TaxTMI 
TaxTMI 
TaxTMI 
2010 (12) TMI 808
X X X X Extracts X X X X
X X X X Extracts X X X X
.... DEPB receipts and the face value of the DEPB credit that has been transferred. However, the Revenue Department has reduced 90 per cent of the whole of receipts on account of DEPB from the profits and gains of business computed under the head 'Profits and gains of business and profession', while computing the deduction available to the assessee under s. 80HHC of the Act. Hence, these appeals were heard together and a common order is being passed, for the sake of convenience. ITA Nos. 124 and 125/Asr/2009:- 2. We shall first take up the appeal in respect of the assessee, M/s F.C. Sondhi and Co. (India) (P) Ltd., Jalandhar. 2.1 In the asst. yr. 2003-04, the assessee claimed deduction under s. 80HHC at Rs. 1,02,75,498. The AO allowed the deduction only to the extent of Rs. 96,28,292. While computing the amount of deduction available to the assessee under s. 80HHC, the AO reduced 90 per cent of export incentive. The assessee received sum of Rs. 19,03,415 on account of DEPB receipts and Rs. 1,73,572 by way of DFRC. The AO reduced 90 per cent thereof from the profits of business computed under the head 'Profits and gains of business' while computing the deduction ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rred by the assessee to acquire the DEPB? V. Whether on the facts and circumstances of the case the Tribunal was right in law in not holding that the word profit referred to in s. 28(iiid) and 28(iiie) of the IT Act, 1961 requires any artificial cost to be interpolated to the extent that the face value of DEPB/DFRC should be deducted from the sale proceed for the purpose of determination of deduction under s. 80HHC of the IT Act, 1961?" 2.2 After hearing both the parties, the Hon'ble High Court disposed of the appeals of the Revenue by observing and holding as under:- "6. After hearing learned counsel for the parties, we are in agreement with the view taken by the Bombay High Court and are of the view that the income from DBK, DEPB and DFRC has to be treated as business income and has to be taken into account for deduction under s. 80HHC. The questions proposed are answered accordingly and matter is remanded to the Tribunal for fresh decision in accordance with law." 2.3 Since the matter has been remitted to the Tribunal for fresh decision in accordance with law and directed the parties to appear before the Tribunal on 20th Dec., 2010, fresh notices ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....with a licence. A DEPB certificate is like a certificate of money and it can be used to pay any customs duty due from any person. A licence is a document which permits a person to import a specific item or a category of item from abroad and as such it cannot be equated with DEPB certificate which is money in the form of a certificate. For example the holder of a DEPB certificate having a face value of Rs. 10 lakhs and from whom customs duty of Rs. 12 lakhs is due can offer the certificate and pay the balance amount of Rs. 2 lakhs in cash/cheque. Now coming to the wording of s. 28(iiid), it refers to 'profit on transfer'. Since DEPB is a form of money, the income to the extent of face value is earned as soon as it is received without any transfer. Importantly it can be adjusted against the import duty of the assessee himself without there being any transfer. The word used in the above clause will therefore carry no meaning if the entire amount realized on the transfer of DEPB is to be treated as the 'profit on transfer'. Also if the intention was to treat the entire amount as 'profit on transfer ' the section would have been worded accordingly i.e., 'amount received on trans....
X X X X Extracts X X X X
X X X X Extracts X X X X
....mputation of indirect cost of trading goods exported on estimated basis i.e., ratio proportion method when the assessee is a manufacturer as well as a trader and therefore cost can be estimated under the present situation also. We would also like to draw our attention to the decision of the Supreme Court in the case of Hero Exports vs. CIT (2007) 213 CTR (SC) 291 : (2007) 295 ITR 454 (SC), copy enclosed at page Nos. 11 to 18 which supports the concept of estimation of cost under s. 80HHC. It is not a situation where a phrase is being interpreted by persons not involved with the framing of the scheme. In this case the scheme itself states that the benefit is being allowed to neutralize the element of duty on inputs. The Circular No. 621, dt. 19th Dec., 1991 [(1992) 101 CTR (St) 1] also clarifies in para No. 32.11 that for computing 'profits of business' receipts by way of brokerage, interest, rent to the extent of 90 per cent have to be reduced and benefit of common expenses at an ad hoc rate of 10 per cent is to be allowed. The concept of estimating the cost is thus not alien to the computation of deduction under s. 80HHC. Relevant portion of the above circular is enclosed at page ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ectly connected to the work of plant and had thus to be adjusted against the cost of the project. The case again supports the contention about netting of face value of DEPB with purchases. CIT vs. Karnal Co-operative Sugar Mills Ltd. (2000) 161 CTR (SC) 241 : (2000) 243 ITR 2 (SC) : In this decision dt. 23rd April, 1999 it was held that the interest earned on margin money for the purposes of opening letter of credit being linked to the acquisition of machinery would go to reduce the cost of plant. If the face value of DEPB is to be treated to be adjusted against purchases, the only amount that will remain is the surplus over and above the face value and it is this amount which can be excluded for the purpose of computing the deduction under s. 80HHC being profit on transfer of DEPB. Another important aspect is that the word 'transfer' used in the term 'profit on transfer' connotes a third party. Unless a third party is involved, there cannot be a transfer. The DEPB certificate originally given to the assessee denotes allotment and not transfer. Benefit of DEPB can be availed by the assessee when the DEPB certificate is allotted to him and he need not transfe....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t. This issue was decided by the Tribunal in the first round in the light of the view taken by the Special Bench of the Tribunal, Mumbai in the case of Topman Exports vs. 1TO (supra) and in the case of Kalpataru Colours and Chemicals vs. Addl. CIT (supra) against which the Department preferred an appeal before the Hon'ble Punjab and Haryana High Court. From the order of the Hon'ble Punjab and Haryana High Court, it is clear to us that the aforesaid decisions of the Special Bench of the Tribunal, Mumbai in the case of Topman Exports vs. ITO (supra) and in the case of Kalpataru Colours and Chemicals vs. Addl. CIT (supra) have been reversed by the Hon'ble Bombay High Court in the case of CIT vs. Kalpataru Colours and Chemicals (supra). The Hon'ble Punjab and Haryana High Court, while remitting this matter back to the Tribunal for fresh decision in accordance with law, has observed that their Lordships are in agreement with the view taken by the Hon'ble Bombay High Court, which goes to show that the view taken by the Hon'ble Bombay High Court in the case of CIT vs. Kalpataru Colours and Chemicals (supra) has been accepted by the Hon'ble Punjab and Haryana High Court. Various aspects of....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ntive schemes of the Government of India would be taxable under cl. (iv) of s. 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 cls. (iiia), (iiib) and (iiic) by the Finance Act of 1990. While explaining the reasons underlying the amendment, Circular No. 572, dt. 3rd Aug., 1990 [(1990) 87 CTR (St) 1] 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 of these incentives by enacting with retrospective effect that profits on the sale of an import licence, cash assistance under ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hich 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) Sec. 80HHC-Profits received from export:- 14. Under sub-s. (1) of s. 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-s. (3) laid down a formula on the basis of which export profits have to be computed. Sub-s. (3) of s. 80HHC consists of three clauses. Clause (a) deals with the export of goods manufactured or processed by the assessee; cl. (b) deals with the export of trading goods; and cl. (c) deals wi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....planation (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 cls. (iiia), (iiib), (iiic), (iiid) and (iiie) of s. 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 situated outside India.' 17. The expression 'profits of the business' means profits as computed under the head of 'Profits and gains of business or profession' under ss. 28 to 44D and they are thereupon to be reduced to the extent provided by cls. (1) and (2). Clause (1) as it now stands is bifurcated in two parts. The first consists of the sums referred to in cls. (iiia), (iiib), (iiic), (iiid) and (iiie) of s. 28; and the second consists of receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits. The first part of cl. (1) provides for the exc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....that any profit on the transfer of the DEPB 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 and G Enterprises (supra) a Bench of the Tribunal at Delhi considered the case of an exporter to whom a credit was available under the DEPB Scheme. The DEPB credit was transferred and the receipts were shown as business receipts under s. 28(iiia). The AO held that the receipts upon the transfer of the DEPB entitlement fell for classification under s. 28(iv) and he excluded ninety per cent of those receipts under s. 80HHC. The CIT(A) held that the receipts were in the nature of revenue receipts and the entirety of those receipts was assessable as business receipts under s. 28(iv). The CIT(A) held that those receipts were not derived from export though they may have been attributable to that business and upheld the action of the AO in excluding ninety per cent of the DEPB receipts under Expln. (baa). Before the Tribunal there was no dispute about the finding that the DEPB receipts were in the n....
X X X X Extracts X X X X
X X X X Extracts X X X X
....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 cl. (iiid) or cl. (iiie) as the case may be, of s. 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 cl. (a) or cl. (b) or cl. (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 cl. (iiid) of s. 28. the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee, if the assessee has necessary and sufficient evidence to prove that:- (a) he had an option to choose either the duty drawback or the DEPB Scheme, being the Duty Remission Scheme, and (b) the rate of drawback credit attributable to the customs duty was higher than the rate of credit allowable under the DEPB Scheme, being the Duty Remission Sc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ance received or receivable under any scheme of the Government of India] 25. 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 IT 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 in paying the customs duty on goods to be imported. When the duty drawback received by the assessee constitutes profits of business, then, it is obvious that the amount realized on transfer of the DEPB credit would also be business profits. Thus, the amount received on transfer of DEPB credit would be profits of business covered under s. 28(iiid). 26. Clause (iiia) treats as income chargeable to tax, profits on the sale of an import licence. When the licence is s....
X X X X Extracts X X X X
X X X X Extracts X X X X
....siness for the purposes of s. 80HHC and inserted the second and third provisos to s. 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 s. 80HHC(3) shall be increased by 90 per cent of the sum referred to in s. 28(iiid). By the third proviso it was provided that in the case of an assessee having an export turnover exceeding Rs. 10 crores, the profits computed under s. 80HHC(3) shall be increased by 90 per cent of the sum referred to in s. 28(iiid) subject to the two conditions set out therein. 29. Admittedly, in the assessment year in question, the assessee had an export turnover exceeding Rs. 10 crores and did not fulfil the conditions set out in the third proviso to s. 80HHC(3), introduced by the Finance Act of 2005. As a result the assessee was not entitled to a deduction under s. 80HHC on the amount received on transfer of DEPB. 30. To get over this difficulty, the assessee contends that the profits on transfer of DEPB in s. 28(iiid) would not include the face value of the DEPB so that the assessee gets a deduction under s. 80HHC on the face value of th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r s. 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 s. 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 s. 28(iiid), it would amount to double taxation is without any merit. 31. 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 K. Ravindranathan Nair's case (supra) has held that all the incomes which fall within cls. (iiia) to (iiie) of s. 28 are 'incentive incomes'. As an incentive, that is made available to the exporter there is no cost that is attached to the grant of the incentive. The incentive, as we have already noted, is calculated as a percentage of the FOB value of the goods exported. The Tribunal in the present case recognized the difficulty in reducing the face value of the DEPB credit from the sale consideration when it observed, in para 48 of its judgment, that 'no doubt the exporter does not....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 s. 28(iiia). The Tribunal in that case held that the entirety of the amount would be covered by s. 28(iv). However, the view of the Tribunal was that since Expln. (baa) in s. 80HHC did not envisage the exclusion of profits covered by s. 28(iv) such profits could not be excluded while computing the deduction under s. 80HHC. Hence, there was no dispute in considering the entirety of the receipts on the transfer of the DEPB credit as profits of business. The dispute was only in not treating the receipts by way of transfer of the DEPB credit as export receipts while computing the deduction under s. 80HHC. Consequently, the entirety of the receipts on the transfer of the DEPB credit which was sought to be included in s. 28(iv) was brought in by the Parliamentary amendment in the form of an insertion of cl. (iiid) in s. 28 with retrospective effect. There was no controversy regarding the taxability of the quantum of receipts on the transfer ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s 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 s. 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 s. 28(iiib). There is no merit in this contention because:- (a) the DEPB credit was not in existence when s. 28(iiib) was inserted by the Finance Act of 1990. DEPB credit was introduced w.e.f. 1st April, 1997 which was after the insertion of cl. (iiib) in s. 28; (b) s. 28(iiib) refers to cash assistance (by whatever name called) received by the assessee from the Government pursuant to a scheme of the Government. The amount received on the transfer of the DEPB credit is not received by the assessee from the Government pursuant to a scheme of the Government within the meaning of cls. (iiic); and (c) When s. 28(iiid) specifically deals with profits realized on the transfer of the DEPB credit, it would be impermissible as a m....
X X X X Extracts X X X X
X X X X Extracts X X X X
....an Rice Exports (P) Ltd., Jalandhar, pertaining to the asst. yrs. 2003-04 and 2004-05. 9.1 In these appeals, the learned counsel for the assessee. Shri J.S. Bhasin, advocate, has reiterated the arguments and contentions put forth by Shri Sandeep Vijh, chartered accountant in the case of M/s F.C. Sondhi and Co. (India) (P) Ltd., Jalandhar, which have already been narrated above in this order. Besides these arguments, the learned counsel for the assessee submitted that the Hon'ble Punjab and Haryana High Court has remitted this matter back to the Tribunal for fresh decision in accordance with law, which means that the matter is wide open before the Tribunal for fresh decision and while deciding this issue, the contentions raised by the assessee are to be considered. He further submitted that the decision of the Hon'ble Bombay High Court in the case of CIT vs. Kalpataru. Colours and Chemicals (supra) is not binding upon this Bench within the State of Punjab and Haryana but has only a persuasive value. He further pointed out that a SLP has already been admitted by the Hon'ble Supreme Court against the decision of the Hon'ble Bombay High Court. He, therefore, submitted that the ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... much as, the decision of the Hon'ble Bombay High Court has not been stayed by the Hon'ble Supreme Court. Thus, these contentions of the assessee are rejected. 12. In the result, the appeals filed by the assessee, namely, M/s Niranjan Rice Export (P) Ltd., Jalandhar, are also decided against the assessee and in favour of the Revenue after following the view taken by the Hon'ble Bombay High Court in the case of CIT vs. Kalpataru Colours and Chemicals (supra). ITA Nos. 53 and 54/Asr/2009:- 13. Coming to the case of the assessee, namely, M/s Raghu Exports, Jalandhar, we find that the issue involved in these appeals is identical based on same set of points and contentions of both the parties. Both the parties have submitted that the issue involved in these cases is quite identical to that of the case of M/s F.C. Sondhi and Co. (India) (P) Ltd., Jalandhar. However, the learned counsel for the assessee pointed out one more point contending that before the learned CIT(A), the assessee pointed out that the AO has himself accepted the contention of the assessee in some of the assessees' cases, namely, M/s GE Motors India (P) Ltd., Faridabad and M/s Upkar Internationa....
X X X X Extracts X X X X
X X X X Extracts X X X X
....'ble Supreme Court of India in the case of Yasha Overseas vs. CST and Anr. (2008) 17 VST 182 (SC) explaining the scope of duty entitlement pass book (DEPB). However, this case is of no help to the assessee, in as much as, this aspect of the matter has been elaborately discussed and analysed by the Hon'ble Bombay High Court in the case of CIT vs. Kalpataru Colours and Chemicals (supra). The issue involved in these appeals, which have been remitted back by Hon'ble Punjab and Haryana High Court to the Tribunal for fresh decision in accordance with law is decided against the assessees and in favour of the Revenue. 17. Before parting with this order, we would like to deal with one more contention of the assessees. In some of the cases, the learned counsel of the assessees has pointed out that the AO while making a fresh assessment in pursuance to the Tribunal's earlier order remitting the matter back to the file of the AO for fresh decision in the light of the decision of the Tribunal, Mumbai Special Bench in the cases of Topman Exports vs. ITO (supra) and in the case of Kalpataru Colours and Chemicals vs. Addl. CIT (supra), has completed the fresh assessment rejecting the asses....