Nosch Labs Private Limited,, Hyderabad vs Assessee

ITA No.672/Hyd/2013 : Asst. Year 2008-09

M/s. Nosch Labs (P) Limited, V/s. Dy. Commissioner of Income-tax Hyderabad Circle 16(1), Hyderabad

( PAN - AABCN 2833 Q)

(Appellant) (Respondent)

Appellant by : Shri A.V.Raghuram

Respondent by : Shri Parneet S.Sachdev CIT-DR

Date of Hearing 21.01.2015 Date of Pronouncement 23.1.2015

ORDER

Per P.M.Jagtap, Accountant Member:

This appeal filed by the assessee is directed against the order dated 4.3.20123 passed by the learned Commissioner of Income-tax IV, Hyderabad under S.263 of the Income Tax Act,1961, revising the assessment made by the Assessing Officer under S.143(3) with direction to him to recompute the deduction allowable to the assessee under S.10B, after excluding other income of Rs.24,27,261 from the profit of the business.

2. The assessee in the present case is a company, which is engaged in the business of manufacture, trading and export of bulk drugs and intermediaries. The return of income for the year under consideration was filed by it on 22.9.2008, declaring total income of Rs.4.88,99,305, after claiming deduction under S.10B amounting to Rs.16,06,05,559. In the assessment completed under S.143(3) vide order dated 27.12.2010, 2 ITA No.672/Hyd/2013 M/s. Nosch Labs (P) Limited, Hyderabad

the claim of the assessee of deduction under S.10B was allowed by the Assessing Officer and the income was assessed on the same figure as returned by the assessee.

3. The records of the said assessment subsequently came to be examined by the learned Commissioner of Income-tax and on such examination, he found that other income amounting to Rs.24,27,261 consisting of interest income, technical consultancy charges, exchange fluctuation, etc. constituted part of the profit of the business of the assessee, and while allowing the claim of the assessee for deduction under S.10B, the said other income was not excluded by the Assessing Officer from the profit of the business. According to the learned Commissioner, the said income did not constitute income derived from the exports of the assessee and the same therefore, was liable to be reduced from the profits of business while computing deduction under S.10B. He therefore, was of the opinion that the order passed by the Assessing Officer under S.143(3) allowing the claim of the assessee for deduction under S10B by including other income in the profits of business was erroneous and prejudicial to the interests of the Revenue. Accordingly, a notice under S.263 was issued by him requiring the assessee to show cause as to why the same should not be revised under S.263. In reply, the nature of each and every item of other income was explained by the assessee before the learned Commissioner as under-

".....

i) Technical consultancy: Rs.58,787/- : It was stated that consultancy income represents amount received for providing technical data to overseas customers in connection with the supply of drugs. The same should be treated as income derived from business by the undertaking.

ii) Exchange Fluctuation:2,85,084/-

It is a trade practice to negotiate price in terms of US $ with 3 ITA No.672/Hyd/2013 M/s. Nosch Labs (P) Limited, Hyderabad

overseas customers or suppliers. While supplying to customers invoices are raised in terms of US $ and procuring materials from overseas suppliers invoices are billed to them in terms US $ Whereas such purchases and sales are reflected in the books of account in Indian Rupees at the prevailing exchange rate. However while settling the dues of suppliers or customers transactions take place in terms of US $ at the prevailing exchange rate at that time. The difference in books of account either in suppliers account or customers account treated as exchange fluctuations. It is evident that income from exchange fluctuations is emanated from business transactions. Accordingly treated as business income for the purpose of claiming exemption u/s.1 OB.

iii) Loss on forex options Rs.268724/- Most of the overseas suppliers supply goods on credit basis against Le and the invoices are raised in terms of foreign currency i.e., US $. To minimize the risk from exchange fluctuations bankers may insist/suggest to take forward/option contracts against the outstanding liabilities and receivables as the case may be. The resultant loss/gain at the time of settlement of contract is te5ated loss on forex options. Hence, the same should be adjusted under other incomes which are nothing but income derived from business.

iv) Suppliers' Discount Rs.1540633/-. In the normal course of business purchases are procured on credit basis for a certain period. Sometimes the suppliers may request for early payment for which they extend certain amount as discount' depending on the mutual negotiations at the time of payment. These discounts are nothing but reduction in purchase. Hence, discounts should be treated as business income for the purpose of claiming deduction u/s.1OB.

v) Interest on LC Margin money Rs.311051/-: It was submitted that certain deposits are to be given as LCs margin with banks who provide letter of credit. The interest earned on such margin is directly connected with business transactions. Since this margin money deposits are made out of working capital loans, such interest earned on Margin money is to be treated as income derived from the business.

vi) Interest Rs.499711/-: Interest earned on electricity deposits, EEFC accounts also treated as business income for the reason that interest paid on loans charged to profit and loss account and the interest earned on deposits to be netted off with a result in interest income of Rs.499711/-."

4 ITA No.672/Hyd/2013 M/s. Nosch Labs (P) Limited, Hyderabad

4. On the basis of the above submissions, it was contended on behalf of the assessee before the learned Commissioner that the other income of Rs.24,27,261 represented its business income and the same was rightly included in the profits of the business by the Assessing Officer for the purpose of allowing deduction under S.10B. It was contended that the order of the Assessing Officer allowing the claim of the assessee for deduction under S.10B was neither erroneous nor prejudicial to the interests of Revenue calling for any revision under S.263.

5. The learned Commissioner did not find merit in the submissions made on behalf of the assessee. According to him, although the other income amounting to Rs.24,27,261 was 'attributable to' the business of the assessee, the same was certainly not 'derived from' the export business, so as to treat it as part of profits of business for the purpose of allowing deduction under S.10B. Relying, inter alia, on the decision of Hon'ble Supreme Court in the case of CIT V/s. Sterling Foods (237 ITR 279), he held that the failure on the part of the Assessing Officer to exclude the other income from the profits of business for purposes of allowing deduction under S.10B thus rendered the order passed under S.143(3) erroneous and prejudicial to the interests of revenue, and the same was revised by him by the impugned order passed under S.263, with a direction to the Assessing Officer to recompute the deduction allowable to the assessee under S.10B, after excluding other income of Rs.24,27,261 from the profits of the business of the assessee undertaking. Aggrieved by the order of the learned Commissioner, assessee has preferred this appeal before the Tribunal.

5 ITA No.672/Hyd/2013 M/s. Nosch Labs (P) Limited, Hyderabad

6. The learned counsel for the assessee submitted that while considering the claim of the assessee for deduction under S.10B in respect of other income, the vital aspect that is required to be considered is that there is a formula given in sub-section (4) of S.10B to work out the profits derived from the export of article or thing or computer software for the purpose of allowing deduction under S.10B. He invited out attention to the provisions of sub-section (4) of S.10B, wherein the formula is given to compute the profits derived from the export of articles or things or computer software, as 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 by the undertaking. He contended that what is relevant to apply this formula is to compute the profits of the undertaking first and then to use the said formula to compute the profits derived from the export of articles or things or computer software. He contended that since the other income in question earned is admittedly forming part of the income of the assessee from the profits of the business of the undertaking, the same cannot be excluded for the purpose of computing the profits derived by the assessee from the export of articles or things or computer software, while applying the formula given in sub-section (4) of section 10B. He contended that there was thus no error in the order of the Assessing Officer passed under S.143(3) in not excluding other income in question from the profits of the business undertaking for the purpose of computing deduction under S.10B and the learned Commissioner is not justified in revising the said order by exercising the powers conferred upon him under S.263.

7. The Learned Departmental Representative, on the other hand, submitted that as per provisions of Sub-section (1) of S.10B, only the profits and gains derived from the export of articles or things or computer 6 ITA No.672/Hyd/2013 M/s. Nosch Labs (P) Limited, Hyderabad

software of the eligible undertaking are entitled for deduction. He contended that the expression 'derived from' has a 'very narrow' meaning as held inter alia by the Hon'ble Supreme Court in the case of Sterling Foods (supra) relied upon by the learned Commissioner in his impugned order, and it includes only that income which has a direct nexus or first degree connection with the export activity of the assessee. He contended that the other income in question earned by the assessee cannot be said to have any direct nexus or first degree connection with the export business of the assessee, and the same, therefore, is not eligible for deduction under S.10B, as rightly held by the learned Commissioner in his impugned order passed under S.263.

8. We have considered the rival submissions and also perused the relevant material on record. The issue that arises for our consideration in the present appeal is whether the other income in question earned by the assessee is liable to be included or excluded from the profits of the business of the undertaking for the purposes of computing the deduction under S.10B. It is no doubt true that the deduction under S.10B is allowable in respect of profits and gains derived by the eligible undertaking from the export of articles or things or computer software. It is also true that the expression 'derived from' is given a narrow meaning inter alia by the Hon'ble Supreme Court in the case of Sterling Foods (supra) by holding that any income for being said to be derived from any business of the undertaking should have a direct nexus or first degree connection with that business of the undertaking. It is, however, relevant to note that this narrow meaning has been given especially in the context of S.80HH and S.80IA etc. where the term 'Profits and gains derived' is neither defined nor any formula is given to compute the profits and gains derived from. In S.10B of the Act, which is relevant in the present context as well as in S.80HHC, a formula, 7 ITA No.672/Hyd/2013 M/s. Nosch Labs (P) Limited, Hyderabad

however, has been given to compute the profits derived from the export of articles or things or computer software. In Sub-section (3)(a) of S.80HHC, it is provided that the profits derived from exports shall be the amount which bears to the profits of the business the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the business and keeping in view this formula given in Sub-section (3) of S.80HHC, it was held by the Hon'ble Supreme Court in the case of Mysodet (P) Ltd. V/s.CIT (305 ITR

276) that S.80HHC statutorily fixes the quantum of deduction on the basis of a proportion of the business profits under the head 'profits and gains of business or profession' irrespective of what could strictly be described as profits derived from export of goods out of India. It was also observed by the Hon'ble Supreme Court that even the illustration given in the Board's Circular No.564 dated 5.7.1990 issued in this context clearly indicates that the ratio mentioned in sub-section (3) of S.80HHC has to be applied to the business profits computed under the provisions of S.28 to S.433D of the Act.

9. In the case of Maral Overseas Ltd. (2012) (146 ITTJ (Ind) SB

129), exactly similar issue had come up for consideration in the context of income received by the assessee from the sale of export entitlement and special import licences and keeping in view the formula given in sub- section (4) of S.10B for computing the profits and gains derived by the export oriented undertaking, the Special Bench of this Tribunal held that once an income forms part of profits of business of the undertaking, the same has to be included in the profits of the business of the undertaking for the purposes of computing deduction under S.10B as per the formula given in Sub-section (4)of that section.

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10. In the present case, the other income in the question earned by the assessee was treated by the Assessing Officer as business income of the assessee and this position is not disputed even by the learned Commissioner in his impugned order passed under S.263. This being so and keeping in view the ratio of the judicial pronouncements discussed above, we hold that the other income in question received by the assessee, which was assessed to tax under the head 'profits and gains of business or profession', is not liable to be excluded from the profits of the business of the eligible undertaking for the purposes of computing deduction under S10B of the Act, as per the formula given in sub-section (4) of that section. There was thus no error in the order of the Assessing Officer passed under S.143(3) on this issue, as alleged by the learned Commissioner, calling for any revision under S.263. We, therefore, set aside the impugned order of the learned Commissioner of Income-tax passed under S.263 and restore that of the Assessing Officer.

11. In the result, appeal of the assessee is allowed.

Order pronounced in the Court on 23rd January, 2015.

Sd/- Sd/- (D.Manmohan) (P.,M.Jagtap) Vice President Accountant Member

Dt/- 23rd January, 2015

Copy forwarded to:

1. M/s. Nosch Labs (P) Limited, Flat No.402 to 406, Vijaya Sai Towers Opp. BJP Office, Kukatpally, Hyderabad 500 072.

2. Dy. Commissioner of Income-tax Circle 16(1). Hyderabad 9 ITA No.672/Hyd/2013 M/s. Nosch Labs (P) Limited, Hyderabad

3. Commissioner of Income-tax(Appeals)-IV , Hyderabad

5. Departmental Representative, ITAT, Hyderabad.

B.V.S