TMI Blog2011 (8) TMI 1106X X X X Extracts X X X X X X X X Extracts X X X X ..... of 2010 1565 of 2010 1007 of 2008 1171 of 2008 1238 of 2010 1318 of 2010 1321 of 2008 1439 of 2008 1244 of 2010 1332 of 2010 MR MR BHATT, SR. ADV WITH MRS MAUNA M BHATT for Appellant(s) MR SN SOPARKAR, SR. ADV. WITH MRS SWATI SOPARKAR MS BHOOMI THAKORE, MR JP SHAH WITH MR MANISH J SHAH, MR RK PATEL, MR DEEPAK SHAH FOR MR TEJ SHAH AD MR TUSHAR HEMANI for Opponent(s) ORAL JUDGMENT (Per : HONOURABLE MR.JUSTICE AKIL KURESHI) 1. This group of appeals involves common question of law. In all materials aspects, facts are similar. These appeals, therefore, have been heard together and are being disposed of by this common judgment. 2. Central controversy involved is as to what extent the benefit of DEPB upon sale of credit by the assessee be eligible for deduction under section 80HHC of the Income Tax Act, 1961. For the purpose of this judgment, we may notice the facts as arising in Tax Appeal No.978/08. 3. Respondent assessee is a manufacturer-exporter. For the year assessment year 2003-04, the assessee filed return of income on 28th November 2003 showing total income of ₹ 1,79,80,000/-. The assessee also claimed deduction under section 80HHC of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ppeals relate to the said assessment year, but in so far as relevant statutory provisions are concerned, there is no material change in different tax appeals. (ii) That as in Tax Appeal No.978 of 2008, all assessees had, during the previous year under consideration, turn over of more than ₹ 10 crores; and (iii) that all cases concern the sale of DEPB credit by assessees and not retention thereof by the assessee concerned. 7. In the above set of circumstances, we adopt the substantial question of law which was framed by the order dated 2.4.2009 while admitting Tax Appeal No.978 of 2008 and certain other connected appeals, in all these tax appeals, which reads as under: Whether the Appellate Tribunal was right in holding that while computing the profit of the business under Explanation (baa) of Section 80HHC, 90% of the profits on transfer of DEPB should be excluded, not the total amount received by he assessee ? 8. Learned Senior Advocate Shri Manish Bhatt for the Revenue submitted that duty entitlement scheme is formulated under the Exim policy of the Government of India. The face value of DEPB benefit cannot be treated as its notional cost. Section 28(iiid) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a) (ITA No.873 of 2010). 9. On the other hand, learned Senior Advocate Shri Soparkar, leading the arguments on behalf of the assessees contended that the object of DEPB scheme is to neutralize the customs duty on the imported inputs used in export product which benefit is directly related to the export profit. Relying on the decision in the case of J.K.Industries Ltd. v. Union of India, 297 ITR 176 (SC), the counsel contended that on the matching principle, benefit is required to be given to the assessee for deduction under section 80HHC of the Act. Counsel further contended that language of section 28(iiid) permits no ambiguity. It would apply only in case of profit on transfer ofDEPB entitlement and the term 'profit' would notinclude the entire sale consideration. 9.1 Relying on the decision of the Apex Court in the case of Badridas Daga v. CIT, 34 ITR 10, counsel submitted that such benefits should be granted having regard to the accepted commercial practice and trading principles. 9.2 Counsel also relied on a decision of this Court in the case of CIT v. Kiranbhai H.Shelat, 235 ITR 635 wherein the term income as defined under section 2(24) of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessees who utilise the DEPB credits for their own use vis-a-vis those assessees who transfer such credits for consideration. Counsel submitted that particularly when an assessee transfers such credit in the year subsequent to the year when such DEPB entitlement accrued would be subject to double taxation vis- -vis the face value of such DEPB entitlement. 9.8 It was contended that the decision of the Apex Court in the case of K.Ravindranathan Nair (supra) does not deal with the present situation. The Apex Court was considering the income of the assessee through processing activity for the benefit of 80HHC deductions. 9.9 It was lastly contended that the provisions of section 80HHC should be construed liberally and in case of doubt, view in favour of the assesee should be adopted. 9.10 Counsel in addition to the decisions noted herein-above, also placed reliance on the decision of the Calcutta High Court in the case of GKW Ltd. v. CIT, dated 13th July 2011 rendered in IT Appeal No.1 of 2004 wherein the provisions of section 28(iiia) of the Act came up for consideration in context of section 115JA of the Act. 10. Counsel appearing for various other assessees, in addition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; (c) Where the export out of India is of goods or merchandise manufactured or processed by the assessee and of trading goods, the profits derived from such export shall, - (i) in respect of the goods or merchandise manufactured or processed by the assessee, be the amount which bears to the adjusted profits of the business, the same proportion as the adjusted export turnover in respect of such goods bears to the adjusted total turnover of the business carried on by the assessee; and (ii) In respect of trading goods, be the export turnover in respect of such trading goods as reduced by the direct and indirect costs attributable to export of such trading goods: Provided that the profits computed under clause (a) or clause (b) or clause (c) of this sub-section shall be further increased by the amount which bears to ninety per cent of any sum referred to in clause (iiia) (not being profits on sale of a licence acquired from any other person), and clauses (iiib) and (iiic), of section 28, the same proportion as the export turnover bears to the total turnover of business carried on by the assessee. Provided further that in the case of an assessee having export turnover not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny other establishment of the assessee situate outside India; Similarly section 28 of the Act relevant our purpose as it stood at the relevant time reads as under: 28. The following income shall be chargeable to income-tax under the head Profits and gains of business or profession -- (i) the profits and gains of any business or profession which was carried on by the assessee at any time during the previous year: xxx xxx (iiia) Profits on sale of a licence granted under the Imports (Control) Order 1955, made under the Imports and Exports (Control) Act, 1947 (18 of 1947); (iiib) Cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India; (iiic) Any duty of customs or excise repaid or repayable as drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules, 1971. (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); (iiie) any profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ofit of business forms part of the numerator and total turnover forms part of denominator by virtue of combined effect of explanation (baa) and (ba), the Legislative intent appears to be to vacuum out from considering 90% of such amount while working out deduction under section 80HHC. This shall have to be borne in mind while interpreting the relevant statutory provisions. To our mind, the entire controversy revolves around two central issues. First is the nature of DEPB entitlement and whether any cost can be attached to such entitlement in the hands of the assessee. Second question is with respect to interpretation of explanation (baa) to section 80HHC read with section 28(iiid) of the Act. 14. Addressing the first issue first, we may note that DEPB scheme is a part of Exim policy of the Government of India formulated under section 5 of the Foreign Trade (Development and Regulation) Act, 1992. The policy outlines the objectives as to include those to accelerate the country's transition to globally oriented vibrant economy with a view to derive maximum benefits from expanding global market opportunities and to stimulate sustained economic growth by pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rkets. Such assistance of the Government would increase profitability of the exporter. It would thus emerge that though the purpose of granting DEPB benefits is to neutralize the customs duty component in an imported component used in export product, nevertheless, it is in the form of duty waiver by the Government to encourage exports. DEPB scheme is a part of duty remission scheme formulated by the Government. 16. The term 'remission' as per Webster's Third New International Dictionary (Unabridged) means, cancellation or relinquishment of the whole or a part of a financial obligation, voluntary release of a debt or claim to a debtor or person liable to a creditor or claimant having legal capacity to alienate; relief from a forfeiture or a penalty. The term 'remission' has been explained in Advanced Law Lexicon by P.Ramanatha Aiyar, 3rd Edition as the action of remitting or giving up partially or wholly a tax, debt, penalty etc. In the context to duty, it is stated that the expression 'remission or adjustment of duty' would have normal meaning of expression and under the circumstances, be a reduction or even exemption of duty which would otherwise be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fits along with Duty Drawback benefits came up for consideration before the Apex Court in the case of Liberty India (supra) wherein it was observed that DEPB is an incentive. It is given under duty exemption remission scheme. Essentially it is an export incentive. It was further observed that the duty drawback/DEBP benefits, rebates etc. cannot be credited against the cost of manufacture of goods debited in the profit and loss account for the purpose of section 80-IA or 80-IB of the Act and such remissions would constitute independent source of income beyond the first degree nexus between profits and the industrial taking. The Apex Court noticed that such benefits are incentive profits not profits derived from eligible business under section 80-IB of the Act. 21. Combined reading of the Government of India policy providing for DEPB benefits, the decisions of the Bombay High Court and the Apex Court, noted above, and our observations with respect to the nature of DEBP benefits would lead us to conclude that the face value of the DEPB credit cannot be taken to be its cost of acquisition in the hands of the assessee-exporter. 22. With the above clarity, we may advert to the stat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... such credit which can qualify to be the profit. In other words, their case is that the face value of DEPB credit should be the cost in the hands of the assessee and if such credits are sold for consideration higher than the face value, difference thereof would be the profit as envisaged in clause (iiid) of section 28. 25. We have already held that the face value of the DEPB credit cannot be treated as cost of cquisition in the hands of the assessee. We have examined the nature of duty waiver under the Scheme. We find that such waiver being in the nature of duty remission, it would be at no cost to the assessee and that therefore, the term profit used in clause (iiid) to section 28 must have reference to the entire sale consideration and not just the excess over the face value as contended by the assessees. 26. This issue came up for consideration before the Bombay High Court in the case of Kalpataru Colours and Chemicals (supra). It was a case wherein, a Special Bench of the Tribunal in case of Topman Exports v. ITO (Mumbai), 318 ITR 87 (AT)(Mumbai) had in a detailed judgment come to the conclusion that the sum referred to in clause (iiid) to section 28 must be understood a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ancillary profits of such undertakings. The Apex Court further observed as under: 22. The cost of purchase includes duties and taxes (other than those subsequently recoverable by the enterprise from taxing authorities), freight inwards and other expenditure directly attributable to the acquisition. Hence trade discounts, rebate, duty drawback, and such similar items are deducted in determining the costs of purchase. Therefore, duty drawback, rebate etc. should not be treated as adjustment (credited) to cost of purchase or manufacture of goods. They should be treated as separate items of revenue or income and accounted for accordingly (see : page 44 of Indian Accounting Standards and GAAP by Dolphy D'souza). Therefore, for the purposes of 23 AS-2, Cenvat credits should not be included in the cost of purchase of inventories. Even Institute of Chartered Accountants of India (ICAI) has issued Guidance Note on Accounting Treatment for Cenvat/Modvat under which the inputs consumed and the inventory of inputs should be valued on the basis of purchase cost net of specified duty on inputs (i.e., duty recoverable from the Department at later stage) arising on account of rebates ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... would not include the receipts on transfer of DEPB credits. The Tribunal held and observed as under. 8. At this stage, we would like to mention that at the time when the legislature inserted clause (baa) in the Explanation to section 80HHC(4B), clause (iv) of section 28 was already on the Statute book in addition to clause (iiia) to (iiic) of section 28. That clearly means that non inclusion of clause (iv) of section 28 in the first category referred to above was deliberate one on the part of legislature. Had the legislature intended to exclude 90 per cent of sum referred to in section 28(iv), it could easily include the same in the aforesaid first category. Thus, deliberate omission to include section 28(iv) in the first category clearly suggests that the legislature never intended to exclude 90% of the aforesaid sum. xxxx 10. In view of the above discussion, it is held that 90% of DEPB receipts assessable under section 28(iv) cannot be excluded from the profits of business as computed under the head Profits and gains of business or profession for the purpose of computing profits of business under clause (baa) of the Explanation to section 80H ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 31. In English Courts as well as in India, previously, strong view prevalent was that the intention of the Parliament which has passed the Act is not to be gathered from the Parliamentary history of the statute. This was on the basis that the Act passed by the Parliament is a collective decision and the speech by a Minister or an individual in the House of Parliament would be the opinion of an individual and therefore such statement or even the reports of the Committees formed for drafting the Bill would not provide good guide for gathering the Legislative intent. However, later on there has been much relaxation in such approach. We need not, however, trace the judicial pronouncements on these issues, suffice it to note that we have decisions of the Apex Court which have put considerable importance on the Finance Ministers speeches leading to statutory changes. In the case of K.P.Varghese v. I.T.O., 131 ITR 597, the Apex Court observed that the speeches made by the Members of the Legislature on the floor of the House when the Bill has been debated are inadmissible for the purpose of interpreting the statutory provisions, but the speech made by the mover of the Bill explain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d down therein, mischief rule can be safely applied in the present case. Prior to introduction of clause (iiid) to section 28, Delhi Bench of the Income Tax Appellate Tribunal, in the case of P G Enterprises Ltd. (supra) had discarded the Revenue s proposition that 90 percent of the DEPB benefits of sale of the credits should be from computation of business profit under clause (baa) to explanation to section 80HHC. In the background of this position, as explained by the Finance Minister in his speech on the floor of the Parliament, clause (iiid) was introduced. From the Finance Minister's speech it clearly emerges that to neutralize this decision of the Tribunal, section 28(iiid) was introduced and corresponding changes were also made in explanation (baa) to section 80HHC. Significantly these changes were made with retrospective effect. Looked from this angle, purpose for which the provision was made, the position before the amendment was introduced and the reasons for introduction of the amendment would clearly advance the interpretation of the Revenue that clause (iiid) of section 28 of the Act would cover the entire sale proceeds of DEPB credit when tr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 crores. 40. The decision in the case of Calcutta High Court in the case of GKW Ltd. v. CIT, West Bengal, in IT Appeal No.1 of 2004 was rendered in an entirely different factual background. It was a case wherein the Tribunal held that a sum of ₹ 228.34 lacs, which represented the notional figure and not the income accrued to the assessee during the previous year relevant to the assessment year in question, would be the income of the assessee while computing the book profits under section 115J of the Act. It was on this background, the Calcutta High Court has observed as under: 10A. If we compare the language employed in sub-section (iiia) with which we are concerned in the present case with the next two sub-sections, i.e. (iiib) and (iiic) as indicated above, it will appear that while in case of sub-section (iiia, it is the profit on actual sale of licence that will be chargeable to tax but in the cases covered by sub-sections (iiib) or (iiic), cash assistance (by whatever name called) received or receivable by any person against export or any duty of customs or excise repaid or repayable as drawback to any person against exports are chargeable to tax. Thus, the legis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e is any benefit given free of cost by way of a gift. To call a grant based on a liability a gift will be a misnomour because the essence of a gift is that it is a gratuitous transfer. Gifts are always gratuitous while grants are upon some consideration or equivalent. The Bench, therefore, held that raw material and spares supplied to the assessee were not gift, but conditions were attached to such supply which was fixed at the maximum return on 10 per cent of the cost of production which would include cost of raw material used for the end product. The decision in the case Kheda District (supra) being based on entirely different set of facts would not apply in the present case. 42. In the case of Groz-Beckert Saboo Ltd. (supra), the Apex Court had held that since raw materials and semi-finished needles are received by the assessee as capital assets and subsequently, they were transferred to business as part of its stock, the cost of the raw materials and semi-finished needles could not be said to be nil. We do not see any applicability of the said ratio in the present case. 43. Both sides presented before us the detailed working out of the accounts and the necessary accountin ..... X X X X Extracts X X X X X X X X Extracts X X X X
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