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TMI Blog2010 (6) TMI 63X X X X Extracts X X X X X X X X Extracts X X X X ..... .).: A. The questions of law 1. This appeal by the Revenue under Section 260A of the Income Tax Act, 1961 arises out of a decision of a Special bench of the Income Tax Appellate Tribunal dated 11 August 2009. The Revenue has formulated two questions of law in the appeal: "a) Whether the Tribunal is justified in holding that the entire amount received on the sale of the Duty Entitlement Passbook does not represent profits chargeable under Section 28(iiid) of the Income Tax Act, 1961 and that the face value of the Duty Entitlement Passbook shall be deducted from the sale proceeds; b) Whether the Tribunal is justified in holding that the face value of the Duty Entitlement Passbook is chargeable to tax under Section 28(iiib) at the time of accrual of income i.e. when the application for Duty Entitlement Passbook is filed with the competent authority pursuant to the exports made and that the profits on the sale of Duty Entitlement Passbook representing the excess of the sale proceeds over the face value is liable to be considered under Section 28(iiid) at the time of sale;" B. Facts 2. The appeal relates to Assessment Year 2003-04. The Appellant is a trader and exporter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DEPB credit were held to represent profit, there being no cost involved. On this ground, the findings of the Assessing Officer were confirmed. 4. A Special bench of the Tribunal was constituted by the President for determining as to whether the entire amount received on the sale of the DEPB entitlement represents profit chargeable under Section 28(iiid) of the Income Tax Act, 1961 or whether the profit referred to therein requires any artificial cost to be interpolated. The Tribunal came to the conclusion that the entire amount that is received on the sale of the DEPB entitlement does not represent a profit chargeable under Section 28(iiid) and the face value of the DEPB entitlement is liable to be deducted from the sale proceeds. According to the Tribunal the face value of the DEPB entitlement was chargeable to tax under Section 28(iiib) while the difference between the sale consideration and the face value of the DEPB entitlement would fall for classification under Section 28(iiid). 5. This appeal has been listed for hearing together with a batch of other appeals. Since certain questions of law would arise in all the appeals, we had in the interests of fairness permitted cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DEPB entitlement. Hence, the face value of the DEPB entitlement is a part of income and forms a part of export profits. Once it is a part of income, whether it falls under clauses (iiib), (iiic) or (iiid) of Section 28 is of no consequence and the assessee would be entitled to a deduction in respect of the face value; (v) The face value of the DEPB entitlement has a direct nexus with exports and it is only the profit element on the trading of the entitlement which is liable to be excluded on the ground that it has no nexus with profits. Both the face value of the DEPB entitlement and the trading profits are comprised in the business profits of the assessee. Explanation (baa) to Section 80HHC determines how much would be exempt for the purposes of the provision. Whatever is not directly relatable to exports has to be excluded. The face value of the DEPB entitlement cannot be excluded because it is directly relatable to exports; (vi) The DEPB entitlement is not required to be reduced under Explanation (baa) because ( a) on a plain reading, Explanation (baa) refers to clause (iiid) of Section 28 which in turn postulates a profit generated on transfer; (b) Clause (iiid) of Section 28 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lled) 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." 10. Prior to the insertion of clauses (iiia) to (iiiic), the question as regards the taxability of export incentives was dealt with in a judgment of this Court in Metal Rolling Works Pvt. Ltd. v. Commissioner of Income Tax {(1983) 142 ITR 170 (Bom.)}and by the Allahabad High Court in Agra Chain Manufacturing Co. v. Commissioner of Income Tax {(1978) 114 ITR 840 (Allahabad)}. The prevailing view of these two courts was that in the case of an assessee who is engaged in exports import entitlements received under incentive schemes of the Government of India would be taxable under clause (iv) of Section 28 as the value of a benefit, whether convertible into money or otherwise arising from business or the exercise of a profession. However, there appeared to be a conflict of opinion among Courts on the issue which was resolved by Parliament by the insertion of clauses (iiia), (iiib) and (iiic) by the Finance Act of 1990 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e import content of the export product. Neutralization is provided by granting a duty credit against the export product. The manner in which the DEPB scheme operates is that an exporter is allowed to apply for credit which is computed as a specified percentage of the FOB value of exports made in freely convertible currency. The export products and the rates governing the grant of DEPB credit are notified. The DEPB credit and items imported against it are made freely transferable under paragraph 7.16. The duty credit under the scheme is calculated by taking into account what is described as a deemed import content of the export product in accordance with standard input output norms and the basic customs duty payable on such deemed import. In other words, the credit which is made available to an exporter under the DEPB scheme represents a specified percentage of the FOB value of the goods exported. The goods which are exported need not, as a matter of fact, necessarily utilize imported inputs. The policy calculates a deemed import content on the basis of standard input output norms and a credit is made available to the exporter. The credit need not be utilized by the exporter himself ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct of such goods bears to the total turnover of the business carried on by the assessee. In other words, the proportion between the export turnover to the total turnover of the business is applied to the profits of the business of the assessee and the result constitutes export profits. However, where an assessee carries on the business of export of trading goods, clause (b) defines export profits to be the export turnover in respect of such trading goods which is to be reduced by the direct and indirect costs attributable to the export. Profits of business 15. In the application of the formula to a manufacturer exporter, clause (a) refers to the profits of the business. The expression profits of the business is elucidated in Explanation (baa) to Section 80HHC. Explanation (baa) is to the following effect: "(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( 1)ninety per cent of any sum referred to in clauses (iiia), (iiib), (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 na ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in under the Taxation Laws (Amendment) Act 2005. The Amending Act brought about a corresponding amendment to Section 28 by the insertion of clauses (iiid) and (iiie). Clauses (iiid) and (iiie) as inserted into Section 28 by the Amending Act of 2005 are to the following effect: "(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)." 19. Clause (iiid) contemplates that any profit on the transfer of the Duty Entitlement Pass Book scheme would be chargeable to income tax as a business profit. The circumstances in which the amendment was brought about would have a bearing on the subject matter of the controversy in the present case and will therefore need some elaboration. In P G Enterprises (supra) a Bench of the Income T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8 by bringing in a specific provision that would cover DEPB receipts on the one hand and by clarifying through the amendment of Explanation (baa) that DEPB receipts also constitute incentive profits which were liable to sustain a reduction of ninety percent. 21. Parliament incorporated several provisos to sub section (3) of Section 80HHC. Under the first proviso the profits computed under clauses (a), (b) or (c) of sub section (3) have to be increased by the amount which bears to ninety percent of any sum referred to any clauses (iiia), (iiib) and (iiic) of Section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee. The second and third provisos to sub section (3) are of some significance in the present case and they read as follows: "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 claus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is to observe that clause (iiid) of Section 28 would cover only the difference between the sale consideration realized by the assessee on the transfer of the DEPB credit and the DEPB credit that was the subject of transfer. As regards the DEPB credit, described as the face value, the Tribunal observed that it was liable to be brought in under Section 28(iiib). E. "Any profit on the transfer" of DEPB credit 23. The submission which has been urged before the Court by the assessee is that Section 28(iiid) brings within the fold of income chargeable to tax any profit on the transfer of the Duty Entitlement Pass Book scheme. According to the assessee, the expression profit means the difference between the sale consideration realized from the transfer of the DEPB receipts and the face value of the DEPB credit that has been transferred. The Tribunal, while accepting the contention of the assessee has also held that it is only this difference which would fall within the purview of clause (iiid) and that the DEPB credit would fall within the purview of clause (iiib). (Clause (iiib) deals with a cash assistance received or receivable under any scheme of the Government of India.) 24. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to be treated as profits of business under Section (iiid). 26. Prior to the insertion of clause (iiid) in Section 28, the dispute was, whether the profits of business such as the amount received on transfer of DEPB would constitute export profit for the purposes of deduction under Section 80HHC or not. According to the exporters, the entire amount received on transfer of a DEPB credit would constitute export profit and according to the revenue it would not. Thus, there was no dispute that the entire amount received on transfer of DEPB was profits of business but the dispute was whether or not such profits would constitute export profits. 27. By the Finance Act of 2005, Parliament resolved the controversy by inserting a specific clause, namely Clause (iiid) in Section 28 to the effect that profits on transfer of DEPB i.e., the amount received on transfer of DEPB is income chargeable to tax under the head - profits and gains of business and profession. As regards the deduction under Section 80 HHC, the legislature substituted Explanation (baa) in Section 80HHC so as to exclude 90% of the profits received on transfer of DEPB from the profits of business for the purposes of Secti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profits of business. Similarly, the amount realized on transfer of DEPB, be it equivalent to the face value of the DEPB; more than the face value of DEPB; or less than the face value of DEPB, would be profit on transfer of DEPB covered under Section 28(iiid); c) The fact that the assessee had accounted for the DEPB credit immediately after making an application seeking DEPB credit would make no difference to the taxability of the entire amount received on transfer of the DEPB credit under Section 28(iiid). What constitutes profits under Section 28(iiid) is the amount received on transfer of the DEPB credit and not the amount of credit which the assessee was entitled to under the DEPB scheme. In other words, the amount equivalent to the face value of DEPB as well as the amount received in excess of the DEPB would constitute profits of business under Section 28(iiid) and merely because, a part of such profits of business (face value) was offered to tax in the year in which the credit accrued to the assessee would not be a ground to hold that such profit was not covered under Section 28(iiid). Where the face value of the DEPB credit is offered to tax as business profits under Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... support; and (iii) Duty drawback. The DEPB scheme was not even in existence when clause (iiib) came to be enacted into Section 28 by the Finance Act of 1990. The DEPB scheme was brought into existence with effect from 1 April 1997. Clause (iiid) of Section 28 was inserted by the Amending Act of 2005 with effect from 1 April 1998. The value of the DEPB credit can by no means be regarded as a cash assistance which is received or receivable by a person against exports under any scheme of the Government of India. 32. The Tribunal has relied to a considerable extent on a speech made by the then Finance Minister on the floor of Parliament in support of its conclusion that only the premium realized by an exporter on the sale of the DEPB credit would fall within the purview of clause (iiid) of Section 28 and not the face value of the DEPB. The entire approach of the Tribunal is with respect misconceived and unsustainable. The Finance Minister sought to introduce clause (iiid) in Section 28 in view of the decision of the Delhi Bench of the Tribunal in the case of P G Enterprises (supra). The dispute in that case related to taxing the entire amount received on the transfer of the DEPB c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not utilized in the business but is transferred for value, the amount received on the transfer would be business profits and not export profits irrespective of whether the amount which is realized is equal to, larger than or less than the face value of the DEPB credit. Parliament has considered that the entirety of the amount received on the transfer of the DEPB shall constitute profits of business under Section 28(iiid). Since such profits are not export profits Parliament directed that ninety percent of those profits would be excluded while computing the deduction under Section 80HHC; (iii) Parliament considered that an exporter who instead of utilizing the DEPB credit for paying customs duty on imported goods, makes a profit by transferring the DEPB, would form a separate class and seeks to tax the receipts on the transfer of the DEPB credit as business profits and not export profits. Exporters who transfer the DEPB credit and make a profit cannot be placed on par with those exporters who utilize the credit for paying the customs duty on the imported goods; (iv) The fact that Parliament did not consider the amount received on the transfer of the DEPB to be export profit ..... X X X X Extracts X X X X X X X X Extracts X X X X
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