Income Tax Appellate Tribunal - Hyderabad
M/S Indus Medicare Private Limited,, ... vs Assessee on 16 September, 2014
IN THE INCOME TAX APPELLATE TRIBUNAL
HYDERABAD BENCH "B", HYDERABAD
BEFORE SHRI B. RAMAKOTAIAH, ACCOUNTANT MEMBER
AND SHRI SAKTIJIT DEY, JUDICIAL MEMBER
ITA No. 205/Hyd/2013
Assessment Year : 2007-08
M/s Indus Medicare Pvt. Ltd., Dy. Commissioner of Income-
Hyderabad. tax, Circle - 2(1),Hyderabad.
PAN - AAAC16449L
(Appellant) (Respondent)
Assessee by Shri C.P. Ramaswamy
Revenue by Shri Solgy Jose T. Kottaram
Date of hearing 27-08-2014
Date of pronouncement 16-09-2014
O RDE R
PER SAKTIJIT DEY, J.M.:
This appeal of the assessee is directed against the order dated 20/12/12 of CIT(A), Vijayawada for AY 2007-08. Assessee has raised 5 grounds. Ground No.s 1 & 5 being general in nature are not required to be adjudicated upon. Ground No. 2 with its sub-ground relates to the restricting deduction claim u/s 10B to Rs. 36,28,536 as against Rs. 1,42,65,614 claimed by the assessee.
2. Briefly the facts relating to the issue in dispute are, assessee a company is engaged in the business of manufacture and sale of sheath contraceptives. Assessee is also an approved 100% Export Oriented Unit (EOU). For the AY under dispute, assessee filed its return of income on 31/10/07 declaring income of Rs. 91,99,741 after claiming deduction of Rs. 1,42,65,614 u/s 10B of the Act. Deduction 2 ITA No.205/Hyd/20 13 M/s Indus Medicare Pvt. Ltd.
claimed u/s 10B is for the eighth year. During scrutiny assessment proceeding, AO on examining the facts and materials on record, noticed that assessee has claimed deduction u/s 10B of Rs. 1,42,65,614 on export turnover of Rs. 11,04,52,037. On verification of details submitted by the assessee relating to its export turnover, AO noticed that out of the total amount claimed as export turnover, an amount of Rs. 3,37,14,685 was received in Indian currency towards sales made within the country. When the AO asked the assessee to explain why local sales have been included in the export turnover, assessee explained that the same represents merchant exports. In other words, sales were made to two companies M/s Medtec Products ltd., Chennai, which is also a 100% EOU project for condoms, and M/s Synmedic Labs, New Delhi, both of 100% EOU and who who ultimately exported them out of the country. Assessee further claimed as per the provisions of exim policy, a sale transaction from one 100% EOU project to another 100% EOU project is considered as merchant export and has to be treated as export sales. The AO on interpreting provisions contained u/s 10B of the Act, however, was of the view that deduction u/s 10B is allowed only on profit and gains derived from export of articles or things manufactured by the undertaking and not on the entire products derived from the undertaking. AO noted that the term 'export out of India' though has not been defined in section 10B, but, the same is defined in section 10BA and applying the meaning of 'export out of India' as contemplated u/s 10BA of the Act, as well as on going through the provisions contained u/s 10B as a whole, AO opined that the intention of the legislature from section 10B is to give benefit of deduction attributable to export of goods or articles but not entire sales of undertaking. AO was of the view that though as per the exim policy sale by one 100% EOU to another EOU may be treated as export but as per section 10B it cannot be treated as export sale under the IT Act. Further, referring to Circulars No. 657 & 684 of CBDT as well as the provision of section 10B which was amended w.e.f. 01/04/03, AO 3 ITA No.205/Hyd/20 13 M/s Indus Medicare Pvt. Ltd.
held that under the amended provisions of section 10B deduction is allowable only on exports out of India with the conditions that export profits are brought into the country within a period of 6 months from the end of the previous year. Accordingly, AO conclude that as the assessee has not directly exported the sales amounting to Rs. 3,37,14,685, which was sold to another EOU within the country, assessee would not be eligible for claim of exemption on the said turnover. AO also noted that out of the total export turnover claimed of Rs. Rs. 11,04,52,037, only the amount of Rs. 4,49,00,628 is received in convertible foreign exchange, therefore, AO held that the export turnover, which is eligible for deduction u/s 10B is Rs. 4,49,00,628 and accordingly allowed deduction of Rs. 36,28,536. Being aggrieved of the part disallowance of exemption claimed u/s 10B, assessee preferred appeal before the CIT(A).
3. Before the CIT(A), assessee reiterated the arguments advanced before the AO. CIT(A) confirming the view of the AO that assessee has not exported goods representing the turnover of Rs. 3,37,14,685, but, has sold it to another 100% EOU within the country, held that the same cannot be considered as part of export turnover. In this context, he relied upon a decision of Hon'ble AP High Court in case of Swayam Consultancy (P) Ltd. Vs. ITO, 336 ITR 189. The relevant findings of the learned CIT(A) are extracted hereunder:
"7B. The second issue relates to the action of the Assessing Officer in restricting the claim of deduction u/s 10B of the IT Act to Rs. 36,28,536/- instead of Rs. 1,42,65,614/- claimed by the appellant. For the said restriction, the Assessing Officer has made 5 adjustments, the merits of which are discussed as under:
7B(i) This issue relates to export turnover, where sales are made from one 100% EOU to another 100% EOU, involving an amount of Rs. 3,37,14,685. It may be noted here that the appellant has sold part of the merchandise to two of 100% EOUs and claimed that in respect of this turnover also, the profits derived was eligible for deduction u/s 10B, but whereas, 4 ITA No.205/Hyd/20 13 M/s Indus Medicare Pvt. Ltd.
the Assessing Officer has negative it on the ground that as only Indian rupees were received from both the 100% EOUs, disentitled the income proportionately, which is under protest. It may be noted here that as per proviso to sub-section (1) of section 10B further provides that profits on domestic sales to the extent of 25% of total sales shall be deemed to be the profits and gains derived from export of articles or things or computer software. In course of the appellate proceedings, the AR has explained that "EOU" means an export oriented unit for which an LOP (Letter of permission) has been issued by The Development Commissioner". And the sale to 100% EOU can be considered as Export Sales as
- Unit will be custom bonded
- The date of commencement of production shall be taken place after getting the approval from the Development Commissioner, Special Economic Zone for fulfilling the terms and conditions mentioned in LOP.
- Sales made from one 100% EOU to another 100% EOU.
Since all the three conditions were fulfilled by the appellant, it is requested that the unit can be considered for these sales as Export Sales. It is further explained that as per Foreign Trade Policy, Para Nos. 6.10, 6.11 (a), 6.12(a) and 6.19 it is clearly mentioned that sales made by an 100% EOU Unit to another 100% EOU Unit can be eligible for 10B exemption even though there is no foreign currency I routed therein. This contention of the appellant was already rejected by the AO on the ground that as far as SEZ, Development Commissioner, Foreign Trade Policy Etc are concerned; it may be entitled for exemption, but in my considered opinion, when there is a clash with Income Tax provisions, it would not survive, i.e., it is not entitled for exemption under section 10B. In this context, it is important to note here that the AP High Court in the case of Swayam Consultancy (P) Ltd vs. ITO, reported in (2011) 63 DTR 205 (AP) has held that in the circumstances stated by the appellant, it is not eligible for exemption under section 10B of the IT Act, 1961. To quote, it is held, 'transaction of manufacturing machines in India by EOU and delivering them in India to another 100 percent EOU, which is alleged to be the agent of a foreign buyer does not amount to "export out of India" either under the Customs Act or under the Income Tax Act, hence the appellant is not entitled to exemption under section 10B'. In view of the AP High Court decision, I am of the firm view that the appellant is not eligible to claim exemption under section 10B in the profits attributable to turnover derived from local sales to 2 100% EOUs and in the process, the stand of the AO 5 ITA No.205/Hyd/20 13 M/s Indus Medicare Pvt. Ltd.
is upheld."
4. Learned AR mostly reiterating the submissions made before the AO as well as before the CIT(A) submitted that assessee having sold the goods to 100% EOUs, it is eligible for exemption u/s 10B with regard to that part of the turnover also in view of the exim policy. Learned AR placing strong reliance on the exim policy submitted that as per the exim policy since sale to another 100% EOU is also treated as export sales, assessee should not be denied exemption u/s 10B of the Act on that part of the turnover, which was sold to 100% EOU. Learned AR submitted that ITAT Ahmedabad Bench in case of ITO Vs. Anita Synthetics (P) Ltd., 100 TTJ 277 while dealing with the issue has considered exim policy and held that sales made to another 100% EOU which in turn exports to foreign country is also eligible for exemption u/s 10B. Learned AR submitted that AO while coming to his conclusion has relied on the provisions contained u/s 10BA of the Act, which uses the expression "export out of India", whereas no such expression has been used u/s 10B of the Act. Further, distinguishing the decision of the Hon'ble AP High Court, learned AR submitted that ratio laid therein will not apply to the facts of the present case as the 100% EOU to whom assessee has sold the products are not the agents of the assessee. Learned AR, therefore, urged that assessee's claim of exemption u/s 10B should be allowed.
5. Learned DR, on the other hand, strongly relying upon the order of the CIT(A) submitted that the issue having been squarely covered by the decision of the Hon'ble AP High Court in case of Swayam Consultancy (P) Ltd.(supra), the contention of the assessee cannot be accepted.
6. We have considered the submissions of the parties, perused the materials on record and the orders of the revenue authorities. There is no dispute to the factual aspect that the turnover of Rs.
6 ITA No.205/Hyd/20 13M/s Indus Medicare Pvt. Ltd.
3,37,46,108 represents sales made by assessee to two 100% EOUs inside the country against Indian currency, who in turn had actually exported the goods outside India. It is the contention of the learned AR that as per the exim policy sales made to a 100% EOU should also be considered as export sales and accordingly allowable as deduction u/s 10B of the Act. However, on a plain reading of provisions of section 10B as a whole and specifically sub-section (3) of section 10B, it becomes clear that assessee will be eligible for deduction if sale proceeds of articles or things exported out of India are received in convertible foreign exchange within a period of six months or further time as may be allowed. It is a fact on record that in the present case, the conditions of sub-section (3) of section 10B has not been fulfilled in respect of the turnover of Rs. 3,37,46,108 sold to two other 100% EOU in India. The Hon'ble AP High Court while examining identical nature of dispute of disallowance of exemption u/s 10B on sales made to another 100% EOU analysed the provisions of section 10B as a whole and also in the context of sections 10A, 10AA and 80 HHC of the Act. The Hon'ble Jurisdictional High Court held as under:
"7. The term "export" is not defined in the IT Act though the term "export turnover" is explained/defined by four provisions, namely, the Explanations to ss. 10A, 10AA, 10B and 80HHC of the Act. Be it noted, s. 10A of the Act enables an undertaking in a free trade zone to claim deduction of profits and gains from the export of articles or things or computer software for a period of 10 consecutive years. Similarly, under s. 10AA of the Act, a newly established unit in a special economic zone can claim deduction of 100 per cent profits and gains derived from the export for a period of 10 years and, under s. 10B of the Act, an assessee can claim deduction of profits and gains as are derived by 100 per cent EOUs from the export of articles or things for a period of 10 years. Sec. 80HHC of the Act is to the effect that an assessee, being an Indian company engaged in the business of 'export out of India', may be allowed deduction of the profits to the extent specified in s. 80HHC(1B) of the Act. The Explanations to all these provisions has a definite bearing in understanding s. 10B(3) of the Act on which the petitioner's counsel placed considerable emphasis. For ready reference, we quote the same hereunder.
"Sec. 10B(3). This section applies to the undertaking, if the sale proceeds of articles or things or computer software exported out of India are received in, or brought into, India by the assessee in convertible foreign exchange, within a period of six months from the 7 ITA No.205/Hyd/20 13 M/s Indus Medicare Pvt. Ltd.
end of the previous year or, within such further period as the competent authority may allow in this behalf."
8. The language of s. 10B(3) of the Act is plain. It does not admit any other meaning than what is conveyed by the language used therein. The benefit under s. 10B(1) of the Act is available to 100 per cent EOUs only if the sale proceeds of articles or things exported out of India are received in convertible foreign exchange. Two conditions should be satisfied before the benefit under s. 10B(1) of the Act is claimed. There should be export of articles or things or computer software out of India, and the sale proceeds therefor shall be received in convertible foreign exchange. One would not exclude the other nor only one condition would satisfy the eligibility conditionalities. The intention of the Parliament, in granting benefit to the units in free trade zones, special economic zones and EOUs, is to allow the benefit of deduction only when the articles or things or computer software are actually and factually exported out of India for foreign currency. This is made very clear by the Explanations to other such similar sections conferring the benefit of deduction of profits. For ready reference, they are shown in the following table.
Sec. 10A Expln. Sec. 10AA Expln. 1 Sec. 10B Expln. Sec. 80HHC 2(iv) "export (i) "export turnover" 2(iii) "export Expln. (aa) turnover" means the means the turnover" means the "export out of consideration in consideration in consideration in India" shall not respect of export by respect of export by respect of export by include any the undertaking of the undertaking, the undertaking of transaction by articles or things or being the unit of articles or things or way of sale or computer software articles or things or computer software otherwise, in a received in, or services received in, received in, or shop, brought into, India or brought into, brought into, India emporium or by the assessee in India by the by the assessee in any other convertible foreign assessee but does convertible foreign establishment exchange in not include freight, exchange in situated in accordance with telecommunication accordance with India, not sub-s. (3), but does charges or insurance sub-s. (3), but does involving not include freight, attributable to the not include freight, clearance at telecommunication delivery of the telecommunication any customs charges or insurance articles or things charges or insurance station as attributable to the outside India or attributable to the defined in the delivery of the expenses, if any, delivery of the Customs Act, articles or things or incurred in foreign articles or things or 1962 (52 of computer software exchange in computer software 1962); Expln. outside India or rendering of services outside India or (b) "export expenses, if any, (including computer expenses, if any, turnover"
incurred in foreign software) outside incurred in foreign means the sale exchange in India; "export in exchange in proceeds providing the relation to the providing the received in, or technical services Special Economic technical services brought into, outside India; Zones" means outside India; India by the taking goods or assessee in providing services convertible out of India from a foreign Special Economic exchange in Zone by land, sea, accordance air, or by any other with cl. (a) of mode, whether sub-s. (2) of physical or any goods or otherwise; merchandise to which this 8 ITA No.205/Hyd/20 13 M/s Indus Medicare Pvt. Ltd.
section applies
and which are
exported out of
India, but does
not include
freight or
insurance
attributable to
the transport
of the goods or
merchandise
beyond the
customs
station as
defined in the
Customs Act,
1962 (52 of
1962);
(Emphasis, italicized in print, supplied)
9. Secs. 10A, 10AA, 10B and 80HHC of the Act allow an assessee to claim deduction of profits from export of articles. These provisions, in effect, deal with different categories of eligible undertakings and establishments engaged in the export of articles and things in various locations. The Explanation to these provisions defines/explains the "export turnover". The freight and telecommunication charges incurred in connection with the "delivery of articles or things outside India" during the course of export cannot be reckoned as "export turnover". This clearly indicates that when the profits from exports are allowed as deduction, the Parliament intended the actual export out of India of the articles or things. The intention was never to consider the delivery of goods to a foreign buyer in India as amounting to export.
10. The decisions relied by the petitioner's counsel do not in any manner assist the point argued by him. Indeed they support the view expressed by us supra. Explanation (aa) of s. 80HHC of the Act is clarificatory in nature and explains a transaction which cannot be treated as "export out of India".
A sale in a shop, emporium, or other establishment in India which does not require any clearance in any customs station is not considered as "export out of India". The view of the Allahabad High Court in Ram Babu & Sons (supra) to the said effect followed by the Rajasthan High Court received imprimatur from the Supreme Court in Silver & Arts Palace (supra). Suffice to excerpt the following observations from the decision of the Supreme Court which reads as under :
"The Allahabad High Court specifically considered the effect of introduction of Expln. (aa) to s. 80HHC of the Act and had taken view in Ram Babu & Sons & Anr. vs. Union of India & Anr. (1997) 141 CTR (All) 310 : (1996) 222 ITR 606 (All) that this Explanation means that, for the purpose of this section, there will be no export out of India if two conditions are cumulatively fulfilled viz., (a) it is a transaction by way of sale or otherwise in a shop, emporium or establishment situate in India, and (b) that it does not involve clearance in any customs station as defined in the Customs Act. This view of the Allahabad High Court had been consistently followed by 9 ITA No.205/Hyd/20 13 M/s Indus Medicare Pvt. Ltd.
several other High Courts, including the Rajasthan High Court itself in ITO vs. Vaibhav Textiles (2002) 177 CTR (Raj) 593 : (2002) 258 ITR 346 (Raj)."
11. It is the admitted position herein that initially Proteco agreed to take delivery of wire/cable drawing machines at Hyderabad ex-factory, subsequently Proteco sent a communication advising the appellant to deliver the machinery to their agent at Silvasa which is also a 100 per cent EOU, the payment was received in convertible foreign exchange as evidenced by FIRC, and the goods were delivered to the agent under a proforma invoice in the name of the foreign buyer. This transaction of manufacturing machines in India by EOU and delivering them in India to another 100 per cent EOU, which is alleged to be the agent of a foreign buyer, does not amount to "export out of India" either under the Customs Act or under the IT Act. The AO, the appellate authority and the learned Tribunal appreciated the principle of law and applied it correctly. The appeal is misconceived."
The ratio laid down by the Hon'ble AP High Court, as aforesaid, squarely applies to assessee's case, hence, assessee will not be entitled for exemption u/s 10B in respect of turnover of Rs. 3,37,46,108 sold to 100% EOU in India. The contention of the ld. AR that decision of the Hon'ble AP High Court being factually distinguishable will not apply to assessee's case, in our view, is devoid of merit. At least in the case of Swayam Consultancy (P) Ltd. (supra) assessee had taken a plea that the 100% EOU to whom goods were sold is the agent of foreign buyer, hence, the sale should be considered as a sale directly made to foreign buyer. Still then Hon'le High Court held that it cannot be said as export sale. Whereas, in case of assessee it is a sale simpliciter to another 100% EOU within the country. So far as the decision of the ITAT, Ahmedabad Bank (supra) we have to observe that the said decision was rendered in the context of provisions contained u/s 10B of the Act, which was existing in the statute book during AY 1999-2000 after which there is a significant change in the said provisions by virtue of amendment brought to statute w.e.f 01/04/03. Further, in view of the binding precedent of Hon'ble Jurisdictional High Court, the decision of ITAT, Ahmedabad Bench will not be of any help to the assessee. Accordingly, we uphold the decision of CIT(A) on this issue.
10 ITA No.205/Hyd/20 13M/s Indus Medicare Pvt. Ltd.
7. The next issue as raised in Ground No. 3 relates to disallowance of amount of Rs. 18,54,969/- being the sale of packing material to Nambia. As can be seen, during the assessment proceeding, AO held that as the packing materials were not manufactured by the assessee, it cannot be eligible for deduction u/s 10B of the Act as 10B is not applicable for trading of goods. AO observed that assessee does not produce packing material, it required packing material for packing its product by purchasing it from outside parties. Accordingly, he treated the turnover of Rs. 18,54,969 as not eligible for deduction u/s 10B of the Act. CIT(A) also confirmed the view of the AO by holding that since the assessee has not manufactured packing material but has purchased it from third parties and exported to foreign country it will not come within the purview of export turnover as envisaged u/s 10B of the Act.
8. We have considered the submissions of the parties and perused the materials on record. As can be seen from the orders of the revenue authorities, the only reason on which they have held that the amount of Rs. 18,54,969 would not be eligible for exemption u/s 10B is packing materials were not manufactured by assessee. In this context, however, we have to observe that the products manufactured by assessee could not have been exported without packing materials, hence, the observation by the lower authorities that it cannot be considered as part of the export turnover, in our view, is not correct. When a particular article or thing cannot be exported without its container/packing, same has also to be considered as part of the product and consequently has to be treated as part of the export turnover of assessee. In the aforesaid view of the matter, we hold that the turnover of Rs. 18,54,969 being part of the export turnover of the assessee would be eligible for deduction u/s 10B. This ground of the assessee is allowed.
11 ITA No.205/Hyd/20 13M/s Indus Medicare Pvt. Ltd.
9. In the result, appeal of the assessee is partly allowed.
Pronounced in the open court on 16/09/2014.
Sd/- Sd/-
(B. RAMAKOTAIAH) (SAKTIJIT DEY)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Hyderabad, Dated: 16 th September, 2014
kv
Copy to:-
1) M/s Indus Medicare Pvt. Ltd., C/o Dr. C.P. Ramaswami, Advocate, Flat Nos. 102 & 303, Gitanjali Apts. Plot No. 108, Srinagar Colony,, Hyderabad - 500 073
2) The DCIT,Circle - 2(1), Aayakar Bhavan, Basheerbag, Hyderabad
3) CIT(A), Vijayawada
4) CIT-II, Hyderabad
5)The Departmental Representative, I.T.A.T., Hyderabad.