Case Note & Summary
The appeal by the Commissioner of Income Tax arose from the Income Tax Appellate Tribunal's order dated 14 October 2008 for assessment year 2002-2003. The revenue challenged the Tribunal's confirmation of the CIT(A)'s order allowing deduction under Section 80IB of the Income Tax Act, 1961 in respect of incentives totaling Rs.1.17 crores, comprising duty drawback of Rs.81.51 lacs, export entitlement of Rs.8.29 lacs, DEPB license of Rs.14.76 lacs, and exchange rate difference of Rs.13.22 lacs. The substantial question of law was whether the Tribunal was justified in allowing the deduction for these incentives which were not actually derived from the industrial undertaking. The High Court held that for duty drawback, export entitlement, and DEPB license, the Tribunal's order could not be sustained in light of the Supreme Court's decision in Liberty India v. CIT, (2009) 317 ITR 218 (SC), which held that such incentives are not profits derived from the industrial undertaking. However, regarding the exchange rate difference, the Court found that it arises directly from the sale transaction of exported goods, as the export invoices were in US dollars and the rupee equivalent varies due to exchange rate fluctuations between the date of export and receipt of proceeds. The Court noted that this view was consistent with its earlier Division Bench decision in Syntel Limited. Consequently, the appeal was partly allowed: the Tribunal's order allowing deduction for duty drawback, export entitlement, and DEPB license was set aside, but the deduction for exchange rate fluctuation was upheld.
Headnote
A) Income Tax - Section 80IB Deduction - Export Incentives - Duty Drawback, Export Entitlement, DEPB License - The Supreme Court in Liberty India v. CIT held that such incentives are not profits derived from industrial undertaking and hence not eligible for deduction under Section 80IB of the Income Tax Act, 1961 - The Tribunal's order allowing deduction for these items was set aside (Paras 3-4). B) Income Tax - Section 80IB Deduction - Exchange Rate Fluctuation - Exchange rate difference arising from export sale proceeds is directly related to the sale transaction and forms part of the sale proceeds - Such difference is eligible for deduction under Section 80IB of the Income Tax Act, 1961 - Consistent with the Division Bench decision in Syntel Limited (Paras 4-5).
Issue of Consideration
Whether the Tribunal was justified in allowing deduction under Section 80IB in respect of incentives (duty drawback, export entitlement, DEPB license, and exchange rate difference) which were not actually derived from the industrial undertaking
Final Decision
The appeal is partly allowed. The judgment of the Tribunal to the extent it allows deduction under Section 80IB for duty drawback, export entitlement, and DEPB license is set aside. The deduction for exchange rate fluctuation is upheld.
Law Points
- Deduction under Section 80IB of the Income Tax Act
- 1961 is not allowable on duty drawback
- export entitlement
- and DEPB license as they are not profits derived from industrial undertaking
- but exchange rate fluctuation on export proceeds is directly related to sale transaction and eligible for deduction
