The exchange gain is sales realisation of the billed amount in US dollar and would be an income derived from the export of goods and articles; therefore, the assessee-EOU would be entitled to the deduction under section 10B with regard to said exchange gain.
ITAT, BENCH ‘C’, AHMEDABAD (THIRD MEMBER)
ITO
v.
Banyan Chemicals Ltd.
ITA No. 2702/Ahd./2004
December 29, 2008
CASE LAW:
9. Sub-section (4) of section 10B provides for computation of profit derived from export. It reads as under:
“10B (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 tljie business carried on by the undertaking."
10. On a plain reading of these two sub-sections of section 10B, it is evident that a deduction is to be allowed on such profits and gains as are derived by an undertaking from the export of articles or things and as computed under sub- section (4) thereof. The words ''profit and gains as are derived by" are, narrow than the profits attributable or arising from the business of an assessee or an undertaking. The term "derived" has been subject matter of judicial interpretation in various decisions, viz., CIT vs. Sterling Foods, 237 ITR 579 (SC) and Pandian Chemicals Limited vs. CIT, 262 ITR 278 (SC). In Sterling Foods (supra), it is held that the word 'derive' means, "get to trace from a source, arise from, originate in, show the origin or formation of. In this case, the court dealt with the nature of import entitlements and it is held the source of the import entitlements could only be said to be the Export promotion Scheme of the Central Government, whereunder the export entitlements become available. It held that there must be, for the application of words "derived from", a direct nexus between the profits and gains and the industrial undertaking and in the instant case, the nexus was not direct but only incidental. By reason of such export, the Export Promotion Scheme applied, whereunder, the assessee was entitled to import entitlements, which it could sell. The sale consideration therefrom could not be held to constitute a profit and gain derived from the assessee's industrial undertaking.
11. In other judgment in the case of Pandian Chemicals (supra), the Supreme Court dealt with a case under section 80HH with -regard to interest on security deposits made by the assessee with electricity department for availing electricity which was necessary for running the undertaking. In that connection, the Supreme Court held that, the word "derived from" in section 80HH of the Income-tax Act, 1961, must be understood as something which has a direct or immediate nexus with the assessee's industrial undertaking. Although electricity may be required for the purposes of industrial undertaking, the deposit required for its supply is a step removed from the business of the industrial undertaking. It held that interest derived by the industrial undertaking of the assessee on deposits made with the Electricity Board for the supply of-electricity for running the industrial undertaking could not be said to be flowing directly from the industrial undertaking itself and was not profit and gains derived by the industrial undertaking. It had also referred to a decision of the Privy Council in the case of CIT vs. Raja Bahadur Kamakhya Narayan Singh 16 ITR 325 (PC) when it said that, the word derived' is not a term of art Its use in the definition indeed demands an enquiry in to the genealogy of the product. But the enquiry should stop as soon as the effective source is discovered In the genealogical tree of the interest land indeed appears in the second degree, but the immediate and effective source is rent, which has suffered the accident of non-payment. And rent is not land within the meaning of the definition." It was, therefore, held to be not an income derived from agricultural land.
16. In the present case, the receipt of the sale consideration is in US Dollar. It was credited/deposited in EEFC Account of the assessee to be retained in US $ as per guidelines for operating this account. In this account, the receipts may be kept in foreign currency instated of converting it to Indian rupee. The gain accounted for by the assessee is the excess rupee value of US $ on the date of realization of sales proceeds credited. Therefore, the exchange gain on the date of deposit in the EEFC account has to be used on account of sales realized in US Dollar on that date. The exchange gain is thus sales realization of the billed amount in US $ and would be an income derived from the export of goods and articles.
18. On a perusal of this chart, we find that receipt of Rs. 15,51,239/- includes 15,31,518/- as the gain on the sale realization in US Dollar on the date of its receipt and deposit in EEFC account and balance Rs. 19,721/- is with regard to exchange gain on import payment. Therefore, the assessee would be entitled to the deduction under section 10B with regard to exchange gain of Rs. 15,31,518/- only which is gthe gain on the day of deposit of US $ in the EEFC Account. In my opinion, therefore, the assessee should be granted deduction under section 10B of the Act with regard to exchange gain of Rs. 15,31,518/- I hold accordingly.
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