(1.) Though somewhat different question was framed at the time of admitting the appeal, we reframe the questions as under:
"(A) Whether,4 on the facts and in the circumstances of the case, the amount earned on account of rate difference due to fluctuation of foreign exchange can be considered for the purpose of calculating profits for deductions under section 80HHC of the Income-tax Act, 1961?
(B) Whether, on the facts and in the circumstances of the case, the amount received on sale of DEPB licence and foreign exchange fluctuation of rate difference can be considered for the purpose of deductions under section 80-IA of the Income-tax Act, 1961?"
So far as question (A) is concerned, this court in Tax Appeal No. 1468 of 2006 and connected appeals, by a judgment dated March 12, 2014 (CIT v. Priyanka Gems, 2014 367 ITR 575 (Guj)), held the issue in favour of the assessee. Such question is, therefore, answered accordingly.
(2.) Question (B) has two facets--one pertains to income arising out of sale of DEPB licence for the purpose of deduction under section 80-IA of the Act in view of the decision of the Supreme Court in the case of Liberty India v. CIT, 2009 317 ITR 218 (SC) holding this issue in favour of the Department and against the assessee. The second aspect of the question is foreign exchange fluctuation for the purpose of deduction under section 80-IA of the Act. This issue would be covered by the judgment of this court in Tax Appeal No. 1468 of 2006--since reported in CIT v. Priyanka Gems, 2014 367 ITR 575 (Guj)) and connected appeals. It is true that the said decision was rendered in the background of section 80HHC of the Act. Counsel for the Revenue would contend that section 80-IA of the Act would stand on a different footing since the requirement is that the profit must have been derived from the eligible business. We had, however, examined this issue from all angles and held as under (page 589 of 367 ITR):
"Under the circumstances, we have no hesitation in upholding the view of the Tribunal. Quite apart, the issue is substantially covered by the decision of CIT v. Amba Impex,2006 282 ITR 144 (Guj). Consistent and at times independent trend of the judicial pronouncements of courts across the country need not be disturbed. Even independently, we are of the view that the foreign exchange gain arising out of the fluctuation in the rate of foreign exchange cannot be divested from the export business of the assessee. As noted, once export is made, due to variety of reasons, the remission of the export sale consideration may not be made immediately. Under the accounting principles, therefore, the assessee, on the basis of accrual, would record sale consideration at the prevailing exchange rate on the quoted price for the exported goods in the foreign currency rates. If during the same year of the export, the remission is also made, the difference in the rate recorded in the accounts of the assessee and that eventually received by way of remission either positive or negative, would be duly adjusted. May be the accounting standards require that the same may be recorded in separate foreign exchange fluctuation account. Nevertheless any deviation either positive or negative must have direct relation to the export actually made. Payment would be due to the assessee on account of the factum of export. Current price of the goods so exported would also be pre-decided in the foreign exchange currency. The exact remittance in Indian rupees would depend on the precise exchange rate at the time when the amount is remitted. This fluctuation and possibility of increase or decrease, in our opinion, can have no bearing on the source of such receipt. Primarily and essentially, the receipt would be on account of the export made. If this is so, any fluctuation thereof also must be said to have arisen out of the export business. Mere period of time and the vagaries of rate fluctuation in international currencies cannot divest the income from the character of the income from the assessee's export business. In that view of the matter, the Revenue's contention that such income cannot be said to have been derived from the export business must fail. If this is the position when the remittance is made during the same year of the export, we fail to see what material change can it bring about if within the time permitted under sub-section (2) of section 80HHC, the remittance is made but in the process accounting year has changed. To our mind mere change in the accounting year can have no real impact on the nature of the receipt. The conclusion of the Assessing Officer that since the year during which such sale proceeds were received by the assessee export was not made, would not in any manner change the situation. The assessee being engaged in the business of export and having made the export, mere fact of the remittance being made after 31st of March of the year when export was made, would not change the situation in so far as, relation of such income to the assessee's export business is concerned. Clause (baa) to the Explanation to section 80HHC provides for exclusion of certain incomes for computation of export profit under section 80HHC. Sub-clause (1) of clause (baa) thereof pertains to 90 per cent. of the sum referred to in clauses (iiia), (iiib), (iiic), (iiid) and (iiie) of section 28 or any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of similar nature included in such profits. The term 'foreign exchange difference' is not specified in any of the categories specifically mentioned in the said clause. The Revenue, however, contended that the same must be included by necessary implication as part of other receipts. The Legislature, however, has used the term 'any other receipt of similar nature'. This expression 'similar nature' would have considerable bearing on the ultimate conclusion that we arrive in this respect. What is to be excluded under the said sub-clause (1) of clause (baa) is any other receipt of a nature similar to the brokerage, commission, interest, rent or charges. The receipt by way of foreign exchange fluctuation not being similar to any of these receipts mentioned above, application of clause (baa) must be excluded. Sub-rule (1) of rule 115 only provides for adopting the rate of exchange for calculation of value of rupee of any income accruing or arising in case of an assessee and provides that the same shall be telegraphic transfer of buying rate of such currency on the specified date. The term 'specified date' has been defined in Explanation 2 to the said sub-rule (1). Rule 115 of the Income-tax Rules, 1962, thus has application for a specific purpose and has no bearing while judging whether the foreign exchange rate fluctuation gain can form part of the deduction under section 80HHC of the Act. In case of CIT v. Chowgule and Co. Ltd., 1996 218 ITR 384 (SC), the court held that rule 115 does not lay down that all foreign currencies received by the assessee will be converted into Indian rupees only on the last date of the accounting period. Rule only fixed the rate of conversion of foreign currency. If there is no foreign currency to convert on the last date of accounting period, then no question of invoking rule 115 will arise...
In case of CIT v. Sterling Foods, 1999 237 ITR 579 (SC), the court held that the facts were that the assessee was engaged in the processing of prawns and sea food and exporting it. In the process the assessee earned import entitlements granted by the Government of India under Export Promotion Scheme. The assessee could use such import entitlements itself or sell the same to others. The assessee sold such entitlements and earned income and included such income for relief under section 80HHC of the Act. The court held that such income cannot be said to have been derived from the assessee's industrial undertaking. In the present case, however, we find that the source of the income of the assessee was the export. On the basis of accrual, income was already reflected in the assessee's account on the date of the export on the prevailing rate of exchange. Further income was earned merely on account of foreign exchange fluctuation. Such income, therefore, was directly related to the assessee's export business and cannot be said to have been removed beyond the first degree.
In case of CIT v. Shah Originals, 2010 327 ITR 19 (Bom), the Bombay High Court considered a case where the assessee, an exporter, was given an option to keep a specified percentage of the receipts on account of the export in its Exchange Earners Foreign Currency (EEFC) account. The assessee realized the full amount on account of the export but kept the portion thereof in EEFC account. The assessee received higher amount in Indian rupees on such amount so set apart due to the fluctuation in the foreign exchange rate. Conscious of the fact that the assessee had received the entire proceeds of the export transaction and thereafter, gained due to the foreign fluctuation on the account kept by the assessee in the EEFC account, the court held that such gain cannot be said to have been derived from the assessee's export business. Thus the significant and distinguishing feature of this case is that the assessee had received the entire proceeds of the export sale. The foreign exchange fluctuation gain arose subsequent to the assessee receiving the sale consideration. It was in this background, the Court held and observed as under (page 24 of 327 ITR ):
"The assessee admittedly in the present case received the entire proceeds of the export transaction. The Reserve Bank of India, has granted of facility to certain categories of exporters to maintain a certain proportion of the export proceeds in an EEFC account. The proceeds of the account are to be utilized for bona fide payments by the account holder subject to the limits and the conditions prescribed. An assessee who is an exporter is not under an obligation of law to maintain the export proceeds in the EEFC account but, this is a facility which is made available by the Reserve Bank. The transaction of export is complete in all respects upon the repatriation of the proceeds. It lies within the discretion of the exporter as to whether the export proceeds should be received in a rupee equivalent in entirety or whether a portion should be maintained in convertible foreign exchange in the EEFC account. The exchange fluctuation that arises, it must be emphasized, is after the export transaction is complete and payment has been received by the exporter. Upon the completion of the export transaction, what the seller does with the proceeds, upon repatriation, is a matter of his option. The exchange fluctuation in the EEFC account arises after the completion of the export activity and does not bear a proximate and direct nexus with the export transaction so as to fall within the expression "derived" by the assessee in sub-section (1) of section 80HHC. Both the Assessing Officer and the Commissioner of Income-tax (Appeals) have made a distinction, which merits emphasis. The exchange fluctuation, as both those authorities noted, arose subsequent to the transaction of export. In other words, the exchange fluctuation was not on account of a delayed realization of export proceeds. The deposit of the receipts in the EEFC account and the exchange fluctuation which has arisen therefrom cannot be regarded as being part of the profits derived by the assessee from the export of goods or merchandise'."
(3.) In the result, appeal is allowed in part to the extent the Tribunal's decision relates to section 80-IA of the Act. With respect to deduction under section 80-IA of the Act on sale of DEPB licence, the same is reversed. The appeal stands allowed in part.;