Case Law Details

Case Name : Principal CIT Vs Universal Precision Screws (Delhi High Court)
Appeal Number : Income Tax (Appeal) No. 392 of 2015
Date of Judgement/Order : 06/10/2015
Related Assessment Year :
Courts : All High Courts (3996) Delhi High Court (1252)
Brief of the Case

Delhi High Court held In the case of Principal CIT vs. Universal Precision Screws that interest on fixed deposits has the requisite characteristic of business income and has a nexus to the business activities of the Assessee. Accordingly it will be part of the profit of business while computing profit derived from the export activities. In the present case, the Assessee has stated that the interest on FDRs was received on ‘margin kept in the bank for utilization of letter of credit and bank guarantee limits’. In those circumstances, the decision of the ITAT that such interest bears the requisite characteristic of business income and has nexus to the business activities of the Assessee cannot be faulted.

Facts of the Case

The Assessee is engaged in the manufacture and export of Fasteners. It is a 100% export oriented unit. The assessee filed his return of income for the AY 2009-10 and claimed the deduction under Section 10B (1). In the assessment order dated 19th December, 2011, the AO noted that the Assessee had included as part of its income scrap sales of Rs.31,84,869/-, exchange rate difference amounting to Rs.32,35,700/- and interest received on Fixed Deposit Receipts (FDRs) amounting to Rs.1,60,11,996/-. The AO was of the view that only those profits and gains would be exempted under Section 10B which had direct and proximate relationship with activities relatable to an EOU. Accordingly AO treated sale of scrap and exchange rate difference as part of domestic sale and also exclude the interest on FDs from income from undertaking while applying formula u/s 10(B) (4).

 Held by CIT (A)

CIT (A) upheld the order of AO.

Held by ITAT

The ITAT allowed the assessee’s appeal. It was held that in terms of the judgment of the Supreme Court in CIT v. Punjab Stainless Steel Industries (2014) 364 ITR 144 (SC) sale of scrap is not includable in the total turnover since the Assessee was not engaged in the business of scrap.

As regards the exchange rate fluctuation, the ITAT referred to the decision of the Bombay High Court in CIT v. Gem Plus Jewellery India Ltd. (2011) 330 ITR 175 (Bom.) which held that foreign exchange fluctuations realized within the stipulated period forms part of the sale proceeds and is directly related to the export activities. It was, accordingly, held that this should be treated as income derived from export activities.

On the question of interest on the FDRs, the ITAT has referred to Section 10B (4) which states that for the purposes of Section 10B (1), the profits derived from export of articles or things or computer software “shall be the amount which bears to the profits of the business of the undertaking”, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking. It was held that such interest bears the requisite characteristic of business income and has nexus to the business activities of the Assessee, hence will be included in profits from business.

 Held by High Court

Income from sale of scrap

We are agreed with the ITAT decision as the legal position has been made clear by the decision of the Supreme Court in CIT v. Punjab Stainless Steel Industries (2014) 364 ITR 144 (SC).

 Exchange rate difference

The decision of the Bombay High Court which was referred by the ITAT was in the context of Section 10A of the Act. Since the provisions of Section 10A and 10B are more or less similar, the ITAT rightly held that for the purposes of Section 10B, the foreign exchange fluctuation has to be considered as part of the export turnover. The ld counsel of the Assessee has also referred to the decision of the Madras High Court in CIT v. M/s Pentasoft Technologies Ltd. (2012) 342 ITR 578 (Mad.) where again that High Court has answered the question likewise and in favour of the Assessee.

Interest income on FDRs

In the case of CIT v. Hritnik Exports Pvt. Ltd. (decision dated 13th November, 2014 in ITA No.219 & 239 of 2014), it was held by Delhi High Court that Section 10B (4) mandates the application of the formula for determining the profits derived from exports for the purposes of Section 10B(1). In terms of the above formula, the question that would arise is whether the interest on the FDRs could form part of the ‘profits of the business of the undertaking’. The attention of the Court has been drawn to the decision of the Karnataka High Court in CIT v. Motorola India Electronics Pvt. Ltd. (2014) 46 Taxmann.com 167 (Kar.) which held that there was a direct nexus between the interest received from the FDRs created by a similarly placed Assessee from the amounts borrowed by it. The High Court approved the order of the ITAT in that case which held that the entire profits of the business of the undertaking should be taken into consideration while computing the eligible deduction under Section 10B of the Act by applying the mandatory formula.

In the present case, the Assessee has stated that the interest on FDRs was received on “margin kept in the bank for utilization of letter of credit and bank guarantee limits”. In those circumstances, the decision of the ITAT that such interest bears the requisite characteristic of business income and has nexus to the business activities of the Assessee cannot be faulted. In other words, interest earned on the FDRs would form part of the “profits of the business of the undertaking” for the purposes of computation of the profits derived from export by applying formula under Section 10B(4) of the Act.

Accordingly, appeal of the revenue dismissed.

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