Gujarat High Court
Commissioner vs Rinkesh on 2 April, 2009
Author: Akil Kureshi
Bench: Akil Kureshi
45/ 45 judgment TAXAP 507/10 IN THE HIGH COURT OF GUJARAT AT AHMEDABAD TAX APPEAL No. 507 of 2010 With TAX APPEAL No. 1004 of 2008 With TAX APPEAL No. 1040 of 2010 With TAX APPEAL No. 1173 of 2008 With TAX APPEAL No. 544 of 2009 With TAX APPEAL No. 979 of 2008 With TAX APPEAL No. 983 of 2008 With TAX APPEAL No. 1231 of 2010 With TAX APPEAL No. 1335 of 2010 With TAX APPEAL No. 1003 of 2008 With TAX APPEAL No. 1172 of 2008 With TAX APPEAL No. 1239 of 2010 With TAX APPEAL No. 1317 of 2010 With TAX APPEAL No. 543 of 2009 With TAX APPEAL No. 613 of 2010 With TAX APPEAL No. 764 of 2009 With TAX APPEAL No. 707 of 2010 With TAX APPEAL No. 1034 of 2010 With TAX APPEAL No. 1237 of 2010 With TAX APPEAL No. 1304 of 2010 With TAX APPEAL No. 1334 of 2010 With TAX APPEAL No. 1555 of 2010 With TAX APPEAL No. 1305 of 2010 With TAX APPEAL No. 1436 of 2008 With TAX APPEAL No. 1437 of 2008 With TAX APPEAL No. 1438 of 2008 With TAX APPEAL No. 1451 of 2008 With TAX APPEAL No. 1639 of 2009 With TAX APPEAL No. 1232 of 2010 With TAX APPEAL No. 19 of 2011 With TAX APPEAL No. 1002 of 2008 With TAX APPEAL No. 1169 of 2008 With TAX APPEAL No. 1 of 2009 With TAX APPEAL No. 1320 of 2008 With TAX APPEAL No. 1326 of 2008 With TAX APPEAL No. 1450 of 2008 With TAX APPEAL No. 612 of 2010 With TAX APPEAL No. 704 of 2010 With TAX APPEAL No. 775 of 2010 With TAX APPEAL No. 987 of 2010 With TAX APPEAL No. 1017 of 2010 With TAX APPEAL No. 1018 of 2010 With TAX APPEAL No. 1234 of 2010 With TAX APPEAL No. 1280 of 2010 With TAX APPEAL No. 1036 of 2010 With TAX APPEAL No. 1319 of 2010 With TAX APPEAL No. 978 of 2008 With TAX APPEAL No. 698 of 2010 With TAX APPEAL No. 988 of 2010 With TAX APPEAL No. 1093 of 2010 With TAX APPEAL No. 1274 of 2010 With TAX APPEAL No. 1291 of 2010 With TAX APPEAL No. 1566 of 2010 With TAX APPEAL No. 1691 of 2010 With TAX APPEAL No. 1041 of 2010 With TAX APPEAL No. 1306 of 2010 With TAX APPEAL No. 1316 of 2008 With TAX APPEAL No. 1446 of 2008 With TAX APPEAL No. 701 of 2010 With TAX APPEAL No. 1214 of 2010 With TAX APPEAL No. 1279 of 2010 With TAX APPEAL No. 1537 of 2010 With TAX APPEAL No. 1676 of 2010 With TAX APPEAL No. 1094 of 2010 With TAX APPEAL No. 1275 of 2010 With TAX APPEAL No. 1276 of 2010 With TAX APPEAL No. 1447 of 2008 With TAX APPEAL No. 1448 of 2008 With TAX APPEAL No. 1039 of 2010 With TAX APPEAL No. 1159 of 2010 With TAX APPEAL No. 1187 of 2010 With TAX APPEAL No. 1215 of 2010 With TAX APPEAL No. 1565 of 2010 With TAX APPEAL No. 1007 of 2008 With TAX APPEAL No. 1171 of 2008 With TAX APPEAL No. 1238 of 2010 With TAX APPEAL No. 1318 of 2010 With TAX APPEAL No. 1321 of 2008 With TAX APPEAL No. 1439 of 2008 With TAX APPEAL No. 1244 of 2010 With TAX APPEAL No. 1332 of 2010 For Approval and Signature: HONOURABLE MR.JUSTICE AKIL KURESHI HONOURABLE MS JUSTICE SONIA GOKANI ========================================================= 1 Whether Reporters of Local Papers may be allowed to see the judgment ? 2 To be referred to the Reporter or not ? 3 Whether their Lordships wish to see the fair copy of the judgment ? 4 Whether this case involves a substantial question of law as to the interpretation of the constitution of India, 1950 or any order made thereunder ? 5 Whether it is to be circulated to the civil judge ? ========================================================= COMMISSIONER OF INCOME TAX - I - Appellant(s) Versus RINKESH EXPORTS - Opponent(s) ========================================================= Appearance : 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) ========================================================= CORAM : HONOURABLE MR.JUSTICE AKIL KURESHI and HONOURABLE MS JUSTICE SONIA GOKANI Date : 10/08/2011 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 Rs.1,79,80,000/-. The assessee also claimed deduction under section 80HHC of the Act. The claim of the assessee for such deduction included consideration of Rs.1,54,67,000/- upon transfer of DEPB credit. The Assessing Officer was of the opinion that 90% of such sum had to be excluded for the purpose of deduction under section 80HHC of the Act. He framed assessment accordingly.
4. The assessee approached the CIT (Appeals), who confirmed the decision of the Assessing Officer, holding that the entire amount received by the assessee towards consideration on transfer of DEPB credits would be covered under section 28(iiid) of the Act. Ninety per cent of such amount, therefore, had to be excluded for the purpose of working out the deduction under section 80HHC of the Act. CIT(A) observed that the treatment to DEPB amount should be the same as that of duty draw back. In other words, the entire amount of DEPB credit would be covered under section 28(iiid) of the Act. CIT(A), was of the opinion that cost for acquiring the DEPB credit to the assessee was nil.
5. Assessee carried the issue in appeal before the Tribunal. The Tribunal in a detailed judgment considered various aspects including the interpretation of various clauses of section 28, and in particular, clause (iiid) of section 28 and its co-relation to section 80HHC of the Act. The Tribunal was of the opinion that face value of the DEPB would be the cost of its acquisition by the assessee. If the assessee sold such DEPB credit at a price higher than the face value, the difference would be the profit of the assessee which would be covered under section 28(iiid) of the Act. It is only this element which to the extent of 90 per cent be excluded for the purpose of working out 80HHC deduction. The Tribunal also referred to explanation (baa) to section 80HHC, by virtue of which, 90% of the income referred to in section 28(iiid) of the Act is to be excluded from the total turnover of the assessee for the purpose of working out 80HHC deduction. It is against this judgment of the Tribunal that the Revenue has approached this Court in this appeal. Other appeals arise out of similar background.
6. Material facts are common in all tax appeals. Three factors which are significant and over which we have based our conclusions are :-
that we are concerned with statutory provisions obtaining at the relevant time applicable to assessment year 2003-04. This is not to suggest that all tax appeals 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.
That as in Tax Appeal No.978 of 2008, all assessees had, during the previous year under consideration, turn over of more than Rs.10 crores; and 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 amoutn 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) of the Act uses the words "any profit on the transfer" of such DEPB credit which would include the entire sale consideration and not only the difference between face value and sale price. He further contended that DEPB entitlement is only an incentive to boost the export and is linked to the FOB value of the export. Even if the intention behind DEPB scheme is to neutralize the import duty on imported inputs used in export products, nevertheless, the same is in form of duty remission. He, therefore, contended that face value of the DEPB credit cannot be treated as the cost of its acquisition in the hands of the assessee.
8.1 Counsel further contended that as held by the Apex Court in the case of CIT v. K.Ravindranathan Nair, (2007) 295 ITR 228 (SC), income from the sale of DEPB credits cannot be stated as income derived from the Industrial undertaking. He further contended that the same can also not be treated as income derived from exports. Counsel further contended that the very intention for introducing explanation (baa) to section 80HHC was to exclude from consideration those incomes which were not derived from export business for the purpose of working out 80HHC deductions.
8.2 Heavy reliance was placed on the decision of the Bombay High Court in the case of CIT v. Kalpataru Colours and Chemmicals, (2010) 328 ITR 451 (Bom.) wherein under similar circumstances, a Division Bench of the Bombay High Court came to the conclusion that the entire amount representing the sale consideration of DEPB credits would be covered under section 28(iiid) and should accordingly be excluded for working out deductions under section 80HHC.
8.3 Counsel also relied on a decision of the Apex Court in the case of Liberty India v. CIT. (2009) 317 ITR 218 (SC) wherein the nature of DEPB and duty drawback benefits came up for consideration in context of the benefits under section 80I, 80IA and 80IB of the Act.
8.4 Reliance was also placed on the orders passed by the Delhi High Court and the Punjab and Haryana High Court in following cases, wherein reference to the decision of the Bombay High Court in Kalpataru Colour and Chemicals (supra) came up under similar circumstances.
Order dated 18.2.2001 in the case of CIT v. Paramount Impex Pvt. Ltd. (ITA Nos.12/2011 and others).
Order dated 15.3.2011 in the case of CIT v. M/s.Kanin (India) (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 of DEPB entitlement and the term 'profit' would not include 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 Act came up for interpretation.
9.3 Counsel also relied on a decision of this Court in the case of C.I.T v. President Industries, 258 ITR 654 wherein it was observed that the amount of sales by itself cannot represent the income of the assessee. Sales only represented the price received by the seller of the goods for acquisition of which it has already incurred cost. It is the realization of excess over the cost incurred that forms part of the profit included in the consideration of sales.
9.4 Counsel further submitted that even if it is believed that the assessee had not paid the actual cost for acquiring DEPB credits, there is still a cost involved in obtaining the same. That being so, such cost would have to be taken into consideration before ascertaining the profit that the assessee would derive upon sale of such DEPB credit. Reliance in this regard was placed on a decision in the case of CIT v. Groz-Beckert Saboo Ltd., 116 ITR 125(SC) as well as on the decision of this Court in the case of CIT v. Kaira District Cooperative Milk Producers Union Ltd. 247 ITR
314. 9.5 Heavy reliance was placed on the opinion of the Advisory Committee of Chartered Accountants on the accounting treatment on export incentives under the DEPB scheme. It was contended that not only in terms of interpretation, but also from the accounting and commercial points of view, Revenue's approach would not be sustainable. Several instances were cited before us to demonstrate that taking the entire sale consideration of DEPB credit taken as profit of the assessee would lead to anomalous situations. It was contended that the DEPB entitlement had direct nexus with the export activity. What was sought to be excluded from consideration of section 80HHC benefits by virtue of explanation (baa) was the income which was not directly relatable to export business.
9.6 It was contended that section 28(iiid) refers to profit on transfer of DEPB credits. It is only this profit which can be excluded from consideration of section 80HHC of the Act by virtue of explanation (baa). This position gets further clear by virtue of the Finance Minister's Speech while moving the amendment in section 28 and corresponding amendment in explanation (baa) to section 80HHC.
9.7 Counsel contended that the Revenue's view would bring about disparity of tax treatment between those assessees 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-a-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 to adopting the submissions made by Shri Soparkar, further elaborated similar propositions and advanced their contentions regarding true interpretation of explanation (baa) to section 80HHC as well as clause (iiid) of section 28. It is not necessary to record such contentions separately.
11. Before considering the rival contentions, it would be necessary to take note of the statutory provisions involved. Section 80HHC pertains to deduction in respect of profits retained for export business. Portion of section 80HHC, relevant for our purpose, as it stood at the relevant time reads as under:
80HHC.
(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 profits referred to in sub-section (IB), derived by the assessee from the export of such goods or merchandise :
xxx xxx (1B) For the purposes of sub-sections (1) and (1A), the extent of deduction of the profits shall be an amount equal to --
eighty per cent thereof for an assessment year beginning on the 1stday of April 2001;
seventy per cent thereof for an assessment year beginning on the 1st day of April 2002;
fifty per cent thereof for an assessment year beginning on the 1st day of April 2003;
thirty per cent thereof for an assessment year beginning on the 1st day of April 2004, and no deduction shall be allowed in respect of the assessment year beginning on the 1st day of April 2005 and any subsequent assessment year.
xxxx xxxx (3) For the purposes of sub-section (1), -
(a) Where the export out of India is of goods or merchandise manufactured or processed by the assessee, the profits derived from such export shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee;
(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;
(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, -
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 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 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 (iiid) or clause (iiie) as the case may be, of section 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 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 (iiid) 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 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.
xxxx xxxx Explanation : For the purposes of this sub-section, -
xxxx xxxx (ba) "Total turnover" shall not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962 (52 of 1962) :
Provided that in relation to any assessment year commencing on or after the 1st day of April, 1991, the expression "total turnover"
shall have effect as if it also excluded any sum referred to in clauses (iiia), (iiib) and (iiic) of section 28;
(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 -
Ninety per cent of any sum referred to in clauses (iiia), (iiib) and (iiic),(iiid) and (iiie) of section 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 The profits of any branch, office, warehouse or any 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 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 section 5 of the Foreign Trade (Development and Regulation) Act, 1992 (22 of 1992)."
(iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession."
12. Upon perusal of the provisions contained in section 80HHC, it emerges that deduction at the rate provided in sub-section (IB) of section 80HHC would be available on export profit of the assessee. The term "export profit" has a definite connotation as envisaged in sub-section (3) and would be worked out by applying a formula, viz. Export Profit = Business Profit x Export Turnover/Total Turnover. Such formula can therefore be expressed in following terms:
EP = BP x ET TT Wherein EP stands for export profit, BP stands for profit from business and ET stands for export turnover and TT stands for total turnover.
13. For working out such formula, certain additions and exclusions are to be made as envisaged in explanations and proviso to sub-section (3). Explanation (baa) to section 80HHC refers to term profits of the business, as to mean, profits of the business as computed under the heads Profit and gains of business or profession as reduced by ninety percent of any sum referred to in clauses (iiia), (iiib), (iiic), (iiid) and (iiie) of section 28 or any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits, and the profits of any branch, office, warehouse, or any other establishment of the assessee situate outside India. We would go into the Legislative changes made in explanation (baa) at a slightly later stage. Suffice it to note that clause (iiid) to section 28 which is one of the exclusionary clauses in explanation (baa) pertains to any profit on the transfer of DEPB scheme. In short, by virtue of explanation (baa), for working out the business profit of an assessee, 90 per cent of profit on transfer of DEPB scheme is to be excluded. We may also notice that by virtue of explanation (ba), such exclusion is to be made even from the computation of total turnover. Since while working out the export profit of an assessee, profit 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 providing access to essential raw materials, intermediates, components, consumables and capital goods required for augmenting production. Chapter 7 of the Export and Import Policy, prevalent at the relevant time, provides that the duty exemption scheme enables import of inputs for export production. The duty remission scheme enables post export replenishment/remission of duty on inputs used in the export product. Such duty remission scheme consists of Duty Free Replenishment Certificate and Duty Entitlement Passbook Scheme. Para 7.14 of the policy explains the duty entitlement to pass book scheme and provides inter alia that for exporters not desirous of going through licensing route, an optional facility is given under DEPB. The objective of DEPB Scheme is to neutralise the incidence of Customs duty on the import content of the export product. The neutralization would be provided by way of grant of duty credit against the export product. Under the said scheme, an exporter may apply for credit, as a specified percentage of FOB value of exports made in freely convertible currency. The credit shall be available against such export products and at such rates as may be specified by the Director General of Foreign Trade. Such DEPB is valid for a period of 12 months from the date of the issue. It is freely transferable subject to certain conditions. In para 7.32 it is further clarified that the duty credit under the scheme shall be calculated by taking into account the deemed import content of an export product as per SION and the basic customs duty payable on such deemed imports. The value addition achieved by export of such product shall also be taken into account while determining the rate of duty credit under the scheme. Para 7.38 of the Policy further provides that DEPB shall be initially issued with non transferable endorsement 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 case where the DEPB is applied after realization, the DEPB shall be issued with transferable endorsement.
15. From the above policy statement of the Government, it can be seen that DEPB benefits granted are in the nature of remission of customs duty. These incentives are given for making export viable or more attractive to compete in the international markets. 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 payable. In Black's Law Dictionary, remission is described as a cancellation or extinguishment of all or part of a financial obligation. In context of conventional remission, under civil law, it is understood as remission expressly granted to a debtor by a creditor having capacity to alienate.
17. It can thus be seen that the term 'remission' has a special connotation in legal terms. When DEPB is universally seen as a duty remission scheme, it must be understood as duty waiver by the Government. In other words, a tax or duty which the Government is otherwise entitled to collect and retain, is being waived or being given remission of by way of a policy to encourage exports. In essence, therefore, such benefit must be considered to be a duty waiver by the Government. In other words, the purpose of such duty waiver is to neutralise the customs duty on imported input used in export product, nevertheless, the basic character of the nature of the waiver does not change.
18. Even otherwise, DEPB benefits are not computed with arithmetic exactitude on the basis of customs duty paid or payable on imported inputs. The factor taken into account for fixing such DEPB entitlement is the deemed import and not actual import of the inputs. In a given case, an exporter may not use the imported inputs for export product, he would still be entitled to DEPB credits on export of his product at the decided rate. It would, therefore, emerge that the DEPB benefits being in the nature of duty remission cannot have a cost related to its acquisition. Such DEPB benefits make the export more attractive. It is not the same thing as to suggest that the customs duty to be paid by the assessee for the imported inputs used in the export product would be equivalent to the cost of acquisition of DEPB credit.
19. The nature of DEPB benefits came up for consideration before the Bombay High Court in the case of Kalpataru Colours and Chemicals (supra). It was observed that what is received on transfer of the DEPB credit is the profit, because DEPB credit under the DEPB scheme is given at a percentage of the FOB value of the exports so as to neutralize the incidence of customs duty on the import content of the export product. The DEPB credit is also given to an exporter who has exported goods without importing raw materials required for the export.
20. The nature of DEPB benefits 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 statutory provisions and some of the judgments throwing light on such provisions. As already noted, section 80HHC of the Act provides for deduction in export profit at the rates specified in sub-section (1b) thereof. For ascertaining the eligible export profit of an assessee for deduction under section 80HHC of the Act, a formula is envisaged in sub-section (3) by virtue of which, profit eligible for deduction would be worked out by way of ascertaining the business profit of the assessee and multiplying the same by a fraction of export profit over total profit. In other words, the eligible export profit of the assessee would be a portion of its business profit wherein export turnover would be the numerator and the total turnover would form the denominator. By virtue of explanation (baa) to section 80HHC, certain incomes have to be excluded from the computation of the business profit. These include 90 per cent of the sums referred to in clause (iiia) to clause (iiie) of section 28 and other receipts by way of property, commission, interest, rent, etc.
23. We have also noticed that for computation of total turnover by virtue of explanation (ba), sums referred to clause (iiic) to clause (iiie) of section 28 have also been excluded.
24. It is in this respect that clause (iiid) of section 28 assumes significance. Section 28 of the Act pertains to profits and gains of business of profession and items enumerated in different clauses thereof are to be treated as income chargeable to income tax under the head of profits and gains of business or profession. Clause (iiid) of section 28 was introduced by the Amendment Act 2005 with effect from 1.4.98. This introduction of clause (iiid) of section 28 has its own history, with respect to which, we shall go a little deeper at a later stage. Suffice it to record that clause (iiid) refers to the profit on the transfer of DEPB scheme being the duty remission scheme under the Export and Import Policy formulated under section 5 of the Foreign Trade Development and Regulation Act. It is this term profit referred to in clause (iiid) which has led to lengthy debate before us. As noted earlier, it the case of the Revenue that the term profit would include the entire sale consideration on transfer of DEPB credit by an assessee whereas the assessees contend that it is only the premium which the assessee may fetch while transferring 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 acquisition 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 as the premium that the assessee may fetch over and above the face value of the DEPB credit while transferring such credit. The Bombay High Court in appeal by the Revenue, came to the conclusion that what is received on transfer of DEPB credit is the profit. The amount equivalent to face value of DEPB as well as the amount received in excess of DEPB would constitute the profit of business under section 28(iiid). The Bombay High Court referred to the decision of the Apex Court in the case of Ravindranathan Nair (supra) and proceeded to hold that clauses (iiia) to (iiic) of section 28 of the Act pertained to incentive incomes. The Bombay High Court also traced the history behind introduction of clause (iiid) to section 28 and referred to the Finance Minister's speech for introduction of such amendment and ultimately concluded that the entire amount received by the assessee upon transfer of DEPB credit would be included within section 28(iiid) and consequently 90 per cent thereof would have to be excluded for the purpose of section 80HHC by virtue of explanation (baa).
27. In the case of K.Ravindranathan Nair (supra), the Apex Court was examining the claim of an assessee for deduction under section 80HHC of the Act with respect to business profits which included besides, the sale by way of exports, substantial amounts received by the assessee towards processing charges. The Apex Court while holding that such amount cannot form part of the benefits under section 80HHC of the Act, observed that formula in section 80HHC of the Act provided for fraction of the export turnover divided by the total turnover to be applied to business profit calculated after deducting 90 per cent of the sums mentioned in clause (baa) to the explanation. That profit incentives and item like, rent, commission, brokerage, charges, etc. though formed part of gross total income had to be excluded as they were independent incomes which had no element of export turnover. Such items distorted the figure of export profits.
28. In the case of Liberty India (supra), the Apex Court was examining the extent of DEPB benefits the assessee was not entitled to under section 80IB of the Act. In this respect, the Apex Court held that incentive profits such as DEPB and Duty Drawback are not profits derived from eligible business under section 80IB of the Act and they belong to the category of 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, duty drawback, DEPB benefit etc. Profit generation could be on account of cost cutting, cost rationalization, business restructuring, tax planning on sundry balances being written back, liquidation of current assets etc. Therefore, we are of the view that duty drawback, 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.
23. We are of the view that Department has correctly applied AS-2 as could be seen from the following illustration :
Expenditure Amount (Rs) Income Amount (Rs.) Opening Stock 100 Sales 1,000 Purchases (including customs duty paid) 500 Duty drawback received 100 Manufacturing overheads 300 Clocking 200 Administrative, selling and distribution exp.200
Net profit 200 1,300 1,300 Note : In above example, Department is allowing deduction on profit of Rs. 100 under Section 80-IB of the 1961 Act."
29. While trying to appreciate the reasons for introduction of clause (iiid) to section 28, we may at this stage advert to the Legislative history. In case of the P & G Enterprise Pvt. Ltd., ITAT Delhi Bench examined the question of treatment of DEPB benefits upon transfer for the purpose of calculating deduction eligible under section 80HHC of the Act. Case of the Revenue was that 90 per cent of such receipts should be excluded from computation of business profit by virtue of clause (baa) to explanation to 80HHC, as it stood at the relevant time. Exclusion envisaged under clause (baa) pertaining to section 28 at the relevant time included only clause (iiia) to (iiic). The Tribunal came to the conclusion that clauses (iiia) to (iiic) to section 28 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 80HHC(4B). Consequently, order of CIT(A) is modified to that extent and Assessing Officer is directed to recompute the deduction under section 80HHC in accordance with our finding."
30. In this background, the Legislature found it necessary to make amendments in section 28 as well as in explanation clause to section 80HHC of the Act. The Finance Minister's speech on the floor of the Parliament explaining the requirement of such amendment is relevant. Portion of the speech referring to this clause reads as under:
"We are now dealing with only the period 1-4-1998 to 31-3-2005. That is a period of about seven years. This problem did not arise before 1-4-1998. This problem does not arise after 1-4-2--5. In this period of seven years, the relevant section - I am not getting into an exposition of the law - are section 28 and section 80HHC. These are the two sections which are relevant. Now, the department's interpretation is that DEPB credit sale - I will explain that it is - is not export profit. What is a DEPB credit sale ? A DEPB credit sale is, that on your DEBP Passbook, if you have certain credits in your favour, you can import items against the credit without paying duty. But you can also sell the credit to another importer. If you actually import, it is part of export-import. If you sell it to another importer and make a profit on that the premium, it is not export profit. It is simply business profit because the income you earn is not in foreign exchange, it is in Indian rupees. It does not arise out of export activity or important activity. It arises because you are trading in a "License"
which has a premium in the market. So, the department took the view that it does not fall under section 28 read with section 80HHC. I am not going into the sub sections. Therefore, this not to be counted as exempted export profit. This must be added back as taxable profit. The assessee took a different view. In appeal, the ITAT has observed that the same falls under section 28(iv), not under section 28(iiib) or (iiic). It falls under section 28(iv). Then, the Tribunal gave a judgment, which I find as a lawyer difficult to understand. But with great respect to the Tribunal which is entitled to take a view, the Tribunal gave a judgment that although it falls under section 28(iv), it does not fall under section 80HHC Explanation (baa)..."
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 explaining the reason for its introduction can certainly be referred for the purpose of ascertaining the mischief sought to be remedied by the Legislation and the object and purpose for which the legislation is intended.
32. In the case of Kerala State Industrial Development Corpn. Ltd. v. CIT, 259 ITR 51, once again the Apex court relying on the decision in the case of K.P.Varghese (supra) observed that the Finance Minister's speech can be relied upon to throw light on the object and purpose of the particular provisions introduced by the Finance Bill.
33. In the case of M/s.Surana Steels Pvt. Ld. Dy. I.T.Commissioner, reported in AIR 1999 SC 1455, the Apex Court referred to the speech of the Finance Minister for introducing section 115J to interpret the said provisions.
34. In addition to the above principles adopted by the Apex Court, the principles of mischief rule also referred to as the Heydon's rule in interpreting the Legislative provisions is by now well known and well settled. In the case of Bengal Immunity Co. v. State of Bihar, AIR 1955 SC 661, the Apex Court observed as under:
"It is a sound rule of construction of statute firmly established in England as far back as 1584 when Heydon's case was decided that for the sure and true interpretation of all Statutes in general (be they penal or beneficial, restrictive or enlarging of the common law) four things are to be discerned and considered:
1st -
What was the common law before making the Act, 2nd -
what was the mischief and defect for which the common law did not provide, 3rd -
What remedy the Parliament hath resolved and appointed to cure the disease of the commonwealth, and 4th -
the true reason of the remedy;
and then the office of all the judges is always to make such construction as shall suppress the mischief, and advance the remedy, and to suppress subtle inventions and evasions for continuance of the mischief, and pro privato commodo, and to add force and life to the cure and remedy, according to the true intent of makers of the Act, pro bono publico."
35. In the case of I.T.Commissioner v. Sodra Devi, 1957 SC 832, however, the Apex Court was of the view that such mischief rule can be applied only when the statutory provision is ambiguous or is capable of more than one meaning.
36. On the basis of the above judicial pronouncements and the principles laid 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 transferred by an assessee and not just the difference between the face value and the sale proceeds. Any other view would bring us back to the position emerging from the Tribunal's decision in case of P & G Enterprises Ltd. (supra) which was precisely the reason for introduction of the legislative changes. This would effectively render such statutory amendments redundant. There is one more reason why we are unable to accept the interpretation put forth by the assessees. It is not in dispute that the entire amount of DEPB credit if retained by assessee would be his income under section 28 of the Act. If we treat only the premium on sale of DEPB credit covered under section 28(iiid), it would lead to anomalous situation. An assessee who retains the DEPB credit would pay tax on entire amount while one who transfers it would offer only to difference for tax.
37. Much was sought to be made out of the difference in language between clause (iiic) and (iiid) of section 28 of the Act. While in clause (iiic) language used is "any duty of customs or excise re-paid or re-payable as drawback ..." whereas in clause (iiid) words used are "any profit on transfer of Duty Drawback Pass Book Scheme ....". To our mind this difference in language does not convey intention of the Legislature to treat the two benefits differently. The difference in language appears to be on account of difference in the two schemes - while DEPB is freely transferable, Duty Drawback scheme is not.
38. Contention that the Revenue's stand would lead to double taxation is not well founded. None of the assessee's have established before us that out of the total consideration received upon sale of DEPB credit, the face value thereof was offered to tax in the earlier years.
39. We may notice that having excluded the benefit of DEPB upon sale by virtue of amended explanation (baa), legislature has brought back such benefit by virtue of further proviso to sub-section (3) to section 80HHC subject to certain conditions. For assessee having turnover of less than Rs.10 crores, such benefit is given unconditionally. But for assessee's having turnover of more than Rs.10 crores, Legislature in its wisdom has made such benefits available subject to fulfilling certain conditions. It is not in dispute that all assessees in these appeals had turnover of more than Rs.10 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 Rs.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 legislature was conscious that in cases covered under sub-section (iiia), only profit on sale of licence should be chargeable but not the profit which may come in future on sale of the licence because the benefit of making import without payment of customs duty accrues to an assessee only at the time of actual import and if the domestic price of the raw-materials is lower than the landed cost of the imported materials, it would not be sensible to import the raw-materials under the Advance License. Moreover, at times, the advance licenses may not be utilized within the period of validity thereof and in such cases, no actual benefit is available to an assessee whereas in the cases covered by sub-sections (iiib) or (iiic), there is no scope of non-utilization of the cash assistance or drawback mentioned therein and as such, those are automatically chargeable to tax."
We are concerned with entirely different situation and the decision of the Calcutta High Court would not govern the present set of cases.
41. The decision in the case of Kheda District Cooperative Milk Producers Union (supra), on which heavy reliance was placed by the counsel for the assessee, was a case where the assessee received certain raw materials without payment through the Government from UNICEF. The question was what could be treated the value of such raw material. The Division Bench noted that the assessee received raw material in the forms of soya flour and skimmed milk powder without any payment. Such raw material was for the purpose of manufacturing high protein food. Such raw material was received under an agreement with the Government of India, under which the Government of India undertook to arrange for the raw material under the aegis of UNICEF. As against the supply of raw material free of cost, the assessee undertook to the Government a corresponding obligation under the agreement to supply free of cost to the Government as a matching contribution a specified quantity of weaning food at a price not exceeding 10 per cent profit over the cost of production. It was on this background that the Division Bench observed that where the grant is coupled with a liability to a matching contribution, its acceptance by itself creates a liability to incur the matching cost. In such a case, the conditions to be fulfilled to avail of the grant will be its cost and it cannot be said that there 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 accounting entries and the complications it may create, if the rival stand was accepted. We need not delve at great length on such accounting procedures primarily because such accounting difficulties or adjustment of entries would not be the conclusive indication of true interpretation that the section may present. Secondly in the case of Liberty India (supra), the Apex Court has also examined the nature of accounting treatment such a sale of DEPB credit should receive, portion of which we have already reproduced herein-above.
44. In the result, we find that the Tribunal committed an error in coming to the conclusion that on transfer of DEPB credit by an assessee only the amount in excess of the face value thereof would form part of profit as envisaged in clause (iiid) of section 28. We, therefore, answer the question in favour of the Revenue and against the assessees.
45. Before concluding we reiterate that we have proceeded on the basis of three unquestioned premises (i) that the statutory provisions applicable in all cases is same as obtained in the assessment year 2003-04, (ii) that all assessees at the relevant time had turnover of more than 10 crores and (iii) that the cases involved are instances of transfer of DEPB credits.
46. In the result, to the extent mentioned above, decisions of the Tribunal involved in respective appeals are reversed. The appeals are allowed accordingly.
47. At this stage, learned Senior Advocate Shri Soparkar requested that the Court may grant certificate under Articles 133 and 133A of the Constitution as the case involves substantial question of law of general importance. We are of the opinion that looking to the nature of controversy, the all India repercussion on large number of assessees as also the question of interpretation of various provisions, the case does involve substantial question of law of general importance. In our opinion, such question needs to be decided by the Apex court. We accordingly, grant the certificate.
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