TaxTMI 
TaxTMI 
TaxTMI 
2013 (9) TMI 85
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....ot the learned Commissioner (Appeals) was justified in declining deduction under section 80 IB of the Act in respect of duty drawback received aggregating of Rs 1,53,94,403, and whether or not the learned Commissioner (Appeals) was justified in upholding the disallowance of the expenses to the tune of Rs 36,000 under secti on 14A of the Act. In view of the smallness of the amount, learned counsel did not really press the second issue beyond stating the facts and leaving the issue to us. 5. So far as the first issue is concerned, the relevant material facts are like this. The assessee before us is engaged in the business of manufacturing and export of footwear. On 21 st January 2006, the assessee filed a return of income disclosing an income of Rs 1,21,94,653. This return was subjected to scrutiny assessment proceedings, during which it was, inter alia, noticed that the assessee had claimed deduction under section 80 IB in respect of entire business profits, including duty drawback receipts amounting to Rs 1,53,94,403. It was in this backdrop that the assessee was required to show cause as to why the duty drawback receipt not be excluded from the computation of deduction under sect....
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....hasis on the nature of duty drawback and contended that the duty drawback receipts actually end up subsidizing the cost of production inasmuch as these receipts represent refund of excise duty and custom duty on the inputs used in products exported. It is contended that the duty drawback receipts, being integral part of the realizations on exports, are inherent part of the overall profits and, therefore, these receipts cannot be considered on standalone basis. It is submitted that on the facts of this case, particularly as duty drawback receipts are as much as almost 7.5% of turnover, and as, but for this duty drawback receipt, there will be virtually no profits or commercial sense of running the industrial undertaking, it cannot be said that duty drawback receipts are incidental receipts or ancillary profits not derived from industrial undertaking. It is then submitted that since duty drawback receipts are de facto refund of excise duty and custom duty paid, and following the principle laid down by Hon'ble Delhi High Court in the case of CIT Vs Dharmpal Premchand Ltd (317 ITR 353), such a refund of duties is eligible for deduction under section 80 IB. Learned counsel submits Hon'b....
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....ent in the case of CIT Vs Meghalaya Steels Ltd (332 ITR 91) wherein it rise held that even transport subsidy and interest subsidy cannot be said to be 'derived from industrial undertaking', and, accordingly, these receipts are not eligible for deduction under section 80 IB. She submits that learned counsel's erudite arguments, even if these are taken as correct on the first principles, are of no avail at this stage. She further submits that it is not a case of refund of duties but rather a case of payment of export incentive, by whatever name called, for encouraging the exports and thus contributing to augmentation of foreign exchange reserves. An export incentive, according to the learned Departmental Representative, cannot be said to related, with first degree nexus, to the 'profits derived by the undertaking'. We are thus urged to confirm the action of the authorities below and decline to interfere in the matter. 7. Learned counsel indeed has an uphill task. No matter how convincing his argument seem to be on the first principles, and no matter how strong a conceptual support he can canvass for his claim, he has judicial precedents, including from the highest judicial forum in ....
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.... for adjudication before Hon'ble Punjab & Haryana High Court was whether or not deduction under section 80 IB was righty declined, in respect of DEPB and duty drawback, by the Tribunal. Their Lordships held that deduction under section 80 IB was not admissible in respect of the DEPB and duty drawback as following the reasoning adopted by Hon'ble Supreme Court in Sterling Food's case (supra), which has been reproduced above, "income of the assessee from duty drawback cannot be held to be 'income derived from' specified business". The efforts of the assessee to distinguish the two situations, i.e. in the case of Sterling Foods and in the case of Liberty India, did not yield any results, as Their Lordships further observed that, "Distinction sought to be made by learned counsel for the assessee, in income derived from duty drawback and sale of import entitlements, cannot be accepted as relevant distinction as core question before the Court was that such income was derived from specified business, which reasoning is fully applicable to the present situation". On the matter being carried in further appeal, Hon'ble Supreme Court, speaking through Hon'ble Justice S H Kapadia for the divis....
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.... We may reiterate that Sections 80I, 80-IA and 80-IB have a common scheme and if so read it is clear that the said sections provide for incentives in the form of deduction(s) which are linked to profits and not to investment. On analysis of Sections 80-IA and 80-IB it becomes clear that any industrial undertaking, which becomes eligible on satisfying sub-section(2), would be entitled to deduction under sub -section (1) only to the extent of profits derived from such industrial undertaking after specified date(s). Hence, apart from eligibility, sub -section(1) purports to restrict the quantum of deduction to a specified percentage of profits. This is the importance of the words "derived from industrial undertaking" as against "profits attributable to industrial undertaking". 16. DEPB is an incentive. It is given under Duty Exemption Remission Scheme. Essentially, it is an export incentive. No doubt, the object behind DEPB is to neutralize the incidence of customs duty payment on the import content of export product. This neutralization is provided for by credit to customs duty against export product. Under DEPB, an exporter may apply for credit as percentage of FOB value of exports....
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....the view that duty drawback, DEPB benefits, rebates etc. cannot be credited against the cost of manufacture of goods debited in the Profit & Loss account for purposes of Sections 80-IA/80-IB as such remissions (credits) would constitute independent source of income beyond the first degree nexus between profits and the industrial undertaking." As we take note of these observations, and in order to ensure that things are put in the right perspective, we must also take note of another judicial precedent which has the approval of the Hon'ble Supreme Court. In the case of Dharam Pal Premchand Ltd (supra), Hon'ble Delhi High Court had an occasion to deal with the impact of Sterling Food decision by Hon'ble Supreme Court and to deal with the question as to whether deduction under section 80 IB was available with respect to refund of excise duty. Their Lordships decided the issue in favour of the assessee, and, in coming to this conclusion, held as follows: In the case of CIT vs. Sterling Foods (supra), the Supreme Court was interpreting the provisions of s. 80HH of the Act. The Supreme Court was called upon to adjudicate income derived from the sale of import entitlements granted by the ....
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....he principle that "(t)here must be, for the application of the words 'derived from', a direct nexus between the profits and gains and the industrial undertaking" and, on the facts of the said case, held that "In the instant case, the nexus is not direct but only incidental". It is also important to bear in mind the fact that the import entitlement scheme, as it then stood, entitled the exporter to certain imports, not necessarily of the manufacturing inputs but even, for example, of entirely unrelated things such as office equipments etc. The profit or advantage on account of such import entitlements was essentially in the realm of such uncertainties that it could hardly get into costing of the production or pricing of the product. In Liberty India's case, Hon'ble Punjab & Haryana High Court relied upon the principle laid down in Sterling Food decision (supra), and observed that distinction sought to be made by learned counsel for the assessee, in income derive d from duty drawback and sale of import entitlements, could not be accepted as relevant distinction since "core question before the Court was that such income was derived from specified business, which reasoning is fully app....
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....e nexus with the business activity of the industrial undertaking. There is still a room for the consideration of the plea that but for the duty drawback, the assessee would not have carri ed out the business activity in the industrial undertaking, because, that would have meant carrying out business for incurring losses. If that be so, the duty drawback receipts cannot be said to be 'not direct but only incidental' income, an 'independent source of income' or 'ancillary profit of the industrial undertaking'. It is also important to bear in mind the fact that the very distinguished Hon'ble Justice, who authored judgment in Liberty India's case (supra), also dismissed special leave petition against the judgment of Hon'ble Delhi high Court in Lakahnpal Premchand Ltd's case (supra)'s observations to the effect, "In that case (i.e. Sterling Food), the Supreme Court found that the nexus was not direct but only incidental. According to us, the ratio of this judgment has no application to the case in the instant case. In the instant case both the CIT(A), as well as, the Tribunal found that the refund of excise duty had a direct nexus with the manufacturing activity carried out by the asses....
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....esult of the exports, which is as high as almost 7.4% of total turnover, is duty drawback itself, it may not really be correct to say that duty drawback receipt is an incidental, unintended, ancillary or independent benefit, which can be seen as a standalone or independent source of income. Quite to the contrary, in such a situation, this receipt appears to be so much a part of the integral profits of the industrial undertaking that the absence of duty drawback receipt may take away the raison d'être of the industrial undertaking being put into business. This factual matrix is in sharp contrast with a situation in which , as was perhaps found, perceived or visualized by Hon'ble Supreme Court, the industrial undertaking is engaged in manufacturing of a product for domestic sales as also exports, and the export incentives are nothing more than an incidental, additional and ancillary sources of profits, in view of the position that de-hors such export incentives also the industrial undertakings make commercial sense. 15. To up a question to ourselves, what are the options open to us in this situation and on the facts of this case. On the one hand, the words employed in Hon'ble ....
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....again that "in the hierarchical system of courts" which exists in our country, "it is necessary for each lower tier", including the High Court, "to accept loyally the decision of the higher tiers". "It is inevitable in hierarchical system of courts that there are decisions of the Supreme appellate Tribunal which do not attract the unanimous approval of all members of the judiciary... But the judicial system only works if someone is allowed to have the last word, and that last word, once spoken, is loyally accepted. "... The better wisdom of the Court below must yield to the higher wisdom of the Court above. That is the strength of the hierarchical judicial system." As we perform our pious judicial duties, we have to strive to find that point of equilibrium when a fine balance between these two observations of Hon'ble Supreme Court can be arrived at. This is by no means an easy task and, being highly as subjective as it is, it is perhaps incapable of unanimity in approach, but then that cannot be a ground enough to deal with the matters at a superficial level . 16. The question that we must, therefore, deal with, to ascertain whether or not duty drawback receipt in includible in co....
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....f states, "the determination of the value at which inventories are carried in the financial statements until the related revenues are recognised". In other words while AS 2 deals with how the inventories are to be reflected in the yearend financial statements, which has nothing to do with determination of costs, CAS 1 deals with, as it specifically so states, "classification of costs for ascertainment of cost of a product or service and preparation of cost statements on a consistent and uniform basis with a view to effect the comparability of the same of an enterprise with that of previous periods and of other enterprise". While CAS 1 thus provides good guidance on what constitutes 'cost' from the management point of view, AS 2 provides guidance on how should the inventories be valued and reflected in the yearend financial statements. Let us in this backdrop take a look at the CAB 1 (Cost Accounting Standard 1) issued by the Institute of Cost Accountants of India, which deals with the question as to how the costs should be recognised, which states as follows: 6.1.2 Material Cost is the cost of material of any nature used for the purpose of production of a product or a service. 6.....
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....nciples are related to factual matrix and when factual matrix has significant and material variations vis-à-vis the factual matrix on which the legal principles were laid down, the entire scenario changes . What is thus equally, if not more, important thus is the factual matrix and as to what extent the legal principles in one fact situation will find application in another seemingly similar, but materially different, fact situation. What should have been really examined by the authorities below is whether or not, on the facts of this case, the duty drawback receipts can be said to have first degree nexus with the industrial undertaking or whether these profits can be said to be ancillary, incidental or standalone income. In our considered view, this aspect of the matter ought to have been examined in detail and by way of a speaking order. That exercise has not been carried out at all. We, therefore, remit the matter to the file of the CIT(A) for adjudication de novo by way of a speaking order, in the light of our above observations, in accordance with the law, and, after giving yet another opportunity of hearing to the assessee. While doing so, learned CIT(A) will also deal....