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TMI Blog2011 (6) TMI 844X X X X Extracts X X X X X X X X Extracts X X X X ..... ed order for the sake of convenience. 3. The issue arising in the captioned appeals relates to the computation of deduction under section 80HHC of the Income Tax Act on account of income by way of Duty Entitlement Pass book(DEPB), Duty Draw Back (DBK) and Duty Free Remission Scheme(DFRC). The issue was decided by the Chandigarh Bench of the Tribunal vide order dated 31.8.2009 following the decision of a Special Bench of Mumbai Tribunal in M/s Topman Exports Vs. ITO (2009) 29 DTR 153 (Mumbai) and the matter was remitted back to the file of the Assessing Officer to be adjudicated afresh conformity with the aforesaid decision of the Special Bench of the Tribunal. 4. The Revenue filed appeals before the Hon'ble High Court. The following substantial questions of law were raised before the Hon'ble High Court : "I. Whether on the facts and circumstances of the case the ITAT was right in law in not holding that the total sale consideration inclusive face value of DEPB and premium amount received thereof represents profit chargeable under section 28(iiid) and 28(iiie) of the Income Tax Act, 1961? II. Whether on the facts and circumstances of the case the ITAT was right in law ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f various captioned ITAs as common questions were involved therein. The Hon'ble High Court has held that the issue stands covered by the order passed in I.T.A.No. 299 of 2010 in CIT Vs. F.C.Sondhi & Company (P) Ltd. (order dated 16.8.2010). 7. The Hon'ble Punjab & Haryana High Court in the case of various assessees including CIT vs. M/s Tipson Cycles Pvt. Ltd. before us have remitted the matter back to the Tribunal for fresh decision in accordance with law by observing as under : "2. Learned counsel for the appellant states that the matter is covered in favour of the revenue by orders of this Court dated 16.8.2010 in I.T.A.No.301 of 2010 CIT v. M/s Victor Forgings and I.T.A.No.299 of 2010 CIT v. F.C.Sondhi, wherein after noticing the judgment of the Bombay High Court in CIT v. Kalpararu Colours & Chemicals 2010 (42) DTR 193, the matter was remanded to the Tribunal for fresh decision in accordance with law. 3. Since we find that the matter is covered by earlier orders of this Court, we dispose of this appeal in same terms. For this purpose, we have not considered it necessary to issue notice to the respondent, but we given liberty to the respondent to move this Court i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; 1/- was the profit to the export on such transfer of DEPB license, as envisaged in clause (iiid) of Section 28 of the Act. Reliance was placed on the speech of Finance Minister, while introducing the Bill to show that the intention of the Statute was to tax only the profits/premium arising on the transfer of DEPB. Further reliance was placed on Calcutta Co. Ltd. Vs. CIT, 37 ITR 1 (SC) and Vania Silk Mills (P) Ltd. Vs. CIT (19 ITR 647 (SC)) and Others that transfer presumes existence of asset and of transferee to whom it is transferred and DEPB licence is an asset having value, which is transferred. 9. The learned A.R. thus submitted that the expression 'profit' signifies sale price over and above the face value of DEPB License and the same was contemplated under clause ((iiid) of Sec 28 of the Act and 90% of such profits only were to be reduced to calculate 'profits of the business' as per clause (baa) of the explanation to sub-sec 4 of Section 80HHC, for the purpose of calculation of deduction u/s 80HHC of the Act. 10. It was further pointed out by the learned A.R. that under clause/s (iiia), (iiib), (iiic) and clause (iv) and (v) of Section 28 of the Act that wherever, Legisl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ned A.R. pointed out that in the judgment of Hon'ble Bombay High Court in the case of Kalaptaru Colours & Chemicals(supra), though the reference has been made to the speech of the Finance Minister, but the intention of the Finance Minister, has not been discussed at all and the bare reading of the speech of the Finance Minister is absolutely clear that only premium i.e. the profit has to be taken into consideration for the purpose of clause (iiid) of Sec 28 of the Act. 14. Shri S.K.Mukhi appearing in I.T.A.Nos. 1043 & 1044/Chd/2007, I.T.A.No. 61/Chd/2010 and I.T.A.No. 69/Chd/2011 relying on the submissions made by Shri Sudhir Sehgal, made further submissions and also filed written submissions, which are placed on record. As per the learned A.R. the issue to be considered by the Tribunal was to decide whether DEPB had any value or not. The learned A.R. stated that though the Hon'ble High Court had agreed with the judgment of Hon'ble Bombay High Court in CIT Vs. Kalapataru Colours & Chemicals (supra), to the extent "that the income from DBK, DEPB and DFRC has to be treated as business income and has to be taken into account for deduction under section 80HHC", but Hon' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... envisaged under section 28(iiid) of the Act and rationale behind section 28(iiib), non-inclusion of 28(iiid) in definition of income under section 2(24) of the Income Tax Act. The learned A.R. relying on the pleadings of the Revenue in CIT vs. M/s Roadways Overseas, Jalandhar in I.T.A.No. 466 of 2010 pointed out that the Revenue had stated that there was some consideration "of DEPB and it was also pleaded in its grounds that if the DEPB credits are consumed the cost incurred by the assessee on import duty will be lower to that extent". The learned A.R. thus pointed out that only the profit on transfer had to be considered for 90% exclusion under explanation (baa) to sub-section 4C to section 80HHC of the Act. It was reiterated that the face value of DEPB was to be taken as cost for arriving at profit allowable to be taxed under section 28(iiid) of the Income Tax Act. The learned A.R. in the second round of arguments pointed out that the proviso to section 80HHC (3) of the Act was inserted by the Taxation Laws (2nd Amendment) Act, 2005 with w.r.e.f. 1.4.1998 wherein such proviso was made applicable to all exporters having turnover exceeding ₹ 10 crores. It was fairly admitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt, the arguments of the Revenue before the Hon'ble Bombay High Court and the arguments raised on behalf of the assessee and after taking us through the various paras of the said judgment pointed out that the issue has been elaborately considered by the Hon'ble Bombay High Court even taking into consideration the ratio laid down by the Apex Court in K. Ravindranathan Nair, 295 ITR 228 (SC). It was pointed out by the learned D.R. that the contention of the learned A.R. that the speech of the Finance Minister at the time of introduction of the bill was not considered, is misplaced as in para 32 of its judgment, the said issue has been considered by the Hon'ble Bombay High Court. 19. The learned D.R. for the Revenue further pointed out that the Hon'ble Punjab & Haryana High Court in F.C.Sondhi (supra) decided the first issue that the receipts on sale of DEPB/DFRC were business income and not export income and thereafter the Jurisdictional High Court had concurred with the ratio laid down by the Hon'ble Bombay High Court and on its acceptance, the said view of the High Court was to be applied. It was the contention of the learned D.R. that the decision in CIT Vs. K ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3. The learned A.R. for the assessee pointed out that the amendment introduced in section 80HHC of the Act denies retrospectively deduction to exporters having turnover of more than 10 crores and imposition of such conditions was ultravirus and against the principles of promissory estoppel. It was pointed out that the present assessee in I.T.A.No. 673/Chd/2007 had suffered a loss of ₹ 11,98,827/-. The learned A.R. for the assessee placed reliance on the submissions made by the learned A.Rs. for other assessees. 24. We have heard the rival contentions and perused the record. The issue arising before us in the captioned appeals heard on different dates pursuant to the judgment passed by the Hon'ble Punjab & Haryana High Court in various cases of the assessees before us was in connection with the assessability of the sale consideration of DEPB entitlement/DFRC and its treatment while computing the deduction under section 80HHC of the Act. 25. The first issue whether the income from DEPB/DFRC is to be treated as business income under section 28(iiid) and 28(iiie) of the Act has been answered in the affirmative by the Hon'ble Punjab & Haryana High Court in CIT Vs. F.C.So ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rived by a trade, professional or similar association from specific services performed for its members ; [(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 re-paid or re-payable as drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules, 1971 ;]" 28. Clauses (iiia), (iiib) and (iiic) of section 28 were inserted by the Finance Act, 1990 though with retrospective effect from different dates. As per the said clauses of section 28 of the Income Tax Act, the incentives given to the exporters were held to be taxable as profits of business comprising of three categories i.e. i) Cash compensatory scheme; ii) Duty Draw back; and iii) Import entitlement licence. By the aforesaid amendment of the Act, profits on sale of import licence, cash assistance under any scheme of the Central Government and drawback on duty of customs or excise would constitute ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er the exim policy in paras 11 and 12 of its judgment. Thereafter a reference was made to the amendment of 2005 by which clauses (iiid) and (iiie) of section 28 of the Act were inserted. The Hon'ble Court referred to the circumstances under which the said insertions were made to the Statute, vide para 19 & 20; the Hon'ble Court observed as under : "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 [2005] 93 ITD 138 (Delhi) a Bench of the Income-tax Appellate Tribunal at Delhi considered the case of an exporter to whom a credit was available under the duty entitlement pass book scheme. The DEPB credit was transferred and the receipts were shown as business receipts under section 28(iiia). The Assessing Officer held that the receipts upon the transfer of the DEPB entitlement fell for classification under section 28(iv) and be excluded ninety per cent. of those rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lause (iiid) to section 28 of the Act profits on transfer of DEPB was income chargeable under the head "profits & gains of business &profession". The Hon'ble Punjab & Haryana High Court in the case of the different assessees before us have held that the profits arising on transfer of DEPB are business profits in the hands of the assessee. Thus there is no controversy regarding the aspect of the said receipts received by the exporter on transfer of DEPB credit to be included as business profits of the said concern. 33. The consequential issue arising in the captioned appeals before us is its treatment under the provisions of section 80HHC of the Act. Under sub-section (1) to section 80HHC of the Act deduction is allowed to the assessee in respect of profits derived from export. The formula for determining the export profits is laid down in sub-section (3) to section 80HHC of the Act, which deals with export of goods manufactured or processed by the assessee in clause (a); export of trading goods in clause (b) and export of goods manufactured/processed and of trading goods in clause (c). The expression "profits derived from export" is defined in clause (a) of sub-section (3) to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , charges or any other receipt of a similar nature included in such profits. The first part of clause (1) provides for the exclusion of ninety per cent. of "incentive profits" (those referred to in clauses (iiia) to (iiie) of section 28) and "independent incomes" which are not relatable to exports. Rationale for exclusion of independent incomes and incentive profits 17. The rationale for this exclusion is explained in the judgment of the Supreme Court in the CIT v. K. Ravindranathan Nair [2007] 295 ITR 228 (SC). The Supreme Court held that the expression "derived from" that is used in sub-section (1) of section 80HHC is narrower in its ambit than the words "attributable to" and consequently, it is only profits that are derived from export that qualify for a deduction. The second important facet of the judgment of the Supreme Court is in explaining the provisions of Explanation (baa). The Supreme Court has observed that what the Explanation postulates is that though incentive profits and independent incomes constitute a part of the gross total income, they have to be excluded from the gross total income because such receipts have no nexu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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." 35. In view of provisions of sub-section (3) to 80HHC of the Act, and the provisions thereunder, for computing the deduction under section 80HHC of the Act, the export turnover of the business carried on by the assessee has a relevance. The Parliament has drawn a distinction between the assessee having export turn over not exceeding ₹ 10 crores and those having turn over exceeding ₹ 10 crores while computing the profits of business. Under sub-section (3) of section 80HHC of the Act where the turn over of the exporters was less than ₹ 10 crores, it has been provided that the profits would further be increased by an amount which bears to 90% of the sum referred in clause (iiid) or (iiie) of section 28, in the same proportion as export turnover bears to the total turn over. However, in the cases of exporters with turnover in excess of ₹ 10 crores, the said benefit is to be allowed on fulfillment of two conditions referred thereunder. Admitted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wback is nothing but receiving back the amount of duty actually paid by the assessee. Similarly, the DEPB credit is a credit to be utilized in paying the customs duty on goods to be imported. When the duty drawback received by the assessee constitutes profits of business, then, it is obvious that the amount realized on transfer of the DEPB credit would also be business profits. Thus, the amount received on transfer of the DEPB credit would be profits of business covered under section 28(iiid)." 38. The treatment of various export incentives as per clauses (iiia) to (iiie) to section 28 of the Act were compared by the Hon'ble Court and vide para 25 it was observed as under : "25. Clause (iiia) treats as income chargeable to tax, profits on the sale of an import licence. When the licence is sold, the entire amount is received as profit. The entire amount that is received on the sale of a licence is considered as profits of business under section 28(iiia). Similarly, the entire amount of cash assistance received or receivable by any person against exports under a scheme of the Government of India is treated as income for the purposes of chargeability to tax. By clause (iiic) t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uction of face value of DEPB under section 80HHC of the Act. The Hon'ble Court held that there was no merit in the said contention of the assessee for the following reasons :- (Para 29 Part) "(a) 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. DEPB credit is given for paying customs duty on import of goods which may or may not be utilized in the export of goods. When the DEPB credit is not utilized for paying customs duty but is transferred for any sum, then such sum would be profits on transfer of the DEPB covered under section 28(iiid) ; (b) Even the assessee has not disputed before the court that the entire amount received on transfer of the DEPB is business income chargeable to tax as profits of business. However, it is contended that the face value of the DEPB would not be covered under section 28(iiid) because it is a credit earned by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ket by incurring any cost". The Hon'ble Court thus concluded that there was no basis or justification in the order of the Tribunal in holding that clause (iiid) would only resort to the difference between sale consideration and the value of DEPB credit. The Hon'ble Court on the issue thus held as under: "31. We do not find any logical justification in bifurcating the value of the sale consideration realized by the exporter on the transfer of the DEPB credit. For one thing clause (iiid) of section 28 must cover within its purview, the entirety of the sale consideration which is realized by the exporter on the transfer of the DEPB credit since that represents the profit which the exporter obtains on the transfer of the credit. No part of the credit that is available under the DEPB scheme can fall for classification under clause (iiib) of section 28 which deals with cash assistance, received or receivable against any scheme of the Government of India. As the legislative history of the provision would show clause (iiib) was enacted by Parliament at a time when the export incentives that were available were (i) import entitlement licences ; (ii) cash compensatory support ; and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the DEPB and the amount received in excess of the DEPB credit constitute profits of business under section 28(iiid) of the Act, where the face value of the DEPB credit has been 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) of the Act'. The Hon'ble Bombay High Court clarified where the face value of DEPB credit was offered to tax as business profits under section 28(iiid) in the year in which the credit accrued to the assessee, then further profit arising on its transfer would be taxed as profit of business under section 28(iiid) in the year in which the transfer takes place. Further no part of the DEPB credit would attract charge under section 28(iiib) of the Act. As in the captioned appeals export turnover of all the assessees exceeds ₹ 10 crores and admittedly the conditions stipulated in third proviso to section 80HHC of the Act have not been fulfilled by the assessee, amount received on transfer of DEPB shall be excluded from the profits of business to determine eligible profits under Explanation (baa) to section 80HHC of the Act. 43. During the course of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xcess of the face value of the DEPB credit. As a matter of fact in that case the assessee had claimed that the entire receipt on the transfer of the DEPB credit including the face value of the credit as profits under section 28(iiia). The Tribunal in that case held that the entirety of the amount would be covered by section 28(iv). However, the view of the Tribunal was that since Explanation (baa) in section 80HHC did not envisage the exclusion of profits covered by section 28(iv), such profits could not be excluded while computing the deduction under section 80HHC. Hence, there was no dispute in considering the entirety of the receipts on the transfer of the DEPB credit as profits of business. The dispute was only in not treating the receipts by way of transfer of the DEPB credit as export receipts while computing the deduction under section 80HHC. Consequently, the entirety of the receipts on the transfer of the DEPB credit which was sought to be included in section 28(iv) was brought in by Parliamentary amendment in the form of an insertion of clause (iiid) in section 28 with retrospective effect. There was no controversy regarding the taxability of the quantum of receipts on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... profit cannot be a ground to hold that the receipts on the transfer of DEPB credit are not business profits. Counsel appearing on behalf of the assessee submits that the entire amount received on the transfer of the DEPB credit is business profit, but it was contended that what is included in section 28(iiid) is the amount received on the transfer of the DEPB credit in excess of the face value of the DEPB and the amount received to the extent of the face value of the DEPB would be covered under section 28(iiib). There is no merit in this contention because (a) the DEPB credit was not in existence when section 28(iiib) was inserted by the Finance Act of 1990. DEPB credit was introduced with effect from April 1, 1997 which was after the insertion of clause (iiib) in section 28 ; (b) section 28(iiib) refers to cash assistance (by whatever name called) received by the assessee from the Government pursuant to a scheme of the Government. The amount received on the transfer of the DEPB credit is not received by the assessee from the Government pursuant to a scheme of the Government within the meaning of clause (iiic) ; and (c) when section 28(iiid) specifically deals with profits realize ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of any amount being the cost of DEPB credit is allowable in the hands of the assessee. In one of the captioned appeals the learned A.R. had stressed that it had incurred loss on the transfer of its DEPB credit. In view of our holding that the amount received on transfer of DEPB credit is to be considered as business profits under section 28(iiid) of the Act and the said DEPB credit has no cost, the loss or profit arising on the transfer of DEPB credit vis-à-vis its face value accrued on application being made, has no relevance and only the amount received on the transfer of DEPB credit is includible in the hands of the assessee under section 28(iiid) of the Act and such amount is to be excluded while computing the profits eligible for deduction under section 80HHC of the Act provided other conditions stipulated by section 80HHC are satisfied. 50. In view of our decision in paras hereinabove we direct the Assessing Officer to compute the deduction under section 80HHC of the Act in line with our directions in the paras hereinabove. Reasonable opportunity shall be allowed to the assessee while computing the income in the hands of the assessee for the captioned years. 51. Acco ..... 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