The Delhi Bench of ITAT ruled that the credit received by the assessee under the “Servi From India Scheme” (SFIS) is not in the nature of income and does not constitute taxable income under Article 2 (24) (xviii) of the Income Tax Act, 1961.
The bench, consisting of Yogesh Kumar US (judicial member) and Dr. BRR Kumar (accounting member), observed that the SFIS credit only reduced the value of a fixed asset in the assessee’s books by the amount excise duties. and that if SFIS credit was not available, the assessee would have paid the excise duty and added it to the cost of the asset. Therefore, the ITAT ruled that there was no income or revenue element in the SFIS credit.
“Served From India Scheme” (SFIS) was notified by the Indian government with the aim of accelerating the growth of service exports. The SFIS provided for duty credit certificates equivalent to 10% of foreign currency earned in a year. Under SFIS, duty credit certificates could also be used to offset tax liability when importing capital goods used for business purposes and for payment of excise duty when purchases were made in the internal market.
Accordingly, Central Excise Tariff Notification No. 34/2006, dated June 14, 2006, was issued to provide for the credit. According to the notification, only capital goods could be taken into account for excise credit under SFIS.
During the appraisal process, the Appraisal Agent (AO) determined that the eligible SFIS credit was tax revenue in the hands of the appraisee Container Corporation of India Ltd. and therefore the AO added the full SFIS credit to the assessee’s taxable income. Against this, the assessee filed an appeal with the Commissioner of Income Tax (Appeals) (CIT(A)). The CIT(A) observed that the assessee had used a certain sum of the total SFIS credit for his excise and customs duty obligations. The CIT(A) therefore limited the addition to the said sum used by the beneficiary. Against this, the assessee and the revenue service lodged incidental appeals before the ITAT. The assessee appealed against the addition of the SFIS credit used by him to his income, while the Ministry of Finance argued that all eligible SFIS credit should be added to the assessee’s taxable income.
The Revenue Department argued before the ITAT that the CIT(A) erred in deleting the unused SFIS certificates. The Revenue Department claimed that the SFIS certificates received by the assessee were in the form of a grant and therefore constituted “income” within the meaning of the Income Tax Act 1961.
ITAT observed that eligible purchases made by the assessee under the SFIS were not under revenue, since credit against excise and customs duties was only available under the SFIS only when the capital goods were purchased.
ITA noted that Central Excise Tariff Notification No. 34/2006, dated June 14, 2006, contains a clear and specific restriction regarding the credit available only for “capital goods” as defined in the foreign trade policy.
The ITAT considered that the SFIS is a credit receipt which is used to effect payment of excise duty on domestic purchases. ITAT added that SFIS certificates are incentives that can be deducted from excise duties when purchasing or importing capital goods.
Therefore, the ITAT ruled that no monies had been received by the assessee under SFIS since all purchases had been capitalized and no new assets had arisen.
“The assessee did not include the SFIS credit in his profit and loss account, as such a credit, by its nature as well as the embedded conditions, could never have been an item in the income account. However, wherever he made purchases of qualifying capital goods, he corresponded with sellers regarding the availability of SFIS credit against excise/customs liability against said purchases, obtained certificates from the authorities of the excise/customs against vendors’ interim invoices, and purchased said capital goods net of excise/customs, against SFIS Capital goods purchased were capitalized at net value excise/customs tax in the balance sheet,” observed the ITAT.
The ITAT ruled that the SFIS credit only reduced the value of a fixed asset on the assessee’s books by the amount of excise duty. ITAT added that if SFIS credit was not available, the assessee would have paid the duty and added it to the cost of the asset while capitalizing the asset. Thus, the ITAT ruled that there was no revenue or income element in the SFIS credit.
ITAT found that the SFIS credit had been used to make purchases of capital goods net of excise duty. ITAT observed that the SFIS credit reduced the cost of capital goods purchased by the assessee. The ITAT added that the SFIS credit given to the assessee could only be used for the purchase of capital goods and to offset part of the excise and customs duties. Thus, the ITAT ruled that the SFIS credit was not in the nature of income and did not constitute taxable income of the assessee under Article 2(24)(xviii) of the Income Tax Act 1961.
The ITAT therefore upheld the assessee’s appeal and denied the revenue department’s appeal.
Case title: Container Corporation of India Ltd. against DCIT
Date: 30.06.2022 (ITAT Delhi)
Appellant’s Representative/Assessed: Mr. S. Krishnan, Adv. and MV Rajakumar, Adv
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