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Before: Shri S.S. Viswanethra Ravi
These appeals of the revenue arise out of the order of the Learned CITA in Appeal No. 851/CIT(A)-XXIV/C-37/10-11 dated 30-05-2012 for the Asst Year 2000-01 Appeal No. 852/CIT(A)-XXIV/C-37/10-11 dated 30-05-2012 for the Asst Year 2001-02 Appeal No. 254/CIT(A)-XXIV/C-37/07-08 dated 30-05-2012 for the Asst Year 2002-03 Appeal No.1/CIT(A)-XXIV/A.C. Cir-37/07-08 dated 30-05-2012 for the Asst Year 2003-04 Appeal No. 134/CIT(A)-XXIV/A.C. Cir/06-07 dated 30-05-2012 for the Asst Year 2004-05 passed against the order of assessment framed by the Learned AO u/s 143(3) of the Income Tax Act, 1961 (hereinafter referred to as the ‘Act’).
Shri.Sanjay Mukherjee, JCIT, the Learned DR argued on behalf of the revenue and Shri. Manish Tiwari, FCA, the Learned AR argued on behalf of the assessee.
The only issue to be decided in all these appeals is that whether the assessee is entitled for deduction u/s 80HHC of the Act in respect of income earned by selling of -1172/Kol/12-C-AM 1 M/s. VENTURES Duty Entitlement Pass Book licences in the event of the turnover of the assessee exceeding Rs 10 crores. Hence all the appeals are taken up together and disposed off by this common order for the sake of convenience.
The brief facts of this issue is that the assessee is a partnership firm engaged in the business of export of fabrics and textile materials apart from rendering financial services by advancing loans etc. The assessee claimed deduction u/s 80HHC of the Act in respect of profits derived from its export activities. Admittedly the turnover of the assessee exceeds Rs 10 crores . The assessee had credited certain sums towards sale of advance licences and debited the export expenses in the profit and loss account in various assessment years. The Learned AO applied the amended provisions of section 80HHC(3) third proviso brought in the statute by Taxation Laws (Amendment) Act, 2005 with retrospective effect from 1.4.1998. The Learned AO stated that during the assessment proceedings, various submissions were made by the assessee. Having stated so, he proceeded to conclude that the deduction u/s 80HHC of the Act has been rightly granted to the assessee in terms of the third proviso to section 80HHC(3) of the Act in the original assessment proceedings itself and hence does not require any interference. On first appeal, the Learned CITA looked into the various arguments and details of the assessee on the impugned issue and applied the third proviso to section 80HHC(3) of the Act , applied the decision rendered by the Hon’ble Apex Court in the case of Topman Exports vs CIT reported in (2012) 18 taxmann.com 120 (SC) and the decision rendered by the Jurisdictional High Court in the case of GKW Ltd vs CIT in of 2004 and gave directions to the Learned AO by working out the deduction to be allowed u/s 80HHC of the Act to the assessee. Aggrieved, the revenue is in appeal before us on the following ground:- “
1. That on the facts and circumstances of the case ld. CIT(A) erred in directing the A.O to allow the benefit of deduction in respect of income earned by selling of DEPB/DFRC licenses while calculating the deduction 80HHC, though the assessee having export more than 10 crores, failed to satisfy the -1172/Kol/12-C-AM
2. M/s. VENTURES conditions as laid down in provisos to Sec. 80HHC(3) read with Sec. 28 as per amendment by Taxman laws (amendment) Act, 2005 w.e.f 1.4.1998.”
The Learned DR vehemently argued that the issue that the applicability of the decision of Hon’ble Supreme Court in the case of Topman Exports vs CIT is not disputed in the facts of the instant case. The only dispute is that the assessee had not proved the fact that the duty drawback received by the assessee is more than the profit on DEPB scheme as stipulated in the third proviso to section 80HHC(3) of the Act which has brought in the statute by Taxation Laws (Amendment) Act, 2005 with retrospective effect from 1.4.1998. In response to this, the Learned AR vehemently supported the order of the Learned CITA and stated that all the details were duly filed before the Learned AO and Learned CITA and the Learned CITA after considering the entire details regarding the export incentives computed the deduction u/s 80HHC of the Act in the appellate order itself and directed the Learned AO to grant the same to the assessee and accordingly argued that the conditions stipulated in third proviso to section 80HHC(3) of the Act have been duly complied with by the assessee.
We have heard the rival submissions and perused the materials available on record. The Learned DR during the course of hearing fairly conceded that the applicability of Topman Exports decision in the instant case is not disputed. We hold that though it is not clearly discernible from the assessment order as to whether the assessee had duly exercised the option in terms of third proviso to section 80HHC(3) of the Act before the Learned AO, we find that the Learned CITA had an occasion to get into the detailed workings of computation of deduction u/s 80HHC of the Act after due consideration of the amended provisions and the judgements of Topman Exports reported in (2012) 18 taxmann.com 120 (SC) and the decision of the Calcutta High Court in the case of GKW Ltd vs CIT in of 2004. We find that the assessee had duly exercised its option of proving that the duty drawback was more than the DEPB scheme before the Learned CITA who had duly appreciated the same in the light -1172/Kol/12-C-AM 3 M/s. VENTURES of the aforesaid judgements. Against the computation mechanism, the revenue is not in appeal before us. It is pertinent to note that the Learned AO states that the issues pertaining to claim of deduction u/s 80HHC of the Act have been discussed during the course of hearing and it is not the case of the Learned AO that the assessee had not proved before him that the element of duty drawback was more than the profit on sale of DEPB scheme though the same is raised by the revenue in the grounds of appeal. Hence in these facts and circumstances, it could only be concluded that the assessee had proved the eligibility of the claim of deduction u/s 80HHC (3) of the Act after due satisfaction of the conditions stipulated therein before the lower authorities and the grievance of the revenue is duly addressed. At this juncture, let us get into the head notes and decision rendered by the Hon’ble Supreme Court in the case of Topman Exports vs CIT reported in (2012) 18 taxmann.com 120 (SC) as below:- Head Notes:
“Section 28(iiib), read with section 28(iiid), of the Income-tax Act, 1961 - Business income - Cash assistance - Assessment year 2002-03 - Whether DEPB is a 'cash assistance' receivable by assessee and is covered under clause (iiib) of section 28, whereas profit on transfer of DEPB takes place on a subsequent date when DEPB is sold by assessee and is covered under clause (iiid) of section 28 - Held, yes Section 80HHC, read with section 28(iiid), of the Income-tax Act, 1961 - Deductions - Exporters - Assessment year 2002-03 - Whether when DEPB accrues to assessee in first previous year and assessee transfers DEPB certificate in second previous year, it is only ninety per cent of profit on transfer of DEPB covered under clause (iiid) of section 28 and not ninety per cent of entire sale value including face value of DEPB gets excluded from 'profits of business' in terms of Explanation (baa) under section 80HHC and, as a result, assessee gets a bigger figure of 'profits of business' which becomes multiplier in formula under section 80HHC(3)(a) for arriving at figure of profits derived from exports - Held, yes [In favour of assessee]. Held: On a reading of the paragraphs of the Hand Book on DEPB and the Export and Import Policy of the Government of India, 1997-2002, it is clear that the objective of DEPB scheme is to neutralize the incidence of customs duty on the import content of the export products. Hence, it has direct nexus with the cost of the imports made by an exporter for manufacturing the export products. The neutralization of the cost of customs duty under the DEPB scheme, however, is by granting a duty credit against the export product and this credit can be utilized for paying customs duty on any item which is freely importable. DEPB is issued against the exports to the exporter and is transferable by the exporter. [Para 10] -1172/Kol/12-C-AM 4 M/s. VENTURES
It is necessary to consider the relevant provisions of section 28 for determining whether DEPB will fall under clause (iiib) or under clause (iiid) of section 28. [Para 11] It will be clear from the provisions of section 28 that under clause (iiib) cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India is by itself income chargeable to income tax under the head 'Profits and Gains of Business or Profession'. DEPB is a kind of assistance given by the Government of India to an exporter to pay customs duty on its imports and it is receivable once exports are made and an application is made by the exporter for DEPB. Therefore, there is no doubt that DEPB is 'cash assistance' receivable by a person against exports under the scheme of the Government of India and falls under clause (iiib) of section 28 and is chargeable to income tax under the head 'Profits and Gains of Business or Profession' even before it is transferred by the assessee. [Para 12] Under clause (iiid) of Section 28, any profit on transfer of DEPB is chargeable to income tax under the head 'Profits and Gains of Business or Profession' as an item separate from cash assistance under clause (iiib). The word 'profit' means the gross proceeds of a business transaction less the costs of the transaction. 'Profits' imply a comparison of the value of an asset when the asset is acquired with the value of the asset when the asset is transferred and the difference between the two values is the amount of profit or gain made by a person. As DEPB has direct nexus with the cost of imports for manufacturing an export product, any amount realized by the assessee over and above the DEPB on transfer of the DEPB would represent profit on the transfer of DEPB. [Para 13] It is thus, opined that while the face value of the DEPB will fall under clause (iiib) of section 28, the difference between the sale value and the face value of the DEPB will fall under clause (iiid ) of section 28 and the High Court was not right in taking the view in the impugned judgment that the entire sale proceeds of the DEPB realized on transfer of the DEPB and not just the difference between the sale value and the face value of the DEPB represent profit on transfer of the DEPB. [Para 14] One may now point out the errors in the impugned judgment of the High Court. The first reason given by the High Court is that clause (iiia) of section 28 treats profits on the sale of an import license as income chargeable to tax and when the license is sold, the entire amount is treated as profits of business under clause (iiia) of section 28 and, thus, there is no justification to treat the amount which is received by an exporter on the transfer of the DEPB any differently than the profits which are made on the sale of an import license under clause (iiia ) of section 28. In taking the view that when the import license is sold the entire amount is treated as profits of business, the High Court has visualized a situation where the cost of acquiring the import license is nil. The cost of acquiring DEPB, on the other hand, is not nil because the person acquires it by paying customs duty on the import content of the export product and the DEPB which accrues to a person against exports has a cost element in it. Accordingly, when DEPB is sold by a person, his profit on transfer of DEPB would be the sale value of the DEPB less the face value of DEPB which represents the cost of the DEPB. The second reason given by the High Court in the impugned judgment is that under the DEPB scheme, DEPB is given at a percentage -1172/Kol/12-C-AM 5 M/s. VENTURES of the FOB value of the exports so as to neutralize the incidence of customs duty on the import content of the export products, but the exporter may not himself utilize the DEPB for paying customs duty but may transfer it to someone else and, therefore, the entire sum received on transfer of DEPB would be covered under clause (iiid) of section 28. The High Court has failed to appreciate that DEPB represents part of the cost incurred by a person for manufacture of the export product and, hence, even where the DEPB is not utilized by the exporter but is transferred to another person, the DEPB continues to remain as a cost to the exporter. When, therefore, DEPB is transferred by a person, the entire sum received by him on such transfer does not become his profits. It is only the amount that he receives in excess of the DEPB which represents his profits on transfer of the DEPB. [Para 15] The High Court has sought to meet the argument of double taxation made on behalf of the assessees by holding that where the face value of the DEPB was offered to tax in the year in which the credit accrued to the assessee as business profits, then any further profit arising on transfer of DEPB would be taxed as profits of business under section 28(iiid ) in the year in which the transfer of DEPB took place. This view of the High Court, is contrary to the language of section 28 under which 'cash assistance' received or receivable by any person against exports such as the DEPB and 'profit on transfer of the DEPB' are treated as two separate items of income under clauses (iiib) and (iiid) of section 28. If accrual of DEPB and profit on transfer of DEPB are treated as two separate items of income chargeable to tax under clauses (iiib ) and (iiid) of section 28, then DEPB will be chargeable as income under clause (iiib ) of section 28 in the year in which the person applies for DEPB credit against the exports and the profit on transfer of the DEPB by that person will be chargeable as income under clause (iiid ) of section 28 in his hands in the year in which he makes the transfer. Accordingly, if in the same previous year the DEPB accrues to a person and he also earns profit on transfer of the DEPB, the DEPB will be business profits under clause (iiib) and the difference between the sale value and the DEPB (face value) would be the profits on the transfer of DEPB under clause (iiid ) for the same assessment year. Where, however, the DEPB accrues to a person in one previous year and the transfer of DEPB takes place in a subsequent previous year, then the DEPB will be chargeable as income of the person for the first assessment year chargeable under clause (iiib ) of section 28 and the difference between the DEPB credit and the sale value of the DEPB credit would be income in his hands for the subsequent assessment year chargeable under clause (iiid ) of section 28. This interpretation, therefore, does not lead to double taxation of the same income, which the legislature must be presumed to have avoided. [Para 16] The High Court has held that as the assessee had an export turnover exceeding Rs. 10 crores and did not fulfil the conditions set out in the third proviso to section 80HHC(3) the assessee was not entitled to a deduction under section 80HHC on the amount received on transfer of DEPB and to get over this difficulty the assessee contended that the profits on transfer of DEPB in section 28(iiid) would not include the face value of the DEPB so that the assessees get a deduction under section 80HHC on the face value of the DEPB. This finding of the High Court is not based on an accurate understanding scheme of section 80HHC. [Para 17] -1172/Kol/12-C-AM 6 M/s. VENTURES
Sub-section (1) of section 80HHC makes it clear that an assessee engaged in the business of export out of India of any goods or merchandise to which this section applies shall be allowed, in computing his total income, a deduction to the extent of profits referred to in sub-section (1B), derived by him from the export of such goods or merchandise. Sub-section (1B) of section 80HHC gives the percentages of deduction of the profits allowable for the different assessment years from the assessment years 2001-2002 to 2004-2005. Sub-section (3)(a ) of section 80HHC provides that where the export out of India is of goods or merchandise manufactured or processed by the assessee, the profits derived from such exports shall be the amount which bears to the profits 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 by the assessee. [Para 19] Explanation (baa ) under section 80HHC states that 'profits of the business' in the aforesaid formula means the profits of the business as computed under the head 'Profits and Gains of Business or Profession' as reduced by (1) ninety per cent of any sum referred to in clauses (iiia ), (iiib), (iiic ), (iiid) and (iiie) of section 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of similar nature including any such receipts and (2) the profits of any branch, office, warehouse or any other establishment of the assessee situated outside India. Thus, ninety per cent of the DEPB which is 'cash assistance' against exports and is covered under clause (iiib) of section 28 will get excluded from the 'profits of the business' of the assessee if such DEPB has accrued to the assessee during the previous year. Similarly, if during the same previous year, the assessee has transferred the DEPB and the sale value of such DEPB is more than the face value of the DEPB, the difference between the sale value of the DEPB and the face value of the DEPB will represent the profit on transfer of DEPB covered under clause (iiid) of section 28 and ninety per cent of such profit on transfer of DEPB certificate will get excluded from 'profits of the business'. But, where the DEPB accrues to the assessee in the first previous year and the assessee transfers the DEPB certificate in the second previous year, only ninety per cent of the profits on transfer of DEPB covered under clause (iiid ) and not ninety per cent of the entire sale value including the face value of the DEPB will get excluded from the 'profits of the business'. Thus, where the ninety per cent of the face value of the DEPB does not get excluded from 'profits of the business' under Explanation (baa) and only ninety per cent of the difference between the face value of the DEPB and the sale value of the DEPB gets excluded from 'profits of the business', the assessee gets a bigger figure of 'profits of the business' and this is possible when the DEPB accrues to the assessee in one previous year and transfer of the DEPB takes place in the subsequent previous year. The result in such case is that a higher figure of 'profits of the business' becomes the multiplier in the aforesaid formula under sub-section (3)(a) of section 80HHC for arriving at the figure of profits derived from exports. [Para 20] To the figure of profits derived from exports worked out as per the aforesaid formula under sub-section (3)(a) of section 80HHC, the additions as mentioned in first, second, third and fourth proviso under sub-section (3) are made to profits derived from exports. Under the first proviso, ninety per cent of the sum referred to in clauses (iiia ), (iiib) and (iiic ) of section 28 are added in the same proportion as -1172/Kol/12-C-AM 7 M/s. VENTURES export turnover bears to the total turnover of the business carried on by the assessee. In this first proviso, there is no addition of any sum referred to in clause (iiid ) or clause (iiie). Hence, profit on transfer of DEPB or DFRC are not to be added under the first proviso. Where therefore in the previous year no DEPB or DFRC accrues to the assessee, he would not be entitled to the benefit of the first proviso to sub-section (3) of section 80HHC because he would not have any sum referred to in clause (iiib) of section 28. The second proviso to sub-section (3) of section 80HHC states that in case of an assessee having export turnover not exceeding Rs. 10 crores during the previous year, after giving effect to the first proviso, the export profits are to be increased further by the amount which bears to ninety per cent of any sum referred to in clauses (iiid) and (iiie) of section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee. The third proviso to sub-section (3) states that in case of an assessee having export turnover exceeding Rs. 10 crores, similar addition of ninety per cent of the sums referred to in clause (iiid ) of section 28 only if the assessee has the necessary and sufficient evidence to prove that (a ) he had an option to choose either the duty drawback or the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme; and (b) the rate of drawback credit attributable to the customs duty was higher than the rate of credit allowable under the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme. Therefore, if the assessee having export turnover of more than Rs. 10 crores does not satisfy these two conditions, he will not be entitled to the addition of profit on transfer of DEPB under the third proviso to sub-section (3) of section 80HHC. [Para 21] The aforesaid discussion would show that where an assessee has an export turnover exceeding Rs. 10 crores and has made profits on transfer of DEPB under clause (iiid ) of section 28, he would not get the benefit of addition to export profits under third or fourth proviso to sub-section (3) of section 80HHC, but he would get the benefit of exclusion of a smaller figure from 'profits of the business' under Explanation (baa) to section 80HHC and there is nothing in Explanation (baa) to section 80HHC to show that this benefit of exclusion of a smaller figure from 'profits of the business' will not be available to an assessee having an export turnover exceeding Rs. 10 crores. In other words, where the export turnover of an assessee exceeds Rs. 10 crores, he does not get the benefit of addition of ninety per cent of export incentive under clause (iiid ) of section 28 to his export profits, but he gets a higher figure of profits of the business, which ultimately results in computation of a bigger export profit. The High Court, therefore, was not right in coming to the conclusion that as the assessee did not have the export turnover exceeding Rs. 10 crores and as the assessee did not fulfil the conditions set out in the third proviso to section 80HHC (iii), the assessee was not entitled to a deduction under section 80HHC on the amount received on transfer of DEPB and with a view to get over this difficulty the assessee was contending that the profits on transfer of DEPB under section 28 (iiid ) would not include the face value of the DEPB. It is a well-settled principle of statutory interpretation of a taxing statute that a subject will be liable to tax and will be entitled to exemption from tax according to the strict language of the taxing statute and if as per the words used in Explanation (baa) to section 80HHC read with the words used in clauses (iiid ) and (iiie) of section 28, the assessee was entitled to a -1172/Kol/12-C-AM 8 M/s. VENTURES deduction under section 80HHC on export profits, the benefit of such deduction cannot be denied to the assessee. [Para 22] The impugned judgment and orders of the High Court are accordingly, set aside. The appeals are allowed to the extent indicated in this judgment. The Assessing Officer is directed to compute the deduction under section 80HHC in the case of the assessee in accordance with this judgment. [Para 23].”
6.1 Let us now get into the decision rendered by the Jurisdictional High Court in the case of GKW Ltd vs CIT in of 2004 wherein it was held:- “If we compare the language employed in sub-section(iiia) with which we are concerned in the present case with the next two sub-sections, i.e (iiib) and (iiic) as indicated above, it will appear that while in case of sub-section(iiia), it is the profit on actual sale of licence that will be chargeable to tax but in the cases covered by sub-sections (iiib) or (iiic), cash assistance (by whatever name called) received or receivable by any person against exports or any duty of customs or excise repaid of repayable as drawback to any person against exports are chargeable to tax. Thus, the legislature was conscious that in cases covered under sub-section(iiia), only profit on sale of licence should be chargeable but not the profit which may come in future on sale of the licence because the benefit of making import without payment of customs duty accrues to an assessee only at the time of actual import and if the domestic price of the raw-materials is lower than the landed cost of the imported materials, it would not be sensible to import the raw-materials under the Advance License. Moreover, at times, the advance licenses may not be utilized within the period of validity thereof any in such cases, no actual benefit is available to an assessee whereas in the cases covered by sub- sections (iiib) or (iiic), there is no scope of non-utilisation of the cash assistance or drawback mentioned therein and as such, those are Automatically chargeable to tax…… Therefore, the Tribunal below committed a substantial error of law in treating the amount of Rs.228.34 lakh as chargeable to income tax notwithstanding the fact that the same did not come within the purview of Section 28(iiia) of the Act when the license had not been sold and no profit had come in the hand of appellant. “ 6.2 We find that the Learned CITA had addressed the deduction u/s 80HHC of the Act by duly considering the third proviso to section 80HHC(3) of the Act by giving detailed workings of deduction in the light of the judgements of the Apex Court and the -1172/Kol/12-C-AM 9 M/s. VENTURES Jurisdictional High Court as stated supra. Hence we are not inclined to interfere with the findings recorded therein. Accordingly, the grounds raised by the revenue are dismissed.
In the result, the appeals of the revenue are dismissed.
THIS ORDER IS PRONOUNCED IN OPEN COURT ON 15 / 10/2015