2020 (8) TMI 276 - HC - Income Tax

Deduction u/s 10B - claim of assessee in respect of management fee while dealing with Section 10B especially when the service income was received from the Associate Enterprises which is not for any technical services rendred by the assessee? - Whether the income from Management fee could be treated as profit derived from export of valves and no deduction could be allowed to the Assessee u/s 10B since the Associate Enterprise has its own expertise to assemble the valves and therefore cannot be construed as technical services rendered by the assessee? - HELD THAT - Finding stems from the details furnished by the assessee in Form No.3CEB. Admittedly, the amount will be received by the assessee through banking channels by way of convertible foreign exchange which has been defined in Section 10B(9A)(ii) which defines convertible foreign exchange to mean foreign exchage which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Management Act, 1999 and the Rules made thereunder or any other corresponding law for the time being in force. There is nothing on record to show that the convertible foreign exchange remittance did not fall within the definition as defined in Section 10B(9A)(ii). This Court, the decision in the case of Electronic Control and Discharge System Private Ltd. 2011 (7) TMI 541 - KERALA HIGH COURT does not render any assistance to the case of the revenue. Furthermore, on facts we are satisfied that the only activity of the assessee is export as admitted by the revenue and the income generated by the Export Unit would be eligible for the benefit of Section 10B of the Act. For all the above reasons, we find no ground to disturb the finding of the Tribunal. - Decided against revenue.

Issues Involved:
1. Whether the Tribunal was right in allowing the claim of the assessee in respect of the management fee under Section 10B.
2. Whether the income from the management fee could be treated as profit derived from the export of valves and thus eligible for deduction under Section 10B.

Detailed Analysis:

Issue 1: Tribunal's Allowance of Management Fee Claim under Section 10B
The primary issue revolves around the Tribunal’s decision to allow the assessee's claim for a management fee deduction under Section 10B of the Income Tax Act, 1961. The assessee, a 100% Export Oriented Unit (EOU), engaged in assembling and exporting valves, claimed that the management fee received from its Associate Enterprise (AE) was for services incidental to its export business. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] initially denied this claim, arguing that the management fee did not relate to the export of valves but was for providing management services, which the AE did not require due to its own expertise. The Tribunal, however, overturned this decision, accepting the assessee's claim that the management fee was indeed related to the export business and thus eligible for deduction under Section 10B.

Issue 2: Treatment of Management Fee as Profit Derived from Export of Valves
The second issue concerns whether the management fee can be considered as profit derived from the export of valves, making it eligible for deduction under Section 10B. The AO argued that the management fee was not for technical services related to the export of valves but for management services, and therefore, it should be excluded from the business income. The CIT(A) supported this view, noting that the fee was received in Indian rupees, not foreign currency. However, the Tribunal found that the management fee was incidental to the export business and should be included in the business income eligible for deduction under Section 10B. The Tribunal's decision was based on the principle that the profits derived from the export of articles or things by a 100% EOU should be calculated as a proportion of the total business profits, considering the entire business income of the EOU.

Court's Analysis:
1. Inconsistent Stand by Assessee: The Court dismissed the argument that the assessee's inconsistent stand (initially claiming the fee as technical service and later as export service) should disqualify the deduction. The Court held that there could be no estoppel on this aspect, especially since the revised return was filed pursuant to a notice issued under Section 148 of the Act.

2. Nexus Between Income and Business: The Court emphasized the need to establish a nexus between the management fee and the business income of the EOU. The Court noted that the only source of income for the assessee was through export, and several decisions have pointed out that there is no requirement to establish a direct nexus for the purposes of Section 10B.

3. Precedents: The Court referred to several precedents, including the case of Camiceria Apparels India (P) Ltd. vs. Assistant Commissioner of Income Tax and Principal Commissioner of Income Tax vs. Dishman Pharmaceuticals & Chemicals Ltd., which supported the view that the entire business income of a 100% EOU should be considered for deduction under Section 10B.

4. Foreign Currency Requirement: The Court rejected the revenue's argument that the fee received in Indian rupees disqualified the deduction. The Court clarified that the fee received through banking channels as convertible foreign exchange meets the requirements under Section 10B(9A)(ii).

Conclusion:
The Court upheld the Tribunal’s decision, dismissing the revenue's appeals. The Court concluded that the management fee received by the assessee was indeed related to its export business and thus eligible for deduction under Section 10B. The substantial questions of law were answered against the revenue, affirming the Tribunal's findings and allowing the assessee's claim for deduction. The appeals were dismissed with no costs.

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