2022 (6) TMI 264 - AT - Income Tax

Tribunal upholds deduction claims for export incentives, reversing CIT's order.

The Tribunal allowed the appeal, dismissing the initiation of proceedings under Section 263 as not pressed. The assessee's deduction claim under Section ... Revision u/s 263 - CIT noted from the records that the assessee had claimed deduction of its profits derived from exports with respect to its unit set up in Special Economic Zone (SEZ) u/s. 10AA which deduction he noted had not been examined and verified by the A.O.- No queries with respect to the said claim except for asking for a calculation of the quantum of deduction and accepting the revised calculation furnished by the assessee to it - contention of assessee before us was that it had been explained to the Ld. PCIT that the export incentive was not of the assessee but related to a vendor of the assessee who had passed on the benefit to the assessee - HELD THAT:- We agree with the assessee that these incentives merely tantamounted to reduction in purchase cost of the assessee and were in no way earned on account of the manufacturing activity carried on by the assessee. The decision in the case of Liberty India Ltd. [2009 (8) TMI 63 - SUPREME COURT] holds export incentives of assessee’s earned on account of the policy of the Government in the course of carrying out its business activities as not being eligible to deduction as not being derived by the undertaking of the assessee but being earned on account of policy of the government. In the present case, since these export incentives have admittedly not been earned by the assessee, the decision of the Hon’ble Apex Court in the case of Liberty India Ltd. does not apply to the facts of the present case. In fact we agree with the assessee that this excise duty refund earned by the vendor of the assessee company and passed on to the assessee merely resulted in reduction in purchase cost of the assessee and higher profits on account of the same were therefore eligible to deduction u/s. 10AA of the Act. The order of the Ld. CIT denying the assessee deduction u/s. 10AA on the export incentive is therefore set aside. Claim of deduction u/s. 10AA on domestic sales undertaken within SEZ - contention of the assessee before us was that these export had been undertaken through a third party i.e. M/s. Glonet Marketing Pvt. Ltd., Mumbai and this export was permissible under the SEZ policy - HELD THAT:- The assessee had claimed deduction of profits earned from sales made to one M/s Glonet Marketing Pvt. Ltd. , which sales was in accordance with the SEZ laws, who in turn had exported these goods. In short the assessee had claimed deduction on indirect exports - As in view of the decision of the Hon’ble Apex Court in the case of Metal Closures (P.) Ltd. . [2019 (1) TMI 228 - SC ORDER] no iota of doubt that the finding of the ld. CIT on this aspect is not in accordance with law. The Hon’ble Apex Court having clearly and categorically held that deemed export made through third parties also qualified as export for the purposes of deduction u/s. 10B of the Act, the assessee in the present case being placed in identical set of facts was entitled to and had rightly claimed deduction on the indirect exports made by it amounting to Rs. 396.22 lakhs. The order of the Ld. CIT denying the assessee deduction on the same u/s. 10AA of the Act is therefore held to be not in accordance with law and set aside. Thus assessee’s claim of deduction u/s. 10AA on both the export incentives and profits earned from indirect exports was in accordance with law. The order of the ld. CIT passed u/s. 263 holding that the assessment order allowing deduction on these two counts to be erroneous and thereafter denying the assessee deduction on the same is directed to be set aside. Appeal of assessee allowed. Issues Involved:1. Legality of the initiation of proceedings under Section 263 of the Income Tax Act.2. Eligibility of the assessee's claim for deduction under Section 10AA of the Income Tax Act on export incentives.3. Eligibility of the assessee's claim for deduction under Section 10AA of the Income Tax Act on profits from domestic sales within SEZ.Detailed Analysis:1. Legality of the initiation of proceedings under Section 263 of the Income Tax Act:The appellant challenged the initiation of proceedings under Section 263, contending that the proceedings were not warranted and were not in accordance with the law. However, these grounds were not pressed before the Tribunal and were dismissed as not pressed.2. Eligibility of the assessee's claim for deduction under Section 10AA of the Income Tax Act on export incentives:The Commissioner of Income Tax (CIT) noted that the assessee had claimed a deduction under Section 10AA for export incentives amounting to Rs. 34,50,931/-. The CIT held that this deduction was erroneously allowed by the Assessing Officer (A.O.) without proper verification. The CIT referenced the Supreme Court decision in Liberty India Ltd. (317 ITR 218) to support his stance that export incentives do not constitute income derived from exports and are thus not eligible for deduction under Section 10AA.The assessee contended that the export incentive was actually an excise duty refund received by a vendor, M/s. Gangaram R.K. Industries Pvt. Ltd., and passed on to the assessee. This, according to the assessee, merely reduced the purchase price and should not be treated as an export incentive. The Tribunal agreed with the assessee, noting that the excise duty refund was not earned by the assessee but was passed on by the vendor, thus reducing the purchase cost. The Tribunal concluded that the CIT had erred in treating the export incentives as ineligible for deduction under Section 10AA, and set aside the CIT's order on this count.3. Eligibility of the assessee's claim for deduction under Section 10AA of the Income Tax Act on profits from domestic sales within SEZ:The CIT also noted that the assessee had claimed a deduction under Section 10AA for profits amounting to Rs. 396.22 lakhs from domestic sales within the SEZ. The CIT held that these sales were not eligible for deduction as they were not direct exports by the assessee but were made through a third party, M/s. Glonet Marketing Pvt. Ltd. The CIT argued that Section 10AA does not provide for deductions on indirect exports, unlike Section 80HHC, which explicitly includes such provisions.The assessee argued that the sales were indeed exports as the goods were exported through a third party, which is permissible under SEZ policy, and convertible foreign exchange was received. The Tribunal referred to the Supreme Court decision in DCIT vs. Metal Closures (P.) Ltd. (261 taxmann.com 161), which held that deemed exports through third parties qualify as exports for the purpose of deductions under Section 10B. The Tribunal found that the CIT's interpretation was not in accordance with the law and held that the assessee was entitled to the deduction under Section 10AA for the profits from these indirect exports.Conclusion:The Tribunal allowed the appeal filed by the assessee, holding that:1. The CIT's initiation of proceedings under Section 263 was not pressed and thus dismissed.2. The assessee's claim for deduction under Section 10AA on export incentives was valid as it was merely a reduction in purchase cost.3. The assessee's claim for deduction under Section 10AA on profits from indirect exports through a third party was valid, following the Supreme Court's decision in a similar case.The order of the CIT was set aside, and the assessee's original deductions were upheld.