Commissioner of Income Tax vs WTI Advanced Technology Ltd.

Chitra Venkataraman, J.—The Revenue is on appeals as against the common order of the Tribunal raising the following questions of law relating to the asst. yrs. 1995-96 and 1997-98:

Whether in the facts and circumstances of the case, the Tribunal was right in holding that assessee ought to be granted the benefit of s. 10B even though he had not exported 100 per cent of his produce, on the ground that the import export policy is satisfied if 75 per cent are exported?

Whether on the facts and circumstances of the case, the Tribunal was right in relying on the Import-Export Policy when the IT Act has a clear definition of a 100 per cent export-oriented unit?

Whether on the facts and circumstances of the case the Tribunal was right in treating the reopening of assessment in respect of the two years in question as mere rethinking on the part of the officer, without giving any reasons therefor?

Whether on the facts and circumstances of the case the Tribunal was right in ignoring the judgment of the Supreme Court in Sri Krishna Private

Ltd. Etc. Vs. I.T.O., Calcutta and Others, which was cited before it?

The assessee herein is an exporter of software and CAD Converted Drawings. Admittedly, the assessee company was certified as 100 per cent Export-Oriented Undertaking (100 per cent EOU) in terms of Explanation to s. 10B of the IT Act (for short, "the Act"), which stated that to qualify as 100 per cent EOU, the said undertaking must be approved as 100 per cent EOU, by the Board appointed in its behalf by the Central Government in exercise of powers conferred under s. 14 of the Industries (Development & Regulations) Act, 1951 and rules made thereunder.

Protected by such certification, the assessee reported "nil" income as per s. 10B. On the returns filed for the asst. yrs. 1995-96 and 1997-98, the assessment was completed on 20th Jan., 2000 and 26th Feb., 1998 respectively. The assessments in respect of the abovesaid assessment years were sought to be reopened on the ground that the assessee having commenced production before 1st April, 1994 should have exported the entirety of its production, however, as it failed to export 100 per cent of production and in the background of domestic earning also the assessee was held as not eligible for exemption under s. 10B of the Act, accordingly, the assessment was reopened by issuing notice under s. 148 of the Act, to bring to tax the said income.

Countering the said reopening of the assessment, the assessee filed its reply placing reliance on Circular No. 684, dt. 10th June, 1994 [(1994)

119 CTR (St) 25]. The assessee pointed out that even assuming that the amendment with effect from 1st April, 1995 had relevance to the case herein, considering the fact that the export during the years under consideration was 86.54 per cent, there was no ground for withdrawal of the exemption granted originally. In any event, there were no grounds for reopening the assessment. Rejecting the said contention the assessment was completed under s. 147. Aggrieved by that, the assessee went on appeals before the CIT(A).

It may be pointed out herein that apart from the said claim, though there are other issues, for the purpose of this tax case, we are concerned only with the claim under s. 10B.

As far as the appeals before the CIT(A) are concerned, the said authority took the view that explanation to s. 10B gives the definition of 10 per cent EOU, that it should be an undertaking certified by the Board appointed in this behalf by the Central Government in exercise of its powers conferred under s. 14 of the Industries (Development and Regulations) Act, 1951, and the Rules made thereunder. Considering the said definition, the reliance on Export and Import Policy was totally irrelevant for considering the benefit of exemption under s. 10B of the Act. The first appellate authority pointed out that the assessee had not produced any evidence regarding 100 per cent export of the product. In these circumstances, the appeals were rejected. Against that the assessee went on further appeals before the Tribunal.

As far as the question of reopening of assessment is concerned, the Tribunal accepted the case of the assessee that the reopening was nothing but rethinking on the part of the assessing authority and held there were no materials justifying the reopening of the assessment under s. 148. As far as the order of exemption granted originally was concerned, the Tribunal pointed out that the Import and Export Policy announced by the Government modified the export obligation that if an assessee showed 75 per cent of its production as exported, the same would be considered as having satisfied the requirement of s. 10B of the Act therefore, the claim of the assessee could not be rejected. Thus, the assessee's appeals were allowed. Aggrieved by the same, the present appeals were filed by the Revenue.

Mr. T. Ravikumar, learned standing counsel appearing for the Revenue, pointed out that as per the law that stood then, the assessee is bound to show that it had exported 100 per cent of its production to qualify for exemption under s. 10B. Since, it had not exported 100 per cent of its production, the withdrawal of the exemption was rightly undertaken.

Supporting the order passed by the Tribunal Mr. Percy J. Pardiwalla, learned senior counsel appearing for the assessee brought to our attention the Circular No. 684, dt. 10th June. 1994 issued by CBDT, wherein, the Board had pointed out that the amendment brought forth under s. 10B of the Act to sub-cl. (ia) of sub-s. (2) w.e.f. 1st April, 1994. It had also referred to the law that existed prior to that circular and the law that existed prior to the amendment by introduction of sub-cl. (ia) to s. 10B(2) of the Act and submitted that in the light of the provision, there cannot be denial of exemption granted as per the original assessment. That apart, when particulars regarding the grant of exemption under s. 10B were before the assessing authority at the time of making the original assessment, in the absence of any material to suggest that the assessee had not disclosed the particulars truly and fully, there cannot be any assumption of jurisdiction beyond four years from the end of the relevant assessment years.

Heard both sides and perused the material placed on record.

It is seen from the facts narrated before this Court that the assessee had exercised its option under s. 10B of the Act to have the benefit of exemption as 100 per cent EOU right from the asst. yr. 1992-93. The original assessments were completed, accepting the return and thereby the assessee was granted exemption under s. 10B. The assessment was, however, sought to be reopened and a notice under s. 148 was issued on the ground that the assessee failed to allow 100 per cent export of its production. The order of reassessment made by the assessing authority shows that there is no allegation that the assessee had not disclosed the facts truly and fully at the time of making the original assessment, a fact which must necessarily be shown as warranting the reopening of the assessment.

Going by the provisions as contained under s. 148, we have no hesitation in holding that the Tribunal rightly came to the conclusion that the facts necessary for assumption of jurisdiction under s. 148 are totally absent in this case. Consequently, the reassessment proceedings have to fail necessarily on the sole ground of jurisdiction. In Commissioner of Income Tax, Delhi Vs. Kelvinator of India Limited, the apex Court pointed out that the concept of change of opinion must be treated as an in-built to check the abuse of power. The apex Court observed that the reason must have a link with the formation of the belief. Leaving this aside, we do not find Revenue has a case to set aside the order of the Tribunal.

As far as the claim under s. 10B of the Act is concerned, the provision of law as it stood prior to its amendment under Finance Act, 1994, is as follows:

10B. Special provision in respect of newly established hundred per cent export oriented undertakings.--(1) Subject to the provisions of this section, any profits and gains derived by an assessee from a hundred per cent EOU (hereafter in this section referred to as the undertaking) to which this section applies shall not be included in the total income of the assessee.

(2) This section applies to any undertaking which fulfils all the following conditions, namely:

(i) it manufactures or produces any article or thing;

(ii) it is not formed by the splitting up, or the reconstruction, of a business already in existence:

Provided that this condition shall not apply in respect of any undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in s. 33B, in the circumstances and within the period specified in that section.

The said provision underwent an amendment subsequently thereto by the Finance Act, 1994 w.e.f. 1st April, 1995 and sub-cl. (ia) of sub-s.

(2) to s. 10B of the Act was introduced, which reads as under:

10B. Special provision in respect of newly established hundred per cent export oriented undertakings--(1) Subject to the provisions of this section, any profits and gains derived by an assessee from a 100 per cent EOU (hereafter in this section referred to as the undertaking) to which this section applies shall not be included in the total income of the assessee.

(2) This section applies to any undertaking which fulfils all the following conditions, namely:

(i) it manufactures or produces any article or thing:

(ia) in relation to an undertaking which begins to manufacture or produce any article or thing on or after the 1st day of April, 1994, its exports of such articles and things are not less than 75 per cent of the total sales thereof during the previous year:

The said amendment was explained in the Board Circular No. 684, dt. 10th June, 1994, which reads as under:

Under s. 10B of the IT Act, a five-year tax holiday is allowed to a 100 per cent export oriented undertaking (100 per cent EOU) which manufactures or produces any article or thing and is approved by the prescribed Board. This tax holiday is in operation since asst. yr. 1989-90.

23.2 100 per cent EOUs as the name signifies, not special treatment by virtue of the fact that they export their entire produce. However, in order to provide economic flexibility to them and allow them to dispose of the export rejects and by-products, they are allowed to sell 25 per cent of their product in the domestic market. In effect, such units get exemption for 5 years even in respect of profits from the 25 per cent domestic sales allowed to them.

23.3 As long as domestic sales of 100 per cent EOUs are within reasonable limits, such sales getting exempt can be justified as a concession incidental to export. Recently, however, it has come to notice that several units approved as 100 per cent EOUs export less then 75 per cent of their turnover and sell the balance amount in the domestic market. Such units are thus getting the five-year tax holiday even on the profit generated from domestic sales forming more than 25 per cent of the total sales.

Going by the said circular and the provision as it stood originally we note that originally prior to the amendment in 1994, the section, as such did not contain a provision like s. 10B(2)(ia) to recognise 75 per cent of the manufactured articles going for export as satisfying the provision under

s. 10B. Yet the circular indicates in para 23.3 that even if the certified 100 (per cent) EOU did not satisfy 100 per cent export and had local sales at 25 per cent they were granted exemption under s. 10B. Hence, to check on this, the amendment brought in under Finance Act, 1994 recognised local sales upto 25 per cent for the grant of exemption under s. 10B even in respect of the profits from 25 per cent domestic sale.

Going by the very object of the said provision and keeping in tune with the Import and Export Policy, the Board did accept the margin for a local

sale. As evident from the circular, the object of s. 10B of the Act is to provide economic flexibility and to give an impetus to export, the Board

(sic) and further to allow the EOU to dispose of the export rejects and by-products, they are allowed to sell 25 per cent of the product in the domestic market. Even in respect of the sale of 25 per cent in the domestic market, 100 per cent exemption was granted to 100 per cent EOUs, which means that 25 per cent domestic sales was also reckoned in the exemption provision for the relief under s. 10B of the Act. It is seen from the circular issued by the CBDT, the amendment itself was brought into effect prescribing at least 75 per cent of turnover for export by reason of the fact that 100 per cent EOU failed to keep the domestic sales within reasonable limits but nevertheless got 100 per cent relief which was nothing but an abuse of the provision of s. 10B of the Act. Thus, a conjoint reading of s. 10B of the Act, as it stood prior to 1995 and the amendment that took place w.e.f. 1st April, 1995 as explained by the circular, one can discern that even though s. 10B of the Act, as it originally stood, did not contain any specific provision as to what extent the domestic sales was permitted, the amended provision, as explained in the circular, recognised the domestic sales to the maximum of 25 per cent of the total production, would not stand in the way of a 100 per cent EOU having the relief under s. 10B. Even applying the amendment w.e.f. 1st April, 1995, in the factual scenario, the export of the assessee company was more than 75 per cent, in fact, it was 86.54 per cent we hold that the assessee company satisfies the condition prescribed even under the amended provision; hence, no fault could be found in the order of the Tribunal. In the circumstances, both on the jurisdictional aspect, as well as on the merits the tax case (appeals) are dismissed and the order of the Tribunal stands confirmed. No costs.