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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 ..... reciated that forward contracts could not be booked unless and otherwise export contracts or export bills were submitted to the bankers and could be settled only by way of delivering export proceeds. 4. Without prejudice, the CIT(Appeals) ought to have appreciated that the requirement of Section 10B was not the income derived from export of goods or merchandise as concluded by the assessing officer and the same being contrary to the requirement of Section 10B, ought to have sustained the disallowance as made by the assessing officer. 7. Without prejudice, the CIT(Appeals) ought to have appreciated that for the assessment year 2005-06, the Tribunal in the Appellant's own case had not at all distinguished the order of the Mumbai Bench in the case of D.KishoreKumar & Co vs. DCIT reported in (2005) 2 SOT 769 and therefore the CIT(Appeals) ought to have followed the said order of the Mumbai Bench." 4. The issue that arises for consideration is as to whether receipts from forward contracts can be considered as profits derived from the business for the purpose of computing deduction u/s. 10B of the Income Tax Act, 1961 (Act)? The material facts that are relevant in this regard are as f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on actual orders on hand or based on orders in pipeline or based on past performance c) These contracts will have to be delivered only by delivering export documents or export proceeds lying in EEFC accounts d) On the delivery date, if the exporter 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 maybe. e) 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. 8. The Assessee pointed out that during the previous year it had booked forward Contracts only for a part of the export turnover which clearly indicated that the Assessee did not over book forward contracts in order to speculate. Whatever contracts booked were based on business requirements substantiated by actual exports performed. The Assessee placed reliance on the decision of the Hon'ble ITAT, Mumbai bench in the case of D Kishorekumar and Co. V DCIT (ITA No.3883/Mum/1997 dated 31. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or (b) to (d)..... shall not be deemed to be a speculative transaction. 11. It was first pointed out by the ld. counsel for the assessee that speculative transaction means a transaction in which a contract for the purchase or sale of any commodity is ultimately settled otherwise by actual delivery. According to him, the expression "commodity" used in section 43(5) of the Act does not include foreign exchange, which was subject matter of the forward contract in the present case. In this regard, our attention was drawn to the decision rendered by the ITAT Ahmedabad Bench in Adani Enterprises Ltd. v. ACIT [2015] 55 taxman.com 375 (Ahd-Trib). In the aforesaid case, the assessee was engaged in export, import and domestic trading of various commodities. The assessee borrowed money for the purpose of its business i.e., global trading various commodities. As per terms of borrowing of foreign currency working capital loan, the assessee had to enter into a currency swap arrangement. The assessee entered into currency swap transaction in respect of outstanding foreign currency loans as per the prevailing RBI guidelines. The currency swap transaction on settlement resulted in a loss of Rs. 6 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e are of the opinion that the decisions relied on by the revenue which are of various Tribunal Benches pale into insignificance. Judicial discipline requires us to follow judgment of High Court unless and until a contrary judgment of jurisdictional High Court is shows by the parties to the litigation. Even if there is a conflict of opinion between various High Courts, unless and until, there is a jurisdictional High Court decision, one way or the other, an assessee can rightly submit that the one in its favour should be followed. We are therefore, of the opinion that the assessee has to succeed in this appeal." 14. The Revenue had, before the Tribunal, placed reliance on the decision of Tribunal rendered in the case of K.M. Mohan & Co. Export Pvt. Ltd. (supra) for A.Y. 2005-06. 15. Besides the above, the ld. counsel for the assessee also placed reliance on the decision of the ITAT Mumbai Bench in the case of S. Vinodkumar Diamonds Pvt. Ltd. v. DCIT (supra). 16. The ld. DR, on the other hand, placed strong reliance on the decision rendered by the Tribunal in assessee's own case and submitted judicial discipline requires that the same should be followed. He drew our attention to t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etween foreign exchange forward contracts and the export orders of the concerned assessee. According to him, in the present case, the assessee has not filed any documentary evidence to show nexus between exports made by it and foreign exchange forward contract. 20. The ld. AR, in his rejoinder, submitted that in the order of assessment, the AO has clearly recorded the fact that foreign currency forward contracts, although pertaining to assessee's own exports, cannot be treated as income derived from export of goods and merchandise. According to him, this finding of the AO is itself enough evidence that he had not disputed the fact that foreign exchange forward contracts was in relation to the exports made by the assessee. It was also pointed out by him that the expression "profits of the business" u/s. 10B means profits of the business of the undertaking which has a broader connotation. 21. We have given a very careful consideration to the rival submissions. The Assessee is engaged in the business of readymade garments. The Assessee realizes the export proceeds in foreign exchange. As a result of variation in the rates of foreign exchange, the Assessee might receive more or less ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns of Section 43(5) of the Act describing speculative transaction, were clearly fulfilled, but the requirement of Expln.-2 to Sec.28 was not fulfilled in as much as it could not be concluded that the transactions were of such a nature as to constitute a business by itself. The Tribunal explained that profit on cancellation of forward contracts is generally revenue neutral because the question of profit on cancellation of forward contracts can only arise in a situation when the value of foreign currency is increasing vis-à-vis domestic currency, and when the foreign exchange value is so increasing, the ultimate payment made in foreign currency was not to go up, there would not have been gains on cancellation of contracts but then the actual costs, in terms of domestic currency that the assessee pays when he has to pay for imports in foreign currency does not also go up. 24. The revenue challenged the order of CIT(A) for AY 06-07 and the same was considered by the ITAT Bangalore in ITA No.113/Bang/09 for AY 05-06 by order dated 7.8.2009. The Tribunal did not agree with the decision rendered by the Mumbai Bench in the case of D.Kishore Kumar & Co. (supra) on which the CIT(A) h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of ITAT, it becomes clear that there is an apparent conflict of judicial opinion on the question as to whether the gain on forward foreign exchange contracts is to be regarded as Income from speculative business. 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. 27. The decisions where it was held that gain on forward foreign exchange contracts is to be regarded as Income from business, which were cited on behalf of the Assessee are as follows: (i) ITA No.1320/Bang/2012 for AY 09-10 M/S.Hanuman Weaving Factory Vs. ACIT order dated 23.8.2013. In this decision the Tribunal distinguished the case of K.Mohan & Co. (Assessee's case for AY 06-07 by observing that the issue therein was as to whether gain on forward foreign exchange contracts is to be regarded as Income derived from the business of export eligible for deduction u/s.10B of the Act. The Tribunal ultimately held that the gain in question was to be regarded as "Income from Business". (ii) London Star Diamond Company (I) Pvt.Ltd. Vs. DCIT (2013) 54(II)ITCL 254 (Mum"D ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... upon by the learned counsel for the Assessee are not relevant and helpful to the plea of the Assessee before us. In view of the above conclusions, we do not deem it necessary to elaborate on the arguments advanced by the learned counsel for the Assessee before us. 29. For the reasons given above, we dismiss ground No. 2 to 4 and ground No.7 raised by the Assessee before us. 30. Ground Nos. 5 & 6 raised by the assessee reads as follows:- "5. The CIT(Appeals) ought not to have upheld the inclusion of inter unit job work charges for arriving at the total turnover of the EOU. 6. The CIT(Appeals) failed to appreciate that the inter unit job work charges represented job works carried out by one EOU by utilizing the facility available with it to the other EOU." 31. As we have already seen the assessee is engaged in the manufacture of readymade garments for exports. The Assessee has two Export Oriented Units (EOUs) and other units which fall under Domestic Tariff Area (DTA). The manufacturing activity involves several processes which results in one EOU undertaking certain manufacturing process for the other EOU and such Inter Unit transactions, are permitted under the EOU regulations. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... period of ten consecutive assessment years beginning with the assessment year relevant to the pervious year in which the undertaking begins to manufacture or produce articles or things or computer, software, as the case may be, shall be allowed from the total income of the assessee: ......... ......... (4) For the purposes of sub-section (1), the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking. Explanation 2 (iii) "export turnover" means the consideration in respect of export by the undertaking of articles or things or computer software received in, or brought into India by the assessee in convertible foreign exchange in accordance with subsection (3), but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d different profits for the business and the undertaking. The inter-units transfers will not be a part of the "Total Turnover" for the Assessee as a whole, but will definitely form a part of the Total Turnover for the undertaking. On considering business of the Unit/Undertaking independent of the Assessee, the inter-unit transfer acquires the character of sale. Hence, the same is includible as part of total turnover of the unit. The AO accordingly computed deduction u/s.10B of the Act by including inter-unit transfer as part of total turnover of the concerned unit which provided service to the other unit. 39. On appeal before the CIT(A), the assessee submitted that the word "turnover" is a commercial term and should be construed in the commercial sense and in accordance with the normal rules of accountancy. Accordingly, "turnover" means gross in-flow of cash receivables and other considerations arising in the course of ordinary activities of an enterprise from the sale of goods or from rendering of services to the buyer or client. In the assessee's case, inter-unit job work charges relate to the assessee only and there is no buyer. The Assessee relied on the guide to company audi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... none of EOUs can be considered as seller or buyer. Section 44AB of I.T.Act puts a coma in between the word "Sales" and "Turnover" to distinguish that both terms are distinct and have different connotations. Sales does not include goods returned, price discount etc., Turnover has a wider connotation. The word "or" interspersed between the words "turnover" and "gross receipts" in S-44AB of IT Act evinces that both can be used interchangeably and are synonymous. It includes all receipts even having no element of profit. Such is the interpretation of the term "Gross Receipts" by the Guidance Note issued by ICAAI reproduced below:- The term 'gross receipts" is also not defined in the Act. It will include all receipts whether in cash or in kind arising from carrying on of the business which will normally be assessable as business income under the Act. Broadly speaking, the following items of income and/or receipts would be covered by the term gross receipts in business" (i) profits on sale of a licence granted under the Imports (Control) Order, 1955 made under the Imports & Exports (Control) Act, 1947; (ii) Cash assistance (by whatever name called) received or receivable by any perso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... relief is to be computed qua undertaking and not company (vide supra)." 41. Aggrieved by the order of CIT(Appeals), the assessee has preferred the present appeal before the Tribunal. 42. The ld. counsel for the assessee drew our attention to the decision of Hon'ble Supreme Court in CIT v. Punjab Stainless Steel Industries, 364 ITR 144 (SC). In the aforesaid decision, the question whether the sale of scrap should form part of the total turnover while computing deduction u/s. 80HHC of the Act came up for consideration. The assessee in that case was a manufacturer and exporter of stainless steel utensils. In the process of manufacturing of stainless steel utensils, some part of the steel which cannot be used or reused for manufacturing utensils remains unused, which is treated as scrap. The assessee sells the scrap in the local market. The income arising from sale of scrap is reflected in the profit & loss account of the assessee. While computing deduction u/s. 80HHC, the assessee did not include the sale proceeds of the scrap in the total turnover and was showing the same separately in the profit & loss account. According to the revenue, sale of scrap was also part of the turnover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... le proceeds of the commodity in which the business unit is dealing, there is no reason to take a different view." 43. According to the ld. counsel for the assessee, the inter-unit transfer between Unit-I & II in the present case would also be akin to sale of scrap. According to the ld. counsel for the assessee, the inter-unit transfers will only ultimately go to reduce the cost of sales of the assessee and need not be regarded as turnover of the unit providing inter-unit services. The ld. counsel for the assessee further drew our attention to the decision of the Special Bench ITAT in the case of ITO v. Sak Soft Ltd., 313 ITR (AT) 353 (Chn.). In the aforesaid decision, the question for consideration before the Special Bench was, as to the meaning of total turnover and export turnover for the purpose of computing deduction u/s. 10B of the Act. The Special Bench observed as follows:- " To say that in the absence of any definition of "total turnover" for the purpose of "total turnover" for the purpose of section 10B, there is no authority to exclude anything from the expression as understood in general parlance would be wrong, as there has to be an element of turnover in the receipt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he unit incurring the expenses in getting it reimbursed by the other unit. It was also pointed out by him that the unit providing services recognizes the expenses in the debit side of the profit & loss account and also recognizes the receipt on the credit side of the profit & loss account, thereby having NIL effect on the profits as per the profit & loss account. The unit receiving the services claims the expenses incurred by the other unit as expenses and thereby profits of the unit receiving the benefit of services provided by the other unit gets reduced to that extent. It was his submission that there is no attempt on the part of the assessee in either of the units to either decrease the total turnover or increase the profits of the business, thereby discharging the claim for deduction u/s. 10B of the Act. 45. The ld. counsel for the assessee also made an alternate submission that when there are inter-unit transfers between the same assessee, then there cannot be any element of profit in such transfers and therefore the profit element of the unit captively consuming the services of other unit, its profit should be excluded while computing deduction u/s. 80HH of the Act. For the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 25,125 but that was for the reason that the inward remittances were not proved. He thus arrived at the export turnover at Rs. 7,96,32,347. The AO thereafter computed the deduction under s. 10B by applying the following formula prescribed by s. 10B(4) :- Deduction under s. 10B = Profits of the business x Export turnover/Total turnover 49. The profits of the business as computed by him came to Rs. 3,39,85,047. The figure of export turnover, as already seen, was taken at Rs. 7,96,32,347. The figure of total turnover was taken at Rs. 9,26,23,216. The deduction was accordingly calculated at Rs. 2,92,18,474. The question before the Special Bench was as to whether the AO should have taken the figure of total turnover which is the denominator in the above formula at Rs. 8,97,16,160 i.e., after deducting the expenditure of Rs. 29,07,056 from the total turnover of Rs. 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 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arising from sale was also reflected in P&L account. For purpose of availing deduction u/s 80HHC, income from sale proceeds of scrap was not included in total turnover but was shown separately in P&L account. Revenue submitted that sale proceeds from scrap should have been included in 'total turnover' as assessee was also selling scrap and that was also part of sale proceeds. High Court held that proceeds generated from the sale of scrap would not be included in 'total turnover'. On further appeal, the Hon'ble Supreme Court held to ascertain whether turnover would also include sale proceeds from scrap, one has to know the meaning of the term 'turnover'. The term 'turnover' has neither been defined in income tax Act nor has been explained by any of CBDT circulars. One has to look at meaning of term 'turnover' in ordinary accounting 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 ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opted by the Assessee there is no effect on the true profits from the business of both the EOUs for the purpose of allowing deduction u/s.10B of the Act. The question is should EOU-I recognise the services rendered by it to EOU-II as its 'turnover'. The Assessee is a manufacturer of readymade garments and does not do the activity of washing. As explained by the Hon'ble Supreme Court in the case of Punjab Stainless Steel Industries (supra) the term 'turnover' has neither been defined in the Act nor has been explained by any of the CBDT circulars. One has to look at the meaning of the term 'turnover' in ordinary accounting or commercial parlance. 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d therefore an amount of Rs. 8,46,458 was added u/s. 2(24)(x) r.w.s. 36(1)(va) of the Act. 57. The assessee raised a specific ground of appeal challenging the addition made by the AO as aforesaid viz., ground No.7 before the CIT(A). The CIT(A) has, however, not addressed the issue in the impugned order. At the time of hearing, it was brought to our notice that the issue in the aforesaid ground of appeal is squarely covered by the decision of the Hon'ble High Court of Karnataka in Spectrum Consultants (India) Pvt.Ltd. Vs. CIT, (2013) 34 Taxman.com 20 wherein it was held that if the employees contribution to ESI is paid on or before the due date for filing return of income u/s. 139(1), then the same cannot be disallowed. The AO is therefore directed to verify if the employees contribution to ESI has been paid by the 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s levied by the AO. The CIT(A) did not discuss this issue, nevertheless, he upheld the order of the AO. Aggrieved by the order of CIT(A), the assessee has raised ground No.3 before the Tribunal. 64. We have heard the submissions of the ld. counsel for the assessee and the ld. DR. Section 112(1) reads as follows:- Tax on long-term capital gains. 112. (1) Where the total income of an assessee includes any income, arising from the transfer of a long-term capital asset, which is chargeable under the head "Capital gains", the tax payable by the assessee on the total income shall be the aggregate of,- (a) in the case of an individual or a Hindu undivided family, [being a resident,]- (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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... elated to debt funds in respect of which no STT had been made. Taking into consideration all these factors, the AO held that the assessee was not entitled to exemption u/s 10B in respect of the profit of EOU-II and has also assessed long-term capital gains of Rs. 43,73,000/- arising from the sale of debt funds and brought the same to tax. 69. Aggrieved, the assessee preferred appeal before the first appellate authority on the following relevant grounds of appeal:- "2(A) The learned A.O. has erred in denying the deduction u/s 10B of the Act to which the appellant is legitimately entitled to while computing the assessment of the appellant. 2(B) The denial of deduction is on the erroneous appreciation of the position of law .and on misplacing reliance on the ratio 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee by the decision of the Hon'ble High Court of Karnataka in the case of CIT & Another v. Yokogawa India Ltd. 341 ITR 385. Therefore, he directed the AO to follow the decision and recompute the deduction u/s 10B accordingly. Aggrieved by the order of the CIT(A), the revenue has filed the present appeal before the Tribunal. 72. At the time of hearing of this appeal, the ld. counsel for the assessee filed before us the decision of the Bangalore Bench of the Tribunal in Mindtech India Ltd. v. ITO, ITA No.1054/Bang/2013, order dated 4.7.2014, wherein the issue was whether section 10B is an exemption provision under Chapter III or a deduction under Chapter VIA of the Act was considered and this Tribunal took the view that the provisions are exemption provisions and therefore loss of EOU or other units will not enter the computation of total income at all. In fact, the CIT(A) has followed the decision of the Hon'ble High Court of Karnataka in CIT v. Yokogawa India ltd., 341 ITR 385, wherein it was held 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 includ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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