DCIT, Hubli V. M/s Flowserve Microfinish Valves Pvt. Ltd., Hubli

ITA 477/BANG/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 57473 (ITAT-BANGALORE)
• Duration Of Justice: 9 month(s) 20 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 15-02-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: A
• Assessment Year: 2007-2008
• Appeal Filed On: 25-04-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: SARAVANAN R JT
• Keywords: Business income
• Section: 143(3); 80HHC; 10B; 10

Judgement Text

PAGE 1 OF 9 ITA NO.4 77/BANG/2011 1 INCOME TAX APPELLATE TRIBUNAL BANGALORE BENCHES A BEFORE SHRI N K SAINI, ACCOUNANT MEMBER AND SHRI GEORGE GEORGE K, JUDICIAL MEMBER ITA NO.477/BANG/2011 (ASST. YEAR 2007-08) THE DEPUTY COMMISSIONER OF INCOME TAX, CIRCLE-2(1), HUBLI. VS M/S FLOWSERVE MICROFINISH VALVES PVT. LTD., 568/1, INDUSTRIAL AREA, GOKUL ROAD, HUBLI. PA NO.AAACF3990R (APPELLANT) (RESPONDENT) DATE OF HEARING 15.02.2012 DATE OF PRONOUNCEMENT 15.02.2012 APPELLANT BY : SHRI SARAVANAN R, JT.CIT RESPONDENT BY : SHRI MALTESH G SORATUR, SR. ACCOUNTS OFFICER O R D E R PER GEORGE GEORGE K : THIS APPEAL INSTITUTED BY THE REVENUE IS DIRECTED AGAINST THE ORDER OF THE LD. CIT(A), HUBLI DATED 18.01.2011. T HE RELEVANT ASSESSMENT YEAR IS 2007-08. 2. THE EFFECTIVE GROUNDS READ AS UNDER:- I) THE LEARNED CIT(A) ERRED IN DIRECTING THE ASSESSING OFFICER TO EXCLUDE THE EXPENSES OF RS.43,37,002/- W HICH WERE DEDUCTED FROM THE EXPORT TURNOVER, CORRESPONDINGLY ALSO FROM THE TOTAL TURNOVER FOR THE PURPOSE OF DETERMINING THE EXEMPTION UNDER SECTION 10B OF THE I T ACT. PAGE 2 OF 9 ITA NO.4 77/BANG/2011 2 II) THE LEARNED CIT(A) OUGHT TO HAVE CONSIDERED THAT TH E TOTAL TURNOVER INCLUDES EXPORT TURNOVER AND ADJUSTM ENTS ARE MADE TO THE EXPORT TURNOVER TO DETERMINE EXACT AMOUNT OF EXPORT TURNOVER. THERE IS NO SPECIFIC PR OVISION TO REDUCE SUCH ADJUSTMENTS FROM THE TOTAL TURNOVER. III) THE LEARNED CIT(A) HAS FAILED TO CONSIDER THAT THE MERE REIMBURSEMENT OF EXPENSES BY THE IMPORTER TO THE ASSESSEE WILL NOT CHANGE THE CHARACTER OF DEFINITIO N OF TOTAL TURNOVER I.E. THE TURNOVER IS NOTHING BUT CONSIDERATION RECEIVED IN LIEU OF TRANSACTION OF A COMMODITY, THEREFORE, EXPENDITURE CANNOT FORM THE PA RT OF TURNOVER. 3. BRIEFLY STATED THE FACTS ARE AS FOLLOWS:- THE ASSESSEE IS A COMPANY. IT IS ENGAGED IN THE B USINESS OF MANUFACTURE AND EXPORT OF VALVES. FOR THE CONCERNE D ASSESSMENT YEAR, RETURN OF INCOME WAS FILED ON 31/10/2007 DECLARING AN INCOME OF RS.15,41,510/- AFTER CLAIMING DEDUCTION UNDER SECTI ON 10B OF THE ACT AMOUNTING TO RS.5,51,87,381/-. SCRUTINY ASSESSMENT UNDER SECTION 143(3) WAS COMPLETED VIDE ORDER DATED 4/12/2009. THE ASSE SSING OFFICER IN THE SCRUTINY ASSESSMENT RE-COMPUTED THE DEDUCTION UNDER SECTION 10B OF THE ACT. THE ASSESSING OFFICER REDUCED PACKING CHARGES OF RS.14,01,370/-, FREIGHT CHARGES OF RS.10,02,844/-, INSURANCE OF RS. 5,74,872/-, TRAVELLING RS.1,25,665, TOOLING CHARGES RS.2,38,651/- AND CLEA RING CHARGES OF RS.9,93,600/- TOTALING TO RS.43,37,002/- AS ATTRIBU TABLE TO THE DELIVERY OF GOODS OUTSIDE INDIA FROM EXPORT TURNOVER, BUT NOT F ROM TOTAL TURNOVER. AS A RESULT OF RE-COMPUTATION OF INCOME, THE ASSESSING O FFICER ARRIVED AT THE TOTAL INCOME AT RS.80,72,650/- AS AGAINST THE RETUR NED INCOME OF RS.15,41,506/-. PAGE 3 OF 9 ITA NO.4 77/BANG/2011 3 4. AGGRIEVED, THE ASSESSEE CARRIED THE MATTER IN A PPEAL BEFORE THE FIRST APPELLATE AUTHORITY. 5. THE FIRST APPELLATE AUTHORITY ALLOWED THE APPEA L OF THE ASSESSEE AND DIRECTED THE ASSESSING OFFICER TO EXCLUDE THE E XPENSES OF RS.43,37,002/- BOTH FROM THE EXPORT TURNOVER AS WEL L AS FROM THE TOTAL TURNOVER WHILE COMPUTING DEDUCTION UNDER SECTION 10 B OF THE ACT. THE CIT(A) PLACED RELIANCE ON THE ORDERS OF THE TRIBUNA L IN ASSESSEES OWN CASE FOR THE ASSESSMENT YEARS 2003-04 AND 2004-05 (ITA NO S.941 AND 942/BANG/2008). THE CIT(A) ALSO RELIED ON THE ORDE R OF THE SPECIAL BENCH OF THE TRIBUNAL IN THE CASE OF ITO V M/S SAK SOFT L TD. 313 ITR (AT) 353. 6. THE REVENUE BEING AGGRIEVED IS IN APPEAL BEFORE US. 7. THE REPRESENTATIVE OF THE ASSESSEE COMPANY SUBMI TTED THAT THE ISSUE UNDER CONSIDERATION IS COVERED IN FAVOUR OF THE COMPANY IN ITS OWN CASE BY THE JUDGEMENT OF THE HONBLE KARNATAKA HIGH COURT IN ITA NO.5029/2009 DATED 28 TH OCTOBER, 2011. A COPY OF THE JUDGEMENT OF THE HONBLE JURISDICTIONAL HIGH COURT IN ASSESSEES OWN CASE IS PLACED ON RECORD FROM PAGES 74 TO 78 OF THE PAPER BOOK FILED BY THE A SSESSEE COMPANY. 8. THE LEARNED DR WAS UNABLE TO CONTROVERT THE SUB MISSION MADE BY THE REPRESENTATIVE OF THE ASSESSEE COMPANY. 9. WE HAVE HEARD THE RIVAL SUBMISSIONS AND PERUSED THE MATERIALS ON RECORD. THE ISSUE IN QUESTION IS SQUARELY COVERE D BY THE JUDGEMENT OF THE HONBLE JURISDICTIONAL HIGH COURT IN ASSESSEES OWN CASE CITED SUPRA. THE HONBLE JURISDICTIONAL HIGH COURT HAD FOLLOWED ITS EARLIER JUDGEMENT IN THE PAGE 4 OF 9 ITA NO.4 77/BANG/2011 4 CASE OF CIT V TATA ELXSI LTD. & OTHERS (2011-TIOL-6 84-HC-KAR-II). THE HONBLE KARNATAKA HIGH COURT IN THE CASE OF CIT V M /S TATA ELXSI LTD. & OTHERS HAD HELD THAT WHILE COMPUTING THE EXEMPTION U/S 10A, IF THE EXPORT TURNOVER IN THE NUMERATOR IS TO BE ARRIVED AT AFTER EXCLUDING CERTAIN EXPENSES, THE SAME SHOULD ALSO BE EXCLUDED FROM THE TOTAL TURNOVER (DENOMINATOR). THE RELEVANT FINDING OF THE HONBLE JURISDICTIONAL HIGH COURT READS AS FOLLOWS:- ..SECTION 10A IS ENACTED AS AN INCENTIVE TO EXP ORTERS TO ENABLE THEIR PRODUCTS TO BE COMPETITIVE IN THE G LOBAL MARKET AND CONSEQUENTLY EARN PRECIOUS FOREIGN EXCHAN GE FOR THE COUNTRY. THIS ASPECT HAS TO BE BORNE IN MIN D. WHILE COMPUTING THE CONSIDERATION RECEIVED FROM SUC H EXPORT TURNOVER, THE EXPENSES INCURRED TOWARDS FREI GHT, TELECOMMUNICATION CHARGES, OR INSURANCE ATTRIBUTABL E TO THE DELIVERY OF THE ARTICLES OR THINGS OR COMPUTER SOFTWARE OUTSIDE INDIA, OR EXPENSES IF ANY INCURRED IN FOREIGN EXCHANGE, IN PROVIDING THE TECHNICAL SERVIC ES OUTSIDE INDIA SHOULD NOT BE INCLUDED. HOWEVER, THE WORD TOTAL TURNOVER IS NOT DEFINED FOR THE PURPOSE OF TH IS SECTION. IT IS BECAUSE OF THIS OMISSION TO DEFINE TOTAL TURNOVER, THE WORD TOTAL TURNOVER FALLS FOR INTERPRETATION BY THIS COURT; ..IN SECTION 10A, NOT ONLY THE WORD TOTAL TURNOVE R IS NOT DEFINED, THERE IS NO CLUE REGARDING WHAT IS TO BE EXCLUDED WHILE ARRIVING AT THE TOTAL TURNOVER. HOW EVER, WHILE INTERPRETING THE PROVISIONS OF SECTION 80HHC, THE COURTS HAVE LAID DOWN VARIOUS PRINCIPLES, WHICH ARE INDEPENDENT OF THE STATUTORY PROVISIONS. THERE SHOU LD BE UNIFORMITY IN THE INGREDIENTS OF BOTH THE NUMERATOR AND THE DENOMINATOR OF THE FORMULA, SINCE OTHERWISE IT WOULD PRODUCE ANOMALIES OR ABSURD RESULTS. SECTION 10A I S A BENEFICIAL SECTION WHICH INTENDS TO PROVIDE INCENTI VES TO PROMOTE EXPORTS. IN THE CASE OF COMBINED BUSINESS OF AN PAGE 5 OF 9 ITA NO.4 77/BANG/2011 5 ASSESSEE, HAVING EXPORT BUSINESS AND DOMESTIC BUSIN ESS, THE LEGISLATURE INTENDED TO HAVE A FORMULA TO ASCER TAIN THE PROFITS FROM EXPORT BUSINESS BY APPORTIONING THE TOTAL PROFITS OF THE BUSINESS ON THE BASIS OF TURNO VERS. APPORTIONMENT OF PROFITS ON THE BASIS OF TURNOVER W AS ACCEPTED AS A METHOD OF ARRIVING AT EXPORT PROFITS. IN THE CASE OF SECTION 80HHC, THE EXPORT PROFIT IS TO BE DERIVED FROM THE TOTAL BUSINESS INCOME OF THE ASSXCESSEE, WHEREAS IN SECTION 10-A, THE EXPORT PRO FIT IS TO BE DERIVED FROM THE TOTAL BUSINESS OF THE UNDERT AKING. EVEN IN THE CASE OF BUSINESS OF AN UNDERTAKING, IT MAY INCLUDE EXPORT BUSINESS AND DOMESTIC BUSINESS, IN O THER WORDS, EXPORT TURNOVER AND DOMESTIC TURNOVER. TO T HE EXTENT OF EXPORT TURNOVER, THERE WOULD BE A COMMONA LITY BETWEEN THE NUMERATOR AND THE DENOMINATOR OF THE FORMULA. IF THE EXPORT TURNOVER IN THE NUMERATOR I S TO BE ARRIVED AT AFTER EXCLUDING CERTAIN EXPENSES, THE SAME SHOULD ALSO BE EXCLUDED IN COMPUTING THE EXPORT TUR NOVER AS A COMPONENT OF TOTAL TURNOVER IN THE DENOMINATOR . THE REASON BEING THE TOTAL TURNOVER INCLUDES EXPORT TUR NOVER. THE COMPONENTS OF THE EXPORT TURNOVER IN THE NUMERA TOR AND THE DENOMINATOR CANNOT BE DIFFERENT. THEREFORE , THOUGH THERE IS NO DEFINITION OF THE TERM TOTAL TU RNOVER IN SECTION 10A, THERE IS NOTHING IN THE SAID SECTIO N TO MANDATE THAT, WHAT IS EXCLUDED FROM THE NUMERATOR T HAT IS EXPORT TURNOVER WOULD NEVERTHELESS FORM PART OF THE DENOMINATOR. WHEN THE STATUTE PRESCRIBED A FORMULA AND IN THE SAID FORMULA, EXPORT TURNOVER IS DEFINED, AND WHEN THE TOTAL TURNOVER INCLUDES EXPORT TURNOVER, THE VERY SAME MEANING GIVEN TO THE EXPORT TURNOVER BY THE LEGISLATURE IS TO BE ADOPTED WHILE UNDERSTANDING TH E MEANING OF THE TOTAL TURNOVER, WHEN THE TOTAL TURNO VER INCLUDES EXPORT TURNOVER. IF WHAT IS EXCLUDED IN COMPUTING THE EXPORT TURNOVER IS INCLUDED WHILE ARR IVING AT THE TOTAL TURNOVER, WHEN THE EXPORT TURNOVER IS A COMPONENT OF TOTAL TURNOVER, SUCH AN INTERPRETATION WOULD RUN COUNTER TO THE LEGISLATIVE INTENT AND IMPERMISSIBLE. THUS, THERE IS NO ERROR COMMITTED B Y THE PAGE 6 OF 9 ITA NO.4 77/BANG/2011 6 TRIBUNAL IN FOLLOWING THE JUDGEMENTS RENDERED IN TH E CONTEXT OF SECTION 80HHC IN INTERPRETING SECTION 10 A WHEN THE PRINCIPLE UNDERLYING BOTH THESE PROVISIONS IS ONE AND THE SAME. 9.1 THE HONBLE MUMBAI HIGH COURT IN THE CASE OF G EM PLUS JEWELLERY INDIA LTD. (SUPRA), IN IDENTICAL CIRCUMSTA NCES, HELD THAT SINCE THE EXPORT TURNOVER FORMS PART OF THE TOTAL TURNOVER, I F AN ITEM IS EXCLUDED FROM THE EXPORT TURNOVER, THE SAME SHOULD ALSO BE R EDUCED FROM THE TOTAL TURNOVER TO MAINTAIN PARITY BETWEEN NUMERATOR AND DE NOMINATOR WHILE CALCULATING DEDUCTION U/S 10A OF THE ACT. THE RELE VANT FINDING OF THE HONBLE MUMBAI HIGH COURT READS AS FOLLOWS:- THE TOTAL TURNOVER OF THE BUSINESS CARRIED ON BY TH E UNDERTAKING WOULD CONSIST OF THE TURNOVER FROM EXPO RT AND THE TURNOVER FROM LOCAL SALES. THE EXPORT TURNOVER CONSTITUTES THE NUMERATOR IN THE FORMULA PRESCRIBED BY SUB-SECTION (4). EXPORT TURNOVER ALSO FORMS A CONS TITUENT ELEMENT OF THE DENOMINATOR IN AS MUCH AS THE EXPORT TURNOVER IS A PART OF THE TOTAL TURNOVER. THE EXPO RT TURNOVER, IN THE NUMERATOR MUST HAVE THE SAME MEANI NG AS THE EXPORT TURNOVER WHICH IS CONSTITUENT ELEMENT OF THE TOTAL TURNOVER IN THE DENOMINATOR. THE LEGISLATURE HAS PROVIDED A DEFINITION OF THE EXPRESSION EXPORT TUR NOVER IN EXPLN.2 TO S.10A WHICH THE EXPRESSION IS DEFINED TO MEAN THE CONSIDERATION IN RESPECT OF EXPORT BY THE UNDERT AKING OF ARTICLES, THINGS OR COMPUTER SOFTWARE RECEIVED I N OR BROUGHT INTO INDIA BY THE ASSESSEE IN CONVERTIBLE FO REIGN EXCHANGE BUT SO AS NOT TO INCLUDE INTER ALIA FREIGH T, TELECOMMUNICATION CHARGES OR INSURANCE ATTRIBUTABLE TO THE DELIVERY OF THE ARTICLES, THINGS OR SOFTWARE OUTSIDE INDIA. THEREFORE IN COMPUTING THE EXPORT TURNOVER THE LEGI SLATURE HAS MADE A SPECIFIC EXCLUSION OF FREIGHT AND INSURA NCE CHARGES. THE SUBMISSION WHICH HAS BEEN URGED ON BE HALF OF THE REVENUE IS THAT WHILE FREIGHT AND INSURANCE CHA RGES ARE PAGE 7 OF 9 ITA NO.4 77/BANG/2011 7 LIABLE TO BE EXCLUDED IN COMPUTING EXPORT TURNOVER, A SIMILAR EXCLUSION HAS NOT BEEN PROVIDED IN REGARD TO TOTAL TURNOVER. THE SUBMISSION OF THE REVENUE, HOWEVER, MISSES THE POINT THAT THE EXPRESSION TOTAL TURNOVER HAS NOT BEEN D EFINED AT ALL BY PARLIAMENT FOR THE PURPOSES OF S.10A. HOW EVER, THE EXPRESSION EXPORT TURNOVER HAS BEEN DEFINED. THE DEFINITION OF EXPORT TURNOVER EXCLUDES FREIGHT AN D INSURANCE. SINCE EXPORT TURNOVER HAS BEEN DEFINED BY PARLIAMENT AND THERE IS A SPECIFIC EXCLUSION OF FRE IGHT AND INSURANCE, THE EXPRESSION EXPORT TURNOVER CANNOT HAVE A DIFFERENT MEANING WHEN IT FORMS A CONSTITUENT PART OF THE TOTAL TURNOVER FOR THE PURPOSES OF THE APPLICATION OF THE FORMULA. UNDOUBTEDLY, IT WAS OPEN TO PARLIAMENT TO MAKE A PROVISION WHICH HAS BEEN ENUNCIATED EARLIER MUST PR EVAIL AS A MATTER OF CORRECT STATUTORY INTERPRETATION. ANY OT HER INTERPRETATION WOULD LEAD TO AN ABSURDITY. IF THE C ONTENTION OF THE REVENUE WERE TO BE ACCEPTED, THE SAME EXPRES SION VIZ. EXPORT TURNOVER WOULD HAVE A DIFFERENT CONNO TATION IN THE APPLICATION OF THE SAME FORMULA. THE SUBMISSIO N OF THE REVENUE WOULD LEAD TO A SITUATION WHERE FREIGHT AND INSURANCE, THOUGH THESE HAVE BEEN SPECIFICALLY EXCLU DED FROM EXPORT TURNOVER FOR THE PURPOSES OF THE NUME RATOR WOULD BE BROUGHT IN AS PART OF THE EXPORT TURNOVER WHEN IT FORMS AN ELEMENT OF THE TOTAL TURNOVER AS A DENOMIN ATOR IN THE FORMULA. A CONSTRUCTION OF A STATUTORY PROVISIO N WHICH WOULD LEAD TO AN ABSURDITY MUST BE AVOIDED. MOREOVE R, A RECEIPT SUCH AS FREIGHT AND INSURANCE WHICH DOES NO T HAVE ANY ELEMENT OF PROFIT CANNOT BE INCLUDED IN THE TOTA L TURNOVER. FREIGHT AND INSURANCE CHARGES DO NOT HAV E ANY ELEMENT OF TURNOVER. FOR THIS REASON IN ADDITION, THESE TWO ITEMS WOULD HAVE TO BE EXCLUDED FROM THE TOTAL TURN OVER PARTICULARLY IN THE ABSENCE OF A LEGISLATIVE PRESCRI PTION TO THE CONTRARY CIT V SUDARSHAN CHEMICALS INDUSTRIES LTD. (2000) 163 CTR (BOM) 596: (2000) 245 ITR 769 (BOM) APPLIED; CIT V LAKSHMI MACHINE WORKS (2007) 210 CTR (SC) 1: (2007) 290 ITR 667 (SC) AND CIT V CATAPHARMA (IN DIA) (P) LTD. (2007) 211 CTR (SC) 83: (2007) 292 ITR 641 (SC) RELIED ON PAGE 8 OF 9 ITA NO.4 77/BANG/2011 8 9.2. IN THE CASE OF SAK SOFT LTD. (SUPRA), THE ASS ESSEE WAS ENGAGED IN THE BUSINESS OF EXPORTING COMPUTER SOFTWARE AND CLAIMED DEDUCTION U/S 10B OF THE ACT. IN COMPLETING THE ASSESSMENT U/S 1 43(3) OF THE ACT, THE AO REDUCED THE EXPENDITURE INCURRED IN FOREIGN EXCH ANGE IN PROVIDING THE TECHNICAL SERVICES OUTSIDE INDIA, FROM THE EXPORT T URNOVER WITHOUT CORRESPONDING REDUCTION FROM TOTAL TURNOVER, THEREB Y REDUCING THE DEDUCTION CLAIMED BY THE ASSESSMENT U/S 10B OF THE A CT. 9.3. IN LIGHT OF THE ABOVE FACTS, THE SPECIAL BENC H HELD AS UNDER:- FOR THE ABOVE REASONS, WE HOLD THAT FOR THE PURPOS E OF APPLYING THE FORMULA UNDER SUB-SECTION (4) OF SECTIO N 10B, THE FREIGHT, TELECOM CHARGES OR INSURANCE ATTRIBUTA BLE TO THE DELIVERY OF ARTICLES OR THINGS OR COMPUTER SOFTW ARE OUTSIDE INDIA OR THE EXPENSES, IF ANY, INCURRED IN F OREIGN EXCHANGE IN PROVIDING THE TECHNICAL SERVICES OUTSID E INDIA ARE TO BE EXCLUDED BOTH FROM THE EXPORT TURNOVER AN D FROM THE TOTAL TURNOVER, WHICH ARE THE NUMERATOR AND THE DENOMINATOR RESPECTIVELY IN THE FORMULA. THE APPEAL S FILED BY THE DEPARTMENT ARE THUS DISMISSED. 9.4 IN THE LIGHT OF THE ABOVE JUDGEMENTS OF THE HO NBLE HIGH COURTS & THE ORDER OF THE SPECIAL BENCH (SUPRA), WE HOLD THAT THE CIT(A) IS JUSTIFIED IN DIRECTING THE ASSESSING OFFICER TO EXC LUDE THE EXPENDITURE TO THE TUNE OF RS.43,,37,002/- BOTH FROM THE EXPORT TU RNOVER AS WELL AS FROM THE TOTAL TURNOVER WHILE CALCULATING DEDUCTION UNDE R SECTION 10B OF THE ACT. PAGE 9 OF 9 ITA NO.4 77/BANG/2011 9 10. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON 15 TH DAY OF FEBRUARY, 2012 SD/- SD/- (N K SAINI) (GEORGE GEORGE K) ACCOUNTANT MEMBER JUDICIAL MEMBER COPY TO:- 1. THE REVENUE 2. THE ASSESSEE 3. THE CIT CONC ERNED 4. THE CIT(A) CONCERNED 5. THE DR 6. GF MSP/- BY ORDER ASST. REGISTRAR, ITAT, BANGALORE.