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Income Tax Appellate Tribunal, DELHI BENCH “G” BENCH NEW DELHI
Before: SHRI G.D. AGRAWAL & SHRI AMIT SHUKLA
ORDER PER AMIT SHUKLA, JUDICIAL MEMBER:
The aforesaid appeals have been filed by the Revenue against common impugned order dated 31.08.2015, passed by the Ld. CIT (Appeals)-10, New Delhi for the quantum of assessment passed u/s 143(3) for the A.Y. 2010-11 and A.Y. 2011-12. In both the appeals the common ground raised by the revenue reads as under:
1. CIT(A) has erred in law in treating the duty drawback receipts to be included in the computation of deduction under section 10B of the Income Tax Act, which is only in respect of profits & gains derived from exports of article or thing. Page 1 of 11
2. CIT(A) has erred in law and facts in applying the ration of the case of CIT Central Circle Vs Motorola India Electronics P Ltd. (ITA No. 428/2007 dated 11.12.2013) as section 10B of the Income- tax Act exempts profits of the undertaking “from export" and not “entire profits.”
The brief facts are that the assessee was engaged in manufacturing and export of garments, make-ups and accessories from its export oriented unit (EOU) located in Noida. The assessee had declared net profit of Rs. 1,52,13,633/- which was claimed u/s 10B. The Assessing Officer noted that the net profit of Rs. 1,52,13,633/- was inclusive of an amount of Rs. 1,03,43,279/- being duty drawback received during the year under consideration. The Ld. Assessing Officer relying upon the judgment of Hon'ble Supreme Court in the case of M/s. Liberty India Ltd. reported in 183 Taxmann 349 (SC) and disallowed the claim of the assessee and made addition of Rs. 1,03,62,769/-.
3. The Ld CIT (A) following the judgment of Delhi High Court in the case of CIT vs. XLNC Fashions in judgment dated 1.9.2014 and Hon'ble Karnataka High Court in case of CIT vs. Motorola India Electronics Pvt. Ltd. ITA No. 428/2007 dated 11.12.2013, allowed the assessee’s claim of deduction and deleted the addition made by the AO.
4. Since, none appeared on behalf of assessee despite service of notice; therefore, we are proceeding to decide the appeal on merits and after hearing the Ld. DR.
Before us, the Ld. DR submitted that now there is a latest Judgment of Hon'ble Supreme Court in the case of M/s. Opera Page 2 of 11 Clothings vs. Income Tax Officer, 2017-TIOL-38-SC-IT, wherein Hon'ble Supreme Court held that deduction of DEPB and duty drawback cannot be allowed for the purpose of computing deduction u/s 80IB and have reiterated the principle laid down in the Liberty India Ltd. vs. CIT (supra).
After considering the aforesaid submission of the Ld. DR and on perusal of the relevant findings given in the impugned orders, we find that only the issue for adjudication is whether the duty drawback receipts is to be computed of deduction u/s 10B or not. Sub section (1) of section 10B envisages deduction of such profits and gains which are derived by 100% EOU from the export of articles or things or computer software for the period of 10 consecutive assessment years, beginning with the assessment years in which the undertakings begins to or produce such articles or things. Sub section (4) of section 10B lays down the formula for computation of deduction which reads as under:
“(4) For the purposes of sub-section (1), the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking.”
Thus, sub-section (4) clearly stipulates that deduction u/s 10B shall be computed by apportioning the business of the undertakings in the ratio of export turnover to the total turnover. The formula enables the assessee to compute the profits derived from the export Page 3 of 11 of articles or things. Conjoint reading of sub section (4) and sub section (1) of the section 10B clearly indicates that, firstly, deduction of such profits and gains as are derived by 100% EOU from the export of articles or things are to be allowed; and secondly, sub- section (4) is the formula for computing what is eligible for deduction under sub section (1). In other words, the manner to compute profits derived from the export is stipulated in sub section (4) and the provision laid down therein does not require that assessee should establish any direct nexus with the business of the undertaking unlike in section 80IB, albeit once an income forms part of the business of eligible undertaking there is no further mandate to exclude deductions u/s 10B. If the said formula is applied then it is not necessary that the entire receipt by way of duty drawback would become eligible for deduction because the amount quantified as per the formula would only be eligible and qualified for deduction.
This precise issue has been dealt by the Hon'ble Jurisdictional High Court in case of CIT vs. XLNC Fashions in judgment dated 1.9.2014 wherein the Hon'ble High Court observed and held as under:-
“………Deduction under Section 10B of the Income Tax Act, 1961 (Act, in short) is to be made as per the formula prescribed by Sub- Section (4), which reads as under: “10B. Special provision in respect of newly established hundred per cent export- oriented undertakings- …………… ………………. (4) For the purposes of sub-section (1), the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the Page 4 of 11 undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking”. Sub-section (4), therefore, is the special provision which enables the assessee to compute the profits derived from the export of articles or things or computer software. We do not see any conflict between Sub- section (1) and Sub-section (4) to Section 10B, as Sub-section (1) states that deduction of such profits and gains as are derived by a hundred percent export-oriented undertaking from the export of articles or things or software would be eligible under the said Section. Sub- section (1) is a general provision and identifies the income which is exempt and has to be read in harmony with Sub-section (4) which is the formula for finding out or computing what is eligible for deduction under Sub-section (1). Neither of the two provisions should be made irrelevant and both have to be applied without negating the other. In other words, the manner of computing profits derived from exports under Sub-section (1), has to be determined as per the formula stipulated in Sub-Section (4), otherwise Sub-section (4) would become otiose and irrelevant. The issue in question in this appeal which pertains to the Assessment Year 2009-10, relates to duty draw back in the form of DEPB benefits. As per Section 28, clause (iii-c), any duty of customs or excise repaid or repayable as drawback to a person against exports under Customs and Central Excise Duties Draw Back Rules, 1971 is deemed to be profits and gains of business or profession. The said provision has to be given full effect to and this means and implies that the duty draw back or duty benefits would be deemed to be a part of the business income. Thus, will be treated as profit derived from business of the undertaking. These cannot be excluded. Even otherwise, when we apply Sub-section (4) to Section 10B, the entire amount received by way of duty draw back would not become eligible for deduction/exemption. The amount quantified Page 5 of 11 as per the formula would be eligible and qualify for deduction/exemption. The position is somewhat akin or close to Section 80HHC of the Act, which also prescribes a formula for computation of deduction in respect of exports. In view of the aforesaid, we do not find any merit in the present appeal and the same is dismissed…………….”
This principle has been reiterated by the Hon'ble Delhi High Court in the case of CIT vs. Hritnik Exports P. Ltd. (supra). Thus, the order of the Learned CIT (Appeals) allowing the apportioned deduction of duty drawback is in accordance with the ratio of the Hon'ble Jurisdictional High Court, therefore, same is upheld.
Now so far as reliance placed by the Ld. DR on the judgment of Hon'ble Supreme Court in the case of M/s. Opera Clothings vs. Income Tax Officer (supra), we find that there the issue for consideration in SLP before their Lordships was, whether the duty drawback/DEPB benefit can be considered as deduction in respect of profits and gains from industrial undertakings for the purpose of section 80-IB. The relevant judgment of the Hon'ble Supreme Court reads as under:-
“We have heard the learned counsels for the parties. 2. The issue, namely, the entitlement of export incentives to deduction under Section 80-IB of the Income Tax Act, 1961 has been squarely decided by this Court in Liberty India vs. C.I.T. (2009) 9 SCC 328. Commissioner of Income Tax vs. Meghalaya Steels Limited (2016) 6 SCC 747 does not in any way erode the efficacy of law laid down in Liberty India (supra) as Meghalaya Steels Limited (supra) was primarily a case where the Court was dealing with transport subsidy, which is a reimbursement of the cost incurred by the manufacturing unit in the North-Eastern part of the Country.
While Liberty India (supra) dealt with a situation of post- manufacture and availability of incentive only in the event there was export of the manufactured goods. Meghalaya Steels Limited (supra), as already noted, dealt with altogether a different situation.
Consequently, we do not find any merit in this special leave petition. Special leave petition is, accordingly, dismissed.”
First of all, the judgment of Hon'ble Supreme Court in the case of Meghalaya Steels Ltd. (supra) was on the issue, whether the subsidies received towards reimbursement of cost of manufacturing are eligible for benefits u/s 80-IB or not. The Hon'ble Supreme Court held that the export incentive is completely different from reimbursement of an element of cost. A duty drawback or DPEB is not related to the business industrial undertakings for manufacturing or selling of its products it arises only when the undertakings goes on to export the said products, i.e., after one produces the same. If there is no export, there is no DPEB entitlement and therefore, its relation to the manufacturing of a product and sale within India is not proximate or direct, i.e., one step removed. In that context, they have said that subsidies like transport, power etc. are inseparable connected with the profitable conduct of the business and therefore, it has a direct nexus with the profits and gains derived from any business. The case of Liberty India Ltd. (supra) was in relation to deduction u/s 80IB. The aforesaid judgment of the Hon'ble Supreme Court which has also been relied upon by the AO, does not impinge upon deduction u/s 10B at all, because section 80IB proposes deduction where the gross total income of assessee includes any profits and gains derived from any eligible business mentioned in sub-section (3) of section 80IB, which is to be allowed while computing the total income of the assessee from such profits and gains. The condition for deduction u/s 80IB is that the profits and gains should derived from the eligible business and there is no such formula for computing the profit as has been provided in section 10B by virtue of section sub section (4). The formula for computing the profit as provided in section 10B (4) makes all the difference when it is juxtaposed with the profit as stipulated in section 80IB and consequently computation of deduction thereof. The ratio and principle laid down by the Hon'ble Supreme Court in the context of section 80IB in our humble opinion would not be applicable on deductions u/s 10B. Thus the contention of the Ld. DR is rejected. Accordingly, grounds raised by the revenue are dismissed.
Now we will take up assessee’s appeal for the A.Y. 2011-12 in wherein the revenue has raised exactly the same ground of allowing the deduction u/s 10B in respect of duty drawback. Since issue involved is same arising out of identical set of facts therefore, out finding given above will apply mutatis mutandis in this year also. Accordingly, the grounds raised by the revenue are dismissed.
In the result, both the appeals of the revenue are dismissed.
The order pronounced in the open court on 28.8.2017.