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TMI Blog2015 (5) TMI 353X X X X Extracts X X X X X X X X Extracts X X X X ..... s for arriving at the total turnover of the EOU - Held that:- the present case, the Assessee has two EOU’s EOU-I and EOU II. Both the EOUs are manufacturing and exporting readymade garments. The reasoning adopted by the CIT(A) in the present case is that “Sales” and “Turnover” are not synonymous. According to him the word “Sale” and “Turnover” as used in Sec.44AB of the Act reveals the intention of the legislature in this regard. According to him the term “Turnover” would include have a wider connotation and would also include inter-unit sales. According to him there would have been an element of profit in the inter unit services to the unit providing service to the other unit. Factually it has not been demonstrated so. The CIT(A) has also proceeded to hold that even assuming that there was no profit element, yet such receipts have to be considered as includible in “total turnover”. We do not think that the above reasoning can be adopted in the context of the provisions of Sec.10B of the Act. In any event, the approach of the Hon’ble Supreme Court in the case of Punjab Stainless Steel Industries (2014 (5) TMI 238 - SUPREME COURT ), clearly suggests that the “total turnover” should ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that section 10A and 10B are exemption provisions and therefore income of such units have to be excluded at source itself before arriving at GTI and since income is not to be included in the income of the assessee at all, there is no occasion to set off losses of the assessee in respect of its other business against profits of the exempt unit. Following the aforesaid decision of the Hon’ble High Court of Karnataka, we uphold the order of the CIT(Appeals) - Decided against revenue. - ITA Nos.1093/Bang/2009, 1266/Bang/2010 & 1057/Bang/2012, ITA No.1103/Bang/2012 - - - Dated:- 24-4-2015 - Shri N.V. Vasudevan And Shri Jason P. Boaz JJ. For the Appellant : Shri V. Srinivasan, C.A. For the Respondent : Shri P. Dhivahar, Jt. CIT(DR) ORDER Per Bench : ITA 1093/B/2009 This appeal by the assessee is against the order dated 4.9.2009 of CIT(Appeals)-I, Bangalore relating to assessment year 2006-07. 2. Grounds No.1 to 8 are general in nature and calls for no specific adjudication. 3. Ground Nos. 2, 3, 4 7 raised by the assessee read as follows:- 2. The CIT(Appeals) ought to have appreciated that the receipts from forward contracts had direct nexus wit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 6. According to the AO deduction U/S.10B of the Act provides for a deduction of such profits and gains as are derived by a 100% Export Oriented Undertaking from the export of articles or things. Therefore, section 10B shall apply only to profits that are derived from export of article or things. The AO was also of the view that u/s.10B(3) the sale proceeds of articles or things are to be received in convertible foreign exchange. In the light of the aforesaid provisions, the AO was of the View that the assessee had indulged in hedging foreign currency risk and at best, the said transaction can be termed as financial transaction . It is also pertinent to mention that assessee has already booked fluctuation of foreign exchange in the accounts and the same is being treated as part of Total turnover. According to the AO by no stretch of imagination, hedging of foreign currency, although pertaining to assessee s own exports, can be treated as income derived from export of goods and merchandise . It may be mentioned that only the income derived from export of goods and merchandise is eligible to exemption u/s 10B. Consequently, the income earned by way of profit on f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Assessee s case from the case cited by the Assessee, i.e. D. Kishore Kumar Co. Vs. DCIT (supra), arrived at a conclusion that hedging in foreign exchange through forward contracts tantamounts to speculation business which is different from and has no relation with the business of the assessee i.e., garments export and hence, found the action of A.O. justified. Following the said decision, the CIT(A) upheld the order of the AO. 10. Aggrieved by the order of the CITA, the assessee has raised the aforesaid grounds before the Tribunal. The ld. counsel for the assessee submitted before us that the decision rendered by the Tribunal in assessee's own case for the earlier assessment years has not been challenged by the assessee before the Hon'ble High Court of Karnataka. Nevertheless, it was submitted by him, that the decision rendered by the Tribunal for A.Y. 2005-06 requires reconsideration. In this regard, the ld. counsel drew our attention to the provisions of section 43(5), which read as follows:- 43. In sections 28 to 41 and in this section, unless the context otherwise requires - .. . (5) speculative transaction means a transaction in which a co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee in the present case and applying the decision of Ahmedabad Bench of the Tribunal, it has to be held that the gain received by the assessee on settlement of foreign exchange forward contract has to be considered as profits of the business of the assessee on which deduction u/s. 10B should be allowed. 13. The ld. counsel for the assessee further placed reliance on the decision of ITAT Bangalore Bench in the case of Star Exports Imports v. ACIT, ITA No.997/Bang/2012, A.Y. 2009-10, wherein this Tribunal considered the decision rendered by the Tribunal in assessee's own case (K. Mohan Co. Exports Pvt. Ltd.) and by its order dated 6.2.2005, held that the decision rendered by the Tribunal referred to above need not be followed as it was contrary to the decision rendered by the Hon'ble Gujarat High Court in the case of CIT v. Friends Friends Shipping Co. [2013] 217 taxman 267 (Guj). In the case of Star Imports Exports (supra), the question before the Tribunal was as to whether loss on account of foreign exchange contracts to hedge against foreign exchange fluctuation was a speculative loss u/s. 43(5) or a normal business loss? The Tribunal after considering the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntract entered into by the assessee was not a hedging transaction as it did not fall within the ambit of clause (a) of section 43(5) of the Act. In this regard, he submitted that only contracts in respect of raw materials or merchandise are covered under clause (a) and not foreign exchange forward contracts. He also highlighted the fact that foreign exchange contract itself was done by the assessee in a systematic manner for a period of time and there is every reason to believe that it was a separate business which itself contradicts the provisions of section 28 of the Act. 17. The ld. DR relied on the following decisions in support of the revenue s case that the income derived from foreign exchange forward contracts cannot be regarded as income from business:- (a) Shankara Infrastructure Materials Ltd. v. ACIT (2015) 53 taxmann.com 429, (Bang. Trib.) (b) Araska Diamond (P.) Ltd. v. ACIT, 52 taxmann.com (Mumbai-Trib.) 18. Besides the above, the ld. DR also submitted that it will not be correct to say that foreign currency is not a commodity. According to him, foreign currency is used as a medium of exchange or valid legal tender. It could be regarded as a commodity. In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter is unable to deliver export documents or dollars from its EEFC account, the banker will cancel the contract and whatever is the difference between the contract rate and prevailing rate on the date of cancellation will be either paid to or received from the exporter from the exporter as the case may be. Cancellation of a contract due to non- delivery of the contracted amount on the due date may result in profit or loss as per the spot rate on due date. It is not in dispute that the forward contracts which resulted in gain to the Assessee were entered into in relation to export orders which the Assessee had procured. 22. In AY 06-07, on identical facts and circumstances, this Tribunal held that the gain or loss on forward contract in foreign exchange was Speculative in character and cannot be regarded as income derived from export business on which deduction u/s.10B of the Act can be allowed. 23. The CIT(A) in AY 06-07 had allowed the claim of the Assessee by placing reliance on D. Kishore Kumar Co. Vs. DCIT (2005) 2 SOT 769 (Mum.) the decision of the ITAT Mumbai Bench in the case of wherein the question before the Hon ble Tribunal was as to whether the profit on cancel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Mumbai Bench in the case of D.Kishore Kumar Co. (supra), the effect of Expln.-2 to Sec.28 of the Act was not considered. (iv) The tribunal in para 20 of its order further held that in the case of the Assessee there are a number of transactions and the forward contracts have been taken in respect of 46% of the export turnover. Thus, it is not an isolated transaction. Hence, in view of Expln.-2 to Sec.28, the profit from the forward contract will have to be assessed as profit from speculation business. (v) In para 21 of its order the Tribunal held that deduction u/s.10B of the Act is to be allowed only on the profits of the business of the undertaking. profit of the business of the undertaking according to the Tribunal would be only profit from manufacture and export of readymade garments and not from gain on forward contract which has to be assessed as profits of Speculation Business separately. 25. The CIT(A) in the present assessment year to which this appeal relates to, followed the order of the ITAT and upheld the action of the AO in excluding the gain on forward foreign exchange contracts from the profits of the business on which deduction u/s.10B of the Act has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss against income from business. The Tribunal held that the loss was not speculative loss and the set off claimed by the Assessee had to be allowed. The Hon ble High Court upheld the order of the Tribunal. This decision was referred to by the Tribunal in the order in the case of Star Exports Imports (supra) and it was further observed that decision rendered by the Tribunal in the case of Assessee K. Mohan Co. for AY 06-07 pale into insignificance as the decision of the Hon ble High Court has to be followed. The claim of the Assessee was accordingly upheld. (iv) Adani Enterprises Ltd. Vs. ACIT (2015) 55 Taxmann.com 375 (Ahd.- Trib): In this case it was held that Sec.43(5) of the Act do not apply to currencies and therefore loss incurred by Assessee in currency swap contract cannot be denied to be set off against other heads of income taking it as speculative loss. 28. As can be seen from the above decisions referred to by the learned counsel for the Assessee, none of the decisions rendered are in the context of the question as to whether such gain can be said to be profits derived from the business of export on which deduction u/s.10B of the Act has to be allowed. We are t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... abour Charges 6,75,188 - - 6,75,188 Sale of Misc. items 1,22,54,744 21,01,187 8,03,684 1,51,59,615 Inter Unit Transfers (Tailoring/ Washing/EMB) 15,87,54,791 34,63,195 6,81,34,730 1,51,59,615 Total 32,91,04,495 194,55,37,839 146,87,338 351,30,35,956 32. The Assessee while computing deduction u/s.10B of the Act took the total turnover of EOU-I and EOU-11, at ₹ 194,20,74,644 and ₹ 140,06,11,608 respectively. The inter unit transfers were excluded from the total turnover. According to the AO the inter unit transfers were also to be regarded as part of the total turnover for the purpose of computing deduction u/s.10B of the Act. The AO accordingly adopted total turnover of EOU-I and EOU-II is ₹ 194,55,37,839 and ₹ 146,87,46,338 respectively for the purpose of computing deduction u/s.10B of the Act. 33. The Assessee s stand was that the In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supplied) 35. According to the AO, from a plain reading of Section 10B it was clear that the said provision provides deduction qua undertaking and not qua company. Hence, while arriving at the deduction for an undertaking, the profits of the undertaking have to be arrived at by considering the unit as the only existing business of the assessee. The same is done in most cases by maintaining separate books of accounts. This fiction of separate entity requires that every transaction done with an external entity, be it another unit of the same company or another company, be considered as external transaction and be included in the accounts of the unit accordingly. It is precisely for this reason that the assessee has also maintained separate books for the Units and has indicated the inter-unit transfer of each unit. The expense incurred for doing the job work forms part of the expenditure booked in the accounts of the unit and hence exclusion of the inter-unit charges will provide for incorrect computation of the profits and also of the deduction u/s 10B. 36. According to the AO, the very fact that the section itself provides for the Total turnover (in sub-section (4)) and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... guide to company audit issued by the Institute of Chartered Accountants which states as follows:- Total turnover, that is, the aggregate amount for which sales are effected by the company, giving the amount of sales in respect of each class of goods dealt with by the Company and indicating the quantities of such sales for each class separately. Note (i) The term Turnover would mean the total sales after deducting therefrom goods returned, price adjustments, trade discount and cancellation of bills for the period of audit, if any, adjustments which do not relate to turnover should not be made e.g. writing off bad debts, royalty, etc. 40. The CIT(A) did not agree with the submissions of the assessee and he held as follows:- 12. I see no merit in the above arguments of the A.R. The legislature was aware of such a predicament when this Section was drafted. Therefore, it made the Section a self-contained code. It specifically spoke as to computation of business profit of an undertaking and spoke of total turnover as well as export turnover of the undertaking. It is now well settled that total turnover is equal to export turnover plus domestic turnover. This definitio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed) received or receivable by any person against exports under any scheme of the Government of India; (iii) Any duty of customs or excise re-paid or repayable as drawback to any person against exports under the Customs Central Excise Duties Drawback Rules, 1995; (iv) The aggregate of gross income by way of interest received by the money lender; (v) Commission, brokerage, service and other incidental charges received in the business of chit funds; (vi) Reimbursement of expenses incurred (e.g. packing, forwarding, freight, insurance, traveling, etc.) and if the same is credited to a separate account in the books, only the net surplus on this account should be added to the turnover for the purpose of Section 44AB; (vii) The net exchange rate difference on export sales during the year on the basis of the guiding principle explained in (vi) above will have to be added; (viii) Hire charges of cold storage; (ix) Liquidated damages; (x) Insurance claims - except for fixed assets; (xi) Sale proceeds of scrap, wastage, etc. unless treated as part of sale or turnover, whether or not credited to miscellaneous in come account; (xii) Gross receipts including leas ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the revenue, sale of scrap was also part of the turnover and should be included in the total turnover. The Hon ble Supreme Court on the above issue observed as follows:- Normally, the term turnover would show the sales effected by a business unit. In the course of business, in addition to the normal sales, the business unit may also sell some other things. In ordinary accounting parlance, as approved by all accountants and auditors, the term sales , when reflected in the profit and loss account, would indicate sale proceeds from sale of the articles or things in which the business unit is dealing. When other things like old furniture or a capital asset, in which the business unit is not dealing are sold, the sale proceeds therefrom would not be included in sales but would be shown separately. Sale proceeds from scrap may either be shown separately in the profit and loss account or may be deducted from the amount spent by the manufacturing unit on the raw material from which goods are manufactured. The raw material, which is not capable of being used for manufacturing the goods will have to be either sold as scrap or might have to be re-cycled of disposed of to someone who ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld be wrong, as there has to be an element of turnover in the receipt if it has to be included in the total turnover. That element is missing in the case of freight, telecom charges or insurance attributable to delivery of the goods outside India and expenses incurred in foreign exchange in connection with the provision of technical services outside India. These receipts can only be received by the assessee as reimbursement of such expenses incurred by him. Mere reimbursement of expenses cannot have an element of turnover. It is only in recognition of this position that in the definition of export turnover in section 10B the aforesaid two items have been directed to be excluded. Secondly, the definition of export turnover contemplates that the amount received by the assessee in convertible foreign exchange should represent consideration in respect of the export. Any reimbursement of the two items of expenses mentioned in the definition can under no circumstances be considered to represent consideration for the export of the computer software or articles or things. Thus the expression total turnover which is not defined in section 10B should also be interpreted in the same m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... should be excluded while computing deduction u/s. 80HH of the Act. For the above proposition, ld .counsel for the assessee relied on the decision of the Hon ble Madras High Court in CIT v. Metal Powder Co. Ltd., (2012) 75 DTR 233 (Mad). 46. The ld. DR submitted that section 10B(7) of the Act provides that provisions of section 80IA(8) (10) shall apply to the undertaking referred to in section 10B also. Section 80IA(8) of the Act provides for a situation where any goods or services held for the purpose of eligible business are transferred to any other business carried on by the assessee. In such circumstances, it is provided therein that the cost as recorded in the books of account of eligible business should correspond to the market value of goods or services. According to him, therefore, the inter-unit services and the cost thereof should correspond to the market value. It is for this reason that the inter-unit services and the cost received by the unit rendering services should be taken as part of turnover of the unit rendering the services. In all respects, he placed reliance on the order of CIT(Appeals). 47. We have carefully considered the submissions of the learned co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... total turnover of ₹ 9,26,23,216. 50. The Special Bench held that as per cl. (iii) of Expln. 2 to s. 10B, freight, telecom charges and insurance attributable to delivery of goods outside India and expenses incurred in foreign exchange in providing technical services outside India have to be excluded from export turnover. On the basis of parity principle, same have to be excluded also from the total turnover though that expression has not been defined in the section. The Special Bench held that element of turnover is missing in these receipts and receipts are received by the assessee only as reimbursement of expenses incurred by it. Secondly, the definition of export turnover contemplates that the amount received by the assessee in convertible foreign exchange should represent consideration in respect of the export. Any reimbursement of the items of expenses mentioned in the definition can under no circumstances be considered to represent consideration for the export. Thus, the expression total turnover should also be interpreted in the same manner and the said items of expenses cannot form part of total turnover. Expression total turnover as defined in ss. 80HHE an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g or commercial parlance. In simple words, word turnover would mean only amount of sale proceeds received in respect of the goods in which an assessee is dealing in. Sale proceeds from scrap may either be shown separately in P L Account or may be deducted from amount spent by manufacturing unit on raw material, which was steel in case of assessee. Raw material, which was not capable of being used for manufacturing utensils would have to be either sold as scrap or might have to be re-cycled in form of sheets of stainless steel, if manufacturing unit is also having its re-rolling plant. If it is not having such a plant, the manufacturer would dispose of scrap of steel to someone who would recycle said scrap into steel so that said steel can be re-used. When such scrap is sold sale proceeds of scrap cannot be included in term turnover , since assessee unit was engaged primarily in manufacturing and selling of steel utensils and not scrap of steel. Proceeds of such scrap would not be included in sales in P L Account of assessee. Since assessee was not primarily dealing in scrap but was a manufacturer of stainless steel utensils, only sale proceeds from sale of utensils would be tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e articles or things in which the business unit is dealing. When some other things like old furniture or a capital asset, in which the business unit is not dealing are sold, the sale proceeds therefrom would not be included in sales but it would be shown separately. The reasoning adopted by the CIT(A) in the present case is that Sales and Turnover are not synonymous. According to him the word Sale and Turnover as used in Sec.44AB of the Act reveals the intention of the legislature in this regard. According to him the term Turnover would include have a wider connotation and would also include inter-unit sales. According to him there would have been an element of profit in the inter unit services to the unit providing service to the other unit. Factually it has not been demonstrated so. The CIT(A) has also proceeded to hold that even assuming that there was no profit element, yet such receipts have to be considered as includible in total turnover . We do not think that the above reasoning can be adopted in the context of the provisions of Sec.10B of the Act. In any event, the approach of the Hon ble Supreme Court in the case of Punjab Stainless Steel Industries (supra), ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee within the time limit as laid down in the aforesaid decision of the Hon ble High Court of Karnataka and allow the claim of the assessee, if it is found to be in accordance with the said decision. 58. The ld. counsel for the assessee also made a prayer for adjudication of ground No.12 (1) 12(2) as raised by the assessee in the original grounds of appeal which are with regard to the action of the revenue authorities in treating the gain on foreign exchange contracts as income not derived from the export business and therefore not eligible for deduction u/s. 10B of the Act. We may also mention that the assessee did not specifically raise a ground of appeal before the CIT(A) on the above issue. According to the ld. DR, the issue therefore should not be considered for adjudication. We are, however, of the view that the powers of the Tribunal to entertain a ground arising out of the assessment proceedings cannot be curtailed. We therefore entertain for adjudication ground Nos.12(1) 12(2) of the original grounds of appeal. This issue is identical to ground Nos.2, 3, 4 7 raised by the assessee in ITA No.1093/Bang/2009. For the reasons stated therein, the action of the rev ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gains, had the total income as so reduced been his total income ; and (ii) the amount of income-tax calculated on such long-term capital gains at the rate of twenty per cent : Provided that where the total income as reduced by such longterm capital gains is below the maximum amount which is not chargeable to income-tax, then, such long-term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax and the tax on the balance of such longterm capital gains shall be computed at the rate of twenty per cent; (b) in the case of a [domestic] company,- (i) the amount of income-tax payable on the total income as reduced by the amount of such long-term capital gains, had the total income as so reduced been its total income ; and (ii) the amount of income-tax calculated on such long-term capital gains at the rate of [twenty] per cent : 65. It can be seen from the aforesaid proviso that if the benefit of indexation is not claimed under second proviso of section 48, then the rate of tax on long term capital gain will only be @ 10%. In the present case, neither the AO nor the CIT(A) ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o of the decision of the Karnataka High Court reported in 286 ITR 255 which is inapplicable to the facts of the case. 3. Without prejudice to the above, apart from the denial, the learned A.O. ought to have granted a greater deduction u/s 10B of the Act, although not specifically claimed for by considering the profits appertaining to the income from the cancellation (of) forward contracts of 100% EOU units. 4. The learned A.O. has erred in subjecting the long term capital gains at 20% instead of 10% in accordance with law. 70. The assessee made the following submissions in the Statement of Facts accompanying the appeal memo on this issue before the CIT(Appeals):- 4 It is the submission of the appellant that the profits from the export unit, which are entitled to deduction u/s 10B of the Act, while computing the deduction as ascribed to such unit should be considered on standalone basis in terms of the provision of section 10B of the Act. The learned A.O. relied on the decision of the Karnataka High court in the case of CIT V. Himatasingike Seide Limited reported in 286 ITR 255, which is altogether on different fact, situation and for different legal proposition. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X
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