TaxTMI 
TaxTMI 
2025 (7) TMI 1752
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....he case was selected for complete scrutiny under CASS and accordingly statutory notices u/s. 143(2) and 142(1) were issued to the assessee calling for the information. The assessee's representative filed its reply on line through e-filing portal. The Ld. Assessing Officer [hereinafter in short "Ld. AO"] on examination of the information furnished by the assessee noticed that assessee claimed deduction under section 80IB(11A) of the Act amounting to Rs. 64,96,87,896/- on the net profits derived from J. Thimmapuram Unit. The Ld.AO noticed that assessee has included other revenue in the form of duty draw back amounting to Rs. 10,59,37,013/- and sale of licenses amounting to Rs. 28,16,55,312/- aggregating to Rs. 38,75,92,325/-. Accordingly, the Ld.AO issued show-cause notice proposing to reduce the receipts on account of duty draw back and sale of licenses from the net profits of the undertaking. In response, assessee filed its submissions and requested to drop the proposal of addition of receipts. After considering the submissions of the assessee, Ld. AO by relying on the decision laid down by the Hon'ble Supreme court in the case of Liberty India v. CIT (SC) 317 ITR 218 disallowed Me....
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....B benefits are derived from the exports made by the assessee. Further he also stated that as per the Income Computation and Disclosure Standards (ICDS) with respect to inventories, it states that purchase price includes duties and taxes and other expenditure directly attributable to the acquisition of material and this is applicable from the A.Y.2016-17 and hence the benefit derived from the exports such as DEPB goes to reduce the cost of the purchase and hence it has been disclosed in the credit side of the Profit & Loss Account for the purpose of claiming deduction u/s. 80IB of the Act. Further he also submitted that the decision of the Hon'ble Supreme Court in the case of Saraf Exports v. CIT [453 ITR 625] has mainly relied on the judgment of the Hon'ble Supreme Court in the case of Liberty India v. CIT [317 ITR 218] and is distinguishable for the reasons, where the judgment is based on the Accounting Standards-2 and not as per ICDS-2 and hence cannot be applied to the assessee's case. In his written submissions he placed reliance on the following decisions:- i. Saraf Seasoning Udyog v. ITA No. [2009] 317 ITR 202 (Raj). ii. CIT v. Eltek SGS private Limited [200....
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....the decision of the Hon'ble Supreme Court in the case of CIT v. Meghalaya Steel Ltd., (supra) while granting relief to the assessee. Further, from the submissions of the Ld.AR it is noticed that the assessee has sold the licenses, which is a tradable product, and has characterised as "other income" in the profit and loss account. From these facts, it is observed that the assessee has not utilised the licenses for the purpose of neutralising the customs duty while making imports which goes to the root of the matter of reducing the cost of production. In these circumstances, it cannot be said that the sale of licenses disclosed under "other income" reduces the cost of production. Subsequently, the Hon'ble Supreme Court in the case of Saraf Exports v. CIT (supra) distinguished the decision of the Hon'ble Supreme Court in the case of CIT v. Meghalaya Steel Ltd., (supra) where the incentives mainly arise due to direct subsidies and not export incentives. Further the Hon'ble Supreme Court in Para No. 7 and 8 held as under: - "7. While considering the aforesaid issue/question, relevant portion of Section 28 and Section 80- IB are required to be referred to, which are as under:- ....
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....n 33-B, in the circumstances and within the period specified in that section; (ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose; (iii) it manufactures or produces any article or thing, not being any article or thing specified in the list in the Eleventh Schedule, or operates one or more cold storage plant or plants, in any part of India: Provided that the condition in this clause shall, in relation to a small-scale industrial undertaking or an industrial undertaking referred to in sub-section (4) shall apply as if the words 'not being any article or thing specified in the list in the Eleventh Schedule' had been omitted. Explanation 1.-For the purposes of clause (ii), any machinery or plant which was used outside India by any person other than the assessee shall not be regarded as machinery or plant previously used for any purpose, if the following conditions are fulfilled, namely:- (a) such machinery or plant was not, at any time previous to the date of the installation by the assessee, used in India; (b) such machinery or plant is imported into India from any c....
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....ially backward State specified in the Eighth Schedule shall be hundred per cent of the profits and gains derived from such industrial undertaking for five assessment years beginning with the initial assessment year and thereafter twenty-five per cent (or thirty per cent where the assessee is a company) of the profits and gains derived from such industrial undertaking: Provided that the total period of deduction does not exceed ten consecutive asssessment years (or twelve consecutive assessment years where the assessee is a cooperative society) subject to fulfilment of the condition that it begins to manufacture or produce articles or things or to operate its cold storage plant or plants during the period beginning on the 1st day of April, 1993 and ending on the 31st day of March, 2004: Provided further that in the case of such industries in the North-Eastern Region, as may be notified by the Central Government, the amount of deduction shall be hundred per cent of profits and gains for a period of ten assessment years, and the total period of deduction shall in such a case not exceed ten assessment years: Provided also that no deduction under this sub-sect....
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....s not exceed eight consecutive assessment years (or where the assessee is a cooperative society, twelve consecutive assessment years): Provided further that the industrial undertaking begins to manufacture or produce articles or things or to operate its cold storage plant or plants at any time during the period beginning on the 1st day of October, 1994 and ending on the 31st day of March, 2004. XXXXXXXX" 7.1 Thus, as per Sections 28(iiid) and (iiie) any profit on the transfer of the Duty Drawback and on transfer of DEPB Schemes, etc., shall be chargeable to income tax under the head "Profits and gains of business or profession". It appears that earlier, there used to be a dispute regarding the receipt by way of incentives from the Government being in the nature of cash assistance, duty drawback, profits on transfer of DEPB Scheme, etc., i.e., as to whether these receipts were capital receipt or revenue receipt and would thus, be taxable. However, thereafter, and in order to put an end to the dispute, the legislature by way of inserting clauses 28 (iiia), (iiib), (iiic), (iiid) and (iiie) has made the said incentives taxable under the head of "profits and gains ....
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....ofits (operational profits). XXXXXXXX 28. In the present batch of cases, the controversy which arises for determination is: whether DEPB credit/duty drawback receipt comes within the first degree sources? 29. According to the assessee(s), DEPB credit/duty drawback receipt reduces the value of purchases (cost neutralisation), hence, it comes within first degree source as it increases the net profit proportionately. 30. On the other hand, according to the Department, DEPB credit/duty drawback receipt do not come within the first degree source as the said incentives flow from the incentive schemes enacted by the Government of India or from Section 75 of the Customs Act, 1962. Hence, according to the Department, in the present cases, the first degree source is the incentive scheme/provisions of the Customs Act. In this connection, the Department places heavy reliance on the judgment of this Court in Sterling Foods [(1999) 4 SCC 98 : (1999) 237 ITR 579]. 31. Therefore, in the present cases, in which we are required to examine the eligible business of an industrial undertaking, we need to trace the source of the profits to manufacture. (See CIT v. K....
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....onents, etc. DEPB credit under the Scheme has to be calculated by taking into account the deemed import content of the export product as per the basic customs duty and special additional duty payable on such deemed imports. 36. Therefore, in our view, DEPB/duty drawback are incentives which flow from the schemes framed by the Central Government or from Section 75 of the Customs Act, 1962, hence, incentives profits are not profits derived from the eligible business under Section 80-IB. They belong to the category of ancillary profits of such undertakings. XXXXXXXX 38. Section 75 of the Customs Act, 1962 and Section 37 of the Central Excise Act, 1944 empower the Government of India to provide for repayment of customs and excise duty paid by an assessee. The refund is of the average amount of duty paid on materials of any particular class or description of goods used in the manufacture of export goods of specified class. The Rules do not envisage a refund of an amount arithmetically equal to customs duty or central excise duty actually paid by an individual importer-cum- manufacturer. Subsection (2) of Section 75 of the Customs Act requires the amount of drawback ....
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....ase of Sterling Foods, Mangalore (supra), in paragraph 7 and 13, it is observed and held as under:- "7. The question, therefore, was whether the income derived by the assessee by the sale of the import entitlements was profit and gain derived from its industrial undertaking of processing seafood. The Division Bench of the High Court came to the conclusion that the income which the assessee had made by selling the import entitlements was not a profit and gain which it had derived from its industrial undertaking. For that purpose, it relied upon the decision of this Court in Cambay Electric Supply Industrial Co. Ltd. v. CIT [(1978) 2 SCC 644 : 1978 SCC (Tax) 119 : (1978) 113 ITR 84]. It was there held that the expression "attributable to" was wider in import than the expression "derived from". The expression of wider import, namely, "attributable to", was used when the legislature intended to cover receipts from sources other than the actual conduct of the business. The Division Bench of the High Court observed that to obtain the benefit of Section 80-HH the assessee had to establish that the profits and gains were derived from its industrial undertaking and it was just not ....
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...., it is required to be noted that in the case of Meghalaya Steels Limited (supra), it was a case of three subsidies, namely a) Transport Subsidy, b) Interest Subsidy, and c) Power Subsidy and in that context this Court observed and held that since these subsidies directly affect the cost of manufacturing, they have a direct nexus with the profits and gains of the undertaking and since these subsidies have a direct nexus, they can be said to be derived from the industrial undertaking. It is to be noted that in the case of Meghalaya Steels Limited (supra), this Court did take note of the decision in the case of Liberty India (supra), however, this Court specifically observed that the case of Liberty India (supra) was concerned with an export incentive, which is very far removed from reimbursement of an element of cost. While dealing with the decision in the case of Liberty India (supra), this Court distinguished Duty Entitlement Pass Book and Duty Drawback Schemes and specifically observed that the DPEB / Duty Drawback Scheme is not related to the business of an industrial undertaking for manufacturing or selling its products and the DEPB entitlement arises only when the undertaking ....