DCIT, CIRCLE-3(1), KOLKATA, KOLKATA vs. M/S BRAHMAPUTRA CARBON LTD., KOLKATA

1. The appeal filed by the revenue is against the order of Ld. CIT(A)-8, Kolkata dated 13.06.2016 for AY 2010-11 on the following ground:

Briefly stated facts of the case are that the assessee filed its return of income through e-filing on 30.09.2010 showing nil income by virtue of claim of deduction of its profits u/s. 80IC(2)(b)(iii) of the Income-tax Act, 1961 (hereinafter referred to as the “Act”). The AO made the assessment u/s. 143(3) of the Act by denying the deduction u/s. 80IC in respect of the following items:

We find that this issue has been elaborately dealt with by the Hon’ble Gauhati High Court in the case of CIT vs Meghalaya Steels Ltd vide order dated 29.05.2013 wherein their lordships had clearly distinguished the decision of the Hon’ble Apex Court in the case of Liberty India case and it is pertinent to go into the operative portion of the Hon’ble Gauhati High Court’s decision in respect of each category of subsidy which is in dispute before us:- 3.Interest Subsidy : “ 112. The facts are, therefore, not in dispute on this aspect. The dispute is : Whether the interest subsidy is payable on non-operational or operational subsidy? If the object of the relevant Scheme is borne in mind, it clearly shows that interest subsidy, having aimed at reducing the interest payable on working capital by an industrial undertaking, helps directly in reducing the cost of manufacturing or production activities and establish thereby direct and first degree nexus between the industrial activities of the assessee-respondents, on the one hand, and the interest subsidy, on the other, received by the assessee-respondents and, in consequence thereof, since interest subsidy results into profits and gains derived from, or derived by, an industrial undertaking, there is no reason as to why such profits and gains, earned by an industrial undertaking on the strength of such a subsidy, namely, interest subsidy, be not allowed to be deducted from the taxable income of the industrial undertaking concerned.”

The Hon’ble Gauhati High Court had distinguished the decision of the Hon’ble Apex Court in Liberty India case as follows:- “ 124. Logically extended, this would mean that there was no relationship or nexus between the export incentive, on the one hand, and manufacturing/production, on the other. DEPB entitlement was based on the artifice of deemed import content of export product and was not even based on actual import content of the export product; whereas, in the cases at hand, the transport subsidy was made available on the raw material actually consumed in the manufacturing process and finished goods, which were actually produced and taken to the existing market for sale and, similarly, power subsidy, interest subsidy, and insurance subsidy are, as already indicated above, made available on the actual amount of the power bill, interest and insurance premium paid by the assessee-respondents concerned the inference, so drawn, gets reinforced from the fact that DEPB entitlement was freely transferable and saleable resulting in profit or loss.

That the case of Liberty India case (supra) is not applicable to the cases at hand is also evident from the fact that the object behind DEPB was to neutralize the incidence of customs duty payment on the import duty of the export product and, hence, the DEPB scheme was not aimed at neutralizing the cost of production; rather, as observed by the Supreme Court, it was an incentive for export and entitlement arose, when export was made and not otherwise.

Most importantly, pointed out the Supreme Court, in Liberty India case (supra), that the Rules do not envisage a refund of an amount ‘ arithmetically equal’ to exemption duty or central excise duty actually paid by an individual importer/manufacturer. This is the striking difference between subsidies on transportation cost, power, interest and insurance, in the cases at hand, on the one hand, and Duty Drawback Scheme, on the other, inasmuch as the subsidies, so provided to the assesses concerned, are arithmetically equivalent to the cost of raw materials actually used in the manufacturing process and the finished goods, which is actually taken to the existing market for sale within and outside the north-eastern region and, similarly, the assessees concerned have the right to receive power subsidy,

Thus, the relationship under the DEPB or Duty Drawback Scheme, on the one hand, and the manufacturing or production, on the other , was not proximate and direct. The entitlement was based on the artifice of average amount of duty paid. In the case of transport subsidy, power subsidy and insurance subsidy, the relation between subsidy received, on the one hand, and the profits earned or the gains made, by an industrial undertaking, stand, as already observed at paragraph 127, well established.

Liberty India case (supra), it may be noted, is, thus, an exposition of law on the schemes of DEPB and Duty Drawback Scheme, which relate to export of goods by an industrial undertaking; whereas the Scheme of transport subsidy, interest subsidy, power subsidy and insurance subsidy, is inextricably and directly connected with the reduction of cost of production and manufacturing of an industrial undertaking entitling thereby the eligible industrial undertakings to claim deduction under Section 80IB or 80IC, as the case may be.

The decision, in Liberty India case (supra), is, therefore, not, in our considered view, relevant to the schemes of subsidies at hand.”

The Hon’ble Supreme Court has also confirmed the aforesaid view of the Hon’ble Gauhati High Court. In view of the decision of the Hon’ble Supreme Court on identical issue on the very same subsidy and taking into consideration all the above aspects, we are of the view that the orders of CIT(A) which is in conformity with the decision of the Hon’ble Supreme Court and CBDT Circular referred to above, does not call for any interference. We therefore do not find any merit in the appeal by the revenue. Accordingly the appeal of the revenue is dismissed. Excise Duty Refund 18. In so far as the second question is concerned, the Central excise duty refund claimed by the assessee is on the basis of an exemption notifications issued by the Ministry of Finance (Department of Brahmaputra Carbon Ltd.., AY- 2010-11 Revenue) being Notification No. 32 of 1999 and Notification No. 33 of 1999 both dated July 8, 1999. In terms of these notifications, a manufacturer is required to first pay the Central excise duty and thereafter claimed a refund on fulfilment of certain conditions. In the next month, after verification of the claim, the Central excise duty so deposited is refunded to the assessee if the conditions laid down in the notifications are fulfilled. In the present case, there is no dispute that the assessee was entitled to the Central excise duty refund.

The Central Board of Excise and Customs in its circular dated December 19, 2002 clarified that the refund is not on account of excess payment of excise duty but is basically designed to give effect to the exemption and to operationalise the exemption given by the notifications. In that sense, the Central excise duty refund does not appear to bear the character of income since what is refunded to the assessee is the amount paid under the modalities provided by the Department of Revenue for giving effect to the exemption notifications. There is also nothing to suggest that the assessee has recovered or passed on the excise duty element to its customers.

Even assuming the refund does amount to income in the hands of the assessee, it is a profit or gain directly derived by the assessee from its industrial activity. The payment of Central excise duty has a direct nexus with the manufacturing activity and similarly, the refund of the Central excise duty also has a direct nexus with the manufacturing activity. The issue of payment of Central excise duty would not arise in the absence of any industrial activity. There is, therefore, an inextricable link between the manufacturing activity, the payment of Central excise duty and its refund. In the circumstances, we are of the opinion that question No. 2 must be answered in the affirmative in favour of the assessee and against the Revenue.” Since the issue raised are squarely covered in favour of the assessee by the aforesaid decision of Tribunal, and since the order of Ld. CIT(A) is by relying on the Apex Court decision, does not call for interference from our part, we, therefore, do not find any merit in the appeal filed by the revenue. Accordingly, the appeal of revenue is dismissed.

In the result, appeal of the revenue is dismissed.