TaxTMI 
TaxTMI 
2010 (6) TMI 63
X X X X Extracts X X X X
X X X X Extracts X X X X
....le proceeds; b) Whether the Tribunal is justified in holding that the face value of the Duty Entitlement Passbook is chargeable to tax under Section 28(iiib) at the time of accrual of income i.e. when the application for Duty Entitlement Passbook is filed with the competent authority pursuant to the exports made and that the profits on the sale of Duty Entitlement Passbook representing the excess of the sale proceeds over the face value is liable to be considered under Section 28(iiid) at the time of sale;" B. Facts 2. The appeal relates to Assessment Year 2003-04. The Appellant is a trader and exporter in dyes, chemicals and other products. In the return of income the assessee declared a total income of Rs.1.06 Crores. The assessee claimed a deduction under Section 80HHC in the amount of Rs.78.01 Crores. The total export turnover of the assessee was Rs.12.82 Crores. The assessee received export incentives of Rs.1.89 Crores inclusive of a consideration of Rs. 1.87 Crores received on the sale of Duty Entitlement Pass Book (DEPB) credit. The export turnover of the Appellant was over Rs.10 Crores. The Assessing Officer declined to grant the benefit of a deduction under Section 80HH....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... does not represent a profit chargeable under Section 28(iiid) and the face value of the DEPB entitlement is liable to be deducted from the sale proceeds. According to the Tribunal the face value of the DEPB entitlement was chargeable to tax under Section 28(iiib) while the difference between the sale consideration and the face value of the DEPB entitlement would fall for classification under Section 28(iiid). 5. This appeal has been listed for hearing together with a batch of other appeals. Since certain questions of law would arise in all the appeals, we had in the interests of fairness permitted counsel appearing on behalf of the assessees in the batch of cases to urge submissions on the question of law. Accordingly, during the course of the hearing, we have heard arguments on behalf of the intervening parties as well. C. Submissions (i) The Revenue 6. On behalf of the Revenue it has been submitted that (i) The assessee had not complied with the conditions prescribed in the third proviso to Section 80HHC and was therefore not entitled to the benefit that is provided therein in respect of income arising from the transfer of the DEPB entitlement; (ii) An entitlement under the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....g profits are comprised in the business profits of the assessee. Explanation (baa) to Section 80HHC determines how much would be exempt for the purposes of the provision. Whatever is not directly relatable to exports has to be excluded. The face value of the DEPB entitlement cannot be excluded because it is directly relatable to exports; (vi) The DEPB entitlement is not required to be reduced under Explanation (baa) because ( a) on a plain reading, Explanation (baa) refers to clause (iiid) of Section 28 which in turn postulates a profit generated on transfer; (b) Clause (iiid) of Section 28 is in contradistinction to clauses (iiib) and (iiic) where the full amount of the benefit is referred to; (vii) The speech of the Finance Minister on the floor of Parliament when the amendment bill was introduced would demonstrate what was required to be removed was the premium representing the excess over the face value; (viii) The judgment of the Tribunal in the case of P & G Enterprises (P) Ltd. v. Deputy Commissioner of Income Tax{(2005) 93 ITD 138 (Delhi)} allowed the benefit of Section 80HHC over the premium realized on the sale of the entitlement and it was this aspect of the decision of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....x {(1978) 114 ITR 840 (Allahabad)}. The prevailing view of these two courts was that in the case of an assessee who is engaged in exports import entitlements received under incentive schemes of the Government of India would be taxable under clause (iv) of Section 28 as the value of a benefit, whether convertible into money or otherwise arising from business or the exercise of a profession. However, there appeared to be a conflict of opinion among Courts on the issue which was resolved by Parliament by the insertion of clauses (iiia), (iiib) and (iiic) by the Finance Act of 1990. While explaining the reasons underlying the amendment, circular 572 dated 3 August 1990 of the Board noted that at that point in time the incentives which were given to exporters fell into three categories (i) Cash compensatory support; (ii) Drawback of duty and (iii) Import entitlement licence. The view of the Revenue had all along been that such export incentives were revenue receipts and were taxable, whether they took the form of cash compensatory support, a drawback of duty or a profit on the sale of an import entitlement licence. Parliament stepped in to settle the question as regards the taxability o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of the export product in accordance with standard input output norms and the basic customs duty payable on such deemed import. In other words, the credit which is made available to an exporter under the DEPB scheme represents a specified percentage of the FOB value of the goods exported. The goods which are exported need not, as a matter of fact, necessarily utilize imported inputs. The policy calculates a deemed import content on the basis of standard input output norms and a credit is made available to the exporter. The credit need not be utilized by the exporter himself nor for that matter is it necessary for the exporter to utilize the goods that may be imported against the utilization of the DEPB credit. The DEPB credit is transferable. (iii) Section 80HHC Profits received from export 13. Under sub section (1) of Section 80HHC, a deduction is allowed to the extent of profits "derived by the assessee" from the export of goods to which the Section applies. Since the deduction is in respect of profits derived from export, Parliament has in sub section (3) laid down a formula on the basis of which export profits have to be computed. Sub section (3) of Section 80HHC consists of ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... clause (a) refers to the profits of the business. The expression profits of the business is elucidated in Explanation (baa) to Section 80HHC. Explanation (baa) is to the following effect: "(baa) "Profits of the business" means the profits of the business as computed under the head "Profits and gains of business or profession" as reduced by( 1)ninety per cent of any sum referred to in clauses (iiia), (iiib), (iiic), (iiid) and (iiie) of section 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits; and (2)the profits of any branch, office, warehouse or any other establishment of the assessee situate outside India." 16. The expression "profits of the business" means profits as computed under the head of 'profits and gains of business or profession' under Sections 28 to 44D and they are thereupon to be reduced to the extent provided by clauses (1) and (2). Clause (1) as it now stands is bifurcated in two parts. The first consists of the sums referred to in clauses (iiia), (iiib), (iiic), (iiid) and (iiie) of Section 28; and the second consists of receipts by way of brokerage, commission, inte....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Scheme under the export and import policy formulated and announced under section 5 of the Foreign Trade (Development and Regulation) Act, 1992 (22 of 1992)." 19. Clause (iiid) contemplates that any profit on the transfer of the Duty Entitlement Pass Book scheme would be chargeable to income tax as a business profit. The circumstances in which the amendment was brought about would have a bearing on the subject matter of the controversy in the present case and will therefore need some elaboration. In P & G Enterprises (supra) a Bench of the Income Tax Appellate Tribunal at Delhi considered the case of an exporter to whom a credit was available under the Duty Entitlement Pass Book scheme. The DEPB credit was transferred and the receipts were shown as business receipts under Section 28(iiia). The Assessing Officer held that the receipts upon the transfer of the DEPB entitlement fell for classification under Section 28(iv) and he excluded ninety percent of those receipts under Section 80HHC. The Commissioner (Appeals) held that the receipts were in the nature of revenue receipts and the entirety of those receipts was assessable as business receipts under Section 28(iv). The Commission....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r of the business carried on by the assessee. The second and third provisos to sub section (3) are of some significance in the present case and they read as follows: "Provided further that in the case of an assessee having export turnover not exceeding rupees ten crores during the previous year, the profits computed under clause (a) or clause (b) or clause (c) of this sub section or after giving effect to the first proviso, as the case may be, shall be further increased by the amount which bears to ninety per cent of any sum referred to in clause (iiid) or clause (iiie) as the case may be, of section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee; Provided also that in the case of an assessee having export turnover exceeding rupees ten crores during the previous year, the profits computed under clause (a) or clause (b) or clause (c) of this sub section or after giving effect to the first proviso, as the case may be, shall be further increased by the amount which bears to ninety per cent of any sum referred to in clause (iiid) of section 28, the same proportion as the export turnover bears to the total turnover....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sessee, the expression profit means the difference between the sale consideration realized from the transfer of the DEPB receipts and the face value of the DEPB credit that has been transferred. The Tribunal, while accepting the contention of the assessee has also held that it is only this difference which would fall within the purview of clause (iiid) and that the DEPB credit would fall within the purview of clause (iiib). (Clause (iiib) deals with a cash assistance received or receivable under any scheme of the Government of India.) 24. Export incentives, such as import licenses, cash assistance, duty drawback, DEPB credit, or duty free replenishment certificates are all intended to encourage exports. The object of these incentives is to neutralize the incidence of customs duty on the import content of the export product. Under the Income Tax Act, 1961 not only the profits on sale of an import licence and profits on transfer of DEPB credit/DFRC, but also the duty drawback received by an assessee are considered as profits of business. Duty drawback is nothing but receiving back the amount of duty actually paid by the assessee. Similarly, the DEPB credit is a credit to be utilized....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the Finance Act of 2005, Parliament resolved the controversy by inserting a specific clause, namely Clause (iiid) in Section 28 to the effect that profits on transfer of DEPB i.e., the amount received on transfer of DEPB is income chargeable to tax under the head - profits and gains of business and profession. As regards the deduction under Section 80 HHC, the legislature substituted Explanation (baa) in Section 80HHC so as to exclude 90% of the profits received on transfer of DEPB from the profits of business for the purposes of Section 80HHC and inserted the second and third provisos to Section 80HHC(3). By the second proviso it was provided that in the case of an assessee having an export turnover not exceeding Rs.10 crores, the profits computed under Section 80HHC(3) shall be increased by 90% of the sum referred to in Section 28(iiid). By the 3rd proviso it was provided that in the case of an assessee having an export turnover exceeding Rs.10 crores, the profits computed under Section 80HHC(3) shall be increased by 90% of the sum referred to in Section 28(iiid) subject to the two conditions set out therein. 28. Admittedly, in the assessment year in question, the assessee had ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e was entitled to under the DEPB scheme. In other words, the amount equivalent to the face value of DEPB as well as the amount received in excess of the DEPB would constitute profits of business under Section 28(iiid) and merely because, a part of such profits of business (face value) was offered to tax in the year in which the credit accrued to the assessee would not be a ground to hold that such profit was not covered under Section 28(iiid). Where the face value of the DEPB credit is offered to tax as business profits under Section 28(iiid) in the year in which the credit accrued to the assessee, then any further profit arising on transfer of DEPB credit would be taxed as profits of business under Section 28(iiid) in the year in which the transfer of DEPB credit took place. Therefore, the argument of the assessee that if the face value of the DEPB credit is held to be covered under Section 28(iiid), it would amount to double taxation is without any merit. 30. There is another perspective from which the issue can be looked at. The DEPB credit to which an exporter is entitled is a form of an export incentive. The Supreme Court in Ravindranathan Nair's case has held that all the in....
X X X X Extracts X X X X
X X X X Extracts X X X X
....onclusion that only the premium realized by an exporter on the sale of the DEPB credit would fall within the purview of clause (iiid) of Section 28 and not the face value of the DEPB. The entire approach of the Tribunal is with respect misconceived and unsustainable. The Finance Minister sought to introduce clause (iiid) in Section 28 in view of the decision of the Delhi Bench of the Tribunal in the case of P & G Enterprises (supra). The dispute in that case related to taxing the entire amount received on the transfer of the DEPB credit and not the amount that was received in excess of the face value of the DEPB credit. As a matter of fact in that case the assessee had claimed that the entire receipt on the transfer of the DEPB credit including the face value of the credit as profits under Section 28(iiia). The Tribunal in that case held that the entirety of the amount would be covered by Section 28(iv). However, the view of the Tribunal was that since Explanation (baa) in Section 80HHC did not envisage the exclusion of profits covered by Section 28(iv), such profits could not be excluded while computing the deduction under Section 80HHC. Hence, there was no dispute in considering ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....zing the DEPB credit for paying customs duty on imported goods, makes a profit by transferring the DEPB, would form a separate class and seeks to tax the receipts on the transfer of the DEPB credit as business profits and not export profits. Exporters who transfer the DEPB credit and make a profit cannot be placed on par with those exporters who utilize the credit for paying the customs duty on the imported goods; (iv) The fact that Parliament did not consider the amount received on the transfer of the DEPB to be export profit cannot be a ground to hold that the receipts on the transfer of DEPB credit are not business profits. Counsel appearing on behalf of the assessee submits that the entire amount received on the transfer of the DEPB credit is business profit, but it was contended that what is included in Section 28(iiid) is the amount received on the transfer of the DEPB credit in excess of the face value of the DEPB and the amount received to the extent of the face value of the DEPB would be covered under Section 28(iiib). There is no merit in this contention because (a) the DEPB credit was not in existence when Section 28(iiib) was inserted by the Finance Act of 1990. DEPB c....