Consolidated FDI Policy notified

 

On June 16, 2008, the Indian Government issued Press Note. 7 (2008) announcing its consolidated Foreign Direct Investment (FDI) Policy. The Press note covers the developments in FDI policy that have taken place up to March 31, 2008.

The Press Note provides that FDI is prohibited in the following sectors:

  • Retail Trading (except single brand product retailing)

  • Atomic Energy

  • Lottery Business

  • Gambling and Betting

  • Business of chit fund

  • Nidhi Company

  • Trading in transferable Development Rights

  • Any Activity/sector not opened to private sector investment.

The table below lists sector-wise FDI policy for India. For sectors/activities not mentioned in the list above or in the table below, FDI is permitted up to 100% on the automatic route subject to applicable sectoral rules or regulations.

Further, in situations where provisions of Press Note 1 (2005)1  are attracted, or where more than 24% foreign equity is proposed to be included for manufacture of items reserved for the Small Scale sector, prior approval from the government is required.

According to Press Note 1 (2005) new proposals for foreign investment/technical collaboration would be allowed under the automatic route subject to sectoral policies as well as the following conditions:

  1. Only if the foreign investor had an existing joint venture or technology transfer/ trademark agreement in the ‘same’ field, would prior government approval be required. The onus to prove that the new proposal would or would not jeopardize the interests of the said joint venture or technology transfer/ trademark agreement would rest with both the foreign investor and the Indian partner.

  2. Such approval, even if the joint venture or technology transfer/trademark agreement as in the ‘same’ field would not be required in case of:

a) Investments to be made by Venture Capital Funds registered with the Security and Exchange Board of India (SEBI); or

b) where in the existing joint-venture investment by either party is less than 3%; or

c) where the existing venture/ collaboration is defunct or sick.

iii)  In case of joint ventures entered into after the issuance of press note 1 (2005), the agreement may contain a ‘conflict of interest’ clause to safeguard the interests of the joint venture partners in the event of one of the partners wanting to set up another joint venture or wholly owned subsidiary in the ‘same’ field of economic activity of economic activity.

The consolidated sectoral FDI policy as of March 31, 2008 is set forth in the table below. 
Sr. No.Sector/Activity		                               FDI Cap/ Equity	Entry Route	Other  conditions	
I	AGRICULTURE
1.	Floriculture, Horticulture, Development 		100%	Automatic	 

	of Seeds, Animal Husbandry, Pisciculture, 

	Aqua-culture and Cultivation of 

	Vegetables & Mushrooms under 

	controlled conditions and services related 

	to agro and allied sectors.


	Note: Besides the above, FDI is not 

	allowed in any other agricultural 

	sector/activity		
2.	Tea  Sector, including tea plantation		100%	FIPB	Subject to divestment of 26% equity in favour of Indian

	Note: Besides the above, FDI is not 				partner/Indian public within 5 years and prior approval

	allowed in any other plantation sector/activity			of State Government concerned in case of any change 
							in future land use.	

II	INDUSTRY

II A	MINING	
3.	Mining covering exploration and mining of 	100%	Automatic	Subject to Mines & Minerals (Development &

	diamonds & precious stones; gold, silver				Regulation) Act, 1957 www.mines.nic.in

	and minerals.					Press Note 18 (1998) and Press Note 1 (2005) are not

							applicable for setting up 100% owned subsidiaries in  
							so far as the mining sector is concerned, subject to a  
							declaration from the applicant that he has no existing   
							joint venture for the same area and /or the particular 
							 mineral.	
4.	Coal  &  Lignite mining for captive		100%	Automatic	Subject to provisions of Coal Mines

	consumption by power projects, and iron 			(Nationalization) Act, 1973

	& steel, cement  production and other 				www.coal.nic.in

	eligible activities permitted under the 

	Coal Mines (Nationalisation) Act, 1973.			
5.	Mining and mineral separation of 		00%	FIPB	Subject to sectoral regulations and the Mines and

	titanium bearing minerals and ores, its 				Minerals (Development & Regulation) Act, 1957 and

	value addition and integrated activities.				the following conditions-

	Note: FDI will not be allowed in mining 				i. value addition facilities are set up within India along 

	of “prescribed substances” listed in 				with transfer of technology;

	Government of India notification 				ii. disposal of tailing during the mineral separation shall

	No. S.O. 61(E) dt. 18.1.2006 issued by 				be carried out in accordance with regulations framed

	the Department of Atomic Energy 				by the Atomic Energy Regulatory Board such Atomic

	under the Atomic Energy Act, 1962.  				Energy (Radiation Protection) Rules 2004 and the  

							Atomic Energy (Safe Disposal of Radioactive Wastes) 
							Rules 1987.	

II B	MANUFACTURING
6.	Alcohol-Distillation  & Brewing		100%	Automatic	Subject to license by appropriate authority	


7.	Cigars  & Cigarettes- Manufacture		100%	FIPB	Subject to industrial license under the Industries  
							(Development & Regulation) Act, 1951	

8.	Coffee&  Rubber processing & warehousing 	100%	Automatic	 	


9.	Defence production			26%	FIPB	Subject to licensing under Industries (Development &  
							Regulation) Act, 1951 and guidelines on FDI in 
							production of arms & ammunition.	


10.	Hazardous chemicals, viz., hydrocyanic 

	acid and its derivatives; phosgene and its

	derivatives; and isocyanates and 

	diisocyantes of hydrocarbon.		100%	Automatic	Subject to industrial license under the Industries 
							(Development & Regulation) Act, 1951 and other
							sectoral regulations.	


11.	Industrial explosives -Manufacture		100%	Automatic	Subject to industrial license under Industries 	
							(Development & Regulation) Act, 1951 and regulations 
							under Explosives Act, 1898	


12.	Drugs & Pharmaceuticals including those 	100%	Automatic	 

	involving use of recombinant DNA technology	

	
II C	POWER	
 
13.	Power including generation (except Atomic	100%	Automatic	Subject to provisions of the Electricity Act, 2003

	energy); transmission, distribution and				www.powermin.nic.in	

	Power Trading.


III 	SERVICES

	
14.	CIVIL AVIATION SECTOR	

(i)	Airports-	

a.	Greenfield projects			100%	Automatic	Subject to sectoral regulations notified by Ministry of  
							Civil Aviation www civilaviation.nic. in


b.	Existing projects 			100%          FIPB beyond 	Subject to sectoral regulations notified by Ministry of
 						74%	Civil Aviation www.civilaviation.nic. in

 	
(ii)     Air Transport Services including Domestic Scheduled Passenger Airlines; Non-Schedules Airlines; Chartered Airlines;  
         Cargo Airlines; Helicopter and Seaplane Services 	
 
c.	Scheduled Air Transport Services/ 		49%- FDI;	Automatic	Subject to no direct or indirect participation by foreign

	Domestic Scheduled Passenger Airline		100%- for		airlines and sectoral regulations. 

					NRI investment	 	


d.	Non-Scheduled Air Transport Service/ 		74%- FDI	Automatic	Subject to no direct or indirect participation by foreign

	Non-Scheduled airlines, Chartered airlines, 	100%- for		airlines in Non-Scheduled and Chartered airlines.

	and Cargo airlines			NRI investment	 Foreign airlines are allowed to participate in the equity

			 				of companies operating Cargo airlines. Also subject   
							to sectoral regulations.	


e.	Helicopter Services/Seaplane services 		100%	Automatic	Foreign airlines are allowed to participate in the equity

	requiring DGCA approval					 of companies operating Helicopter and seaplane 	
							airlines. Also subject to sectoral regulations. 


(iii)      Other services under Civil Aviation Sector	
 
f.	Ground Handling Services			74%- FDI	Automatic	Subject to sectoral regulations and security clearance.

					100%- for NRIs 

					investment			


g.	Maintenance and Repair organizations; 	100%	Automatic

	flying training institutes; and technical 

	training institutions


15.	Asset Reconstruction Companies		49% (only FDI)   FIPB	Where any individual investment exceeds 10% of 	
							the equity, provisions of Section 3(3)(f) of Securitization 
							and Reconstruction of Financial Assets and 	
							Enforcement of Security Interest Act, 2002 should be   
							complied with. www.finmin.nic.in	


16.	Banking  - Private  sector			74% (FDI+FII)  Automatic	Subject to guidelines for setting up branches /   	
							subsidiaries of foreign banks issued by RBI. 
							www.rbi.org.in	

17.       Broadcasting	


a.	FM Radio				FDI+FII 	FIPB	Subject to Guidelines notified by Ministry of Information

					investment 		& Broadcasting. www.mib.nic.in

					up to 20%	 	


b.	Cable network			49% (FDI+FII)  FIPB	Subject to Cable Television Network Rules (1994) 	
 							Notified by Ministry of Information & Broadcasting.  
							www.mib.nic.in	


c.	Direct-To-Home			49% (FDI+FII).  FIPB	Subject to guidelines issued by Ministry of Information

					Within this limit, 	& Broadcasting. www.mib.nic.in

					FDI component 

					not to exceed 20%	 	


d.	Setting up hardware facilities such as 		49% (FDI+FII)       FIPB	Subject to Up-linking Policy notified by Ministry of

	up-linking, HUB, etc			 		Information & Broadcasting. www.mib.nic.in	


e.	Up-linking a News & Current Affairs		26% FDI+FII        FIPB	Subject to guidelines issued by Ministry of Information 
	TV Channel						& Broadcasting. www.mib.nic.in	


f.	Up-linking a Non-news & CurrentAffairs 		100%	FIPB	Subject to guidelines issued by Ministry of Information 
	TV Channel						& Broadcasting. www.mib.nic.in	
 
18.	Commodity Exchanges			49% (FDI+FII)  FIPB	FII purchases shall be restricted to secondary

					Investment by 	market only.

					Registered FII 

					under PIS will be 	No foreign investor/entity, including persons acting in 

					limited to 23% and 	concert, will hold more than 5% of the equity in these

					Investment under 	companies.

					FDI Scheme limited to 26%.	 	 

				 	
19.	Construction Development projects, 		100%	Automatic	Subject to conditions notified vide Press Note 2

	including housing, commercial premises, 			(2005 Series) including: 

	resorts, educational institutions, recreational			a. minimum capitalization of US$ 10 million for

	facilities, city and regional level 				wholly owned subsidiaries and US$ 5 million for joint 

	infrastructure,townships.					venture. The funds would have to be brought within 

 							six months of commencement of business of the

	Note:: FDI is not allowed in Real Estate 				Company. 		

	Business						b. Minimum area to be developed under each project-
							10 hectares in case of development of serviced 	
							housing plots; and built-up area of 50,000 sq. mts. in 	
 							case of construction development project; and any of   
							the above in case of a combination project.

							[Note 1:  For investment by NRIs, the conditions 

							mentioned in Press Note 2 / 2005 are not applicable.

							Note 2: For investment in SEZs, Hotels & Hospitals   
							conditions mentioned in Press Note 2(2005) are not 	 
							applicable]	
 
20.	Courier  services			100%	FIPB	Subject to existing laws and exclusion of activity 

	for carrying packages, parcels and other 				relating to distribution of letters, which is exclusively

	items which do not come within the ambit 			reserved for the State. www.indiapost.gov.in	

	of the Indian Post Office Act, 1898.			 
 
21.	Credit Information Companies  		49 % (FDI+FII)     FIPB  	Foreign Investment in CIC will be subject to Credit 

					Investment by 	Information Companies (Regulation) Act, 2005.

					Registered FII 	FII investment will be subject to the conditions that:

					under PIS will be 	(a) No single entity should directly or indirectly hold 

					limited to 24% only 	more than 10% equity

					in the CICs listed at 	(b) Any acquisition in excess of 1% will have to be 

					the Stock Exchanges 	reported to RBI as a reporting requirement; and

					within the overall 	(c) FIIs investing in CICs shall not seek a 

					limit of 49% 		representation on the Board of Directors based upon

					foreign investment.	 their shareholding. 	
 
22.	Industrial Parks both setting up and in 		100%	Automatic	Conditions in Press Note 2(2005) applicable for

	established Industrial Parks	 				construction development projects would not apply 	
 							provided the Industrial Parks meet with the under-	
							mentioned conditions-

							i. it would comprise of a minimum of 10 units and no  
							single unit shall occupy more than 50% of the allocable
 							area;

							ii. the minimum percentage of the area to be allocated  
							for industrial activity shall not be less than 66% of the   
							total allocable area.	


23	Insurance				26%	Automatic	Subject to licensing by the Insurance Regulatory &  
							Development Authority

							www.irda.nic.in	


24.	Investing companies  in infrastructure/		100%	FIPB	Where there is a prescribed cap for foreign investment,

	services  sector (except  telecom sector) 			only the direct investment will be considered for the  
							prescribed cap and foreign investment in an investing  
							company will not be set off against this cap provided 
							the foreign direct investment in such investing   
							company does not exceed 49% and the management   
							of the investing company is with the Indian owners. 

25.	Non  Banking  Finance  Companies 	
i).	Merchant Banking			100%	Automatic	Subject to:

ii).	Underwriting Portfolio Management Services			a. minimum capitalization norms for fund based 

iii).	Investment Advisory Services				NBFCs - US$ 0.5 million to be brought upfront for

iv).	Financial Consultancy					FDI up to 51%;  US$ 5 million to be brought upfront

v).	Stock  Broking					for FDI above 51% and up to 75%; and US$ 50

vi).	Asset Management					million out of which US$ 7.5 million to be brought

vii).	Venture  Capital					upfront and the balance in 24 months for FDI beyond

viii).	Custodial Services					75% and up to 100%.

xi).	Factoring						b. minimum capitalization norms for non-fund based

x).	Credit  Rating Agencies					NBFC activities- US$ 0.5 million.

xi).	Financial Leasing & Hire Purchase 				c. foreign investors can set up 100% operating 

xii).	Finance						subsidiaries without the condition to disinvest a

xiii).	Housing Finance					minimum of 25% of its equity to Indian entities

xiv).	Forex  Broking 					subject to bringing in US$ 50 million without any

xv).	Credit card Business					restriction on number of operating subsidiaries without

xvi).	Money changing business					bringing additional capital.

xvii).	Micro  credit  					d. joint venture operating NBFC’s that have 75% or 

xviii).	Rural credit						less than 75% foreign investment will also be allowed  
							to set up subsidiaries for undertaking other NBFC   	
							activities subject to the subsidiaries also complying 	
							with the applicable minimum capital inflow.

							e. compliance with the guidelines of the RBI.

							f. The minimum capitalization norms would apply  
							would be applicable where the  foreign holding in a  
							NBFC(both direct and indirect)  exceeds the limits 
							indicated at (a) above

							g. The capital for the purpose of minimum capitalization  
							norms shall consist of ordinary shares only.	

26.	Petroleum  &  Natural  Gas  sector

 	
a.	Refining 				49% in case   FIPB	Subject to Sectoral policy

					of PSUs	  (in case of	www.petroleum.nic.in and no divestment or dilution

					100% in case   PSUs)	 of domestic equity in the existing PSUs. 

					of Private   	   Automatic

					 companies 	   (in case of

						   private

						   companies)		


b.	Other than Refining and including market	100% 	Automatic 	Subject to sectoral regulations issued by Ministry of

	study and formulation; investment/financing; 			Petroleum & Natural Gas

	setting up infrastructure for marketing in				www.petroleum.nic.in

	Petroleum & Natural Gas sector.		

	
27.	Print Media	
a.	Publishing of newspaper  and periodicals	26%	FIPB	Subject to Guidelines notified by Ministry of Information

	dealing with news and current affairs	 			& Broadcasting. www.mib.nic.in


b.	Publishing of scientific magazines/		100%	FIPB	Subject to guidelines issued by Ministry of Information 

	specialty journals/periodicals				& Broadcasting. www.mib.nic.in	
28.	Telecommunications

	
a.	Basic and cellular, Unified Access  		74%	 Automatic	Subject to guidelines notified in the PN   3(2007)

	Services, National/International		(Including	 up to 49%.

	Long Distance, V-Sat, Public Mobile 		FDI, FII,	

	Radio Trunked Services (PMRTS),		NRI, FCCBs,	   FIPB

	Global Mobile Personal 			ADRs,GDRs     beyond 49%.

	Communications Services (GMPCS) 		convertible

	and other value added telecom services 	preference

					shares, and

					proportionate foreign

					equity in Indian promoters/

					Investing Company)	
 

b.	ISP with gateways, radio-paging, 		74%	Automatic	Subject to licensing and security requirements notified

	end-to-end bandwidth.				up to 49%.	by the Dept. of Telecommunications.

					                   FIPB beyond 	 www.dotindia.com

						49%.	 


c.	(a) ISP without gateway, (b) infrastructure	100%	Automatic	Subject to the condition that such companies shall 

	provider providing dark fibre, right of way,		up to 49%.  	divest 26% of their equity in favour of Indian public in

	duct space,tower (Category I); 		                   FIPB beyond 	 5 years, if these companies are listed in other parts

	(c) electronic mail and voicemail			49%.	 of the world. Also subject to licensing and security  	
							requirements, where required.

							www.dotindia.com	


d.	Manufacture of telecom equipments		100%	Automatic	Subject to sectoral requirements.

							www.dotindia.com	
29.	Trading	
a)	Wholesale/cash & carry trading		100%	Automatic	Subject to the condition that the test marketing approval

b)	Trading for exports			100%	Automatic	will be for a period of two years and Investment in

c)	Trading of items sourced from small 		100%	 FIPB	setting up manufacturing facilities commences	

	scale sector						 simultaneously with test marketing.

d)	Test marketing of such items for which 		100%	 FIPB

	a company has approval for manufacture			Subject to guidelines for FDI in trading issued by 

e)	Single Brand product retailing		51%	 FIPB	Department of Industrial Policy & Promotion vide

							Press Note 3 (2006 Series).
 
30.	Satellites-Establishment and operation		74%	FIPB	Subject to Sectoral guidelines issued by Department  
							of Space/ISRO

							www.isro.org	


31.	Special Economic Zones and Free 		100%	Automatic	Subject to Special Economic Zones Act, 2005 and

	Trade Warehousing Zones covering				the Foreign Trade Policy.

	setting up of these Zones and setting up 				www.sezindia.nic.in

	units in the Zones

In the Office of the Commissioner of Income Tax (Appeals)-XXXII, Mumbai

Date of Order: 28/04/2008

Appeal No. CIT(A)XXXII/IT-206/06-07

  1. Date of Institution of Appeal : 18.12.2006

  2. Name & Designation of the Officer who made the order: Shri Mudit Nagpal,Dy.C.I.T.Circle-3(3), Mumbai

  3. Assessment year : 2004-05

  4. Name of the Appellant : M/s Vijay Silk House (Bangalore) Ltd, 7/23 Grants Building, Arthur Bunder Road, Colaba, Mumbai-400 005

  5. PAN : AAACV7285M

  6. Income/Wealth assessed : Rs. 1,40,26,920

  7. Income Tax/Super Tax/Penalty/Fine demanded: Rs. 12,07,292/-

  8. Section under which order appealed against was passed : U/s. 143(3) of the Income Tax Act, 1961

___________________________________________________________________________________

 

1. Date of hearing : 25/04/2008

2. Present for Appellant : Shri Ishwar Rathi, C.A.

3. Present for Department : None

______________________________________________________________________________________

APPEALLATE ORDER AND GROUNDS OF DECISION

This appeal has been filed against the order dated 7/11/2006 passed u/s. 143(3) by the Dy. C.I.T., Circle -3(3), Mumbai. Following grounds of appeal have been raised:

  1. That the learned Dy. CIT has erred in charging tax on the amount of "any profit on transfer of DEPB…." as defined under section 28(iiid), whereas the sum covered under section 28(iiid) should be excluded from the total income as the same is not included in the definition of "Income" under section 2 (24) of the Income Tax Act.

  2. That the learned Dy. Commissioner of Income Tax has erred in charging tax on the amount of "any profit on transfer of DFRC…." as defined under section 28(iiie), whereas the sum covered under section 28(iiie) should be excluded from the total income as the same is not included in the definition of "INCOME" under section 2(24) of the Income Tax Act.

  3. Without prejudice to the above, the learned Dy.CIT has erred in reducing the deduction u/s 80HHC to Rs. 11,70,526/- as against a claim Rs. 45,35,802/-.

  4. That the learned Dy.CIT has erred in excluding Rs. 5,06,13,308/- from the eligible export turnover of the appellant while calculating the deduction u/s 80-HHC, due to non receipts of foreign currency within stipulated time, despite the fact that the appellant has realized all such proceeds and the applications to the competent authority made for post facto approval was pending.

  5. That the learned Dy.CIT has erred in considering the entire DEPB benefit of Rs. 16,31,434/- as profit on transfer of DEPB u/s 28(iiid), as against actual profit on transfer of DEPB as amount realized over and above the face value of DEPB entitlement, whereas during this year the DEPB’s were sold at discount and there was no profit on transfer of such DEPB.

  6. That the learned Dy. CIT has erred in considering the entire DFRC benefit of Rs. 85,65,493/- as profit on transfer of DFRC u/s 28(iiie), as against actual profit on transfer of DFRC as amount realized over and above the entitlement value of DFRC, whereas during this year the DFRC’s were sold at discount and there was no profit on transfer of such DFRC.

  7. That the learned Dy.CIT has erred in not considering the DEPB/DFRC entitlements accrued on export performance as export incentives u/s 28(iiia) or (iiib) or (iiic) or business income u/s 28 (i) or 28 (iv) while calculating the deduction u/s 80HHC or the same ought to have been reduced from the cost of exports.

2. Ground Nos. 1 & 2

2.1 These grounds of appeal relate to chargeability of tax on receipts in the nature of profit on transfer of DEPB/DFRC as defined u/s 28(iiid) and 28(iiie). It was argued that sections 28(iiid) and 28(iiie) are deeming provisions inserted by the taxation law amendment act 2005, under which certain receipts are held to be treated as business income w.e.f. 1.4.1998, but section 2 (24) i.e. the definition of Income has not been amended. Hence, if the receipts are not being deemed to be treated as income u/s 2(24), same cannot be taxed as business income though defined u/s 28(iiid) and 28(iiie). This sections 28(iiid) and 28(iiie) being deeming provisions, can not override the basic definition of income as contemplated u/s 2(24).

2.2 I have carefully considered the facts and submissions and I am not convinced with the AR’s arguments. The provision of section 28(iiid) and 28(iiie) specifically cover DEPB/DFRC benefit and therefore the same has to be treated as part of business profit. So far as section 2(24) of the Act is concerned, same gives an inclusive definition of income and not an exhaustive definition. Which means that any other items which are in the nature of income chargeable to tax can also be taxed. Since section 28(iiid) and 28(iiie) specifically provide for chargeability of DEPB/DFRC profits, same has been rightly taxed by the A.O. It is not correct on the part of the appellant that section 28(iiid) and 28(iiie) which are deeming provisions, cannot override section 2(24) because this is not the case at all by virtue of the reason that section 2(24) provides only an inclusive definition of "Income". Therefore the appellant’s contention is not maintainable and the same is hereby rejected.

2.3 These grounds of appeal are dismissed.

3 Ground No. 3:

3.1 This ground of appeal is general in nature and relates to deduction u/s 80HHC which is specifically covered by other grounds of appeal No. 5 to 7. Hence, this ground does not require any adjudication.

4 Ground No.4:

4.1 This ground of appeal relates to claim of deduction u/s 80HHC on export proceeds realized after the specified date. As claimed by the appellant the AO has rectified the order u/s 154 and the appellant has withdrawn this ground of appeal.

4.2 This ground of appeal is, therefore, treated as dismissed on account of being withdrawn.

5. Ground Nos. 5 to 7:

5.1 These grounds of appeal relate to claim of deduction u/s 80HHC on DEPB/DFRC benefits earned on export performance. The issue relates to the scope of sections 28(iiid) and (iiie), and the deduction u/s 80 HHC as per the 3rd proviso to section 80 HHC (3), both inserted by the taxation law amendment act 2005 with retrospective effect from A.Y.1998-99.

5.2 The appellant has argued that sections 28(iiid) and (iiie) refer to profit on transfer of DEPB/DFRC respectively and not the entire sale proceeds of DEPB/DFRC and hence while calculating the profits of the business as computed under clause (baa) to explanation below section 80 HHC, 90% of profits on transfer of DEPB/DFRC should only be reduced and not the entire sales proceeds of DEPB/DFRC. It was further argued that the entitlement value of the DEPB/DFRC should be considered as business income u/s 28(iv) and the same should not be reduced while calculating the profits of the business under explanation (baa) to section 80HHC. The appellant has given following submissions:

"While calculating deduction u/s 80HHC the profit on transfer of DEPB u/s 28 (iiid) should be restricted to the amount realized over the value of the DEPB. And the disentitlement of deduction u/s 80HHC on DEPB read with 3rd proviso to 80 HHC (3) should be restricted to the profit element on transfer of DEPB only and not the entire sales proceeds of DEPB. Further the value of DEPB should be treated as income u/s 28(iv) and the same can not be reduced under explanation "baa".

The same proposition has been accepted by the jurisdictional ITAT in the case of Vijay Silk House (Surat) Ltd v/s DCIT ITA No. 6148/M/06. And has further been followed by the ITAT Rajkot in the case of the Economic Traders and others."

5.3 The case was argued with reference to the decision of the Vijay Silk House (Surat) Ltd. V/s DCIT ITA No.6148/M/06 decided by the Hon’ble ITAT Mumbai. The copy of the decision was filed along with the other relevant decision of ITAT Rajkot in the case of the Economic Traders and others, wherein it was held that "the assessing officer in the present case is also directed to re-compute the deduction u/s 80HHC by taking only profit earned on account of transfer of DEPB license and not the entire receipts after affording reasonable opportunity of being heard" to the assessee". Thus in this case also the aforesaid proposition was followed and it was further held considering the scheme of the DEPB and the speech of the Finance Minister given in the Parliament during the debate of the aforesaid amendments, that the cost of acquisition of DEPB should be the credit value given to the exporter under the DEPB scheme and held as under; "Therefore, in view of the aforesaid discussions we are of the opinion that it is only the profit on transfer of DEPB Scheme which are chargeable to tax under the head income from business or profession. Therefore, while computing the profits of the business under explanation (baa) of section 80HHC 90% of profit on transfer of DEPB should be excluded, not the total amount received by the assessee on the transfer of DEPB credit. The cost of acquisition in the case of DEPB can not be NIL but it will be the credit value given to the assessee under the scheme as that represents the incidence of the customs duty on the import contents of the export product which the assessee has already paid at the time of import. Thus, the order of CIT(A) is set aside on this issue and the AO is directed to allow deduction to the assessee u/d 80 HHC after co-computing it in the above manner. Thus, Ground No. 1 and 2 are allowed."

5.4 I have considered the above submissions and decisions on Hon’ble Mumbai and Rajkot Tribunal in the case of appellant’s group concern M/s Vijay Silk House (Surat) Ltd. and M/s Economic Traders and others respectively. I agree with the appellant that sections 28(iiid) and (iiie) provide for chargeability of only the "Profits on transfer of DEPB/DFRC" and not the whole value of sale receipts. The principal value of entitlement will have to be taxed u/s 28(iv) of the Act. Therefore, in view of this legal position, what has to be reduced under clause (baa) to Explanation below section 80HHC is only the said profit on transfer of DEPB/DFRC and not the full value of its consideration. The above decisions of ITAT, Mumbai and Rajkot also support the same view. Therefore, respectfully agreeing with the orders of the Hon’ble ITAT in the case of Vijay Silk House (Surat) Ltd v/s DCIT ITA No. 6148/M/06 and ITAT Rajkot in the case of the Economic Traders and others ITA No. 70 & 71/RJT/2003-04, I hold that 90% of only the profit on transfer of DEPB/DFRC should be considered for exclusion under clause (baa) to explanation below section 80HHC. The A.O. is directed to allow deduction to the assessee u/s 80HHC accordingly. Only 90% of profit on transfer of DEPB/DFRC should be excluded , not the entire sales proceeds of DEPB/DFRC, while computing the "profits of the business" under explanation (baa) of section 80HHC. Also, since the export turnover of the appellant is above Rs. 10 crores and they are unable to satisfy the two conditions prescribed in the 3rd proviso to section 80 HHC (3), the profit on transfer of DEPB/DFRC i.e. the amount realized over and above the face value of DEPB/DFRC shall not be eligible for deduction.

5.5 Ground Nos. 5 to 7 are allowed subject to the aforesaid direction.

6. In the result, the appeal of the appellant is partly allowed

Sd/

(Ajit Kumar Sinha)

Commissioner of Income Tax Appeal XXXII, Mumbai

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In the Office of the Commissioner of Income Tax (Appeals)-XXXII, Mumbai

Date of Order: 28/04/2008

Appeal No. CIT(A)XXXII/IT-207/06-07

  1. Date of Institution of Appeal : 18.12.2006

  2. Name & Designation of the Officer who made the order: Shri Mudit Nagpal, Dy.C.I.T.Circle-3(3), Mumbai

  3. Assessment year : 2004-05

  4. Name  of the Appellant : M/s Vijay Silk House (Delhi) Ltd,  7/23 Grants Building, Arthur Bunder Road, Colaba, Mumbai-400 005

  5. PAN : AAACV5908K

  6. Income/Wealth assessed : Rs. 52,83,630/-

  7. Income Tax/Super Tax/Penalty/Fine demanded: Rs. 3,00,799/-

  8. Section under which order appealed against was passed : U/s. 143(3) of the Income Tax Act, 1961

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  1. Date of hearing : 17/04/2008

  2. Present for Appellant : Shri Ishwar Rathi, C.A.

  3. Present for Department : None

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APPEALLATE ORDER AND GROUNDS OF DECISION

This appeal has been filed against the order dated 7/11/2006 passed u/s. 143(3) by the Dy. C.I.T., Circle -3(3), Mumbai. Following grounds of appeal have been raised:

1. That the learned Dy.CIT has erred in reducing the deduction u/s 80HHC of the Income Tax Act to Rs. 13,69,276/- as against a claim of Rs. 19,95,872/-.

2. On the facts and in the circumstances of the case and in law, the learned Dy.CIT has erred in reducing 90% the gross interest receipts of Rs. 7,63,245/- ( as against Rs. NIL) while calculating the profits of the business under explanation "baa" under section 80HHC, though the same was assessed as business income and the payment of interest was more than the interest receipts, further there was a clear nexus between such interest receipts and the interest payments.

3. That the learned Dy.CIT has erred in excluding Rs. 1,62,55,855/- from the eligible export turnover of the appellant while calculating the deduction u/s 80-HHC, due to non receipts of foreign currency within stipulated time, despite the fact that the appellant has realized all such proceeds and the application to the competent authority made for post facto approval was pending.

2. Ground No. 1:

2.1 This ground of appeal is general in nature and relates to issues which are specifically covered by other grounds of appeal. Hence, this ground does not require any adjudication.

3 Ground No. 2:

3.1 The appellant has argued that the AO has reduced 90% of gross amount of interest receipt in view of clause (baa) to explanation below section 80HHC, whereas as per facts of the case the net interest should have been considered for the same. The appellant has given following detailed submissions.

"As per the facts of the case the appellant has maintained bank deposits to obtain bank loan facilities and used the same as collateral security for bank facilities for the purpose of the export business. The gross interest earned thereon was Rs. 7,63,245/- at the same time they had paid interest on borrowed funds and the same was more than the amount of interest received. As no amount of interest was credited to the profit and loss account nothing was required to reduced under explanation "baa" while calculating the deduction u/s 80HHC.

These bank deposits were maintained for the purpose of the business and also the funds were borrowed for the purpose of the business both has the direct nexus with each other and hence the netting of the interest should be allowed as has been held by the Honorable Special Bench of the Delhi Tribunal in the case of M/s Lalsons Enterprises."

3.2 It is thus pleaded that the Hon’ble Delhi Tribunal in the case of Lalsons Enterprises have held that net interest should be considered for deduction under clause (baa) of explanation below section 80HHC. It is also pointed out that the Hob’ble Mumbai Tribunal in the appellant’s sister concern M/s Vijay Silk House (Mumbai) Ltd. has allowed the appeal for the A.Y. 2001-02 with a direction to follow the decision of Lalsons Enterprises and the AO has allowed the netting as per direction of the Hon’ble ITAT.

3.3 I have considered the issue pertaining to this ground of appeal. In view of order of the Hon’ble Delhi ITAT in the case of M/s Lalsons Enterprises and Hon’ble Mumbai ITAT in appellant’s sister concern, it is evident that the appellant is entitled for deduction of 90% of net interest for the purpose of explanation (baa). Therefore the AO is directed to consider only net interest under explanation (baa) to section 80HHC.

3.4 This ground of appeal is allowed

4. Ground No. 3

4.1 This ground of appeal relates to claim of deduction u/s 80 HHC on export proceeds realized after the specified date. As claimed by the appellant the AO has rectified the order u/s 154 and the appellant has withdrawn this ground of appeal.

4.2 This ground of appeal is, therefore, treated as dismissed on account of being withdrawn.

5. In the result, the appeal of the appellant is partly allowed.

 

Sd/

Ajit Kumar Sinha

Commissioner of Income Tax (Appeal)XXXII, Mumbai

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Federation of Indian Export Organisations
New Delhi, INDIA.