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TMI Blog2016 (7) TMI 463X X X X Extracts X X X X X X X X Extracts X X X X ..... NT (PER : HONOURABLE MR.JUSTICE AKIL KURESHI) 1. The assessee is in the appeal against the judgement of the Income Tax Appellate Tribunal dated 17.9.2010. At the time of admission, following substantial question of law was framed : Whether the Tribunal below committed substantial error of law in holding that the assessee was not entitled to deduction under Section 80IB of the Income Tax Act, 1961 in respect of DEPB and DEPB premium, without appreciating that there was no element of income embedded in such receipts. 2. This question arises in the following background. The assessee is engaged in processing and exporting Castoroil and other similar products. For the assessment year 2002-2003, the assessee filed return of income in which the assessee had raised claim of deduction under section 80IB of the Income Tax Act,1961 ( the Act for short). While processing such claim, the Assessing Officer noticed that the claim included income of Duty Entitlement Pass Book ( DEPB for short) of ₹ 17.72 lacs (rounded off) and DEPB premium income of ₹ 2.96 lacs. Along with other sundry receipts, the Assessing Officer disallowed the deduction qua these incomes holding th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... submitted that the Tribunal committed an error in providing for exclusion of the entire value of the DEPB and not just the premium received thereon by the assessee. 6. On the other hand, learned counsel Shri Nitin Mehta for the department opposed the appeal contending that scheme of deduction under section 80HHC and 80I, 80IA, 80IB etc. are vastly different. Observations of the Supreme Court in case of Topman Exports (supra), were made in context of provisions contained in section 80HHC of the Act which provides for a formula for computing the deduction in case of an assessee who is engaged in export business alongside other businesses. He submitted that the decision in case of Liberty India (supra) was rendered in the background of deduction under section 80IB of the Act. Such decision holds the field. The ratio laid down would squarely apply in facts of the present case and was therefore, rightly applied by the Tribunal. 7. In order to resolve this controversy we may notice that section 80IB of the Act pertains to deduction in respect of profits and gains from certain industrial undertakings other than infrastructure development undertakings. Subsection( 1) of section 8 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as percentage of FOB value of exports made in freely convertible currency. Credit is available only against the export product and at rates specified by DGFT for import of raw materials, components etc.. DEPB credit under the Scheme has to be calculated by taking into account the deemed import content of the export product as per basic customs duty and special additional duty payable on such deemed imports. Therefore, in our view, DEPB/Duty Drawback are incentives which flow from the Schemes framed by Central Government or from Section 75 of the Customs Act, 1962, hence, incentives profits are not profits derived from the eligible business under Section 80IB. They belong to the category of ancillary profits of such Undertakings. 17. The next question is what is duty drawback? Section 75 of the Customs Act, 1962 and Section 37 of the Central Excise Act, 1944 empower Government of India to provide for repayment of customs and excise duty paid by an assessee. The refund is of the average amount of duty paid on materials of any particular class or description of goods used in the manufacture of export goods of specified class. The Rules do not envisage a refund of an amount arithme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t duty drawback, DEPB benefits, rebates etc. cannot be credited against the cost of manufacture of goods debited in the Profit Loss account for purposes of Sections 80IA/ 80IB as such remissions (credits) would constitute independent source of income beyond the first degree nexus between profits and the industrial undertaking. 23. We are of the view that Department has correctly applied AS2 as could be seen from the following Expenditures Amount (Rs.) Income Amount (Rs.) Opening Stock 100 Sales 1,000 Purchases (including customs duty paid) 500 Duty Drawback received 100 Manufacturing overheads 300 Closing stock 200 Administrative, Selling and Distribution Exp. 200 Net profit 200 Note: In above example, Department is allowing deduction on profit of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vity carried on by the eligible industry. 10.Section 80HHC of the Act on the other hand pertains to deduction in respect of profits retained for export business. Under subsection( 1) of section 80HHC where an assessee, being an Indian company or a person resident in India, is engaged in the business of export out of India of any of the goods or merchandise to which the section applies, there would be in computing of the total income of the assessee, a deduction to the extent of profits referred to in subsection (1B), derived by the assessee from the export of such goods or merchandise. Subsection (1B) of section 80HHC specifies the extent of deduction on the profit as provided in subsection( 1). Subsection( 3) of section 80HHC provides a formula to ascertain an assessee's profit relatable to its export business. For example, under clause(a) of subsection( 1) where the export out of India is of goods or merchandise manufactured or processed by the assessee, the profits derived from such export shall be the amount which bears to the profit of the business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court also referred to section 28(iiid) which provides that any profit on the transfer of the DEPB, being the Duty Remission scheme under the export and import policy, would be chargeable to tax under the head profits and gains of business or profession . 14.For variety of reasons, we cannot accept the contention of the counsel for the assessee that by virtue of judgement of the Supreme Court in case of Topman Exports (supra), the method of computing deduction under section 80IB of the Act in relation to DEPB benefits should also be changed. First and foremost, as noted, the decision in case of Liberty India ( supra) and Topman Exports (supra), were rendered in the background of entirely different statutory provisions. Section 80IB of the Act grants deductions to eligible industries and has nothing to do with the export of a product. If therefore, an industry eligible for deduction under section 80IB also exports the product, the DEPB benefits are seen in addition to and not as having been derived by the industry out of its eligible business. On the other hand, section 80HHC of the Act has direct corelation to the export business of an assessee and essentially aims ..... X X X X Extracts X X X X X X X X Extracts X X X X
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