2014 (10) TMI 295 - AT - Income Tax

Restriction of deduction u/s 10B 100% Export Oriented Unit (EOU) - sales made by assessee to two 100% EOUs inside the country against Indian currency, who in turn had actually exported the goods outside India - Held that - assessee will not be entitled for exemption u/s 10B in respect of turnover of ₹ 3,37,46,108 sold to 100% EOU in India. The contention of the ld. AR that decision of the Hon ble AP High Court being factually distinguishable will not apply to assessee s case, in our view, is devoid of merit. The conditions of sub-section (3) of section 10B has not been fulfilled in respect of the turnover sold to two other 100% EOU in India relying upon Swayam Consultancy (P) Ltd vs. ITO 2011 (4) TMI 683 - Andhra Pradesh High Court -the language of s. 10B(3) of the Act is plain - It does not admit any other meaning than what is conveyed by the language used - The benefit u/s 10B(1) of the Act is available to 100 per cent EOUs only if the sale proceeds of articles or things exported out of India are received in convertible foreign exchange - Two conditions should be satisfied before the benefit under s. 10B(1) of the Act is claimed. - Decided against the assessee. Deduction in respect of amount on sale of packing material to Nambia disallowed Held that - The only reason on which they have held that the amount would not be eligible for exemption u/s 10B is packing materials were not manufactured by assessee - the products manufactured by assessee could not have been exported without packing materials, hence, the observation by the lower authorities that it cannot be considered as part of the export turnover is not correct - When a particular article or thing cannot be exported without its container/packing, same has also to be considered as part of the product and consequently has to be treated as part of the export turnover of assessee - the turnover being part of the export turnover of the assessee would be eligible for deduction u/s 10B Decided in favour of assessee.

Summary

Issues Involved:

1. Restriction of deduction claim under Section 10B.
2. Disallowance of deduction on sale of packing material.

Issue-wise Detailed Analysis:

1. Restriction of Deduction Claim under Section 10B:

The primary issue revolves around the restriction of the deduction claim under Section 10B of the Income Tax Act, 1961. The assessee, a 100% Export Oriented Unit (EOU) engaged in the manufacture and sale of sheath contraceptives, claimed a deduction of Rs. 1,42,65,614 under Section 10B for the Assessment Year (AY) 2007-08. However, the Assessing Officer (AO) restricted this deduction to Rs. 36,28,536. The AO observed that out of the total export turnover of Rs. 11,04,52,037, an amount of Rs. 3,37,14,685 was received in Indian currency for sales made within the country to other 100% EOUs. The AO concluded that sales to another 100% EOU within India cannot be treated as export sales under Section 10B of the Income Tax Act, even though such sales might be considered as exports under the exim policy.

The CIT(A) upheld the AO's decision, relying on the decision of the Hon'ble AP High Court in the case of Swayam Consultancy (P) Ltd. vs. ITO, which held that sales made to another 100% EOU within India cannot be considered as exports for the purpose of Section 10B. The ITAT also upheld this view, emphasizing that the benefit under Section 10B is available only if the sale proceeds are received in convertible foreign exchange within six months from the end of the previous year. The ITAT referred to the AP High Court's decision, which clarified that the term "export" under Section 10B requires actual export out of India and receipt of sale proceeds in convertible foreign exchange. Consequently, the ITAT concluded that the turnover of Rs. 3,37,46,108, representing sales to other 100% EOUs within India, does not qualify for deduction under Section 10B.

2. Disallowance of Deduction on Sale of Packing Material:

The second issue pertains to the disallowance of deduction on the sale of packing material amounting to Rs. 18,54,969. The AO disallowed the deduction on the ground that the packing materials were not manufactured by the assessee but purchased from third parties. The AO held that Section 10B applies only to the export of articles or things manufactured by the assessee, not to traded goods.

The CIT(A) confirmed the AO's view, stating that since the assessee did not manufacture the packing material but purchased it from outside parties, it does not qualify for deduction under Section 10B. However, the ITAT disagreed with this view. The ITAT observed that the products manufactured by the assessee could not have been exported without the packing material. Therefore, the packing material should be considered as part of the product exported. The ITAT held that when a particular article cannot be exported without its container/packing, the packing material should also be treated as part of the export turnover. Consequently, the ITAT allowed the deduction for the sale of packing material under Section 10B.

Conclusion:

In conclusion, the ITAT upheld the restriction of the deduction claim under Section 10B for the sales made to other 100% EOUs within India, in line with the AP High Court's decision. However, the ITAT allowed the deduction for the sale of packing material, considering it as part of the export turnover. Thus, the appeal of the assessee was partly allowed.