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Income Tax Appellate Tribunal, DELHI BENCH: ‘E’: NEW DELHI
Before: SMT. DIVA SINGH & SH. O.P. KANT
ORDER PER O.P. KANT, A.M.: These two appeals of the Revenue and the assessee are preferred against two separate orders dated 08.07.2011 and 14.11.2012 of the Commissioner of Income-tax( Appeals)-XVI, New Delhi for assessment year 2008-09 and 2009- 2 of 2011 & 6172 of 2012 AYs: 2008-09 & 2009-10 10 respectively. Since the common issue of deduction under section 80IB of the Income-tax Act, 1961 is involved in both the appeals, these appeals are heard together and disposed of by this consolidated order. 2008-09 2. First, we take up the appeal in ITA No. 5063/Del/2011. The grounds of appeal
raised are as under: “1. The Ld. CIT(A) has erred in deleting the addition of Rs. 10,18,41,937/-made by the AO on account of excise duty being refunded to the assessee but the same has not been booked as revenue.
2. The Ld. CIT(A) has erred in ignoring the fact that the excise is being refunded to the assessee but the same has not been booked as revenue.
3. The Ld. CIT(A) has erred in holding that the excise duty has been credited in profit and loss account and already accounted for in the receipts is factually wrong and since refund of excise duty was not accounted for as income during the year.
4. The Ld. CIT(A) has completely ignored and omitted to consider relevant circular and notification of Central Excise Department which clearly states that it is not the case where the refund is given to the manufacturer on account of excess payment of excise duty by the manufacturer to the Central Excise Department, but is a case of refund of regular excise duty paid by an assessee, by way of an incentive to the assessee.
5. The Ld. CIT(A) has erred in deleting the disallowance made by the AO on the issue of deduction u/s 80-IB of the Act in view of the fact that excise duty refund does not have any direct nexus with the 'operational profit' derived by the assessee and will not qualify for deduction u/s 80IB,
6. The Ld. CIT(A) has not appreciated the facts of the case that the assessee company has made its whole of the sales to its own sister concern 'Mentha & Allied Products Ltd.', whereby the assessee company has shown higher net profit @ 8.55% and claimed higher deduction u/s 80IB of the Act.
7. The appellant craves to be allowed to add any fresh ground of appeal and/or delete or amend any of the grounds of appeal.”
The facts in brief are that the assessee company was engaged in business of manufacturing of essential oils, menthol solutions, DMO and menthol. The assessee filed its return of income declaring total income of Rs. 42,544/- on 07/10/2008. In the return of income filed, the assessee claimed deduction under 3 of 2011 & 6172 of 2012 AYs: 2008-09 & 2009-10 section 80IB of the Income-tax Act, 1961 (for short “the Act”) of Rs. 6,03,03,648/-. The case of the assessee was selected for scrutiny and notice under section 143(2) of the Act was issued and served within the stipulated period. It was observed by the Assessing Officer ( for short “the AO") that the assessee had set up a unit in the State of Jammu and Kashmir and has been claiming deduction under section 80IB of the Act on the profit derived from the said unit. According to the assessee, following the notifications issued by the Central Excise Department, the assessee collected the central excise duty in sales bill from the customer and paid to the Central Excise Department, who after verification, refunded the excise duty in respect of goods manufactured from the unit. Further, the assessee stated that the excise duty paid was not charged to profit and loss account and, therefore, the refund due from the Central Excise Department was also not booked in profit and loss account. This contention of the assessee was not accepted and according to the AO excise refund of Rs. 9,91,86,041/- was not credited to the profit and loss account, he added the said sum to the income of the assessee. Further, the AO held that central excise duty refund was not derived from the industrial undertaking and it was in the nature of incentives granted by the government, and therefore not eligible for deduction under section 80IB of the Act, accordingly the deduction under section 80IB of the Act claimed by the assessee in respect of central excise duty refund was withdrawn. Further, according to the AO all sales of the assessee were made to the sister concern and excess profit was shown by the assessee on sales, therefore, the AO estimated the profit of the assessee at 3% of the turnover and deduction under section 80IB of the Act in respect of balance amount of Rs. 3,93,01,635/- was withdrawn. Aggrieved with the above findings of the AO, the assessee filed appeal before the Commissioner of Income- tax(Appeals), who allowed the appeal. Aggrieved, the Revenue is in appeal before the Tribunal challenging the findings of the ld. Commissioner of Income- tax(Appeals).
4 of 2011 & 6172 of 2012 AYs: 2008-09 & 2009-10 4. In ground No. 1 to 3 of the appeal, the Revenue has raised the issue of non-booking of excise duty refund as revenue in its profit and loss account.
The ld. Department Representative ( in short ‘DR’) relied on the order of the AO, whereas on the contrary, the ld. Authorized Representative ( in short AR) of the assessee, relying on the order of the ld. Commissioner of Income- tax(Appeals) submitted that the assessee has already credited the excise duty collected from the customers in sales and same was paid to the Central Government but not claimed as expenses , therefore, the assessee was not required to credit the refund of the central excise duty, which was due to the assessee as per the notifications of the Central Excise Department. 5.1 We have heard the rival submissions and perused the material on record. The learned Commissioner of Income-tax(Appeals) has decided the issue as under: “So far as the first issue regarding the non inclusion of excise duty refund in the P&L account is concerned, the Assessing Officer was clearly in error. The sales bills, the sales account and figure of sales as taken in the P&L account are inclusive of the element of excise duty which has been charged in invoices and posted along-with invoice value to the sales. It has also been explained that the excise duty has not been debited to the profit and loss account, since the excise paid by the appellant is subsequently refunded to it. That being the case there was no need or warrant to add the excise duty element once again to the assessed income on the ground of its not being allegedly accounted for by the appellant. I have also considered the notes as filed before the Assessing Officer dated 11th October 2010 wherein this issue has been highlighted by the appellant before the Assessing Officer. The excise duty as collected by the appellant having been shown as part of the sales, the Assessing Officer was clearly in error in once again including the same for assessment. 1 am also in agreement with the other point as raised on behalf of the appellant that the excise duty was required to be accounted for consistent with the method of accounting pursued by the appellant. Having pursued mercantile method of accounting, the excise duty collected by the appellant month after month had to be considered as part of that month's sale to which it pertained. I see no logic in reflecting it after a month's delay as attempted by the Assessing Officer. The reconciliation as submitted by the appellant before the Assessing Officer in terms of its note dated 3rd December 2010 has also been seen by me and I agree with the submissions of the appellant that the 5 of 2011 & 6172 of 2012 AYs: 2008-09 & 2009-10 books of accounts depicted the correct disclosure on account of excise duty collections.” 5.2 We find that the assessee collected Central Excise Duty in respect of the unit eligible for deduction under section 80IB of the Act, in the sale bills issued to the customers and subsequently paid to the Central Government, however, same payment was not claimed in the profit and loss account as expenses as the assessee was eligible for refund of the said duty from the Central Excise Department, after verification of the payments in accordance to the notification issued. Since the assessee was to be refunded the central excise duty collected from the customers, which has already been credited by the assessee in the sales and therefore the assessee was not required to again credit the refund due from the Central Excise Department. In our considered opinion, the accounting entries made by the assessee in respect of excise duty refund are in order and there is no infirmity in the finding of the ld. Commissioner of Income-tax(Appeals) on the issue in dispute. Accordingly, we uphold the finding of the ld. Commissioner of Income-tax(Appeals) and the grounds Nos. 1 to 3 of the Revenue are dismissed.
In ground Nos. 4 and 5, the Revenue has challenged allowing deduction under section 80IB of the Act in respect of central excise duty refund. 6.1 The ld. DR relying on the findings of the AO submitted that the central excise duty refund was an incentive granted by the government and not part of the profit derived from the Industrial Undertaking and, therefore, it was not eligible for deduction under section 80-IB of the Act as held by the Hon’ble Apex Court in the case of Liberty India versus CIT reported in 317 ITR 218. 6.2 Before us, the ld. AR of the assessee relying on the submission made before the Ld. Commissioner of Income-tax(Appeals) submitted that the excise duty was part of the sale receipt and thus derived from the business of manufacturing activity. He further relied on the judgment of the Hon’ble Jurisdictional High Court in the case of CIT versus Dharmpal Premchand Ltd (2009) 317 ITR 353 and submitted that the Special Leave Petition filed by the 6 of 2011 & 6172 of 2012 AYs: 2008-09 & 2009-10 Revenue against the said decision was dismissed by the Hon’ble Apex Court. He further reiterated the submission made before the ld. CIT(A) that Hon’ble High Court of Guwahati in the case of Meghalya Steels Ltd in the order dated 16/09/2010 held that excise duty refund is covered under the purview of exemption provided under section 80-IB of the Act. 6.3 We have heard the rival submissions and perused the material on record. The deduction under section 80-IB of the Act is allowed in respect of the profit derived from the industrial undertaking. Before we deal the issue, it is important to refer the relevant part of the section 80-IB of the Act which is reproduced as under : “80-IB. (1) Where the gross total income of an assessee includes any profits and gains derived from any business referred to in sub-sections (3) to (11), (11A) and (11B) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to such percentage and for such number of assessment years as specified in this section. (2) ………………………………..”
6.4 So claiming deduction under section 80-IB of the Act, the first prerequisite is that the deduction is allowable only in respect of the profit and gains derived from the eligible business. The assessee is claiming deduction in respect of profit derived from the industrial undertaking set up in the state of Jammu and Kashmir. The assessee has been granted exemption from the excise duty on the goods manufactured from units set up in the state of Jammu and Kashmir, which is an area notified by the Government. But according to the notification scheme of excise duty exemption, the assessee first collected the excise duty on the goods from the customers and paid to the government and subsequently the assessee has been granted refund of the excise duty paid, in accordance with the notifications granting exemption to the assessee. The assessee claimed this excise duty refund as part of profit from the industrial undertaking and claimed deduction under section 80-IB of the Act. The assessee is treating this refund of excise duty as part of the profit of the undertaking, 7 of 2011 & 6172 of 2012 AYs: 2008-09 & 2009-10 whereas according to the Revenue, refund of excise duty is not derived from the industrial undertaking and therefore the amount of refund of excise duty is not eligible for deduction under section 80-IB of the Act. Thus, the entire controversy is whether the excise duty refund received by the assessee is part of profit derived from the industrial undertaking. The contention of the assessee is that on manufacturing of the goods the assessee was liable for excise duty and it collected the same from the customers and therefore there was a direct nexus of the excise duty refund with the manufacturing activity carried out by the assessee. The assessee relied on the judgment of the Hon’ble jurisdictional High Court in the case of Commissioner of Income Tax versus Dharmpal Premchand Ltd. reported in 317 ITR 353. In the said judgment, the Hon’ble High Court has held as under:
5. Having considered the decisions cited by the learned counsel for the Revenue, as well as, by the counsel for the assessee, we are of the view that in the instant case, as noted above, the factual aspects are required to be kept in mind. The finding of the authorities below is, that the, refund of excise duty is pivoted on the manufacturing activity carried on by the assessee. Once such a finding of fact has been returned we need not go further and examine the immediate and proximate source of refund of excise duty. In other words, as to whether there was direct nexus between the refund of excise duty and industrial activity. As a matter of fact, in the questions proposed by the Revenue, there is no specific question, that this finding of the authorities below is perverse. There is of course a very broad based and general question that the order passed by the Tribunal is perverse in law and on facts. According to us, such a question is vague. A perusal of the grounds of appeal would substantiate this aspect of the matter. There is no ground taken by the Revenue whereby the substantial findings of fact have been challenged by the Revenue as being perverse.
6.5 We find that the Hon’ble High Court has not decided the issue as to whether there was direct nexus between the refund of excise duty and the industrial activity in view of the vague question of law that the order of the Tribunal was perverse in law and on the facts, however the refund of excise duty has been held to be related with the manufacturing activity carried on by the assessee in view of the finding of the lower authorities.
8 of 2011 & 6172 of 2012 AYs: 2008-09 & 2009-10 6.6 Subsequent to the above judgment of the jurisdictional High Court, the Hon’ble Supreme Court in the case of Liberty India versus CIT (supra) decided the issue of deduction under section 80-IB of the Act in respect of profit from duty drawback and DEPB and held that these are not profit derived from the industrial undertaking and, therefore, same are not eligible for deduction. The relevant findings of the Hon’ble Supreme Court on the issue are as under:
“Discussions and findings: 12. In this batch of Civil Appeals we are concerned with admissibility of the amounts of duty drawback and DEPB for deduction under s. 80-IB.
Before analyzing s. 80-IB, as a prefatory note, it needs to be mentioned that the 1961 Act broadly provides for two types of tax incentives, namely, investment linked incentives and profit linked incentives. Chapter VI-A which provides for incentives in the form of tax deductions essentially belong to the category of "profit linked incentives". Therefore, when s. 80-IA/80-IB refers to profits derived from eligible business, it is not the ownership of that business which attracts the incentives. What attracts the incentives under s. 80-IA/80-IB is the generation of profits (operational profits). For example, an assessee company located in Mumbai may have a business of building housing projects or a ship in Nava Sheva. Ownership of a ship per se will not attract s. 80-IB(6). It is the profits arising from the business of a ship which attracts sub-s. (6). In other words, deduction under sub-s. (6) at the specified rate has linkage to the profits derived from the shipping operations. This is what we mean in drawing the distinction between profit linked tax incentives and investment linked tax incentives. It is for this reason that Parliament has confined deduction to profits derived from eligible businesses mentioned in sub-ss. (3) to (11A) (as they stood at the relevant time). One more aspect needs to be highlighted. Each of the eligible business in sub-ss. (3) to (11A) constitutes a stand-alone item in the matter of computation of profits. That is the reason why the concept of "Segment Reporting" stands introduced in the Indian Accounting Standards (IAS) by the Institute of Chartered Accountants of India (ICAI).
Analyzing Chapter VI-A, we find that s. 80-IB/80-IA are the Code by themselves as they contain both substantive as well as procedural provisions. Therefore, we need to examine what these provisions prescribe for "computation of profits of the eligible business". It is evident that s. 80-IB provides for allowing of deduction in respect of profits and 9 of 2011 & 6172 of 2012 AYs: 2008-09 & 2009-10 gains derived from the eligible business. The words "derived from" is narrower in connotation as compared to the words "attributable to". In other words, by using the expression "derived from", Parliament intended to cover sources not beyond the first degree. In the present batch of cases, the controversy which arises for determination is: whether the DEPB credit/duty drawback receipt comes within the first degree sources? According to the assessee(s), DEPB credit/duty drawback receipt reduces the value of purchases (cost neutralization), hence, it comes within first degree source as it increases the net profit proportionately. On the other hand, according to the Department, DEPB credit/duty drawback receipt do not come within first degree source as the said incentives flow from Incentive Schemes enacted by the Government of India or from s. 75 of the Customs Act, 1962. Hence, according to the Department, in the present cases, the first degree source is the incentive scheme/provisions of the Customs Act. In this connection, Department places heavy reliance on the judgment of this Court in Sterling Food (supra). Therefore, in the present cases, in which we are required to examine the eligible business of an industrial undertaking, we need to trace the source of the profits to manufacture. [see CIT vs. Kirloskar Oil Engines Ltd. (1985) 44 CTR (Bom) 98 : (1986) 157 ITR 762 (Bom)] 15. Continuing our analysis of s. 80-IA/80-IB it may be mentioned that sub-s. (13) of s. 80-IB provides for applicability of the provisions of sub-s. (5) and sub-ss. (7) to (12) of s. 80-IA, so far as may be, applicable to the eligible business under s. 80-IB. Therefore, at the outset, we stated that one needs to read ss. 80-I, 80-IA and 80-IB as having a common Scheme. On perusal of sub-s. (5) of s. 80-IA, it is noticed that it provides for manner of computation of profits of an eligible business. Accordingly, such profits are to be computed as if such eligible business is the only source of income of the assessee. Therefore, the devices adopted to reduce or inflate the profits of eligible business has got to be rejected in view of the overriding provisions of sub-s. (5) of s. 80-IA, which are also required to be read into s. 80-IB. [see s. 80-IB(13)]. We may reiterate that ss. 80-I, 80-IA and 80-IB have a common scheme and if so read it is clear that the said sections provide for incentives in the form of deduction(s) which are linked to profits and not to investment. On analysis of ss. 80-IA and 80-IB it becomes clear that any industrial undertaking, which becomes eligible on satisfying sub-s. (2), would be entitled to deduction under sub-s. (1) only to the extent of profits derived from such industrial undertaking after specified date(s). Hence, apart from eligibility, sub-s. (1) purports to restrict the quantum of deduction to a specified percentage of profits. This is the importance of the words "derived from industrial undertaking" as against "profits attributable to industrial undertaking".
10 of 2011 & 6172 of 2012 AYs: 2008-09 & 2009-10 16. DEPB is an incentive. It is given under Duty Exemption Remission Scheme. Essentially, it is an export incentive. No doubt, the object behind DEPB is to neutralize the incidence of customs duty payment on the import content of export product. This neutralization is provided for by credit to customs duty against export product. Under DEPB, an exporter may apply for credit 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 s. 75 of the Customs Act, 1962, hence, incentives profits are not profits derived from the eligible business under s. 80-IB. They belong to the category of ancillary profits of such undertakings.
The next question is—what is duty drawback ? Sec. 75 of the Customs Act, 1962 and s. 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 arithmetically equal to customs duty or central excise duty actually paid by an individual importer-cum-manufacturer. Sub-s. (2) of s. 75 of the Customs Act requires the amount of drawback to be determined on a consideration of all the circumstances prevalent in a particular trade and also based on the facts situation relevant in respect of each of various classes of goods imported. Basically, the source of duty drawback receipt lies in s. 75 of the Customs Act and s. 37 of the Central Excise Act.
18. Analysing the concept of remission of duty drawback and DEPB, we are satisfied that the remission of duty is on account of the statutory/policy provisions in the Customs Act/Scheme(s) framed by the Government of India. In the circumstances, we hold that profits derived by way of such incentives do not fall within the expression "profits derived from industrial undertaking" in s. 80-IB.
19. Since reliance was placed on behalf of the assessee(s) on AS-2 we need to analyse the said standard.
20. AS-2 deals with valuation of inventories. Inventories are assets held for sale in the course of business; in the production for such sale or in form of materials or supplies to be consumed in the production.
11 of 2011 & 6172 of 2012 AYs: 2008-09 & 2009-10 21. "Inventory" should be valued at the lower of cost and net realizable value (NRV). The cost of "inventory" should comprise all costs of purchase, costs of conversion and other costs including costs incurred in bringing the "inventory" to their present location and condition.
22. The cost of purchase includes duties and taxes (other than those subsequently recoverable by the enterprise from taxing authorities), freight inwards and other expenditure directly attributable to the acquisition. Hence trade discounts, rebate, duty drawback and such similar items are deducted in determining the costs of purchase. Therefore, duty drawback, rebate etc. should not be treated as adjustment (credited) to cost of purchase or manufacture of goods. They should be treated as separate items of revenue or income and accounted for accordingly (see : p. 44 of Indian Accounting Standards and GAAP by Dolphy D’souza). Therefore, for the purposes of AS-2, Cenvat credits should not be included in the cost of purchase of inventories. Even ICAI has issued Guidance Note on Accounting Treatment for Cenvat/Modvat under which the inputs consumed and the inventory of inputs should be valued on the basis of purchase cost net of specified duty on inputs (i.e. duty recoverable from the Department at later stage) arising on account of rebates, duty drawback, DEPB benefit etc. Profit generation could be on account of cost cutting, cost rationalization, business restructuring, tax planning on sundry balances being written back, liquidation of current assets etc. Therefore, we are of the view that duty drawback, DEPB benefits, rebates etc. cannot be credited against the cost of manufacture of goods debited in the P&L a/c for purposes of s. 80-IA/80-IB 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 AS-2 as could be seen from the following illustration :
Expenditure Amount Income Amount (Rs.) (Rs.) Opening stock 100 Sales 1,000 Purchases 500 Duty 100 (including drawback customs duty received paid) Manufacturing 300 closing 200 12 of 2011 & 6172 of 2012 AYs: 2008-09 & 2009-10 overheads stock Administrative, 200 selling and distribution expenses Net profit 200 1,300 1,300 Note : In above example, Department is allowing deduction on profit of Rs. 100 under s. 80-IB of the 1961 Act.
In the circumstances, we hold that duty drawback receipt/DEPB benefits do not form part of the net profits of eligible industrial undertaking for the purposes of ss. 80-I/80-IA/80-IB of the 1961 Act. 25.The appeals are, accordingly, dismissed with no order as to costs.” 6.7 The Ld AR submitted that the Special Leave Petition filed by the Revenue against the judgment of the Hon’ble Jurisdictional High Court in the case of Commissioner of Income Tax versus Dharmpal Premchand Ltd (supra) was rejected by the Hon’ble Apex Court and, therefore, the ratio of the judgment in the case of Dharmpal Premchand Ltd. is applicable over the facts of the case of the assessee. 6.8 In a recent judgment in the case of Commissioner of Income Tax versus Meghalya Steels Ltd. reported in 132 DTR 273 the Hon’ble Apex Court has discussed the judgments on the issue including the cases of Cambay Electric Supply Industrial Company Ltd versus CIT 1978 CTR (SC) 50, CIT versus Sterling Foods (1999) 153 CTR (SC) 439, Pandian Chemicals Ltd. versus CIT (2003) 183 CTR (SC) 99 and Liberty India versus CIT (2009) 225 CTR (SC) 233. 6.9 In the case of Meghalya Steels Ltd ( supra), the assessee claimed deduction under section 80-IB of the Act on the subsidies received which consisted of transport subsidy, interest subsidy and power subsidy. The Hon’ble Supreme Court held that all the subsidies are reimbursed to the assessee towards 13 ITA Nos. 5063 of 2011 & 6172 of 2012 AYs: 2008-09 & 2009-10 element of cost relating to manufacturing or sale of their products and thus there existed a direct nexus between the profit and gains of the industrial undertaking and reimbursement of the subsidies. The Hon’ble Apex Court distinguished the subsidies in the form of drawback or DEPB which are related to export and not directly related to the manufacturing and thus the ratio held in the case of Liberty India (supra) was not applicable. The relevant Paras of the judgment are reproduced as under:
“17. An analysis of all the aforesaid decisions cited on behalf of the Revenue becomes necessary at this stage. In the first decision, that is in Cambay Electric Supply Industrial Company Limited v. Commissioner of Income Tax, Gujarat II, this Court held that since an expression of wider import had been used, namely "attributable to" instead of "derived from", the legislature intended to cover receipts from sources other than the actual conduct of the business of generation and distribution of electricity. In short, a step removed from the business of the industrial undertaking would also be subsumed within the meaning of the expression "attributable to". Since we are directly concerned with the expression "derived from", this judgment is relevant only insofar as it makes a distinction between the expression "derived from", as being something directly from, as opposed to "attributable to", which can be said to include something which is indirect as well.
The judgment in Sterling Foods lays down a very important test in order to determine whether profits and gains are derived from business or an industrial undertaking. This Court has stated that there should be a direct nexus between such profits and gains and the industrial undertaking or business. Such nexus cannot be only incidental. It therefore found, on the facts before it, that by reason of an export promotion scheme, an assessee was entitled to import entitlements which it could thereafter sell. Obviously, the sale consideration therefrom could not be said to be directly from profits and gains by the industrial undertaking but only attributable to such industrial undertaking inasmuch as such import entitlements did not relate to manufacture or sale of the products of the undertaking, but related only to an event which was post manufacture namely, export. On an application of the aforesaid test to the facts of the present case, it can be said that as all the four subsidies in the present case are revenue receipts which are reimbursed to the assessee for elements of cost relating to manufacture or sale of their products, there can certainly be said to be a direct nexus between profits and gains of the industrial undertaking or business, and reimbursement of such subsidies. However, Shri Radhakrishnan stressed the fact that the immediate source of the subsidies was the fact that the Government gave them and that, therefore, the immediate source not being from the business of the assessee, the element of directness is missing. We are afraid we cannot agree. What is to be seen for the applicability of Sections 80-IB and 80-IC is whether the profits and gains are derived from the business. So long as profits and gains emanate directly from the business itself, the fact that the immediate source of the subsidies is the Government would make no difference, as it cannot be disputed that the said subsidies are only in order to reimburse, wholly or partially, costs actually incurred by the assessee in the manufacturing and selling of its products. The "profits and gains" spoken of by Sections 14 of 2011 & 6172 of 2012 AYs: 2008-09 & 2009-10 80-IB and 80-IC have reference to net profit. And net profit can only be calculated by deducting from the sale price of an article all elements of cost which go into manufacturing or selling it. Thus understood, it is clear that profits and gains are derived from the business of the assessee, namely profits arrived at after deducting manufacturing cost and selling costs reimbursed to the assessee by the Government concerned.
Similarly, the judgment in Pandian Chemicals Limited v. Commissioner of Income Tax is also distinguishable, as interest on a deposit made for supply of electricity is not an element of cost at all, and this being so, is therefore a step removed from the business of the industrial undertaking. The derivation of profits on such a deposit made with the Electricity Board could not therefore be said to flow directly from the industrial undertaking itself, unlike the facts of the present case, in which, as has been held above, all the subsidies aforementioned went towards reimbursement of actual costs of manufacture and sale of the products of the business of the assessee.
Liberty India being the fourth judgment in this line also does not help Revenue. What this Court was concerned with was an export incentive, which is very far removed from reimbursement of an element of cost. A DEPB drawback scheme is not related to the business of an industrial undertaking for manufacturing or selling its products. DEPB entitlement arises only when the undertaking goes on to export the said product, that is after it manufactures or produces the same. Pithily put, if there is no export, there is no DEPB entitlement, and therefore its relation to manufacture of a product and/or sale within India is not proximate or direct but is one step removed. Also, the object behind DEPB entitlement, as has been held by this Court, is to neutralize the incidence of customs duty payment on the import content of the export product which is provided for by credit to customs duty against the export product. In such a scenario, it cannot be said that such duty exemption scheme is derived from profits and gains made by the industrial undertaking or business itself.
The Calcutta High Court in Merino Ply & Chemicals Ltd. v. CIT, 209 ITR 508 [1994], held that transport subsidies were inseparably connected with the business carried on by the assessee. In that case, the Division Bench held:- "We do not find any perversity in the Tribunal's finding that the scheme of transport subsidies is inseparably connected with the business carried on by the assessee. It is a fact that the assessee was a manufacturer of plywood, it is also a fact that the assessee has its unit in a backward area and is entitled to the benefit of the scheme. Further is the fact that transport expenditure is an incidental expenditure of the assessee's business and it is that expenditure which the subsidy recoups and that the purpose of the recoupment is to make up possible profit deficit for operating in a backward area. Therefore, it is beyond all manner of doubt that the subsidies were inseparably connected with the profitable conduct of the business and in arriving at such a decision on the facts the Tribunal committed no error."
However, in CIT v. Andaman Timber Industries Ltd., 242 ITR 204 [2000], the same High Court arrived at an opposite conclusion in considering whether a deduction was allowable under Section 80HH of the Act in respect of transport subsidy without noticing the aforesaid earlier judgment of a Division Bench of that very court. A Division Bench of the Calcutta High Court in C.I.T. v. Cement Manufacturing Company Limited, by a judgment dated 15.1.2015, distinguished the judgment in CIT v. Andaman Timber Industries Ltd. and followed the impugned judgment of the Gauhati High Court 15 of 2011 & 6172 of 2012 AYs: 2008-09 & 2009-10 in the present case. In a pithy discussion of the law on the subject, the Calcutta High Court held: "Mr. Bandhyopadhyay, learned Advocate appearing for the appellant, submitted that the impugned judgment is contrary to a judgment of this Court in the case of CIT v. Andaman Timber Industries Ltd. reported in (2000) 242 ITR, 204 wherein this Court held that transport subsidy is not an immediate source and does not have direct nexus with the activity of an industrial undertaking. Therefore, the amount representing such subsidy cannot be treated as profit derived from the industrial undertaking. Mr. Bandhypadhyay submitted that it is not a profit derived from the undertaking. The benefit under section 80IC could not therefore have been granted. He also relied on a judgment of the Supreme court in the case of Liberty India v. Commissioner of Income Tax, reported in (2009) 317 ITR 218 (SC) wherein it was held that subsidy by way of customs duty draw back could not be treated as a profit derived from the industrial undertaking. We have not been impressed by the submissions advanced by Mr. Bandhyopadhyay. The judgment of the Apex Court in the case of Liberty India(supra) was in relation to the subsidy arising out of customs draw back and duty Entitlement Pass-book Scheme (DEPB). Both the incentives considered by the Apex Court in the case of Liberty India could be availed after the manufacturing activity was over and exports were made. But, we are concerned in this case with the transport and interest subsidy which has a direct nexus with the manufacturing activity inasmuch as these subsidies go to reduce the cost of production. Therefore, the judgment in the case of Liberty India v. Commissioner of Income Tax has no manner of application. The Supreme Court in the case of Sahney Steel and Press Works Ltd. & Others versus Commissioner of Income Tax, reported in [1997] 228 ITR at page 257 expressed the following views:- ". . . . . Similarly, subsidy on power was confined to 'power consumed for production'. In other words, if power is consumed for any other purpose like setting up the plant and machinery, the incentives will not be given. Refund of sales tax will also be in respect of taxes levied after commencement of production and up to a period of five years from the date of commencement of production. It is difficult to hold these subsidies as anything but operation subsidies. These subsidies were given to encourage setting up of industries in the State of Andhra Pradesh by making the business of production and sale of goods in the State more profitable."
We are of the view that the judgment in Merino Ply & Chemicals Ltd. and the recent judgment of the Calcutta High Court have correctly appreciated the legal position.
24. We do not find it necessary to refer in detail to any of the other judgments that have been placed before us. The judgment in Jai Bhagwan case (supra) is helpful on the nature of a transport subsidy scheme, which is described as under: "The object of the Transport Subsidy Scheme is not augmentation of revenue, by levy and collection of tax or duty. The object of the Scheme is to improve trade and commerce between the remote parts of the country with other parts, so as to bring about economic development of remote backward regions. This was sought to be achieved by the Scheme, by making it feasible and attractive to industrial entrepreneurs to start and run industries in remote parts, by giving them a level playing field so that they could compete with their counterparts in central (non- remote) areas.
16 of 2011 & 6172 of 2012 AYs: 2008-09 & 2009-10 The huge transportation cost for getting the raw materials to the industrial unit and finished goods to the existing market outside the state, was making it unviable for industries in remote parts of the country to compete with industries in central areas. Therefore, industrial units in remote areas were extended the benefit of subsidized transportation. For industrial units in Assam and other north-eastern States, the benefit was given in the form of a subsidy in respect of a percentage of the cost of transportation between a point in central area (Siliguri in West Bengal) and the actual location of the industrial unit in the remote area, so that the industry could become competitive and economically viable." (Paras 14 and 15) 25. The decision in Sahney Steel and Press Works Ltd. v. Commissioner of Income Tax, A.P. - I, Hyderabad (1997) 7 SCC 764, dealt with subsidy received from the State Government in the form of refund of sales tax paid on raw materials, machinery, and finished goods; subsidy on power consumed by the industry; and exemption from water rate. It was held that such subsidies were treated as assistance given for the purpose of carrying on the business of the assessee.
We do not find it necessary to further encumber this judgment with the judgments which Shri Ganesh cited on the netting principle. We find it unnecessary to further substantiate the reasoning in our judgment based on the said principle.
A Delhi High Court judgment was also cited before us being CIT v. Dharampal Premchand Ltd., 317 ITR 353 from which an SLP preferred in the Supreme Court was dismissed. This judgment also concerned itself with Section 80-IB of the Act, in which it was held that refund of excise duty should not be excluded in arriving at the profit derived from business for the purpose of claiming deduction under Section 80-IB of the Act.
It only remains to consider one further argument by Shri Radhakrishnan. He has argued that as the subsidies that are received by the respondent, would be income from other sources referable to Section 56 of the Income Tax Act, any deduction that is to be made, can only be made from income from other sources and not from profits and gains of business, which is a separate and distinct head as recognised by Section 14 of the Income Tax Act. Shri Radhakrishnan is not correct in his submission that assistance by way of subsidies which are reimbursed on the incurring of costs relatable to a business, are under the head "income from other sources", which is a residuary head of income that can be availed only if income does not fall under any of the other four heads of income. Section 28(iii)(b) specifically states that income from cash assistance, by whatever name called, received or receivable by any person against exports under any scheme of the Government of India, will be income chargeable to income tax under the head "profits and gains of business or profession". If cash assistance received or receivable against exports schemes are included as being income under the head "profits and gains of business or profession", it is obvious that subsidies which go to reimbursement of cost in the production of goods of a particular business would also have to be included under the head "profits and gains of business or profession", and not under the head "income from other sources".
For the reasons given by us, we are of the view that the Gauhati, Calcutta and Delhi High Courts have correctly construed Sections 80-IB and 80-IC. The Himachal Pradesh High Court, having wrongly interpreted the judgments in Sterling Foods and Liberty India to arrive at the opposite conclusion, is held to be wrongly decided for the reasons given by us hereinabove.”
17 of 2011 & 6172 of 2012 AYs: 2008-09 & 2009-10 6.10 We find from the para 29 of the aforesaid judgment that the judgment of the Hon’ble Delhi High Court in the case of the Dharmpal Premchand Ltd. (supra) , where also the issue of deduction under section 80-IB of the Act on refund of excise duty was involved, has been approved by the Hon’ble Apex Court. Thus, respectfully following the judgment of the jurisdictional High Court in the case of Dharmpal Premchand Ltd (supra) and the Hon’ble Apex Court judgment in the case of Meghalya Steels Ltd (supra), we uphold the findings of the ld. Commissioner of Income-tax(Appeals) on the issue in dispute in the impugned order. Accordingly, the grounds of the Revenue are dismissed 7. In ground No. 6 the Revenue has raised the issue of higher deduction claimed by the assessee under section 80-IB of the Act in respect of the sales made to its sister concern. 7.1 The Ld DR relying on the order of the Assessing Officer submitted that entire sales were made to the sister concern namely M/s Mentha & Allied products Ltd (MAPL) and the gross profit rate of the assessee was higher than the other concerns in similar trade ,therefore the restricting of the deduction to normal profit at the rate of 3% on similar trade was, justified. 7.2 On the other, Ld. AR relying on the order of the Ld. Commissioner of Income-tax(Appeals) submitted that the price at which the sister concern i.e. MAPL purchased the product from other supplier was, higher as compared to the assessee and, therefore, no extra price has been paid to the assessee thus, no excess deduction was claimed by the assessee. 7.3 We have heard the rival submissions and perused the material on record. The learned Commissioner of Income-tax(Appeals) has decided the issue as under: “3.1 I have considered the findings of the Assessing Officer and the arguments advanced on behalf of the appellant. I have also examined the bills of the unrelated parties who have supplied the same commodity to Mentha & Allied Products Ltd. during the same year. The rate variations as noticed by me in the invoices are only marginal and in fact in many cases the rates at which the appellant has sold to Mentha & Allied 18 ITA Nos. 5063 of 2011 & 6172 of 2012 AYs: 2008-09 & 2009-10 Products Ltd. are lower than those at which the outsiders have sold to Mentha & Allied Products Ltd., as would be evidenced from the table below:- Month Sale by appellant to Sale by other supplier MAPL to MAPL Commodity Rate Per Name of Rate Per KGs(Rs.) Party KGs(Rs.) May,2007 DMO 295 N armada 299 Industries August,2007 M Solution 640 SR Industries 660 November,2007 M Solution 590 Maa Durga 605 Industries December,2007 M Solution 575 Alfa Menthol 581.5 January,2008 M Solution 570 Jay Ambey 585 Corporation I also agree with the appellant that the net profit realization is not a proper indication of the trading result and that a safer and more reliable estimate would be the gross profit realization. The appellant has shown the profits of the preceding years where from it is evident that the results of the subject year are not as attractive as those of the preceding years. From the assessment order of Mentha & Allied Products Ltd., it is clear that if facts as narrated by the Assessing Officer in the subject case are taken to be correct, then there was good reason for not allowing that loss. That, however, is not the case here. Further in terms of the mandate u/s 80IA(10) the onus to show that there is an arrangement between the two connected entities for profit management is on the Assessing Officer which in the subject case has not been satisfactorily discharged. The sales as made are at rates similar to those of outside parties. Further, the rates as per the advance settlements with the appellant could not be compared with the current rates of outsiders with Mentha & Allied Products Ltd. In the circumstances of the case there appears to be no justification for disturbing the book result by the Assessing Officer after taking recourse to Section 80- IA (10) of the Act. The interference as made by the Assessing Officer is 5n erroneous premises and unnecessary. The claim as made by the appellant is found to be correct. The ground of appeal stands allowed.”
19 of 2011 & 6172 of 2012 AYs: 2008-09 & 2009-10 7.4 We find that the sale price per unit paid to the assessee by the sister concern M/s MAPL is lower than the sale price per unit paid to the other suppliers. This fact has not been controverted by the Ld. DR. In such circumstances it cannot be said that profits have been diverted to the assessee from its sister concern . We find that order of the learned Commissioner of Income-tax(Appeals) on the issue in dispute is well reasoned and no interference on our part is required. Accordingly we uphold the decision of the learned Commissioner of Income-tax(Appeals) on the issue in dispute. The ground of the appeal is dismissed.
In the result, appeal of the Revenue is dismissed.
ITA No. 6172/Del/2012 of 2009-10
Now we take up appeal in ITA No. 6172/Del/2012. The sole ground of appeal raised is as under: “That on facts and in the circumstances of the case and in law the learned Commissioner of Income Tax(Appeals) erred in denying deduction claimed u/s 80-IB of the Act holding that the refund of excise duty is not derived from industrial undertaking and therefore not eligible for deduction.”
9.1 The ground of appeal raised by the assessee is identical to the ground No. 4 and 5 raised by the Revenue in , wherein we have held that the central excise duty refund due to the assessee is part of the profit derived from the industrial undertaking and therefore the assessee was eligible for deduction under section 80-IB of the Act on the said refund. Accordingly, the ground of the assessee is allowed.
10. In the result the appeal of the assessee is allowed. The decision is pronounced in the open court on 8th April, 2016.