Case Law Details
Brief Facts of the Case
In the present case the Hon’ble Tribunal held that the Forex gains or losses after the sale receipts would be treated as an amount which will be eligible for deduction under section 10B. On the second issue, the Hon’ble Tribunal held that the amount received after sale of scrap will be eligible to be deducted u/s 80IC.
Facts of the Case
The assessee is carrying on the activity at three different units, in which two are registered 100% EOU for manufacturing plastic containers and the third unit is for manufacturing shampoo products. The income derived from the 100% EOU at Hyderabad is exempt u/s 10B of the I.T. Act and the income derived at Baddi is eligible for deduction u/s 80IC of the I.T Act. Separate books of account were maintained for all the units together. The assessee claimed deduction u/s 80IC of Rs.1,63,08,828 and exemption u/s 10B of Rs.1,05,60,996. The Assessing officer sought for explanations with regard to exemption u/s 10B and deduction u/s 80IC of the I.T. Act. The assessee submitted all such details. The Assessing officer completed the assessment u/s 143(3) on 5.12.2011 determining the total income at Rs.1,25,38,317. While doing so he restricted the exemption u/s 10B to Rs.19,29,860 and deduction u/s 80IC to Rs.1,53,28.227.
With respect to non-inclusion of Rs.44,83,952/- being the gain on fluctuation in foreign from the eligible profits and the export turnover. The Assessing officer is of the view that the forex gain or loss is not attributable to the manufacturing activity and because the money is received in Euros and kept by the company in the EEFC Current account; the withdrawal of the money converting foreign exchange into rupees is being made as per its business exigencies and, therefore, the gain derived cannot be considered as the income derived from the industrial undertaking.
Contentions of the Assessee
It was submitted that the gain on fluctuation in foreign exchange represents the gain relating to its manufacturing activity. The manufactured goods are exported and the sale consideration is received in foreign exchange. The provisions of Sec. 10B clearly stipulate that the sale consideration should be received m convertible foreign exchange into India. There is no stipulation as to when such foreign currency is to be withdrawn from the bank. The amount is received in the foreign exchange as per the invoice and is credited to the bank account of the assessee. The assessee would be paid in the Indian currency based on the exchange rate on the date of withdrawal. There may be either a gain or a loss in the process and such gain or loss is to be treated as a part of the sale consideration of the goods manufactured. Therefore, the amount represents the sale price and is eligible for exemption u/s 10B of the I.T. Act. The said amount also forms part of the export turnover.
On the issue of Scrap sale, the Ld. Counsel of the assessee contended that the Raw Materials and chemical in drums were supplied by the Customer to the assessee, that after use of the raw materials, these packing material were sold and the aggregate sale proceeds of Rs.20,43,698 credited to the P&L a/c (thereby reducing the cost of production) that the customer had reduced the sale price by an equivalent amount and that as a result, the scrap sale needed to be considered as part of the turnover.
In the case of the assesses “job work charges receipts” and “scrap sale receipts” are not two independent and separate activities. On the contrary, scrap sale receipts and job work charges receipts are inextricably associated and inter-related and therefore, scrap sale receipts have to be treated as integral part of job work receipts. Therefore, it was submitted that scrap sale receipts qualifies for exemption u/s 80IC.
Contention of the Revenue
The Assessing officer was of the view that the forex gain or loss is not attributable to the manufacturing activity and because the money is received in Euros and kept by the company in the EEFC Current account. The ld. CIT(A) observed that an assessee who is an exporter is not under an obligation of law to maintain the export proceeds in the EEFC account, but, this is a facility which is made available by the Reserve Bank. It lies within the discretion of the exporter as to whether the export proceeds should be received in a rupee equivalent in the entirety or whether a portion should be maintained in convertible foreign exchange in the EEFC account. The exchange fluctuation that arises is after completion of export and payment has been received by the exporter. The exchange fluctuation in the EEFC account arises after the completion of the export activity and does not bear a proximate and direct nexus with the export transaction so as to fall within the expression “derived” by the assessee in sub-section (1) of section 80HHC”. The ld. CIT(A) while affirming the order of AO held that these gains are not derived from the export business.
Held by CIT(A)
The CIT (A) observed that the AR had claimed that the customer M/s Hindustan Unilever Ltd had reduced the sales price by the amount realised from scrap scales and the CIT (A) stated that the AR’s claim would be acceptable in case where the sale proceeds were shown to be realised partly in cash and partly through an adjustment from the scrap sale receipts. The CIT (A) held that since the sale proceeds were not shown to be partly in cash and partly through an adjustment from scrap sale receipts and in this case since the assessee has reduced the sale consideration itself in view of its other income “from scrap sales”, such receipts cannot be taken to be derived from the business of manufacture of shampoo. Hence, the CIT (A) held that merely because the assessee is able to make some profits from scrap sales, it cannot be concluded that such receipts are derived from the business of manufacture of shampoo.
Held by the Tribunal
The Hon’ble Tribunal while relying on the Judgment of CIT vs. Gem Plus Jewellery India Ltd (Bom.) (330 ITR 177) held that the foreign exchange gains/loss post receipt of sale is not income for the unit to be allowed deduction u/s 10B. Accordingly, the issue was set aside to be examined by AO and given an opportunity to Assessee to substantiate its claim.
The Hon’ble Tribunal while relying on the Judgment of CIT v Sadhu Forgings Ltd. 336 ITR 444 where it was observed that there cannot be any two opinions that manufacturing activity of the type of material being undertaken by the assessee would also generate scrap in the process of manufacturing. The receipts of sale of scrap being part and parcel of the activity and being proximate thereto would also be within the ambit of gains derived from industrial undertaking for the purpose of computing deduction under section 80-IB. Hence, the Tribunal was of the view that sale of scrap has the effect of reducing the cost of production. Further, sale of scrap is eligible for deduction u/s 80IC.
