2011 (4) TMI 1022 - AT - Income Tax

Tribunal's mixed ruling on export receivables, foreign currency expenses

Core Jewellery (P.) Ltd. Versus Income-tax Officer, Ward 8(1) (2)

The tribunal's judgment in the case resulted in a mixed outcome for the assessee. The appeal was partly allowed, with favorable decisions on netting off ... Exclusion of the payment made for import from the export for the purpose of computation of deduction u/s 10A - netting of export is permissible as per the RBI circular, there should not be any reduction of such amount while calculating the export turnover. He has further contended that the assessee has utilized the export proceedings for import of goods which is used for the export business of the assessee, therefore, this expenditure cannot be considered as sale proceed not brought into India - in the case of J. B. Boda & Co. (P.) Ltd. (1996 - TMI - 40198 - SUPREME Court) - assessee's appeal is allowedReduction in expenditure incurred in foreign currency while calculating the export turnover - AO has not given the findings that the other expenditure in foreign currency are for providing the technical services outside India, therefore, the same cannot be excluded as per the meaning of export turnover provided under Explanation (2)(IV) - expenditure other than freight and insurance not incurred for technical services outside India cannot be excluded while calculating export turnoverInterest earned on deposits as income from other sources - in the case of CIT v. Menon Impex (P.) Ltd. (2002 - TMI - 12192 - MADRAS High Court) Held that the interest received by the assessee was on deposits made by it in the banks, It was the deposit which was the source of the interest income. The mere fact that the deposit was made for the purpose of obtaining letters of credit which were in turn used for the purpose of the business of the industrial undertaking did not establish a direct nexus between the interest and the industrial undertaking and, therefore, the assessee was not entitled to get the benefit of section 10A in relation to the interest, appeal of the assessee is partly allowed Issues Involved:1. Reduction of unrealized export proceeds while calculating export turnover under Section 10A.2. Exclusion of payment made for imports from export turnover for deduction under Section 10A.3. Reduction of expenses incurred in foreign currency while calculating export turnover.4. Treatment of interest earned on deposits as income from other sources.Issue-Wise Detailed Analysis:1. Reduction of Unrealized Export Proceeds:The primary issue was whether the recalculation of benefits under Section 10A should include unrealized export proceeds. The assessee argued that RBI Circular No. 9/2009-10 removed the time limit for realizing export proceeds, thereby allowing them to avail deductions without adhering to the six-month period stipulated in Section 10A(3). The respondent contended that RBI circulars could not override statutory provisions. The tribunal concluded that the condition under Section 10A(3) requiring export proceeds to be brought into India within six months, or within an extended period allowed by the competent authority, remained mandatory. The tribunal upheld the CIT(A)'s order, dismissing the assessee's appeal on this ground.2. Exclusion of Payment Made for Imports:The second issue concerned whether the payment made for imports should be excluded from the export turnover for computing deductions under Section 10A. The assessee claimed that netting off exports against import payments was permissible as per RBI guidelines and relied on the Supreme Court's decision in J.B. Boda & Co. (P.) Ltd. v. CBDT. The tribunal agreed with the assessee, stating that netting off export receivables against import payments was permissible and did not require a two-way traffic of the same amount. The tribunal allowed the netting off of export receivables against imports, thereby deciding this issue in favor of the assessee.3. Reduction of Expenses Incurred in Foreign Currency:The third issue was whether expenses incurred in foreign currency should be reduced while calculating export turnover. The assessee argued that only specific expenses listed under Explanation 2(IV) to Section 10A should be excluded. The tribunal noted that the AO had excluded freight and insurance expenses but had not provided findings on other foreign currency expenses. The tribunal partially allowed the assessee's appeal, stating that only freight and insurance expenses should be excluded, not other expenses unless they were for technical services outside India.4. Treatment of Interest Earned on Deposits:The final issue was whether interest earned on deposits should be treated as income from other sources. The tribunal referenced the Madras High Court's decision in CIT v. Menon Impex (P.) Ltd., which held that interest on deposits used for business purposes did not have a direct nexus with the industrial undertaking and should be treated as income from other sources. The tribunal decided this issue against the assessee, affirming that such interest income was not eligible for benefits under Section 10A.Conclusion:The tribunal's judgment resulted in a mixed outcome for the assessee. The appeal was partly allowed, with favorable decisions on netting off export receivables against import payments and partial allowance on foreign currency expenses, while the issues regarding unrealized export proceeds and interest earned on deposits were decided against the assessee.