2013 (3) TMI 216 - HC - Income Tax

Deduction u/s 80HHC - DEPB Credit - Application of AS-2 - held that - 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. - Decided in favor of assessee.

Summary

Issues Involved:
1. Whether the Appellate Tribunal is right in law and on facts in holding that while computing the profit of the business under Explanation (BA) of Section 80HHC, 90 percent of the profits on transfer of DEPB should be excluded, not the total amount received by the assessee on the transfer of the DEPB credit?

Issue-wise Detailed Analysis:

1. Assessing Officer's Opinion:
The Assessing Officer disallowed the deduction under section 80HHC of the Income Tax Act, 1961, on the grounds that the respondent-assessee had wrongly claimed deduction of DEPB credit and DEPB premium.

2. CIT(Appeals) Opinion:
CIT(Appeals) opined that since the assessee's export exceeded Rs.10.00 crores, it was not eligible for deduction under section 80HHC of the Act.

3. Tribunal's Decision:
The Tribunal set aside the order of CIT(Appeals) and remanded the file for reconsideration, relying on the decision in the case of M/s. Topman Exports. However, the decision in M/s. Topman Exports was set aside by the Bombay High Court in the case of C.I.T Vs. Kalpataru Colours and Chemicals.

4. Nature of DEPB Benefits:
The nature of DEPB benefits was discussed in the case of Kalpataru Colours and Chemicals, where it was observed that the profit on transfer of DEPB credit is the total amount received, not just the premium over the face value. DEPB credit is given to neutralize customs duty on the import content of the export product and is an export incentive.

5. Supreme Court's Observation:
In Liberty India, the Supreme Court observed that DEPB benefits are incentive profits and not profits derived from eligible business under section 80-IB of the Act. Such benefits constitute an independent source of income beyond the first-degree nexus between profits and the industrial undertaking.

6. Statutory Provisions and Judgments:
Section 80HHC provides for deduction in export profit, which is calculated by ascertaining the business profit and multiplying it by a fraction of export profit over total profit. Explanation (baa) to section 80HHC excludes 90 percent of certain incomes from the computation of business profit. Clause (iiid) of section 28, introduced by the Amendment Act 2005, refers to the profit on the transfer of DEPB scheme.

7. Interpretation of Clause (iiid):
The term "profit" in clause (iiid) includes the entire sale consideration on transfer of DEPB credit, not just the premium over the face value. This interpretation aligns with the legislative intent and avoids anomalies such as different tax treatments for retained and transferred DEPB credits.

8. Legislative History and Finance Minister's Speech:
The introduction of clause (iiid) and corresponding changes in explanation (baa) to section 80HHC were to neutralize the decision of the Tribunal in P & G Enterprises Ltd. The Finance Minister's speech emphasized that DEPB credit sales should be treated as business profit, not export profit.

9. Judicial Pronouncements:
The Apex Court's decisions in K.P. Varghese and Kerala State Industrial Development Corpn. Ltd. support the use of Finance Minister's speeches to interpret statutory provisions. The mischief rule, as established in Heydon's case, also supports this approach.

10. Conclusion:
The Tribunal erred in concluding that only the amount in excess of the face value of DEPB credit forms part of the profit under clause (iiid) of section 28. The entire sale proceeds of DEPB credit should be considered as profit. The appeals are allowed, reversing the Tribunal's decisions.

11. Certificate for Appeal:
The court granted a certificate under Articles 133 and 133A of the Constitution, recognizing the substantial question of law of general importance involved in the case, which needs to be decided by the Apex court.

Final Judgment:
The appeal is answered in favor of the Revenue, reversing the order of the Tribunal. The appeal stands allowed to the above extent.