Income Tax Appellate Tribunal - Hyderabad
Yodev Plastics Pvt. Ltd.,, Hyderabad vs Assessee on 17 June, 2015
ITA No.s 1156, 1157, 1234 & 1235 of 2013 Yodeva Plastics Private Ltd Hyderabad
IN THE INCOME TAX APPELLATE TRIBUNAL
Hyderabad 'B' Bench, Hyderabad
Before Shri B.Ramakotaiah, Accountant Member
& Smt.Asha Vijayaraghavan, Judicial Member
ITA Nos.1156 & 1157/Hyd/2013
(A.Y. 2009-10 & 2010-11)
M/s. Yodeva Plastics Private Dy. Commissioner of
Limited Vs. Income Tax, Circle -3(3)
D-17, B-4 & B-5, Phase-I IDA Hyderabad
Jeedimetla, Hyderabad
PAN: AAACY 0760 C
(Appellant) (Respondent)
ITA Nos. 1234 & 1235/Hyd/2013
(Assessment years: 2009-10 & 2010-11)
Dy. Commissioner of Income M/s. Yodeva Plastics
Tax, Vs. Private Limited
Circle -3(3), Hyderabad D-17, B-4 & B-5, Phase-I
IDA Jeedimetla, Hyderabad
PAN: AAACY 0760 C
(Appellant) (Respondent)
For Revenue: Shri Rajat Mitra, DR
For Assessee: Shri S. Rama Rao, Advocate
Date of Hearing : 07.04.2015
Date of Pronouncement : 17.06.2015
ORDER
Per Smt. Asha Vijayaraghavan, J.M.
These are cross appeals by both the assessee and the Revenue against the separate orders of the CIT(A)-IV, Hyderabad, relating to A.Ys 2009-10 & 2010-11.
ITA No.1156/Hyd/2013 (A.Y 2009-10) Assessee's Appeal:2. Briefly stated, the assessee is a company in which Page 1 of 26 ITA No.s 1156, 1157, 1234 & 1235 of 2013 Yodeva Plastics Private Ltd Hyderabad public are not substantially interested. The assessee is carrying on the activity at three different units - at (1) B- 4 & B-5,·Phase-I, IDA Jeedimetla, Hyderabad; (2) D-17 & D-18, Phase- I, IDA, Jeedimetla which is registered as 100% EOU manufacturing plastic containers and (3) Plot No.8I, EPIP, Phase-II, Baddi at Solan in Himachal Pradesh manufacturing shampoo products. The income derived from the 100% EOU at Hyderabad is exempt u/s l0B of the I.T. Act and the income derived at Baddi is eligible for deduction u/s 80IC of the I.T Act. Separate books of account are maintained for all the units together. The aggregate of the receipts from various units during the previous year amounted to Rs.
26,34,54,758/-. The income before tax of all the units amounted to Rs. 2,81,27,850/-. After adjustments, the gross total income before depreciation and tax amounted to Rs.4,89,12,109. The assessee claimed deduction u/s 80IC of Rs.1,63,08,828 and exemption u/s 10B of Rs.1,05,60,996. The net profit after claiming deduction of depreciation amounted to Rs.39,15,526. This was admitted in the return of income filed by the assessee.
3. The Assessing Officer converted the case to scrutiny and issued notice u/s 143(2) on 2.8.2010. The assessee submitted all the details before the Assessing officer. The Assessing officer sought for explanations with regard to exemption u/s l0B and deduction u/s 80IC of the I.T. Act. The assessee submitted all such details. The Assessing officer completed the assessment u/s 143(3) Page 2 of 26 ITA No.s 1156, 1157, 1234 & 1235 of 2013 Yodeva Plastics Private Ltd Hyderabad on 5.12.2011 determining the total income at Rs.1,25,38,317. While doing so he restricted the exemption u/s l0B to Rs.19,29,860 and deduction u/s 80IC to Rs.1,53,28.227. It is against the said determination of income, the assessee filed the appeal before the CIT (A).
4. Before the CIT (A) it was submitted as follows:
Exemption u/s l0B of the I.T.Act: The Assessing Officer accepted that the assessee is eligible for exemption u/s l0B of the I.T. Act. However, the Assessing officer is of the view that the following items of receipts are not eligible for exemption u/s l0B of the LT Act. The Assessing Officer accordingly arrived at the eligible export profit at Rs.22,16,125 after reducing the following receipts.
A) Sale proceeds not received in India Rs.2,61,844
B) Freight and insurance of Rs.38,82,369
C) Amortisation income of Rs.23,04,841
D) Profit on sale of assets - Rs.12,11,433
E) Development charges of Rs.7,08,756
F) The fluctuation in foreign exchange is not considered
as a gain for the purpose.
5. However, for the purpose of determining the total turnover, Assessing officer included the amortization income of Rs.23,04,841, profit on sale of assets of Rs.12,1l,433 and development charges of Rs.7,08,756.
He arrived at a total turnover at Rs.10,36,91,891. The proportionate amount eligible for exemption u/s 10B was arrived at Rs.19,29,860 and the same was allowed by the Assessing officer.
6. With respect to non-inclusion of Rs.44,83,952/-
Page 3 of 26ITA No.s 1156, 1157, 1234 & 1235 of 2013 Yodeva Plastics Private Ltd Hyderabad being the gain on fluctuation in foreign from the eligible profits and the export turnover:
(i) The Assessing officer is of the view that the forex gain or loss is not attributable to the manufacturing activity and because the money is received in Euros and kept by the company in the EEFC Current account; the withdrawal of the money converting foreign exchange into rupees is being made as per its business exigencies and, therefore, the gain derived cannot be considered as the income derived from the industrial undertaking.
(ii) In this regard, it was submitted that the gain on fluctuation in foreign exchange represents the gain relating to its manufacturing activity. The manufactured goods are exported and the sale consideration is received in foreign exchange. The provisions of Sec. 10B clearly stipulate that the sale consideration should be received m convertible foreign exchange into India. There is no stipulation as to when such foreign currency is to be withdrawn from the bank. The sale price is credited based on the rate of exchange at the time of raising the invoice. The amount is received in the foreign exchange as per the invoice and is credited to the bank account of the assessee. The assessee would be paid the Indian currency based on the exchange rate on the date of withdrawal. There may be either a gain or a loss in the process and such gain or loss is to be treated as a pat of the sale consideration of the goods manufactured.
Therefore, the amount represents the sale price and is Page 4 of 26 ITA No.s 1156, 1157, 1234 & 1235 of 2013 Yodeva Plastics Private Ltd Hyderabad eligible for exemption u/s 10B of the I.T. Act. The said amount also forms part of the export turnover. In this regard the assessee relied on the following decisions.
• The decision of the ITAT, Chennai B-Bench in the case of ACIT vs. P.S.Apparels reported in 101 TTJ 29 • The decision of Hon'ble Karnataka High Court in the case of Motor Industries Co.Ltd., vs. CIT reported in 291 ITR 269.
• The decision of ITAT, Mumbai-E Bench in the case of Shah Originals vs. ACIT reported in 112 TTJ 754.
• The decision of ITAT, Chennai - A-Bench in the case of Changepond Technologies (P) Ltd., vs. ACIT reported in 119TTJ18 • The decision of Hon'ble Supreme Court in the case of CIT vs. Woodward Governor India Ltd., reported in 312 ITR 254 wherein it is held that loss is allowable as business loss.
• The decision of Hon'ble Bombay High Court in the case of CIT vs. Gem Plus Jewellery India Ltd., reported in 330 ITR 175.
7. In view of the above, the assessee requested the Commissioner of Income-Tax (Appeals) that the gain on foreign exchange may be treated as the income eligible for Page 5 of 26 ITA No.s 1156, 1157, 1234 & 1235 of 2013 Yodeva Plastics Private Ltd Hyderabad exemption u/s 10B and also as forming part of the export turnover.
8. The CIT (A) held as follows:
"6.3 I have considered the facts on record and the submissions of the AR. In the case of Gem Plus Jewellery India Ltd., the court had held that the gain from foreign exchange fluctuations was derived from the export of goods. However, the court also referred to and distinguished the facts of this case from those of CIT v. Shah Originals (2010) 327 ITR 19 (Bom.) with the following observations:
The decision in Shah Originals is however, distinguishable for the reason that the foreign fluctuation in that case arose after the export transaction had been completed and after the export profits were deposited by the assessee in an EEFC Account. This is evident from the following observations:
"The assessee admittedly in the present case received the entire proceeds of the export transaction. The Reserve Bank of India has granted a facility to certain categories of exporters to maintain a certain proportion of the export proceeds in an EEFC account. The proceeds of the account are to be utilized for bonafide payments by the account holder subject to the limits and the conditions prescribed. An assessee who is an exporter is not under an obligation of law to maintain the export proceeds in the EEFC account, but, this is a facility which is made available by the Reserve Bank. The transaction of export is complete in all respects upon the repatriation of the proceeds. IT lies within the discretion of the exporter as to whether the export proceeds should be received in a rupee equivalent in the entirety or whether a portion should be maintained in convertible foreign exchange in the EEFC account. The exchange fluctuation that arises, it must be emphasized, is after the Page 6 of 26 ITA No.s 1156, 1157, 1234 & 1235 of 2013 Yodeva Plastics Private Ltd Hyderabad export transaction is complete and payment has been received by the exporter. Upon the completion of the export transaction, what the seller does with the proceeds, upon repatriation, is a matter of his option. The exchange fluctuation in the EEFC account arises after the completion of the export activity and does not bear a proximate and direct nexus with the export transaction so as to fall within the expression "derived" by the assessee in sub-section (1) of section 80HHC".
In the present case, the assessee has realized a larger amount in terms of Indian rupees as a result of a foreign exchange fluctuation that took place in the course of the export transaction".
6.4 The gains to the appellant arise from deposits made in the EEFC account. On facts, therefore, it is the decision in the case of Shah Originals that is applicable to the appellant and not that of Gem Plus Jewellery India Ltd. These gains are, therefore, held as not derived from the export business and the decision of the AO is upheld on this issue".
9. On appeal before us, assessee raised Ground Nos. 2 & 3 which are as under:
"2. The ld CIT (A) erred in holding that the foreign exchange gain derived by the appellant is not eligible for exemption u/s 10B of the I.T. Act. The ld CIT (A) ought to have seen that the said gain is a part of the turnover and is eligible for exemption u/s 10B of the Act.
3. The ld CIT (A) ought to have seen the fact that the amount received in foreign currency is deposited in the bank account and when the said amount was withdrawn, there was a gain and such gain is relatable to the exports and is eligible for exemption u/s 10B of the I.T. Act".Page 7 of 26
ITA No.s 1156, 1157, 1234 & 1235 of 2013 Yodeva Plastics Private Ltd Hyderabad
10. We heard both parties. We are of the opinion that the issue is squarely covered by the decision of CIT vs. Gem Plus Jewellery India Ltd (Bom.) (330 ITR 177) wherein the decision of CIT vs. Shah Originals (327 ITR 19 (Bom.) has been clearly distinguished. However, the ld Counsel for the assessee submitted that foreign exchange gain before realization of sale price in convertible foreign exchange was Rs.53,92,050 and loss on exchange fluctuation was credited to the P&L a/c i.e. the net amount accounted was Rs.44,83,952 which we find from the account copy filed in the paper book. The foreign exchange gains/loss post receipt of sale is not income for the unit to be allowed deduction u/s 10B. In these circumstances, we set aside the issue to be examined by the AO and give an opportunity to the assessee to substantiate its claim. Hence, ground Nos.2 & 3 raised by the assessee are allowed for statistical purposes.
11. Ground No.4 raised by the assessee read as under:
"4. The ld CIT (A) erred in confirming the action of the AO in excluding an amount of Rs.2,61,844 being the amount adjusted by the foreign customer from the eligible turnover for the purpose of computation of exemption u/s 10B of the Act".
12. The AO reduced the amount of Rs.2,61,844 not received into India as per section 10B(3). AO stated as follows:
"The assessee company shown export turnover of Rs.9,86,66,861. Out of this, an amount of Rs.2,61,844 (4132 Euros from Lubeckkar Page 8 of 26 ITA No.s 1156, 1157, 1234 & 1235 of 2013 Yodeva Plastics Private Ltd Hyderabad Ststoffwerk Gmbh, (Invoice No.E44/C39) was not received into India within the specified time, as given in the provisions of section 10B(3) of the Income Tax Act. Therefore, as per the stated provisions, since this amount is not received into India, the same is to be reduced from the export turnover".
13. It was submitted before the CIT (A) that the amount of Rs.2,61,844/-equal to 4132 Euros was adjusted for purchase of Rotation drive unit of Duck cap from Lubecker who is the customer of the assessee. The said amount is reduced from the amount due to the appellant and the balance of amount was remitted into India. Therefore, the amount of Rs.2,61,844/- also is to be considered as receipt into India particularly in view of the fact that it was adjusted towards the amount due to the said company for purchase of moulds used in the plastic industry.
14. Therefore, before the CIT (A) it was argued that the Assessing officer is not justified in reducing the income attributable to EOU from any of the above mentioned items.
15. The CIT (A) stated that issue relating to deduction u/s 10B pertains to a sum of Rs.2,61,844 excluded from the export turnover by the AO since the amount was not received in India within the specified time. The CIT (A) observed that the AR has submitted that this sum was adjusted for purchase of rotation drive unit of duck cap from Lubeckert who is the customer of the assessee and the sale proceeds were remitted to the assessee after adjusting this amount.
Page 9 of 26ITA No.s 1156, 1157, 1234 & 1235 of 2013 Yodeva Plastics Private Ltd Hyderabad
16. The CIT (A) further stated that Explanation 2(iii) to sec.10B defines 'export turnover' as 'the consideration in respect of export received in or brought into, India in convertible foreign exchange'. The CIT (A) pointed out that The emphasis on the remittance of the foreign exchange into India is understandable in view of the fact that since the basic purpose of the section is promotion of exports and consequently, foreign exchange for the country. As held in the case of Secretary, CBDT vs. B.K. Sinha (2009) 309 ITR 1(Kar.), though a liberal interpretation has to be given to a provision, the interpretation has to be as per the wording of the section and if the wording is clear and unambiguous, benefits which are not available under the section cannot be conferred by expanding or misinterpreting the words in the section. The CIT (A) stated that requirement of bringing the foreign exchange into India is basic and crucial to the provisions of section 10B and therefore, the assessee's claim in this regard cannot be accepted and the appeal was dismissed on this issue.
17. Aggrieved, assessee is in appeal before us.
18. We find that Rs.2,61,844/- has been equal to Rs.4,132 Euros was reduced from the amount due to the assessee and the balance of the amount was Page 10 of 26 ITA No.s 1156, 1157, 1234 & 1235 of 2013 Yodeva Plastics Private Ltd Hyderabad remitted into India. We are of the opinion that Rs.2,61,844 cannot considered as receipt into India as the amount was adjusted. We rely on the decision in the case of CIT vs. McLeod Russel (India) Ltd. (2014) 361 ITR 663 (Cal.), wherein it has been held as follows:
"(iii) That the amount of commission or brokerage paid outside India was not received or brought into the country of the exporter. The amount spent on account of brokerage or commission was deducted from the price of the goods and the balance amount was received in the country in foreign exchange. Thus, the amount of commission or brokerage would be excludible from the export turnover".
Following the decision in the case of CIT vs. McLeod Russel (India) Ltd (361 ITR 663 (Cal.), we hold that the amount claimed by the assessee is to be excluded from the export turnover and the ground is accordingly dismissed.
Computation of deduction u/s 80IC of Baddi unit:
19. The Assessing Officer reduced the interest of Rs.62,640 on the fixed deposits with the bank.
According to the Assessing officer, the said amount has no nexus with the manufacturing activity and, therefore, the assessee is not entitled for deduction in the said amount. In this regard, assessee humbly submitted that the Assessing Officer ought to have considered only the net amount of such interest while deducting the interest and not the gross interest received.
Page 11 of 26ITA No.s 1156, 1157, 1234 & 1235 of 2013 Yodeva Plastics Private Ltd Hyderabad
20. In view of the above, the assessee preferred appeal before the Commissioner of Income-Tax (Appeals) to allow the appeal as prayed for.
21. We heard both parties. We are of the opinion that once the income is assessed as business income, the corresponding expenditure is to be reduced and the balance to be excluded for the purpose of 80IC. Hence, we direct the AO to examine the nature of interest and decide this issue after giving an opportunity to the assessee.
22. In the result, appeal in ITA No.1156/Hyd/2013 is partly allowed for statistical purposes.
ITA No.1157/Hyd/2013 - AY. 2010-11 (Assessee's Appeal):1. The first ground is general in nature. The second and third grounds are as follows:
"2. The ld CIT (A) erred in confirming the action of the AO in determining the deduction claimed u/s 80IC by the AO".
"3. The ld CIT (A) erred in holding that the amount derived by sale of scrap; interest income and other income were not derived by the manufacturing unit and that the same are not eligible for deduction u/s 80IC of the Act".
2. Before the CIT (A) the AR submitted that the customer M/s Hindustan Unilever Ltd supplied the raw material and the required chemicals in drums and corrugated bags etc., to the assessee, that after use of the raw materials, these packing material were sold and the aggregate sale proceeds of Rs.20,43,698 credited to the P&L a/c (thereby reducing the cost Page 12 of 26 ITA No.s 1156, 1157, 1234 & 1235 of 2013 Yodeva Plastics Private Ltd Hyderabad of production) that the customer had reduced the sale price by an equivalent amount and that as a result, the scrap sale needed to be considered as part of the turnover.
3. The CIT (A) observed that the AR had claimed that the customer M/s Hindustan Uniliver Ltd had reduced the sales price by the amount realised from scrap scales and the CIT (A) stated that the AR's claim would be acceptable in case where the sale proceeds were shown to be realised partly in cash and partly through an adjustment from the scrap sale receipts. The CIT (A) held that since the sale proceeds were not shown to be partly in cash and partly through an adjustment from scrap sale receipts and in this case since the assessee has reduced the sale consideration itself in view of its other income "from scrap sales", such receipts cannot be taken to be derived from the business of manufacture of shampoo. Hence, the CIT (A) held that merely because the assessee is able to make some profits from scrap sales, it cannot be concluded that such receipts are derived from the business of manufacture of shampoo. Aggrieved, assessee is in appeal before us.
4. Before us, the ld Counsel submitted that the AO had computed the deduction u/s 80IC at Rs.58,75,851 as against the claim made of Rs.65,71,560. The AO while computing such deduction u/s 80IC reduced among other things the sale of scrap. It is submitted that an amount of Rs.20,43,698 was derived on account of sale of scrap.
Page 13 of 26ITA No.s 1156, 1157, 1234 & 1235 of 2013 Yodeva Plastics Private Ltd Hyderabad
5. It was further submitted that the customer Hindustan Uniliver Ltd supplied raw material and the required chemicals in drums and corrugated bags. After use of the material so supplied, the same were to be sold. Such sale price is credited to the scrap sales account and the aggregate of such amount is Rs.20,43,698. This amount reduced the cost of production. When scrap sale is appropriated by the assessee, the party supplying the goods reduced the sale price downwards. It can be seen from the details that the said HUL informed the assessee that it would reduce the sale price as the assessee is appropriating the sale of scrap.
6. It was further submitted that the amount of sale of scrap derived is the income derived from the industrial undertaking and is to be added to the sale price. Therefore, the same is eligible for deduction u/s 80IC of the I.T. Act.
7. The ld Counsel for the Assessee pointed that the AO relied in the decision in the case of CIT vs. Sterling Foods (SC) (237 ITR
579) which is not applicable to the facts of the assessee's case. In the said case, the Apex Court was considering the question whether the profit/gain derived from the sale of import entitlement would be eligible for exemption or not.
8. It was further argued that AO relied on the decision in the case of Liberty India vs. CIT (317 ITR 218). This judgment also is not applicable to the facts of the assessee's case as the said judgment was with regard to the question of allowability of Page 14 of 26 ITA No.s 1156, 1157, 1234 & 1235 of 2013 Yodeva Plastics Private Ltd Hyderabad deduction u/s 80IB in respect of profits from DEPB and Duty Draw Back Schemes.
9. It was contended by the ld Counsel that the CIT (A) did not consider the submissions of the assessee and had not distinguished the case of the assessee from that of the cases relied on by the AO. The CIT (A) further did not appreciate that the sale of scraps emanating from the supply of raw materials, has the effect of reduction in the sale price since there was a direct nexus with the manufacturing activity of the assessee i.e. manufacture of shampoo.
10. We heard both the parties. We find that the ld Counsel for the assessee had submitted a detailed note on the issue before us. It has been stated that the unit in Baddi (H.P) is engaged in the manufacture of shampoo for HUL (Hindustan Uniliver Ltd) on job work basis. During the F.Y 2009-10, scrap sale activity was entrusted to the assessee by their customer HUL by simultaneously corresponding reduction in rates of job work.
11. The assessee submitted that in the case of the assesses "job work charges receipts" and "scrap sale receipts" are not two independent and separate activities. On the contrary, scrap sale receipts and job work charges receipts are inextricably associated and inter-related and therefore, scrap sale receipts have to be treated as integral part of job work receipts. Therefore, it was submitted that scrap sale receipts qualifies for exemption u/s 80IC.
Page 15 of 26ITA No.s 1156, 1157, 1234 & 1235 of 2013 Yodeva Plastics Private Ltd Hyderabad
12. The ld Counsel brought to our notice that during F.Y 2013- 14, HUL reverted its earlier decision and again took the scrap sale activity back to their account and simultaneously enhanced the rate of the job work. They had also enclosed the purchasing document of HUL for all products which indicates the increase in job work rates w.e.f. 1.7.2013 i.e. The date on which the scrap sale activity was withdrawn. The ld Counsel had also given a statement for FY 2009-10 showing the decrease in job work w.e.f. 12th October, 2009.
13. Hence we are of the opinion that sale of scrap has the effect of reducing the cost of production. Further, sale of scrap is eligible for deduction u/s 80IC. The following cases support the view that 80IC deduction would be available with respect to sale of scrap.
CIT v. SundaramClayton Ltd., 133 ITR 34 CIT vs. Wheels India ltd 141 ITR 745 CIT vs. Sadhu Forgings Ltd 336 ITR 444 Fenner India Ltd vs. CIT 241 ITR 803
14. In the case of CIT vs. Sadhu Forgings Ltd, it has been held as follows:
"The assessee's industrial undertaking was set up for the purpose of manufacture of steel, forging, transmission gears and parts, and accessories of motor vehicles. During the relevant assessment year, it claimed deduction under section 80-IB on its gross receipts which, apart from goods sales, also included scrap sales, labour charges and job work charges. The Assessing Officer held that the deduction under section 80-IB could not be allowed on sale of scrap, job work and labour charges as the same were attributable to the business carried on by the assessee, but not derived from the profits of industrial undertaking. On appeal, the Commissioner (Appeals) allowed Page 16 of 26 ITA No.s 1156, 1157, 1234 & 1235 of 2013 Yodeva Plastics Private Ltd Hyderabad deduction under section 80-IB on the scrap sales holding that the scrap generation at various stages of manufacturing process was part of the manufacturing activity of an industrial unit and, thus, profits and gains derived on that account were from the industrial undertaking. However, with regard to the claim of deduction on job work and labour charges, the Commissioner (Appeals) disallowed the appeal of the assessee and held that the job charges and labour charges not derived from the exports, were to be categorized as independent income and had to be deducted from gross profits to calculate profits derived from the exports. On second appeal, the Tribunal allowed deduction under section 80-IB on job work charges and labour charges also holding that job works/labour charges income received by the assessee, by utilizing its plant and machinery installed in the undertaking, gave rise to income which had a direct nexus with the assessee's industrial undertaking, and, thus, was entitled to claim of deduction under section 80-IB.
From a plain reading of section 80-IB, it would be seen that the only essential requisite is that the eligible industrial undertakings should be carrying out manufacture or production of articles or things. The industrial undertaking set up by the assessee was for the purpose of manufacture of steel, forging, transmission gears and part, and accessories of motor vehicles and the scrap of those items was stated to be a bye-product of manufacturing process. The assessee explained in detail the process involved in forging and in that regard drew attention to the finding of the Tribunal based on the records that the assessee was involved in manufacturing of forging which involved purchase of steel, cutting the same, making of forging parts, giving heat treatment and machining. Die making was stated to be the primary process and was a separate industry by itself. It was noted, and rightly so, that each of the above processes could be done in separate industrial undertaking, whereas assessee had undertaken all those processes in its units. The issue was also that the assessee was doing those works on job basis for other undertakings, by getting the raw material from them. When the assessee was entitled to claim exemption in respect of income derived from such processes doing for itself, there was no reason as to why it would not be entitled to so merely because the raw material component was being supplied by other customers for whom the assessee was doing the job. In fact, deduction under section 80-IB is given on the profits derived from the manufacturing process, being undertaken by the assessee which qualifies for deduction. [Para 9] The heat treatment is one of the processes through which the forgings are given the desired temperature and then cooled in different manner which results in changing the mechanical properties desired by the customers. The heat treatment toughens the forged part for being used as automobile parts. The process of heat treatment is absolutely Page 17 of 26 ITA No.s 1156, 1157, 1234 & 1235 of 2013 Yodeva Plastics Private Ltd Hyderabad essential for rendering them marketable. Without the heat treatment, the material is not fit for automobile industry. [Para 10] Thus, in view of several decisions of the High Courts and the Supreme Court, the activity of forging is 'manufacturing' within the ambit of section 80-IB. It was immaterial that the assessee was doing the job of forging also for customers and was charging them on job-work basis or on the basis of labour charges. It would still be qualified as carrying eligible business under section 80-IB. [Para 12] Keeping in view the activities of the assessee in giving heat treatment for which it had earned labour charges and job-work charges, it could, thus, be said that the assessee had done a process on the raw material which was nothing but a part and parcel of the manufacturing process of the industrial undertaking. Those receipts could not be said to be independent income of the manufacturing activities of the undertakings of the assessee and, thus, could not be excluded from the profits and gains derived from the industrial undertaking for the purpose of computing deduction under section 80-IB. Those were gains derived from industrial undertakings and, so, entitled for the purpose of computing deduction under section 80-IB. There cannot be any two opinions that manufacturing activity of the type of material being undertaken by the assessee would also generate scrap in the process of manufacturing. The receipts of sale of scrap being part and parcel of the activity and being proximate thereto would also be within the ambit of gains derived from industrial undertaking for the purpose of computing deduction under section 80-IB. [Para 13]
15. Since there is parity in the provisions of section 80IB and 80IC, the above case shall apply in the case of 80IC deduction with respect to sale of scrap. Respectfully following the decision in CIT vs. Sadhu Forgings Ltd, we allow Ground Nos. 2 & 3 raised by the assessee.
16. In the result ITAT No.1157/Hyd/2013 is allowed.
ITA No.1234/Hyd/2013: A.Y. 2009-10 (Revenue's Appeals):1. The assessee had included a sum of Rs.12,11,433 being profit on sale of assets as part of its export turnover. The assets in question were various plastic Page 18 of 26 ITA No.s 1156, 1157, 1234 & 1235 of 2013 Yodeva Plastics Private Ltd Hyderabad moulds. The AO noted that the assessee had been granted permission by the Development Commissioner, Visakhapatnam SEZ to manufacture specified plastic articles and there was no license for production of moulds. Indeed, assessee had admittedly merely purchased these moulds and not manufactured them so that the sale of moulds was just a trading activity and not a manufacturing activity. AO therefore, held that the assessee was not eligible for exemption u/s 10B on the profit from its sale.
2. It was submitted by the ld AR of the assessee that the assessee is in the business of manufacture and sale of plastic products as per the specification provided by the oversees customers. To manufacture each of the specified plastic product, the assessee needs moulds for each product and the moulds are to be supplied by the foreign customers. They require the assessee herein to purchase the moulds on their behalf and utilize the same in the manufacturing activity. Accordingly, the assessee during the previous year under consideration purchased moulds of the value of Rs 46,71,344/-. Such amount spent is not separately received but forms part of the sale price. The cost of the moulds is not separately billed to the foreign buyers and is shown as a part of the sale consideration of the goods and the invoice clearly indicates that no such amount is separately billed. Such amount was shown in the books separately by bifurcating the invoice into two different items. The Page 19 of 26 ITA No.s 1156, 1157, 1234 & 1235 of 2013 Yodeva Plastics Private Ltd Hyderabad income for the purpose of Sec. 10B includes all the parts of the sale price of goods exported to them. The assessee further submits that the purchase and sale of moulds is not a separate business activity. There is no gain in the process of sale of moulds and whatever the amount received from the foreign company is towards sale of the products which includes the cost of manufacture and the cost of purchase of the moulds required. Therefore, the Assessing Officer is not justified in excluding the gain on sale of moulds for the purpose of deduction u/s 10B of the I.T. Act.
3. The CIT (A) held as under:
"7.3 It is seen from the copies of the invoices that the appellant is correct in its claim that the cost of moulds is not separately billed nor is the payment for it separately made. I therefore, agree with the appellant that the cost of the moulds has become a part of the expenditure of the business and the recovery of its cost from the customers and the resultant profit therefrom is part of the turnover of the export business. The appeal is allowed on this issue".
4. Aggrieved, Revenue is in appeal before us and raised the following grounds:
Ground No.2 "The ld CIT (A) erred in law and on fact by holding that sale of assets was export revenue receipt and hence eligible for deduction without appreciating the fact that the sale of assets cannot be eligible for deduction as sale of asset is not export product even though it was not billed separately.Page 20 of 26
ITA No.s 1156, 1157, 1234 & 1235 of 2013 Yodeva Plastics Private Ltd Hyderabad Ground No.3 "The ld CIT (A) erred in law and facts by holding that amortization and development charges relating to manufacture of moulds are part of export turnover and hence eligible for deduction".
5. We find no infirmity in the order of the CIT (A). From the copies of the invoices we find that the cost of the moulds is not separately billed and the payments have not been separately made. Hence, we agree with the CIT (A)'s view that the cost of moulds have become part of expenditure of the business and the entire amount of invoice price i.e sale consideration received represents the turnover on account of sale of plastic products. Hence ground No. 2 raised by the Revenue is dismissed.
6. The next issue is relating to the deduction u/s 10B relates to amortization of income and development charges of Rs.23,04,841 and Rs.7,08,756 respectively, credited separately to the P&L a/c. The AO noted that the assessee had failed to produce the invoices for these amounts for which foreign exchange was claimed to have been received. The assessee submitted that the sale price was inclusive of amortization which represented the cost of mould apportioned on number of pieces likely to be produced from a particular mould and that similarly the development charges pertained to the mould development. The assessee further submitted that the sale price as reflected in the invoices included amortization and development charges but these amounts were separately recorded in the books for internal presentation and control.
Page 21 of 26ITA No.s 1156, 1157, 1234 & 1235 of 2013 Yodeva Plastics Private Ltd Hyderabad
7. AO did not accept this explanation and held that these amounts were not on account of sale of plastic caps but related to the transaction in moulds which were not manufactured by the company and constituted only a trading activity and therefore not eligible for deduction u/s 10B.
8. Before the CIT (A) the ld AR submitted a reconciliation of the sale as per the P&L a/c and the invoices with the amortization income and development charges.
9. Further, it was argued that if the Assessing officer is of the view that this amount does not form part of the turnover of the business activity, it should not have been added to the total turnover for the purpose of provisions of Sec. 10B of the I.T Act.
Amortization income (mould) Rs.23,04,841
Development charges (mould) Rs. 7,08,756
Profit on sale of mould Rs.12,11,433
10. It was pointed out that the above three items are similar to profit on sale of assets and they also represent the cost of moulds, the cost of development of moulds included in the sale consideration.
11. It was further submitted that the assessee would be incurring the expenditure (against the income of Development Charges of Rs.7,08,756 and gain on mould sale Rs. 12,11,433) under following heads:
a) Travelling expenses Rs. 1,44,396/-Page 22 of 26
ITA No.s 1156, 1157, 1234 & 1235 of 2013 Yodeva Plastics Private Ltd Hyderabad
a) Salary of the personnel involved in mould development Rs. 15,89,082/-
b) Cost of samples - freight Rs. 1,87,422/-
12. On considering the expenditure incurred under the above heads; there will not be any profit and the assessee is not carrying on this activity for sake of deriving any profit on the sale of moulds or development expenses, but such activity is taken up to improve the marketing of the plastic products manufactured by the assessee company.
13. The CIT (A) held that from the invoices that the amounts are billed without reference to amortization and development charges whereas in the books of account, the invoice value is recorded after splitting into sales, amortization and development charges. The CIT (A) further stated that the total of these three accounts tallies with the total invoice value and the inward remittance of foreign exchange is also of the invoice value, i.e. the aggregate of these three heads. Therefore, the CIT (A) held that there was no justification for the adjustment to the deduction u/s 10B on account of amortization and development charges.
14. The ld Counsel submitted written submissions.
15. We find that amortization is actually cost of mould apportioned on number of pieces likely to be produced from a particular mould. Development charges also pertain to mould Page 23 of 26 ITA No.s 1156, 1157, 1234 & 1235 of 2013 Yodeva Plastics Private Ltd Hyderabad development only. Hence, we confirm the order of the CIT (A) and dismiss ground No.3 raised by the Revenue.
16. The 4th ground raised by the Revenue read as under:
"Ld CIT (A) erred in law by holding that the freight and insurance charges should not be deducted from export turnover while calculating the deduction u/s 10B".
17. This issue relating to deduction u/s 10B pertains to freight and insurance. The AO had reduced the freight and insurance expenses of Rs.39,15,079 debited to its P&L a/c from the export turnover for the purpose of section 10B. The AR has submitted before the CIT (A) that the assessee incurred total expenses of Rs.39,15,079 on freight and insurance and debited this sum to its P&L a/c and that on the other hand, it had received a sum of Rs.11,56,285 only on this count and that this receipt was credited to the freight expenditure a/c and did not form part of the turnover as credited to the P&L a/c.
18. The ld AR also filed copies of its freight account to establish its claim before the CIT (A). The ld CIT (A) found the claim to be factually correct on an examination of the ledger account. Since the receipt towards freight and insurance do not form part of the export turnover in the first place, their deduction from the turnover is not justified. Hence, the CIT allowed this ground.
19. We find no infirmity in the order of the CIT (A). On an examination of the ledger account, the receipts towards freight and insurance charges does not form part of the export turnover Page 24 of 26 ITA No.s 1156, 1157, 1234 & 1235 of 2013 Yodeva Plastics Private Ltd Hyderabad and hence cannot be deducted from the turnover. Hence ground No.4 of the Revenue is dismissed.
20. In the result, appeal in ITA No.1234/Hyd/2013 is dismissed.
ITA No.1235/Hyd/2013 - Revenue's Appeal -(AY 2010-11)1. First ground is general in nature.
2. The second ground of appeal is as follows:
"ii. The ld CIT (A) erred in law and facts by holding that amortization and development charges relating to manufacture of moulds are part of export turnover and hence eligible for deduction"
3. The facts are relating to the exclusion of the amortization income from the export turnover for the purposes of section 10B. This issue had arisen for adjudication in the assessee's case for A.Y 2009-10 and the CIT (A) allowed the assessee's claim in its order dated 12.06.2013.
4. We have decided this issue at para 14 in ITA No.1234/Hyd/2013 and the same conclusion shall be followed here also.
5. The third ground read as under:
"iii. The ld CIT (A) erred in law by holding that the freight and insurance charges should not be deducted from export turnover while calculating the deduction u/s 10B.
6. With respect to freight and insurance charges of Rs.11,14,986 from the export turnover for the purposes of section 10B, the AR submitted before the CIT (A) that the total expenses on freight amounted to Rs.37,95,738 out of which it Page 25 of 26 ITA No.s 1156, 1157, 1234 & 1235 of 2013 Yodeva Plastics Private Ltd Hyderabad received Rs.26,80,752 and the balance sum of Rs.11,14,986 was debited to the P&L a/c. This issue had arisen for adjudication in the assessee's case for A.Y 2009-10 wherein the CIT (A) allowed the assessee's claim.
7. We have decided this issue at para 18 in ITA No.1234/Hyd/2013 and the same conclusion shall be followed here also.
8. In the result, Revenue's appeal in ITA No.1235/Hyd/2013 is dismissed.
9. To sum up assessee's appeal in 1156/Hyd/2013 is partly allowed and 1157/Hyd/2013 is allowed, while Revenue's appeals are dismissed.
Order pronounced in the Open Court on 17th June, 2015.
Sd/- Sd/-
(B. Ramakotaiah) (Asha Vijayaraghavan)
Accountant Member Judicial Member
Hyderabad, dated 17th June, 2015.
Vnodan/sps
Copy to:
1. M/s. Yodeva Plastics Private Limited, D-17, B-4 & B-5 Phase-I IDA Jeedimetla, Hyderabad
2. Dy. Commissioner of Income Tax, Circle 3(3), Hyderabad
3. The CIT(A) -IV Hyderabad
4. The CIT III Hyderabad
5. The DR, ITAT, Hyderabad
6. Guard File By Order Page 26 of 26