ITO, Cochin V. Electronic controls & Discharge Systems P.Ltd, Cochin

ITA 78/COCH/2011

• Counselvise Citation: [2012] 140 COUNSELVISE.COM (IT) 64814 (ITAT-COCHIN)
• Duration Of Justice: 1 year(s) 7 month(s) 7 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 07-09-2012
• Appeal Filed By: Department
• Order Result: Dismissed
• Bench Allotted: DB
• Next Hearing Date: 03-09-2012
• Assessment Year: 2006-2007
• Appeal Filed On: 31-01-2011
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Department Lawyers: A S BINDHU
• Keywords: Business income; Deemed export; Capital receipt

Judgement Text

1 ITA NO.77 & 78/COCH/2011 CO NO. 02 & 03/COCH/2011 IN THE INCOME TAX APPELLATE TRIBUNAL COCHIN BENCH, COCHIN BEFORE SHRI N.R.S. GANESAN (JM) AND SHRI B.R. BASKARA N(AM) I.T.A NO. 77 & 78/COCH/2011 (ASSESSMENT YEARS 2005-06 & 2006-07) ITO, WD.1(1) VS M/S ELECTRONIC CONTROLS & KOCHI DISCHARGE SYSTEMS PVT LTD PLOT NO.16A, GARMENTS COMPLEX CSEZ, KAKKANAD, KOCHI PAN : AAACE8837C (APPELLANT) (RESPONDENT) C.O. NOS 02 & 03/COCH/2011 (ARISING OUT OF I.T.A NO. 77 & 78/COCH/2011) (ASSESSMENT YEARS 2005-06 & 2006-07) M/S ELECTRONIC CONTROLS & VS ITO, WD.1(1) DISCHARGE SYSTEMS PVT LTD, CSEZ, KAKKANAD KOCHI (CROSS OBJECTOR) (RESPONDENT) REVENUE BY : SMT. A.S. BINDHU ASSESSEE BY : NONE DATE OF HEARING : 03-09-2012 DATE OF PRONOUNCEMENT : 07-09-2012 2 ITA NO.77 & 78/COCH/2011 CO NO. 02 & 03/COCH/2011 O R D E R PER N.R.S. GANESAN (JM) THE REVENUE FILED THE PRESENT APPEALS CHALLENGING THE INDEPENDENT ORDERS OF THE FIRST APPELLATE AUTHORITY BOTH DATED 29-10-201 0 FOR THE ASSESSMENT YEARS 2005-06 AND 2006-07. THE TAXPAYER HAS FILED THE CROS S OBJECTIONS. 2. NO ONE APPEARED FOR THE TAXPAYER EVENTHOUGH THE APPEAL WAS ADJOURNED AT THE REQUEST OF THE TAXPAYER. THEREFORE, WE HEAR D THE LD.DR AND PROCEED TO DISPOSE OF THE APPEALS AND CROSS OBJECTIONS ON MERI T. 3. SMT. A.S. BINDHU, THE LD.DR SUBMITTED THAT THE O NLY ISSUE ARISES FOR CONSIDERATION IN BOTH THE APPEALS IS WITH REGARD TO INCLUSION OF DEEMED EXPORT IN THE TURNOVER FOR THE PURPOSE OF EXEMPTION U/S 10A O F THE ACT. THE COMMISSIONER OF INCOME-TAX(A) BY FOLLOWING THE ORDERS OF THIS TRI BUNAL IN THE TAXPAYERS OWN CASE FOR THE ASSESSMENT YEARS 2003-04 AND 2004-05 HAS ALLOWED THE CLAIM OF THE TAXPAYER. THE LD.DR FURTHER POINTED OUT THAT THE D EPARTMENT HAS FILED APPEALS AGAINST THE ORDERS OF THIS TRIBUNAL FOR THE ASSESSM ENT YEARS 2003-04 AND 2004-05 AND THE HIGH COURT IN ITA NO.217 & 232 OF 2010 BY J UDGMENT DATED 27-07-2011 FOUND THAT EXEMPTION IS AVAILABLE ONLY ON THE ACTUA L PROFIT DERIVED ON EXPORT MADE AGAINST RECEIPTS IN CONVERTIBLE FOREIGN EXCHAN GE. THEREFORE, THE INTER UNIT SALES IN THE EXPORT PROCESSING ZONE ARE NOT TREATED AS EXPORT WITHIN THE MEANING OF SECTION 10A OF THE ACT. ULTIMATELY, THE HIGH CO URT REVERSED THE ORDERS OF THE TRIBUNAL AND HELD THAT THE TAXPAYER IS NOT ENTITLED FOR EXEMPTION U/S 10A IN RESPECT OF DEEMED EXPORT TO ANOTHER SPECIAL ECONOMI C ZONE. IN VIEW OF THE JUDGMENT OF THE KERALA HIGH COURT IN THE TAXPAYERS OWN CASE FOR THE ASSESSMENT 3 ITA NO.77 & 78/COCH/2011 CO NO. 02 & 03/COCH/2011 YEARS 2003-04 AND 2004-05, ACCORDING TO THE LD.DR, TH E COMMISSIONER OF INCOME- TAX(A) IS NOT JUSTIFIED IN PLACING RELIANCE ON THE ORDERS OF THIS TRIBUNAL. 4. WE HAVE CONSIDERED THE SUBMISSIONS OF THE LD.DR AND ALSO PERUSED THE ORDERS OF THE COMMISSIONER OF INCOME-TAX(A) WHEREIN HE HAS FOLLOWED THE ORDERS OF THIS TRIBUNAL FOR THE ASSESSMENT YEARS 2003-04 & 2004-05 WHILE ALLOWING THE CLAIM OF THE TAXPAYER U/S 10A OF THE ACT. IN FACT, THE REVENUE FILED APPEALS BEFORE THE HIGH COURT IN ITA NOS.217 & 232 OF 2010 AGAINST THE ORDERS OF THIS TRIBUNAL AND THE HIGH COURT AFTER CONSIDERING THE PROVISIONS OF SECTION 10A FOUND THAT THE LEGISLATURE NEVER INTENDED THE BENEFIT TO BE EXTEND ED TO LOCAL SALES MADE BY THE UNIT IN THE SPECIAL ECONOMIC ZONE. THE HIGH COURT FURTHER FOUND THAT IN FACT ALL SPECIAL ECONOMIC ZONES ARE ALLOWED TO MAKE 25% DOMES TIC SALES TO DOMESTIC TARIFF AREA AND THE PROFIT DERIVED FROM SUCH SALES IS NOT ENTITLED FOR EXEMPTION. ACCORDINGLY THE DECISION OF THIS TRIBUNAL FOR THE A SSESSMENT YEARS 2003-04 AND 2004-05 ARE REVERSED. IN VIEW OF THE JUDGMENT OF TH E KERALA HIGH COURT REVERSING THE ORDERS OF THIS TRIBUNAL, THE COMMISSIONER OF IN COME-TAX(A) IS NOT JUSTIFIED IN PLACING RELIANCE ON THE ORDERS OF THIS TRIBUNAL. B Y RESPECTFULLY FOLLOWING THE JUDGMENT OF THE KERALA HIGH COURT IN THE TAXPAYERS OWN CASE FOR THE ASSESSMENT YEARS 2003-04 AND 2004-05 IN ITA NO.217 & 232 OF 2010 AND FOR THE REASONS STATED THEREIN THE IMPUGNED ORDERS OF THE FIRST APP ELLATE AUTHORITY ARE SET ASIDE AND THAT OF THE ASSESSING OFFICER ARE RESTORED. 5. THE REVENUE HAS TAKEN ONE MORE GROUND FOR THE ASS ESSMENT YEAR 2005-06 WITH REGARD TO EXCHANGE RATE FLUCTUATION AS PROFIT FROM EXPORT. THE DEPARTMENT HAS PLACED RELIANCE ON THE JUDGMENT OF THE APEX COU RT IN COMMISSIONER OF INCOME-TAX VS STERLING FOODS (1999) 237 ITR 579 (SC) AND UNIVERSAL RADIATORS VS 4 ITA NO.77 & 78/COCH/2011 CO NO. 02 & 03/COCH/2011 COMMISSIONER OF INCOME-TAX (1993) 201 ITR 800 (SC) T O CONTEND THAT EXCHANGE RATE IS NOT TO BE CONSIDERED AS BUSINESS INCOME FRO M THE PROFIT OF SALE PROCEEDS. 6. WE HAVE CAREFULLY GONE THROUGH THE ORDERS OF THE LOWER AUTHORITIES. THE TAXPAYER HAS RECEIVED PROFIT DUE TO FOREIGN EXCHANG E FLUCTUATION IN FOREIGN CURRENCY. AFTER THE EXPORT OF GOODS, DUE TO EXCHAN GE RATE DIFFERENCE ARISING FROM FOREIGN CURRENCY TRANSACTION, THE TAXPAYER HAS RECE IVED RS. 59,04,446 FOR THE ASSESSMENT YEAR 2005-06. THE ASSESSING OFFICER FOUN D THAT THE INCOME BY WAY OF UNREALIZED EXCHANGE RATE GAIN IS INCOME FROM OTHER SOURCES. THE PROFIT OR GAIN DERIVED BY AN UNDERTAKING ALONE IS ELIGIBLE FOR EXEM PTION U/S 10A. THEREFORE, THE ASSESSING OFFICER FOUND THAT THE PROFIT / INCOME BY WAY OF FOREIGN EXCHANGE DIFFERENCE ARE TO BE EXCLUDED WHILE COMPUTING EXEMP TION U/S 10A OF THE ACT. HOWEVER, THE FIRST APPELLATE AUTHORITY FOUND THAT T HE FOREIGN EXCHANGE GAIN ACCOUNTED BY THE TAXPAYER CAN BE CONSIDERED AS RECE IPTS FROM EXPORTS. THE FOREIGN EXCHANGE GAIN IS RELATED TO THE EXPORT AND ANY INCREASE IN THE VALUE OF THE FOREIGN EXCHANGE RESULTING IN THE EXCESS BEING CRED ITED TO THE ACCOUNT AS A RESULT OF FLUCTUATION WAS FOUND TO BE INCOME FROM BUSINESS ACTIVITY. THE ASSESSING OFFICER CLAIMS THAT THE RATE DIFFERENCE WAS DUE TO UNREALIZED EXCHANGE WHICH WAS CREDITED IN THE BOOKS OF ACCOUNT. THE FACT REMAINS IS THAT THE TAXPAYER HAS EXPORTED THE GOODS AND BEFORE RECEIVING THE SALE PR OCEEDS IN FOREIGN CURRENCY, DUE TO EXCHANGE RATE DIFFERENCE, THE TAXPAYER HAS R ECEIVED EXCESS SALE PROCEEDS WHICH WAS CREDITED IN THE BOOKS OF ACCOUNT. THE QUE STION ARISES FOR CONSIDERATION IS WHETHER THE EXCESS SALE PROCEEDS R ECEIVED BY THE TAXPAYER DUE TO THE EXCHANGE RATE FLUCTUATION IN FOREIGN CURRENC Y IS THE INCOME FROM EXPORT ACTIVITY OR IS IT THE INCOME FROM OTHER SOURCES. 5 ITA NO.77 & 78/COCH/2011 CO NO. 02 & 03/COCH/2011 7. WE HAVE CAREFULLY GONE THROUGH THE JUDGMENT OF T HE APEX COURT IN THE CASE OF UNIVERSAL RADIATORS (SUPRA). IN THIS CASE, THE TAXPAYER CARRIED ON THE BUSINESS IN MANUFACTURING RADIATOR FOR AUTOMOBILES AND BOOKED COPPER INGOTS FROM A CORPORATION IN THE USA. WHEN THE COPPER IN GOTS WERE IMPORTED TO BOMBAY TO CONVERT THE SAME INTO STRIPS AND SHEETS H OSTILITIES BROKE OUT BETWEEN INDIA AND PAKISTAN AND THE VESSEL CARRYING THE GOODS WAS SEIZED BY THE PAKISTANI AUTHORITIES. THE TAXPAYER CLAIMED THE PRICE OF THE GOODS AS COMPENSATION FROM THE INSURANCE COMPANY. THE INSURANCE COMPANY SETTL ED THE MATTER IN FAVOUR OF THE TAXPAYER. IN THE MEANTIME, THE INDIAN RUPEE DE VALUED AND THEREFORE, IN TERMS OF INDIAN RUPEE THE TAXPAYER RECEIVED RS.3,43 ,556 AS AGAINST THE ACTUAL VALUE BEFORE DEVALUATION OF THE INDIAN RUPEE AT RS. 2,00,164. THE TAXPAYER CLAIMED THE DIFFERENCE DUE TO DEVALUATION OF THE IN DIAN RUPEE AS NOT TAXABLE. HOWEVER, THE ASSESSING AUTHORITY REJECTED THE CLAIM OF THE TAXPAYER. BUT THE TRIBUNAL HELD THAT WHEN THE GOODS WERE SEIZED BY TH E PAKISTANI AUTHORITY, THE SURPLUS WAS IN THE NATURE OF CAPITAL RECEIPT AND NO T A PROFIT MADE BY THE TAXPAYER IN THE COURSE OF BUSINESS. WHEN THE MATTER TRAVELL ED TO SUPREME COURT, THE SUPREME COURT FOUND THAT THE BUSINESS OF THE TAXPAY ER IS MANUFACTURING RADIATORS. THE INGOTS WERE IMPORTED TO BE CONVERTE D INTO STRIPS AND SHEETS AT BOMBAY. THE LINK WHICH COULD CREATE DIRECT RELATIO NSHIP BETWEEN THE FINISHED GOODS AND INGOTS WAS SNAPPED EVEN BEFORE IT REACHED BOMBAY. THEREFORE, THE PAYMENTS RECEIVED FOR LOSS OF INGOTS DID NOT BEAR A NY NEXUS WITH TAXPAYERS BUSINESS. SO LONG AS THE INGOTS DID NOT REACH BOMB AY AND WERE CONVERTED INTO STRIPS AND SHEETS THE CONNECTION WITH THE TAXPAYERS BUSINESS WAS REMOTE AND ANY PAYMENT MADE IN RESPECT OF THE LOSS OF INGOTS CANNO T BE SAID TO ACCRUE FROM BUSINESS. IN THE CASE BEFORE US, THE TAXPAYER HAS RECEIVED EXCESS MONEY ON EXPORT OF GOODS TO FOREIGN COUNTRY DUE TO EXCHANGE RATE FLUCTUATION. IT IS NOT A 6 ITA NO.77 & 78/COCH/2011 CO NO. 02 & 03/COCH/2011 CASE OF STERILIZATION OF RAW MATERIAL IMPORTED FROM FOREIGN COUNTRY. THEREFORE, THIS JUDGMENT OF THE APEX COURT IN THE CASE OF UNIV ERSAL RADIATORS (SUPRA) MAY NOT BE APPLICABLE TO THE FACTS OF THE CASE. 8. WE HAVE ALSO CAREFULLY GONE THROUGH THE JUDGMENT OF THE APEX COURT IN THE CASE OF STERLING FOODS (SUPRA). THE ISSUE BEFORE T HE APEX COURT IN THE CASE OF STERLING FOODS (SUPRA) WAS WITH REGARD TO DEDUCTION U/S 80HH OF THE ACT IN RESPECT OF PROFIT FROM SALE OF IMPORT ENTITLEMENT. THE APEX COURT AFTER CONSIDERING THE PROVISIONS OF THE ACT FOUND THAT TH E IMPORT ENTITLEMENT WAS RECEIVED BY THE TAXPAYER ON THE SCHEME OF THE CENTR AL GOVERNMENT AND NOT DERIVED FROM THE BUSINESS OF THE TAXPAYER; THEREFOR E, NOT ELIGIBLE FOR DEDUCTION U/S 80HH OF THE ACT. IN THE CASE BEFORE US, THE MO NEY WAS RECEIVED DUE TO EXCHANGE RATE FLUCTUATION AS SALE PROCEEDS OF THE E XPORTED GOODS. THEREFORE, IT HAS DIRECT NEXUS WITH THE EXPORT OF THE GOODS BY TH E TAXPAYER. TRIBUNAL IS OF THE CONSIDERED OPINION THAT THE JUDGMENT OF THE APEX CO URT IN THE CASE OF STERLING FOODS (SUPRA) IS ALSO NOT APPLICABLE TO THE FACTS O F THE CASE. 9. IN VIEW OF THE ABOVE, THIS TRIBUNAL HAS NO HESIT ATION IN UPHOLDING THE ORDER OF THE FIRST APPELLATE AUTHORITY HOLDING THE EXCHAN GE RATE FLUCTUATION AS BUSINESS INCOME FROM EXPORT SALE PROCEEDS. 10. THE TAXPAYER HAS FILED THE CROSS OBJECTIONS ONL Y TO SUPPORT THE ORDER OF THE COMMISSIONER OF INCOME-TAX(A) AND NO INDEPENDENT GRO UNDS ARE RAISED. THEREFORE, BOTH THE CROSS OBJECTIONS FILED BY THE T AXPAYER BECOME INFRUCTUOUS. 7 ITA NO.77 & 78/COCH/2011 CO NO. 02 & 03/COCH/2011 11. IN THE RESULT, THE APPEAL OF THE REVENUE IN ITA NO.77/COCH/2011 IS PARTLY ALLOWED AND THAT IN ITA NO.78/COCH/2011 IS DISMISSE D; AND THE CROSS OBJECTIONS OF THE TAXPAYER ARE DISMISSED. ORDER PRONOUNCED IN THE OPEN COURT ON THIS 07 TH SEPTEMBER, 2012. SD/- SD/- (B.R. BASKARAN) (N.R.S. GANESAN) ACCOUNTANT MEMBER JUDICIAL MEMBER COCHIN, DT : 07 TH SEPTEMBER, 2012 PK/- COPY TO: 1. THE APPELLANT 2. THE RESPONDENT 3. THE COMMISSIONER OF INCOME-TAX 4. THE COMMISSIONER OF INCOME-TAX(A) 5. THE DR (TRUE COPY) BY ORDER ASSTT. REGISTRAR, INCOME-TAX APPELLATE TRIBUNAL, COCHIN BENCH