The Commissioner Of Income Tax Chennai v. M/S.oliver Valves India Pvt. Ltd

In the High Court of Judicature at MadrasDated : 23.07.2020 Coram : The Honourable Mr.Justice T.S.SIVAGNANAMand The Honourable Mrs.Justice V.BHAVANI SUBBAROYAN Tax Case Appeal Nos.278 and 279 of 2018 The Commissioner of Income Tax Chennai. ...Appellant in both appeals/RespondentVs M/s.Oliver Valves India Pvt. Ltd.,No.6, First Cross Street,SIDCO Industrial Estate, Ambattur, Chennai – 600 098.PAN: ...Respondent in both appeals/Appellant Appeals filed under Section 260A of the Income Tax Act,1961 against the common order dated 20.09.2017 in ITA Nos.1055 &1056/Mds/2017 on the file of the Income Tax Appellate TribunalChennai 'C' Bench for the assessment year 2009-10 and 2010-11against the order of the Commissioner of Income Tax (Appeals) 3Chennai 34 dated 28/02/2017 and made in ITA No.82 & 83/2015-16/CIT(A)-3 and against the order of the Deputy Commissioner ofIncome Tax Corporate Circle 5(1) Chennai-34 dated 1713/2015 madein PA/GIR No.AAAC06874B to the Assessment year 2009-10-2010-11. For Appellant : M/s.R.Hemalatha Senior Standing Counsel For Respondent : Mr.G.Baskar Common Judgment was delivered by T.S.SIVAGNANAM,J We have elaborately heard M/s.R.Hemalatha, learned SeniorStanding Counsel appearing for the appellant/revenue andMr.G.Baskar,learnedcounselappearingfortherespondent/assessee. 2.These appeals, filed by the revenue under Section 260A ofthe Income Tax Act, 1961 (“the Act” for brevity), are directed https://hcservices.ecourts.gov.in/hcservices/ against the common order dated 20.09.2017 passed by the IncomeTax Appellate Tribunal, Chennai 'C' Bench (for brevity, theTribunal) in ITA Nos.1055 & 1056/Mds/2017 for the assessmentyear 2009-10 and 2010-11. 3.These appeals were admitted on 28.06.2018 on thefollowing substantial questions of law: “1.Whether the Tribunal was right in allowingthe claim of assessee in respect of management feewhile dealing with Section 10B especially when theservice income was received from the AssociateEnterprises which is not for any technicalservices rendred by the assessee?2.Whether the income from Management feecould be treated as profit derived from export ofvalves and no deduction could be allowed to theAssessee under Section 10B since the AssociateEnterprise has its own expertise to assemble thevalves and therefore cannot be construed astechnical services rendered by the assessee?” 3.These appeals were admitted on 28.06.2018 on thefollowing substantial questions of law: “1.Whether the Tribunal was right in allowingthe claim of assessee in respect of management feewhile dealing with Section 10B especially when theservice income was received from the AssociateEnterprises which is not for any technicalservices rendred by the assessee?2.Whether the income from Management feecould be treated as profit derived from export ofvalves and no deduction could be allowed to theAssessee under Section 10B since the AssociateEnterprise has its own expertise to assemble thevalves and therefore cannot be construed astechnical services rendered by the assessee?” 4.The assessee is a 100% Export Oriented Unit engagedin the business of assembling valves in India and exporting thesame to M/s.Oliver Valves Limited, UK. The raw material isstated to be procured locally. The assessee had stated that atechnical support team of Engineers providing “on-demand”technical support and service for the product range supply andthis technical support does an array of services that areintricately linked to the business of the assessee. Theassessee states that this includes services like provision oftechnical assistance for product enrichment, product service,minor repairs and also extend maintenance support for thebroken-down products. Further assessee states that the servicecorresponds with the customers, replies to their queries andalso educates them about the product if they have any doubts.It also suggests periodic corrections, updates, changes,improvements and/or enhancement to the product apart from emailand telephone support. The assessee filed return of income forthe assessment years under consideration returning a loss. Thecase was selected for scrutiny under Section 143(3) of the Actand an assessment order was passed on 13.03.2012 (2009-10) and27.10.2012 (2010-100), accepting the return of income filed bythe assessee. The case was reopened by issuing notice underSection 148 of the Act dated 06.01.2014. Notice under Section143(2) of the Act was issued and the reasons for reopening werealso furnished to the assessee. The Assessing Officer proposedto deny the claim of deduction under Section 10B of the Act.Objection was filed by the assessee which was disposed of byorder dated 09.02.2015. Subsequently, a show cause notice wasissued calling upon the assessee to explain as to why the other income should not be excluded from the business income, then itwould result in loss and therefore, the assessee was noteligible to claim deduction under Section 10B of the Act. Theassessee's explanation was that they are 100% EOU and eligibleundertaking engaged in the export of valves and earnedmanagement fee in the nature of export services which isincidental to business of export of valves; the management feepartake the character of profit and gain from business. TheAssessing Officer did not accept the reply on the ground thatinitially the assessee stated that the management fee was in thenature of rendering technical services and subsequently whilefiling the revised return, they have stated it to be in thenature of export services which is incidental to the business ofexport of valves. The Assessing Officer took into considerationForm No.3CEB, wherein, in one of the columns, the nature ofservice provided to the Associate Enterprise were indicatedand concluded that the AE does not require any technical serviceas the AE has its own expertise to assemble the valves. Thus,the Assessing Officer concluded that the management fee does notrelate to export of valves and was not derived from export ofarticles and was to be excluded from the profit of the business.With this reasoning, the Assessing Officer added back theSection 10B deduction amount to the total income of the assesseeand arrived at the assessed income for both the assessment years. 5.The assessee preferred appeals to the Commissioner ofIncome Tax (Appeals)-3 [CIT(A)], who dismissed the appeals bycommon order dated 28.02.2017. Aggrieved by the same, theassessee preferred appeals before the Tribunal. The assesseehad also challenged the reopening of the assessment before theCIT(A) as well as before the Tribunal. The Tribunal acceptedthe assessee's case holding that the management fee is inrelation to export of valves and cannot be reduced from theprofit of undertaking. Aggrieved by such finding, the revenueis before us by way of these appeals. Though the reopening ofthe assessment was held to be valid by the Tribunal, theassessee having succeeded on merits before the Tribunal has notpreferred any appeal before this Court. 6.The undisputed fact is that the assessee is a 100% ExportOriented Unit was entitled to claim deduction under Section 10Bof the Act. The revenue does not dispute the fact that theassessee is an “eligible undertaking”. The dispute is withregard to the management fee received by the assessee from theAE and how it has to be treated in the hands of the assessee.The Assessing Officer points out that the assessee has takencontrary stand with regard to the receipt. Initially theassessee had stated that it is fee received for renderingtechnical service in connection with the export of valves,therefore forms part of profit and gains from business. Subsequently they took a stand that management fee is in thenature of export of services which is incidental to the businessof export of valves. After stating that this is an inconsistentstand the Assessing Officer examines Form 3CEB, moreparticularly, the information provided in column No.10 under theheading “particulars in respect of providing services”. Theinformation furnished is that they provide management service tothe AE at UK , the amount paid is INR 56,52,503/- and the methodused for determining the Arms Length price is TNMM. On perusalof this Form, the Assessing Officer holds that the assessee hasearned the service income only from its AE and that is forproviding management service and not for technical service orservice incidental to the business of export of valves.Further, the Assessing Officer holds that the AE has its ownexpertise and therefore the service rendered by the assesseecannot be termed as technical service. With the above finding,the case of the assessee stood rejected. 7.The CIT(A) confirmed the order and agreed to whateverrecorded by the Assessing Officer and also pointed out that themanagement fee has been received in Indian rupees as could beseen from Form No.3CEB. The CIT(A) further holds that theAssessing Officer was right in holding that the receipts areincome from other sources but not business income as the amountwas not received in foreign currency but in Indian rupees. TheTribunal over turned the finding of the CIT(A) and allowed theassessee's appeal. In the considered view of this Court, theassessee cannot be non-suited on the ground of inconsistentstand, in the original return of income which was processedunder Section 143(3) of the Act, the assessee took a particularstand. On the assessment being reopened and notice underSection 148 of the Act being issued and the assessee having beencalled upon to file a revised return, they stated that thereceipt is in the nature of management fee for export of servicewhich is incidental to the business of export of valves. Therecan be no estoppel on this aspect and the assessee's standcannot be brushed aside as being inconsistent, moreparticularly, because the revised return was filed pursuant tonotice issued under Section 148 of the Act. In the consideredview of this Court, the crucial test which had to be applied tothe instant case has not been applied by the Assessing Officeras well as by the CIT(A). In terms of the provisions of Section10B(1), deduction shall be allowed for profits and gains derivedby a 100% EOU from the export of articles or things from thetotal income of the assessee. The method of computation is interms of sub-section (4) of Section 10B which states that forthe purpose of sub-section (1), the profits derived from exportof articles or things or computer software shall be the amountwhich 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 totalturnover of the business carried on by the undertaking. It hasnot been disputed by the revenue that the only source of incomefor the assessee is through export being a 100% Export OrientedUnit. The test to be applied is whether there is nexus betweenthis income/management fee and the income from the business ofthe undertaking. In fact there are several decisions which havepointed out that there is no requirement for the purposes ofSection 10B to establish the direct nexus between the income andthe undertaking and the entire business income of the 100% EOUwill be the profits of the business of the undertaking. articles or things or computer software bears to the totalturnover of the business carried on by the undertaking. It hasnot been disputed by the revenue that the only source of incomefor the assessee is through export being a 100% Export OrientedUnit. The test to be applied is whether there is nexus betweenthis income/management fee and the income from the business ofthe undertaking. In fact there are several decisions which havepointed out that there is no requirement for the purposes ofSection 10B to establish the direct nexus between the income andthe undertaking and the entire business income of the 100% EOUwill be the profits of the business of the undertaking. 8.Identical issue was considered by the Hon'ble DivisionBench of this Court in the case of Camiceria Apparels India (P)Ltd., vs. Assistant Commissioner of Income Tax [(2019) 103taxmann.com 238 (Madras)]. The assessee therein was 100% ExportOriented Unit and during the relevant year, the assessee claimedexemption under Section 10A of the Act in respect of the incomearising out of manufacturing and export of garments. Afternoting the decisions cited, it was held that the basis ofcomputation of the deductions enumerated under Chapter VI A isdifferent from that set out for special deductions like Sections10A and 10B. Section 80IA provides for a deduction of profitsand gains derived by an undertaking or an enterprise from aneligible business. The provisions of Section 80IA(1) statesthat where the gross total income of an assessee includesprofits and gains derived from an undertaking or an enterprisefrom any eligible business, there shall, in accordance with andsubject to the provisions be allowed, in computing the totalincome of the assessee, a deduction an equivalent amount to 100%of the profits and gains derived from such business for ademarcated period. It was further held that the relief underSection 10A on the other hand is granted in respect of profitsderived from eligible activity of export, computed as aproportion of the profits of the business of the undertaking. 9.In the case of Principal Commissioner of Income Tax vs.Dishman Pharmaceuticals & Chemicals Ltd. [(2019) 112 taxmann.com91 (Gujarat)], the Court pointed out that the Parliamentintended to encourage the entrepreneurs to export the productsfrom India; as part of that, it incorporated Section 10B of theAct. Explaining the scope of Section 10B, it was pointed outthat the basic principle, namely, that the profit and gain mustbe derived from the concerned activity is a common feature.Noting that the assessee in the said case was undisputedly a100% Export Oriented Unit, the provisions of Section 10B wereheld to be applicable. It was further pointed out that themethodology for computation as envisaged under sub-section (1)of Section 10B is by way of a mathematical formula set out insub-section (4) whereby the profits derived from the exports of articles or things or computer software is stated to be theamount which bears to the profits of the business of theundertaking, the same proportion as the export turnover inrespect of such articles/things/computer software bears to thetotal turnover of the business carried on by the undertaking. articles or things or computer software is stated to be theamount which bears to the profits of the business of theundertaking, the same proportion as the export turnover inrespect of such articles/things/computer software bears to thetotal turnover of the business carried on by the undertaking. 10.M/s.R.Hemaltha, learned Senior Standing Counselappearing for the appellant/revenue relied on the decisions ofthe Division Bench in the case of Commissioner of Income-tax vs.Menon Impex (P.) Ltd. ([2003] 128 Taxman 11 (Madras)), IndiaComnet International vs. Income-tax Officer ([2012] 26taxmann.com 349 (SC)) and Commissioner of Income-tax, Cochinvs. Electronic Controls & Discharge Systems (P.) Ltd. ([2011] 13taxmann.com 193 (Kerala)). The decision in Menon Impex (P) Ltd.and India Comnet International was placed for considerationbefore the Hon'ble Division Bench in Camiceria Apparels India(P) Ltd. and the same were distinguished and held to be notapplicable to the facts on the following terms: “21.The assessee before us has lost throughoutin the proceedings before the lower authorities andthe issue has been held against it based on adecision of the Tribunal in the case of ABIShowatech (India) Ltd. vs. DCIT that in turn relieson the judgment of this Court in the case of MenonImpex (supra) and other orders of the Tribunalitself. 22.In the case of Menon Impex (supra), the legaldistinction argued before use and noted above haseviently not been placed for consideration beforethat Bench which decides the matter against theassessee following the judgment of the SupremeCourt in the case of CIT vs. Sterlings Foods [1999]104 Taxman 204/237 ITR 579, that has been renderedin the context of Section 80I of the Act. 23.As far as the decision of this Court in IndiaComnet (supra) is concerned, the matter travelledin appeal to the Supreme Court which has, in itsjudgment Indian Comnet (supra) remanded the matterto the Income Tax Appellate Tribunal for a decisionafresh after detailed examination of thetransaction in question.” 11.The above reasoning would be a clear answer to thecontention of the revenue that the decision will not beapplicable. It was further argued by the revenue that theassessee has received the funds in Indian currency and thereforenot eligible. This finding stems from the details furnished bythe assessee in Form No.3CEB. Admittedly, the amount will be https://hcservices.ecourts.gov.in/hcservices/ received by the assessee through banking channels by way ofconvertible foreign exchange which has been defined in Section10B(9A)(ii) which defines “convertible foreign exchange” to meanforeign exchage which is for the time being treated by theReserve Bank of India as convertible foreign exchange for thepurposes of the Foreign Exchange Management Act, 1999 and theRules made thereunder or any other corresponding law for thetime being in force. There is nothing on record to show thatthe convertible foreign exchange remittance did not fall withinthe definition as defined in Section 10B(9A)(ii). Therefore, inthe considered view of this Court, the decision in the case ofElectronic Control and Discharge System Private Ltd. does notrender any assistance to the case of the revenue. Furthermore,on facts we are satisfied that the only activity of the assesseeis export as admitted by the revenue and the income generated bythe Export Unit would be eligible for the benefit of Section 10Bof the Act. For all the above reasons, we find no ground todisturb the finding of the Tribunal. 12.In the result, the the tax case appeals are dismissedand the Substantial Questions of law are answered against therevenue. No costs. Sd/-Assistant Registrar(CS-III) //True copy// cse Sub Assistant Registrar To 1.The Income Tax Appellate Tribunal, Madras 'C' Bench. 2. The Commissioner of Income Tax (Appeals) 3, Chennai-34 12.In the result, the the tax case appeals are dismissedand the Substantial Questions of law are answered against therevenue. No costs. Sd/-Assistant Registrar(CS-III) //True copy// cse Sub Assistant Registrar To 1.The Income Tax Appellate Tribunal, Madras 'C' Bench. 2. The Commissioner of Income Tax (Appeals) 3, Chennai-34 3. The Deputy Commissioner of Income Tax, Corporate Circle 5(1) Chennai-34. +1cc to Mr.G.Baskar, Advocate SR.No.25116 +1cc to Mr.T.Ravikumar, Advocate SR.No.25118 TCA.Nos.278 and 279 of 2018 PVS(CO)GMY(28/08/2020)