SFIS Credit Does Not Constitute Taxable Income: ITAT Delhi

The Bench, consisting of Yogesh Kumar US (Judicial Member) and Dr. B.R.R. Kumar (Accountant Member), observed that the SFIS credit had only reduced the value of a capital asset in the books of accounts of the assessee by the amount of excise duty and that if the SFIS credit was not available, the assessee would have paid the excise duty and added the same to the cost of the asset. Hence, the ITAT ruled that there was no element of revenue or income in the SFIS credit.

"Served From India Scheme" (SFIS) was notified by the Government of India with the objective of accelerating growth in export of services. The SFIS provided for Duty Credit Scrips equivalent to 10% of foreign exchange earned during a year. Under the SFIS, Duty Credit Scrips could also be utilized for offsetting the tax liability while importing capital goods which were used for the purpose of business, and for payment of excise duty when purchases were made domestically.

Accordingly, Central Excise Tariff Notification No. 34/2006, dated 14.06.2006, was issued to provide for the credit. As per the Notification, only capital goods could be reckoned for excise credit under SFIS.

During the assessment proceedings, the Assessing Officer (AO) held that the eligible SFIS credit was a revenue receipt in the hands of the assessee Container Corporation of India Ltd. and thus, the AO added the entire SFIS credit to the assessee's taxable income. Against this, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) (CIT(A)). The CIT (A) observed that the assessee had utilized certain sum of the total SFIS credit against its excise duty and customs duty liabilities. The CIT(A) thus restricted the addition to the said sum utilized by the assessee. Against this, the assessee and the revenue department filed cross appeals before the ITAT. The assessee filed an appeal against the addition of the SFIS credit utilized by it to its income, while the revenue department contended that the entire eligible SFIS credit should be added to the assessee's taxable income.

The revenue department submitted before the ITAT that the CIT(A) had erred in deleting the unutilized SFIS scrips. The revenue department averred that the SFIS scrips received by the assessee were in the form of subsidy and hence, they were 'Income' within the meaning of the Income Tax Act, 1961.

The ITAT observed that the eligible purchases made by the assessee under the SFIS were not on revenue account, since credit against excise duty and customs duty was only available under SFIS when capital goods were purchased.

The ITAT noted that the Central Excise Tariff Notification No.34/2006, dated 14 .06.2006, contains a clear and specific restriction with respect to the credit being available only in respect of "Capital Goods" as defined in the Foreign Trade Policy.

The ITAT held that SFIS is a credit receipt which is used for making payment of excise duty on domestic purchases. The ITAT added that Scrips under SFIS are enticements which can be set off against excise duty while making purchases or import of capital goods.

Hence, the ITAT ruled that no amount was received by the assessee under SFIS since all the purchases were capitalized and no new assets came into existence.

"The Assessee has not reckoned SFIS credit in its Profit & Loss account, since such credit for its nature as well as built-in conditions, could never have been an item on revenue account. Wherever it has made purchases of eligible capital goods however, it has corresponded with vendors as to availability of SFIS credit against Excise / Customs liability against the said purchases, obtained certificates from Excise / Customs authorities against provisional Invoices from vendors, and has purchased the said capital goods net of Excise / Customs duty, against SFIS credit. The capital goods as purchased have been brought into Assets at the net-of Excise / Customs value in the Balance Sheet.", the ITAT observed.

The ITAT ruled that the SFIS credit has only reduced the value of a capital asset brought into the books of accounts of the assessee by the amount of excise duty. The ITAT added that if the SFIS credit was not available, the assessee would have paid the duty and added the same to the asset cost while capitalizing the same. Thus, the ITAT ruled that there was no element of revenue or income in the SFIS credit.

The ITAT held that the SFIS credit had been utilized to make purchases of capital goods at net of Excise prices. The 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 be utilized only against purchase of capital goods and to set off a portion of excise duty and customs duty. Thus, the ITAT ruled that the SFIS credit was not in the nature of income and that it did not constitute taxable income of the assessee under Section 2(24) (xviii) of the Income Tax Act, 1961.

The ITAT thus allowed the appeal of the assessee and dismissed the appeal of the revenue department.

Case Title: Container Corporation of India Ltd. versus DCIT

Dated: 30.06.2022 (ITAT Delhi)

Representative for the Appellant/Assessee: Mr. S. Krishnan, Adv. and Mr. V. Rajakumar, Adv

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