TaxTMI 
TaxTMI 
TaxTMI 
2011 (8) TMI 1106
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.... of 2008 1039 of 2010 1159 of 2010 1187 of 2010 1215 of 2010 1565 of 2010 1007 of 2008 1171 of 2008 1238 of 2010 1318 of 2010 1321 of 2008 1439 of 2008 1244 of 2010 1332 of 2010 MR MR BHATT, SR. ADV WITH MRS MAUNA M BHATT for Appellant(s) MR SN SOPARKAR, SR. ADV. WITH MRS SWATI SOPARKAR & MS BHOOMI THAKORE, MR JP SHAH WITH MR MANISH J SHAH, MR RK PATEL, MR DEEPAK SHAH FOR MR TEJ SHAH AD MR TUSHAR HEMANI for Opponent(s) ORAL JUDGMENT (Per : HONOURABLE MR.JUSTICE AKIL KURESHI) 1. This group of appeals involves common question of law. In all materials aspects, facts are similar. These appeals, therefore, have been heard together and are being disposed of by this common judgment. 2. Central controversy involved is as to what extent the benefit of DEPB upon sale of credit by the assessee be eligible for deduction under section 80HHC of the Income Tax Act, 1961. For the purpose of this judgment, we may notice the facts as arising in Tax Appeal No.978/08. 3. Respondent assessee is a manufacturer-exporter. For the year assessment year 2003-04, the assessee filed return of income on 28th November 2003 showing total income of ₹ 1,79,80,000/-. The assessee also claimed deduction....
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....ggest that all tax appeals relate to the said assessment year, but in so far as relevant statutory provisions are concerned, there is no material change in different tax appeals. (ii) That as in Tax Appeal No.978 of 2008, all assessees had, during the previous year under consideration, turn over of more than ₹ 10 crores; and (iii) that all cases concern the sale of DEPB credit by assessees and not retention thereof by the assessee concerned. 7. In the above set of circumstances, we adopt the substantial question of law which was framed by the order dated 2.4.2009 while admitting Tax Appeal No.978 of 2008 and certain other connected appeals, in all these tax appeals, which reads as under: "Whether the Appellate Tribunal was right in holding that while computing the profit of the business under Explanation (baa) of Section 80HHC, 90% of the profits on transfer of DEPB should be excluded, not the total amount received by he assessee ?" 8. Learned Senior Advocate Shri Manish Bhatt for the Revenue submitted that duty entitlement scheme is formulated under the Exim policy of the Government of India. The face value of DEPB benefit cannot be treated as its notional cost. Section....
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..... On the other hand, learned Senior Advocate Shri Soparkar, leading the arguments on behalf of the assessees contended that the object of DEPB scheme is to neutralize the customs duty on the imported inputs used in export product which benefit is directly related to the export profit. Relying on the decision in the case of J.K.Industries Ltd. v. Union of India, 297 ITR 176 (SC), the counsel contended that on the matching principle, benefit is required to be given to the assessee for deduction under section 80HHC of the Act. Counsel further contended that language of section 28(iiid) permits no ambiguity. It would apply only in case of profit on transfer ofDEPB entitlement and the term 'profit' would notinclude the entire sale consideration. 9.1 Relying on the decision of the Apex Court in the case of Badridas Daga v. CIT, 34 ITR 10, counsel submitted that such benefits should be granted having regard to the accepted commercial practice and trading principles. 9.2 Counsel also relied on a decision of this Court in the case of CIT v. Kiranbhai H.Shelat, 235 ITR 635 wherein the term income as defined under section 2(24) of the Act came up for interpretation. 9.3 Counsel als....
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....ssessees who transfer such credits for consideration. Counsel submitted that particularly when an assessee transfers such credit in the year subsequent to the year when such DEPB entitlement accrued would be subject to double taxation vis-à-vis the face value of such DEPB entitlement. 9.8 It was contended that the decision of the Apex Court in the case of K.Ravindranathan Nair (supra) does not deal with the present situation. The Apex Court was considering the income of the assessee through processing activity for the benefit of 80HHC deductions. 9.9 It was lastly contended that the provisions of section 80HHC should be construed liberally and in case of doubt, view in favour of the assesee should be adopted. 9.10 Counsel in addition to the decisions noted herein-above, also placed reliance on the decision of the Calcutta High Court in the case of GKW Ltd. v. CIT, dated 13th July 2011 rendered in IT Appeal No.1 of 2004 wherein the provisions of section 28(iiia) of the Act came up for consideration in context of section 115JA of the Act. 10. Counsel appearing for various other assessees, in addition to adopting the submissions made by Shri Soparkar, further elaborated sim....
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....see 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) or clause (b) or clause (c) of this sub-section shall be further increased by the amount which bears to ninety per cent of any sum referred to in clause (iiia) (not being profits on sale of a licence acquired from any other person), and clauses (iiib) and (iiic), of section 28, the same proportion as the export turnover bears to the total turnover of business carried on by the assessee. Provided further that in the case of an assessee having export turnover not exceeding rupees ten crores during the previous year, the profits computed under clause (a) or clause (b) or cl....
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....relevant our purpose as it stood at the relevant time reads as under: "28. The following income shall be chargeable to income-tax under the head "Profits and gains of business or profession" -- (i) the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year: xxx xxx "(iiia) Profits on sale of a licence granted under the Imports (Control) Order 1955, made under the Imports and Exports (Control) Act, 1947 (18 of 1947); (iiib) Cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India; (iiic) Any duty of customs or excise repaid or repayable as drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules, 1971. (iiid) any profit on the transfer of the Duty Entitlement Pass Book Scheme being the Duty Remission Scheme under the export and import policy formulated and announced under section 5 of the Foreign Trade (Development and Regulation) Act, 1992 (22 of 1992); (iiie) any profit on the transfer of the Duty Free Replenishment Certificate, being the Duty Remission Scheme under the export and imp....
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....m out from considering 90% of such amount while working out deduction under section 80HHC. This shall have to be borne in mind while interpreting the relevant statutory provisions. To our mind, the entire controversy revolves around two central issues. First is the nature of DEPB entitlement and whether any cost can be attached to such entitlement in the hands of the assessee. Second question is with respect to interpretation of explanation (baa) to section 80HHC read with section 28(iiid) of the Act. 14. Addressing the first issue first, we may note that DEPB scheme is a part of Exim policy of the Government of India formulated under section 5 of the Foreign Trade (Development and Regulation) Act, 1992. The policy outlines the objectives as to include those to accelerate the country's transition to globally oriented vibrant economy with a view to derive maximum benefits from expanding global market opportunities and to stimulate sustained economic growth by providing access to essential raw materials, intermediates, components, consumables and capital goods required for augmenting production. Chapter 7 of the Export and Import Policy, prevalent at the relevant time, provides....
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....t used in export product, nevertheless, it is in the form of duty waiver by the Government to encourage exports. DEPB scheme is a part of duty remission scheme formulated by the Government. 16. The term 'remission' as per Webster's Third New International Dictionary (Unabridged) means, cancellation or relinquishment of the whole or a part of a financial obligation, voluntary release of a debt or claim to a debtor or person liable to a creditor or claimant having legal capacity to alienate; relief from a forfeiture or a penalty. The term 'remission' has been explained in Advanced Law Lexicon by P.Ramanatha Aiyar, 3rd Edition as the action of remitting or giving up partially or wholly a tax, debt, penalty etc. In the context to duty, it is stated that the expression 'remission or adjustment of duty' would have normal meaning of expression and under the circumstances, be a reduction or even exemption of duty which would otherwise be payable. In Black's Law Dictionary, remission is described as a cancellation or extinguishment of all or part of a financial obligation. In context of conventional remission, under civil law, it is understood as remission e....
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....ly it is an export incentive. It was further observed that the duty drawback/DEBP benefits, rebates etc. cannot be credited against the cost of manufacture of goods debited in the profit and loss account for the purpose of section 80-IA or 80-IB of the Act and such remissions would constitute independent source of income beyond the first degree nexus between profits and the industrial taking. The Apex Court noticed that such benefits are incentive profits not profits derived from eligible business under section 80-IB of the Act. 21. Combined reading of the Government of India policy providing for DEPB benefits, the decisions of the Bombay High Court and the Apex Court, noted above, and our observations with respect to the nature of DEBP benefits would lead us to conclude that the face value of the DEPB credit cannot be taken to be its cost of acquisition in the hands of the assessee-exporter. 22. With the above clarity, we may advert to the statutory provisions and some of the judgments throwing light on such provisions. As already noted, section 80HHC of the Act provides for deduction in export profit at the rates specified in sub-section (1b) thereof. For ascertaining the eligi....
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....nce thereof would be the profit as envisaged in clause (iiid) of section 28. 25. We have already held that the face value of the DEPB credit cannot be treated as cost of cquisition in the hands of the assessee. We have examined the nature of duty waiver under the Scheme. We find that such waiver being in the nature of duty remission, it would be at no cost to the assessee and that therefore, the term profit used in clause (iiid) to section 28 must have reference to the entire sale consideration and not just the excess over the face value as contended by the assessees. 26. This issue came up for consideration before the Bombay High Court in the case of Kalpataru Colours and Chemicals (supra). It was a case wherein, a Special Bench of the Tribunal in case of Topman Exports v. ITO (Mumbai), 318 ITR 87 (AT)(Mumbai) had in a detailed judgment come to the conclusion that the sum referred to in clause (iiid) to section 28 must be understood as the premium that the assessee may fetch over and above the face value of the DEPB credit while transferring such credit. The Bombay High Court in appeal by the Revenue, came to the conclusion that what is received on transfer of DEPB credit is the....
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....directly attributable to the acquisition. Hence trade discounts, rebate, duty drawback, and such similar items are deducted in determining the costs of purchase. Therefore, duty drawback, rebate etc. should not be treated as adjustment (credited) to cost of purchase or manufacture of goods. They should be treated as separate items of revenue or income and accounted for accordingly (see : page 44 of Indian Accounting Standards and GAAP by Dolphy D'souza). Therefore, for the purposes of 23 AS-2, Cenvat credits should not be included in the cost of purchase of inventories. Even Institute of Chartered Accountants of India (ICAI) has issued Guidance Note on Accounting Treatment for Cenvat/Modvat under which the inputs consumed and the inventory of inputs should be valued on the basis of purchase cost net of specified duty on inputs (i.e., duty recoverable from the Department at later stage) arising on account of rebates, duty drawback, DEPB benefit etc. Profit generation could be on account of cost cutting, cost rationalization, business restructuring, tax planning on sundry balances being written back, liquidation of current assets etc. Therefore, we are of the view that duty drawb....
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....xclude 90% of the aforesaid sum." xxxx "10. In view of the above discussion, it is held that 90% of DEPB receipts assessable under section 28(iv) cannot be excluded from the profits of business as computed under the head "Profits and gains of business or profession" for the purpose of computing profits of business under clause (baa) of the Explanation to section 80HHC(4B). Consequently, order of CIT(A) is modified to that extent and Assessing Officer is directed to recompute the deduction under section 80HHC in accordance with our finding." 30. In this background, the Legislature found it necessary to make amendments in section 28 as well as in explanation clause to section 80HHC of the Act. The Finance Minister's speech on the floor of the Parliament explaining the requirement of such amendment is relevant. Portion of the speech referring to this clause reads as under: "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 after 1-4-2-5. In this period of seven years, the relevant section - I am not getting into an exposition of the law - are section 28 and ....
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....tory changes. In the case of K.P.Varghese v. I.T.O., 131 ITR 597, the Apex Court observed that the speeches made by the Members of the Legislature on the floor of the House when the Bill has been debated are inadmissible for the purpose of interpreting the statutory provisions, but the speech made by the mover of the Bill explaining the reason for its introduction can certainly be referred for the purpose of ascertaining the mischief sought to be remedied by the Legislation and the object and purpose for which the legislation is intended. 32. In the case of Kerala State Industrial Development Corpn. Ltd. v. CIT, 259 ITR 51, once again the Apex court relying on the decision in the case of K.P.Varghese (supra) observed that the Finance Minister's speech can be relied upon to throw light on the object and purpose of the particular provisions introduced by the Finance Bill. 33. In the case of M/s.Surana Steels Pvt. Ld. Dy. I.T.Commissioner, reported in AIR 1999 SC 1455, the Apex Court referred to the speech of the Finance Minister for introducing section 115J to interpret the said provisions. 34. In addition to the above principles adopted by the Apex Court, the principles of misch....
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....which the provision was made, the position before the amendment was introduced and the reasons for introduction of the amendment would clearly advance the interpretation of the Revenue that clause (iiid) of section 28 of the Act would cover the entire sale proceeds of DEPB credit when transferred by an assessee and not just the difference between the face value and the sale proceeds. Any other view would bring us back to the position emerging from the Tribunal's decision in case of P & G Enterprises Ltd. (supra) which was precisely the reason for introduction of the legislative changes. This would effectively render such statutory amendments redundant. There is one more reason why we are unable to accept the interpretation put forth by the assessees. It is not in dispute that the entire amount of DEPB credit if retained by assessee would be his income under section 28 of the Act. If we treat only the premium on sale of DEPB credit covered under section 28(iiid), it would lead to anomalous situation. An assessee who retains the DEPB credit would pay tax on entire amount while one who transfers it would offer only to difference for tax. 37. Much was sought to be made out of the ....
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.... sub-sections (iiib) or (iiic), cash assistance (by whatever name called) received or receivable by any person against export or any duty of customs or excise repaid or repayable as drawback to any person against exports are chargeable to tax. Thus, the legislature was conscious that in cases covered under sub-section (iiia), only profit on sale of licence should be chargeable but not the profit which may come in future on sale of the licence because the benefit of making import without payment of customs duty accrues to an assessee only at the time of actual import and if the domestic price of the raw-materials is lower than the landed cost of the imported materials, it would not be sensible to import the raw-materials under the Advance License. Moreover, at times, the advance licenses may not be utilized within the period of validity thereof and in such cases, no actual benefit is available to an assessee whereas in the cases covered by sub-sections (iiib) or (iiic), there is no scope of non-utilization of the cash assistance or drawback mentioned therein and as such, those are automatically chargeable to tax." We are concerned with entirely different situation and the decision ....