M/S METRIX PRECISION COMPONENTS PVT. LIMITED V. THE DEPUTY COMMISSIONER OF INCOME TAX

ITA/384/2014

AI Insights

The case revolves around the denial of deduction under Section 10B of the Income Tax Act, 1961 to M/S. Metrix Precision Components Pvt. Limited, a 100% export-oriented unit. The primary legal contention was whether the Tribunal was correct in sustaining the denial of deduction on grounds of misinterpretation and misreading of the provisions of Section 10B, particularly subsection (3), and on the misconstruction of facts. The Tribunal had previously held that the assessee, being a supporting manufacturer, was not eligible for the deduction. However, the High Court, referencing various precedents and the specific circumstances of the case, concluded that the assessee was indeed entitled to the deduction as the export proceeds were received in convertible foreign currency through a third party, which met the requirements of the Act.

• Counselvise Citation: [2020] 140 COUNSELVISE.COM (IT) 698188 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 23-09-2020
• Assessment Year: misc
• Other Referred Cases: DEPUTY COMMISSIONER OF INCOME TAX VS. METAL CLOSURES PRIVATE LIMITED, TATA ELXSI LIMITED VS. ACIT, BANGALORE, CIT VS. INTL. STONES INDIA (P.) LTD, M/S GRANITE MART LIMITED
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Others
• Court: HIGH COURT
• Department Lawyers: K V ARAVIND
• Assessee Lawyers: BALRAM RAO; KAUSHIK
• Keywords: 100% Export Oriented Unit; Convertible Foreign Currency; Deduction; Deemed export; Export; Income Tax
• Section: 10B; 260-A

Judgement Text

" 1 IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 23RD DAY OF SEPTEMBER 2020 PRESENT THE HON’BLE MR. JUSTICE ALOK ARADHE AND THE HON’BLE MR. JUSTICE H.T.NARENDRA PRASAD I.T.A. NO.384 OF 2014 BETWEEN: M/S. METRIX PRECISION COMPONENTS PVT. LIMITED 46, KSSIDC INDUSTRIAL ESTATE KUMBALGODU, BANGALORE REPRESENTED BY ITS MANAGING DIRECTOR SRI. PRADEEP KASHYAP AGED ABOUT 50 YEARS S/O SRI. GOPINATH M. ... APPELLANT (BY SRI. BALRAM R. RAO AND SRI. KAUSHIK M, ADVS.,) AND: THE DEPUTY COMMISSIONER OF INCOME TAX CIRCLE-12(1), BANGALORE. ... RESPONDENT (BY SRI. K.V. ARAVIND, ADV.,) - - - THIS ITA IS FILED UNDER SECTION 260-A OF I.T. ACT, 1961 ARISING OUT OF ORDER DATED 11.04.2014 PASSED IN ITA NO.248/BANG/2013 FOR THE ASSESSMENT YEAR 2009-10, PRAYING THAT THIS HON’BLE COURT MAY BE PLEASED TO: (I) FORMULATE THE SUBSTANTIAL QUESTIONS OF LAW STATED ABOVE. (II) ALLOW THE APPEAL AND SET ASIDE THE ORDER OF THE INCOME TAX APPELLATE TRIBUNAL DATED 11-04-2014 2 BEARING ITA NO.248/BANG/2013 FOR THE ASSESSMENT YEAR 2009-10. THIS ITA COMING ON FOR FINAL HEARING, THIS DAY, ALOK ARADHE J., DELIVERED THE FOLLOWING: JUDGMENT This appeal under Section 260A of the Income Tax Act, 1961 (hereinafter referred to as the Act for short) has been preferred by the assessee. The subject matter of the appeal pertains to the Assessment year 2009-10. The appeal was admitted by a bench of this Court vide order dated 20.03.2015 on the following substantial question of law: (i) Whether the Tribunal is correct in sustaining the order of the Respondent in denying the benefit of deduction u/s 10B of the Act in the computation of taxable total income on the wrong interpretation of as well as on the misreading of the said provisions especially the sub-section (3)? (ii) Whether the Tribunal is correct in sustaining the order of the Respondent in denying the benefit of deduction u/s 10B 3 of the Act in the computation of taxable total income on the misconstruction of the facts of the case thereby establishing perversity in the impugned order? (iii) Whether the Appellate Tribunal is correct in confirming the disallowance of the deduction u/s 10B of the Act overlooking the principles laid down by the Supreme Court in the decision reported in 223 ITR 271 and the principles laid down by the Co-ordinate Bench rendered in the case of M/s Granite Mart P Ltd.,?.” 2. Facts leading to filing of the appeal briefly stated are that the assessee is a company engaged in the business, manufacture and exports of automotive components. The assessee filed the return of income for the Assessment Year 2009-10 declaring total income of Rs.4,25,531/- and an amount of Rs.1,57,69,992/- was shown as income under the Minimum Alternative Tax (MAT) regime. The return of income was selected for scrutiny and the Assessing Officer on 30.10.2011 passed 4 an order determining the taxable total income of Rs.1,77,09,421/- upon the assessee. The Assessing Officer also held that though the assessee had exported the goods but it did not realize export proceeds in convertible foreign currency as mandated under Section 10B(3) of the Act and the same was realized in convertible foreign currency by a third party. The Assessing Officer therefore, disallowed the claim of deduction of the assessee under Section 10B of the Act. 3. The assessee thereupon filed an appeal before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) by an order dated 20.09.2012 inter alia held that the assessee has not satisfied the conditions required for claiming deduction under Section 10B of the Act, since, the export proceeds were not received in convertible foreign exchange by the assessee and dismissed the appeal preferred by the assessee. The assessee thereupon filed an appeal before the Income Tax Appellate Tribunal 5 (hereinafter referred to as 'the Tribunal' for short). The Tribunal by order dated 11.04.2014 inter alia held that assessee was only a supporting manufacturer and deduction under Section 10B of the Act is not available to the supporting manufacturer. Accordingly, the appeal preferred by the assessee was dismissed. In the aforesaid factual background, this appeal has been filed. 4. Learned counsel for the assessee submitted that the Tribunal failed to appreciate the fact that the claim of the assessee for deduction under Section 10B of the Act in computation of total taxable income for the Assessment Year 2009-10 was legally sustainable especially in view of disclaimer certificate issued by the recipient viz., M/s Toyota Tsusho India Pvt. Ltd. It is further submitted that the assessee being 100% export oriented unit is entitled to deduction under Section 10B of the Act in respect of deemed export of goods made by it to a third party. It is also submitted that in order to eligible for exemption under Section 10B of the Act, it is 6 not necessary that undertaking should personally export goods, manufacture /software developed by it outside the country and it may export the same through any other STP unit. In support of aforesaid submissions, reliance has been placed on decisions of Supreme Court in ‘DEPUTY COMMISSIONER OF INCOME TAX VS. METAL CLOSURES PRIVATE LIMITED’, 102 TAXMAN.COM 72, ‘TATA ELXSI LIMITED VS. ACIT, BANGALORE’, ITA NO.411/2008, ‘CIT VS. INTL. STONES INDIA (P.) LTD’, (2018) 94 TAXMANN.COM 287 KARNTAKA and decision of this court in ‘M/S GRANITE MART LIMITED’, ITA NO.28/2011 DATED 19.03.2020. 5. On the other hand, learned counsel for the revenue submitted that the manufacturing unit as well as the exporting unit should be eligible units in order to claim deduction under Section 10B of the Act. It is further submitted that the decision of this court in case 7 of Tata Elxsi supra has no application to the fact situation of the case as the issue with regard to eligibility of both the units was not in dispute. It is also submitted that merely having a contract with foreign enterprise and merely earning foreign exchange does not ipso facto make an assessee eligible for deduction under Section 10B of the Act. It is also submitted that an incentive provision like Section 10B of the Act has to be interpreted strictly and the burden of proving its applicability is on the assessee and in case, there is any ambiguity in the provision, the benefit has to be extended in favour of the revenue. In support of aforesaid submission, reliance has been placed on decision of the Supreme Court in ‘RAMNATH & CO. VS. COMMISSIONER OF INCOME-TAX’, (2020) 116 TAXMANN.COM 885 (SC). 6. We have considered the submissions made by learned counsel for the parties and have perused the 8 record. Before proceeding further, it is apposite to take note of relevant extract of Section 10B(1) to (3) of the Act, which read as under: '10B. (1) Subject to the provisions of this section, any profits and gains derived by an assessee from a hundred per cent export- oriented undertaking (hereafter in this section referred to as the undertaking) to which this section applies shall not be included in the total Income of the assessee. (2) This section applies to any undertaking which fulfils all the following conditions, namely:— (i) it manufactures or produces any article or thing; (ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence: Provided that this condition shall not apply in respect of any undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of 9 the business of any such industrial undertaking as is referred to in section 33B. in the circumstances and within the period specified in that section: (iii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose. Explanation—The provisions of Explanation 1 and Explanation 2 to sub-section (2) of section 80-I shall apply for the purposes of clause (iii) of this sub-section as they apply for the purposes of clause (ii) of that sub- section. (3) This section applies to the undertaking, if the sale proceeds of articles or things or computer software exported out of India are received in, or brought into, India by the assessee in convertible foreign exchange, within a period of six months from the end of the Previous year or, within such further period as the competent 10 authority may allow in this behalf. 7. Section 10A and 10B of the Act are pari materia provisions. However, difference is with regard to nature of the unit. Section 10A deals with Free Trade Zone (FTZ) unit whereas, Section 10B deals with 100% export oriented unit. Section 10A of the Act covers newly established undertaking in Free Trade Zones whereas, Section 10B deals with newly established 100% export oriented undertakings. Section 10A of the Act was introduced to give effect to EXIM policy of the Central Government. Paragraph 6.10 of the aforesaid policy deals with exchange through others and provides that EOU/EHTP/STP/BTP unit may export goods manufactured / software developed by it through another exporter or any other EOU/EHTP/STP/SEZ unit subject to the conditions mentioned in paragraph 6.19 of Handbook. Paragraph 6.19 of the policy reads as under: 11 6.19 An EOU/EHTP/STP/BTP unit may export goods manufactured /software developed by it through other exporter or any other EOU/EHTP/STP/SEZ/BTP unit subject to condition that: (a) Goods shall be produced in EOU/SHTP/STP/BTP unit concerned. (b) Level of NFE or any other conditions relating to imports and exports as prescribed shall continue to be discharged by EOU/EHTP/STP unit concerned. (c) Export orders so procured shall be executed within parameters of EOU/EHTP/STP/BTP schemes and goods shall be directly transferred from unit to port of shipment. (d) Fulfillment of NFE by EOU/EHTP/STP/BTP units in regard to such exports shall be reckoned on basis of price at which goods are supplied by EOUs to other Exporter or other EOU/EHTP/STP/STP/SEZ unit. (e) All export entitlements, including 12 recognition as status Holder would accrue to exporter in whose name foreign exchange earnings are realized. However, such export shall be counted towards fulfillment of obligation under EOU/EHTP/STP/BTP scheme only. 8. While dealing with scope and ambit of Section 10A of the Act, a bench of this court in Tata Elxsi Ltd., supra held that when a supply is made from DTA to STP, it does not satisfy the requirements of export as defined under the Customs Act. However, for the purposes of EXIM policy it is treated as deemed export and therefore, Section 10A of the Act was introduced to give effect to EXIM policy, the supplies made from one STP to another STP have to be treated as deemed export, as clause 6.19 specifically provides for export to status holder. Thus, in order to be eligible for exemption from Income Tax, the exports should earn foreign exchange and it does not matter whether the undertaking should personally export goods manufactured / software 13 developed by it outside the country. It may export out of India by itself or through any other STP unit. It has further been held that once it is shown that goods manufactured by the assessee have been exported out of India either by the assessee or by another STP unit and the foreign exchange is directly attributable to such export, then provisions of Section 10A of the Act is attracted and such exported is entitled to the benefit of deduction of profits and gains derived from such export from payment of tax. Even if the assessee does not directly export the material outside the country and supplies the same through another STP unit, which exports the same and receives the foreign exchange has to be held entitled to benefit of deduction. The aforesaid decision was followed by another division bench in INTERNATIONAL STONES INDIA PVT. LTD. while dealing with a claim of deduction under Section 10B of the Act and it was held that assessee being 100% export oriented unit would be entitled to deduction under 14 Section 10B of the Act in respect of deemed export of goods made by it to the third party. 9. In the instant case, admittedly, the assessee is a manufacturing unit and is 100% export oriented unit as has been found by the Tribunal in para 3 of the order. The assessee has manufactured precision components and has exported the same through Toyota Tsusho P. Ltd., which had received the export proceeds in convertible foreign currency. Therefore, the assessee was entitled to the benefit of deduction under Section 10B of the Act. In view of preceding analysis, the substantial questions of law framed by this court are answered in favour of the assessee and against the revenue. The orders passed by the Assessing Officer, Commissioner of Income Tax (Appeals) and the order of the Tribunal insoafar it deprives the assessee of the benefit under Section 10B of the Act are hereby quashed and the 15 assessee is entitled to the benefit of deduction under Section 10B of the Act. In the result, the appeal is allowed. Sd/- JUDGE Sd/- JUDGE ss "