and 1139/Bang/03, the issue is inclusion of income from sale of import licences, for the purpose of computing deduction under Sections 1OA / 10B of the I.T. Act. We find that the first appellate authority has relied on the decision of this Bench of the Tribunal, in the case of Wipro Information Technologies v. DCIT (Assessment) in ITA Nos. 651/Bang/94 Dt. 31.7.2002. We find no infirmity in the finding of the first appellate authority. Respectfully following our own order in the case of Wipro Information Technology (supra), we dismiss both the appeals of the revenue.
11. Coming to the Cross Objections filed by the assessee, we find that the assessee had challenged the order of the CIT(A) on the ground that he should adjudicate Ground Nos. 10 & 11 as well as Ground No. 12 raised before him. At the time of hearing, the cross objections were not pressed. Thus the same are dismissed as not pressed.
In the result ITAs are allowed in part as indicated above and C.Os are dismissed.