Facts of the Case

The assessee, Universal Precision Screws, was engaged in the business of manufacturing and exporting fasteners and operated as a 100% Export Oriented Unit (EOU). For Assessment Year 2009–10, the assessee filed its return of income and claimed deduction under Section 10B(1) of the Income Tax Act.

During assessment proceedings, the Assessing Officer noted inclusion of:

  • Scrap sales amounting to ₹31,84,869/-
  • Exchange rate fluctuation gain amounting to ₹32,35,700/-
  • Interest on FDRs amounting to ₹1,60,11,996/-

The Assessing Officer held that these incomes did not qualify fully for Section 10B deduction in the manner claimed and recomputed the deduction. The CIT(A) upheld the Assessing Officer’s findings. On further appeal, the ITAT allowed relief to the assessee, following which the Revenue approached the Delhi High Court.

Issues Involved

  1. Whether sale proceeds from scrap should form part of domestic turnover while computing deduction under Section 10B.
  2. Whether foreign exchange fluctuation gains arising from export transactions are eligible for deduction under Section 10B.
  3. Whether interest income earned on FDRs maintained for obtaining letter of credit and bank guarantee facilities qualifies as business profits under Section 10B(4).

Petitioner’s Arguments (Revenue)

The Revenue contended that deduction under Section 10B is allowable only on profits directly derived from export activities.

It argued:

  • Scrap sale income does not arise from export activity.
  • Foreign exchange fluctuation gains are not directly derived from manufacturing/export operations.
  • Interest income from FDRs is income from other sources and lacks direct nexus with export business.

Accordingly, these receipts should not be included for computing Section 10B deduction.

Respondent’s Arguments (Assessee)

The assessee submitted:

  • Scrap generated during manufacturing is incidental to business operations and cannot be treated as domestic turnover.
  • Foreign exchange fluctuation gains are directly connected to export sales realization.
  • FDRs were maintained as margin money for availing letters of credit and bank guarantees, and therefore interest thereon had a direct business nexus.

It was argued that all such receipts formed part of business profits eligible under Section 10B.

Court Findings / Order

The Delhi High Court upheld the ITAT’s order and dismissed the Revenue’s appeal.

1. Scrap Sale

The Court held that scrap sale cannot be included in total turnover where the assessee is not engaged in the business of dealing in scrap. It relied upon the Supreme Court ruling in CIT v. Punjab Stainless Steel Industries.

2. Foreign Exchange Fluctuation

The Court held that foreign exchange fluctuation realized within the prescribed period is directly linked to export sales and forms part of export turnover. Reliance was placed on:

  • CIT v. Gem Plus Jewellery India Ltd.
  • CIT v. Pentasoft Technologies Ltd.

3. Interest on FDRs

The Court held that where FDRs are maintained as margin money for business purposes such as letters of credit and bank guarantees, the interest earned thereon forms part of business profits of the undertaking under Section 10B(4).

Reliance was placed on:

  • CIT v. Hritnik Exports Pvt. Ltd.
  • CIT v. Motorola India Electronics Pvt. Ltd.

The appeal of the Revenue was dismissed.

Important Clarification

This judgment clarifies that for Section 10B computation:

  • Scrap sale arising incidentally during manufacturing cannot be artificially treated as domestic turnover.
  • Foreign exchange gains attributable to export realization retain the character of export profits.
  • Interest on FDRs may qualify as business profits where there exists a direct business nexus.

The judgment reinforces the wider interpretation of “profits of the business of the undertaking” under Section 10B(4).

Sections Involved

  • Section 10B(1), Income Tax Act, 1961 – Deduction in respect of profits and gains derived by a 100% Export Oriented Unit
  • Section 10B(4), Income Tax Act, 1961 – Formula for computation of profits derived from expor

Link to Download the Order https://delhihighcourt.nic.in/app/case_number_pdf/2015:DHC:8411-DB/VIB06102015ITA3922015.pdf

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