TMI Blog2023 (4) TMI 420X X X X Extracts X X X X X X X X Extracts X X X X ..... wback claims, the assessee shall not be entitled to the deductions under Section 80-IB as such income cannot be said to be an income derived from industrial undertaking and even otherwise as per Section 28(iiid) and (iiie), such an income is chargeable to tax. In view of the above and for the reasons stated above, the High Court has rightly held that the respondent assessee is not entitled to the deductions under Section 80-IB on the amount of DEPB as well as Duty Drawback Schemes. We hold that on the profit earned from DEPB / Duty Drawback Schemes, the assessee is not entitled to deduction under Section 80-IB of the Act, 1961. Any contrary decision of any High Court is held to be not good law. Decided in favor of the Revenue. - CIVIL APPEAL NO. 4822 OF 2022 (@SLP (C) NO. 17539 OF 2016) - - - Dated:- 10-4-2023 - M.R. SHAH And B. V. NAGARATHNA , JJ. For the Appellant : Mr. Gautam Narayan, AOR For the Respondent : Mr. Balbir Singh, A.S.G. Mr. Raj Bahadur Yadav, AOR Mr. Shashank Bajpai, Adv. Mr. Shyam Gopal, Adv. Mr. Siddhant Kohli, Adv. Chinmayee Chandra, Adv. Mr. Adit Khorana, Adv. Ms. Monica Benjamin, Adv. JUDGMENT M. R. SHAH, J. 1. Feeling aggr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Commissioner disallowing the deductions claimed under Section 80-IB of the Act, 1961. The impugned judgment and order passed by the High Court is the subject matter of the present appeal. 3. Learned counsel appearing on behalf of the assessee has heavily relied upon the decision of this Court in the case of Commissioner of Income Tax Vs. Meghalaya Steels Limited, (2016) 6 SCC 747 : (2016) 383 ITR 217 (SC), 3.1 It is submitted that the meaning of derived from under Section 80-IB as laid down in Liberty India (supra) has been widened by this Hon ble Court in the case of Meghalaya Steels Limited (supra). 3.2 It is further submitted that the conclusion of Liberty India (supra) is based on the finding that derived from under Section 80-IB requires a first degree connection with the business of the industrial undertaking whereas the source of DEPB / Duty Drawback are incentives given under the Duty Exemption Remission Scheme / Section 75 of the Customs Act, 1962. That applying the test of first degree , this Court in the case of Liberty India (supra) held that receipts from DEPB / Duty Drawback cannot be deducted under Section 80-IB. 3.3 It is next submitted that, how ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sonance with the view taken earlier in the case of B. Desraj Vs. Commissioner of Income Tax, Salem, (2010) 14 SCC 510, which held that the Duty Drawback was in the nature of cash assistance under Section 28(iii)(b). 3.7 It is next contended that in the case of Topman Exports (supra), it is held that the DEPB is assistance given by the Government to an exporter to pay customs duty on its imports and it is receivable once exports are made and an application under the DEPB Scheme is made. That this Court has also held that DEPB also has a cost element in so much as the cost of acquiring it is not nil because it is acquired by paying customs duty on the import content of the export product. It is submitted that the decision of this Court in the case of Topman Exports (supra) has been subsequently followed in the cases of ACG Associated Capsules Private Limited Vs. Commissioner of Income Tax, Central-IV, Mumbai (2012) 3 SCC 321; Vikas Kalra Vs. Commissioner of Income Tax VII, New Delhi, (2012) 3 SCC 611 and Nissan Export Vs. Commissioner of Income Tax, (2014) 14 SCC 152. 3.8 It is submitted that, therefore, and in view of the development of law in Meghalaya Steels Limited (supra ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... itted that Section 80-IB provides for deductions in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings. That this Section applies to the following industrial undertakings which are eligible for deduction under the said Section:- a) Small scale industries into manufacturing and production b) Undertaking in industrially backward state and North-Eastern Region c) Ship d) Hotels e) Cold storage plants and cold chains f) Mineral oil and natural gas g) Housing projects h) Scientific research and development i) Processing, preservation and packaging of food items j) Multiplex theatre k) Convention centre l) Hospitals in rural and specified areas 4.4 It is next submitted that as per the language used in Section 80-IB with regard to calculating the deduction, the deduction would be applicable on any profits and gains derived from any business referred to in included in the gross total income of the assessee. That the most important thing to be considered while interpreting the said section is that the words used are derived from and not attributable to . That the words attri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hese subsidies directly affect the cost of manufacturing, they have a direct nexus between the profits and gains of the undertaking. Since these subsidies have a direct nexus, they can be said to be derived from the industrial undertaking. It is submitted that though in the said decision, this Court has not held the decision in the case of Liberty India (supra) to be bad in law, in para 20, this Court has also observed that since if there is no export, there is no DEPB entitlement. Therefore, its relation to manufacture of a product and/or sale within India is not proximate or direct but is one step removed. That it is observed that the object behind the DEPB entitlement, as has been held by this Court, is to neutralise the incidence of customs duty payment on the import content of the export product. In such a scenario, it cannot be said that such duty exemption scheme is derived from profits and gains made by the industrial undertaking or business itself. It is submitted that, therefore, in light of the above, the decision in the case of Meghalaya Steels Limited (supra) shall not be applicable to the present matter as it pertains to the above-mentioned subsidies only. It is next ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings. (1) Where the gross total income of an assessee includes any profits and gains derived from any business referred to in sub-sections (3) to (11), (11-A) and (11- B) (such business being hereinafter referred to as the eligible business), 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 from such profits and gains of an amount equal to such percentage and for such number of assessment years as specified in this section. (2) This section applies to any industrial undertaking which fulfils all the following conditions, namely: (i) it is not formed by splitting up, or the reconstruction, of a business already in existence: Provided that this condition shall not apply in respect of an industrial undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such industrial undertaking as is referred to in Section 33-B, in the circumstances and within the period specified in that section; ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... industrial undertaking for a period of ten consecutive assessment years (or twelve consecutive assessment years where the assessee is a cooperative society) beginning with the initial assessment year subject to the fulfilment of the following conditions, namely: (i) it begins to manufacture or produce, articles or things or to operate such plant or plants at any time during the period beginning from the 1st day of April, 1991 and ending on the 31st day of March, 1995 or such further period as the Central Government may, by notification in the Official Gazette, specify with reference to any particular undertaking; (ii) where it is an industrial undertaking being a small-scale industrial undertaking, it begins to manufacture or produce articles or things or to operate its cold storage plant not specified in sub-section (4) or sub-section (5) at any time during the period beginning on the 1st day of April, 1995 and ending on the 31st day of March, 2002. (4) The amount of deduction in the case of an industrial undertaking in an industrially backward State specified in the Eighth Schedule shall be hundred per cent of the profits and gains derived from such industrial ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hereafter, twenty-five per cent (or thirty per cent where the assessee is a company) of the profits and gains of an industrial undertaking: Provided that the total period of deduction shall not exceed ten consecutive assessment years or where the assessee is a cooperative society, twelve consecutive assessment years: Provided further that the industrial undertaking begins to manufacture or produce articles or things or to operate its cold storage plant or plants at any time during the period beginning on the 1st day of October, 1994 and ending on the 31st day of March, 2004; (ii) hundred per cent of the profits and gains derived from an industrial undertaking located in a backward district of category B for three assessment years beginning with the initial assessment year and thereafter, twenty-five per cent (or thirty per cent where the assessee is a company) of the profits and gains of an industrial undertaking: Provided that the total period of deduction does not exceed eight consecutive assessment years (or where the assessee is a cooperative society, twelve consecutive assessment years): Provided further that the industrial undertaking begins to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eyond the first degree nexus between profits and the industrial undertaking. Thus, it is observed and held that duty drawback receipts / DEPB benefits do not form part of the net profits of eligible industrial undertakings for the purpose of Section 80-IB of the Act, 1961. The relevant discussions are in paragraphs 24, 28 to 36, 38, 39, 41, 43 and 45, which are as under:- 24. Before analysing Section 80-IB, as a prefatory note, it needs to be mentioned that the 1961 Act broadly provides for two types of tax incentives, namely, investment-linked incentives and profit-linked incentives. Chapter VI-A which provides for incentives in the form of tax deductions essentially belong to the category of profit-linked incentives . Therefore, when Sections 80-IA/80-IB refers to profits derived from eligible business, it is not the ownership of that business which attracts the incentives. What attracts the incentives under Sections 80-IA/80-IB is the generation of profits (operational profits). XXXXXXXX 28. In the present batch of cases, the controversy which arises for determination is: whether DEPB credit/duty drawback receipt comes within the first degree sources? 29. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b-section (1) only to the extent of profits derived from such industrial undertaking after specified date(s). Hence, apart from eligibility, sub-section (1) purports to restrict the quantum of deduction to a specified percentage of profits. This is the importance of the words derived from industrial undertaking as against profits attributable to industrial undertaking . 35. DEPB is an incentive. It is given under the Duty Exemption Remission Scheme. Essentially, it is an export incentive. No doubt, the object behind DEPB is to neutralise the incidence of customs duty payment on the import content of export product. This neutralisation is provided for by credit to customs duty against export product. Under DEPB, an exporter may apply for credit as percentage of FOB value of exports made in freely convertible currency. Credit is available only against the export product and at rates specified by DGFT for import of raw materials, components, etc. DEPB credit under the Scheme has to be calculated by taking into account the deemed import content of the export product as per the basic customs duty and special additional duty payable on such deemed imports. 36. Therefore, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... awback, DEPB benefits, rebates, etc. cannot be credited against the cost of manufacture of goods debited in the profit and loss account for purposes of Sections 80- IA/80-IB as such remissions (credits) would constitute independent source of income beyond the first degree nexus between profits and the industrial undertaking. XXXXXXXX 45. In the circumstances, we hold that duty drawback receipt/DEPB benefits do not form part of the net profits of eligible industrial undertaking for the purposes of Sections 80- I/80-IA/80-IB of the 1961 Act. The appeals are, accordingly, dismissed with no order as to costs. 7.5 Prior thereto, the treatment of profits and gains derived from industrial undertakings for the purpose of determining tax liability came up for consideration before this Court in the case of Sterling Foods, Mangalore (supra), which was followed by this Court in the case of Liberty India (supra). In the case of Sterling Foods, Mangalore (supra), in paragraph 7 and 13, it is observed and held as under:- 7. The question, therefore, was whether the income derived by the assessee by the sale of the import entitlements was profit and gain derived from its in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reunder, the assessee is entitled to import entitlements, which it can sell. The sale consideration therefrom cannot, in our view, be held to constitute a profit and gain derived from the assessee's industrial undertaking. 7.6 Therefore, following the law laid down by this Court in the case of Sterling Foods, Mangalore (supra) and Liberty India (supra) as such, no error has been committed by the High Court in holding that on the profit from DEPB and Duty Drawback claims, the assessee shall not be entitled to the deductions under Section 80-IB as such income cannot be said to be an income derived from industrial undertaking and even otherwise as per Section 28(iiid) and (iiie), such an income is chargeable to tax. 7.7 Insofar as reliance placed by the learned counsel for the assessee upon the subsequent decision of this Court in the case of Meghalaya Steels Limited (supra) is concerned, at the outset, it is required to be noted that in the case of Meghalaya Steels Limited (supra), it was a case of three subsidies, namely a) Transport Subsidy, b) Interest Subsidy, and c) Power Subsidy and in that context this Court observed and held that since these subsidies directly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... did not disapprove of the decision of this Court in the case of Liberty India (supra). Even in the case of Meghalaya Steels Limited (supra), this Court did not consider the earlier decision in the case of Sterling Foods, Mangalore (supra). Thus, the decision of this Court in the cases of Liberty India (supra) and Sterling Foods, Mangalore (supra), which as such are on DEPB / Duty Drawback Schemes clinch the issue at hand. It cannot be said that the decision taken in the case of Meghalaya Steels Limited (supra) is contrary to the decisions in the case of Sterling Foods, Mangalore (supra) and Liberty India (supra). On the contrary, the observations made in paragraph 20 can be said to be in favour of the Revenue and against the assessee. 8. In view of the above and for the reasons stated above, the High Court has rightly held that the respondent assessee is not entitled to the deductions under Section 80-IB on the amount of DEPB as well as Duty Drawback Schemes. We hold that on the profit earned from DEPB / Duty Drawback Schemes, the assessee is not entitled to deduction under Section 80-IB of the Act, 1961. Any contrary decision of any High Court is held to be not good law. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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