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TMI Blog2007 (12) TMI 236X X X X Extracts X X X X X X X X Extracts X X X X ..... this issue to the file of the AO to ascertain the value of DEPB license on the date of receipt and reduce the same from total direct cost. We clarify that any difference in realization of DEPB license will be treated under s. 28(iiid) of the Act. Thereafter the AO is directed to recompute the deduction under s. 80HHC. We order accordingly. In the result, the appeal filed by the assessee is partly allowed for statistical purpose. - Member(s) : R. K. GUPTA., V. K. GUPTA. ORDER - R.K. Gupta, J.M. : This is an appeal by the assessee against the order of the CIT(A) relating to asst. yr. 2002-03. 2. The assessee is objecting in holding that DEPB/DFRC income will not form part of business income for the purpose of computing deduction under s. 80HHC of the Act. 3. Briefly stated facts of the case are that the assessee is engaged in the business of export of generic pharmaceuticals, formulations etc. During the year the assessee had carried out trading exports. The assessee has claimed deduction under s. 80HHC amounting to Rs. 76,80,735. The same was computed taking into consideration the DEPB income amounting to Rs. 1,21,91,643. The AO did not consider DEPB income as el ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (22 of 1992); 4.3 The learned counsel referring to the above, submitted that only the profit arising on sale or transfer of DEPB is covered under s. 28(iiid) of the Act. Therefore, it was submitted that the provisions of s. 28(iiid) clearly mention that only the profit is to be taken into account, which implies that the value of DEPB is not covered under s. 28(iiid) of the Act. 4.4 The learned counsel for the assessee referring to the third proviso to s. 80HHC(3) submitted that the same refers to cl. (iiid) of s. 28 of the Act. It was submitted that only profit on sale or transfer of DEPB is covered under s. 28(iiid) of the Act as stated above. It was further submitted that the value of DEPB is covered under s. 28(iv) of the Act. Reliance was placed on the decision of Hon'ble Bombay High Court in the case of Metal Rolling Works (P) Ltd. v. CIT [1982] 31 CTR (Bom) 116 : [1983] 142 1TR 170 (Bom) wherein it was held that import entitlements were obtained by the assessee directly in the course of business and the value of the same constituted profits and gains of business of the assessee within the meaning of s. 28(iv). 4.5 It was submitted that the CIT(A) dismissed the appeal of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... same. The fact that without considering DEPB there is a loss itself proves that the assessee had taken the value of DEPB into account while deciding the price of exported goods. The learned counsel then submitted that had the assessee not taken the DEPB income into account he would not have exported the goods at a lower price. Therefore, it was submitted that DEPB has a direct nexus to the determination of sales price of the exported goods and would thus form part of the cost of sales. It was submitted that if the value of DEPB is not considered as part of the cost of sales, it would always result into a loss thereby giving results contrary to the economics of trade. 4.9 It was submitted before us that like should always be compared with like. It was submitted that the exclusion of DEPB for the purpose of computing profit from exports would always give absurd result as the sale is at a price lower than the cost of purchase. It was further submitted that the aforesaid anomaly is as a result of not considering DEPB and ignoring the matching principle. In this regard, reliance was placed on the decisions of Hon'ble Supreme Court in the case of CIT v. Lakshmi Machine Works [2007] 21 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... DEPB at the time of imports or to sell the same to a third party. The assessee selected the second option wherein it sold the DEPB to a third party. The learned counsel submitted that if the assessee had not transferred the said DEPB, then it would utilize the same for set off against subsequent imports, which in turn would reduce the cost of the goods imported. Thus by merely transferring the DEPB it cannot be said that the assessee is not entitled to reduce the cost of the goods exported by the value of DEPB. The value of DEPB is already factored in the cost of the goods which are imported by the assessee by paying duty which otherwise would not have been paid if the assessee chooses to utilize DEPB for the said purpose. 4.12 The learned counsel of the assessee further submitted that DEPB is an export incentive and the purpose of giving the same is actually reimbursement of the taxes paid in relation to exports. Every exporter has an option to avail of refund of taxes and duties paid in relation to export of goods or avail of DEPB. Accordingly, it was submitted that DEPB is nothing but the reimbursement of taxes and duties paid on purchase of goods, which are exported. It was s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the relevant material, we find that there is no dispute that the value of DEPB incentive falls within the meaning of s. 28(iv) of the Act. We also found that as per cl. (iiid) only the profits on sale/transfer of DEPB can be taken into consideration. The language of ss. 28(iv) and 28(iiid) is very clear. In this regard we have also noted the decision in the case of Amar International on which reliance was placed by the learned counsel of the assessee. Therefore, the value of license falls within sec. 28(iv) and only the profit on transfer of license falls within 28(iiid). The aspect that what is the value of the DEPB incentive on the date of receipt was neither examined at the end of the AO or at the end of the CIT(A). The issue of apportionment of indirect cost has been examined by the Special Bench in the case of Surendra Engineering. In this case in respect of indirect cost attributable to trading export was discussed in detail and it was held that 10 per cent of indirect cost is to be attributable to the trading export. In a recent decision in the case of Hero Export v. CIT decided in Appeal No. 5315 of 2007 [reported at [2007] 213 CTR (SC) 291], the Hon'ble Supreme Court has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that in case falling under s. 80HHC(3)(b) direct and indirect costs attributable to such exports have to be deducted from the export turnover to arrive at export profits. Similar provision is made in cl. (d) which defines the words 'direct cost' to mean costs attributable to exports of trading goods. Moreover, cl. (e) of the Explanation defines 'indirect costs' as costs which are not direct costs as defined in cl. (d). The word 'attributable' is wider than the word 'derived'. The Department in this case, as can be seen from above example, itself says that Rs. 50,000 in full is the indirect cost which has to be deducted in full as cl. (e) does not provide for proportionate deduction. According to the Department, the definition of indirect costs will not cover expenses incurred for earning other incomes. However, at the same time, Department concedes that the assessee had earned export turnover of Rs. 6,50,000 plus Rs. 1,60,000 as other incomes. It also concedes that Rs. 50,000 is the indirect expense. If so, what should be the expense allocated to the earning of the two incomes and in what proportion is the question ? 12. According to the Department, the question of allocation doe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be attributed to earning of Rs. 1,60,000. If so, the next question which arises is how to allocate the costs ? As stated above, assessee has two incomes with one common pool of expenses and since 'principle of attribution' has been retained in the scheme of s. 80HHC, both in terms of s. 80HHC(3), cl. (e) to the Explanation to s. 80HHC (3)(a), (b) and (c) and in cl. (baa) to the Explanation to s. 80HHC, instead of going into lengthy exercise of dividing such common expenses, the assessee has estimated the reduction of export turnover by 10 per cent of the other income of Rs. 1,60,000 (in the above example). Ultimately, cl. (baa) to the Explanation is itself based on the assumption that 10 per cent of the income would be an expense. We make it clear that we are not reading Expln. (baa) into s. 80HHC(3)(b). What we say is as a guidance value/factor, 10 per cent of the total other income of Rs. 1,60,000 would be fair estimate. This guidance value is not flowing from cl. (baa) but from the scheme of s. 80HHC read with the Memorandum to the Finance Act of 1991. Take a reverse case. If allocation of expenses is to be done on actual basis, it would not only be very difficult but in some ..... X X X X Extracts X X X X X X X X Extracts X X X X
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