TMI Blog2012 (2) TMI 100X X X X Extracts X X X X X X X X Extracts X X X X ..... r JJ. JUDGMENT A. K. PATNAIK, J. Delay condoned. Leave granted in Special Leave Petitions. 2. These are appeals by way of special leave under Article 136 of the Constitution against the judgment and orders of the Bombay High Court holding that the entire amount received by an assessee on sale of the Duty Entitlement Pass Book (for short the DEPB ) represents profit on transfer of DEPB under Section 28(iiid) of the Income Tax Act, 1961 (for short the Act ) for the purpose of the computation of deduction in respect of profits retained for export business under Section 80HHC of the Act. 3. For appreciating the controversy between the parties, we will state the facts of only the lead case of M/s Topman Exports (hereinafter referred to as the assessee ). The assessee is a manufacturer and exporter of fabrics and garments. During the previous year relevant to the assessment year 2002-2003, the assessee sold the DEPB and DFRC (Duty Free Replenishment Certificate) which had accrued to the assessee on export of its products. The assessee filed a return for the assessment year 2002-2003 claiming a deduction of Rs.83,69,303/- under Section 80HHC of the Act. The Assessi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the Act in which the expression cash assistance is used, with the language of Section 28(iiia), (iiid) and (iiie) of the Act in which the expression profit is used and held that the words profit on transfer in Section 28 (iiid) and (iiie) of the Act would not represent the entire sale value of DEPB but the sale value of DEPB less the face value of the DEPB. With these reasons, the Tribunal set aside the orders of the Assessing Officer and the Commissioner of Income Tax (Appeals) and directed the Assessing Officer to compute the deduction under Section 80HHC of the Act accordingly. 5. This judgment of the Special Bench of the Tribunal was followed by the Tribunal in all the cases in appeal before us. Against the judgment and orders of the Tribunal, the Commissioner of Income Tax, Mumbai filed appeals in all the cases under Section 260A of the Act before the High Court and by the impugned orders the High Court disposed of the appeals in terms of the judgment delivered in Commissioner of the Income Tax vs. Kalpataru Colours and Chemicals (ITA(L) 2887 of 2009). In Commissioner of the Income Tax vs. Kalpataru Colours and Chemicals (supra), the High Court formulated the follo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat it will be clear from different provisions of the DEPB Scheme that the object of granting DEPB to an exporter is to neutralize the incidence of custom duties which has been incurred on the import component of the export product and this neutralization is achieved by grant of duty credit of the amount specified in the DEPB Scheme. They submitted that the Tribunal, therefore, was right in coming to the conclusion that there was a direct relation between the DEPB and the cost of inputs imported for manufacture of the export product. 7. Learned counsel for the appellants submitted that since DEPB was cash assistance receivable by a person against exports and was covered under clause (iiib) of Section 28 of the Act and it has a direct relation with the costs of the inputs imported by an exporter from manufacturer of the export product, the DEPB cannot form part of the profits on transfer of DEPB under Section 28(iiid) of the Act. They argued that as and when DEPB is transferred and the sale value realized on such transfer of DEPB is more than the face value of the DEPB, the difference between the sale value and face value of the DEPB will constitute profit on transfer of DEPB and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fer of DEPB and the entire sale proceeds of the DEPB represent the profits earned by the assessee on transfer of the DEPB. He argued that the findings of the Tribunal that there is a direct relation between DEPB and the costs incurred by the assessee for importing inputs for manufacture of export products is, therefore, not correct and the High Court was right in setting aside the findings of the Tribunal and in coming to the conclusion that the entire sale proceeds of DEPB represent the profits on transfer of DEPB within the meaning of clause (iiid) of Section 28 of the Act. 10. For appreciating the nature of the DEPB, paragraphs 4.37 and 4.42 of the Hand Book on DEPB issued by the Government of India and paragraphs 7.14, 7.15, 7.16 and 7.38 of the Export and Import Policy, 1997-2002 as notified by the Central Government in the Notification No.1(RE-99)/ 1997-2202 dated 31st March, 2000 are extracted hereinbelow: Hand Book on DEPB 4.37 Duty Entitlement Passbook Scheme (DEPB) The Policy relating to Duty Entitlement Passbook (DEPB) Scheme is given in Chapter- 4 of the Policy. The duty credit under the scheme shall be calculated by taking into account the deemed import co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he FOB value in free foreign exchange shall be converted into Indian rupees as per the authorized dealer s T/T buying rate, prevalent on the date of receipt of advance payment. (ii) The DEPB shall be initially issued with non transferable endorsement in such cases where realization has not taken place to enable the exporter to effect import for his own use. However, upon receipt of realization, the DEPB shall be endorsed transferable. In such cases where the applicant applies for DEPB after realization, the DEPB shall be issued with transferable endorsement. On a reading of the aforesaid paragraphs of the Hand Book on DEPB and the Export and Import Policy of the Government of India, 1997-2002, it is clear that the objective of DEPB scheme is to neutralize the incidence of customs duty on the import content of the export products. Hence, it has direct nexus with the cost of the imports made by an exporter for manufacturing the export products. The neutralization of the cost of customs duty under the DEPB scheme, however, is by granting a duty credit against the export product and this credit can be utilized for paying customs duty on any item which is freely importable. DEPB is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ss or Profession as an item separate from cash assistance under clause (iiib). The word profit means the gross proceeds of a business transaction less the costs of the transaction. To quote from Black s Law Dictionary (Fifth Edition): Profit. Most commonly, the gross proceeds of a business transaction less the costs of the transaction, i.e. net proceeds. Excess of revenues over expenses for a transaction; sometimes used synonymously with net income for the period. Gain realized from business or investment over and above expenditures. This Court in E.D. Sassoon Company Ltd. and Others v. Commissioner of Income-Tax, Bombay City (1954) 26 ITR 27 (SC) has quoted the following observations of Lord Justice Fletcher Moulton in The Spanish Prospecting Company Limited [(1911) I Ch. 92] on the meaning of the word profits : . Profits implies a comparison between the state of a business at two specific dates usually separated by an interval of a year. The fundamental meaning is the amount of gain made by the business during the year. This can only be ascertained by a comparison of the assets of the business at the two dates. Profits , therefore, imply a comparison of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the export products, but the exporter may not himself utilize the DEPB for paying customs duty but may transfer it to someone else and therefore the entire sum received on transfer of DEPB would be covered under clause (iiid) of Section 28. The High Court has failed to appreciate that DEPB represents part of the cost incurred by a person for manufacture of the export product and hence even where the DEPB is not utilized by the exporter but is transferred to another person, the DEPB continues to remain as a cost to the exporter. When, therefore, DEPB is transferred by a person, the entire sum received by him on such transfer does not become his profits. It is only the amount that he receives in excess of the DEPB which represents his profits on transfer of the DEPB. 16. The High Court has sought to meet the argument of double taxation made on behalf of the assessees by holding that where the face value of the DEPB was offered to tax in the year in which the credit accrued to the assessee as business profits, then any further profit arising on transfer of DEPB would be taxed as profits of business under Section 28(iiid) in the year in which the transfer of DEPB took place. Thi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... anding scheme of Section 80HHC of the Act. 18. The relevant provisions of Section 80HHC are quoted hereinbelow: Section 80HHC- Deduction in respect of profits retained for export business.-- [(1) Where an assessee, being an Indian company or a person (other than a company) resident in India, is engaged in the business of export out of India of any goods or merchandise to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, [a deduction to the extent of profits, referred to in sub-section (1B),] derived by the assessee from the export of such goods or merchandise: . (1B) For the purposes of sub-sections (1) and (1A), the extent of deduction of the profits shall be an amount equal to (i) eighty per cent thereof for an assessment year beginning on the 1st day of April, 2001; (ii) seventy per cent thereof for an assessment year beginning on the 1st day of April, 2002; (iii) fifty per cent thereof for an assessment year beginning on the 1st day of April, 2003; (iv) thirty per cent thereof for an assessment year beginning on the 1s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ributable to the customs duty was higher than the rate of credit allowable under the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme. Provided also that in the case of an assessee having export turnover exceeding rupees ten crores during the previous year, the profits computed under clause (a) or clause (b) or clause (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 clause (iiie) of section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee, if the assessee has necessary and sufficient evidence to prove that (a) he had an option to choose either the duty drawback or the Duty Free Replenishment Certificate, being the Duty Remission Scheme; and (b) the rate of drawback credit attributable to the customs duty was higher than the rate of credit allowable under the Duty Free Replenishment Certificate, being the Duty Remission Scheme. Explanation . For the purposes of this clause, rate of credit allowable means the rate of credit allowable under the Dut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r nature including any such receipts and (2) the profits of any branch, office, warehouse or any other establishment of the assessee situated outside India. Thus, ninety per cent of the DEPB which is cash assistance against exports and is covered under clause (iiib) of Section 28 will get excluded from the profits of the business of the assessee if such DEPB has accrued to the assessee during the previous year. Similarly, if during the same previous year, the assessee has transferred the DEPB and the sale value of such DEPB is more than the face value of the DEPB, the difference between the sale value of the DEPB and the face value of the DEPB will represent the profit on transfer of DEPB covered under clause (iiid) of Section 28 and ninety per cent of such profit on transfer of DEPB certificate will get excluded from profits of the business . But, where the DEPB accrues to the assessee in the first previous year and the assessee transfers the DEPB certificate in the second previous year, as appears to have happened in the present batch of cases, only ninety per cent of the profits on transfer of DEPB covered under clause (iiid) and not ninety per cent of the entire sale val ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dition of ninety per cent of the sums referred to in clause (iiid) of Section 28 only if the assessee has the necessary and sufficient evidence to prove that (a) he had an option to choose either the duty drawback or the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme; and (b) the rate of drawback credit attributable to the customs duty was higher than the rate of credit allowable under the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme. Therefore, if the assessee having export turnover of more than Rs.10 crores does not satisfy these two conditions, he will not be entitled to the addition of profit on transfer of DEPB under the third proviso to sub-section (3) of Section 80HHC. 22. The aforesaid discussion would show that where an assessee has an export turnover exceeding Rs.10 crores and has made profits on transfer of DEPB under clause (d) of Section 28, he would not get the benefit of addition to export profits under third or fourth proviso to sub-section (3) of Section 80HHC, but he would get the benefit of exclusion of a smaller figure from profits of the business under explanation (baa) to Section 80HHC of the Act and there is not ..... X X X X Extracts X X X X X X X X Extracts X X X X
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