| SooperKanoon Citation | sooperkanoon.com/71403 |
| Court | Income Tax Appellate Tribunal ITAT Hyderabad |
| Decided On | Jan-15-2001 |
| Judge | H Sidhu, R K Gupta |
| Appellant | Andhra Pradesh Industrial |
| Respondent | Deputy Commissioner of Income Tax |
2. Assessee is a company which is fully owned subsidiary company of M/s Ureka Forbes Ltd. as borne out from the financial statements of the appellant-company. Assessee-company was manufacturing water purifier system, popularly known as Aqua-guard. It claimed expenditure on foreign travel, which was disallowed by the AO in the assessments on the ground that the expenses were not incurred for the purpose of the business of the assessee. Aggrieved against the disallowance, assessee went in appeal before the learned CIT(A), who confirmed the action of the AO.3. There is another issue also invoved in the present appeals inasmuch as assessee has agitated the action of the AO, which was later on confirmed by learned CIT(A) in reducing the claim made under Sections 80HH and 80-I on the amount of duty drawback and interest on the ground that these sums were not derived from industrial undertakings and as such cannot form part of the profits and gains.
4. On the date of hearing, learned counsel for the assessee reiterated his submissions made before the authorities below and submitted that assessee-company was not having any marketing set-up and assessee was dependent on M/s Ureka Forbes Ltd. for marketing its products both national and for exports. These submissions were given in paras 6 and 8 of the written submissions filed before us. He took us to the details filed to show that the entire expenses were incurred for the purposes of the assessee's business and merely because some of the employees of Ureka Forbes Ltd. happened' to be the directors, who travelled abroad, with reference to whom foreign travel expenses are claimed, it does not make the expenditure disallowable on the ground that such expenses are not pertaining for the business purposes of the assessee. When a question was posed to the learned counsel from the Bench that the details filed contained certain expenses of foreign travel which do not pertain to the years under appeal, it was argued by him that expenditure in question was not disallowed by the AO on the ground that these did not pertain to the years under appeal. He argued that absence of export sales in the years under appeal is not the ground for disallowance otherwise allowable expenditure and moreover, according to him, AO has accepted that, in asst. yr. 1991-92 there were export sales. In the matter of deduction under Sections 80-I and 80HH, it was pleaded by him that duty draw-back is nothing, but is the part of sales price reimbursed by the Government and, therefore, it should be treated as profits and gains of the business. He relied upon the decision of CIT v. Universal Radiators (1984) 145 ITR 195 (Mad), CIT v. India Pistons (1987) 167 ITR 917 (Mad) and CIT v. Davidson of India Ltd. (1987) 161 ITR 407 (Cal) in support of his contention. In respect of interest income learned counsel was fair enough to concede that deduction under Sections 80-I and 80HH may not be granted with reference to such interest income 5. On the other hand, learned Departmental Representative took us to p 3 of the learned CIT(A)'s order and submitted that disallowance was perfectly in order. Moreover, according to him, expenses pertain to the year which are not the years under appeal. In relation to the other ground, learned Departmental Representative relied upon the case of Sterling Food v. CIT (1984) 150 ITR 292 (Kar). Learned counsel in reply submitted that reliance of learned CIT(A) on the case of Malayalam Plantation was totally misplaced as the facts and ratios of that decision had got no bearing on the case at hand.
6. We have heard the rival submissions and have gone through the orders passed by the authorities below. We have also gone through the written submission filed by the assessee and the details of expenses incurred on foreign travel.
7. Coming to the first ground relating to foreign travelling expenses in both the years, we find that the case of the assessee is that the assessee-company is manufacturing water purifier system and selling it to M/s Ureka Forbes Ltd. which is 100 per cent holding company of the assessee-company. The said M/s Ureka Forbes Ltd. was doing marketing in the domestic market as well as in the international market. These submissions were also made by the learned counsel for the assessee at the time of hearing before us and are made in para 6 of the written submission filed before us. Details filed by the learned counsel for the assessee before us show that expenditure on foreign travelling to the extent of Rs 1,90,525 in asst. yr. 1992-93 and Rs. 23,153 in asst.
yr. 1993-94 were explained to be for sales promotions. It strongly appears to us that the claim of the appellant has not been examined by the AO in the absence of sufficient details and descriptions. It also looks paradoxical to note that on the one hand the assessee sells its products entirely to its 100 per cent holding company in India and on the other hand in incurs expenditure on sales promotion abroad. Factum of the exports having been made in earlier year also runs contrary to the claim of the assessee that entire sales are made in India to its 100 per cent holding company. Moreover, the balance amount of expenditure amounting to Rs 3,84,339 in asst. yr. 1992-93 and Rs. 2,15,849 in asst. yr. 1993-94 are claimed to have been incurred for attending conference of all chairman and managing directors of all companies in Electrolux Group at Stockholm or for attending international conference-cum-exhibition. From a plain reading of the assessment order, it appears that this claim in this form was not made out by the assessee at the assessment stage. Therefore, it will be in the interests of justice if we restore this issue to the file of the AO to decide it de novo after giving adequate opportunity of hearing of the assessee. Thus, the issue of disallowance of foreign travelling expenses in these two years are restored to the file of the AO as directed above.
8. In respect of the other ground, the short point for our consideration as to whether the amount of duty drawback can be said to have been derived from the industrial undertaking, so that deductions under Sections 80HH and 80-I can be allowed with reference to such duty drawback. As per the plain reading of Sections 80HH and 80-I, it is clear that the deduction is admissible from the profits and gains derived from an industrial undertaking. In other words, if the duty drawback cannot be said to be derived from the industrial undertaking of the assessee-company, deductions under the aforesaid sections shall not be allowed. It has been held by the Supreme Court in the case of Hindustan Lever Ltd. v. CIT (1999) 239 ITR 297 (SC), that the word "derived" is not a term of art. Its use in the definition indeed demands an enquiry into the genealogy of the product. It has also been held in the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT (1978) 113 ITR 84 (SC), that the expression "attributable to" was wider in import than the expression "derived from". The word "derived from" require direct nexus between the profits and gains and the industrial undertaking. The word "derived" has come to be discussed and interpreted by the apex Court in the case of National Organic Chemical Industries Ltd. v. Collector of Central Excise 106 STC 467. The relevant portion of the judgment as contained in paras. 10 and 11, reads thus : "10. The dictionaries state that the word 'derive' is usually followed by the word 'from', and it means, get or trace from a source, arise from, originate in, show the origin or formation of." "11. The use of the words 'derived from' in item 11-AA(2) suggests that the original source of the product has to be found. Thus, as a matter of plain English, when it is said that one work is derived from another, often in another language, what is meant is that the source of what word is another word, often in another language. As an illustration, the word 'democracy' is derived from the Greek word 'demos' the people, and most dictionaries will so state. That is the ordinary meaning of the words 'derived from' and there is no reason to depart from that ordinary meaning here." Thus, it is to be seen in the light of the above law as to what is the nature of duty drawback. In terms of the export policy of the Government, the three incentives of cash compensatory support (CCS), duty drawback (DBK) and import entitlement (IE) were offered as a package to the exporters like the assessee, their basis, nature and incidents are not the same, DBK means the rebate of duty chargeable on any imported materials or excisable materials in the manufacture of such goods in India. This definition occurs in Rule 2(a) of the Customs and Central Excise Duties Drawback Rules, 1971, framed under Section 75 of the Customs Act, 1962, and Section 36 of the Central Excises and Salt Act, 1944. The object of the duty drawback system is to reimburse exporters for tariffs paid on the imported raw materials and intermediates and Central excise duties paid on domestically produced inputs which enter into export production. Customs duties and excise duties on inputs raise the cost of production in export industries and thereby affect the competitiveness of exports. Therefore, exporters need to be compensated for the escalation in their costs attributable to such customs and excise duties. Import entitlement has a statutory basis and is given under an order under Section 3 of the Imports and Exports (Control) Act, 1947. Through the import replenishment licences the exporters are allowed to import limited permissible items. IE is saleable also. Thus, duty drawback and import entitlements though both are export incentives scheme, but as it is clear from the above that duty drawback is intended to reduce the cost, whereas import entitlement is an incident of business and comes to the assessee by way of supplemental trading receipt. Therefore, duty drawback can be said to be "derived" from the industrial undertaking and would qualify for deduction under Sections 80HH and 80-I. Reliance placed by the Revenue on the decision of the Honourable Supreme Court in the case of CIT v.Sterling Food (1999) 237 ITR 579 (SC), is not applicable to the facts of the assessee's case as in that case the Honourable Supreme Court came to consider the admissibility of the deduction with reference to the sale proceeds of import entitlements. As discussed earlier in the order, the nature of import entitlement is different from the duty drawback, the ratio of the said decision cannot be applied to the case of the assessee. Moreover, it cannot be ignored that in the case of Sterling Foods (supra) it was the sale of import entitlements, which was bringing an element of remoteness vis-a-vis to the industrial undertaking whereas in the case before us, the nature of the receipt is a duty drawback which has got the direct and immediate nexus with the profits and gains of the industrial undertaking. Therefore, we hold that the amount of duty drawback can be said to be the profits and gains "derived from" industrial undertaking and are, thus, eligible for deduction under Sections 80HH and 80-I. Therefore, this ground in both the years to the extent above said is allowed.