TMI Blog2010 (12) TMI 808X X X X Extracts X X X X X X X X Extracts X X X X ..... Singh, JJ. Sandeep Vijh, J.S. Bhasin, Nirmal Mahajan, Ashwani Gupta, S.S. Kalra, M.R. Bhagat, K.C. Suman, Atul Vijh, Y.K. Sud and Ashwani Mittal for the Appellant Tarsem Lal for the Respondent ORDER By the Bench:- 1. In all these appeals, filed by the different assessees, a common and identical issue is involved. The case of the assessee is that in view of the wording of the s. 80HHC(iiid), where expression used is "profit on transfer", it is only the profit on transfer of the DEPB which is to be taken under consideration and not whole of the DEPB receipts for the purpose of computation of deduction under s. 80HHC r/w Expln. (baa) to s. 80HHC of the Act. According to the assessee, the expression profit means the difference between the sale consideration realized from the transfer of the DEPB receipts and the face value of the DEPB credit that has been transferred. However, the Revenue Department has reduced 90 per cent of the whole of receipts on account of DEPB from the profits and gains of business computed under the head 'Profits and gains of business and profession', while computing the deduction available to the assessee under s. 80HHC of the Act. Hen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... circumstances of the case the Tribunal was right in law in not holding that profit on transfer of DEPB entitlement represents the entire amount inclusive of premium of sale of such DEPB? III. Whether on the facts and circumstances of the case the Tribunal was right in law in not holding that the word 'profit' referred to in s. 28(iiid) and 28(iiie) of IT Act, 1961 means the difference between the sale price of DEPB and the face value of DEPB ignoring the fact that the entire amount represents the profit in the hands of assessee? IV. Whether on the facts and circumstances of the case the Tribunal was right in law in deducting the face value of DEPB from sale price of DEPB for calculating profit under s. 28(iiid) and 28(iiie) of IT Act, 1961 as if the face value is the cost incurred by the assessee to acquire the DEPB? V. Whether on the facts and circumstances of the case the Tribunal was right in law in not holding that the word profit referred to in s. 28(iiid) and 28(iiie) of the IT Act, 1961 requires any artificial cost to be interpolated to the extent that the face value of DEPB/DFRC should be deducted from the sale proceed for the purpose of determination of deducti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (iiid) any profit on the transfer of the DEPB Scheme, being the Duty Remission Scheme under the export and import policy formulated and announced under s. 5 of the Foreign Trade (Development and Regulation) Act, 1922 (22 of 1992); (iiie) any profit on the transfer of the duty-free replenishment certificate, being the Duty Remission Scheme under the export and import policy formulated and announced under s. 5 of the Foreign Trade (Development and Regulation) Act, 1922 (22 of 1992). It is an accepted principle of interpretation that a section is to be interpreted in view of the specific words used in the section. Before referring to s. 28(iiid), it is pertinent to mention that DEPB is not a licence and cannot be equated with a licence. A DEPB certificate is like a certificate of money and it can be used to pay any customs duty due from any person. A licence is a document which permits a person to import a specific item or a category of item from abroad and as such it cannot be equated with DEPB certificate which is money in the form of a certificate. For example the holder of a DEPB certificate having a face value of Rs. 10 lakhs and from whom customs duty of Rs. 12 lakhs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s aspect. Once there is some cost, the estimation of the cost made by the policy under which the incentive is allowed can be safely adopted to compute the profit. In other words, the face value which is the estimated cost of the duty incurred on the inputs used for manufacture has to be treated as the cost. The intention under the scheme was not to give any margin and thus the face value has to be treated as the minimum cost to the assessee. Without prejudice to the above submission, even if cost cannot be quantified in every case with precision and the face value of the DEPB is not to be treated as the cost, some method has to be followed to determine the cost. Sec. 80HHC itself provides for computation of indirect cost of trading goods exported on estimated basis i.e., ratio proportion method when the assessee is a manufacturer as well as a trader and therefore cost can be estimated under the present situation also. We would also like to draw our attention to the decision of the Supreme Court in the case of Hero Exports vs. CIT (2007) 213 CTR (SC) 291 : (2007) 295 ITR 454 (SC), copy enclosed at page Nos. 11 to 18 which supports the concept of estimation of cost under s. 80HHC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1990 it was held that where two or more transactions on which interest is paid or received are shown to have an element of mutuality, in such cases only the interest paid to the partner in excess of the interest received could be disallowed. The decision is fully applicable to the present case where the issue involved is adjustment of face value of DEPB with purchase cost which includes customs duty which the DEPB scheme intends to neutralize. CIT vs. Bokaro Steel Ltd. (1999) 151 CTR (SC) 276 : (1999) 236 ITR 315 (SC) : In this decision dt. 18th Dec., 1998 it was held that the rent charged from contractors, hire charge of plant and interest on advance given to contractor were directly connected to the work of plant and had thus to be adjusted against the cost of the project. The case again supports the contention about netting of face value of DEPB with purchases. CIT vs. Karnal Co-operative Sugar Mills Ltd. (2000) 161 CTR (SC) 241 : (2000) 243 ITR 2 (SC) : In this decision dt. 23rd April, 1999 it was held that the interest earned on margin money for the purposes of opening letter of credit being linked to the acquisition of machinery would go to reduce the cost of plant. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that the issue involved in these appeals, which has been remitted back to the Tribunal by the Hon'ble Punjab and Haryana High Court, is to be decided in the light of the decision of the Hon'ble Bombay High Court in the case of CIT us. Kalpataru Colours and Chemicals (supra). 4. We have heard both the parties and perused the material on record. 5. The issue involved in these appeals is with regard to the assessee's claim of deduction under s. 80HHC with reference to the DEPB (duty entitlement pass book) and DFRS (Duty Free Remission Scheme) within the meaning of Expln. (baa) to s. 80HHC of the Act read with s. 28(iiid) and (iiie) of the Act. This issue was decided by the Tribunal in the first round in the light of the view taken by the Special Bench of the Tribunal, Mumbai in the case of Topman Exports vs. 1TO (supra) and in the case of Kalpataru Colours and Chemicals vs. Addl. CIT (supra) against which the Department preferred an appeal before the Hon'ble Punjab and Haryana High Court. From the order of the Hon'ble Punjab and Haryana High Court, it is clear to us that the aforesaid decisions of the Special Bench of the Tribunal, Mumbai in the case of Topman Export ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in Metal Rolling Works (P) Ltd. vs. CIT (1982) 31 CTR (Bom) 116 : (1983) 142 ITR 170 (Bom) and by the Allahabad High Court in Agra Chain Manufacturing Co. vs. CIT 1978 CTR (All) 415 : (1978) 114 ITR 840 (All). The prevailing view of these two Courts was that in the case of an assessee who is engaged in exports import entitlements received (1982) 31 CTR (Bom) 116 : (1983) 142 ITR 170 (Bom) (supra) and by the Allahabad High Court in Agra Chain Manufacturing Co. vs. CIT (supra). The prevailing view of these two Courts was that in the case of an assessee who is engaged in exports import entitlements received under incentive schemes of the Government of India would be taxable under cl. (iv) of s. 28 as the value of a benefit, whether convertible into money or otherwise arising from business or the exercise of a profession. However, there appeared to be a conflict of opinion among Courts on the issue which was resolved by Parliament by the insertion of cls. (iiia), (iiib) and (iiic) by the Finance Act of 1990. While explaining the reasons underlying the amendment, Circular No. 572, dt. 3rd Aug., 1990 [(1990) 87 CTR (St) 1] of the Board noted that at that point in time the incentive ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at an exporter is allowed to apply for credit which is computed as a specified percentage of the FOB value of exports made in freely convertible currency. The export products and the rates governing the grant of DEPB credit are notified. The DEPB credit and items imported against it are made freely transferable under para 7.16. The duty credit under the scheme is calculated by taking into account what is described as a deemed import content of the export product in accordance with standard input output norms and the basic customs duty payable on such deemed import. In other words, the credit which is made available to an exporter under the DEPB Scheme represents a specified percentage of the FOB value of the goods exported. The goods which are exported need not, as a matter of fact, necessarily utilize imported inputs. The policy calculates a deemed import content on the basis of standard input output norms and a credit is made available to the exporter. The credit need not be utilized by the exporter himself nor for that matter is it necessary for the exporter to utilize the goods that may be imported against the utilization of the DEPB credit. The DEPB credit is transferable. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fits of the business of the assessee and the result constitutes export profits. However, where an assessee carries on the business of export of trading goods, cl. (b) defines export profits to be the export turnover in respect of such trading goods which is to be reduced by the direct and indirect costs attributable to the export. Profits of business:- 16. In the application of the formula to a manufacturer exporter, cl. (a) refers to the profits of the business. The expression profits of the business is elucidated in Expln. (baa) to s. 80HHC. Explanation (baa) is to the following effect:- '(baa) 'Profits of the business' means the profits of the business as computed under the head 'Profits and gains of business or profession' as reduced by:- (1) ninety per cent of any sum referred to in cls. (iiia), (iiib), (iiic), (iiid) and (iiie) of s. 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 situated outside India.' 17. The expression 'profits of the business' means profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y profit on the transfer of the DEPB Scheme being the Duty Remission Scheme under the export and import policy formulated and announced under s. 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 import policy formulated and announced under s. 5 of the Foreign Trade (Development and Regulation) Act, 1992 (22 of 1992).' 20. Clause (iiid) contemplates that any profit on the transfer of the DEPB Scheme would be chargeable to income-tax as a business profit. The circumstances in which the amendment was brought about would have a bearing on the subject-matter of the controversy in the present case and will therefore need some elaboration. In P and G Enterprises (supra) a Bench of the Tribunal at Delhi considered the case of an exporter to whom a credit was available under the DEPB Scheme. The DEPB credit was transferred and the receipts were shown as business receipts under s. 28(iiia). The AO held that the receipts upon the transfer of the DEPB entitlement fell for classification under s. 28(iv) and he excluded ninety per ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d to in cls. (iiia), (iiib) and (iiic) of s. 28. the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee. The second and third provisos to sub-s. (3) are of some significance in the present case and they read as follows:- '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 cl. (a) or cl. (b) or cl. (c) of this sub-section or after giving effect to the first proviso, as the case may be, shall be further increased by the amount which bears to ninety per cent of any sum referred to in cl. (iiid) or cl. (iiie) as the case may be, of s. 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee:- Provided also that in the case of an assessee having export turnover exceeding rupees ten crores during the previous year, the profits computed under cl. (a) or cl. (b) or cl. (c) of this sub-section or after giving effect to the first proviso, as the case may be, shall be further increased by the amount which bears to ninety per cent of any sum referred to in cl. (ii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the expression profit means the difference between the sale consideration realized from the transfer of the DEPB receipts and the face value of the DEPB credit that has been transferred. The Tribunal, while accepting the contention of the assessee has also held that it is only this difference which would fall within the purview of cl. (iiid) and that the DEPB credit would fall within the purview of cl. (iiib). [Clause (iiib) deals with a cash assistance received or receivable under any scheme of the Government of India] 25. Export incentives, such as import licenses, cash assistance, duty drawback, DEPB credit, or duty-free replenishment certificates are all intended to encourage exports. The object of these incentives is to neutralize the incidence of customs duty on the import content of the export product. Under the IT Act, 1961 not only the profits on sale of an import licence and profits on transfer of DEPB credit/DFRC, but also the duty drawback received by an assessee are considered as profits of business. Duty drawback is nothing but receiving back the amount of duty actually paid by the assessee. Similarly, the DEPB credit is a credit to be utilized in paying the cust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... controversy by inserting a specific clause, namely cl. (iiid) in s. 28 to the effect that profits on transfer of DEPB i.e., the amount received on transfer of DEPB is income chargeable to tax under the head 'Profits and gains of business and profession'. As regards the deduction under s. 80HHC, the legislature substituted Expln. (baa) in s. 80HHC so as to exclude 90 per cent of the profits received on transfer of DEPB from the profits of business for the purposes of s. 80HHC and inserted the second and third provisos to s. 80HHC(3). By the second proviso it was provided that in the case of an assessee having an export turnover not exceeding Rs. 10 crores, the profits computed under s. 80HHC(3) shall be increased by 90 per cent of the sum referred to in s. 28(iiid). By the third proviso it was provided that in the case of an assessee having an export turnover exceeding Rs. 10 crores, the profits computed under s. 80HHC(3) shall be increased by 90 per cent of the sum referred to in s. 28(iiid) subject to the two conditions set out therein. 29. Admittedly, in the assessment year in question, the assessee had an export turnover exceeding Rs. 10 crores and did not fulfil the condit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of DEPB as well as the amount received in excess of the DEPB would constitute profits of business under s. 28(iiid) and merely because, a part of such profits of business (face value) was offered to tax in the year in which the credit accrued to the assessee would not be a ground to hold that such profit was not covered under s. 28(iiid). Where the face value of the DEPB credit is offered to tax as business profits under s. 28(iiid) in the year in which the credit accrued to the assessee, then any further profit arising on transfer of DEPB credit would be taxed as profits of business under s. 28(iiid) in the year in which the transfer of DEPB credit took place. Therefore, the argument of the assessee that if the face value of the DEPB credit is held to be covered under s. 28(iiid), it would amount to double taxation is without any merit. 31. There is another perspective from which the issue can be looked at. The DEPB credit to which an exporter is entitled is a form of an export incentive. The Supreme Court in K. Ravindranathan Nair's case (supra) has held that all the incomes which fall within cls. (iiia) to (iiie) of s. 28 are 'incentive incomes'. As an incentive, that is m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d not the face value of the DEPB. The entire approach of the Tribunal is with respect to misconceived and unsustainable. The Finance Minister sought to introduce cl. (iiid) in s. 28 in view of the decision of the Delhi Bench of the Tribunal in the case of P and G Enterprises (supra). The dispute in that case related to taxing the entire amount received on the transfer of the DEPB credit and not the amount that was received in excess of the face value of the DEPB credit. As a matter of fact in that case the assessee had claimed that the entire receipt on the transfer of the DEPB credit including the face value of the credit as profits under s. 28(iiia). The Tribunal in that case held that the entirety of the amount would be covered by s. 28(iv). However, the view of the Tribunal was that since Expln. (baa) in s. 80HHC did not envisage the exclusion of profits covered by s. 28(iv) such profits could not be excluded while computing the deduction under s. 80HHC. Hence, there was no dispute in considering the entirety of the receipts on the transfer of the DEPB credit as profits of business. The dispute was only in not treating the receipts by way of transfer of the DEPB credit as expor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss profits and not export profits. Exporters who transfer the DEPB credit and make a profit cannot be placed on par with those exporters who utilize the credit for paying the customs duty on the imported goods; (iv) the fact that Parliament did not consider the amount received on the transfer of the DEPB to be export profit cannot be a ground to hold that the receipts on the transfer of DEPB credit are not business profits. Counsel appearing on behalf of the assessee submits that the entire amount received on the transfer of the DEPB credit is business profit, but it was contended that what is included in s. 28(iiid) is the amount received on the transfer of the DEPB credit in excess of the face value of the DEPB and the amount received to the extent of the face value of the DEPB would be covered under s. 28(iiib). There is no merit in this contention because:- (a) the DEPB credit was not in existence when s. 28(iiib) was inserted by the Finance Act of 1990. DEPB credit was introduced w.e.f. 1st April, 1997 which was after the insertion of cl. (iiib) in s. 28; (b) s. 28(iiib) refers to cash assistance (by whatever name called) received by the assessee from the Governmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ondhi and Co. (India) (P) Ltd., Jalandhar, the issue raised in these appeals of the assessee, namely, M/s Kohinoor International, Jalandhar has also been decided against the assessee and in favour of the Revenue. ITA Nos. 51 and 52/Asr/2009:- 9. Now, we shall take up the cases of the assessee, namely, M/s Niranjan Rice Exports (P) Ltd., Jalandhar, pertaining to the asst. yrs. 2003-04 and 2004-05. 9.1 In these appeals, the learned counsel for the assessee. Shri J.S. Bhasin, advocate, has reiterated the arguments and contentions put forth by Shri Sandeep Vijh, chartered accountant in the case of M/s F.C. Sondhi and Co. (India) (P) Ltd., Jalandhar, which have already been narrated above in this order. Besides these arguments, the learned counsel for the assessee submitted that the Hon'ble Punjab and Haryana High Court has remitted this matter back to the Tribunal for fresh decision in accordance with law, which means that the matter is wide open before the Tribunal for fresh decision and while deciding this issue, the contentions raised by the assessee are to be considered. He further submitted that the decision of the Hon'ble Bombay High Court in the case of CIT vs. Kalpa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 'ble Bombay High Court is to be followed by this Bench. Further merely because the SLP has been admitted by the Hon'ble Supreme Court against the decision of the Hon'ble Bombay High Court, that merely by itself is not sufficient not to follow the decision of the Hon'ble Bombay High Court at this stage, in as much as, the decision of the Hon'ble Bombay High Court has not been stayed by the Hon'ble Supreme Court. Thus, these contentions of the assessee are rejected. 12. In the result, the appeals filed by the assessee, namely, M/s Niranjan Rice Export (P) Ltd., Jalandhar, are also decided against the assessee and in favour of the Revenue after following the view taken by the Hon'ble Bombay High Court in the case of CIT vs. Kalpataru Colours and Chemicals (supra). ITA Nos. 53 and 54/Asr/2009:- 13. Coming to the case of the assessee, namely, M/s Raghu Exports, Jalandhar, we find that the issue involved in these appeals is identical based on same set of points and contentions of both the parties. Both the parties have submitted that the issue involved in these cases is quite identical to that of the case of M/s F.C. Sondhi and Co. (India) (P) Ltd., Jalandhar. However, the le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... andhar. Therefore, this decision passed in the case of M/s F.C. Sondhi and Co. (India) (P) Ltd., Jalandhar shall apply to these appeals also. However, in the case of M/s GDPA Fastners, Jalandhar, the learned counsel for the assessee has relied upon one more decision of the Hon'ble Supreme Court of India in the case of Yasha Overseas vs. CST and Anr. (2008) 17 VST 182 (SC) explaining the scope of duty entitlement pass book (DEPB). However, this case is of no help to the assessee, in as much as, this aspect of the matter has been elaborately discussed and analysed by the Hon'ble Bombay High Court in the case of CIT vs. Kalpataru Colours and Chemicals (supra). The issue involved in these appeals, which have been remitted back by Hon'ble Punjab and Haryana High Court to the Tribunal for fresh decision in accordance with law is decided against the assessees and in favour of the Revenue. 17. Before parting with this order, we would like to deal with one more contention of the assessees. In some of the cases, the learned counsel of the assessees has pointed out that the AO while making a fresh assessment in pursuance to the Tribunal's earlier order remitting the matter back to the fil ..... X X X X Extracts X X X X X X X X Extracts X X X X
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