$ * IN HIGH COURT OF DELHI AT NEW DELHI 9. + ITA 459/2015 RIVIERA HOME FURNISHING ..... Appellant Through: Mr. Ved Jain and Mr. Pranjal Srivastava, Advocates. versus ADDL. COMMISSIONER OF INCOME TAX RANGE 15 ..... Respondent Through: Mr. Ashok Manchanda, Senior Standing counsel. CORAM: JUSTICE S. MURALIDHAR JUSTICE VIBHU BAKHRU ORDER % 19.11.2015 S. Muralidhar, J.: 1. present appeal by Appellant Assessee under Section 260A of Income Tax Act ( Act ) is directed against impugned order dated 27 th February 2015 passed by Income Tax Appellate Tribunal ( ITAT ) in ITA No.1191/Del/2012 for Assessment Year ( AY ) 2008-09. 2. Admit. 3. following questions of law are framed for consideration: (i) Whether in facts and circumstances of case, ITAT is correct in law in not allowing exemption of Rs.28,27,224/-, on account of customer claim, ignoring ITA No.459/2015 Page 1 of 12 express provision of Section 10B (4) of Act, whereby profit of business of undertaking are eligible for deduction. (ii) Whether in facts and circumstances of case, ITAT is correct in law in not allowing exemption of Rs.29,24,405/- on account of freight subsidy, ignoring express provision of section l0B(4) of Act, whereby profit of business of undertaking are eligible for deduction. (iii) Whether in facts and circumstances of case, ITAT is correct in law in not allowing exemption of Rs.43,287/-, on account of interest on FDR, ignoring express provision of section 10B (4) of Act, whereby profit of business of undertaking are eligible for deduction. 4. Assessee is private limited company engaged in business of manufacture and sale of home furnishings such as rugs, bath mats, blankets etc. Assessee set up 100% Export Oriented Undertaking ('EOU') which was 'eligible unit' for purposes of deductions under Section 10B of Act. Assessee commenced operations on 1st October 2002. Assessee filed its return of income for AY 2008-09 on 27th September 2008 declaring income of Rs. 10,34,24,340. Inter alia, Assessee claimed deduction in respect of income earned from following receipts: (a) Deemed Export Drawback (Export Incentives) Rs. 1,22,25,214/- (b) Customer Claims Rs. 28,27,224/- (c) Freight Subsidy Rs. 29,24,405/- (d) Interest on Fixed Deposit Receipts (FDRs) made for business purposes: Rs.43,287/-. ITA No.459/2015 Page 2 of 12 5. return of Assessee was picked up for scrutiny and notice under Section 143(2) was issued. Assessing Officer ( AO ) by order dated 3rd December 2010 excluded above receipts from computation of eligible income under Section 10B (4) of Act. AO was of view that above receipts did not fall within expression profit derived from export of articles. 6. appeal of Assessee was dismissed by Commissioner of Income Tax (Appeals) [ CIT (A) ] on 11th January 2012. Assessee thereafter filed appeal before ITAT which came to be decided by impugned order. 7. ITAT in impugned order agreed with contention of Assessee as regards deemed export drawback forming part of income eligible for deduction under Section 10B of Act. However, as regards other three items, viz., customer claims, freight subsidy and interest on FDRs made for business purposes, ITAT concurred with view of AO and CIT (A). This is how Assessee is in appeal before this Court. 8. This Court has heard arguments of Mr. Ved Jain, learned counsel for Assessee and Mr. Ashok Manchanda, Senior standing counsel for Revenue. 9. question as to what can constitute as profits and gains derived by 100% EOU from export of articles and computer software came for consideration before Karnataka High Court in CIT v. Motorola India ITA No.459/2015 Page 3 of 12 Electronics Pvt. Ltd. (2014) 46 Taxmann.com 167 (Kar).The said appeal before Karnataka High Court was by Revenue challenging order passed by ITAT which held that interest payable on FDRs was part of profits of business of undertaking and therefore includible in income eligible for deduction Sections 10A ad 10B of Act. There Assessee had earned interest on deposits lying in EEFC account as well as interest earned on inter-corporate loans given to sister concerns out of funds of undertaking. There was restriction on Assessee in that case from making pre-payment of its external commercial borrowings ( ECB ). It could repay only to extent of 10% of outstanding loan in year. This made Assessee temporarily park balance funds as deposits or with various sister concerns as inter corporate deposits until date of repayment. Assessee contended that interest derived from business of industrial undertaking was eligible for exemption within meaning of Section 10B and applied formula under Section 10B (4) of Act for determining profits from exports. Assessee s contention that expression profits of business of undertaking" in Section 10B (4) was wider than expression "profits and gains derived by Assessee from 100% EOU occurring in Section 10 B (1) was accepted by ITAT. ITAT noticed that unlike Section 80 HHC, where there was express exclusion of interest earned from profits of business of undertaking , there was no similar provision as far as Sections 10A and 10B were concerned. 10. In CIT v. Motorola India Electronics Pvt. Ltd. (supra) reference was made to decision of Supreme Court in Pandian Chemicals Ltd. v. ITA No.459/2015 Page 4 of 12 Commissioner of Income Tax (2003) 262 ITR 278 which dealt with Section 80HH and Liberty India v. Commissioner of Income Tax (2009) 317 ITR 218, which interpreted Section 801B of Act. Reference was also made to decision of CIT v. Sterling Foods (1999) 237 ITR 579 (SC), which interpreted Section 80HH and decision of Madras High Court in CIT v. Menon Impex P Ltd. (2003) 259 ITR 403(Mad.) which interpreted Section 10A of Act. Karnataka High Court in CIT v. Motorola India Electronics Pvt. Ltd. (supra), after noticing above decisions, held that it is clear that, what is exempted is not merely profits and gains from export of articles but also income from business of undertaking . Specific to question of interest earned by EOU on FDRs placed by it and interest earned from loans given to sister concerns, it was held that although it did not partake character of profit and gains from sale of article it is income which is derived from consideration realized by export of articles. 11. decision of Karnataka High Court in CIT v. Motorola India Electronics Pvt. Ltd. (supra) was followed by this Court in its decision in CIT v. Hritnik Exports Pvt. Ltd. (decision dated 13th November 2014 in ITA Nos. 219 and 239 of 2014). This Court also referred to its earlier decision dated 1st September 2014 in ITA No. 438 of 2014 (CIT v. XLNC Fashions). While declining to frame question of law in Revenue s appeal, this Court in CIT v. Hritnik Exports Pvt. Ltd. (supra) quoted with approval observations of Special Bench of ITAT in Maral Overseas Ltd. v. ACIT (decision dated 20th March 2012) on interpretation of Section 10B (4) of Act as under: ITA No.459/2015 Page 5 of 12 79. Thus, sub-section (4) of section 10B stipulated that deduction under that section shall be computed by apportioning profits of business of undertaking in ratio of turnover to total turnover. Thus, not-with-standing fact that sub-section (1) of section 10B refers profits and gains as are derived by 100% EOU, yet manner of determining such eligible profits has been statutorily defined in sub-section (4) of section 10B of Act. As per formula stated above, entire profits of business are to be taken which are multiplied by ratio of export turnover to total turnover of business. Sub-section (4) does not require assessee to establish direct nexus with business of undertaking and once income forms part of business of undertaking, same would be included in profits of business of undertaking. Thus, once income forms part of business of eligible undertaking, there is no further mandate in provisions of section 10B to exclude same from eligible profits. mode of determining eligible deduction u/s 10B is similar to provisions of section 80HHC inasmuch as both sections mandates determination of eligible profits as per formula contained therein. only difference is that section 80HHC contains further mandate in terms of Explanation (baa) for exclusion of certain income from "profits of business" which is, however, conspicuous by its absence in section 10B. On basis of aforesaid distinction, sub-section (4) of section 10A/10B of Act is complete code providing mechanism for computing "profits of business" eligible for deduction u/s 10B of Act. Once income forms part of business of income of eligible undertaking of assessee, same cannot be excluded from eligible profits for purpose of computing deduction u/s 10B of Act. As per computation made by Assessing Officer himself, there is no dispute that both these incomes have been treated by Assessing Officer as business income. CBDT Circular No. 564 dated 5th July, 1990 reported in 184 ITR (St.) 137 explained scope and ambit of section 80HHC and mode of determination of profits derived by assessee from export of goods. I.T.A.T., ITA No.459/2015 Page 6 of 12 Special Bench in case of International Research Park Laboratories v. ACIT, 212 ITR (AT) 1, after following aforesaid Circular, held that straight jacket formula given in sub-section (3) has to be followed to determine eligible deduction. Hon'ble Supreme Court in case of P.R. Prabhakar; 284 ITR 584 had approved principle laid down in Special Bench decision in International Research Park Laboratories v. ACIT (supra). In assessee's own case I.T.A.T. in preceding years, after considering decision in case of Liberty India held that provisions of section 10B are different from provisions of section 80IA wherein no formula has been laid down for computing eligible business profit. 12. Recently, in decision dated 6th October 2015 in ITA NO. 392 of 2015 (Principal Commissioner of Income Tax v. Universal Precision Screws), this Court had occasion to again consider whether interest earned on fixed deposits kept by Assessee which was eligible under Section 10B of Act, as condition for utilization of letter of credit and bank guarantee limits, would qualify for deduction. That question was decided in favour of Assessee and against Revenue. Court held as under: "9. On question of interest on FDRs, ITAT has referred to Section 10B (4) which states that for purposes of Section 10B (1), profits derived from export of articles or things or computer software shall be amount which bears to profits of business of undertaking , same proportion as export turnover in respect of such articles or things or computer software bears to total turnover of business carried on by undertaking. As noted by this Court in CIT v. Hritnik Exports Pvt. Ltd. (decision dated 13th November, 2014 in ITA No.219 & 239 of 2014), Section 10B (4) mandates application of formula for determining profits derived from exports for purposes of Section 10B(1). In other words, formula would read thus: ITA No.459/2015 Page 7 of 12 Profits derived = profits of business x export turnover from export of undertaking total turnover 9A. In terms of above formula, question that would arise is whether interest on FDRs could form part of profits of business of undertaking . attention of Court has been drawn to decision of Karnataka High Court in CIT v. Motorola India Electronics Pvt. Ltd. (2014) 46 Taxmann.com 167 (Kar.) which held that there was direct nexus between interest received from FDRs created by similarly placed Assessee from amounts borrowed by it. High Court approved order of ITAT in that case which held that entire profits of business of undertaking should be taken into consideration while computing eligible deduction under Section 10B of Act by ITA 392/2015 applying mandatory formula. 10. In present case, Assessee has stated that interest on FDRs was received on margin kept in bank for utilization of letter of credit and bank guarantee limits . In those circumstances, decision of ITAT that such interest bears requisite characteristic of business income and has nexus to business activities of Assessee cannot be faulted. In other words, interest earned on FDRs would form part of profits of business of undertaking for purposes of computation of profits derived from export by applying formula under Section 10B(4) of Act 13. Mr. Ashok Manchanda, learned Senior standing counsel for Revenue, urged that none of earlier decisions of High Courts have considered effect of Sections 80I, 801A and 801B of Act which occur in Chapter VIA of Act. He referred in particular to Section 80A (4) of Act, which reads as under: 4) Notwithstanding anything to contrary contained in section 10A or section 10AA or section 10B or section 10BA or in any ITA No.459/2015 Page 8 of 12 provisions of this Chapter under heading C Deductions in respect of certain incomes , where, in case of assessee, any amount of profits and gains of undertaking or unit or enterprise or eligible business is claimed and allowed as deduction under any of those provisions for any assessment year, deduction in respect of, and to extent of, such profits and gains shall not be allowed under any other provisions of this Act for such assessment year and shall in no case exceed profits and gains of such undertaking or unit or enterprise or eligible business, as case may be. 14. Mr. Manchanda s attempt was to show that Section 80A (4), which inter alia stated that any deduction allowable under Section 10B cannot in any case exceed profits and gains of such undertaking or unit or enterprise or eligible business, as case may be made it clear that unit seeking deduction under Section 10B would be eligible to do so only in so far as such income was directly attributable to business of export. Any income that might be merely incidental to business of undertaking, not directly related to activity of export, would not be eligible for such deduction. He also took Court again through decision of Supreme Court in Liberty India (supra) and submitted that earlier decisions of this Court in Hritnik Exports (supra) and Universal Precision Screws (supra) might require to be reconsidered. When question was posed to him as to whether Revenue had challenge aforementioned decisions of this Court, and of ITAT in present case to extent it has allowed plea of Assessee as regards deemed export drawback , Mr. Manchanda stated that Revenue ought to have challenged above decisions as well as impugned order of ITAT in present case and perhaps he would advise it to do so hereafter. He has also handed over written note of ITA No.459/2015 Page 9 of 12 submissions, reiterating above submissions. 15. In considered view of Court, submissions made on behalf of Revenue proceed on basic misconception regarding true purport of provisions of Chapter VIA of Act and on incorrect understanding of Section 80A (4) of Act. opening words of Section 80A (4) read Notwithstanding anything to contrary contained in section 10A or section 10AA or section 10B or section 10BA or in any provisions of this Chapter..... . What is sought to be underscored, therefore, is that Section 80A, and other provisions in Chapter VIA, are independent of Sections 10A and 10B of Act. It appears that object of Section 80A (4) was to ensure that unit which has availed of benefit under Section 10B will not be allowed to further claim relief under Section 80IA or 80IB read with Section 80A (4). intention does not appear to be to deny relief under Section 10B (1) read with Section 10B (4) or to whittle down ambit of those provisions as is sought to be suggested by Mr. Manchanda. Also, he is not right in contending that decisions of High Courts referred to above have not noticed decision of Supreme Court in Liberty India. Karnataka High Court in CIT v. Motorola India Electronics Pvt. Ltd. (supra) makes reference to said decision. That decision of Karnataka High Court has been cited with approval by this Court in Hritnik Exports (supra) and Universal Precision Screws (supra). In Hritnik Exports (supra) Court quoted with approval observations of Special Bench of ITAT in Maral Overseas Ltd. (supra) that Section 10A/10B of Act is complete code providing mechanism for computing profits of business eligible for deduction u/s 10B of ITA No.459/2015 Page 10 of 12 Act. Once income forms part of business of income of eligible undertaking of assessee, same cannot be excluded from eligible profits for purpose of computing deduction u/s 10B of Act. 16. This then brings us to questions framed for consideration in present case and decision of ITAT in not accepting Assessee s plea in regard to customer claims freight subsidy and interest on fixed deposit receipts even while it accepted Assessee s case as regards deemed export drawback . 17. contention of Assessee as regards customer claims was that it had received claim of Rs. 28,27,224 from customer for cancelling export order. Later on cancelled order was completed and goods were exported to another customer. sum received as claim from customer was non-severable from income of business of undertaking. Court fails to appreciate as to how ITAT could have held that this transaction did not arise from business of export of goods. Even as regards freight subsidy, Assessee s contention was that it had received subsidy in respect of business carried on and said subsidy was part of profit of business of undertaking. If ITAT was prepared to consider deemed export draw back as eligible for deduction then there was no justification for excluding freight subsidy. Even as regards interest on FDR, Court has been shown note of balance sheet of Assessee [which was placed before AO] which clearly states that fixed deposit receipts (including accrued interest) valuing Rs.15,05,875 are under lien with Bank of India for facilitating letter of credit and bank ITA No.459/2015 Page 11 of 12 guarantee facilities. In terms of ratio of decisions of this Court both in Hritnik Exports (supra) and Universal Precision Screws (supra), interest earned on such FDR ought to qualify for deduction under Section 10B of Act. 18. Accordingly, questions are answered in favour of Assessee and against Revenue. impugned order of ITAT to extent it answered said questions against Assessee is hereby set aside. 19. appeal is allowed in above terms, but with no order as to costs. S. MURALIDHAR, J VIBHU BAKHRU, J NOVEMBER 19, 2015 mg ITA No.459/2015 Page 12 of 12 Riviera Home Furnishing v. Addl. Commissioner Of Income Tax Range 15