TaxTMI 
TaxTMI 
2012 (2) TMI 100
X X X X Extracts X X X X
X X X X Extracts X X X X
....ed for export business under Section 80HHC of the Act. 3. For appreciating the controversy between the parties, we will state the facts of only the lead case of M/s Topman Exports (hereinafter referred to as 'the assessee'). The assessee is a manufacturer and exporter of fabrics and garments. During the previous year relevant to the assessment year 2002-2003, the assessee sold the DEPB and DFRC (Duty Free Replenishment Certificate) which had accrued to the assessee on export of its products. The assessee filed a return for the assessment year 2002-2003 claiming a deduction of Rs.83,69,303/- under Section 80HHC of the Act. The Assessing Officer held that if the profit on transfer of the export incentives was deducted from the profits of the assessee, the figure would be a loss and there will be no positive income of the assessee from its export business and the assessee will not be entitled to any deduction under Section 80HHC of the Act as has been held by this Court in IPCA Laboratories Ltd. v. Deputy C.I.T. (2004) 266 ITR 521 (SC). Aggrieved, the assessee filed an appeal before the Commissioner of Income Tax (Appeals) and contended that the profits on the transfer of DEPB and ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nder Section 80HHC of the Act accordingly. 5. This judgment of the Special Bench of the Tribunal was followed by the Tribunal in all the cases in appeal before us. Against the judgment and orders of the Tribunal, the Commissioner of Income Tax, Mumbai filed appeals in all the cases under Section 260A of the Act before the High Court and by the impugned orders the High Court disposed of the appeals in terms of the judgment delivered in Commissioner of the Income Tax vs. Kalpataru Colours and Chemicals (ITA(L) 2887 of 2009). In Commissioner of the Income Tax vs. Kalpataru Colours and Chemicals (supra), the High Court formulated the following two substantial questions of law: "(a) Whether the Tribunal is justified in holding that the entire amount received on the sale of the Duty Entitlement Passbook does not represent profits chargeable under Section 28(iiid) of the Income Tax Act, 1961 and that the face value of the Duty Entitlement Passbook shall be deducted from the sale 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 a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rned counsel for the appellants submitted that since DEPB was cash assistance receivable by a person against exports and was covered under clause (iiib) of Section 28 of the Act and it has a direct relation with the costs of the inputs imported by an exporter from manufacturer of the export product, the DEPB cannot form part of the profits on transfer of DEPB under Section 28(iiid) of the Act. They argued that as and when DEPB is transferred and the sale value realized on such transfer of DEPB is more than the face value of the DEPB, the difference between the sale value and face value of the DEPB will constitute profit on transfer of DEPB and would be covered under clause (iiid) of Section 28 of the Act. They argued that if the intention of the legislature was to cover the entire sale proceeds arising on transfer of DEPB under clause (iiid) of Section 28 of the Act then they would have used the expression "sale proceeds" instead of profit on transfer of DEPB in clause (iiid) of Section 28 of the Act. 8. Learned counsel for the appellants argued that if the entire sale proceeds of the DEPB is treated as profits arising on transfer of DEPB for the purpose of clause (iiid) of Sect....
X X X X Extracts X X X X
X X X X Extracts X X X X
....clause (iiid) of Section 28 of the Act. 10. For appreciating the nature of the DEPB, paragraphs 4.37 and 4.42 of the Hand Book on DEPB issued by the Government of India and paragraphs 7.14, 7.15, 7.16 and 7.38 of the Export and Import Policy, 1997-2002 as notified by the Central Government in the Notification No.1(RE-99)/ 1997-2202 dated 31st March, 2000 are extracted hereinbelow: Hand Book on DEPB "4.37 Duty Entitlement Passbook Scheme (DEPB) The Policy relating to Duty Entitlement Passbook (DEPB) Scheme is given in Chapter- 4 of the Policy. The duty credit under the scheme shall be calculated by taking into account the deemed import content of the said export product as per SION and the basic custom duty payable on such deemed imports. The value addition achieved by export of such product shall also be taken into account while determining the rate of duty credit under the scheme. 4.42 Utilization of DEPB credit. The credit under DEPB shall be utilized for payment of customs duty on any item which is freely importable. Export and Import Policy, 1997-2002 7.14 For exporters not desirous of going through the licensing route, an optional facility is given under D....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d with transferable endorsement." On a reading of the aforesaid paragraphs of the Hand Book on DEPB and the Export and Import Policy of the Government of India, 1997-2002, it is clear that the objective of DEPB scheme is to neutralize the incidence of customs duty on the import content of the export products. Hence, it has direct nexus with the cost of the imports made by an exporter for manufacturing the export products. The neutralization of the cost of customs duty under the DEPB scheme, however, is by granting a duty credit against the export product and this credit can be utilized for paying customs duty on any item which is freely importable. DEPB is issued against the exports to the exporter and is transferable by the exporter. 11. We may now consider the relevant provisions of Section 28 for determining whether DEPB will fall under clause (iiib) or under clause (iiid) of Section 28. The relevant provisions of Section 28 of the Act are reproduced hereunder: Section 28. Profits and Gains of Business or Profession.-The following income shall be chargeable to income-tax under the head "Profits and gains of business or profession",-- .....................................
X X X X Extracts X X X X
X X X X Extracts X X X X
....nonymously with net income for the period. Gain realized from business or investment over and above expenditures." This Court in E.D. Sassoon & Company Ltd. and Others v. Commissioner of Income-Tax, Bombay City (1954) 26 ITR 27 (SC) has quoted the following observations of Lord Justice Fletcher Moulton in The Spanish Prospecting Company Limited [(1911) I Ch. 92] on the meaning of the word "profits": ".... 'Profits' implies a comparison between the state of a business at two specific dates usually separated by an interval of a year. The fundamental meaning is the amount of gain made by the business during the year. This can only be ascertained by a comparison of the assets of the business at the two dates." 'Profits', therefore, imply a comparison of the value of an asset when the asset is acquired with the value of the asset when the asset is transferred and the difference between the two values is the amount of profit or gain made by a person. As DEPB has direct nexus with the cost of imports for manufacturing an export product, any amount realized by the assessees over and above the DEPB on transfer of the DEPB would represent profit on the transfer of DEPB. 14. We ar....
X X X X Extracts X X X X
X X X X Extracts X X X X
....zed by the exporter but is transferred to another person, the DEPB continues to remain as a cost to the exporter. When, therefore, DEPB is transferred by a person, the entire sum received by him on such transfer does not become his profits. It is only the amount that he receives in excess of the DEPB which represents his profits on transfer of the DEPB. 16. The High Court has sought to meet the argument of double taxation made on behalf of the assessees by holding that where the face value of the DEPB was offered to tax in the year in which the credit accrued to the assessee as business profits, then any further profit arising on transfer of DEPB would be taxed as profits of business under Section 28(iiid) in the year in which the transfer of DEPB took place. This view of the High Court, in our considered opinion, is contrary to the language of Section 28 of the Act under which "cash assistance" received or receivable by any person against exports such as the DEPB and "profit on transfer of the DEPB" are treated as two separate items of income under clauses (iiib) and (iiid) of Section 28. If accrual of DEPB and profit on transfer of DEPB are treated as two separate items of inc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....n accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, [a deduction to the extent of profits, referred to in sub-section (1B),] derived by the assessee from the export of such goods or merchandise: ......................................................................... (1B) For the purposes of sub-sections (1) and (1A), the extent of deduction of the profits shall be an amount equal to- (i) eighty per cent thereof for an assessment year beginning on the 1st day of April, 2001; (ii) seventy per cent thereof for an assessment year beginning on the 1st day of April, 2002; (iii) fifty per cent thereof for an assessment year beginning on the 1st day of April, 2003; (iv) thirty per cent thereof for an assessment year beginning on the 1st day of April, 2004,] and no deduction shall be allowed in respect of the assessment year beginning on the 1st day of April, 2005 and any subsequent assessment year.] ......................................................................... (3) For the purposes of sub-section (1),- (a) where the export out of India is of goods or merchandise manufacture....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 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 (iiie) of section 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 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:] ......................................................................... Explanation:- For the purposes of this section,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ce" against exports and is covered under clause (iiib) of Section 28 will get excluded from the "profits of the business" of the assessee if such DEPB has accrued to the assessee during the previous year. Similarly, if during the same previous year, the assessee has transferred the DEPB and the sale value of such DEPB is more than the face value of the DEPB, the difference between the sale value of the DEPB and the face value of the DEPB will represent the profit on transfer of DEPB covered under clause (iiid) of Section 28 and ninety per cent of such profit on transfer of DEPB certificate will get excluded from "profits of the business". But, where the DEPB accrues to the assessee in the first previous year and the assessee transfers the DEPB certificate in the second previous year, as appears to have happened in the present batch of cases, only ninety per cent of the profits on transfer of DEPB covered under clause (iiid) and not ninety per cent of the entire sale value including the face value of the DEPB will get excluded from the "profits of the business". Thus, where the ninety per cent of the face value of the DEPB does not get excluded from "profits of the business" unde....
X X X X Extracts X X X X
X X X X Extracts X X X X
....k or the Duty Entitlement Pass Book 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 Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme. Therefore, if the assessee having export turnover of more than Rs.10 crores does not satisfy these two conditions, he will not be entitled to the addition of profit on transfer of DEPB under the third proviso to sub-section (3) of Section 80HHC. 22. The aforesaid discussion would show that where an assessee has an export turnover exceeding Rs.10 crores and has made profits on transfer of DEPB under clause (d) of Section 28, he would not get the benefit of addition to export profits under third or fourth proviso to sub-section (3) of Section 80HHC, but he would get the benefit of exclusion of a smaller figure from "profits of the business" under explanation (baa) to Section 80HHC of the Act and there is nothing in explanation (baa) to Section 80HHC to show that this benefit of exclusion of a smaller figure from "profits of the business" will not be available to an assessee having an export turnover exceeding Rs.1....