2018 (6) TMI 1478 - HC - Income Tax

Exemption u/s.10B - assessee being 100% Export Oriented Unit (EOU) for these assessment years in respect of the deemed export of goods made during the period in question through a third party - Held that - Deemed Export by the assessee Undertaking even through a third party who has exported such goods to a Foreign country and has fetched Foreign Currency for India, still remains a Deemed Export in the hands of the assessee undertaking also. If the Parliament intended to put any restrictive meaning for curtailing the said deduction, such words could be employed in sub-section (1) itself, which could have excluded Deemed Export from the ambit and scope of word export employed in sub-section (1) of S.10B. The Explanation defining Export Turnover in both these provisions does not make any such distinction between the Direct Export and Deemed Export . The word export read with the background of Exim Policy of Union of India would certainly include Deemed Export also within the ambit and scope of the Export Turnover as explained in Explanation-2 of sub- section (9A) of the said S.10B of the Act. Restrict the deduction in the hands of the respondent-assessee by excluding the Deemed Exports , does not have any merit and the said contention deserves to be rejected and the same is accordingly rejected. Establish that both the Respondents-assessees before us and the entity through whom such export was made by the assessee for the period in question, have claimed any double or repetitive benefit u/s.10B of the Act for the same transaction of export. The issue raised in the present case by the Revenue is squarely covered by the decision of the Division Bench of this Court in M/s. Tata Elxsi s case 2015 (10) TMI 634 - KARNATAKA HIGH COURT - substantial question of law decided in favour of the assessee.

Summary

Issues Involved:
1. Deduction of expenses incurred towards Freight and Insurance charges from 'Export Turnover' and 'Total Turnover'.
2. Entitlement of the Respondent-assessee to deduction under Section 10B of the Income Tax Act, 1961, in respect of 'Deemed Export' of goods made through a third party.

Issue-wise Detailed Analysis:

1. Deduction of Expenses from 'Export Turnover' and 'Total Turnover':
The Revenue raised a question regarding the expenses incurred by the assessee towards Freight and Insurance charges to be reduced from the 'Export Turnover'. The counsel for the Appellants-Revenue conceded that this issue is covered against the Revenue by the Supreme Court's judgment in Commissioner of Income-tax, Central – III vs. HCL Technologies Ltd., [2018] 93 Taxmann.com 33(SC). The Supreme Court held that expenses excluded from 'Export Turnover' must also be excluded from 'Total Turnover' to maintain the formula's workability under Section 10A(4) of the Income Tax Act. Consequently, the Revenue did not press this question further.

2. Entitlement to Deduction under Section 10B for 'Deemed Export':
The primary issue was whether the Respondent-assessee is entitled to deduction under Section 10B for 'Deemed Export' of goods made through a third party. The High Court referred to a similar case, M/s. Tata Elxsi Ltd. vs. Asst. Commissioner of Income Tax, where the Division Bench held that the assessee was entitled to deduction under Section 10A for 'Deemed Exports' made through another STP unit.

The Court discussed the definition of 'Export Turnover' and the Exim Policy, emphasizing that the purpose of Section 10A and Section 10B is to encourage exports and fetch foreign currency. The Court noted that the conditions of Section 10A were satisfied when the goods were sold to another STP unit, which exported them and received foreign currency. The same rationale applied to Section 10B, as both sections are intended to provide incentives for exports.

The Court rejected the Revenue's argument that Section 10B applies only to direct exports by the assessee-unit. It clarified that sub-section (2) of Section 10B determines the eligibility of the unit, while sub-section (1) grants the deduction. The Court found no restriction in Section 10B(2) on the quantum of deduction based on the source of export. The Court also rejected the argument that the words "by the Undertaking" in Section 10B(1) imply that only direct exports qualify for deduction.

The Court held that 'Deemed Export' through a third party, which fetches foreign currency, qualifies for deduction under Section 10B. The Court emphasized that the beneficial provisions of the Income Tax Act should be interpreted harmoniously with the Exim Policy to include 'Deemed Export' within the scope of 'Export Turnover'.

Conclusion:
The High Court concluded that the issue raised by the Revenue was covered by the decision in M/s. Tata Elxsi Ltd. The Court dismissed the appeals filed by the Revenue, holding that the Respondent-assessee is entitled to deduction under Section 10B for 'Deemed Exports' made through a third party. The substantial question of law was answered against the Revenue and in favor of the assessee.