DCIT, Madurai V. Penguin Apparels P Ltd., Madurai

ITA 390/CHNY/2014

• Counselvise Citation: [2016] 132 COUNSELVISE.COM (IT) 9510 (ITAT-CHENNAI)
• Duration Of Justice: 2 year(s) 2 month(s) 10 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 27-04-2016
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: C
• Next Hearing Date: 10-02-2016
• Assessment Year: 2009-2010
• Appeal Filed On: 17-02-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: A V SREEKANTH IRS
• Assessee Lawyers: R SRINIVASAN
• Keywords: Business income; Opportunity of being heard; Peak credit; Permanent establishment; Advance ruling; Deemed dividend
• Section: 115JB; 80IB; 2

Judgement Text

, , IN THE INCOME TAX APPELLATE TRIBUNAL C BENCH, CHENNAI , . ! , '!# BEFORE SHRI CHANDRA POOJARI, ACCOUNTANT MEMBER AND SHRI G. PAVAN KUMAR, JUDICIAL MEMBER ./ I.T.A. NOS.2230/MDS/2013 & 390/MDS/2014 ' $ %$ / ASSESSMENT YEARS : 2010-2011 & 2009-2010. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE I(1) MADURAI VS. M/S. PENGUIN APPARELS P. LTD. PLOT NO.2, MEENAKSHMI NAGAR, GST ROAD, PASUMALAI, MADURAI 625 004. [PAN AABCP 7832P] ( / APPELLANT) ( /RESPONDENT) &' ( ) / APPELLANT BY : SHRI. A.V. SREEKANTH, IRS, JCIT. *+&' ( ) /RESPONDENT BY : SHRI. R. SRINIVASAN, ADVOCATE. ( , / DATE OF HEARING : 10-02-2016 -.% ( , / DATE OF PRONOUNCEMENT : 27-04-2016 / O R D E R PER G. PAVAN KUMAR, JUDICIAL MEMBER : THESE TWO APPEALS FILED BY DEPARTMENT ARE DIRECT ED AGAINST DIFFERENT ORDERS OF COMMISSIONER OF INCOME TAX (APP EALS), MADURAI FOR THE ABOVE ASSESSMENT YEARS PASSED U/S.143(3) AND 2 50 OF THE INCOME TAX ACT, 1961 (HEREIN AFTER REFERRED TO AS THE AC T). SINCE THE ASSESSEE IS COMMON FOR BOTH ASSESSMENT YEARS, HENCE THESE APPEALS ITA NO2230/2013 & 390/2014. :- 2 -: ARE COMBINED, HEARD TOGETHER, AND DISPOSED OF BY A COMMON ORDER FOR THE SAKE OF CONVENIENCE. 2. FIRST WE TAKE UP ITA NO.2230/MDS/2013, OF ASSESSME NT YEAR 2010-11 FOR ADJUDICATION. 3. THE GROUNDS OF APPEAL RAISED BY THE ASSESSEE ARE U NDER :- 2 .1 THE CIT(A) ERRED IN HOLDING THAT BOTH THE COMPANIES ARE NOT HOLDING EACH OTHER'S SHARE AND HENCE THE BUSINESS ADVANCES RECEIVED FROM PENGUIN GARMENTS PVT. LTD., WAS TREATED AS COMMERCI AL TRANSACTION WHICH DO NOT ATTRACT THE PROVISION OF DEEMED DIVIDE ND. 2.2 THE CIT(A) FAILED TO NOTE THAT THE DEEMING PRO VISION UNDER SECTION.2(22)(E) WILL EXTEND TO ANY PAYMENT BY A COMPANY, TO ANY CONCERN IN WHICH SUCH SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTIAL INTEREST . 2.3 THE CIT(A) ALSO FAILED TO NOTE THAT THE DEEMIN G PROVISION UNDER SECTION.2(22)(E) DOES NOT LAID DOWN ANY CONDITION T HAT BORROWER MUST HOLD SHARES IN LENDING COMPANIES. 2.4 THE CIT(A) OUGHT TO HAVE FOLLOWED THE DECISION IN THE CASES OF CIT V. BHARTI OVERSEAS TRADING CO. [2012] 207 TAXMAN 1 35 (MAG.) AND CIT V. NATIONAL TRAVEL SERVICES [2012] 249 CTR 540 (DELHI), WHEREIN IT WAS HELD THAT THE BORROWER NEED NOT BE A SHARE H OLDER TO INVOKE THE DEEMING PROVISION UNDER SECTION.2(22)(E). 3.1 THE CIT(A) FAILED TO NOTE THAT THE COMMISSION PAID BY THE ASSESSEE COMPANY TO THE FOREIGN AGENTS IS ONLY FOR PROCURING ORDER ABROAD FOR THE BUSINESS OF THE ASSESSEE COMPANY IN INDIA AND T HUS THE COMMISSION INCOME OF THE FOREIGN AGENTS DOES ACCRUE AND ARISE IN INDIA AND ACCORDINGLY SECTION.195 WOULD ATTRACT. 3.2 THE CIT(A) FAILED TO NOTE THE IMPACT OF CBDT'S WITHDRAWAL OF CIRCULAR NOS.23 DATED 23.07.09, 163 DATED 29.05.197 5 AND 786 DATED 07.02.2000 BY ITS CIRCULAR NO.7 OF 2009 IS TH AT IN RESPECT OF ENTITIES WHO ENGAGE NON-RESIDENT AGENTS FOR CANVASS ING OVERSEAS CONTRACT, FOR EXPORT OF THEIR PRODUCTS AND SUCH AGE NTS WHO RENDER SERVICE OVERSEAS ARE PAID COMMISSION WOULD BECOME T AXABLE IN INDIA; ITA NO2230/2013 & 390/2014. :- 3 -: 3.3 THE CIT(A) OUGHT TO HAVE FOLLOWED THE RECENT R ULINGS BY THE AUTHORITY FOR ADVANCE RULING IN THE CASE OF M/S. SKF BOILERS AND DRIERS PVT. LTD., [AAR NO.983-984 OF 2012] WHICH ADJUDGED THIS ISSUE IN FAVOUR OF DEPARTMENT WHEREIN IT WAS HELD THAT, 'NO DOUBT THAT THE AGENTS RENDERED SERVICES ABROAD AND HAVE SOLICITED ORDERS, BUT THE RIGHT TO RECEIVE THE COMM ISSION ARISES IN INDIA WHEN THE ORDER IS EXECUTED BY THE APPLICAN T IN INDIA. THE FACT THAT THE AGENTS HAVE RENDERED SERVICES ABR OAD IN THE FORM OF SOLICITING THE ORDER AND THE COMMISSION IS TO BE REMITTED TO THEM ABROAD ARE WHOLLY IRRELEVANT FOR T HE PURPOSE OF DETERMINING THE SITUS OF THEIR INCOME. WE FOLLOW THE RULING OF THIS AUTHORITY IN [RAJIVE MALHOTRA AAR 671 OF 2005, 284 ITR 564}. WE THEREFORE HOLD THAT THE INCOME ARISING ON ACCOUN T OF COMMISSION PAYABLE TO THE TWO AGENTS IS DEEMED TO A CCRUE AND ARISE IN INDIA, AND IS TAXABLE UNDER THE ACT IN VIEW TO THE SPECIFIC PROVISION OF SECTION.5(2)(B) READ WITH SEC TION.9(1)(I) OF THE ACT. THE PROVISION OF SECTION. 195 WOULD APPLY, AND THE RATE OF TAX WILL BE AS PROVIDED UNDER THE FINANCE A CT FOR THE RELEVANT YEAR'. 3.4. THE CIT(A) ERRED IN NOT FOLLOWING THE DECISIO N OF RAJIV MALHOTRA AAR 671 OF 2005, (284 ITR 564), WHERE FACTS ARE S IMILAR. 4. THE BRIEF FACTS OF THE CASE THAT THE ASSESSEE IS A PRIVATE LIMITED COMPANY MANUFACTURING GARMENTS AND HAVING 100% EXPORT ORIENTED UNIT (EOU) AND FILED E-RETURN OF INCOME ON 08.09.2010 ADMITTING TOTAL INCOME OF C2,36,51,160/- UNDER NORM AL COMPUTATION AND C2,00,59,175/- UNDER PRESUMPTIVE PROVISIONS OF SEC.115JB OF THE ACT AND RETURN WAS PROCESSED U/S.143(1) OF THE ACT ON 15.03.2011. THE CASE WAS SELECTED FOR SCRUTINY UNDER CASS AND N OTICE U/S.143(2) OF THE ACT WAS ISSUED. THE ASSESSING OFFICER AFTER CONSIDERING THE SUBMISSIONS OF THE ASSESSEE MADE AN ADDITION IN RES PECT OF DEEMED DIVIDEND U/S.2(22) (E) C1,02,11,870/-. IN THE APP ELLATE PROCEEDINGS, IT WAS EXPLAINED THAT ASSESSEE HAS AVAILED LOAN FRO M SISTER CONCERN ITA NO2230/2013 & 390/2014. :- 4 -: M/S. PENGUIN GARMENTS P. LTD. WEREAS THE DIRECTOR O F M/S. PENGUIN GARMENTS P. LTD SHRI. K.S.S.A. MARIAPPAN HOLDS 35. 86% OF SHARES AND COMPANY ALSO HAS ACCUMULATED PROFITS OF C4,66,34,76 0/-. THE DIRECTOR ALSO HOLDS 52.49% OF SHARES IN M/S. PENGUIN APPAREL S P. LTD AND THE LEDGER COPY WAS PROVIDED IN RESPECT OF M/S. PENGUIN GARMENTS P. LTD AND PEAK CREDIT ESTABLISHED C1,02,11,870/- AND EN TIRE AMOUNT WAS SQUARED OFF BY REPAYING THE AMOUNT. THE ASSESSING OFFICER TREATED THE TRANSACTION AS DEEMED DIVIDEND AND SHOW CAUSE NOTIC E WAS ISSUED AND THE ASSESSEE HAS FILED EXPLANATION AS UNDER:- THE ASSESSEE-COMPANY FILED RELEVANT LEDGERS AND D ETAILS REGARDING THE SAME. FURTHER THE ASSESSEE-COMPANY HA VE SUBMITTED THAT PROVISIONS OF SEC.2(22)(E) IS NOT APPLICABLE I N REGARD TO THE TRANSACTION FOR THE REASON THAT 'WE ADMIT THAT A. MARIAPPAN IS HOLDING THE REQUISITE PERCENTAGE OF SHAREHOLDING IN OUR COMPANY AS WELL AS IN M/S. PENGUIN GARMENTS P. LTD., BUT IT SHOULD BE NOTED THAT NEITHER PENGUIN GARMENTS P. LT D., IS A SHAREHOLDER IN OUR COMPANY NOR OUR COMPANY SHAREHOL DER IN PENGUIN GARMENTS P. LTD., THEREFORE THE PRIMARY REQ UISITE THAT THE LOANER SHOULD BE A SHAREHOLDER OF THE LENDING COMPANY IS NOT SATISFIED'. THE ASSESSEE-COMPANY RELIED UPON CI T VS ANKITECH ITD 340 ITR. HOWEVER, THE MATTER HAD NOT BEEN FINALIZED AND THE DEPARTMENT HAD FILED SLP AGAINST THIS ORDER . TO HAVE BETTER UNDERSTANDING OF THE PROVISIONS OF THE SECTION, IT IS WORTHWHILE TO REPRODUCE THE SECTION HERE WHICH READS AS- 'DIVIDEND' INCLUDES ANY PAYMENT BY A COMPANY, NOT BEING A COMPANY IN WHICH THE PUBLIC ARE SUBSTANTIALLY INTERESTED, OF ANY SUM (WHETHER AS REPRESENTING A PART OF THE ASSETS OF THE COMPANY OR OTHERWISE) MADE AFTER 31 ST DAY OF MAY, 1987, BY WAY OF ADVANCE OR LOAN TO A SHAREHOLDER BEING A PERSON WHO IS THE BENEFICIAL OWNER OF THE SHARES (NOT BEING SHARES ENTITLED TO A FIXED RATE OF DIVIDEND WHETHER WITH OR WITHOUT A RIGHT TO PARTICIPATE IN PROFITS) HOLDING NOT LESS THAN 10% OF THE VOTING POWER, OR TO ANY CONCERN IN WHICH SUCH ITA NO2230/2013 & 390/2014. :- 5 -: SHAREHOLDER IS A MEMBER OR A PARTNER AND IN WHICH HE HAS A SUBSTANTIAL INTEREST [HEREAFTER IN THIS CLAUSE REFERRED TO AS A SAID CONCERN] OR ANY PAYMENT BY ANY SUCH COMPANY ON BEHALF, OR FOR THE INDIVIDUAL BENEFIT OF ANY SUCH SHAREHOLDER, TO THE EXTENT TO WHICH A COMPANY IN EITHER CASE POSSESS ACCUMULATED PROFITS. ' BUT THE ASSESSING OFFICER RELYING ON JUDICIAL DECIS IONS MADE AN ADDITION OF C1,02,11,870/-. AGGRIEVED BY THE ORDER, THE ASS ESSEE FILED AN APPEAL BEFORE COMMISSIONER OF INCOME TAX (APPEALS). 5. IN THE APPELLATE PROCEEDINGS, THE ASSESSEE FILED W RITTEN SUBMISSIONS AND EXPLAINED THE PROVISIONS OF DEEMED DIVIDEND DOES NOT APPLY TO THE ASSESSEE COMPANY AND LD. COMMISSIONER OF INCOME TAX (APPEALS) CONSIDERED THE PROVISIONS OF THE ACT AND THE CIRCUMSTANCES AND HOLDING OF THE SHARE OBSERVED AT PARA 4.4 OF H IS ORDER AS UNDER:- 4.4 IN THE PRESENT CASE, UNDER CONSIDERATION, THE APPELLANT COMPANY HAS RECEIVED BUSINESS ADVANCES FR OM TIME TO TIME, FROM PENGUIN GARMENTS PVT LTD., WITH WHOM, THE APPELLANT COMPANY HAD AN OPEN & MUTUAL CURRENT ACCOUNT. THE ASSESSING OFFICER, HAS TAKEN A PEAK CR EDIT AS THE LOAN GIVEN BY THE PENGUIN GARMENTS PVT. LTD. , TREATED THE SAME AS DIVIDEND INCOME ULS 2(22)( E). THE AR IN HIS SUBMISSIONS HAS STATED THAT THE APPELLANT COMPANY IS NOT A SHAREHOLDER IN PENGU IN GARMENTS PVT. LTD. AS THE APPELLANT COMPANY DO NOT HOLD ANY SHARES IN PENGUIN GARMENTS PVT. LTD., THE PROVI SIONS OF SECTION 2(22)( E) ARE NOT ATTRACTED. IN HIS SUBM ISSIONS THE AR HAS MENTIONED, THAT, THE RELIANCE PLACED BY THE AO ON SEVERAL CASE LAWS MENTIONED SUPRA, ARE RELATE D TO THE TRANSACTION BETWEEN THE ASSESSEE COMPANY AND TH E SHAREHOLDER. IN THE CASE OF THE APPELLANT, THERE IS NO SUCH RELATIONSHIP AS A SHAREHOLDER BETWEEN THE APPELLANT ITA NO2230/2013 & 390/2014. :- 6 -: COMPANY AND PENGUIN GARMENTS PVT. LTD. THUS THE APPELLANT COMPANY PENGUIN APPARELS PVT. LTD DOES NO T HOLD ANY SHARES IN PENGUIN GARMENTS PVT. LTD. SIMIL ARLY, PENGUIN GARMENTS PVT. LTD DOES NOT HOLD ANY SHARES IN PENGUIN. APPARELS PVT. LTD., I.E THE APPELLANT COMP ANY. THEREFORE, THE CONTENTION OF THE AO IS TOTALLY UNTE NABLE. THUS THE AR OF THE APPELLANT REQUESTED FOR DELETION OF THE ADDITION UNDER SECTION 2(22)( E) OF THE INCOME TAX ACT, 1961. 4.5 THE PROVISIONS OF SEC. 2(22)(E) OF THE ACT CREA TES A FICTION, PURPOSE BEING THAT PERSONS WHO MANAGE CLOS ELY HELD COMPANIES SHOULD NOT ARRANGE THEIR AFFAIRS IN A MANNER THAT THEY ASSIST THE SHAREHOLDER IN AVOIDIN G THE PAYMENT OF TAXES BY HAVING THESE COMPANIES PAY TO DISTRIBUTE, WHAT WOULD LEGITIMATELY BE DIVIDEND IN THE HANDS OF THE SHAREHOLDERS, MONEY IN THE FORM OF ADV ANCE OR LOAN. THE WORD 'ADVANCE' HAS TO BE READ IN CONJU NCTION WITH THE WORD 'LOAN'. USUALLY A LOAN INVOLVES POSIT IVE ACT OF LENDING COUPLED WITH ACCEPTANCE BY THE OTHER SIDE O F THE MONEY AS LOAN AND CARRIES AN INTEREST WITH AN OBLIG ATION OR REPAYMENT. THE TERM 'ADVANCE' MAYOR MAY NOT INCL UDE LENDING. BOTH THE TERMS, I.E. ADVANCE OR LOAN ARE R ELATED TO THE ACCUMULATED PROFITS OF THE COMPANY. THE PURP OSE BEHIND INSERTION OF THE TERM ADVANCE WAS TO BRING W ITHIN THE TAX NET, PAYMENTS MADE IN GUISE OF LOAN TO SHAREHOLDERS BY COMPANIES IN WHICH THEY HAVE A SUBSTANTIAL INTEREST SO AS TO AVOID PAYMENT OF TAX BY THE SHAREHOLDERS. WHEREAS TRADE ADVANCES, WHICH ARE IN THE NATURE OF MONEY TRANSACTED TO GIVE EFFECT TO A COMM ERCIAL TRANSACTION WOULD NOT BE DEEMED DIVIDEND. THUS THE CURRENT ACCOUNT MAINTAINED BETWEEN THE PARTIES ESTABLISHING THE PAYMENT TO THE RESULT OF TRADING TRANSACTION BETWEEN THE PARTIES AND NOT GIVEN BY WA Y OF LOAN OR ADVANCE, THE SAME CANNOT BE TREATED AS DIVI DEND. 4.6 THE PURPOSE OF SECTION 2(22)( E) IS TO TAX THE DISTRIBUTION OF PROFITS TO SHARE HOLDERS, WHERE THE SAME IS DISTRIBUTED NOT BY WAY OF DIVIDEND BUT BY WAY OF LO AN OR ADVANCES. THE AR PLACED HIS RELIANCE ON THE RATIOS HELD IN NAVYUG PROMOTERS (P) LTD., WHERE IN IT WAS HELD CLEARLY, THAT THE CONDITION PRECEDENT IS THAT BORROWER MUST HOLD SHARES IN LENDING COMPANIES. AN ASSESSEE WHO IS NOT A SHARE HOLDER OF THE COMPANY FROM WHICH HE RECEIVED A LOAN OR AN ADVANCE CANNOT BE TREATED AS BEING COVER ED BY THE DEFINITION OF THE WORD, DIVIDEND. THE PROVIS ION OF SEC. 2(22)( E) CAN BE APPLIED, ONLY WHEN THE SHAREH OLDER OF THE COMPANY IS IN RECEIPT OF LOAN / ADVANCE. SIM ILARLY, ITA NO2230/2013 & 390/2014. :- 7 -: THE AR PLACED HIS RELIANCE ON ANKITECH PVT. LTD., & OTHERS, WHEREIN IT WAS HELD THAT THE APPELLANT COMP ANY HAD RECEIVED SOME AMOUNT BY WAY OF BOOK ENTRIES FRO M ONE JACKSON GENERATORS P. LTD., WHICH THE AO TREATE D AS DEEMED DIVIDEND. THE RATIO HELD IN THE ABOVE JUDGEM ENT THAT THE AMOUNT RECEIVED CANNOT BE ASSESSED IN THE HANDS OF THE ASSESSEE COMPANY AS IT WAS NOT A SHAREHOLDER IN JACKSON GENERATORS P. LTD. THUS THE BUSINESS ADVANCES RECEIVED FROM PENGUIN GARMENTS PV T, LTD., AND THE APPELLANT COMPANY CANNOT BE TERMED AS DEEMED DIVIDEND U/S 2(22( E) AS BOTH THE COMPANIES ARE NOT SHAREHOLDERS IN EACH OTHER AND HAS TO BE TR EATED AS BUSINESS TRANSACTIONS AND HENCE THE QUESTION OF TAXING THEM AS DEEMED DIVIDEND AND INCOME U/S 2(22) (E) DOES NOT ARISE. 4.7 THEREFORE, RESPECTFULLY FOLLOWING THE RATIOS HE LD IN THE CASE LAWS MENTIONED SUPRA, THE ADDITION MADE BY THE AO UNDER THE HEAD DEEMED DIVIDEND AT 1,02,11,870 IS DELETED AS BOTH THE COMPANIES ARE NOT HOLDING EACH OTHER'S SHARE HOLDING AND HENCE THE BUSINESS ADVANC ES RECEIVED FROM PENGUIN GARMENTS PVT. LTD., IS TREATE D AS COMMERCIAL TRANSACTION WHICH DO NOT ATTRACT THE PRO VISION OF DEEMED DIVIDEND AND HENCE DELETED. THE APPELLANT SUCCEEDS ON THIS GROUND OF APPEAL . AND ALLOWED THE GROUND OF THE ASSESSEE. AGGRIEVED BY THE COMMISSIONER OF INCOME TAX (APPEALS) ORDER, THE REV ENUE HAS ASSAILED AN APPEAL BEFORE TRIBUNAL. 6. BEFORE US, THE LD. DEPARTMENTAL REPRESENTATIVE AGI TATED THE GROUNDS THAT COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN HOLDING THAT BOTH THE COMPANIES ARE NOT HOLDING EACH OTHER S SHARE AND HENCE THE BUSINESS ADVANCES RECEIVED FROM M/S. PENGUIN GA RMENTS PVT. LTD ITA NO2230/2013 & 390/2014. :- 8 -: WAS TREATED AS COMMERCIAL TRANSACTION AND BUT ANY P AYMENT BY THE COMPANY TO ANY CONCERN IN WHICH SHARE HOLDER IS A M EMBER OR A PARTNER IN WHICH HE IS HAVING SUBSTANTIAL INTEREST DEEMING PROVISION SHALL APPLY AND ALSO RELIED ON THE JUDICIAL DECISI ONS AND ARGUED THAT THE BORROWER NEED NOT BE A SHARE HOLDER TO INVOKE T HE DEEMING PROVISIONS. 7. CONTRA, THE LD. AUTHORISED REPRESENTATIVE REITERATE D THE SUBMISSIONS MADE IN THE APPELLATE PROCEEDINGS, JUDI CIAL DECISIONS RELIED IN THE APPELLATE PROCEEDINGS AND WRITTEN SUB MISSIONS FILED BEFORE COMMISSIONER OF INCOME TAX (APPEALS). THE COMMISSIO NER OF INCOME TAX (APPEALS) HAS CONSIDERED THE PROVISIONS AND ALL OWED THE GROUND OF THE ASSESSEE. THE LD. AUTHORISED REPRESENTATIVE FU RTHER SUBSTANTIATED HIS ARGUMENTS WITH THE FACTUAL MATRIX OF SHAREHOLDI NG AND PRAYED FOR DISMISSING THE APPEAL OF THE REVENUE. 8. WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATE RIAL ON RECORD AND JUDICIAL DECISIONS. THE CONTENTION OF T HE LD. DEPARTMENTAL REPRESENTATIVE THAT THE ASSESSEE COMPANY TRANSACTIO NS CANNOT BE TREATED AS ADVANCE RECEIVED FROM M/S. PENGUIN GARME NTS PVT. LTD AND DOES NOT HAVE COMMERCIAL EXISTENCE AND BY APPLYING THE PROVISIONS AS PER THE FINDINGS OF THE ASSESSING OFFICER EVEN THO UGH TRANSACTION IS ITA NO2230/2013 & 390/2014. :- 9 -: SQUARED OFF THE COMPANY WILL BE TREATED AS BENEFICI ARY AND DEEMING PROVISIONS ARE APPLICABLE. FURTHER ON PERUSAL OF FINDINGS AND OBSERVATION OF ORDER THE COMMISSIONER OF INCOME TAX (APPEALS) AND THE ARGUMENTS OF THE LD. AUTHORISED REPRESENTATIVE, THE PROVISION IS VERY CLEAR THAT TO BECOME A BENEFICIARY THEY MUST B E REGISTERED AS SHAREHOLDER. WE RELY ON THE DECISION OF CIT VS. MADURAI CHETTIYAR KARTHIKEYAN 223 TAXMAN 350 (MADRAS ) WERE HELD TRADE ADVANCE IN RELATION TO BUSINESS TRANSACTION CANNOT BE TREATED AS DEEMED DIVIDEND WITHIN SEC.2(22) (E) OF THE ACT. CONSIDERING THE AP PARENT FACTS AND ALSO DEEMING PROVISIONS, WE ARE NOT INCLINED TO INT ERFERE WITH THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS) ON THIS ISS UE AS LD. COMMISSIONER OF INCOME TAX (APPEALS) DISCUSSED ELAB ORATELY AND EXAMINED THE DETAILS. THEREFORE, WE UPHELD THE SAM E AND DISMISS THE GROUND OF THE REVENUE. 9. THE SECOND GROUND RAISED BY THE REVENUE BEING PAYME NT OF FOREIGN COMMISSION PAID TO FOREIGN AGENT IN PROCURI NG ORDERS. 10. DURING THE FINANCIAL YEAR 2009-2010, THE ASSESSEE C OMPANY HAS AVAILED THE SERVICES OF M/S. NATURAL ORIGIN WOR LDSISE PTE. LTD, SINGAPORE FOR PROCURING THE ORDERS. THE ASSESSEE PAID THE COMMISSION WITHOUT DEDUCTION OF TAX AS PER SEC.195 OF THE ACT AS THERE WAS NO PERMANENT ESTABLISHED IN INDIA. THE L D. ASSESSING OFFICER ITA NO2230/2013 & 390/2014. :- 10 -: RELIED ON THE CBDT CIRCULAR DISCUSSED ELABORATELY A T PAGE 4 OF HIS ORDER AS UNDER:- THE CENTRAL BOARD OF DIRECT TAXES HAS BY ITS CIRC ULAR 7 OF 2009 DATED 22.10.2009 WITHDRAWN ITS EARLIER [I] CIR CULAR NO.23 DATED 23.07.2009 [II] CIRCULAR NO.163 DATED 29.05.1975 AND [III] CIRCULAR NO.786 OF 07.02.2000. THE IMPACT OF SUCH WITHDRAWAL IS THAT IN RESPECT OF ENT ITIES WHO ENGAGE NON- RESIDENT AGENTS FOR CANVASSING OVERSEAS CONTRACT, FOR EXPORT OF THEIR PRODUCTS AND SUCH AGE NTS WHO RENDER SERVICE OVERSEAS ARE PAID COMMISSION WOULD B ECOME TAXABLE. THE EARLIER CIRCULAR HAVE CLEARLY FURNISHED ILLUSTR ATIONS TO EXPLAIN THAT SUCH COMMISSION CAN BE PAID WITHOUT DE DUCTION OF TAX. BUT ALL THAT HAD BEEN WITHDRAWN BY THE CIRC ULAR MENTIONED IN SUPRA. THE RECENT RULINGS BY THE AUTHORITY FOR ADVANCE RUL ING IN THE CASE OF M/S. SKF BOILERS AND DRIERS PVT. LTD., (AAR NO.983- 984 OF 2012), HAD ADJUDGED THIS ISSUE IN FAVOUR OF DEPARTMENT. THE RELEVANT PARAGRAPHS ARE REPRODUCED BELOW: ' ON THE ABOVE STATED FACTS, THE APPLICANT HAS RAISED THE FOLLOWING QUESTIONS, COMMON IN BOTH THE ABOVE APPLICATIONS, FOR A RULING BY THIS AUTHORITY. 1. WHETHER THE INCOME OF THE NON-RESIDENT AGENT CAN BE DEEMED TO ACCRUE OR ARISE IN INDIA? 2. WHETHER TAX DEDUCTION WOULD BE MANDATORY UNDER SECTION 195 UNDER EXPORT COMMISSION PAID TO NON-RESIDENT AGENT, IF SO, AT WHAT RATE? ........... IT IS STATED THAT THE CIRCULAR NO.786 HAS BEEN WITHDRAWN. THE INCOME ARISING TO THE TWO AGENTS ON ACCOUNT OF EXPORT COMMISSION FALLS UNDER SECTION 5(2)(B) OF THE ACT AS THE INCOME HAS ACCRUED IN INDIA WHEN THE RIGHT TO RECEIVE THE INCOME BECAME VESTED. ITA NO2230/2013 & 390/2014. :- 11 -: AND DISALLOWED AN AMOUNT OF C63,70,717/- FOR NON CO MPLIANCE OF SEC. 40(A)(I) OF THE ACT. AGGRIEVED BY THE ORDER, THE AS SESSEE FILED AN APPEAL BEFORE THE COMMISSIONER OF INCOME TAX (APPEA LS). 11. IN THE APPELLATE PROCEEDINGS, THE LD. AUTHORISED REPRESENTATIVE REITERATED THE SUBMISSIONS MADE BEFO RE ASSESSING OFFICER AND SUPPORTED THE CASE WITH VARIOUS PROVISI ONS AND CASE LAWS TO PROVE THAT THERE IS NO PERMANENT ESTABLISHMENT I N INDIA AND FILED WRITTEN SUBMISSIONS. THE LD. COMMISSIONER OF INCOME TAX (APPEALS) CONSIDERED THE FINDINGS AND OBSERVATIONS OF THE ASS ESSING OFFICER AND WRITTEN SUBMISSIONS OF THE ASSESSEE AND DISCUSSED E LABORATELY ON THE ISSUE OF FOREIGN AGENCY COMMISSION AT PAGE 9 TO 13 OF HIS ORDER AND ALLOWED THE GROUND OF THE ASSESSEE. AGGRIEVED BY THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS), THE REVENUE H AS ASSAILED AN APPEAL BEFORE TRIBUNAL. 12. BEFORE US, THE LD. DEPARTMENTAL REPRESENTATIVE ARGU ED THAT THE COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN N OT CONSIDERING THAT THE INCOME HAS ACCRUED AND ARISED IN INDIA AND PROVISIONS OF SEC.195 AND CBDT CIRCULAR AND THE FOREIGN AGENT WH O RECEIVED THE COMMISSION ARE LIABLE TO THE TAXED. THEREFORE, PRA YED THE TRIBUNAL TO SET ASIDE THE COMMISSIONER OF INCOME TAX (APPEALS) ORDER. ITA NO2230/2013 & 390/2014. :- 12 -: 13. CONTRA, THE LD. AUTHORISED REPRESENTATIVE OF THE AS SESSEE RELIED ON THE FINDINGS OF THE COMMISSIONER OF INCOM E TAX (APPEALS) AND SUBSTANTIATED HIS ARGUMENTS ON VARIOUS ASPECTS ALONGWITH HIGH COURT DECISIONS AND FILED PAPER BOOK AND DREW ATTE NTION TO THE VARIOUS ASPECTS OF COMMISSION PAYMENTS AND PLEADED FOR DISM ISSAL OF THE APPEAL. 14. WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATE RIAL ON RECORD AND JUDICIAL DECISIONS. THE CONTENTION OF THE LD. DEPARTMENTAL REPRESENTATIVE BEING THAT PAYMENT MADE TO FOREIGN AGENT ARE LIABLE FOR TDS AND THERE IS NO EVIDENCE TO PROVE THAT THEY DO NOT HAVE ANY ESTABLISHMENT IN INDIA EVEN THE LD. COMMISSIONER OF INCOME TAX (APPEALS) HAS RELIED ON THE OTHER ASPECT WITHOUT CO NSIDERING THE FINDINGS OF THE ASSESSING OFFICER AND CBDT CIRCULAR . THE LD. AUTHORISED REPRESENTATIVE SUBSTANTIATED HIS ARGUMENTS AND DREW OUR ATTENTION TO THE AGREEMENTS WITH THE NON-RESIDENT AT PAGE 1 AND CONFIRMATION LETTER AT PAGE 4 OF THE PAPER BOOK THAT THEY DO NOT HAVE ANY ESTABLISHMENT IN INDIA AND EXCLUSIVELY DEAL OUTSIDE INDIA. FURTHER SUBSTANTIATED THE GROUNDS WITH THE DEBIT NOTE RAISE D IN RESPECT OF FOREIGN AGENT AND JURISDICTIONAL HIGH COURT DECISIO NS. THE ASSESSEE HAS NOT SUBSTANTIATE WITH THE TYPE OF WORKS UNDERTAKEN BY FOREIGN AGENT AND VOLUME OF BUSINESS CONDUCTED BY THEM IN PROPORT IONATE TO TOTAL ITA NO2230/2013 & 390/2014. :- 13 -: TURNOVER AND ALSO THERE IS NO CONFIRMATION PRODUCED IN RESPECT OF COMMISSION S BY FOREIGN AGENT. CONSIDERING THE FAC TS, WE SET ASIDE THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS) AND R EMIT THE ISSUE TO THE ASSESSING OFFICER FOR LIMITED PURPOSE TO VERIFY THE GENUINENESS OF TRANSACTION WHETHER FOREIGN AGENT HAVE PAID TAXES IN THEIR COUNTRY. WE RELY ON THE CO-ORDINATE BENCH DECISION IN THE CA SE OF ACIT VS. EUOR LEDER FASHIONS LTD (2015) 44 ITR (TRIB) 571(CHENNAI ) OBSERVED AT PARA 10 & 11 AS UNDER:- THE AFORESAID CLAUSE MAKES IT CLEAR THAT THE DISALLOWANCE SHALL BE MADE IN CASE OF ANY PAYMENT MADE WHICH IS CHARGEABLE UNDER THIS ACT AND IS PAYA BLE OUTSIDE INDIA OR IN INDIA TO A NONRESIDENT NOT BEIN G A COMPANY OR TO A FOREIGN COMPANY ON WHICH TAX IS DEDUCTIBLE AT SOURCE. THEREFORE, THE FIRST CONDITIO N REQUIRED TO BE FULFILLED IS THE PAYMENT MUST BE CHARGEABLE UNDER THE ACT, THEREAFTER THE QUESTION O F DEDUCTION OF TAX WILL ARISE. SECTION 195 (1) OF THE ACT ALSO PRESCRIBES THAT TAX HAS TO BE DEDUCTED WHILE M AKING PAYMENT TO NON-RESIDENT WHICH IS CHARGEABLE UNDER T HE PROVISIONS OF THE ACT. THEREFORE, THE CONDITION PRE CEDENT FOR DEDUCTION OF TAX IS THE INCOME MUST BE CHARGEAB LE UNDER THE PROVISIONS OF THE ACT. IN THE FACTS OF TH E PRESENT CASE, THE ASSESSEE HAS NOT PRODUCED THE AGREEMENT ENTERED INTO BY THE ASSESSEE WITH FOREIGN AGENTS TO SHOW THAT THEY WERE APPOINTED TO ACT AS COMMISSION AGENTS OUTSIDE INDIA IN THEIR RESPECTIVE COUNTRIES. THE AO HAS DISALLOWED COMMISSION PAYMENT U/S 40(A)(I) OF THE ACT, SINCE, THERE WAS NO AGREEM ENT TO SUGGEST THE PAYMENT OF SALES COMMISSION. AS SEEN FROM THE ORDER S OF THE LOWER AUTHORITIES, THE ASSESSEE HAS NOT DISCHARGED THE BURDEN CAST UPON IT TO SHOW THE NATURE OF SERVICES RENDERED BY NON-RESIDEN T AGENT. IF THERE ARE SERVICES RENDERED BY NON-RESIDE NTS, ITA NO2230/2013 & 390/2014. :- 14 -: WHO HAVE NO PERMANENT ESTABLISHMENT IN INDIA OR HAV E ANY BUSINESS CONNECTION IN INDIA, BY VIRTUE OF WHIC H THE PAYMENT OF COMMISSION ACCRUED OR AROSE IN INDIA THE N, IT IS EXEMPTED, IF THE ASSESSEE IS ABLE TO PROVE TH AT THE SERVICES WERE RENDERED BY THOSE NON-RESIDENTS AT ABROAD. IN THE PRESENT CASE, THE ASSESSEE HAS NOT ESTABLISHED THE FACTS ON RECORD THAT THE NON-RESIDE NT HAS RENDERED SERVICES AT ABROAD AND THERE IS NO BUSINES S CONNECTION IN INDIA BY PRODUCING RELEVANT RECORDS, VIZ., EITHER AGREEMENT ENTERED INTO BY THE ASSESSEE WITH THEM OR CORRESPONDENCE TOOK BETWEEN THE PARTIES. WITHOUT EXAMINING THESE DETAILS, WE ARE NOT IN A POSITION TO DECIDE THE NATURE OF SERVICES RENDERED BY THE NON-RESIDENT AGENT. THEREFORE, IT IS APPROPRIATE TO REMIT THE ENTIRE ISSUE BACK TO THE FILE OF THE AO WITH DI RECTION TO THE ASSESSEE TO PROVE THAT IT WAS SALES COMMISSI ON TOWARDS PROCUREMENT OF ORDERS FROM ABROAD. ACCORDINGLY, THE ENTIRE ISSUE IS REMITTED BACK TO T HE FILE OF THE AO FOR FRESH CONSIDERATION AND THE AO IS DIR ECTED TO MAKE NECESSARY ENQUIRY REGARDING THE NATURE OF SERVICES RENDERED BY THE NON-RESIDENT AGENT AND THE PAYMENTS MADE THEREOF. WITH THESE OBSERVATIONS, THE APPEAL IS ALLOWED FOR STATISTICAL PURPOSES. RESPECTFULLY, FOLLOWING THE DECISION OF CO-ORDINATE BENCH, WE REMIT THE ISSUE TO THE FILE OF ASSESSING OFFICER FOR VERIFICA TION AND EXAMINATION AND THE APPEAL OF THE REVENUE IS PARTLY ALLOWED FOR STATISTICAL PURPOSE. 15. . IN THE RESULT, THE APPEAL OF THE DEPARTMENT IN ITA NO.2230/MDS/2013 OF ASSESSMENT YEAR 2010-2011 IS PA RTLY ALLOWED. 16. NOW WE TAKE UP ITA NO.390/MDS/2014 OF ASSESSMENT YE AR 2009-2010 FOR ADJUDICATION. ITA NO2230/2013 & 390/2014. :- 15 -: 17. THE GROUND RAISED BY THE REVENUE THAT COMMISSION ER OF INCOME TAX (APPEALS) ERRED IN CONSIDERING THE CLAIM OF DEDUCTION U/S.80IB OF THE ACT ON JOB WORKS TREATED AS BUSINE SS INCOME AND ALSO NOT CONSIDERING THE FINDINGS OF THE PUNJAB AND HARY ANA HIGH COURT IN THE CASE OF CIT VS. IMPAL FORGE AND ALLIED INDUSTRIES LIMITED WERE INCOME DERIVED FROM A JOB WORK CHARGES RECEIVED F ROM THE PROCESS OF DRY CLEANING IS NOT AN INCOME DERIVED FROM THE INDU STRIAL UNDERTAKING FROM THE MANUFACTURING PROCESS AND THE ASSESSEE IS NOT ENTITLED TO DEDUCTION U/SEC. 80IB OF THE ACT. THE SECOND GROUND THAT COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN ALLOW ING BANK DISCOUNT REPRESENTING GAINS ON THE FOREIGN EXCHANGE FORWARD CONTRACT AS INCOME DERIVED FROM THE INDUSTRIAL UNDERTAKING FROM ELIGIBLE BUSINESS. 18. THE ASSESSEE FILED RETURN OF INCOME FOR THE ASSESS MENT YEAR 2009-10 ON 15.09.2009 ADMITTING AN INCOME OF C2,29, 65,699/- UNDER THE NORMAL PROVISIONS OF THE ACT AND C2,61,00,317/- UNDER THE PROVISIONS OF 115JB OF THE ACT. THE RETURN OF INCO ME WAS PROCESSED U/S.143(1) ON 09.02.2011 RESULTING IN A DEMAND OF C 29,97,289/- AND THE CASE WAS SELECTED FOR SCRUTINY AND THE ASSESSME NT WAS COMPLETED U/S.143(3) OF THE ACT, TREATING RECEIPTS RECEIVED T OWARDS DUTY DRAWBACK AND JOB WORK AS OTHER INCOME AND EXCLUDED FROM BUSINESS ITA NO2230/2013 & 390/2014. :- 16 -: INCOME. AGGRIEVED BY THE ORDER, THE ASSESSEE FILED AN APPEAL BEFORE THE COMMISSIONER OF INCOME TAX (APPEALS). 19. IN THE APPELLATE PROCEEDINGS, THE LD. COMMISSIONER OF INCOME TAX (APPEALS) BASED ON THE SUBMISSIONS AND F INDINGS OF THE ASSESSING OFFICER HAS OBSERVED AT PARA 7 OF HIS ORD ER AND ALLOWED THE GROUND OF THE ASSESSEE AND DIRECTED THE ASSESSING O FFICER TO ALLOW TO TREAT THE JOB WORKS AS INCOME FROM BUSINESS AND ALL OW DEDUCTION. AGGRIEVED BY THE COMMISSIONER OF INCOME TAX (APPEAL S) ORDER, THE REVENUE HAS ASSAILED AN APPEAL BEFORE TRIBUNAL. 20. BEFORE US, THE LD. DEPARTMENTAL REPRESENTATIVE AGI TATED THE GROUNDS AND ALSO COMMISSIONER OF INCOME TAX (APPEAL S) ERRED IN CONSIDERING THE FACTS THAT JOB WORKS ARE IN THE NAT URE OF BUSINESS AND DEDUCTION BE DISALLOWED AND FURTHER SUBSTANTIATED H IS ARGUMENTS WITH THE JUDICIAL DECISIONS AND PRAYED FOR SET ASIDE OF THE ORDER OF COMMISSIONER OF INCOME TAX (APPEALS). 21. ON THE OTHER HAND, THE LD. AUTHORISED REPRESENTATIV E RELIED ON THE FINDINGS OF THE COMMISSIONER OF INCOME TAX (APPEALS) AND THE JUDICIAL DECISIONS AND OPPOSED THE GROUND. ITA NO2230/2013 & 390/2014. :- 17 -: 22. WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATE RIAL ON RECORD AND JUDICIAL DECISIONS. THE CONTENTION OF THE LD. AUTHORISED REPRESENTATIVE BEING THAT THE NATURE OF JOB WORKS A RE SIMILAR TO THE BUSINESS AND THE ASSESSEE HAS RIGHTFULLY CLAIMED DE DUCTION IN RESPECT OF SEC 80IB OF THE ACT AND WE RELY ON THE FINDINGS OF CIT VS. IMPEL FORGE & ALLIED INDUSTRIES LTD 326 ITR 27 WERE IT WAS HELD THAT ONCE IT IS FOUND THAT THE ASSESSEE IS DERIVING INCOME FROM ELIGIBLE BUSINESSES COVERED BY SEC.80IB, APART FROM OTHER CONDITIONS, T HE ASSESSEE IS AT LIBERTY TO DO MANUFACTURING ACTIVITY NOT ONLY FOR H IMSELF BUT FOR OTHERS ALSO. CONSEQUENTLY PROFITS DERIVED FROM JOB WORK D ONE FOR OTHERS ALSO QUALITY FOR DEDUCTION UNDER SEC. 80IB OF THE ACT A ND FURTHER SUPPORTED WITH THE DECISION OF CIT VS. SADHU FORGING LTD 336 ITR 444 WERE IT WAS HELD THAT ACTIVITY OF FORGING WHICH INVOLVES HE AT TREATMENT OF MATERIAL TO PRODUCE AUTOMOBILE PARTS IS MANUFACTU RE AND, THEREFORE, LABOUR CHARGES AND JOB WORK CHARGES EARNED BY THE A SSESSEE FOR DOING THE JOB OF FORGING FOR CUSTOMERS ARE GAINS DERIVED FROM INDUSTRIAL UNDERTAKINGS AND THE SAME ARE ENTITLED FOR DEDUCTIO N UNDER SEC. 80IB OF THE ACT. WE CONSIDERED THE SUBMISSIONS AND FIN DINGS OF THE LD. DEPARTMENTAL REPRESENTATIVE ON THE ORDER OF COMMIS SIONER OF INCOME TAX (APPEALS) WHICH LACKS CLARITY AND THE CLAIM OF JOB WORKS BY THE LD. ITA NO2230/2013 & 390/2014. :- 18 -: AUTHORISED REPRESENTATIVE DOES NOT SPECIFY THE NA TURE OF WORK UNDERTAKEN BY THE ASSESSEE COMPANY AND THE SAME WAS NOT REFLECTED BY THE ASSESSING OFFICER IN HIS ORDER NOR ASSESSEE HAS PRODUCED RELEVANT MATERIALS ON RECORD TO EXPLAIN THE NATURE OF JOB WORKS UNDERTAKEN AND JOB WORKS CHARGES TAKES THE CHARACTE RISTIC OF BUSINESS INCOME. EVEN BEFORE US, THE LD. AUTHORISED REPRESEN TATIVE COULD NOT SUBSTANTIATE THE WORKING CRITERIA OF NATURE OF JOB WORKS WITH ANY SUPPORTING MATERIAL IN RESPECT OF PARTICULAR PRODUC T AND FURTHER THERE IS NO DISCUSSION ON THE PRODUCT USED IN JOB WORKS B Y THE COMMISSIONER OF INCOME TAX (APPEALS). WE ARE OF THE OPINION TH AT THE MATTER HAS TO BE RE-EXAMINED FOR LIMITED PURPOSES TO VERIFYING THE NATURE OF JOB WORKS FOR CAPTIVE CONSUMPTION OR FOR OTHERS. THERE FORE, WE DEEM IT NECESSARY TO SET ASIDE THE IMPUGNED ORDER OF COMMIS SIONER OF INCOME TAX (APPEALS) AND REMIT THE FILE TO THE ASSESSING O FFICER TO PASS THE ORDER ON ABOVE FINDINGS AND ASSESSING OFFICER SHALL ALSO PROVIDED ADEQUATE OPPORTUNITY OF BEING HEARD TO THE ASSESSEE . THIS GROUND OF THE DEPARTMENT IS PARTLY ALLOWED FOR STATISTICAL PU RPOSE. 23. THE ASSESSING OFFICER IN THE ASSESSMENT PROCEEDINGS FOUND THAT THE ASSESSEE HAS CLAIMED BANK DISCOUNT ON FORE IGN EXCHANGE FORWARD CONTRACT AS INCOME DERIVED FROM ELIGIBLE B USINESS AND SUCH DISCOUNT REPRESENT GAIN ON FOREIGN EXCHANGE FORWARD CONTRACT AND ITA NO2230/2013 & 390/2014. :- 19 -: DIRECTLY ATTRIBUTABLE TO THE BUSINESS AND DEDUCTIO N U/S.80IB OF THE ACT. BUT THE ASSESSING OFFICER HAS DENIED THE CLAIM. AG GRIEVED BY THE ORDER, THE ASSESSEE FILED AN APPEAL BEFORE COMMISSI ONER OF INCOME TAX (APPEALS). 24. IN THE APPELLATE PROCEEDINGS, THE LD. COMMISSIONER OF INCOME TAX (APPEALS) CONSIDERED THE GROUNDS, WRITTE N SUBMISSIONS AND DECISION OF APEX COURT BASED ON THE SUBMISSION S OF THE ASSESSEE AT PARAS 8.1 AND 8.2 OF HIS ORDER AS UNDER:- WITH REGARD TO ALLOWABILITY OF DISCOUNT FOR COMPUTI NG DEDUCTION U/S 80-IB, ASSEESSEE SUBMITTED AS UNDER THE BANK DISCOUNT REPRESENTS GAINS ON THE FOREIGN EXCHANGE FORWARD CONTRACT. AS SOON AS WE BOOK THE O RDER OF OUR READYMADE GARMENTS ABROAD IN USD OR IN EURO; WE HEDGE IT BY ENTERING WITH THE BANK FORWARD COVER TO PREVENT ANY EROSION IN EXCHANGE RATE AT THE TIME OF SHIPMENT. SOMETIMES THE SHIPMENT TAKES PLACE BEYOND THE EXPECTED PERIOD WHEN WE HAVE BEEN OBLIGED TO CA NCEL THE FORWARD CONTRACT. THE BANKERS PASS ON THE BENEF IT ON FOREIGN EXCHANGE CONTRACT BY CREDITING TO OUR ACCOU NT AND LOSS TO THE DEBIT OUR ACCOUNT. THIS IS IN THE COURS E OF EXPORT TRADE. THEREFORE THE EXCHANGE GAIN ON HEDGIN G IS IN THE NATURE OF EXPORT TRADE. THE DECISION OF THE APEX COURT IN CIT VS. WOODWARD GOVERNOR INDIA (P) LTD. ( 312 ITR 254 (SC) WILL APPLY AND IT CANNOT BE TREATED AS AN INCOME UNDER 'OTHER SOURCES' AND RELIEF UNDER SECTI ON 80LB CANNOT BE DENIED. AS PER AS11 THE INCOMES OR LOSSES ARISING IN FOREIG N CURRENCY TRANSACTION HAVE TO BE RECOGNIZED AS INCOM E OR EXPENSES AND HENCE IT IS CLEARLY BUSINESS INCOME AN D NEITHER IT CAN BE ASSESSED UNDER 'OTHER SOURCES' NO R RELIEF UNDER SECTION 80IB DENIED. 8.2 THUS DISCOUNT WHICH REPRESENTS GAINS IN FOREIGN EXCHANGE IS DIRECTLY ATTRIBUTABLE TO THE BUSINESS O F THE ASSESSEE ITA NO2230/2013 & 390/2014. :- 20 -: I.E. EXPORTS AND IS ON REVENUE ACCOUNT. FOLLOWING T HE DECISION OF THE APEX COURT IN CIT VS WOODWARD GOVERNOR INDIA (P ) LTD 312 ITR 254(SC) THE ASSESSING OFFICER IS DIRECTED TO AL LOW THE CLAIM OF THE ASSESSEE FOR THIS DEDUCTION UNDER SECTION 80 IB. AND ALLOWED THE GROUND OF THE ASSESSEE. AGGRIEVED BY THE ORDER, THE REVENUE HAS ASSAILED AN APPEAL BEFORE TRIBUNAL. 25. IN THE APPELLATE PROCEEDINGS, THE LD. DEPARTMENTAL REPRESENTATIVE CONTENTION THAT THE ASSESSEE IS NOT ELIGIBLE FOR DEDUCTION U/S.80IB OF THE ACT IN RESPECT OF FOREIGN EXCHANGE FORWARD CONTRACT AND RELIED ON THE FINDINGS OF THE ASSESSIN G OFFICER AND COMMISSIONER OF INCOME TAX (APPEALS) ERRED IN DIREC TING THE ASSESSING OFFICER TO ALLOW THE CLAIM WERE THE CHARACTERISTIC OF PROFIT DERIVED FROM FOREIGN EXCHANGE CONTRACT ARE NOT ELIGIBLE FOR DEDU CTION AND SUCH SPECULATIVE BUSINESS CANNOT BE CONSIDERED FOR CLAIM OF DEDUCTION. 26. ON THE OTHER HAND, THE LD. AUTHORISED REPRESENTATIV E RELIED ON THE FINDINGS OF THE COMMISSIONER OF INCOME TAX ( APPEALS) AND SUPPORTED HIS ARGUMENTS WITH THE JUDICIAL DECISION S. 27. WE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATE RIAL ON RECORD AND JUDICIAL DECISIONS. THE CONTENTION OF T HE LD. DEPARTMENTAL REPRESENTATIVE THAT NATURE OF TRANSACTION OF FOREIG N EXCHANGE GAIN IS SPECULATION AND THEY ARE NOT ELIGIBLE FOR ANY BENEF IT FOR ELIGIBLE ITA NO2230/2013 & 390/2014. :- 21 -: BUSINESS. THERE IS NO NEXUS PROVIDED WITH RESPECT TO BUSINESS ACTIVITIES. PRIME FACIE THE ASSESSEE ENTERS INTO IN TERNATIONAL BUSINESS TRANSACTIONS AND SUCH FOREIGN EXCHANGE GAIN SHOULD BE PART OF THE BUSINESS ACTIVITY. THE ACTIVITY OF RATE DIFFERENCE ARISED DIRECTLY RELATED TO THE SALE TRANSACTION INVOLVING EXPORT OF GOODS O F INDUSTRIAL UNDERTAKING. WE RELY ON THE DECISION OF JURISDICTI ONAL HIGH COURT IN THE CASE OF CIT VS. PENTASOFT TECHNOLOGIES LTD 347 ITR 578 (MAD ) WERE IT WAS HELD THAT IN ORDER TO ALLOW A CLAIM UND ER SECTION 10A WHAT ALL IS TO BE SEEN IS WHETHER SUCH BENEFIT EARNED BY THE ASSESSEE WAS DERIVED BY VIRTUE OF EXPORT MADE BY THE ASSESSEE. THE EXCHANGE VALUE BASED ON UPWARD OR DOWNWARD OF THE RUPEE VALU E IS NOT IN THE HANDS OF THE ASSESSEE. THEREFORE, WHEN THE FLUCTUA TION IN FOREIGN EXCHANGE RATE WAS SOLELY RELATABLE TO THE EXPORT BU SINESS OF THE ASSESSEE, AND THE HIGHER RUPEE VALUE WAS EARNED BY VIRTUE OF SUCH EXPORTS CARRIED OUT BY THE ASSESSEE, THE BENEFIT OF SECTION 10A SHOULD ALLOWED TO THE ASSESSEE IN RESPECT OF SUCH GAIN AND ALSO RELIED ON BOMBAY HIGH COURT DECISION IN THE CASE OF CIT VS. RACHNA UDHYOG 230 CIT 72 WERE IT WAS HELD THAT EXCHANGE RATE DIFFERENCE ARI SES AND IS DIRECTLY RELATED TO SALE TRANSACTION INVOLVING EXPO RT OF GOODS OF THE INDUSTRIAL UNDERTAKINGS AND, THEREFORE, THE DIFFERE NCE ON ACCOUNT OF EXCHANGE RATE FLUCTUATION IS ENTITLED TO DEDUCTION UNDER SECTION 80IB OF THE ACT. CONSIDERING APPARENT FACTS WE ARE NOT INCL INED TO INTERFERE ITA NO2230/2013 & 390/2014. :- 22 -: WITH THE ORDER OF COMMISSIONER OF INCOME TAX (APPEA LS) AND DISMISS THE GROUND OF THE REVENUE. 28. IN THE RESULT, THE APPEAL OF THE REVENUE IN ITA NO.390/MDS/2014 IS PARTLY ALLOWED. 29. TO SUM UP, THE APPEALS OF THE REVENUE IN ITA NOS. 2230/MDS/2013 AND 390/MDS/2014 ARE PARTLY ALLOWED. ORDER PRONOUNCED ON WEDNESDAY, THE 27TH DAY OF A PRIL, 2016, AT CHENNAI. SD/- SD/- ( ) (CHANDRA POOJARI) / ACCOUNTANT MEMBER ( . ! ) (G. PAVAN KUMAR) /JUDICIAL MEMBER / CHENNAI / / DATED:27.04.2016 KV 0 ( *',12 32%, / COPY TO: 1 . &' / APPELLANT 3. 4, () / CIT(A) 5. 278 *',' / DR 2. *+&' / RESPONDENT 4. 4, / CIT 6. 89$ : / GF