Income Tax Appellate Tribunal - Ahmedabad
Rachna Exports, Surat vs Assessee
IN THE INCOME_TAX APPELLATE TRIBUNAL "A " BENCH,
AHMEDABAD
BEFORE SHRI Deepak R. Shah AND SHRI D.T. Garasia.
AHMEDABAD BENCH-B, AHMEDABAD.
(CAMP AT ; SURAT)
ITA No. 3791/ Ahd/2007
(Assessment Year :2004-05)
The Assistant Commissioner Vs M/s.Rachana Exports
of Income tax,Cir.6, Room 177/1 G.I.D.C.,
No.623 ,Aayakar Pandesara, Surat.
Bhavan,Majura Gate,Surat.
(Appellant) (Respondent)
PAN:AADFR0654G
ITA No. 3849/ Ahd/2007
(Assessment Year :2004-05)
M/s.Rachana Exports Vs The Assistant Commissioner
177/1 G.I.D.C., of Income tax,Cir.6, Room
Pandesara, Surat. No.623 ,Aayakar
Bhavan,Majura Gate,Surat.
(Appellant) (Respondent)
By Department : Shri Ashokkumar Bal CIT(DR)
By Assessee. : Shri Dennish Chokshi.
(आदे श)/ORDER
)/ PER: SHRI D.T. GARASIA.
ITA No.3791/Ahd/2007.The only ground in this appeal is as under:-
1"On the facts and in the circumstances of the case and in law, the learned Commissioner of Income Tax (A)-IV, Surat has erred in deleting an addition of Rs.59,27,941/- out of Foreign Buyer Agency Commission made by the Assessing Officer."
2. The A.O. observed that the assessee has paid commission to Foreign Buyer's Agent (FBA) on export sales. The AO requiring the assessee to furnish name and address of foreign buyers to submit mode of payment, copy of agreement with agent and confirmation letters regarding the payment of commission. In response thereto the assessee stated nature of service rendered by the agent, introduction of Export buyer, booking of purchases for and on behalf of Export buyer and subsequent follow up regarding proper shipment of export of goods and payment thereof by the export buyer. The assessee further stated that commission was deducted from gross value of export invoices and only the net value after deducting the commission was received from foreign buyers as the evidence from Bank realization certificate. The assessee submits that copy of agreement signed for each of the foreign buyer's agent was obtained. The assessee submitted that there was no payment of export commission but same was reflected by way of deduction in this value and such export commission was paid only in respect of 29 invoices out of 163 invoices. The assessee stated that as per the Circular No.786, the C.B.D.T. clarifies that no part of foreign buyers agents commission income accrues or arises in India since it was usually remitted directly to him and therefore, not received by him or on his behalf in India and therefore was not liable to Income tax in India on such commission. The commission was paid for genuine business purposes and rate of commission has been well within the limits of permissible as laid down by the RBI such commission would not appear in the books of accounts of the assessee since it was directly made and payment of 1.87 % which was reasonable by way of standard acceptable the contention of the assessee and held that it was directly paid by buyer to agent and payment was accordingly 1.87% of thetotal export which was reasonable by any standard. The AO did not accept the 2 contention of the assessee and held that identity of the agent and actual purpose of such commission expenditure was not properly followed and authorized dealer of Bank informed that it was remitted commission from India but the same was deducted from the duty amount. Therefore, the A.O. was of the view that it is not an allowable expenditure under the I.T. Act. The A.O. further observed that the assessee failed to produce any evidence in support of the claim, services rendered there was only remittance from India to outside which shows assessee has not paid such commission and not having been furnished as claimed by the assessee. The A.O. further referred to commercial agency law of UAE and Indonesia where the appellant had claimed to have paid commission. He observed that as per the U.A.E. law the commission agent must be U.A.E. National and agency agreement must be registered. The agreement should signed by both the parties and legalized before a notary and it should be signed in Dubai. The assessee has not followed any of the requirements of U.A.E. Federal Laws in case of Exports made to U.A.E. and had only furnished copy of agency agreement between U.A.E. Agent at Dubai and assessee has claimed to have traded art art silk sarees through this agent and Internet site of the agent mentioned the line of business as "Mens & Boys Clothings" only. The assessee claimed to have made the commission payment to 3 parties in Indionesia which is in the opinion of A.O. was questionable, since as per Govt. of Indonesia had issued a decree concerning textile import arrangement according to which the only companies having production facilities to use fabrics for finished products may obtain import license. The assessee had claimed to have exported the fabrics to parties in Indonesia who were real agents and not having any production facilities. The A.O. observed that sales to Indonesian parties was claimed to have been made though the agent M/s. Hatta Fort Trading Co., Dubai and the prospect of selling goods to Singapore through an agent in Dubai was not very bite. The A.O. relying upon various judicial pronouncements held that assessee has failed to establish the exact nature of services provided by the commission agent and the actual payment to the said agent and therefore, the 3 A.O. disallowed the foreign agent commission expenses of Rs.59,27,941/- on this account.
3.. The matter carried to the CIT (A) and the CIT(A) has allowed the claim by observing as under :-
" I have considered the submission and gone through the various documents furnished by the Ld. AR. It is seen that the appellant has claimed to have allowed commission to the foreign buyers by way of deduction from the Invoice Value and the export invoice has been raised for only the net amount after deducting foreign buyers' agent commission. The AO has rejected the book results on the ground that gross amount of export sales has not been credited to the P & L account and it is only the net amount which is reflected in the accounts. However, as per the Explanation-(b) to section 80HHC the term "export turn over" means the sale proceeds received in, or brought into India by the assessee in convertible foreign exchange in accordance with clause- (a) of sub-section-2 of any goods or merchandise to which the section applies and which are exported out of India. Therefore, in view of this definition of "export turn over", it is the net sale proceeds brought into India in convertible foreign exchange would constitute the turn over of the exporter. This view has also been taken by the Hon'ble Delhi Bench of the ITAT in the case of Franco Footwear vs. ITO 30 ITD 457 wherein it was held that the "Turnover" in the case of an exporter for the purpose of computing the deduction u/s. 80HHC should only be the net amount received by the assessee which was to be considered after deducting from the total turnover - (i) the Foreign buyers' agents commission (ii) one percent rebate to 4 Foreign buyers for hidden defects and (iii) Foreign buyer inspection charges.
It is also seen that the AO has referred to the Federal law of U.A.E. regarding appointment of commercial agents and also stated that prospect of exporting textile products to Indonesia was questionable. In this context the appellant has submitted that it was only a procedural non-compliance of a law which is applicable to foreign agent and the foreign buyer but has failed to show that payment of commission in the instant case was prohibited under any law of that country and I am of the view that procedural non-compliance of a U.A.E. law by an agent in that country alone cannot form a ground for rejection of appellant's claim for payment of commission. Regarding export to Indonesia, it is seen that the goods have been cleared at the Indonesian port as evidenced from the export documents.
The Ld. A.R. has further relied on the decision of Jurisdictional bench of Hon'ble ITAT in the case of ITO vs. Mugatlal & Sons 100 TTJ-1042, where the disallowance of commission was deleted on the ground that confirmation of parties who actually received the commission was produced by the appellant. In the instant case the appellant exporter has paid commission in only 29 invoices out of the total of 163 invoices. The appellant has also furnished the sale contracts and copies of confirmation of receiving commissions from all these parties. Here, the identity of the recipient of commission is established and the recipient has confirmed having received such commission from the appellant and therefore, I am of the considered view that the commission has actually been paid by the appellant to the foreign agent through the foreign buyers.5
Further, the AO's observation that prospect of selling goods to a buyer in Singapore through an agent based in Dubai is also misplaced, since in today's world, conducting business anywhere in the world is possible through any person since the orders are placed through Internet and other modern facilities. It is also important to note that the agent who facilitated the export sale to Singapore is the same Hatta Fort Trading Co., in Dubai, who has also furnished confirmation of having received such commission. The A.O. has also relied on the fact that the said foreign agent, as per his Website deals in "Mens & Boys' Clothing" and therefore, his being an agent for Art Silk is doubtful but this fact is also not based on correct appreciation of the functions of a foreign agent. Since he is dealing in such line of business as clothing, he would be having sufficient contacts in the foreign markets to facilitate sale of Art Silk also. It is also important to note that the appellant has claimed payment of commission in respect of only 29 invoices out of a total of 163 invoices and had the intention of the appellant been to defraud the revenue, he could have claimed commission in all or most of the 163 invoices. This, in my view, goes to prove the bona fide of the appellant and the genuineness of such commission payment. In view of this and the fact that the recipients of commission is identified and such recipients has also filed confirmations of having received the commission, disallowance of such commission payment is not justified.
Further, the AO's reliance on DTAA between India and UAE to conclude that the payment of commission to the agent would tentamount to fiscal evasion is also misplaced since if that be the case, all deals between an Indian and a UAE national would fall 6 under this category. I also find that the AO's view that tax should have been deducted on payments made to the foreign buyers' agent is against the CBDT Circular No.786 referred to in earlier part of this order. It is also seen that the AO has relied on the AS-1 stating that since the accounts were not drawn in accordance with AS-1, these were liable to be rejected. On this issue, I am in agreement with the Ld. AR that the Accountingf Standards could not override the provisions of law and accordingly,, the provisions of the Income-tax Act as provided in the Explanation (b) to section 80HHC so as to account for the export turnover at the net realizable value, would override the Accounting Standards and any AS would not be relevant on this issue. Therefore, the AO's action in rejecting the book results is without any basis.
In view of the findings in foregoing para, I am of the considered view that there was no justification in AO's action in disallowing the claim of foreign buyers' agent's commission totally disregarding the evidences filed before him and misinterpreting the provisions in this regard is not in order and therefore, addition on this account is directed to be deleted."
4. The learned D.R. filed written submission which is part of the order. The learned D.R. argued that the issue is relating to allowability or otherwise, of Foreign Buyers' Agent commission. The assessee exporter of Surat has claimed to have paid sales commission to Foreign Buyer's Agents at a rate varying about 10%. The payment of such commission is that the foreign buyer has made the payment to the agent on behalf of the assessee exporter. For example, if the goods of Rs.100/- are being exported to the foreign buyer(importer) 7 and the assessee exporter has mentioned the rate of commission at 10% on invoice, then the foreign buyer has remitted only Rs.90/- to the exporter and has as claimed the balance Rs.10/- to the agent on behalf of the exporter. In other words, the foreign buyer has facilitated the Indian exporter by paying the agency commission on behalf of it. However, this practice has not been reflected in the books of assessee exporter. in Profit and loss account. When the Profit and loss account has been examined it was found that there was no expenditure debited to the accounts related to agency commission. At the same time it has been observed from the trading account that sales have been taken on the net basis. Thus, foreign buyer's agent commission is an expenditure incurred by the exporter assessee but paid by the foreign buyer on behalf of the exporter assessee. Consequently, the assessee was requested to establish the genuineness and business nexus of claim agency expenditure as mandated under section 37 of the Act and also to prove that any service has been rendered by the agent to the business of the assessee-firm. However, assessee grossly failed to establish the requirements of section 37 and grossly that no service was actually rendered for business purpose and hence this was disallowed.
5. The brief facts of the case that assessee has deducted commission expenses as reflected in various documents like Export Invoice, BRC, GR form etc. It has been found from the BRC that the bank has certified the payment of commission on the basis of declaration made by the assessee-exporter on the GR forms and there is no clarity as to whether the commission is Foreign Buyer's Agent's Commissioner or the assessee exporter's commission. The assessee has accepted the net sales realization of export proceeds at the net 8 amount after deduction of commission. The assessee has accepted net sales proceeds realization, thus assessee has borne the agency commission expenses. However, assessee has failed to furnish any evidence in support of the claim that it has received any service in lieu of the commission or that any commission has been paid to the commission agent. Thus the assessee is liable to be taxed on actual sales turnover as per the declaration made before the Excise and Customs Authorities in various in various forms and documents, which is inclusive of the so-called commission amount. The book results of assessee should have been rejected and the assessee's claim of commission expenditure should have been disallowed. The Ld. D.R. submitted that books of accounts of the assessee are incorrect and foreign commission expenditure is not of the assessee and any service rendered which was so-called commission agent cannot be allowed as deduction and he relied upon the written submissions filed along with this argument.
6. The Ld. A.R. submitted that it is significant to note that foreign buyer's agent commission is also directly and squarely covered by the following decisions of Ahmedabnad Bench in the cases of (1) Shri Sanjay Jain vs. DCIT in ITA No.1533/Ahd/2008 order dt.16.12.2009 and (2) Shri Samir Batra vs. ITO in ITA. No.4131 & 4552/Ahd/07 Dated 12-12-2008) A copy of the aforesaid judicial pronouncement is enclosed with the paper book on page 28 to 84. The Ld. A.R. submitted that even in the aforesaid cases Foreign Buyers' Agent Commission was allowed as deduction from invoice value was disallowed/added by the department 9 in the hands of the assessee on the similar ground as taken in the case of the assessee and same stands deleted by the Bench by coming to the conclusion finding on each of the accretion raised by the department. The issue of disallowance of foreign buyer's agent commission duly supported or covered by the decision of jurisdictional Bench of ITAT. Therefore, the same needs to be followed in the interest of judicial pronouncement and hence the present appeal of the department needs to be dismissed.
7. The learned A.R,. submitted that during the year under consideration, the assessee has made total export of Rs.31,65,05,218/- while out of 163 total invoices in only 29 invoices commission has been allowed by the assessee. The total commission allowed is around 10% which amounts to Rs.59,27,941/- in respect of 29 invoices and the same is worked out to 1.87% of total export turnover and thus, this proves the bona fide of the assessee. During the course of assessment proceedings assessee has submitted the complete invoice-wise details giving the names and address of the agent, copy of the sales contract with the foreign buyers agent showing the passing of commission @ 10%, ciopy of Bank realization certificate from Authorized Dealer, confirmation of foreign buyer's agent. Thus, it can be seen that assessee has completely discharged the onus not only to prove the fact that it has received only the net sales proceeds after deduction of commission but also proved the expenses of foreign buyer's agent's genuineness of the transaction and services rendered by them by furnishing the evidences. He also submitted that assessee is 100% exporter. Thus, as per the law the turnover in the case of the assessee is only net amount of invoices and not the gross amount. Thus as per term of export turnover which is 10 explanation-1 to section 80 HHC the same sale proceeds brought in India by assessee in convertible foreign exchange in accordance with the clause (a) of sub-section (2) of any goods or merchandise to which this section applies and which are exported out of India but does not include freight or insurance attributable to the transport of goods or merchandise beyond the customs station as defined in Customs Act,1962. In the present case, export turnover has been considered by the assessee as per the net sales proceeds received/brought in India inconvertible foreign exchange. However, the A.O. states that export turnover should have been at gross figure which is absolutely in violation of provisions of I.T. Act or what should quantify for the turnover it is decided by the ITAT Delhi Bench in the case of Franco Footwear Factory 32 ITD page 457(Delhi). The assessee has not made any payment or remittance of commission by asssessee to the foreign agent and the income which does not accrue or arise in India has interalia carry out that there can not be any agreement for the said expenditure in India. However, A.O. failed to consider that he himself has verified from the internet site that there was M/s.Hatta Font Trading Co. as the agent. Moreover he has submitted written submissions.
8. We have heard the rival contentions of both the parties. Looking to the facts and circumstances of the case, we find that similar issue had been come up in ITA.No.1533/Ahd/08 in the case of Shri Sanjay Jain vs,. DCIT wherein the Tribunal has decided the issue of foreign commission by observing as under :-
" There is no dispute regarding the fact that the assessee has given commission/discount in the export invoices itself in 11 favour of the foreign buyer. The foreign buyer has stated that this discount/commission would be distributed by him to the intending agents abroad. They have stated that the commissions are to be paid by them directly to the agents in the countries of import. It is also a fact on record that the assessee has received the net amount only as export proceeds by way of convertible foreign exchange. All these matters have been certified by the bankers of the assessee. All the matters are well within the law regulated by the RBI for the purpose of export of goods outside India. In such circumstances, the simply fact that emerges out of the maze of arguments is that as far as the assessee is concerned, his export sales turnover is the net amount of the export invoice issued by him. It is not proper to treat the gross invoice amount as the export sales turnover of the assessee.
In fact, in the situation of the case, as stated in the above paragraph, it is to be seen that the export sale proceeds received by the assessee was net amount alone and not the gross amount. It is also to be seen that the foreign buyer is not bound to pay to the assessee the amount covered by the commission or discount at any future date. Therefore, the right/claim of the assessee in respect of the export sales was to received only the net invoice amount and nothing more. Therefore, there is nothing left over byway of balance to be treated as income accruing or arising to the assessee outside India by virtue of the impugned export sales. The entire income attributable to the export sales were already received by the assessee in India in the form of convertible foreign exchange. This position is proved by the certificates issued by the bankers as well as letters of credit opened by the foreign buyers. When 12 the assessee has received only the net proceeds as per the invoice, there is nothing further left over to be treated as income received or to be received or accrued or deemed to be accrued or arising in India or outside India. Therefore, the reliance placed by the lower authorities on Section 5 of the Income Tax Act is rather misleading.
As the assessee has not paid to the foreign buyers any amount by way of commission, but it was only adjustment through the export invoices by way of commission/discount, Section 94H also had no role to play. Therefore, we find that all the discussions made by the lower authorities to make additions of the commission amount were based on hypothesis and not on any facts proved. When the assessee had no additional amount to be received from the foreign buyers, no question of additional income arises. The income of the assessee is fully embedded in the net sale proceeds received and accounted by him. When the income itself is not generated, there is no question of such income becoming accrued or due. When there is nothing left over to be further received by the assessee, there is no question of any income arising in the hands of the assessee, attributable to the quantum of commission recorded in the invoice. Therefore, we find that the entire discussions, but well made by the lower authorities, have been made unfortunately in a wrong direction.
When the factum of actual receipt of sale proceeds to the extent of net invoice amount is established beyond any doubt, there is no justification in overlooking upon those speaking facts on the technical ground that the assessee has claimed the DEPB benefit on the gross amount of the invoice. The DEPB claim was 13 made by the assessee on the basis of permission granted by the RBI and that has nothing to do with the actual amount of export sales proceeds received by the assessee in the form of convertible foreign exchange.
Therefore, it is quite obvious without much discussion and deliberation that the Revenue has no case to hold the assessee responsible for an additional income of Rs.1,42,31,458/-. The said addition is accordingly deleted.
9. We similarly in ITA.No.4330-4331/Ahd/2007 & ITA No.4552/Ahd/07 wherein the Tribunal has allowed the claim of the assessee by observing as under :-
" The lower authorities have noted that most of the so-called confirmations are on paper and does not bear the letter head of the said buyers. This is partly correct because plain paper confirmation was in reference to one party Mohmed Abdula of Dubai i.e. at assessee's paper book page No.609 which is on plain paper. However, in such situation the AO ought to have made inquiry if he has any doubt in this regard. But he simply concluded that it is on a plain paper and did not believe the aforesaid commission payment particularly when assessee is having supporting evidence in reference to the confirmation of the sales invoices, exchange control copy of shipping bills and bank realization evidence."
10. We find that similar issue had arisen before the Ahmedabad Truibunal and Tribunal after considering the various decisions has held that Foreign Buyer's Agent Commission should be allowed as deduction 14 from the invoice value disallowed and added by the Department in the hands of the assessee. We therefore, respectfully following the aforesaid Judgement of the Tribunal, dismiss the department's appeal.
ITA.No.3849/Ahd/2007.
11. In this appeal, the assessee has raised the following grounds :-
1. That on facts and circumstances of the case, the Ld.CIT(A) has grossly erred uin upholding the disallowance of the entire deduction u/s. 80HHC of the Act as made by the A.O. without appreciating -
(a) That the amount of DEPB license received by the appellant is nothing but reimbursement of cost of duties suffered by the inputs and thus, the same should be reduced from, the cost of goods sold and the profit so arrived should be treated as derived from, exports, being fully eligible for deduction u/s. 80HHC of the Act.
(b) That the Taxation Laws (Amendment) Act,2005 makes undue distinction between ex[porters on the basis of turnover and amends the law, by laying down various conditions, on a retrospective basis, which is unconstitutional and ultra-vires, requiring outright annulment.
(c ) That the appellant firm has in fact not earned any profit i.e. premium on transfer of Duty Entitlement Passbook Scheme (DEPB), but there a loss since the DEPB has been sold at a discount.
15Hence, it is most humbly submitted that the deduction under section 80HHC as computed by the appellant may kindly be allowed.
All the aforesaid grounds regarding disallowance of deduction u/s. 80HHC of the Act are independent to each.
2. The appellant craves to add, amend, alter, substitute, modify any or all the above grounds of appeal, if necessary, on the basis of submissions to be made at the time of personal hearing.
12. The short facts of the case that assessee is a partnership firm engaged in the business of Export of fabrics. The return of income for the year under consideration was filed by the assessee on 24.6.2004 declaring the total income at Rs. 1,70,52,150 after claiming deduction of Rs.1,03,93,647/- under section 80HHC of thde Act. In view of the amendment in section 80HHC the entire deduction u/s. 80HHC disallowed by the A.O. which was upheld by the CIT(A). Thereaofre, the assessee is in appeal before the Tribunal. At the very outset the learned AR submitted that the issue in controversy is squarely and purely covered in favour of the assessee by the decision in the case of Supreme Court and in the case of ITAT (Spl. Bench) (Mumbai) in the case of Topman Exports vs. ITO (2009) 125 TTJ-289 (Mum) (Spl.Bench), the learned A.R. submitted that Special Bench has categorically held that entire amount received in sale of DEPB entitlement is not profit chargeable u/s.28(iiid) of the Act but the difference between face value of the DEPB and sale proceeds is profit on sale of DEPB which alone has to be deducted from the profit of the business for computing the deduction u/s. 80HHC. The Ld. AR submitted that assessee has reduced the entire sale proceeds from DEPB from profit of the business by treating it as a direct cost of goods exported and thereby has completely denied the deduction u/s.80HHC 16 to the assessee since the profit worked out to a negative figure. In the case of assessee there is a loss of sale of shares DEPB license excluding from profit of business by treating it as a direct cost for the purpose of computing the deduction u/s. 80HHC of the Act. Therefore, the assessee's claim may be allowed.
13. On the other hand, the learned DR relied upon the order of lower authorities.
14. We have heard the rival contentions of both the parties. Looking to the facts and circumstances of the case, we find that the issue in controversy is directly covered by the decision of Special bench (Mumbai) in the case of Topman Export vs. ITO wherein it is held as under:-
"11. We have heard the rival submissions and perused the orders of the lower authorities and the materials available on record. In our considered view, the issue is squarely covered by the decision of ITAT Mumbai Special Bench in the case of M/s.Topman Exports (supra). For the sake of convenience, we reproduce the operative part of the judgement as under:-
"43. The major controversy before us is to interpret section 28 (iiid) in which the expression "any profit on the transfer Duty Entitlement Pass Book Scheme" has been used. From the facts of the cases under consideration it is noted that the AO treated the entire sale proceeds as covered under section 28(iiid), as against the case of the assessee that only the premium or the profit element on the transfer of DEPB be considered. To put the controversy in simple words, if, for example, the assessee received DEPB worth the face value of Rs.100/- and then sold it for Rs.110/-, the assessee is contending that only a sum of Rs.10/- is to be included under clause (iiid), whereas, the Revenue's contention is that the entire amount of Rs.110/- be considered.
44. Thus we have to interpret the word 'profit' as fielded in section 28(iiid). As noted supra section 28 has clauses (i) to (vi). On a careful 17 circumspection of the language of clause (iiib) and (iiie), it is noted that the reference is to the gross sum of cash assistance and duty drawback etc. On the contrary clauses (iiia), (iiid) and (iiie) use the word "profit" on sale/transfer of licence/DEPB/DFRC. From here, it can be easily inferred that the employment of the words "any profit of transfer" in clauses (iiid) and (iiie) of section 28 in contradistinction to the omission of such word profit in clauses (iiib and iiie) is not without any object.
45. The principle rule of interpretation is that meaning is to be given to each and every word in the language of section. No word can be claimed as superfluous. Each comma, full stop or every sign of punctuation has significance. In our considered opinion the need for interpretation with the aid of some external aids of construction of a section arises only when there is some ambiguity in the language of section and the intention of the legislature is not properly conveyed with the words so used. It has been held by the Hon'ble Supreme Court in numerous judgments including the case of Federation of Andhra Pradesh Chambers of Commerce & Industry & Ors Etc. Vs State of Andhra Pradesh & Ors. Etc. Etc. (2001) 165 CTR (SC) 672 (2001) 247 ITR 36 (SC) that the taxing statute has to be strictly construed and nothing can be read in it. Identical view has been taken in the case of Padmasundara Rao (Decd.) & Ors. Vs. State of Tamil Nadu & Ors (2002) 176 CTR (SC) 104 : (2002) 255 ITR 147 (SC) holding that "while interpreting a statute legislative intention must be found in the words used by the legislature". In the like manner it has been reiterated in the case of Commr. Of Agrl, IT vs. Plantation Corporation of Kerala Ltd. (2000) 164 CTR (SC) 502 : (2001) 247 ITR 155 (SC) that : "So long as there is no ambiguity in the statutory language, resort to any interpretative process to unfold the legislative intent becomes impermissible".
46. Coming back to the issue under consideration we note that the language of clause (iiid) and (iiie) of section 28 is crystal clear which talks of "any profit on the transfer of DEPB/DFRC. The reference is not to the sale proceeds but to the profit on the transfer of DEPB/DFRC. A line of demarcation needs to be drawn between the provisions in which gross amount is considered and the provisions in which only the profit demerit has been the subject matter of consideration. We need not wander here and there in search of such distinction, which is highlighted from section 28 itself . Apart from clauses (iiib) and (iiic) to section 28, clauses (iv) and (vi) also refer to the inclusion of the gross amount, and not the profit element thereon, further the legislature is not oblivious to such distinction between the gross amount and the profit element inasmuch as it has used the appropriate words wherever it intended so. It is amply 18 demonstrated from the language of section 54 which grants deduction from the capital gains by providing that it the amount of capital gain' is greater than the cost of the residential house so purchased or constructed, the differential amount shall be charged under section 45; as against section 54E which provides deduction in respect of long term capital assets by providing that if the cost of the new asset, is not less than the net consideration' in respect of the original asset, the whole of such capital gain shall not be charged under section 45. If we carefully peruse the language of section 54 in juxtaposition to section 54E it can be seen that whereas the former section provides deduction with reference to the investment of the amount of capital gain, the later section grants deduction with reference to the extent of investment of the net consideration and not the capital gain. Thus, it can be visualized that the legislature is not unmindful of the distinction between "sale consideration and 'profit' and has used the appropriate expression to exhibit its intendment. Reverting to the language of (iiid) of section 28 we observe that it refers to any profit on the transfer of DEPB. The words used in the provision indicate that only the profit element on the transfer of DEPB is to be considered under this clause and not the sale proceeds itself. Thus in order to fee covered with the scope of this clause, two things are essential. First, there should be transfer of the DEPB and second, such transfer should result into any profit. Unless both the conditions are cumulatively satisfied, the transaction cannot form part of section 28 (iiid).
47. This leaves us with the determination of the meaning of the word 'profit'. In common dialect the word profit' refers to excess of sale proceeds over the cost of goods. The word profit' has another shade also, which involves a comparison between the state of business at two specific dates and the excess of the value of asset on one date over the other, constitutes profit. Their Lordships of the Hon'ble Supreme Court in E.D. Sassoon & Company (supra) has laid down to this effect.
"The word 'profits' has in my opinion a well defined legal meaning, and this meaning considers with the fundamental conception of profits in general parlance although in mercantile phraseology the word may at lime bear meanings indicated by the special context which deviate in some respects from this fundamental signification. 'Profits' implies a comparison between the state of a business at two specific dates usually separated by an interval year. The fundamental meaning is the amount of gain made by the business during the year. This can only be ascertained by a comparison of the assets of the business at the two dates".19
48. Going by the concept of comparison of the assets of business on two dates, it can be seen that at the stage of receipt of DEPB on its accrual the face value of Rs.100/- constituted an asset in the hands of the exporter which could be utilized by him in any of the ways open to him. If the exporter chooses to sell the DEPB for Rs. 110 at a subsequent date, then the prevailing market rate at the time of sale, that is Rs. 110 shall represent the value of asset on such date of sale. Accordingly, the difference of Rs 10 between the value of two dates, viz, on the date of its sale (Rs.110/-) and the date when it was acquired on accrual (Rs.100/-), will constitute profit. Even going by the meaning of "profit' as commonly understood representing excess of sale proceeds over cost, we find that similar result will follow. No doubt the exporter does not directly purchase the DEPB from the market by incurring any cost, but when we see the scheme of section 28 in which the face value of DEPB, at the time of making application, results into the accrual of income as includible u/s 28(iiib) and the corresponding amount represents the value of DEPB, such value, which is in the nature of an asset, shall constitute its cost when DEPB is made the subject matter of sale at a later date. The following accounting entry shall be passed in this situation.
Cash/Bank Dr Rs. 110
To DEPB Rs. 100
To Profit on sale of DEPB Rs. 10
[At the time of sale, the income of Rs. 10 shall arise to the assessee u/s 28(iiid) as income of Rs. 100 had already accrued u/s 28(iiib) at time of application]
49. The absurdity in the result can be seen from the consequences following the reasoning of the Department, that the entire sale proceeds shall be taxable u/s 28(iiid) at the time of sale. In such a situation there will be double taxation of the face value of DEPB, firstly, when application for DEPB is made resulting in to accrual of income u/s 28(iiib) if the extent of us face value at Rs. 100 and subsequently when DEPB is sold for Rs. 110, the entire sale consideration of Rs. 110 shall stand included u/s 28(iiid) resulting into total income of Rs. 210 on account of the transaction of DEPB, as against, the real income only to the tune of Rs.110. .....
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53. From the above it can be noted that DEPB credit sale is different from the premium on the DEPB and such profit or the premium, is not export profit Since it does not arise out of export activity or import 20 activity and arises because of trading in a "License" which has a premium in the marker such premium or profit cannot to be counted as exempted export profit and should be added back as taxable profit. The speech of the Finance Minister, as extracted above, divulges the intention of the scope of section 28(iiid) as covering only the premium on sale of DEPB and not the face value.
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72. Reverting to the main question posted before this special bench for consideration as to whether the entire amount received on sale of DEPB entitlements represents profit chargeable u/s 28 (iiid) or some artificial cost is to be interpolated, we find that the relevance of this question is only in the context of the computation of deduction u/s 80HHC. We have held above that sub-section (3) dealing with the computation of the profits derived from export of goods or merchandize is a complete code in itself, thus the computation of eligible profits is to be made firmly as per this sub- section with the aid of Explanation as interpreted by the Hon'ble Supreme Court in the case of Hero Exports (supra) and K. Ravindranathan (supra). The AO has denied the deduction u/s 80HHC by holding that the entire sale proceeds of DEPB fall under section 28(iiid) and since in that view of the matter, there is no positive income, the deduction is impermissible. On the contrary the view point of the assessee is that the face value of DEPB should be reduced from the cost of purchases as it is given by the Government of India only to neutralize the incidence of custom duty. On the import content of the exports. We have examined the format of DEPB Scheme and come to the conclusion that the face value of DEPB is nothing but partial reimbursement of the purchase price of goods. Our this view is based on the understanding of the scheme of DEPB in commercial sense and in the tight of the Foreign Trade Policy of the Government of India. But when we come to the computation of deduction and the placement of the face value of DEPB in the scheme of section 80HHC, the general view based on the foreign Trade Policy about the reduction of such amount from the purchase cost, fails. We have seen above the sub-section (3) of section 80HHC is complete code in itself in so far as the computation of the eligible profits derived from export are concerned. The mandate of sub- section (3) has to be religiously followed for determining the amount of eligible profits for deduction and as such the general view about the understanding of the nature of DEPB will be subdued and the one based on the prescription of this provision will come to fore. In that view of the matter we hold that the face value of DEPB cannot be reduced from the cost of purchases and has to be considered as a separate species of" Business 'income'. Thus all the contentions put 21 forward on behalf of the assesses and the interveners about the reduction of the face value of DEPB have become academic in the context of section 80HHC. Similarly the comparison of DEPB with MODVAT, which is an off-shoot of the basic contention of reduction of the DEPB value from the purchases and also the arguments by the ld. AR towards the reduction of the face value of DEPB from the purchase cost on the strength of certain decisions rendered in the framework of section 80IB, lose their relevance in the present context of section 80HHC and hence need not be examined.
73. If the intention of the legislature had been to allow the reduction of the face value of DEPB from the cost of purchases, as has been, contended before us, then there was no need to have clauses (iiia) to (iiie) of section 28 and also the first to fifth provisos to section 80HHC(3) along with the necessary ingredients of Explanation below section 80HHC(4C). We have held that the face value of DEPB under the scheme of the Income-tax Act, 1961 falls under section 28(iiib) and the profit element t on the sale of DEPB, that is the excess of sale proceeds over the face value of DEPB falls u/s 28(iiid). 'Profits of business' as per Explanation (baa) provides for the Exclusion of ninety per cent of any sum referred to in section 28(iiia to iiie). Then first proviso to sub-section (3) states that the profits computed under clauses (a) or (b) or (c) shall be further increased by the amount which bears to the ninety per cent of any sum referred to in section 28(iiia, iiib and iiie).
It means that the ninety cent of the face value of DEPB which was reduced while computing the 'profits of the business' shall stand included when effect is given to first proviso. If we go with this argument that the fact value of DEPB is to be reduced from the cost of purchase then in the case of merchant exporter with turnover of less than Rs.10 crores, an anomalous situation will crop up inasmuch as the amount of eligible profit will far exceed the actual profit as demonstrated below.
Export turnover Rs.
1,000
Cost of goods sold - Direct costs (without DEPB) Rs. 800
- No indirect costs Face value of DEPB Rs 100
74. Going by sub-section (3)(b) the profits derived from such export shall be export turnover minus the direct and indirect costs attributable to such export. Going by the contention of the ld. AR, the direct cost will come al Rs.700 (800 - 100) as against the export 22 turnover at Rs.1,000 resulting into profits derived from export as per clause (b) of sub-section (3) coming, to Rs.300 i.e. Rs.1,000 minus Rs.700. When we further give effect to the first proviso to sub-section (3), the profit of Rs.300 as computed above would require to be further increased by the ninety per cent of the face value of DEPB. The amount of Rs.90 (i.e. 90% of Rs.100 i.e face value of DEPB could, therefore, be added and the profit as determined in clause (b) of 80HHC(3) will come at Rs.390. As against that we find the real profit from export after giving effect to the DEPB benefit is only Rs.300 [1000 700 (800 - 100)]. Thus it can be easily ascertained that whereas the total business from export is Rs.300 but if we accept the contention that the face value of DEPB be reduced from the cost of purchases then the amount of profits derived from export as per section 80HHC(3)(b) will come at Rs.390. Obviously this calculation defies all logics and is incapable of acceptance due to awkward situation created by determining the profits derived from export at a figure higher than the actual business profit, the former amount, in no case can be higher than the later. We find that the logic behind introducing clauses (iiia) to (iiie) to section 28 is to de link the export incentives from the business profits while continuing them to be governed by Chapter IV-D at the same time. The natural outcome following the prescription of clauses (iiia) to (iiic) of section 28 along with section 80HHC(3) is that all the export incentives including the DEPB and DFRC etc. be considered as separate business income and not to reduce them from the cost of purchases.
75. We will now endeavor to evaluate the stand point of the AO from another angle that the entire amount of sale proceeds is covered under clause (iiid) and; not only the profit element. Continuing with the above example, where we supposed that the exporter made export turnover of Rs. 1000/- and he earned Rs.200/- from the export transaction in addition to Rs.100/- towards the face value of DEPB. The amount of profits derived from exports shall come at Rs.300 as per clause (baa) of Explanation below 80HHC(4C) read with sub-section (3) including the first proviso. Further suppose that the said DEPB is held as such at the close of the year and is then sold in the succeeding year for Rs. 110. If we agree with the view point of the Department that at the time of sale of DEPB, the entire amount of Rs . 110/- is includible in section 28 (iiid) then it would mean that in order to give effect to sub- section (3), firstly the sum of Rs.100/- will require inclusion in the profits and gains of business or profession" in the year of sale, because the question of 90% exclusion shall arise only if 100% is included in the profits of the business as computed under the head Profits and gains of business or profession'. That obviously cannot be the done because the sum of Rs.100/- had already been included 23 in the Profits and gains of business or profession' for the last year when such income accrued to the assessee u/s 28(iiib). The further inclusion of Rs.110/- in succeeding year at the time of sale in the "Profits and gains of business or profession" would lead to obvious incongruity and an impossible situation because the inclusion of face value of Rs.100/- in the profits of the second year also will amount to double taxation of Rs.100/- firstly in the year one when the income on account of the face value of DEPB accrued u/s 28(iiib) and there in the year two at the time of sale u/s 28(iiid). ....
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79. The second proviso to section 80HHC provides that in the case of an assessee having export turnover not exceeding Rs. 10 crores during the previous year, the profits computed under clause (a) or clause (b) or clause (e) 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 (iiic) of section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee. In other words, in the case of an assessee with export turnover not exceeding Rs. 10 crores, even the profit element of Rs.10/- in the above example on the sale of DEPB for Rs.110/- will also be considered as eligible for deduction despite the fact that it is out of the trading of DEPB entitlement in India only. But for this proviso no profit on sale of DEPB or DFRC could have been considered for deduction under this section. In contrast to it the third and fourth provisos are applicable to the case of the assessee having export turnover exceeding rupees ten crores in which case the profit computed under clause (a) or clause (b) or clause (c) of sub section (3) or after giving effect to the first proviso, shall be further increased by the amount which bears 90% of any sum referred to in section 28(iiid) or (iiie) in proportion to the export turnover to the total turnover only if the further two conditions stipulated therein are fulfilled and also the assessee has suffered evidence to prove the fulfillment of such conditions. It is this category of exporters which has been statutorily discriminated vis a vis the small exporters having turnover not exceeding Rs. 10 crores. They shall not be entitled to increase in the quantum of deduction by profit at transfer of DEPB/DFRS which is otherwise available to small exporters, unless the two conditions as set out in these provisos are fulfilled. In the cases under consideration it is an admitted position that the two conditions as so specified in third and, fourth provisos are not capable of compliance and hence the further increase as suggested in these two provisos cannot be made to the computation of deduction u/s.80HHC. Thus, it is apparent that the statutory 24 discrimination is between the exporters having export turnover not exceeding Rs. 10 crores and those having exceeding Rs. 10 crores. Whereas the benefit of deduction in respect of the profit of sale of DEPB realized from the Indian market is also available to small exporters having export turnover, it is not so in the case of the large exporters having export turnover exceeding Rs. 10 crores. This appears to be the only reason for inserting clauses (iiid) and (iiie) to section 28 by the Taxation, Laws (Amendment Act, 2005), simultaneous with the insertion of section 3rd and 4th provisos. .....
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89. The question raised before the special bench has two parts. In so far as the first part: 'Whether the entire amount received on sale of DEPB entitlements represents profit chargeable under section 28(iiid) of the Income Tax act, is concerned, we answer it in negative and the second part of the question or the profit referred to therein requires any artificial cost to be interpolated is replied in affirmative to the extent that the face value of DEPB shall be deducted from the sale proceeds. As regards the grounds based in these appeals against the denial of deduction u/s 80HHC, in full or part, we find that the computation of profits derived from exports and the resultant amount of deduction under this section can be made only when the decision is taken on the amount and the timing of taxability of the face value of DEPB and the profit on its sale. On this issue we hold that the face value of DEPB is chargeable to tax u/s 28(iiib) at the time of accrual of income, that is, when the application for DEPB is filed with the competent authority pursuant to exports and profit on sale of DEPB representing the excess of sale proceeds of DEPB over its face value is liable to be considered u/s 28(iiid) at the time of its sale. Whatever is said about DEPB shall also hold good for DFRC, on both its components, viz the face value of DFRC and profit on its transfer, except for the fact that the profit on sale of DFRC shall be charged to tax u/s 28(iiie). There is no dispute about the duty drawback, which shall be chargeable to tax at time of accrual of income u/s 28(iiic) when application is filed with the competent authority after making exports. Since the necessary facts for the determination of the quantum of deduction u/s 80HHC, as discussed above, are not available on record, we, therefore, set aside the impugned orders and direct the AO to compute the amount of relief in accordance with the view expressed by us here in above."
12. Respectfully following the above judgment of the Tribunal, we hold that profit element on DEPB licence will be covered by section 28(iiid) and, accordingly, by third proviso to section 80HHC(3) of the I.T. Act, 1961 as the turnover of the assessee exceeds Rs.10 crores 25 This amount shall be excluded for the purpose of computing deduction u/s.80HHC of the I.T. Act, 1961, if condition laid down in that proviso are not satisfied . The face value of the DEPB licence will be covered u/s.28(iiib) of the I.T. Act, 1961 and, therefore, 90% thereof would be added to the export profits as per first proviso to section 80HHC(3) of the I.T. Act, 1961.
15. We respectfully following the same, we restore this issue to the file of A.O. to decide as per the above decision of Special Bench and A.O. is directed accordingly to recalculate the DEPB entitlement. In the result, the appeal is allowed for statistical purposes.
Order pronounced in Open Court on 24 / 03 /2010.
Sd/- Sd/-
(DEEPAK R. SHAH) (D.T. GARASIA)
ACCOUNTANT MEMBER. JUDICIAL MEMBER.
Ahmedabad.
Dated: 24 /03/2010.
SAP
Copy of the Order forwarded to:-
1. The Appellant.
2. The Respondent.
3. The CIT(Appeals)-
4. The CIT concerned.
5. The DR.,ITAT, Ahmedabad.
6. Guard File.
By ORDER
Deputy/Asstt.Registrar
ITAT, Ahmedabad.
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