Value received on transfer of DEPB
not taxable: ITAT Mumbai
Mumbai Bench of Income Tax Appellate Tribunal (ITAT) has ruled that the value received on transfer of DEPB does not constitute profit and thus can not be taxed. The Tribunal held this in the three separate cases M/s Glenmark Laboratories Ltd. v Dy. Commissioner of Income Tax, Mumbai; M/s Shrijee India Export Pvt. Ltd v Dy. Commissioner of Income Tax, Mumbai and M/s. Vijay Silk House (Delhi) Ltd. v Dy. Commissioner of Income Tax, Mumbai.
In three separate judgments pronounced in the last week of January, the Tribunal has directed assessing officers of the appellants to consider only profit on transfer of DEPB for the purpose of deduction under Sec. 80 HHC of the Income Tax Act and not the entire receipt against transfer of such DEPB.
Section 80-HHC, read with section 28 of the Income-Tax Act, 1961, was amended with retrospective effect by the Taxation Laws (Amendment) Act, 2005. The amendment gave a jolt to exporters with export turnover exceeding Rs 10 crore and who availed DEPB against their exports. In case of such exporters, the entire receipt against the transfer of DEPB was taken as profit by the income tax authority. However, for allowing deduction in respect of profit retained for export business under Sec. 80 HHC of the Income Tax Act, the exporter having export turnover exceeding Rs. 10 crore was required to prove that he had an option to choose either duty drawback or duty entitlement pass book scheme; and that the rate of drawback credit attributable to the customs duty was higher than the rate of credit allowed under duty entitlement pass book scheme.
The exporters having export turnover exceeding Rs. 10 crore who could not fulfill the two conditions were not allowed deduction under Sec. 80 HHC of the Income Tax Act and for them the entire receipt against the transfer of DEPB was treated as profit and was thus subjected to the levy of income tax. The authorities issued demand notice for tax so calculated.
A number of such exporters challenged the constitutional validity of Taxation Laws (Amendment) Act, 2005 and consequent levy of income tax on transfer of DEPB. Some of the High Courts granted stay against recovery of such disputed tax amount. The Union of India subsequently moved to the Supreme Court for clubbing of all the cases pending before various High Courts on the subject. The case is still listed before Hon’ble Chamber Judge for non-prosecution against unserved respondents as Union of India failed to serve notices to some of the respondents.
Meanwhile, few exporters moved ITAT against the order of CIT (Appeal) treating the entire receipt against transfer of DEPB as profit.
The full text of the orders given by the ITAT Mumbai in the three cases is reproduced below:
IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH – K – MUMBAI
BEFORE SHRI R K GUPTA, JM & SHRI V K GUPTA, AM
ITA NO : 5979/Mum/06
(Asst. Year: 2002-03)
| M/s Glenmark
Laboratories Ltd
601, 6th Floor, Chintamani Plaza Mohan Studio Compound, Andheri – Kurla Road Andheri (E), Mumbai 99 |
V/s |
The Dy. Commissioner of Income Tax Cen.Cir 33 Mumbai |
| (Appellant) | (Respondent) |
PAN No AABCG3289R
Appellant by Shri Vijay Mehta
Respondent by Ms Ruby Srivastava & Vivek Batra
ORDER
PER R K GUPTA, JM;
This is an appeal by the assessee against the order of the CIT (A) relating to assessment year 2002-03.
2. The assessee is objecting in holding that DEPB/DFRC income will not form part of business income for the purpose of computing deduction u/s 80 HHC of the Act.
3. Briefly stated facts of the case are that the assessee is engaged in the business of export of Generic Pharmaceuticals, Formulations etc. During the year the assessee had carried out trading exports. The assessee has claimed deduction u/s 80 HHC amounting to Rs 76,80,735/-. The same was computed taking into consideration the DEPB income amounting to Rs 1,21,91,643/-. The A.O. did not consider DEPB income as eligible for deduction u/s 80 HHC of the Act. Further, after reducing the DEPB there was a loss and considering decision of Hon’ble Supreme Court in the case of IPCA Laboratoreis (266 ITR 52), the deduction u/s 80 HHC was disallowed. The assessee filed an appeal before the CIT(A), which was rejected on the ground that the assessee had not fulfilled the additional conditions laid down vide Taxation Laws (Amendment) Act, 2005 which has amended the provisions of section 80 HHC. Now, the assessee is in appeal here before the Tribunal.
4. The ld Counsel of the assessee, who appeared before the Tribunal argued at length. Written note as asked to file is also field. Through the written submission, it has been stated that the assessee was an exporter of ‘trading goods’ during the year under consideration. Thus the assessee would be entitled to deduction under clause (3) (b) of s. 80 HHC of the Act. The ld Counsel then refereed to clause (3) (b) of sec 80 HHC which reads as under:
(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";
4.1 It was submitted that in the case of an exporter of trading goods, the export profits eligible for deduction shall be the export turnover in respect of trading goods as reduced by (i) the direct cost and (ii) the indirect cost. It was further submitted that as per the scheme of deduction u/s 80 HHC, the deduction so arrived is to be increased by the 90% of the sums referred to in clause (iiia), (iiib), (iiic), (iiid) or (iiie) of sec. 28 of the Act as the case may be. It was submitted that in the present case the assessee has availed of the DEPB and therefore clause (iiid) of sec. 28 would be applicable.
4.2 The ld counsel for the assessee referred to sec 28(iiid) and submitted that only the profits on sale/transfer of DEPB is covered under the said section. The ld Counsel then referred to clause (iiid) of section 28 dealing with DEPB which reads as under:
(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):
4.3 The ld counsel referring to the above, submitted that only the profit arising on sale or transfer of DEPB is covered u/s 28(iiid) of the Act. Therefore, it was submitted that the provisions of sec. 28 (iii) clearly mention that only the profit is to be taken into account, which implies that the value of DEPB is not covered u/s 28(iiid) of the Act.
4.4 The ld Counsel for the assessee referring to the third provision to sec. 80 HHC(3) submitted that the same refers to clause (iiid) of s. 28 of the Act. It was submitted that only profit on sale or transfer of DEPB is covered u/s 28(iiid) of the Act as stated above. It was further submitted that the value of DEPB is covered u/s 28(iv) of the Act. Reliance was placed on the decision of Hon’ble High Court in the case of Metal Rolling Works Pvt Ltd. V. Commissioner of Income Tax (142 ITR 170) wherein it was held that import entitlement were obtained by the assessee directly in the course of business and the value of the same constituted profits and gains of business of the assessee within the meaning of sec.28(iv).
4.5 It was submitted that the CIT (A) dismissed the appeal of the assess on the ground that the assessee had not satisfied the additional conditions laid down under the third proviso to sec. 80HHC of the Act. It was submitted that in the case of the assessee, if the additional conditions laid down under the third provision are not fulfilled, the denial of deduction will be only to the extent o "profit" arising on sale/transfer of DEPB and not the value of DEPB which would fall with the provisions of s. 28(iv) of the Act.
4.6 The learned Counsel then referred to the definition of direct cost and indirect cost as given in clause (d) and (e) of Explanation to sub-section (3) of sec. 80HHC which reads as under:
"Direct Cost" means costs directly attributable to the trading goods Exported out of India including the purchase price of such goods.
"Indirect Costs" means costs, not being direct costs, allocated in the ratio of the export turnover in respect of trading goods to the total turnover.
It was submitted that the definition of direct cost includes all costs attributable to trading goods. The learned counsel emphasized on the use of the words "attributable" in the definition of direct cost. It was submitted that the term "attributable" has been considered by various Courts in the past. It was submitted that direct cost would thus only include the direct cost relatable to exports of goods.
4.7 The learned counsel submitted that in the case of most of the exporters, goods are exported at a price below the purchase price considering the entitlement of DEPB. It was submitted that an exporter who has incurred a cost of Rs 95/- on purchases and who is entitled to DEPB of say Rs 10/- would be readyh to export the goods at any price, say Rs 90/-. In such case also he would make a profit of Rs 5/- It was therefore, submitted that it would be unreasonable to say that the entire cost of Rs 95/- is attributable to the exports of Rs 90/- It was therefore, submitted that the cost of purchases net of value of DEPB only can be considered to be attributable to the export of Rs 90/-
4.8 It was further submitted that the assessee had incurred loss in trading exports as is evident from the assessment order. It was submitted that the assessee exported the goods at a lower price since he knew he would be entitled to DEPB. The learned counsel also submitted that any businessmen would never sell any of his products by incurring loss on the same. The fact that without considering DEPB there is a loss itself proves that the assessee had taken the value of DEPB into account while deciding the price of exported goods. The learned consul counsel then submitted that had the assessee not taken the DEPB income into account he would not have exported the goods at a lower price. Therefore, it was submitted that DEPB has a direct taxes to the determination of sales price of the exported goods and would thus form part of the cost of sales. It was submitted that if the value of DEPB is not considered as part of the cost of sales, it would always result into a loss thereby giving results countrary to the economies of trade.
4.9 It was submitted before us that like should always be compared with like. It was submitted that the exclusion of DEPB for the purpose of computing profit from exports would always give absurd result as the sales is at a price lower than the cost of purchase. It was further submitted that the aforesaid anomaly is as a result of not considering DEPB and ignoring the matching principle. In this regard, reliance was placed on the decision of Hon’ble Supreme Court in the case of CIT v/s Lakshmi Machine Works (290 ITR 667) and Hon’ble Bombay High Court in the case of Commissioner of Income Tax v. Sudarshan Chemicals Industries Ltd (245 ITR 769). Further, reliance was placed on the decision of Mumbai bench of the Tribunal in the case of Surendra Engg. Corpn v. Assistant Commissioner of Income-Tax (86 ITD 121) (SB). The learned counsel of the assessee emphasized the following observations of the Tribunal.
"In the instant case, the assessee was undisputedly an exporter of "trading goods" exclusively and, therefore, clause (b) of sub section (3) applied. In the case of such an exporter, the export profits shall be the export turnover on respect of such trading goods as reduced by (1) the direct cost and (2) the indirect costs. Both these costs should, however, be ‘attributable to such export;, which means the export of trading goods. By using these words in clause (b) of sub-section (3) and thereby introducing a condition that both the direct and indirect cost must be attributable to the exports of trading goods, the Legislature has manifested an intention that any costs which are attributable to receipts other than export turnover of trading goods must be left out of reckoning at the threshold itself. This condition, thus, forms the substratum or bedrock of the computation of the export profits. Therefore, it any part of the direct or indirect costs are attributable not to the exports of the trading goods – in other words, the export turnover – that part should be left and out of consideration".
4.10 The learned counsel of the assessee, relying upon the aforesaid decision argued that the principle that the export incentives are attributable to costs has been upheld by the Tribunal and following the same analogy, in the present case as well, the export incentives should be held to be attributable to exports and the cost of goods debited in profit and loss account be reduced to the extent of DEPB for purpose of computing deduction u/s 80 HHC (3) (b) of the Act.
4.11 It was submitted that in the instant case also DEPB income is directly attributable to the trading goods exported. Thus the direct cost comprising the cost of goods should be reduced to the extent of value of DEPB to arrive at profit from export of trading goods. It was further submitted that after availing DEPB, the assessee had two options i.e. either to utilize the said DEPB at the time of imports or to sale the same to a third party. The assessee selected the second option wherein it sold the DEPB to a third party. The learned counsel submitted that if the assesse had not transferred the said DEPB, then it would utilize the same for set off against subsequent imports, which in turn would reduce the cost of the goods imported. Thus by merely transferring the DEPB it cannot be said that the assessee is not entitled to reduce the cost of the goods exported by the value of DEPB. The value of DEPB is already factored in the cost of the goods which are imported by the assessee by paying duty which otherwise would not have been paid if the assessee choose to utilize DEPB for the said purpose.
4.12 The learned counsel of the assessee further submitted that DEPB is an export incentive and the purpose of giving the same is actually reimbursement of the taxes paid in relation to exports. Every exporter has an option to avail of refund of taxes and duties paid in relation to export of goods or avail of DEPB. Accordingly, it was submitted that DEPB is nothing but the re-imbursement of taxes and duties paid on purchase of goods, which are exported. It was submitted that since DEPB is re-imbursement of the taxes and duties, it should be set of f the against the duties and taxes paid which is part of the cost of goods.
Thus, in effect, the cost of goods should be considered without taxes and duties paid or in other words after setting off DEPB against such taxes and duties. It was submitted that DEPB credit in actual terms reduces the cost of goods, which are exported. It was further submitted that considering the above, the direct cost would mean cost of goods attributable to exports i.e. cost of goods as arrived at after setting off or reducing the value of DEPB. Further reliance was also placed on the decision of the Tribunal in the case of M/s Amar International decided in ITA No 613/Mum/06 for AY 02-03 vide order dated 26/9/2007. Copy of the order of the Tribunal is also filed.
4.13 The ld DR on the other hand firstly placed strong reliance on the orders of the authorities below. It was further submitted that direct cost means related to the attributable goods. Therefore, the entire cost shown in the Profit & Loss Account has to be taken into consideration and not the appointment of the cost as stated by the ld consul of the assessee. It was further submitted that there is no cost in respect of DEPB incentive; therefore, as per provisions of law, the cost shown in the P&L Account has to be taken into consideration.
4.14 The ld counsel, in reply again explained the provisions of law once again and invited the attention of the Bench on the decision of the Special Bench (supra) and it was submitted that some cost has to be attributed to the DEPB incentive as without any expense DEPB cannot be obtained. Ld Counsel of the assessee invited out attention to see 80HHC (3) (b), which states ‘direct cost and indirect attributable to such export’. He also drew our attention towards definition of direct cost contained in Explanation D according to which direct cost means cost directly attributable to trading goods exported. Thus, only that the most of direct cost is required to be reckoned which is attributable to trading goods exported. Therefore, the principle of attribution is inbuilt in the scheme of the section.
5. We have heard rival submissions and considered them carefully. We have considered the case laws on which reliance was placed by the ld counsel of the assessee. After considering all the relevant material, we find that there is no dispute that the value of DEPB incentive falls within the meaning of sec. 28(iv) of the Act. We also found that as per clause (iiid) only the profits on sale/transfer of DEPB can be taken into consideration. The language of sec. 28(iv) and 28(iiid) are very clear. In this regard we have also noted the decision in the case of Amar International on which reliance was placed by ld counsel of the assessee. Therefore, the value of license fall within sec. 28(iv) and only the profit on transfer of license fall with 28(iiid). The aspect that what is the value of the DEPB incentive on the date of receipt was neither examined at the end of the Assessing Officer or at the end of the CIT (A). The issue of apportionment of indirect cost has been examined by the Special Bench in the case of Surendra Engineering. In this case in respect of indirect cost attributable to trading export was discussed in detail and it was held that 10% of the indirect cost is to be attributable to the trading export. In a recent decision in the case of Hero Export decided in appeal no 5315 of 2007, the Hon’ble Supreme Court as affirmed the identical view which was taken by the Special Bench. The argument of the department as well as the appellant was taken into consideration and after discussing the issue in detail, the Hon’ble Supreme Court has given its findings in para 11 to 15 which are as under:
11. We have considered the rival submissions. It is not disputed by the department that the assessee, in addition to the income derived from export of trading goods, also derived income from Export Incentives etc. of Rs 1,60,000 against FOB value of exports amounting to Rs 6,50,000 in the above illustration. It is not the case of the department that the assessee could have earned Rs 1,60,000 without incurring any expenditure (Rs 50,000 in the above example). It is not in dispute that the case falls under section 80 HHC (3) (a). It is not the case of the department that assessee had not income by way of incentive, interest etc. (Rs 1,60,000 in the example). The basic case of the department was that the words "indirect costs" in clause (e) in the explanation did not provide for exclusion of expenses incurred for earning incentives, commission, rent etc, and, therefore, the entire amount of expenses (Rs 50,000 in the above example) spent for earning such other incomes did not fall within the meaning of the world ‘indirect cost’ in clause (e). According to the department, section 80 HHC (3) (b) provides for a statutory formula to calculate export profits by deducting direct and indirect costs from export turnover, however, expenses incurred for earning incentives, commission etc. (other income) does not fall in the definition of ‘indirect cost’. That, the assessee was not entitled to claim 10% of the receipts from its other income (Rs 1,60,000 in the above example) as expense to be deduced from the indirect cost (Rs 50,000) in the above example). Accordingly, the Assessing Officer deducted full Rs 50,000 as indirect cost from the export turnover. Therefore, even according to the department, it is not in dispute that the assessee had incurred an expense of Rs 16,000 (in the above example) to earn other incomes of Rs 1,60,000 but it denied the proportionate deduction from Rs 50,000 on account of strict interpretation of the words ‘indirect cost’ in clause (e).
However, in the above stand of the department, there is a fallacy. Under Section 80 HHC (3)(b) which is the main section, the Legislature has provided that in case falling under section 80HHC (3)(b) direct and indirect costs attributable to such exports have to be deducted from the export turnover to arrive at Export Profits. Similar provision is made in clause (d) which defines the words ‘direct costs’ to mean cots attributable to exports of trading goods. Moreover, clause (e) of the Explanation defines ‘indirect costs’ as costs which is not direct costs as defined in clause (d). The word ‘attributable’ is wider than the word ‘derived’. The department in this case, as can be seen from above example, itself says that Rs 50,000 in full is the indirect cost which has to be deducted in full as clause (e) does not provide for proportionate deduction. According to the department, the definition of indirect costs will not cover expenses incurred for earning other incomes. However, at the same time, department concedes that the assessee had earned export turnover of Rs 6,50,000 plus Rs 1,60,000 as other incomes. It also concedes that Rs 50,000 is the indirect expenses. If so, what should be the expense allocated to the earning of the two incomes and in what proportion is the question?
12 According to the department, the question of allocation does not arise in cases falling under section 80 HHC (3(b). We do not find merit in this contention. Firstly, clause (e) to the Explanation which refers to allocation of costs applies to sections 80 HHC (3) (a), 80 HHC (3) (b) and 80 HHC (3) (c). Secondly, section 80HHC (3)(b) equates export profits to export turnover less direct and indirect costs attributable to the exports of trading goods. Therefore, the principle of attribution is retained. Thirdly, keeping in mind the provisions of section 80HHC(3)(b) read with clauses (d) and (e) of the Explanation it is clear that Legislature intended allocation of costs between export turnover and total turnover. It is urged that the apportionment would not apply to cases under section 80HHC (3) (b). It is true that, in most cases, it may not. But in certain cases falling under section 80HHC (3) (b), ratio still applies. For example, in the case where the assessee exports all bought-out items, but brings back only a part of the export proceedings into India, in such cases, the ratio will apply and, therefore, if one is to read clause (e), it retains the words indirect costs to be allocated in the ratio of export turnover to the turnover.
13 The question, which, however, needs to be decided, is whether, in the above example, the assessee is entitled to reduction of Rs 16,000 from Rs 50,000 being the total indirect expenses for earning both the incomes. Department reduces the FOB value by Rs 50,000 whereas assessee contends that it should be reduced by Rs 34,000 (Rs 50,000 - Rs 16,000), assessee claims apportionment at the rate of 10% of other income of Rs 1,60,000 (in the above example).This is opposed by the department saying that since apportionment does not apply to sec 80HHC (3) (b), there is no question of applying the yardstick of 10%. According to the department, the words, ‘indirect costs’ does not take into account the expenses to earn other incomes. In this case, reliance is placed on clause (e). However, the department has failed to notice the words ‘attributable to exports’ in sec 80HHC (3)(b).
14. As stated above, in our opinion, the words ‘attributable’ in section 80HHC(3) (b) in the main section itself indicates that apportionment (principle of attribution) is not omitted from the said provision of section 80HHC (3)(b). As stated above, assessee has earned other income of Rs 1,60,000 apart from FOB value of exports of Rs 6,50,000. Therefore, some expenses has to be attributed to earning of Rs 1,60,000. If so, the next question which arises is how to allocate the costs? As stated above, assessee has two incomes with one common pool of expenses and since principle of attribution has been retained in the scheme of section 80HHC, both in terms of section 80HHC (3), clause (e) to the Explanation to section 80HHC (3)(a), (b) and (c) and in clause (baa) to the Explanation to section 80HHC, instead of going into lengthy exercise of dividing such common expenses, the assessee has estimated the reduction of export turnover by 10% of the other income of Rs 1,60,000 (in the above example). Ultimately, clause (baa) to the Explanation is itself based on the assumption that 10% of the income would be an expenses. We make it clear that we are not reading Explanation (baa) into section 80HHC (3)(b).
What we say is as a guidance value/factor, 10% of total other income of Rs 1,60,000 would be fair estimate. This guidance value is not flowing from clause (baa) but from the scheme of section 80HHC read with the Memorandum to the Finance Act of 1991. Take a reverse case, if allocation of expenses is to be done on actual basis, it would not only be very difficult but in some cases actual apportionment may not be in the interest even of the department.
15. In conclusion, we may state that under section 80HHC (3)(b) one has to balance the ‘principle of attribution’ with the concept of allocation’. The concept of allocation is meant to reduce the incentive. However, when ‘allocation’ has to be balance with the ‘principle of attribution’, the object is to reduce the incentive and not to eliminate it.’
6. The above findings of the Hon’ble Supreme, which are binding on us, are very relevant to the present issue. In view of the judgment of the Special Bench and in view of the recent judgment of the Supreme Court, we hold that part of the direct cost is attributable to the value of DEPB license. To find out the direct cost relatable to trading export, one has to reduce that part of the direct cost attributable to earnings of DEPB from the value of total direct cost. However, this aspect has not been examined by the Assessing Officer or by the CIT (A). Therefore, we restore this issue to the file of the Assessing Officer to ascertain the value of DEPB license on the date of receipt and reduce the same from total direct cost. We clarify that any difference in realization of DEPB license will be treated u/s 28(iiid) of the Act. Thereafter the Assessing Officer is directed to recompute the deduction u/s 80HHC. We order accordingly.
7. Ground No 2 relate to imitation of penalty u/s 27 1(1)(C) This ground is pre-mature, therefore, does not require any adjudication upon. Accordingly, this ground is dismissed.
8. Ground No 3 is against levy of interest u/s 234C and D which are consequential in nature. Accordingly, the Assessing Officer is directed to adjudicate the same afresh by passing a speaking order.
9. In the result, the appeal filed by the assessee is partly allowed for statistical purpose.
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Order pronounced on 27/12/2007 |
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Sd/- (V K GUPTA) Accountant Member Mumbai dated: 27th December 2007
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Sd/- (R K GUPTA) Judicial Member |
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Mumbai Bench -K- Mumbai Before Shri R.K. Gupta, JM & Shri V K Gupta, AM ITA Nos. 6147/Mum/06 (Asstt. Year 2002-03) |
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| M/s Vijay Silk House –
(Delhi) Ltd.
7/23 Grants Bldg, Arthur Bunder Road, Colaba, Mumbai 5 |
V/s. |
The Dy. Comm. of Income Tax Cir 3(3) Mumbai |
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(Appellant) PAN NO. AAACV5908K |
(Respondent) | |
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Ita No.s 6148/Mum/06 (Asstt. Year 2003-04) |
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M/s Vijay Silk House – (Surat) Ltd. 7/23 Grants Bldg, Arthur Bunder Road, Colaba, Mumbai 5 |
V/s. |
The Dy. Comm. of Income Tax Cir 3(3) Mumbai |
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(Appellant) PAN NO. AAACV3544P |
(Respondent) | |
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Appellant by: Shri I P Rathi Respondent by: Shri Vijay Batra |
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ORDER
PER R K GUPTA, JM:
These are two appeals by two different assesses against the order of the CIT(A) relating to assessment years 2002-03 and 03-04. Common issues are involved in both these appeals; therefore, they are disposed off by this single order.
2. The ground on merit is in respect of receipts on account of DEPB benefits does not fall u/s 28(iiid) as only profit on transfer of DEPB is falls u/s 28(iiid).
2.1 Without prejudice, it has been stated that the value of DEPB entitlements accrued on export performance should have been considered as export incentive u/s 28(iiia) or (iiib) or (iiic) or business income u/s 28(i) or (iv) while calculating the deduction u/s 80-HHC.
3. For AY 2002-03, the assessee has taken a legal ground also that the CIT(A) erred in confirming the reopening of the assessment u/s147.
4. First, we shall deal with the legal ground raised for AY 2002-03.
5. Briefly stated facts in this case are that return declaring a total income of Rs. 51,41,460/- was filed on 24.10.2002. The assessment was completed on the same income vide order dated 25.2.2003. Thereafter the Assessing Officer noted that the assessee has claimed deduction u/s 80-HHC. In the body of the assessment order the Assessing Officer has observed that the deduction is claimed by the assessee company out of the export incentives as well as manufacturing exports. The export incentives consist of sale of DEPB licenses. The sale of DEPB licenses is not covered u/s 28(iiia) (iiib) (iiic) but under section 28(iv) of the I T Act, 1961 on which deduction u/s 80HHC is not admissible. As the income chargeable to tax has escaped assessment, the said assessment was reopened u/s 147 of the Act by way of issue of notice u/s 148 of the Act vide notice dated 3.12.2004. In response to notice u/s 148, the assessee company vided letter dated 12.1.2005 stated that the return of income filed originally may be treated as return of income in response to notice u/s 148 of the Act.
5.1 During the assessment proceedings, the objections against the reopening of the assessment were filed, however, the Assessing Officer was of the view that since income has escaped assessment, and therefore, reopening is well within law. Reliance was placed on the decision of the Hon’ble Bombay High Court in the case of Dr. Amin’s Pathology Laboratory reported in 252 ITR 673. Accordingly, the objections raised by the assessee were rejected and the notice issued u/s 148 was held as valid. Thereafter, the Assessing Officer, after considering the amended provisions of sec. 80HHC held that as per the amended provisions of sec. 80HHC by which an assessee is entitled for deduction u/s 80HHC on profit on transfer of Duty Entitlement Pass Book Scheme (DEPB)/Duty Free Replenishment Certificate (DFRC) licenses under the Export Import Policy formulated by the Govt. of India, only if the total Export Turnover is below Rs. 10 crores. It was noted by the Assessing Officer that in the instant case, the total export turnover is above Rs. 10 crore. Accordingly, as per amended provisions of law, it was held that the assessee is not entitled for deduction u/s 80HHC as the assessee is entitle for deduction u/s 80-HHC only, if the assessee has necessary and sufficient evidence to prove that it had an option to choose which is either the duty draw back or the profit on sale of DEPB/DFRC, being the Duty Remission Scheme and the rate of draw back credit attributable to the customs duty was higher then the rate of credit allowable under the DEPB/DFRC, being the Duty Remission Scheme. By further observing that as the assessee could not produce sufficient and necessary evidence to prove that the rate of draw back credit attributable to the customs duty was higher then the rate of credit allowable under the DEPB/DFRC, being the duty remission scheme, the assessee will not be entitled for deduction u/s 80HHC for benefit on transfer of DEPB/DFRC. Accordingly, the deduction u/s 80HHC allowed earlier was withdrawn.
5.2 Similarly the assessment was completed for AY 2003-04 also. The assessee preferred appeal before the CIT(A) challenging the assessment order on merit for both the years and challenging the reopening of the assessment foray 2002-03.
5.3 Detailed written submissions were filed before the CIT(A) in respect of allowability of deduction u/s 80HHC and in respect of reopening of the assessment for AY 02-03. After considering the submissions, the CIT(A) was in agreement with the findings of the Assessing Officer. Accordingly, the orders of the Assessing Officer for both the years and reopening the assessment for AY 02-03 were confirmed. Now, the assessee is in appeal here before the Tribunal for both the years.
6. The ld counsel of the assessee who appeared before the Tribunal on behalf of the assessee firstly argued in respect of legal ground raised for AY 2002-03. It was submitted that reopening of the assessment was bad in law because the assessment was reopened u/s 147 by way of issue of notice u/s 148 dated 3.12.2004. It was submitted that see 80HHC r.w.s. 28 are amended in 2005, therefore, reopening of the assessment before the amendment of the provisions was bad in law. Before amendment of the provisions of section 80-HHC, the assessee was entitled for deduction u/s 80HHC on DEPB licence as they falls u/s 28(iv) of the Act. The Hon’ble Bombay High Court in the case of Metal Rolling Works Pvt. Ltd. in 142 ITR 170 has held that the DEPB licence falls u/s 28(iv). Accordingly, the DEPB license entitlement is business profit and they are eligible for deduction u/s 80HHC on the business profit. The claim of the assessee was allowable in past and was allowed also. Therefore, on the same set of facts, the reopening of the assessment is bad in law, as the same has to be treated merely on account of change of opinion. Reliance was placed on the decision of the Hon’ble Bombay High Court in 285 ITR 26, 290 ITR 252 and 268 ITR 203 and in the case of Foramer France reported in 264 ITR 566(SC). Regarding the decision of the Hon’ble Bombay high Court in the case of Dr. Amin’s Pathology Laboratory, it was submitted that the ratio of the decision is not applicable on the facts of the present case as in past on the same set of facts the deduction was allowed by the department itself. In view of these arguments, it was submitted by the ld AR that the order of the Assessing Officer is liable to be quashed.
7 Regarding the merit, it was submitted that only profit on transfer of DEPB license can be attributable to profit earned u/s 28(iiid) for the purpose of deduction u/s 80HHC. Lengthy arguments were advanced in this regard and it was submitted that the Assessing Officer may be directed to consider only profit on transfer of DEPB instead of the entire receipts on account of DEPB license received by the assessee.
8. On the other hand, the ld DR stated that though the profit on account of DEPB valued falls u/s 28(iv), however, for the purpose of deduction u/s 80HHC the entire profit has to be taken u/s 28(iiid).
8.1 Regarding the legal ground, it was submitted by the ld DR that the Assessing Officer was correct in reopening the assessment and the CIT(A) was also correct in upholding the action of the Assessing Officer. Further reliance was placed on the orders of the authorities below.
9. We have heard rival submissions and considered them carefully. We have also taken into consideration the various case laws on which reliance was placed by the ld counsel of the assessee. After taken into consideration the decision of the Hon’ble Bombay High Court in the case of German Remedies reported in 285 ITR 26, we find that the order of the Assessing Officer for AY 2002-03 is liable to be quashed. The Hon’ble Bombay High Court has held that on the same set of facts in past the claim of the assessee has been allowed then subsequent year cannot be reopened as the reopening of the assessment will be on account of mere change of opinion. The Hon’ble Supreme Court in the case of Foramer France (supra) has also held so. Various Benches of the Tribunal have also held that merely on account of change of opinion, reopening of the assessee is bad in law. The Assessing Officer, in the present case has decided the issue against the assessee in view of the amended provisions of sec. 80HHC. These provisions were amended in the year 2005 whereas the reopening proceedings u/s 147/148 were initiated in the year 2004. The amended were not on the statute on the date of reopening of the assessment; therefore, for this reason also the reopening was bad in law. The Assessing Officer has not given any finding while completing the reassessment that before the amendment of provisions of law the claim of the assessee was not allowable. Complete details/particulars in respect of deduction were filed along with return. On the basis of these details, the deduction u/s 80-HHC was allowed while completing the assessment on 24.10.2002. Therefore, it cannot be said that the assessee fully and truly has not filed the particulars of income.
10. In view of these facts and circumstances we hold that the reopening of the assessee for AY 2002-03 was bad in law. Accordingly, we quash the assessment order for AY 2002-03.
11. On merit we noted that similar issue was involved in the case of M/s Shrijee India Exports Pvt.Ltd. and the same has been decided by this Bench vide order dated 31.12.2007. The Tribunal has taken into consideration the detailed arguments of the assessee in that case along with various case laws and has held as under:
"5. We have heard rival submissions and considered them carefully. We have also perused the decision of the Hon’ble Bombay High Court in the case of Metal Rolling Works P Ltd and the decision of the Tribunal in the case of M/s Amar International and found that in view of the provisions of sec. 28(iiid) only profit out of the value of DEPB can be taken for consideration. The Hon’ble Bombay High Court has clearly held that DEPB entitlements were obtained by the assessee during the course of its business so that the value of the same constitute profit and gains of the business of the assessee within the meaning of said terms in clause (iv) of sec. 28 of the said Act. Therefore, no doubt remains that DEPB entitlement falls under the clause (iv) of sec. 28 of the Act. The provisions of sec. 28(iiid) are also very clear which reads as under:
"Sec.28. The following income shall be chargeable to income tax under the head "profit and gains of business or profession"
i) ……
ii) ……
(a)….
(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 u/s 5 of the Foreign Trade (Development & Regulation) Act 1992(22 of 1992)
It is clear from the above provisions of sec. 28 that only profit from DEPB benefit falls under this section. Section 28(iv) has been considered by the Bombay High Court and has also held that the import entitlements of which DEPB is one of the constituents falls u/s 28(iv). Therefore, no doubt remains that only profit from DEPB entitlement shall fall u/s 28(iiid).
5.1 Similar issue came before the Tribunal in the case of Amar International. The Tribunal has restored the matter to the file of the Assessing Officer with a direction to consider only profit on transfer of DEPB and not the entire receipts thereof. This order was rendered by the Tribunal in ITA no. 613/M/06 vide order dated 26.9.2007. Copy of the order is placed on record.
5.2 On similar issue also came before this Bench in the case M/s Glenmark Laboratories Ltd. In this case, the issue was regarding whether there is any indirect cost attributable to DEPB is involved or not. The Tribunal, after taking into consideration all the aspects and the decision of the Apex Court in the case of Hero Exports decided in appeal No. 5315 of 2007 has held that "part of the direct cost is attributable to the value of DEPB licence.
5.3 From the above decision of the Tribunal, decided in ITA No. 5979/Mum/06 vide order dated 27.12.2007, it is clearly seen that the DEPB incentives are profit in toto, therefore, only profit element has to be taken for the purpose of allowance or disallowance u/s the amended provisions of sec. 80HHC. Since this aspect has not been examined either by the Assessing Officer or by the CIT(A) that how much profit has been earned on account of DEPB license/benefits, therefore, we are of the considered view that the matter should be sent back to the file of the Assessing Officer to ascertain the quantum of profit after affording reasonable opportunity of being heard to the assessee. Accordingly, we set aside this issue to the file of the Assessing Officer and the Assessing Officer is directed to consider only profit on transfer of DEPB for the purpose of deduction u/s 80HHC and not the entire receipts as discussed above. We order accordingly."
12. Since the facts are similar, therefore, the Assessing Officer, in the present cases also is directed to re-compute the deduction u/s 80HHC by taking only profit earned on account of transfer of DEPB license and not the entire receipts after affording reasonable opportunity of being heard to the assessee for both the years. We order accordingly.
8 In the result, the appeal for AY 2002-03 is allowed whereas the appeal for AY 2003-04 is allowed for statistical purpose.
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Order pronounced on 31st , Dec 2007. Sd/-(V K Gupta) Accountant Member Mumbai: Dated: 31st Dec, 2007 |
Sd/- (R K Gupta) Judicial Member |
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In the Income Tax Appellate Tribunal Mumbai Bench -K- Mumbai Before Shri R.K. Gupta, JM & Shri V K Gupta, AM ITA Nos. 6092/Mum/06 (Asstt. Year 2003-04) |
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M/s Shrijee India Exports Pvt. Ltd. 384 M Dabholkarwadi Mumbai Kalbadevi Road, Mumbai 2 |
V/s. |
The Dy. Comm. of Income Tax Cir 4(3) |
| (Appellant) | (Respondent) | |
| PAN NO. AACFS5658J |
Appellant by: Shri Vijay Mehta Respondent by: Ms Ruby Srivastava |
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ORDER
PER R K GUPTA, JM:
This is an appeal by the assessee against the order of the CIT(A) relating to assessment year 2003-04.
2. The only issue involved in this appeal is regarding the treatment of DEPB receipt of Rs. 3,10,68,386/- while calculating the deduction u/s 80HHC.
3. Briefly stated, the facts in this case are that the assessee is a private limited company and is engaged in the business of manufacturing & export of cloth and achieved an export turnover of Rs. 26,24,98,674/-. Return of income declaring a total income of Rs. 2,80,50,960/- was filed on 28.11.2003. The Assessing Officer held that since the export turnover of the assessee exceeded Rs. 10 crores, the DEPB sale realization at Rs. 3,10,68,386/- were not eligible for deduction as the second condition as per third proviso to sec. 80-HHC(3) was not fulfilled. The assessee preferred appeal before the CIT(A), who after considering the facts an submissions held that the assessee has not satisfied the conditions laid down in the amended provisions of sec. 80HHC of the Act and accordingly, confirmed the action of the Assessing Officer. Now, the assessee is in appeal here before the Tribunal.
4. During the courts of hearing the assessee was been asked to file a brief note. Accordingly, a brief note is also filed. Through the written note, it has been stated that the value of DEPB benefit does not fall under the provisions of Sec. 28(iiid) of the Act. It was stated that the said benefit is covered by the provisions of sec. 28(iv) of the Act. It was submitted that while calculating the deduction u/s 80HHC the eligible deduction is to be worked out under clause (b) of sub.sec (3) of the said section. According to the said provision, the deduction would be equal to the profit of the business. As defined in clause (baa) of Explanation to sec. 80HHC of the Act profit of the business is profit as computed under the head "profits and gains of business or profession". From the above amount, one has to reduce 90% of the sum referred to in clauses (iiia), (iiib), (iiic), (iiid) and (iiie) of Sec.28 of the act as well as receipt by way of brokerage, commission, interest, etc. Since the value of DEPB benefit does not fall u/s 28(iiid) of the Act and since it gets covered by Sec. 28(iv), it is submitted that 90% of said sum cannot be reduced from the profit of the business. On the proposition that nothing is to be reduced while applying clause (baa) to Explanation to Sec. 80HHC of the act, reliance was placed on the decision of the Hon’ble Delhi Bench of the Tribunal in the case of P&G Enterprises (P) Ltd. Vs DCIT (93TTJ 788). Similarly while applying the third proviso to sub. Sec. (3) of the sec. 80HHC of the act, nothing is required to be added back as admittedly the assessee is not fulfilling two conditions mentioned in the said proviso.
4.1 It was further submitted that the value of DEPB does not fall within the provisions of sec. 28(iiid) but falls within the provisions of sec. 28(iv) of the Act. Attention of the Bench was invited to the phrascology used in sec. 28 of the Act. Clauses (iiia), (iiib), (iiic) of Sec 28 use the words "profits on sale of licence", "cash assistance" and "any duty" respectively. It was therefore, submitted that this clearly shows that the legislature has carefully used the language to cover the gross amount or net amount wherever it was intended so. Now, coming to clauses (iiid) and iiie), the language used is "any profit on the transfer of DEPB". This clearly shows, on its plain and literal interpretation, that only profit portion arising out of sale of license is covered by clauses (iiid) and (iiie). It was submitted that the value of license was always covered u/s 28(iv) which was there on the statute book since 01-04-1964. This is also supported by the decision of the Hon’ble Bombay High Court in the case of Metal Rolling Works P Ltd v CIT (142 ITR 170). Attention is invited to the following observations on page no. 173 of the report:
"We find it difficult to accept this submission. What Mr. Mehta’s argument overlooks is the provisions of cl. (iv) of s.28. The said clause read with the opening portion of sec. 28 of the said Act read as follows:
"Section 28: The following income shall be chargeable to income tax under the head "profits and gains of business of profession"-
(iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession".
Now, in the present case, the facts found by the Tribunal clearly show and this is not disputed by either side that the import entitlements were obtained by the assessee in the course of its business, so that the value of the same constituted profits and gains of the business of the assessee within the meaning of the said term in cl (iv) of s. 28 of the said Act."
4.2 It was submitted that from the above observation, it is very clear that the DEPB benefit is to be taxed u/s 28(iv) and only the profit portion is to be taxed u/s 28(iiid). Further, prior to the amendment, license value was taxable u/s 28(iv) of the Act. It was further submitted that after the amendment this has not been changed, because there is no amendment to s. 28(iv) of the Act. If it is held that the value of licence is taxable u/s 28(iiid) of the act, it would be anomalous because S.28(iiid) has been inserted w.e.f 1.4.1998, whereas value of license was taxable all along u/s 28 of the Act. Apart from this, one cannot ignore the phrase ‘profit on the transfer of …’ employed in S.28(iiid) of the act. The said words have to be given some meaning and cannot be allowed to become redundant. The legislature has intentionally avoided use of the phrase ‘receipt on the transfer of ….’ and used the word ‘profit on the transfer of…’
4.3 It was further submitted that the value of DEPB licence is taxable as income u/s 28 (iv) at the time of receipt of same from Government of India. At the time of sale of licence to third party, which would be the subsequent event, only the profit portion is to be taxed. It was submitted that on the date of receipt of licence, its market value has to be reckoned and the same has to be brought to tax. It was further submitted that on the date of transfer of licence, only the difference between selling price and the value of the date of acquisition is to be taxed. It was submitted that there may be time gap between these two events and in such case the acquisition of licence may be in year one and the sale may be in the year two or three. In such a situation, it cannot be said that on the date of receipt, there is no taxable event and on the date of transfer, the entire selling price is to bring to tax. Therefore, the observations of the ld CIT(A) that the entire amount is profit as there is no cost of acquisition of licence is incorrect. It was submitted that in a commercial sense, upon transfer of licence only profit element is income. The licence, upon its acquisition, is a valuable asset and the value thereof has been taxed u/s 28(iv) upon receipt. It was submitted that for a businessman, any benefit arising out of the trade – in this case upon receipt of licence from government – is an income and it would be incorrect to say that the licence does not have any cost.
4.4 It was stated that the CIT(A) has observed in his order that since ‘cost’ of licence is nil, the entire receipt is profit on transfer. This is not correct. It was submitted that the calculation is not under the head capital gain where cost of acquisition is relevant. Under ‘business income’ head, commercial profit is to be determined. Value of licence upon accrual/receipt is the income and profit on transfer is difference between value and selling price at the time of sale. Further reliance was placed on the recent unreported order of the Hon’ble Mumbai Bench of the Tribunal in the case of M/s Amar International v ACIT, Mumbai in ITA No. 613/M/06 for AY 2002-03 dated 26.9.2007. Copy of the order of the Tribunal is also filed.
4.5 On the other hand, the ld DR submitted that though the DEPB benefits falls under sec. 28(iv), however, as profit cannot be ascertained on DEPB benefit, therefore, in view of the amended provisions of sec. 80HHC, the entire DEPB benefit has to be taken for the purpose of sec. 28(iiid).
5. We have heard rival submissions and considered them carefully. We have also perused the decision of the Hon’ble Bombay High Court in the case of Metal Rolling Works P Ltd and the decision of the Tribunal in the case of M/s. Amar International and found that in view of the provisions of sec. 28(iiid) only profit out of the value of DEPB can be taken for consideration. The Hon’ble Bombay High Court has clearly held that DEPB entitlements were obtained by the assessee during the course of its business so that the value of the same constitute profit and gains of the business of the assessee within the meaning of said terms in clause (iv) of sec 28 of the said Act. Therefore, no doubt remains that DEPB entitlements falls under the clause (iv) of sec. 28 of the Act. The provisions of sec. 28(iiid) are also very clear which reads as under:
"Sec. 28. The following income shall be chargeable to income tax under the head "profit and gains of business or profession:
i) ……
ii) ……
a) .……
(iiid) Any profits on the transfer of the duty entitlement Pass Book Scheme being the duty remission scheme under the export and import policy formulated and announced u/s 5 of the Foreign Trade (Development & Regulation) Act 1992 (22 of 1992).
It is clear from the above provisions of sec. 28 that only profit from DEPB benefit falls under this section. Section 28(iv) has been considered by the Bombay High Court and has also held that the import entitlements of which DEPB is one of the constituents falls u/s 28(iv). Therefore, no doubt remains that only profit from DEPB entitlement shall fall u/s 28(iiid).
5.1 Similar issue came before the Tribunal in the case of Amar International. The Tribunal has restored the matter to the file of the Assessing Officer with a direction to consider only profit on transfer of DEPB and not the entire receipts thereof. This order was rendered by the Tribunal in ITA No. 613/M/06 vide order dated 26.9.2007. Copy of the order is placed on record.
5.2 On similar issue also came before this Bench in the case of M/s Glenmark Laboratories Ltd. In this case, the issue was regarding whether there is any indirect cost attributable to DEPB is involved or not. The Tribunal, after taking into consideration all the aspects and the decision of the Apex Court in the case of Hero Exports decided in appeal No. 5315 of 2007 has held that "part of the direct cost is attributable to the value of DEPB license."
5.3 From the above decision of the Tribunal, decided in ITA No. 5979/Mum/06 vide order – dated 27.12.2007, it is clearly seen that the value of DEPB benefit cannot constitute entire profit. Therefore, only profit element has to be taken for the purpose of allowance or disallowance under the amended provisions of sec. 80HHC. Since this aspect has not been examined either by the Assessing Officer or by the CIT(A) that how much profit has been earned on account of DEPB license/benefits, therefore, we are of the considered view that the matter should be sent back to the file of the Assessing Officer to ascertain the quantum of profit after affording reasonable opportunity of being heard to the assessee. Accordingly, we set aside this issue to the file of the Assessing Officer and the Assessing Officer is directed to consider only profit on transfer of DEPB for the purpose of deduction u/s 80HHC and not the entire receipts as discussed above. We order accordingly.
6. In the result, the appeal of the assessee is disposed off as above.
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Order pronounced on 31.12.2007 Sd/- V K Gupta Accountant Member Judicial Member Mumbai: Dated: 31st, , Dec. 2007 |
Sd/- R K Gupta |
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FIEO organized a meeting on 3rd January at New Delhi with 27 foreign nationals from 17 countries to brief them about the activities carried out by the Federation towards promoting global trade. The visitors, representing small and medium enterprises, are attending a training programme conducted by NIESBUD (National Institute for Entrepreneurship and Small Business Development). On behalf of the Federation, Director General Mr. Ajay Sahai briefed the visitors about how FIEO was helping India’s trade with the world as the apex export promotion organization of all the export promotion councils, commodity boards, export development authorities etc. |
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Dr. R.K. Dhawan (extreme left) addressing the degates. On his right are Dr Rishi Raj Singh, Mr. Ajay Sahai, and Mr.Sunil Agnihotri, Director, FIEO(NR). |
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Northern Region Chairman of FIEO Dr. R.K. Dhawan on this occasion briefed the visitors about how India was emerging as a farvourable investment destination in the world. Dr. Rish Raj Singh, Director (Training UEPA), NIESBUD joined the meet and thanked FIEO for organizing it. |
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