Income Tax Appellate Tribunal - Chennai
Urjita Electronics Pvt.Ltd.,, Chennai vs Assessee on 20 June, 2012
IN THE INCOME-TAX APPELLATE TRIBUNAL
'B' BENCH, CHENNAI.
Before Shri N.S. Saini, Accountant Member &
Shri Challa Nagendra Prasad, Judicial Member
I.T.A. No. 806/Mds/2012
Assessment Year : 2006 - 07
&
C.O.No. 92/Mds/2012 [In I.T.A. No. 806/Mds/2012]
The Assistant Commissioner of M/s. Urjitha Electronics Pvt. Ltd.,
Income Tax, Company Circle, III(3), Vs. No. 36/39, SDF-III, Phase II, MEPZ-
Chennai 600 034. SEZ, Tambaram, Chennai - 45.
[PAN: AAACU4616R]
(Appellant) (Respondent/Cross Objector)
Revenue by : Shri Vikramaditya, JCIT, Sr. DR
Assessee by : Shri S.R. Chandrasekaran, C.A.
Date of Hearing : 20.06.2012
Date of pronouncement : 20.07.2012
ORDER
PER Challa Nagendra Prasad, Judicial Member
This is an appeal filed by the Revenue and Cross Objection by the assessee against the order of the Commissioner of Income Tax (Appeals) III, Chennai dated 04.01.2012 in ITA No. 382/08-09/A.III for the assessment year 2006-07. Shri Vikramaditya, JCIT - Sr. DR represented on behalf of the Revenue and Shri S.R. Chandrasekaran, C.A. represented on behalf of the assessee.
2 I.T.A. No.80
No.806 806/M/12 /M/12
2. The first issue in the grounds of appeal of the Revenue is that the Commissioner of Income Tax (Appeals) erred in directing the Assessing Officer to include exchange fluctuation gains as part of export turn over for the purpose of computation of deduction under section 10A.
3. The facts of the case are that the assessee is a company engaged in the business of design, manufacturing and sale of electronic components. For the assessment year 2006-07, the assessee filed its return of income on 29.11.2006 declaring income of `.33,24,330/-. The return was processed on 31.12.2006 under section 143(1) and assessment was completed on 26.12.2008 under section 143(3) determining the income at `.58,40,750/-. While completing the assessment, the Assessing Officer disallowed deduction claimed under section 10A on the income from foreign exchange fluctuation and engineering & design charges holding that they are not derived from exports.
4. On appeal, the Commissioner of Income Tax (Appeals) allowed the claim of the assessee. With regard to the claim on exchange fluctuation gains as forming part of export turnover, the Commissioner of Income Tax (Appeals), following the Tribunal's decision in the case of ACIT vs. Inautix Technologies India (P) Ltd. in I.T.A. No. 1054/Mds/2006 for the assessment year 2002-03 held that such fluctuation is part of export turnover for the purpose of computation of deduction under section 10A. With regard to 3 I.T.A. No.80 No.806 806/M/12 /M/12 inclusion of income from engineering and design charges as part of export turnover, the Commissioner of Income Tax (Appeals) held that income received from engineering and design charges are eligible for inclusion under export turnover for the purpose of deduction under section 10A in view of the CBDT Notification No. 890(E) dated 26.09.2000. Against his order of the Commissioner of Income Tax (Appeals), the Revenue is in appeal before us.
5. The counsel for the Revenue supported the order of the Assessing Officer in excluding the exchange fluctuation and income from engineering and designs charges from export turnover for the purpose of computation of deduction under section 10A of the Act.
6. The counsel for the assessee, with regard to foreign exchange fluctuation, submits that on an identical issue, this Tribunal in the case of ACIT vs. Inautix Technologies India (P) Ltd., decided that exchange gains arising out of trading transaction had direct nexus with the business of the assessee and therefore held to be as part of the export turnover.
7. We have heard both sides, perused the materials available on record, orders of lower authorities and the case law relied on by the counsels. The Commissioner of Income Tax (Appeals), on the issue of inclusion of exchange fluctuation gains as part of export turnover for the purpose of computation of deduction under section 10A, held as under: 4 I.T.A. No.80
No.806 806/M/12 /M/12 "4.1 The Id. AR submitted that the gain on foreign exchange is derived by the appellant solely due to application of Accounting Standard 11 (AS) of ICAI. This AS requires the company to translate the foreign exchange (forex) amount of invoice into Indian Rupee (INR) at the rate of exchange prevalent on the day of invoice.
Similarly, the AS requires the company to translate the forex amount of the remittance received from the debtor into INR., at the rate of exchange prevalent on the day of receipt of remittance, as certified by the bankers. This results in gain or loss to the company depending on fluctuation in rates on the respective dates. The AS further stipulates that this gain or loss has to be accounted separately as foreign exchange fluctuation gain or loss only in the profit and loss account. Therefore, it was contended that the foreign exchange gain reported for the year is an integral part of the export proceeds earned by the company and arises only due to exports. It was argued that this cannot be separated from the export proceeds and this certainly is not other income as contended by the A.O. It was submitted that the foreign exchange fluctuation gain has resulted in the appellant's case only on account of remittance of export proceeds by the debtor and not otherwise. Reliance was placed on the decision of Hon'ble ITAT Bangalore in the case of Sanyo ISI Technology India Pvt. Ltd v. DCIT, CIT v. Pentasoft Technologies Ltd [2010-TIOL- 525-HC-MAD-ITJ, Renaissance Jewellery P. Ltd v. ITO, 289 ITR (AT) 65 and Sujata Grover [74 TTJ 347 (Del)]. Reliance was also placed on the decision of Hon'ble High Court at Madras in the case of CIT v. Indo Matsushita Carbon Co. Ltd. 286 ITR 201 where it was held that the interest received by the assessee from its customers on overdue payments on sales was its income derived from industrial undertaking and was accordingly entitled for deduction. On a similar footing, since for-ex gains are inextricably connected to the payment on sales, it was contended that the same also needs to be given a similar treatment and has to be held as 'derived from' the export business of the undertaking. Reliance was also placed on the decision of Hon'ble ITAT Chennai in the case of ACIT v. Inautix Technologies India (P) Ltd. in I.T.A.No. 1054/Mds/2006 - A. Y 2002-03, where it was held that the foreign exchange gain arising on exports are eligible for inclusion in export turnover for the purpose of deduction u/s 10A.
4.2 I have carefully considered the facts of the case and the submission of the Id. AR. I have also gone through the decisions relied on by the AO and AR. The Hon'ble jurisdictional ITAT in the case of ACIT v. Inautix Technologies India (P) Ltd (supra) has clearly held that foreign exchange gain arising out of trading transactions has a direct nexus with business of eligible unit. The Hon'ble IT AT had held as under:
"In the business of export, the assessee-company raises bills against the customer. The rates mentioned in the bill, to raised, are recorded in the books of account and at the same time, the company debits the account of the foreign buyer with equal amount. At the end of the year, if the sale proceeds are not received by the assessee company, the foreign buyer is shown as 'sundry debtor'. If the proceeds are not received in the same financial year and received after one or two years, the fluctuation arising at 5 I.T.A. No.80 No.806 806/M/12 /M/12 that time will have any relevance to the turnover reported for the previous year in which the sale took place or not is the puzzle of this issue. In the opinion of the Assessing Officer, the assessee loses its rights over the sold items on the very despatch of the same and as per Accounting Standard prescribed by the ICAI, foreign currency transactions are to be recorded at the date of the transactions applying the exchange rate between the reporting currency and the foreign currency as on such date of transaction(s). Thus, according to the Revenue, the sale proceeds should be the value recorded in the books and any increase or decrease in exchange fluctuation on the bill amount is only a subsequent event after the completion of the transaction; it is only an accretion to the amount due to be received by the assessee and not an accretion to the sale price of items exported. In this context, it was argued by the Id. CIT/DR that it may be a treasury income and although this gain arises in the course of export business yet it has no direct nexus with the business of the undertaking and hence, needs to be excluded from the profits of the business of the undertaking for the purpose of computing exemption u/s 10A. As against this, the case of the Id.AR is that for-ex gain arises out of trading transactions for supply of software and hence, has a direct nexus with business of eligible unit.
14. We have examined the rival stands of the parties. Our attention was invited by the Id.AR to the observation made by both the authorities below, that these transactions are on 'Revenue Account'. We have also noticed that both Assessing Officer and the Id. CIT(A) have accepted these transactions on Revenue Side. If it is so, the decisions relied by the Id.AR would support her contention. The Id. CIT/DR has stated that the decisions relied on by the Id. CIT(A) in the case of MIs Cognizant Technology Solutions India Pvt. Ltd and M/s Convansys (India) Pvt. Ltd have not been accepted by the Department. But in any case, this decision has got a binding effect being a decision of the Co-ordinate Bench and therefore, this issue stands covered in favour of the assessee. The following decisions also support our contention apart from the decision of Cognizant Technology Solutions (supra):
(i) Pentasoft Techonologies Ltd.
(ii) M/s Mysodet (P) Ltd (Civil Appeal No. 5475 of 2008) S.C. 15. Therefore, in the given facts and circumstances of the case, we cannot interfere in the finding of the Id. CIT(A). We are bound by the above decisions, therefore, we cannot allow this ground in favour of the Revenue. This issue is decided in favour of the assessee by dismissing the ground raised by the Revenue."
Respectfully following the above decision, the AO is directed to include exchange fluctuation as a part export turnover for computing deduction u/s 10A." 6 I.T.A. No.80
No.806 806/M/12 /M/12
8. The Commissioner of Income Tax (Appeals), following the Coordinate Bench of this Tribunal in the case of ACIT v. Inautix Technologies India (P) Ltd. in I.T.A. No. 1054/Mds/2006, held that foreign exchange gain is part of export turnover for computation of deduction under section 10A. Therefore, we uphold the order of the Commissioner of Income Tax (Appeals). The grounds raised by the Revenue are dismissed.
9. With regard to the gains on income from engineering and design charges, the counsel for the assessee invited our attention to page 83 of paper book and submits that the CBDT has issued a notification specifying that engineering and design services are information technology enabled products entitled to be treated as software and when transmitted to foreign countries, they have to be treated as exports for the purpose of deduction under section 10A. The counsel for the assessee submits that in view of the said notification, the Assessing Officer is not justified in excluding the engineering and design charges from export turnover for the purpose of deduction allowable under section 10A of the Act.
10. On going through the notification, we see that the CBDT clearly specifies that the engineering and design services are information and technology enabled products or services and are to be treated as software and export of such software has to be treated as export. The Commissioner of Income Tax (Appeals) referring to the said notification and the decision of 7 I.T.A. No.80 No.806 806/M/12 /M/12 the Bangalore Bench of ITAT in the case of Wipro Ltd. vs. DCIT [96 TTJ 211] directed the Assessing Officer to include the income from engineering design and drawings as part of the export turnover for the purpose of deduction under section 10A, which in our view is in accordance with the notification issued by the CBDT. Therefore, we uphold the order of the Commissioner of Income Tax (Appeals) on this issue also. The grounds raised by the Revenue are dismissed.
11. Since we have dismissed the above appeal of the Revenue and decided issues in favour of the assessee by sustaining the order of the Commissioner of Income Tax (Appeals), the Cross Objection filed by the assessee in support of the order of the Commissioner of Income Tax (Appeals) without any material grounds become infructuous.
12. In the result, the appeal of the Revenue and CO of the assessee are dismissed.
Order pronounced on Friday, the 20th of July, 2012 at Chennai.
Sd/- Sd/- (N.S. SAINI) (CHALLA NAGENDRA PRASAD) ACCOUNTANT MEMBER JUDICIAL MEMBER Chennai, Dated, the 20.07.2012 Vm/- To: The assessee//A.O./CIT(A)/CIT/D.R.