Brief of the Case
In Riviera Home Furnishing vs. Addl. CIT, Hon’ble Delhi High Court while dealing with the interpretation of Section 10B(4) held that the manner of determining such eligible profits has been statutorily defined in sub-section (4) of section 10B of the Act. As per the formula the entire profits of the business are to be taken which are multiplied by the ratio of the export turnover to the total turnover of the business. Sub-section (4) does not require an assessee to establish a direct nexus with the business of the undertaking and once an income forms part of the business of the undertaking, the same would be included in the profits of the business of the undertaking.
Fact of the Case
The Assessee, a private limited company engaged in the business of manufacture and sale of home furnishings, set up a 100% Export Oriented Undertaking (‘EOU’) which was an ‘eligible unit’ for the purposes of deductions under Section 10B of the Act. In A.Y. 2008-09, the assessee in its return of income claimed the deduction in respect of the income under the heading Deemed Export Drawback, Customer Claims, freight subsidy and interest on fixed deposit receipts made for the business purpose. During the scrutiny, the A.O. forming the view that the above receipts did not fall within the expression ‘profit derived’ from the export of articles, excluded the same from the computation of eligible income under section 10B(4) of the Act. The appeal of the assessee was dismissed by the CIT(A). However, ITAT agreed with the contention of the Assessee as regards the deemed export drawback forming part of the income eligible for deduction u/s 10B but as regards the other three items viz., customer claims, freight subsidy and interest on FDRs made for business purposes, the ITAT concurred with the view of the AO and the CIT(A).
Question of Law
Thus the question before the High Court was to decide whether the ITAT was correct in law in not allowing the exemption ignoring the express provision of section 10B(4) of the Act, whereby profit of the business of the undertaking are eligible for deduction.
Contention of Revenue
The Ld. Senior Counsel of the revenue attempted to show that a unit seeking deduction under Section 10B would be eligible to do so only in so far as such income was directly attributable to the business of export. Any income that might be merely incidental to the business of the undertaking, not directly related to the activity of export, would not be eligible for such deduction.
Contention of Assessee
The assessee contention was that it had received the claim of Rs. 28,27,224 from a customer for cancelling the export order. Later on the cancelled order was completed and goods were exported to another customer. The sum received as claim from the customer was non-severable from the income of the business of the undertaking. Even as regards freight subsidy, the Assessee’s contention was that it had received the subsidy in respect of the business carried on and the said subsidy was part of the profit of the business of the undertaking.
Held by the High Court
The Hon’ble High Court observed that the question as to what can constitute as profits and gains derived by a 100% EOU from the export of articles and computer software came for consideration before the Karnataka High Court in CIT v. Motorola India Electronics Pvt. Ltd. (2014) 46 Taxmann.com 167 (Kar). in which the court held that “it is clear that, what is exempted is not merely the profits and gains from the export of articles but also the income from the business of the undertaking”. Specific to the question of interest earned by the EOU on the FDRs placed by it and interest earned from the loans given to sister concerns, it was held that although it did not partake the character of profit and gains from the sale of an article “it is income which is derived from the consideration realized by export of articles.” Further the Court in its earlier decision in case of CIT v. Hritnik Exports Pvt. Ltd, observed that once an income forms part of the business of the eligible undertaking, there is no further mandate in the provisions of section 10B to exclude the same from the eligible profits. The mode of determining the eligible deduction u/s 10B is similar to the provisions of section 80HHC inasmuch as both the sections mandates determination of eligible profits as per the formula contained therein. The only difference is that section 80HHC contains a further mandate in terms of Explanation (baa) for exclusion of certain income from the “profits of the business” which is, however, conspicuous by its absence in section 10B. On the basis of the aforesaid distinction, sub-section (4) of section 10A/10B of the Act is a complete code providing the mechanism for computing the “profits of the business” eligible for deduction u/s 10B of the Act. Once an income forms part of the business of the income of the eligible undertaking of the assessee, the same cannot be excluded from the eligible profits for the purpose of computing deduction u/s 10B of the Act.
The Court further held that if the ITAT was prepared to consider the deemed export draw back as eligible for deduction then there was no justification for excluding the freight subsidy. Even as regards the interest on FDR, the Court has been shown a note of the balance sheet of the Assessee [which was placed before the AO] which clearly states that “fixed deposit receipts (including accrued interest) valuing Rs.15,05,875 are under lien with Bank of India for facilitating the letter of credit and bank guarantee facilities.” In terms of the ratio of the decisions of this Court cited above the interest earned on such FDR ought to qualify for deduction under Section 10B of the Act. Accordingly, the questions are answered in favour of the Assessee and against the Revenue. Appeal of the assessee allowed.