TaxTMI 
TaxTMI 
2011 (8) TMI 1106
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....2010 1276 of 2010 1447 of 2008 1448 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 Rs.....
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....pplicable to assessment year 2003-04. This is not to suggest 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 Rs. 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....
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.... circumstances. (i) Order dated 18.2.2001 in the case of CIT v. Paramount Impex Pvt. Ltd. (ITA Nos.12/2011 and others). (ii) Order dated 15.3.2011 in the case of CIT v. M/s.Kanin (India) (ITA No.873 of 2010). 9. 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 benefit....
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....he Act by virtue of explanation (baa). This position gets further clear by virtue of the Finance Minister's Speech while moving the amendment in section 28 and corresponding amendment in explanation (baa) to section 80HHC. 9.7 Counsel contended that the Revenue's view would bring about disparity of tax treatment between those assessees who utilise the DEPB credits for their own use vis-a-vis those assessees 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 note....
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....s 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) or clause (b) or clause (c) of this sub-section shall be further increased by the amount which bears to ninety per ....
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....s and gains of business or profession" as reduced by - (1) Ninety per cent of any sum referred to in clauses (iiia), (iiib) and (iiic),(iiid) and (iiie) of 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;" Similarly section 28 of the Act 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 an....
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....heme. In short, by virtue of explanation (baa), for working out the business profit of an assessee, 90 per cent of profit on transfer of DEPB scheme is to be excluded. We may also notice that by virtue of explanation (ba), such exclusion is to be made even from the computation of total turnover. Since while working out the export profit of an assessee, profit of business forms part of the numerator and total turnover forms part of denominator by virtue of combined effect of explanation (baa) and (ba), the Legislative intent appears to be to vacuum 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. Addressi....
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....t for his own use. However, upon receipt of realization, the DEPB shall be endorsed transferable. In case where the DEPB is applied after realization, the DEPB shall be issued with transferable endorsement. 15. From the above policy statement of the Government, it can be seen that DEPB benefits granted are in the nature of remission of customs duty. These incentives are given for making export viable or more attractive to compete in the international markets. Such assistance of the Government would increase profitability of the exporter. It would thus emerge that though the purpose of granting DEPB benefits is to neutralize the customs duty component in an imported component 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; relie....
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....urs and Chemicals (supra). It was observed that what is received on transfer of the DEPB credit is the profit, because DEPB credit under the DEPB scheme is given at a percentage of the FOB value of the exports so as to neutralize the incidence of customs duty on the import content of the export product. The DEPB credit is also given to an exporter who has exported goods without importing raw materials required for the export. 20. The nature of DEPB benefits along with Duty Drawback benefits came up for consideration before the Apex Court in the case of Liberty India (supra) wherein it was observed that DEPB is an incentive. It is given under duty exemption remission scheme. Essentially 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 un....
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....he Export and Import Policy formulated under section 5 of the Foreign Trade Development and Regulation Act. It is this term profit referred to in clause (iiid) which has led to lengthy debate before us. As noted earlier, it the case of the Revenue that the term profit would include the entire sale consideration on transfer of DEPB credit by an assessee whereas the assesses contend that it is only the premium which the assessee may fetch while transferring such credit which can qualify to be the profit. In other words, their case is that the face value of DEPB credit should be the cost in the hands of the assessee and if such credits are sold for consideration higher than the face value, difference 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 s....
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....e excluded as they were independent incomes which had no element of export turnover. Such items distorted the figure of export profits. 28. In the case of Liberty India (supra), the Apex Court was examining the extent of DEPB benefits the assessee was not entitled to under section 80IB of the Act. In this respect, the Apex Court held that incentive profits such as DEPB and Duty Drawback are not profits derived from eligible business under section 80IB of the Act and they belong to the category of ancillary profits of such undertakings. The Apex Court further observed as under: "22. The cost of purchase includes duties and taxes (other than those subsequently recoverable by the enterprise from taxing authorities), freight inwards and other expenditure 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 I....
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....to section 28 at the relevant time included only clause (iiia) to (iiic). The Tribunal came to the conclusion that clauses (iiia) to (iiic) to section 28 would not include the receipts on transfer of DEPB credits. The Tribunal held and observed as under. "8. At this stage, we would like to mention that at the time when the legislature inserted clause (baa) in the Explanation to section 80HHC(4B), clause (iv) of section 28 was already on the Statute book in addition to clause (iiia) to (iiic) of section 28. That clearly means that non inclusion of clause (iv) of section 28 in the first category referred to above was deliberate one on the part of legislature. Had the legislature intended to exclude 90 per cent of sum referred to in section 28(iv), it could easily include the same in the aforesaid first category. Thus, deliberate omission to include section 28(iv) in the firs....
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....n 28 read with section 80HHC. I am not going into the sub sections. Therefore, this not to be counted as exempted export profit. This must be added back as taxable profit. The assessee took a different view. In appeal, the ITAT has observed that the same falls under section 28(iv), not under section 28(iiib) or (iiic). It falls under section 28(iv). Then, the Tribunal gave a judgment, which I find as a lawyer difficult to understand. But with great respect to the Tribunal which is entitled to take a view, the Tribunal gave a judgment that although it falls under section 28(iv), it does not fall under section 80HHC Explanation (baa)..." 31. In English Courts as well as in India, previously, strong view prevalent was that the intention of the Parliament which has passed the Act is not to be gathered from the Parliamentary history of the statute. This was on the basis that the Act passed by the Parliament is a collective decision and the speech by a Minister or an individual in the House of Parliament would be the opinion of an individual and therefore such statement or even the reports of the Committees formed for drafting the Bill would not provide good guide for gathering ....
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....fice of all the judges is always to make such construction as shall suppress the mischief, and advance the remedy, and to suppress subtle inventions and evasions for continuance of the mischief, and pro privato commodo, and to add force and life to the cure and remedy, according to the true intent of makers of the Act, pro bono publico." 35. In the case of I.T.Commissioner v. Sodra Devi, 1957 SC 832, however, the Apex Court was of the view that such mischief rule can be applied only when the statutory provision is ambiguous or is capable of more than one meaning. 36. On the basis of the above judicial pronouncements and the principles laid down therein, mischief rule can be safely applied in the present case. Prior to introduction of clause (iiid) to section 28, Delhi Bench of the Income Tax Appellate Tribunal, in the case of P & G Enterprises Ltd. (supra) had discarded the Revenue's proposition that 90 percent of the DEPB benefits of sale of the credits should be from computation of business profit under clause (baa) to explanation to section 80HHC. In the background of this position, as explained by the Finance Minister in his speech on the floor of the Parliament, claus....
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....ell founded. None of the assessee's have established before us that out of the total consideration received upon sale of DEPB credit, the face value thereof was offered to tax in the earlier years. 39. We may notice that having excluded the benefit of DEPB upon sale by virtue of amended explanation (baa), legislature has brought back such benefit by virtue of further proviso to sub-section (3) to section 80HHC subject to certain conditions. For assessee having turnover of less than Rs. 10 crores, such benefit is given unconditionally. But for assessee's having turnover of more than Rs. 10 crores, Legislature in its wisdom has made such benefits available subject to fulfilling certain conditions. It is not in dispute that all assessees in these appeals had turnover of more than Rs. 10 crores. 40. The decision in the case of Calcutta High Court in the case of GKW Ltd. v. CIT, West Bengal, in IT Appeal No.1 of 2004 was rendered in an entirely different factual background. It was a case wherein the Tribunal held that a sum of Rs. 228.34 lacs, which represented the notional figure and not the income accrued to the assessee during the previous year relevant to the ass....
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.... material was received under an agreement with the Government of India, under which the Government of India undertook to arrange for the raw material under the aegis of UNICEF. As against the supply of raw material free of cost, the assessee undertook to the Government a corresponding obligation under the agreement to supply free of cost to the Government as a matching contribution a specified quantity of weaning food at a price not exceeding 10 per cent profit over the cost of production. It was on this background that the Division Bench observed that where the grant is coupled with a liability to a matching contribution, its acceptance by itself creates a liability to incur the matching cost. In such a case, the conditions to be fulfilled to avail of the grant will be its cost and it cannot be said that there is any benefit given free of cost by way of a gift. To call a grant based on a liability a gift will be a misnomour because the essence of a gift is that it is a gratuitous transfer. Gifts are always gratuitous while grants are upon some consideration or equivalent. The Bench, therefore, held that raw material and spares supplied to the assessee were not gift, but conditions....