2015 (1) TMI 789 - AT - Income Tax

Reimbursement of freight charges - Held that - Find ourselves to be in complete agreement with the findings by the ld. CIT(A), whose order has not been impugned by the assessee in any meaningful manner. The receipt on account of freight is not in vacuum, and its basis lies in the incurring of the freight and insurance expenses by the assessee. Both the incurring of the expenditure on these counts, as well as the raising of the bills on cum freight and insurance basis on the overseas customers, has not been disputed by the Revenue. How then, we wonder, could it adopt a view as that followed by the A.O. Further, the source of the said receipt does not clearly lie in any separate or independent source of income, i.e., distinct and apart from the assessee s business of manufacture and export of goods outside India. We, accordingly, find no merit in the Revenue s stand, and the said receipt would stand to form as a part of the assessee s export business. - Decided against revenue. DEPB receipt for being included in computing the deduction u/s.10B - Held that - The receipt by way of DEPB shall not form part of the eligible profit of the assessee s EOU u/s.10B(1) r/w s. 10B(4). Decided against assessee.

Summary

Issues Involved:
1. Reimbursement of freight charges.
2. Eligibility of Duty Entitlement Pass Book Scheme (DEPB) receipt for deduction under section 10B of the Income Tax Act, 1961.

Issue-wise Detailed Analysis:

Issue No. 1 - Reimbursement of Freight Charges (Rs.74,14,903/-):

The assessee, a manufacturer and exporter of readymade garments, disclosed a receipt of Rs. 74.15 lacs as freight charges. The assessee explained that the sales invoices for exported goods were on a CIF (Cost, Insurance, and Freight) basis, meaning the exporter paid the freight and insurance costs, which amounted to Rs. 81.30 lacs for the year, and these costs were subsequently recovered from customers. The assessee argued that this should not be considered income but rather a reimbursement, resulting in a negative impact on profits. The Assessing Officer (A.O.) treated this receipt as income from other sources. However, the Commissioner of Income Tax (Appeals) [CIT(A)] found a clear nexus between the freight income and expenses, stating that even if considered an independent source of income, the related expenses would be deductible under section 57(iii), leading to a loss under 'income from other sources'. The tribunal agreed with CIT(A), noting that the freight receipt was directly linked to the business of manufacturing and exporting goods, and thus should be considered part of the assessee's export business. Consequently, the tribunal found no merit in the Revenue's appeal on this ground.

Issue No. 2 - DEPB Receipt (Rs.92,42,507/-):

The issue concerned the eligibility of the DEPB receipt for inclusion in the deduction under section 10B. The Revenue and the assessee cited various case laws to support their positions. The Revenue's argument was based on the premise that section 10B's deduction pertains to profits derived from the eligible undertaking's export activities, and DEPB receipts, being a step removed from the direct export activity, should not qualify. They relied on Supreme Court decisions like Liberty India vs. CIT and others, which held that such receipts are not directly derived from the business of the eligible undertaking.

Conversely, the assessee cited cases like Topman Exports vs. CIT, arguing that the computation formula in section 10B(4) should include DEPB receipts as part of the business profits. The tribunal noted conflicting views from various courts and tribunals but emphasized the jurisdictional high court's decision in Arts & Crafts Exports, which was based on the Revenue's concession that Liberty India did not apply to that case.

The tribunal concluded that the DEPB receipt should not be considered part of the eligible profits under section 10B. They interpreted that the profits eligible for deduction must be directly derived from the export activity of the eligible undertaking. The DEPB receipt, being a fiscal incentive and not directly linked to the economic activity of exporting goods, does not meet this criterion. Therefore, the tribunal denied the benefit of section 10B for DEPB receipts, aligning with the interpretation that only profits directly derived from the business of the eligible undertaking qualify for the deduction.

Conclusion:

The tribunal ruled in favor of the assessee regarding the reimbursement of freight charges, including it as part of the export business income. However, it ruled against the assessee on the DEPB receipt issue, excluding it from the eligible profits for deduction under section 10B. The Revenue's appeal was partly allowed.