2010 (7) TMI 24 - HC - Income Tax

Sale of DEPB - Taxable under section 28(iid) of the Income Tax Act 1961 - interpolation of artificial cost - computation of profit for the purpose of section 80HHC - freight and insurance charges - Held that the fact that the seller of the goods stands reimbursed in respect of certain expenses is not a consideration which would indicate that those expenses do not form part of the costs incurred by the seller. Costs do not cease to be costs because they are reimbursed to the seller as part of the sale consideration. the fact that the seller of the goods stands reimbursed in respect of certain expenses is not a consideration which would indicate that those expenses do not form part of the costs incurred by the seller. Costs do not cease to be costs because they are reimbursed to the seller as part of the sale consideration. - while computing direct cost attributable to export the freight and insurance amounting to Rs.1, 71, 87, 614/ should be excluded for arriving at export profits while computing the deductions u/s.80HHC - decided in favor of assessee - the issue related to DEPB was also decided in favour of the Revenue and against the assessee

Summary

Issues:
1. Interpretation of Section 28(iiid) of the Income Tax Act regarding the treatment of profit from the sale of DEPB entitlements.
2. Computation of export profits under Section 80HHC, specifically regarding the exclusion of freight and insurance costs.

Issue 1: Interpretation of Section 28(iiid) regarding DEPB sale profits:

The appeal raised questions on whether the profit element from the sale of DEPB, exceeding the face value, falls under Section 28(iiid) of the Income Tax Act. The Tribunal's decision was challenged, contending that the entire amount received from the sale of DEPB entitlements should be considered as profits chargeable under Section 28(iiid). However, the judgment referred to a previous case where it was held that only the profit element exceeding the face value is covered under Section 28(iiid), ruling in favor of the Revenue.

Issue 2: Computation of export profits under Section 80HHC:

The case involved the deduction provided under Section 80HHC for profits derived from exporting goods. The dispute centered on whether the freight and insurance costs should be excluded from the export turnover when computing the profits. The Revenue argued that these costs should be treated as part of direct costs, while the Assessee contended that such costs are already excluded from the export turnover as per legislative intent.

The Court analyzed the relevant sections and explanations, emphasizing that the exclusion of freight and insurance from the export turnover aims to ensure that Section 80HHC incentivizes export profits. It was concluded that such costs cannot be considered as direct costs attributable to trading goods exported out of India. The judgment aligned with the Supreme Court's interpretation, stating that direct costs should have a proximate connection to the purchase of trading goods, which freight and insurance costs lack post-customs station.

Additionally, the Court referenced a Delhi High Court case where it was held that expenses recovered from foreign buyers do not negate their status as costs incurred by the seller. The judgment favored the Assessee's position, ruling against the Revenue's argument to include freight and insurance costs in direct costs for computing export profits under Section 80HHC.

In conclusion, the judgment addressed the issues of interpreting Section 28(iiid) and computing export profits under Section 80HHC, providing detailed analysis and aligning with previous legal interpretations to decide in favor of the Revenue for the first issue and in favor of the Assessee for the second issue. The case was remanded back to the Assessing Officer for fresh disposal in accordance with the law and the court's judgment in a related case.