2018 (4) TMI 1370 - HC - Income Tax

High Court upholds deduction claim for processing plant outside bonded area under Income Tax Act

The High Court dismissed the appeals, ruling that the location of the processing plant outside the bonded area did not disqualify the assessee from ... Claim of deduction u/s 10B - whether mere processing of the iron ore in a plant and machinery located outside the bonded area will not disentitle the assessee from deduction where the iron ore was excavated from the mining area belonging to an export oriented unit - location of the ‘SESA Plant’ outside the EOU and customs bonded area - Held that:- The judgment in the case of Commissioner of Income Tax Vs. Caritor (India) Pvt. Ltd. (2015 (2) TMI 670 - KARNATAKA HIGH COURT) though arises in the context of deduction under Section 10A of the Act which is different from deduction under Section 10B in so far as Section 10A provides for the location of the unit in the ‘Special Economic Zone’ [see 10A 2(c)] such locational restriction is absent in case of Section 10B, however the principle that benefit of customs and excise duty is independent of the entitlement of deduction under the Income Tax Act is applicable in the present case also. Hence, in our view, mere location of the ‘SESA Plant’ outside the EOU and customs bonded area is not a disqualification to claim deduction under Section 10B of the Act. - Decided against revenue Issues:1. Interpretation of Section 10B of the Income Tax Act, 1961 regarding deduction eligibility for iron ore processing.2. Disallowance of deduction under Section 10B due to processing of iron ore outside the bonded area.3. Outsourcing of processing activity affecting deduction claim.4. Legal significance of the location of processing plant for deduction eligibility.Analysis:Issue 1: Interpretation of Section 10BThe High Court addressed the interpretation of Section 10B concerning the eligibility of deduction for iron ore processing. The Tribunal allowed the appeals of the assessee, permitting the claim of deduction under Section 10B. It was held that processing of iron ore outside the bonded area does not disentitle the assessee from deduction if the iron ore was excavated from the mining area of an export-oriented unit and both raw material and finished product belonged to the assessee.Issue 2: Disallowance of DeductionThe Revenue contended that deduction under Section 10B should be disallowed as the production was not carried out in the EOU unit. The High Court examined the factual aspects and rejected the Revenue's assertions, emphasizing that outsourcing of processing to the non-EOU plant did not warrant disallowance of the deduction.Issue 3: Outsourcing Impact on Deduction ClaimThe Tribunal considered the outsourcing of processing activity to the non-EOU plant and concluded that custom bonding was not a prerequisite for exemption under Section 10B. The High Court upheld this decision, emphasizing that the processing by the non-EOU plant did not disqualify the assessee from claiming the deduction.Issue 4: Location of Processing PlantRegarding the contention that processing outside the bonded area disentitles the deduction claim, the High Court clarified that the processing being in the nature of job work and integral to the EOU's activity was permissible. The Court highlighted that the benefit of customs bonding is distinct from the entitlement of deduction under the Income Tax Act, and the location of the processing plant outside the bonded area does not disqualify the deduction claim under Section 10B.In conclusion, the High Court dismissed the appeals, holding that the location of the processing plant outside the bonded area did not disqualify the assessee from claiming deduction under Section 10B of the Income Tax Act. The judgment emphasized the independence of customs benefits from income tax deductions, citing relevant legal precedents to support the decision.