2016 (5) TMI 953 - AT - Income Tax

Tax appeal allows deductions for specific incomes under Sections 80IB and 10B. Head office expenses apportioned based on turnover.

The appeal was partly allowed in favor of the assessee regarding deductions under Sections 80IB and 10B. Certain incomes like foreign exchange fluctuation ... Deduction under section 80IB - requirement of direct nexus with the industrial undertaking - Deduction under section 10B - apportionment of profits by export-turnover ratio (section 10B(4)) and inclusion of export incentives - Treatment of duty-drawback/DEPB for deduction under section 80IB and section 10B - Foreign exchange fluctuation receipts as part of business income linked to exports - Interest receipts (FDs, bank guarantees, tax refunds) and proximate source test for eligibility of deduction - Allocation of head office expenses and directors' remuneration - turnover ratio apportionment versus requirement of relevance to the undertaking - Operation of section 10B(7A) and section 80IB(12) on amalgamation does not entitle automatic allowance without merits scrutinyDeduction under section 80IB - requirement of direct nexus with the industrial undertaking - Interest receipts (FDs, bank guarantees, tax refunds) and proximate source test for eligibility of deduction - Interest income included in the assessee's other income is not eligible for deduction under section 80IB for lack of direct nexus with the eligible industrial undertaking. - HELD THAT: - The Tribunal examined the components of interest (income-tax refund interest, fixed deposit interest, interest on water charges deposits, delayed collection, bank guarantee interest) and, applying the proximate/immediate source test adopted in earlier authorities, found that the assessee failed to establish a direct nexus between these interest receipts and the eligible industrial undertaking for section 80IB purposes. Precedents relied upon concerning section 10B were held to be inapposite on facts and law. Considering the factual matrix and absence of first degree nexus, the finding of the CIT(A) and AO disallowing inclusion of these interest receipts for computing deduction under section 80IB was affirmed. [Paras 7]Claim for deduction under section 80IB in respect of interest receipts of Rs. 39,995/- disallowed.Treatment of duty-drawback/DEPB for deduction under section 80IB and section 10B - Deduction under section 80IB - requirement of direct nexus with the industrial undertaking - DEPB/duty drawback receipts are not eligible for deduction under section 80IB in this case. - HELD THAT: - Relying on the decision of the jurisdictional High Court in CIT v. Rachana Udyog construing the Supreme Court's liberty India line, the Tribunal held that duty drawback/DEPB receipts do not qualify for deduction under section 80IB. The Tribunal respectfully followed that precedent and dismissed the assessee's contention that DEPB received during exports should be included for section 80IB computation. [Paras 7]DEPB of Rs. 10,46,433/- excluded from eligible income for section 80IB.Foreign exchange fluctuation receipts as part of business income linked to exports - Deduction under section 80IB - requirement of direct nexus with the industrial undertaking - Foreign exchange fluctuation gains on export receipts are part of the business income of the export activity and are eligible for deduction under section 80IB. - HELD THAT: - On facts the Tribunal followed precedent (including Rachana Udyog and Dharampal Premchand) that fluctuations in the rupee equivalent of export sale proceeds are directly related to export of goods. Such exchange variation constitutes income arising from the export activity and thus bears the requisite nexus to the industrial undertaking for section 80IB purposes. Accordingly the CIT(A)'s disallowance was set aside insofar as foreign exchange fluctuation receipts are concerned. [Paras 7]Foreign exchange fluctuation of Rs. 2,05,090/- allowed for deduction under section 80IB.Deduction under section 10B - apportionment of profits by export-turnover ratio (section 10B(4)) and inclusion of export incentives - Treatment of duty-drawback/DEPB for deduction under section 10B - DEPB/duty drawback receipts are includible for computation of deduction under section 10B; the Tribunal allowed DEPB for section 10B purposes. - HELD THAT: - The Tribunal considered Special Bench authority on the statutory formula in section 10B(4) and subsequent judicial approvals (including Maral Overseas and related Delhi High Court treatment) holding that once an income forms part of the business of the undertaking it is to be apportioned by the export turnover ratio and need not be separately shown to have a direct nexus. On that basis and the weight of precedents, the Tribunal held that DEPB/duty drawback is covered in favour of the assessee for section 10B computation and allowed the claim. [Paras 13, 14]DEPB of Rs. 48,245/- allowed for computing deduction under section 10B.Foreign exchange fluctuation receipts as part of business income linked to exports - Deduction under section 10B - apportionment of profits by export-turnover ratio (section 10B(4)) and inclusion of export incentives - Foreign exchange fluctuation gains are eligible to be included in profits for computation of deduction under section 10B. - HELD THAT: - The Tribunal, following its view on exchange fluctuation under section 80IB and supportive authority from the Bombay High Court (Badridas Gauridu), held that foreign exchange fluctuation gains are intimately connected with export business and therefore are includible in the business profits to be apportioned under section 10B(4). The CIT(A)'s exclusion was reversed in this respect. [Paras 15]Foreign exchange fluctuation of Rs. 2,37,713/- allowed for deduction under section 10B.Interest receipts (FDs, bank guarantees, tax refunds) and proximate source test for eligibility of deduction - Deduction under section 10B - apportionment of profits by export-turnover ratio (section 10B(4)) and inclusion of export incentives - Nominal interest (and interest on deposits) not established to be part of the business of the undertaking and disallowed for deduction under section 10B. - HELD THAT: - The Tribunal applied the proximate source and first degree nexus test and, on the facts, found no evidence to treat the small interest receipts as forming part of the undertaking's business income for section 10B purposes. The earlier authorities relied upon by the assessee were distinguished as not supporting inclusion under section 10B on these facts. Accordingly the CIT(A)'s view was upheld. [Paras 12]Interest of Rs. 146/- disallowed for section 10B computation.Miscellaneous income and cenvat/cess adjustments - requirement of evidence to link to business income - Deduction under section 10B - apportionment of profits by export-turnover ratio (section 10B(4)) and inclusion of export incentives - Miscellaneous income was not shown to be connected with the undertaking and was excluded from deduction under section 10B. - HELD THAT: - The assessee failed to adduce evidence that the miscellaneous receipts related to the business profits of the undertaking. Even if argued as cenvat credit, the Tribunal observed appropriate adjustment against excise liability would be necessary and that cess cannot form part of business profits. The Revenue's exclusion of the miscellaneous income for section 10B calculation was sustained. [Paras 16]Miscellaneous income of Rs. 33,326/- disallowed for section 10B.Allocation of head office expenses and directors' remuneration on turnover ratio apportionment versus requirement of relevance to the undertaking - Certain head office expenses and directors' remuneration were to be apportioned among units on the basis of turnover, while other head office expenses lacking relevance to the eligible undertakings were not to be reallocated. - HELD THAT: - The Tribunal considered competing precedents. It held that directors' remuneration and foreign travelling expenses related to export activities should be allocated among the three units in proportion to turnover because directors service all units and Unit Vaav had specific export exhibition activity justifying allocation. Conversely, expenditures such as staff training, recruitment, pollution control and other head office costs that had no relevance to the eligible undertakings were not to be apportioned and rightly remained on the head office account. Applying the relevance test and proportional allocation where justified, the CIT(A)'s apportionment was partially modified. [Paras 20]Head office expenses partly apportioned (directors' remuneration and relevant travel) by turnover; other head office expenses not reallocated.Operation of section 10B(7A) and section 80IB(12) on amalgamation does not preclude merit based scrutiny - Provisions dealing with application on amalgamation (section 10B(7A) and section 80IB(12)) do not mandate automatic grant of deduction without examination of merits; the additional ground alleging mandatory allowance on amalgamation was dismissed. - HELD THAT: - The Tribunal observed that the statutory language of the sub sections provides that the provisions shall, as far as may be, apply to the resulting company, but do not oust requirement of merit based scrutiny of the claimed deduction. The authorities below had considered the merits of the claims; there was no contention that benefits were denied solely on account of amalgamation. Precedents cited by the assessee on unexpired period entitlement were distinguishable. Consequently the additional ground seeking an entitlement merely by reason of amalgamation was rejected. [Paras 22]Additional ground on automatic entitlement on amalgamation dismissed.Withdrawal of contested items - freight export receipts - Claims in respect of freight export receipts were withdrawn by the assessee and are therefore dismissed. - HELD THAT: - The assessee expressly withdrew contest of the freight export receipts in respect of both units; the Tribunal recorded the withdrawal and dismissed those parts of the grounds accordingly. [Paras 7, 11]Freight export receipt claims not pressed and dismissed.Final Conclusion: The appeal is partly allowed: foreign exchange fluctuation receipts and DEPB/duty drawback were allowed for relevant computations (section 80IB limited to exchange fluctuation; section 10B allowed DEPB and exchange gains), certain interest and miscellaneous receipts were disallowed for lack of nexus, head office expenses were apportioned only to the extent justified (directors' remuneration and relevant travel by turnover; other head office costs not reallocated), additional ground on amalgamation entitlement dismissed, and freight claims were withdrawn. Issues Involved:1. Deduction under Section 80IB2. Deduction under Section 10B3. Apportionment of Head Office expenses4. Additional ground regarding calculation of deductions under Sections 10B(7A) and 80IB(12)Issue-wise Detailed Analysis:1. Deduction under Section 80IB:The assessee claimed a deduction of Rs. 8,52,865 under Section 80IB, which was restricted to Rs. 6,089 by the AO. The AO excluded certain incomes such as freight export received, interest received, DEPB received, and foreign exchange fluctuation, stating they were not derived from the industrial undertaking. The CIT(A) upheld this decision, citing the Liberty India and Sterling Foods judgments, which required a direct nexus between the income and the industrial undertaking.Freight Export Received:The assessee did not press this part of the ground, and hence, it was dismissed.Interest Received:The interest earned on income tax refund, fixed deposits, water charges deposits, delayed collection, and bank guarantee was considered not directly related to the industrial undertaking. The ITAT upheld the CIT(A)'s decision, dismissing this part of the ground.DEPB Received:The DEPB received during the course of export was also not considered as derived from the industrial undertaking. The ITAT followed the Bombay High Court's decision in CIT vs. Rachana Udhyog and dismissed this part of the ground.Foreign Exchange Fluctuation:The ITAT allowed this part of the ground, citing the Bombay High Court's decision in Rachana Udyog, which held that foreign exchange fluctuation gains are directly related to export activities and hence eligible for deduction under Section 80IB.2. Deduction under Section 10B:The assessee claimed a deduction of Rs. 33,52,127 under Section 10B, which was restricted to Rs. 11,13,460 by the AO. The AO excluded incomes such as freight export received, interest received, DEPB received, foreign exchange fluctuation, and miscellaneous income.Freight Export Received:The assessee withdrew this part of the ground, and it was dismissed.Interest Received:The ITAT dismissed this part of the ground, maintaining that the interest on fixed deposits had no direct nexus with the industrial undertaking.DEPB Received:The ITAT allowed this part of the ground, following the Special Bench decision in Maral Overseas Ltd. and the Delhi High Court's approval in Hritnik Export Pvt. Ltd., which held that DEPB is part of business income and eligible for deduction under Section 10B.Foreign Exchange Fluctuation:The ITAT allowed this part of the ground, citing the Bombay High Court's decision in Badridas Gauridu (P) Ltd., which held that foreign exchange fluctuation gains are intimately connected to the export business.Miscellaneous Income:The ITAT dismissed this part of the ground, stating that there was no evidence to show that the miscellaneous income had any bearing on the business income of the undertaking.3. Apportionment of Head Office Expenses:The AO reallocated certain expenses based on the turnover of each unit, which reduced the eligible profit for deductions under Sections 80IB and 10B. The CIT(A) upheld this apportionment.Director's Remuneration:The ITAT upheld the apportionment of Director's remuneration based on the turnover of the three units, as Directors are responsible for all units.Travelling Expenses:The ITAT held that travelling expenses related to export activities should be allocated to the relevant units. For Unit Vaav, which participated in an exhibition, the allocation was justified, but no allocation was required for Unit G-Three-M, which had no such expenses.Other Expenses:The ITAT directed that other expenses such as staff training and recruitment should not be reallocated and should remain debited to the head office.4. Additional Ground Regarding Calculation of Deductions:The assessee raised an additional ground claiming that deductions under Sections 10B(7A) and 80IB(12) should be allowed without recalculating the quantum. The ITAT dismissed this ground, stating that these provisions do not mandate granting deductions without considering the merits of the claim.Conclusion:The appeal was partly allowed, with certain parts of the grounds being dismissed and others being allowed in favor of the assessee. The order was pronounced in the Open Court on March 31, 2016.