TaxTMI 
TaxTMI 
2009 (8) TMI 827
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....ed the facts of this case are that the assessee, a manufacturer and exporter of fabric/garments, furnished its return declaring total income of Rs. 36,24,230 after claiming deduction of Rs. 83,69,303 under section 80HHC of Income-tax Act, 1961 (hereinafter referred 'Act'). During the course of assessment proceedings, it was noticed by the Assessing Officer that the assessee had shown purchase of Rs. 13,94,90,454. On the perusal of the details of purchases furnished by the assessee, it was noticed that total amount of purchases was at Rs. 16,96,83,882, out of which the assessee had reduced an amount of Rs. 3,01,93,428 on account of sale of DEPB licenses and drawback. It was opined by the Assessing Officer that the assessee was not entitled to reduce the amount of sale proceeds of DEPB license from purchases as it had no connection with that. The assessee explained its position by submitting that the profit on sale of DEPB licenses was an export incentive covered under clause (iiia) of section 28 for the purposes of claiming deduction under section 80HHC. The Assessing Officer did not accept the submission advanced on behalf of the assessee as in his opinion the net profit after redu....
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....not the sale proceeds, the ld. CIT(A) held that the cost of these entitlements/certificates to the assessee was at Rs. Nil and hence, the entire sale consideration of the licenses was profit on transfer. He, therefore, directed the Assessing Officer to treat the entire amount of Rs. 2,06,84,841 and Rs. 1,65,616 as profit on the transfer of DEPB and DFRC licenses for working out the deduction under section 80HHC as per the amended provisions. 5. The assessee is aggrieved against the denial of deduction under section 80HHC with the following grounds :- "On the facts and in the circumstance of the case, the Learned Commissioner of Income-tax(A) - XIV, Mumbai :- 1.erred in confirming the action of the Assessing Officer in not granting deduction under section 80HHC of Rs. 83,69,303. 2.erred in not giving any finding as regards eligibility of duty drawback for deduction under section 80HHC. 3.erred in confirming the action of the Assessing Officer in not accepting the contention of the appellant that sale proceeds of DEPB of Rs. 2,06,84,841 and DFRC of Rs. 1,65,616 is to be reduced from the purchases of Rs. 16,96,83,882 as it is nothing but reimbursement and therefore, not....
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....ort was also accounted for. The breakup of Rs. 1,87,81,094 shown in the profit and loss account was stated to be as under :- (a) Sale proceeds of DEPB licence issued in respect of 51,00,00 exports of the year (face value Rs. 52,88,352) (b) Licence value receivable in respect of DEPB licence in respect of exports of the year (face value) 1,21,60,759 1,72,60,760 (c) Difference between sale proceeds realized and licence value accounted in respect of exports of earlier years (Profit) 15,20,334 1,87,81,094 8. It was claimed that the question of bringing to tax the DEPB would arise only at the point of its transfer. The licence value of Rs. 1.21 crores and odd was stated to be in respect of licence expected and not licence transferred. As regards the sale proceeds of the entitlements worth Rs. 1.57 crores, the assessee stated that their face value was Rs. 1.75 crores and hence, there was no profit on the sale of DEPB entitlement. It was still further submitted that face value of the DEPB entitlement would go to reduce the ....
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.... reduce the cost of purchases and only the premium part of the DEPB sale proceeds would be covered under section 28(iiid). It was also contended that the Duty drawback is specifically relatable to the cost of goods and in the context of section 80-IB, it has been held by several courts that the amount of duty drawback was to be considered as derived from industrial undertaking eligible for deduction. He referred to the case of CIT v. India Gelatine & Chemicals Ltd. [2005] 275 ITR 2841 (Guj.). He also invited our attention towards the judgment of Hon'ble Rajasthan High Court in Saraf Seasoning Udyog v. ITO [2008] 174 Taxman 594 in which the sale of DEPB licenses has been held to be derived from industrial undertaking by considering the provisions of section 28(iiid). In the light of these judgments, it was contended that only on the premium on sale of DEPB was liable to be considered under section 28(iiid) and the face value of the entitlement would go to reduce the cost of purchases. 10. He further explained that during the period under consideration, the assessee had the option of either availing duty drawback or get covered under DEPB/DFRC Schemes. He stated that the exporter ....
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....Vijay Silk House (Surat) Ltd. v. Dy. CIT [IT Appeal No. 6147 (Mum.) of 2006, dated 31-12-2007]; and 3.Amar International v. Asstt. CIT [IT Appeal No. 613 (Mum.) of 2006 dated 27-12-2007]; 4.KRBL Ltd. v. Dy. CIT [IT Appeal No. 3577 etc. (Delhi) of 2006 dated 30-5-2008]; 5.Sankalp International v. Asstt. CIT [2008] 118 TTJ (Jp.) 703. 12. In the light of these orders, it was stated that the Tribunal has taken a correct view that only the premium on the sale of DEPB could be covered within the purview of section 28(iiid) and not the entire sale proceeds. It was further explained that on the receipt of DEPB entitlement, the exporter gets the option either to sell it to some outside party or utilize it in his own business by making imports without payment of duty to that extent or could import the goods and then sell it in the local market. He stated that in the case of exporters, who, instead of, selling DEPB entitlement, import the goods for their own consumption, get the benefit of deduction and the Department accepts the position. He stated that only those exporters selling the DEPB entitlement are being discriminated by the revenue as against those utilizing the same for....
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....tive it was claimed that if the view of the assessee on section 28(iiid) was not found to be acceptable, then also the profit would be required to be computed by taking the market value of the DEPB on the date of acquisition as its cost price for computing the profit on sale of DEPB. While referring to the Matching principle as laid down by the various courts, the ld. AR stated that the purchase cost be considered as matching with the export proceeds on one hand and the DEPB factor on the other. 17. Sh. Ajay Vohra, representing two manufacturer exporters, relied on the submissions made prior to him on behalf of the assessee. He claimed that the scope of clauses (iiid) and (iiie) of section 28 was confined only to include the profit on the transfer of DEPB and DFRC and not the sale proceeds. He contended that the face value of DEPB, as was apparent from the EXIM Policy itself, was towards allowing credit for the custom duty included in the input cost of the goods exported and hence, was to be reduced from the cost of purchases. He submitted that the face value of DEPB shall reduce the cost of purchases and only the profit or the premium over and above that was the subject-matter ....
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....introduced to section 28 by the Finance Act, 1990, there was carried out a corresponding amendment to section 2(24) by way of insertion of clauses (va), (vb) and (vc ), which indicated that the Legislature intended to include only the incentives referred in clauses (iiia) to (iiic) to section 28 in the ambit of income and not those mentioned in clauses (iiid) and (iiie) to section 28. 21. Per contra, Sh. G.C. Srivastava, the ld. Senior Departmental representative along with Sh. Anil Kumar initiated his submissions by stating that so many arguments have been advanced by all the ld. ARs that the objective of the DEPB was to neutralize the incidence of import duty on the input cost, which is not correct. He submitted, with reference to, Foreign Trade Policy, a copy of which is available in Paper book that the main objective of this incentive was to boost up the exports. It was stated that the DEPB entitlement is a post-export incentive, which is linked to the FOB value of exports and not with the import content. He further submitted that the point of accrual of such incentive is the making of exports and not the making of imports to be utilized as the input for the goods exported. ....
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....e export incentives as referred to in section 28(iiia) to (iiic ) which was an exception carved out. He stated that but for this the exporter cannot take the benefit of deduction against any income even though falling under the head 'Profits and gains of business or profession'. In his opinion the computation of business profits as per Chapter IV-D is the determination of business profit, whereas the deduction is restricted only to the profits derived from export of goods or merchandise. He stated that though the DEPB may constitute business profit, but its sale proceeds cannot be included in the profits eligible for deduction under this section because it is not derived from the exports. 24. It was further stated by the ld. Sr. DR that the reliance on the speech of the Finance Minister at the time of moving the Bill in the Parliament was not permissible. Relying on the judgment of the Hon'ble Punjab & Haryana High Court in Coca Cola India Inc. v. Asstt. CIT [2009] 309 ITR 194, he stated that it has been made clear that when the words of the section are clear and unambiguous, there is no scope for looking into the intention of the Legislature beyond the actual words. 25.He al....
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....oviso and those too with retrospective effect. Concept and Nature of DEPB 27. Before we delve upon the real controversy, it will be of interest to have an insight into the concept of Duty Entitlement Pass Book Scheme. The exporters are encouraged by way of various schemes launched by the Government of India from time to time so that they can withstand the stiff competition from other exporting countries and quote competitive rates enabling them to stand in the export market, which ultimately enriches the national kitty of foreign currency. The major incentive is in the shape of the duty exemption schemes which enable duty-free import of inputs required for export production. Duty Exemption Scheme consists of (a) Advance Authorisation Scheme and (b) Duty-Free Import Authorisation Scheme (DFIA). Advance licence is granted for import of inputs without payment of custom duty. As it is evident from the scheme itself, it is a pre-export incentive so that the exporter may make the import of the inputs required for the export without payment of any custom duty. On the other hand, the Duty Remission Scheme enables post-export replenishment/remission of duty on inputs used in the expor....
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....deemed imports. As per para 4.43: An application for grant of credit under DEPB may be made to the Regional Authority concerned in the form given in 'AAyat Niryaat Form' along with the documents prescribed therein. As per para 4.44 in cases where the applicant applies for DEPB after realization or shipments are made against confirmed irrevocable letter of credit or bill of exchange is unconditionally availed and the same is confirmed by the exporter's bank, the DEPB shall be issued with transferable endorsement. In other cases, the DEPB shall be initially issued with non-transferable endorsement. Upon realization of export proceeds, such DEPBs can be endorsed as transferable, if the applicant so desires. As per para 4.46, the application for obtaining credit shall be filed within a period of twelve months from the date of exports or within six months from the date of realization or within three months from the date of printing/release of shipping bill, whichever is later, in respect of shipments for which the claim have been filed. Para 7.53 deals with the fixation of DEPB rates. It states that all applications for fixation of DEPB rates shall be routed through the concerned Export....
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....ntly availed of in respect of one export. The actual payment of custom duty by the exporter himself is not a pre-condition for entitlement of either of these schemes. If the goods are purchased by the exporter from someone, there is a presumption that first of the previous buyers in the chain, must have paid the import duty, which eventually forms part of the cost of purchase to the exporter. Thus the objective of the DEPB or duty drawback, as per the Foreign Trade Policy formulated by the Government of India, is to neutralize the incidence of custom duty on the import content of the export product. 30. The learned Departmental Representative has argued that DEPB is post export event which has no relation with purchase of goods. It has further been argued that the DEPB is allowed at a specific percentage on the FOB value of exports which indicates that the purchase cost or the duty component in the raw material input has no relation with the entitlement to DEPB. This argument though looks attractive at the first blush but on closer examination it falls on the ground when we make in-depth scrutiny of the scheme of DEPB. It is true that the DEPB is issued with reference to the FOB....
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....rter. It cannot be seen as an incentive detached from cost of goods purchased. 32. Be that as it may we will see infra that the understanding of DEPB scheme in commercial sense, as reducing the cost of purchases, does not fit in the scheme of Income-tax Act, more specifically in section 80HHC. When DEPB income accrues 33. Before we venture to decide the accrual of income on account of DEPB, it is essential to note that both the appellants before us are following the mercantile system of accounting. Under this method of accounting, expenses become deductible when the liability to pay arises irrespective of the date of actual payment. Similarly income is recognized and becomes chargeable to tax when the right to receive such income is finally acquired by the assessee. The date of actual receipt of the income is not a decisive criteria, which event may take place before or after such accrual. As soon as the right to receive income is finally acquired by the assessee, the income accrues and has to be accounted for and offered for taxation as per the provisions of the Act. We are reminded of the classic judgment rendered by the Hon'ble Supreme Court in the case of E.D. Sassoon ....
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....sis. It was argued on behalf of the assessee that accrual of income would occur only when the amount was sanctioned and not when application, claiming cash incentives, was filed by the assessee on the making of the exports. The Tribunal took the view that the cash incentives accrued to the assessee on the date on which application for the claim was made to the competent authority. Approving the view of the Tribunal, the Hon'ble High Court held that the right to receive export incentive accrued to the assessee on the filing of claim. It was held that the export by itself would not give rise to income and neither the date of receipt of cash incentive was relevant. This judgment stands approved by the Hon'ble Supreme Court in the case of CIT v. Punjab Bone Mills [2001] 251 ITR 7803. In the light of this judgment and by considering the general principles of the accrual of income, it becomes explicitly clear that the assessees in question became entitled to DEPB at the time they filed applications for such incentive, of course, after making the exports. Thus the time of accrual of DEPB is the date when application for DEPB is filed with the concerned authority. That being the position, ....
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....5 of the Foreign Trade (Development and Regulation) Act, 1922 (22 of 1922); (iv)the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession; (v)****** (va)****** (vi)******" 36. Clauses (iiia ) to (iiic) to section 28 were inserted by the Finance Act, 1990 with retrospective effect. In the like manner clauses (iiid) and (iiie) to section 28 were inserted by the Taxation Laws (Amendment) Act, 2005 with retrospective effect. Prior to the insertion of clauses (iiia) to (iiic) to section 28, two views were prevailing as to the taxability or otherwise of the export incentives. The Hon'ble jurisdictional High Court in the case of Metal Rolling Works (P.) Ltd. v. CIT [1983] 142 ITR 170 1 (Bom.) considered a case in which an exporter secured some import entitlements which were sold and it was claimed that the amount so received was capital receipt or in the alternative an item of income in the nature of casual and non-recurring receipt and hence exempt from tax. The ITO rejected these contentions and included the amount in the total income of the assessee. The Tribunal held that the sale of import licen....
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.... capital receipt and hence not subject to tax. The department's view all along has been that CCS or any other subsidy received by an exporter as an export incentive is a revenue receipt and hence taxable. 27.2 Similarly, the Department's view as regards drawback of duty and profit on sale of import entitlement licences has been that these are revenue receipts and hence liable to tax. There are many court decisions supporting this view. 27.3 To put an end to litigation which may arise regarding the taxability of these incentives received by exporters, new clauses (iiia), (iiib) and (iiic ) have been inserted in section 28 of the Income-tax Act to provide that profit on sale of import entitlement licences, CCS and drawback of duty, respectively, shall be chargeable to income-tax under the head "Profits and gains of business or profession". These have, further, been included in the definition of the term "income" in clause (24) of section 2. 27.4 These amendments will take effect retrospectively from the dates from which these incentives were introduced. Thus, amendment with regard to profit on sale of import entitlement licences will apply from 1-4-1962; cash assistance from....
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.... 1971 and not to 1995 Rules. The matter was brought to the notice of the Central Board of Direct Taxes. Vide Circular No. 5/2006 dated 15-5-2006 the position has been clarified that the benefit of deduction under section 80HHC cannot be denied to an assessee claiming refund of the duty drawback under the Duty Drawback Rules, 1995. Thus, it can be seen that even though clause (iiic) of section 28 refers to the Duty Drawback Rules, 1971, the CBDT, after their substitution with the Duty Drawback Rules, 1995, clarified that such drawback under the later rules, will continue to be governed by section 28(iiic) notwithstanding the fact that the necessary change was not carried out to section 28(iiic). Here it is important to mention that as against clauses (iiia) and (iiic) of section 28, which deal with specific items of export incentives, the language of clause (iiib) is couched in general words and does not refer to any specific scheme of export incentives. It talks of: 'cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India'. On the perusal of the language of this clause, the following features can be ....
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....), it would mean that upto the year 2005, the Legislature did not intend to include the face value of the DEPB, if not sold, under the 'business income' of the assessee, which interpretation is not capable of acceptance because of the position as clarified by the Finance Act, 1990, at the time of introducing clauses (iiia) to ( iiic) to section 28, when it was made patent that all the export incentives are chargeable to tax under the head 'Profits and gains of business or profession'. It, therefore, implies that by the Finance Act, 1990, all the specific existing schemes of incentives were made chargeable to tax under the head 'Business income' under clauses (iiia) and (iiic) to section 28 with retrospective effect from the dates of the introduction of such schemes and the other non-specific existing incentives as well as the new export incentives schemes likely to be launched by the Government of India in future were intended to be included under section 28(iiib). The Mumbai Bench of the Tribunal in Pink Star v. Dy. CIT [2000] 72 ITD 137 considered a case in which the assessee, inter alia, surrendered both self-acquired import license and those purchased from the open market and r....
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....the DEPB certificate in possession, but the total purchase shall be recorded at inclusive of custom duty, which would otherwise have been payable, but for the utilization of DEPB in hand. The following accounting entry shall be passed at that time. Purchases (1000+100) Dr. Rs. 1100 To Bank Rs. 1000 To DEPB Rs. 100 [At the time of utilization of DEPB, no income will arise by way of non-payment of custom duty and the purchase will be recorded at the cost price of the goods inclusive of custom duty. At this stage it is only the adjustment of DEPB, which has already accrued as income to the assessee] Meaning of word 'Profit' under section 28(iiid ) 43. The major controversy before us is to interpret section 28(iiid) in which the expression "any profit on the transfer Duty Entitlement Pass Book Scheme" has been used. From the facts of the cases under consideration it is noted that the Assessing Officer treated the entire sale proceeds as covered under section 28(iiid), as against the case of the assessee that only the premium or the profit element on the transfer of DEPB be considered. To put the controversy in simple words, if, fo....
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.... section 28 is crystal clear which talks of "any profit on the transfer of" DEPB/DFRC. The reference is not to the sale proceeds but to the profit on the transfer of DEPB/DFRC. A line of demarcation needs to be drawn between the provisions in which gross amount is considered and the provisions in which only the profit element has been the subject matter of consideration. We need not wander here and there in search of such distinction, which is highlighted from section 28 itself. Apart from clauses (iiib) and (iiic) to section 28, clauses (iv) and (vi) also refer to the inclusion of the gross amount and not the profit element thereon. Further the Legislature is not oblivious to such distinction between the gross amount and the profit element inasmuch as it has used the appropriate words wherever it intended so. It is amply demonstrated from the language of section 54 which grants deduction from the capital gains by providing that if the 'amount of capital gain' is greater than the cost of the residential house so purchased or constructed, the differential amount shall be charged under section 45; as against section 54E which provides deduction in respect of long-term capital assets ....
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....e assets of the business at the two dates." 48. Going by the concept of comparison of the assets of business on two dates, it can be seen that at the stage of receipt of DEPB on its accrual, the face value of Rs. 100 constituted an asset in the hands of the exporter which could be utilized by him in any of the ways open to him. If the exporter chooses to sell the DEPB for Rs. 110 at a subsequent date, then the prevailing market rate at the time of sale, that is, Rs. 110 shall represent the value of asset on such date of sale. Accordingly, the difference of Rs. 10 between the value of two dates, viz., on the date of its sale (Rs. 110) and the date when it was acquired on accrual (Rs. 100), will constitute profit. Even going by the meaning of 'profit' as commonly understood representing excess of sale proceeds over cost, we find that similar result will follow. No doubt the exporter does not directly purchase the DEPB from the market by incurring any cost, but when we see the scheme of section 28, in which the face value of DEPB, at the time of making application, results into the accrual of income as includible under section 28(iiib) and the corresponding amount represents the va....
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.... Shahzada Nand & Sons [1966] 60 ITR 392 . 52. Now we will move to determine the mischief, if any, sought to be remedied by the insertion of clause (iiid) to section 28. The Finance Minister, at the time of moving the Taxation Laws Amendment Bill, 2005 in the Parliament, made the following speech :- "We are now dealing with only the period 1-4-1998 to 31-3-2005. That is a period of about seven years. This problem did not arise before 1-4-1998. This problem does not arise before 1-4-1998. This problem does not arise after 1-4-2005. In this period of seven years, the relevant sections - I am not getting into an exposition of the law - are section 28 and section 80HHC. These are the two sections which are relevant. Now, the department's interpretation is that DEPB credit sale - I will explain what it is - is not export profit. What is a DEPB credit sale? A DEPB credit sale is, that on your DEPB Passbook, if you have certain credits in your favour, you can import items against the credit without paying duty. But you can also sell the credit to another importer. If you actually import, it is part of export-import. If you sell it to another importer and make a profit on that the pre....
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....has been expressed in the case of Kerala State Industrial Development Corpn. Ltd. v. CIT [2003] 259 ITR 512 (SC) by holding that the Finance Minister's speech can be relied upon to throw light on the object and purposes of the particular provision introduced by the Finance Bill. Recently the Hon'ble Supreme Court in the case of R & B Falcon (A) Pty. Ltd. v. CIT [2008] 301 ITR 3093 has held that in a certain situation a representation made by an authority like Minister presenting the Bill before the Parliament may also be found bound thereby. We are fully conscious of the primary rule of interpretation that the words used in a section express the real intention of the Legislature. It is not for the Courts or for that purpose the Tribunal, which is an inferior authority in the judicial hierarchy, to suo motu add or subtract some words to/from the language of section in the process of unearthing the real intention, which is otherwise clear and capable of assigning only one meaning. External aids of interpretation, as such, may not be directly relevant in such a situation. But if the language of section admits of doubt or some ambiguity can be traced from it, then certainly recourse ca....
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....d its intention that unless there is direct nexus of the income with the export activity, no deduction can be allowed. Relying on certain decisions in the context of the interpretation of the expression 'derived from', he submitted that there should be direct nexus of the income with export of goods or merchandise so as to qualify for deduction. He further stated that the income should directly result from the export of goods and it cannot bring within its sweep any income other than the one which is directly 'derived from' export of goods. By referring to certain judgments he emphasized that the export incentives cannot be held as derived from the export of goods or merchandize and, hence, the amount of incentives is not at all eligible for deduction. The next associated contention put forth on behalf of the revenue was that the denial of deduction on the export benefits was evident from the language of sub-section (2) of section 80HHC, which states that the income is received in or brought into India by the assessee in convertible foreign exchange. He stated that the intention behind the insertion of this section was to encourage exports that will eventually enhance the foreign e....
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....ofits derived from such export shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee; (b)where the export out of India is of trading goods, the profits derived from such export shall be the export turnover in respect of such trading goods as reduced by the direct costs and indirect costs attributable to such export; (c)where the export out of India is of goods or merchandise manufactured [or processed] by the assessee and of trading goods, the profits derived from such export shall,- (i)in respect of the goods or merchandise manufactured [or processed] by the assessee, be the amount which bears to the adjusted profits of the business, the same proportion as the adjusted export turnover in respect of such goods bears to the adjusted total turnover of the business carried on by the assessee; and (ii)in respect of trading goods, be the export turnover in respect of such trading goods as reduced by the direct and indirect costs attributable to export of such trading goods : Provided that the profits computed under clause (a)....
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.... the assessee has necessary and sufficient evidence to prove that,- (a)he had an option to choose either the duty drawback or the Duty Free Replenishment Certificate, 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 Duty Free Replenishment Certificate, being the Duty Remission Scheme. Explanation.-For the purposes of this clause, "rate of credit allowable" means the rate of credit allowable under the Duty Free Replenishment Certificate, being the Duty Remission Scheme calculated in the manner as may be notified by the Central Government: Provided also that in case the computation under clause (a ) or clause (b) or clause (c) of this sub-section is a loss, such loss shall be set off against the amount which bears to ninety per cent of,- (a)any sum referred to in clause (iiia) or clause (iiib) or clause (iiic), as the case may be, or (b)any sum referred to in clause (iiid) or clause (iiie), as the case may be, of section 28, as applicable in the case of an assessee referred to in the second or the third or the fourth proviso, as the case may be. The same pro....
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....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;]" 58. Sub-section (1) provides that where an assessee, being an Indian company or a person (other than a company) resident in India, is engaged in the business of export out of India of any goods or merchandize to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed a deduction to the extent of profits referred to in sub-section (1B) derived by the assessee from the export of such goods or merchandize. Sub-section (3) of section 80HHC has three clauses (a), (b) and (c ) which separately deal with the determination of the profits derived from exports in the case of goods manufactured under clause (a), goods traded as per clause (b) and goods manufactured as well as of traded goods, in accordance with clause (c). Sub-section (3) has five provisos. Here it may be pertinent to mention that when clauses (iiia) to (iiic) were inserted to section 28 by....
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....n of import entitlements would not be held to constitute profits and gains derived from assessee's industrial undertaking for the purpose of computing deduction under section 80HH as the source of import entitlements was the export promotion scheme of the Central Government and not the industrial undertaking. Similarly in the case of Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 2782 (SC) their Lordships did not accept the argument on behalf of the assessee that the interest earned by the industrial undertaking on deposits with the Electricity Board qualified for relief under section 80HH for the reason that section 80HH contains the words 'derived from'. It was observed that though electricity may be required for the purposes of industrial undertaking but the deposit required for the purpose of supply of electricity was a step away from the business of the industrial undertaking and hence, the interest on the deposits could not be said to flow directly from the industrial undertaking itself. It was emphasized that the words "derived from" must be understood as something which has direct or immediate nexus with the assessee's industrial undertaking. On the contrary, where the words ....
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.... use of expression 'derived from' in sub-section (1) is not the end of the road. When we turn to sub-section (3) of section 80HHC, it is observed that the words 'profits derived from such exports' have been given an artificial meaning as "amount which bears to the 'profits of the business' the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee". Proceeding further the expression 'profits of business' as referred to in sub-section (3) has been defined in Explanation (baa) below sub-section (4C) to mean the profits of the business as computed under the head 'Profits and gains of business or profession' as reduced, inter alia, by 90 per cent of the incentives as described in section 28(iiia) to (iiie). After computing profits of business, as per Explanation (baa), we need to go back to sub-section (3) to determine the amount of profits derived from export. For this purpose, when we peruse the first proviso to this sub-section, it transpires that 90 per cent of such incentives as referred to section 28(iiia) to (iiic) in the proportion of the export turnover to the total turnover are to be added to the ....
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....ybrid exporters for which separate methods of computing 'profits derived from exports' have been provided in sub-section (3). The merchant exports are governed by clause (b) of sub-section (3) of section 80HHC as per which the "profits derived from such export" shall be the export turnover in respect of trading goods as reduced by the direct costs and indirect costs attributable to such export. "Direct Costs" have been exhaustively defined in clause (d) of Explanation below sub-section (3) to mean 'costs directly attributable to the trading goods exported out of India including the purchase price of such goods.' It means that the costs which are distinctly identifiable with the trading goods exported are covered within the ambit of "direct costs". Clause (e) of Explanation below sub-section (3) defines "indirect costs" to mean 'costs, not being direct costs, allocated in the ratio of export turnover in respect of the trading goods to the total turnover.' It implies that the expenses which are collectively incurred both for the domestic as well as the export turnover are to be segregated from the direct costs and then bifurcated in the ratio of export turnover to total turnover for ....
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....by the Hon'ble Summit Court is that the expenses attributable to incomes other than from exports, that is, incentives, interest and miscellaneous income, are to be reduced from the total indirect costs so as to unload the element of indirect costs which do not relate to the turnover of business. The amount of such expenses on ad hoc basis has been held to be ten per cent of the amount of income. 66. Now coming to the manufacturer exporters, we note that the computation of profits derived from exports is governed by clause (a) of section 80HHC(3) which provides that such profit shall be the amount which bears to the 'profits of the business' the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee. When we proceed further to examine the scope of 'profits of business' as explained in clause (baa) of Explanation below section 80HHC(4C), it transpires that it starts with the profits of the business as computed under the head "Profits and gains of business or profession" which is then reduced by 90 per cent of the sums referred to in section 28(iiia) to ( iiie) or receipts by way of brokerage, commissio....
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.... from the financing business, even if falling under the head "Profits and gains of business or profession", cannot, by any stretch of imagination, be considered as profits eligible for deduction under section 80HHC on the sole ground that it also falls under Chapter IV-D of the Act. Since in our above supposition, it is a composite business and the common expenses may have been incurred, 90 per cent of such finance charges will be reduced from the total income under the head "Profits and gains of business or profession" which also includes income from financing business. The reduction by 90 per cent of such income is to ensure that the common expenses incurred for earning the independent stream of income, presuming to be at 10 per cent of the income, do not needlessly raise the export expenses resulting into the reduction of the export income. 67. At the same time it is obvious that the 'Profits and gains of business or profession' as referred to clause (baa) of Explanation below sub-section (4C) will include both the profits from domestic sales as well as exports. Even though the element of income as relatable to the domestic sales forms part of the profits of the bus....
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.... to take note of the submission advanced by the learned Departmental Representative, with reference to the sub-section (2) of section 80HHC, in the light of which it was initially argued that unless income is realized in convertible foreign exchange within the specified period, no deduction can be allowed and further since the export incentives are realized in Indian currency only, the test laid down in sub-section (2) will fail. We are not agreeable with this contention for the reason that section 80HHC talks of granting deduction in respect of profits derived by the assessee from export business. When it is further seen in the light of Explanation (baa) defining "profits of the business" along with sub-section (3), it is manifest that all the incomes arising from the export business are covered within its scope. Income arising from export business does not only mean the profit on the realization of the export proceeds in convertible foreign exchange but also the items of income which are directly incidental to export business, being the export incentives covered under section 28, which have been referred to in the five provisos to sub-section (3) to section 80HHC. It is only with....
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....the business' and then reduce 90 per cent of the same as per Explanation (baa) in the case of a manufacturer exporter, ten per cent of such income stands reduced towards 'the expenses'. Similarly in the case of merchant exporter when we reduce 10 per cent of such income from the 'indirect costs' again the same result follows. Thus it can be seen that 'the expenses' against such incentives income get automatic reduction at a fixed percentage of ten per cent instead of independently establishing the amount of expenses incurred for earning such income in each and every case. It has been so provided in section with a view to get rid of the difficulty which may arise in each case in proving the expenses incurred for earning such incentives as the identification of such expenses from the common pool of expenses may be an intricate task. Thus it is obvious that 10 per cent of such incomes representing 'the expenses' are reduced from the total expenses at the time of computing the profits derived from export under sub-section (3) of section 80HHC and hence there is no scope for granting any further deduction towards such expenses while working out the profits on transfer of DEPB under sect....
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....ction (3) of section 80HHC is complete code in itself insofar as the computation of the eligible profits derived from export are concerned. The mandate of sub-section (3) has to be religiously followed for determining the amount of eligible profits for deduction and as such the general view about the understanding of the nature of DEPB will be subdued and the one based on the prescription of this provision will come to fore. In that view of the matter we hold that the face value of DEPB cannot be reduced from the cost of purchases and has to be considered as a separate species of 'Business income'. Thus all the contentions put forward on behalf of the assessees and the interveners about the reduction of the face value of DEPB have become academic in the context of section 80HHC. Similarly the comparison of DEPB with MODVAT, which is an off-shoot of the basic contention of reduction of the DEPB value from the purchases and also the arguments by the ld. AR towards the reduction of the face value of DEPB from the purchase cost on the strength of certain decisions rendered in the framework of section 80-IB, lose their relevance in the present context of section 80HHC and hence need not....
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....and the profit as determined in clause (b) of section 80HHC(3) will come at Rs. 390. As against that we find the real profit from export after giving effect to the DEPB benefit is only Rs. 300 [1000 -700 (800 - 100)]. Thus it can be easily ascertained that whereas the total business profit from export is Rs. 300 but if we accept the contention that the face value of DEPB be reduced from the cost of purchases then the amount of profits derived from export as per section 80HHC(3)(b) will come at Rs. 390. Obviously this calculation defies all logics and is incapable of acceptance due to awkward situation created by determining the profits derived from export at a figure higher than the actual business profit. The former amount, in no case can be higher than the later. We find that the logic behind introducing clauses (iiia) to (iiic) to section 28 is to delink the export incentives from the business profits while continuing them to be governed by Chapter IV-D at the same time. The natural outcome following the prescription of clauses (iiia) to (iiic) of section 28 along with section 80HHC(3) is that all the export incentives including the DEPB and DFRC etc. be considered as separate b....
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....ed as covered in clause (iiid). We are unable to digest this view canvassed by the Revenue for the reason that unless the statute makes separate classes of exporters, there can be no discrimination between the exporter who imports the goods for his own business utilizing the face value of DEPB and the other exporter who sells the DEPB as such. If the Departmental view is acted upon, there will arise variation in the quantum of deduction qua the face value of DEPB earned on the making of exports, between two exporters otherwise equally placed in terms of goods exported identical in quantity, quality and value. Such a discrimination cannot be impliedly inferred unless expressly provided by the statute. 77. We, therefore, hold that in the scheme of section 80HHC, the face value of DEPB cannot be reduced from the purchase cost but is separate income under section 28(iiib), which accrues at the time of making application pursuant to exports. Only the profit element on the sale of DEPB, that is the amount in excess of sale proceeds over the face value, is covered under section 28(iiid). Rationale behind section 28(iiid ) and (iiie) 78. It is noticed above that export incentive i....
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.... considered for deduction under this section. In contrast to it the third and fourth provisos are applicable to the case of an assessee having export turnover exceeding rupees ten crores in which case the profit computed under clause (a) or clause (b) or clause (c) of sub-section (3) or after giving effect to the first proviso, shall be further increased by the amount which bears 90 per cent of any sum referred to in section 28(iiid) or (iiie) in proportion to the export turnover to the total turnover only if the further two conditions stipulated therein are fulfilled and also the assessee has sufficient evidence to prove the fulfilment of such conditions. It is this category of exporters which has been statutorily discriminated vis-a-vis the small exporters having turnover not exceeding Rs. 10 crores. They shall not be entitled to increase in the quantum of deduction by profit of transfer of DEPB/DFRC, which is otherwise available to small exporters, unless the two conditions as set out in these provisos are fulfilled. In the cases under consideration it is an admitted position that the two conditions as so specified in third and fourth provisos are not capable of compliance and h....
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....ncludes various items as mentioned in clauses (i) to (xiv ). If an item of receipt is or contains the element of income in common parlance, that would still be included within 'income' under this provision notwithstanding the fact that there is no specific inclusion of such item of income in the definition. The word 'income' has to be understood in the generic sense. If a receipt bears the traits of income as per the plain and natural meaning, the same will still be included within the scope of section 2(24) even though there is no specific mention of such item in the definition clause. From the items enumerated in clauses (i) to ( xiv) of section 24, we find that the first item is, "profits and gains". This clause covers all the items of income resulting from the carrying of the business or otherwise having the element of profit and gain. Thus, any receipt ensuing from the business having characteristics of income cannot be excluded from the definition of "income". If we strictly go by the interpretation of section 2(24) as suggested by the learned A.R., then the receipts by way of rent from property, would stand excluded for the reason that it is not specifically included in the ....
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....ultantly at the time of claiming set off the face value against the sale proceeds, there is no question of double deduction, because at the first stage no deduction was claimed rather income was offered for taxation. The purchase cost, in the scheme of section 80HHC remains intact and is not altered with the amount of the face value of DEPB. We fail to appreciate the contention about the double deduction. It is self evident that section 28 deals with the items of income chargeable to income-tax under the head 'Profit and gains of business or profession' and not the items of deduction. In our considered opinion, there is no question of allowing double deduction when the face value of DEPB is reduced from the sale proceeds for working out the amount of profits on sale of DEPB. 85. It is patent that when the overall profit of the exporter is determined from the Trading, Profit and loss account, all the items of expenses and incomes including the face value of DEPB pursuant to the making of export, are taken care of. However when the question comes of computing profit on the transfer of DEPB and we reduce the face value of DEPB, it does not amount to granting any separate deduction ....
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.... 86. The ld. DR, relying on one of the orders passed against the assessee, stated that exporter may or may not apply for DEPB, considering the premium in the open market on the raw material/goods to be imported if the raw material is available in the local market at the same rate at which imported material is available. In that case neither the assessee would be interested in importing such material nor any purchaser would be available in the market for purchasing such import entitlement. There appears to be some misunderstanding about the very scheme of DEPB. Primarily the question of the exporter applying for the DEPB or not is not germane to the dispute about the computation of profit on transfer of DEPB under section 28(iiid) as it pre-supposes that the exporter did apply and get the certificate. Further there is no one-to-one co-relation between the item exported and item to be imported under DEPB. Any item can be imported under DEPB except those which are specifically banned. To say that exporter may not apply for the DEPB at all considering the premium in the open market on the raw material consumed, is fallacious on the ground that it is an incentive having intrinsic value....
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....on the appreciation of all the relevant aspects relating to the income on account of DEPB, that a proper conclusion can be drawn. 88. With utmost respect to the Benches deciding the point in favour of the Revenue, we are inclined to agree with the contrary view in favour of the assessee. Conclusion 89. The question raised before the Special Bench has two parts. Insofar as the first part : 'Whether the entire amount received on sale of DEPB entitlements represents profit chargeable under section 28(iiid) of the Income-tax Act, is concerned, we answer it in negative and the second part of the question : 'for the profit referred to therein requires any artificialcost to be interpolated?' is replied in affirmative to the extent that the face value of DEPB shall be deducted from the sale proceeds. As regards the grounds raised in these appeals against the denial of deduction under section 80HHC, in full or part, we find that the computation of profits derived from exports and the resultant amount of deduction under this section can be made only when the decision is taken on the amount and the timing of taxability of the face value of DEPB and the profit on its sale. On this iss....
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....' and not allowing deduction under section 80HHC on such amount. The assessee had included such interest income under the head 'Profits and gains of business or profession' and claimed deduction accordingly. On being called upon to explain the nature of such interest income, it was stated to have been earned out of temporary deployment of the business funds. Not convinced, the Assessing Officer held it to be falling under the head 'Income from other sources'. The assessee failed to convince the ld. CIT(A) on its line of reasoning. 93. After considering the rival submissions and perusing the relevant material on record we find it as an undisputed fact that the said interest was earned from the 'temporary deployment of business funds', as contended by the assessee before the authorities below. The ld. AR has relied on the judgment rendered by the Hon'ble Bombay High Court in CIT v. Indo Swiss Jewels Ltd. [2006] 284 ITR 389 for putting forth the submission that the interest be considered as falling under Chapter IV-D of the Act. We are not convinced with the view point canvassed on behalf of the assessee. From the statement of facts filed before the ld. CIT(A), it is found that the....
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....lauses (i) to (iia) of this section provide for deductions in respect of specific types of income. Obviously interest does not fall under these clauses. Then there is a general clause (iii) as per which "any other expenditure (not being in the nature of capital expenditure) laid out or expended wholly and exclusively for the purpose of making or earning such income" shall be allowed as deduction. So in order to qualify for this clause it is of paramount importance that the expenditure must be 'wholly and exclusively' laid out for earning such income. We are considering a situation in which the business funds were temporarily deployed with private parties and a small fraction with bank. Nothing has been shown that there was some business exigency necessitating the deployment of funds. Thus it is a case of simple parking of surplus funds with third parties and bank, having no relation, worth the name, with the export business. We are, therefore, of the considered opinion that the interest income has been rightly held to be taxable under the last head of income and there is no amount deductible against this income. The natural consequence which, therefore, follows is that once a parti....