M/S. Saraf Exports v. Commissioner of Income Tax, Jaipur-iii
M. R. SHAH, J.
1. Feeling aggrieved and dissatisfied with the impugned judgment
and order passed by the High Court of Judicature for Rajasthan at Jaipur
dated 04.02.2016 in D.B. Income Tax Appeal No. 7 of 2014 by which
the High Court has allowed the said appeal preferred by the Revenue
and has held that the assessee is not entitled to the deduct ion under
Section 80-IB of the Income Tax Act, 1961 (hereinafter referr ed to as
341
“Act, 1961”) with respect to the receipts under the Duty Draw back
Scheme (hereinafter referred to as “Duty Drawback”) and on transfer
of Duty Entitlement Pass Book Scheme (hereinafter referr ed to as
“DEPB”), the assessee has preferred the present appeal .
2. The facts leading to the present appeal in nutshell are as under:-
2.1 The assessee, a partnership firm, was engaged in the business
of manufacturing and exporting wooden handicraft item s. For the
Assessment Year (A.Y.) 2008-09, the assessee filed its return on
30.09.2008 declaring its income as nil, claiming de duction of
Rs. 70,197/- on account of DEPB and of Rs. 76,27,636/- on account of
receipts under the Duty Drawback.
2.2 The assessee credited the receipts of the aforesaid amounts
into the Profit & Loss Account and claimed the same as “Profit/gains of
business/profession” under Sections 28(iiic) and 28(iiib) of the Act, 1961.
The assessee was issued a notice under Section 143(2) of the Act, 1961.
2.3 By order dated 24.11.2010, the Deputy Commissio ner
disallowed the deductions as claimed. The order of the Deputy
Commissioner disallowing the exemption as claimed, came to be upheld
by the Commissioner of Income Tax (Appeals). However, the Income
Tax Appellate Tribunal (ITAT) allowed the appeal prefer red by the
assessee vide order dated 17.12.2013 by inter alia observing that the
decision of this Court in the case of Liberty India Vs. Commissioner
of Income Tax, (2009) 9 SCC 328 : (2009) 317 ITR 218 (SC) can
be said to be per incuriam and allowed the deductions as claimed on the
receipts of amount under DEPB Scheme and Duty Drawback Scheme.
2.4 By the impugned judgment and order and relying upon the
decision of this Court in the case of Liberty India (supra) and the
decision of this Court in the case of Commissioner of Income Tax,
Karnataka Vs. Sterling Foods, Mangalore (1999) 4 SCC 98 , the
High Court has allowed the appeal preferred by the Revenue and has
restored the order passed by the Deputy Commissioner disallowing the
deductions claimed under Section 80-IB of the Act, 1961. The impugned
judgment and order passed by the High Court is the subject mat ter of
the present appeal.
3. Learned counsel appearing on behalf of the assessee has heavily
relied upon the decision of this Court in the case of Commissioner of
M/S. SARAF EXPORTS v. COMMISSIONER OF INCOME TAX,
JAIPUR-III [M. R. SHAH, J.]
Income Tax Vs. Meghalaya Steels Limited, (2016) 6 S CC 747 :
(2016) 383 ITR 217 (SC) ,
3.1 It is submitted that the meaning of “derived from” under Section
80-IB as laid down in Liberty India (supra) has been widened by this
Hon’ble Court in the case of Meghalaya Steels Limited (supra).
3.2 It is further submitted that the conclusion of Liberty India
(supra) is based on the finding that “derived from” under Section 80-IB
requires a “first degree” connection with the business of the industrial
undertaking whereas the source of DEPB/Duty Drawback are incentives
given under the Duty Exemption Remission Scheme/Section 75 of the
Customs Act, 1962. That applying the test of “first degree”, this Court in
the case of Liberty India (supra) held that receipts from DEPB/Duty
Drawback cannot be deducted under Section 80-IB.
3.3 It is next submitted that, however, subsequently, in the case of
Meghalaya Steels Limited (supra) , the issue before this Court was
whether transport, interest and power subsidy granted by the Government
were entitled to be deducted under Section 80-IB and this Hon’ble Court
has held that receipts of amount on the aforesaid subsidies were entitled
to be deducted under Section 80-IB. It is submitted that in the said case,
before this Court, the Revenue relied upon Liberty India (supra) to
contend that the source of subsidies was the Government and therefore,
it could not be considered as having a direct nexus/close connect ion
with the business of the assessee. It is submitted that, however, this
Court has rejected the said contention and held that the fact that the
Government is the “immediate source” of the subsidies is not relevant
so long as the subsidies reimbursed, wholly or partially, costs actually
incurred by the assessee in manufacturing or selling of the p roducts,
because, the profits or gains referred to in Section 80-IB mea ns net
profit, i.e., profit derived after deduction of manufacturing cost and selling
cost.
3.4 It is contended that this Court specifically relied on Secti on
28(iii)(b) and reiterated that any cash assistance rece ived from the
Government against exports under any Scheme is chargeable to income
tax under the head of “Profit or gains of business or profession”. T hat
this Court approved the decision of the Delhi High Court in the case of
Commissioner of Income Tax Vs. Dharam Pal Prem Chand Ltd. ,
(2009) 317 ITR 353 (Del) holding that the refund of excise duty should
343
not be excluded in arriving at the profit derived from busine ss for the
purpose of claiming deduction under Section 80-IB.
3.5 It is further contended that therefore, applying the law l aid
down by this Court in the case of Meghalaya Steels Limited (supra),
the expression “Profit or gains derived from any business” under Section
80-IB will include any reimbursement of cost even if the immediate
reimbursement of such source is the Government or its policy.
3.6 It is submitted by the learned counsel appearing on behalf of
the assessee that in the case of Topman Exports Vs. Commissioner
of Income Tax, Mumbai, (2012) 3 SCC 593, it is observed and held
that the DEPB/Duty Drawback are relatable to cost of manufacture
and has a direct nexus with the cost of imports. That the said view is in
consonance with the view taken earlier in the case of B. Desraj Vs.
Commissioner of Income Tax, Salem, (2010) 14 SCC 510 , which
held that the Duty Drawback was in the nature of cash assistance under
Section 28(iii)(b).
3.7 It is next contended that in the case of Topman Exports
(supra), it is held that the DEPB is assistance given by the Government
to an exporter to pay customs duty on its imports and it i s receivable
once exports are made and an application under the DEPB Sc heme is
made. That this Court has also held that DEPB also has a cost element
in so much as the cost of acquiring it is not nil because it is acquired by
paying customs duty on the import content of the export product. I t is
submitted that the decision of this Court in the case of Topman Exports
(supra) has been subsequently followed in the cases of ACG Associated
Capsules Private Limited Vs. Commissioner of Income Tax,
Central-IV, Mumbai (2012) 3 SCC 321; Vikas Kalra Vs .
Commissioner of Income Tax – VII, New Delhi, (2012) 3 SCC
611 and Nissan Export Vs. Commissioner of Income Tax, (2014)
14 SCC 152 .
3.8 It is submitted that, therefore, and in view of the development
of law in Meghalaya Steels Limited (supra) and the Topman Exports
(supra) DEPB/Duty Drawback are “profits and gains derived from any
business” within the purview of Section 80-IB.
3.9 It is averred by the learned counsel appearing on behalf of the
assessee that various High Courts have taken the view that the “immediate
source” of the income is not determinative.
M/S. SARAF EXPORTS v. COMMISSIONER OF INCOME TAX,
JAIPUR-III [M. R. SHAH, J.]
4. Shri Balbir Singh, learned ASG while opposing the present appeal
has vehemently submitted that the issue involved in the present appeal is
squarely covered against the assessee in view of the decisi on of this
Court in the case of Liberty India (supra) and Sterling Foods,
Mangalore (supra). It is submitted that therefore, relying upon and
following the decisions of this Hon’ble Court in the a foresaid two
decisions, the High Court has not committed any error in holding that the
assessee is not entitled to the deductions under Section 80-I B on the
amount received by way of DEPB and Duty Drawback Schemes.
4.1 Insofar as the reliance placed by the assessee upon the decision
of this Court in the case of Meghalaya Steels Limited (supra) is
concerned, it is submitted that in the case of Meghalaya Steels Limited
(supra), this Court has not disagreed with or disapproved the decision in
the case of Liberty India (supra) or Sterling Foods, Mangalore
(supra). It is submitted that even otherwise, the said decisions shall not
be applicable in case of receipt of the amount under DEPB and Duty
Drawback Schemes as the same cannot be said to be an income that
falls under the head “profits and gains of business or profession”.
4.2 Shri Balbir Singh, learned ASG has taken us through the scheme
of Section 28 and Section 80-IB of the Act, 1961. It is submi tted that
insofar as Section 28 is concerned, it speaks about the income that falls
under the head of “profit and gains of business or profession”. That
earlier there used to be a dispute regarding the receipt by way of incentives
from the Government being in the nature of cash assista nce, Duty
Drawback, profits on transfer of DEPB Scheme, as to whet her these
receipts were capital receipts or revenue receipts and would these be
taxable. That to put an end to the uncertainty, the legislature by way of
inserting clauses (iiia), (iiib), (iiic), (iiid) and (iiie) in Section 28 has made
the said incentives taxable under the head of profits and gains of business
and profession.
4.3 It is further submitted that Section 80-IB prov ides for
deductions in respect of profits and gains from certa in ‘industrial
undertakings’ other than infrastructure development undertakings. That
this Section applies to the following “industrial undertakings” which are
eligible for deduction under the said Section:-
a) Small scale industries into manufacturing and production
b) Undertaking in industrially backward state and North-Eastern
Region
345
c) Ship
d) Hotels
e) Cold storage plants and cold chains
f) Mineral oil and natural gas
g) Housing projects
h) Scientific research and development
i) Processing, preservation and packaging of food items
j) Multiplex theatre
k) Convention centre
l) Hospitals in rural and specified areas
4.4 It is next submitted that as per the language used in Se ction
80-IB with regard to calculating the deduction, the deduction would be
applicable on “any profits and gains ‘derived from’ any business referred
to in…” included in the gross total income of the assessee. That the
most important thing to be considered while interpreting the said section
is that the words used are “derived from” and not “attributable to”. That
the words “attributable to” in the given clause have been given a wider
connotation as opposed to the words “derived from” which have b een
interpreted to be confined to “first degree sources”. It is submitted that
the words “derived from” have been given a restrictive interpretation.
4.5 It is contended that the connotation “derived from” used i n
Section 80-IB has to be read to be unit specific and cann ot be read as
“standalone” since the words used in the clauses of Section 80- IB are
“industrial undertaking”. That the core issue therefore, pertai ns to the
interpretation of the words “derived from” in Section 80-IB of the Act.
It is submitted that on a fair reading of Section 80-IB read with Section
28 and on true interpretation of Section 80-IB, the DEPB a nd Duty
Drawback Schemes cannot be said to be deriving the income from the
business undertaking and, therefore, deduction under Section 80-IB on
such receipt of the Duty Drawback shall not be allowable as a deduction.
4.6 It is submitted that in the case of Sterling Foods, Mangalore
(supra),while adjudicating the issue of whether on earning of import
entitlements under an export promotion scheme of th e Central
Government, deduction under Section 80HH would be allowable or not,
M/S. SARAF EXPORTS v. COMMISSIONER OF INCOME TAX,
JAIPUR-III [M. R. SHAH, J.]
this Court gave the words “derived from” used in Section 80HH a
restricted interpretation and it was observed that since the words “derived
from” have been used, it shall suggest to go to the source of such profits
and gains.
4.7 It is submitted that in the case of Liberty India (supra), this
Court has considered in detail, deduction in respect of profits and gains
“derived from”. That in the said decision, this Court has discussed the
DEPB and Duty Drawback and thereafter has held that the Duty
Drawback and DEPB benefits cannot be credited against the cost of
manufacture of goods debited in the profit and loss account for the purpose
of Section 80-IB as such remissions would constitute independent source
of income, beyond the first degree nexus between profits and the industrial
undertaking.
4.8 Insofar as the reliance placed by the assessee upon the decision
of this Court in the case of Meghalaya Steels Limited (supra) is
concerned, it is submitted that the question in Meghalaya Steels Limited
(supra) pertained to three subsidies, namely, a) Transport Subsidy, b)
Interest Subsidy and c) Power Subsidy. That this Court held that since
these subsidies directly affect the cost of manufacturi ng, they have a
direct nexus between the profits and gains of the undertaking . Since
these subsidies have a direct nexus, they can be said to be derived from
the industrial undertaking. It is submitted that though in the said decision,
this Court has not held the decision in the case of Liberty India (supra)
to be bad in law, in para 20, this Court has also observed that since if
there is no export, there is no DEPB entitlement. Therefore, its relation
to manufacture of a product and/or sale within India is not proximate or
direct but is one step removed. That it is observed that the object behind
the DEPB entitlement, as has been held by this Court, is to neutralise the
incidence of customs duty payment on the import content of the export
product. In such a scenario, it cannot be said that such duty exemption
scheme is derived from profits and gains made by th e industrial
undertaking or business itself. It is submitted that, therefore, in light of
the above, the decision in the case of Meghalaya Steels Limited (supra)
shall not be applicable to the present matter as it pertains to the above-
mentioned subsidies only. It is next submitted that though binding, the
ITAT did not follow the decisions of this Court in the case of Liberty
India (supra) and Sterling Foods, Mangalore (supra), and, therefore,
the High Court has rightly set aside the order passed by the ITAT following
347
the decisions of this Court in the case of Liberty India (supra) and
Sterling Foods, Mangalore (supra) . It is submitted that therefore,
the impugned judgment and order passed by the High Court is not required
to be interfered with.
4.9 Making above submissions, it is prayed that the present appeal
be dismissed.
5. Heard the learned counsel for the respective parties at length.
6. The short question, which is posed for consideration of this
Court is:-
Whether on the income amount received/profit from DEPB and
Duty Drawback Schemes, the assessee is entitled to deduc tion
under Section 80-IB of the Income Tax Act, 1961 and whether
such an income can be said to be an income “derived from”
industrial undertaking?
7. While considering the aforesaid issue/question, relevant portion
of Section 28 and Section 80-IB are required to be referr ed to, which
are as under:-
“28. Profits and gains of business or profession .—The
following income shall be chargeable to income tax under the
head “Profits and gains of business or profession”,—
XXXXXXXX
(iii-a) profits on sale of a licence granted under the Impo rts
(Control) Order, 1955, made under the Imports and Ex ports
(Control) Act, 1947 (18 of 1947);
(iii-b) cash assistance (by whatever name called) received or
receivable by any person against exports under any scheme of
the Government of India;
(iii-c) any duty of customs or excise repaid or repayable as
drawback to any person against exports under the Customs a nd
Central Excise Duties Drawback Rules, 1971;
(iii-d) any profit on the transfer of the Duty Entitlement Pass
Book Scheme, being the Duty Remission Scheme under the export
and import policy formulated and announced under Section 5 of
the Foreign Trade (Development and Regulation) Act, 1992 (22
of 1992);
M/S. SARAF EXPORTS v. COMMISSIONER OF INCOME TAX,
JAIPUR-III [M. R. SHAH, J.]
(iii-e) any profit on the transfer of the Duty Free Replenishment
Certificate, being the Duty Remission Scheme under the expor t
and import policy formulated and announced under Section 5 of
the Foreign Trade (Development and Regulation) Act, 1992 (22
of 1992);
XXXXXXXX”
“80-IB. Deduction in respect of profits and gains fr om
certain industrial undertakings other than infrastruc ture
development undertakings.—(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), (11-A) and (11-B)
(such business being hereinafter referred to as the eligible
business), there shall, in accordance with and subje ct to the
provisions of this section, be allowed, in computing the total income
of the assessee, a deduction from such profits and gains o f an
amount equal to such percentage and for such number of
assessment years as specified in this section.
(2) This section applies to any industrial undertaking which fulfils
all the following conditions, namely:—
(i) it is not formed by splitting up, or the reconstruction, of a business
already in existence:
Provided that this condition shall not apply in respect of an
industrial undertaking which is formed as a result of t he re-
establishment, reconstruction or revival by the assessee of the
business of any such industrial undertaking as is referred to in
Section 33-B, in the circumstances and within the period specified
in that section;
(ii) it is not formed by the transfer to a new business of machinery
or plant previously used for any purpose;
(iii) it manufactures or produces any article or thing, not being
any article or thing specified in the list in the Eleventh Schedule,
or operates one or more cold storage plant or plants, in any part of
India:
Provided that the condition in this clause shall, in relation to a
small-scale industrial undertaking or an industrial undertaking
referred to in sub-section (4) shall apply as if the words ‘not being
349
any article or thing specified in the list in the Eleventh Schedule’
had been omitted.
Explanation 1.—For the purposes of clause (ii), any machinery
or plant which was used outside India by any person other than
the assessee shall not be regarded as machinery or plant previously
used for any purpose, if the following conditions are fulfil led,
namely:—
(a) such machinery or plant was not, at any time previous to
the date of the installation by the assessee, used in India;
(b) such machinery or plant is imported into India from any
country outside India; and
(c) no deduction on account of depreciation in respect of such
machinery or plant has been allowed or is allowable under
the provisions of this Act in computing the total income of
any person for any period prior to the date of the installation
of the machinery or plant by the assessee.
Explanation 2.—Where in the case of an industrial undertaking,
any machinery or plant or any part thereof previously used for
any purpose is transferred to a new business and the total v alue
of the machinery or plant or part so transferred does not excee d
twenty per cent of the total value of the machinery or plant used
in the business, then, for the purposes of clause ( ii) of this sub-
section, the condition specified therein shall be deemed to h ave
been complied with;
(iv) in a case where the industrial undertaking manufactures or
produces articles or things, the undertaking employs ten or more
workers in a manufacturing process carried on with the aid of
power, or employs twenty or more workers in a manufacturing
process carried on without the aid of power.
(3) The amount of deduction in the case of an industrial undertaking
shall be twenty-five per cent (or thirty per cent where the assessee
is a company), of the profits and gains derived from such industrial
undertaking for a period of ten consecutive assessment years (or
twelve consecutive assessment years where the assessee is a
cooperative society) beginning with the initial assess ment year
subject to the fulfilment of the following conditions, namely:—
M/S. SARAF EXPORTS v. COMMISSIONER OF INCOME TAX,
JAIPUR-III [M. R. SHAH, J.]
(i) it begins to manufacture or produce, articles or things or to
operate such plant or plants at any time during the period beginning
from the 1st day of April, 1991 and ending on the 31st day of
March, 1995 or such further period as the Central Government
may, by notification in the Official Gazette, specify with reference
to any particular undertaking;
(ii) where it is an industrial undertaking being a small-s cale
industrial undertaking, it begins to manufacture or produce articles
or things or to operate its cold storage plant not specified in sub-
section (4) or sub-section (5) at any time during the p eriod
beginning on the 1st day of April, 1995 and ending on the 31st day
of March, 2002.
(4) The amount of deduction in the case of an industrial undertaking
in an industrially backward State specified in the Eighth Schedule
shall be hundred per cent of the profits and gains derived from
such industrial undertaking for five assessment years beginning
with the initial assessment year and thereafter twenty-f ive per
cent (or thirty per cent where the assessee is a company) of the
profits and gains derived from such industrial undertaking:
Provided that the total period of deduction does not exceed ten
consecutive asssessment years (or twelve consecutive assessment
years where the assessee is a cooperative society) sub ject to
fulfilment of the condition that it begins to manufacture or produce
articles or things or to operate its cold storage plant or plants
during the period beginning on the 1st day of April, 1993 and ending
on the 31st day of March, 2004:
Provided further that in the case of such industries in the North-
Eastern Region, as may be notified by the Central Government,
the amount of deduction shall be hundred per cent of profits and
gains for a period of ten assessment years, and the total period of
deduction shall in such a case not exceed ten assessment years:
Provided also that no deduction under this sub-section shall be
allowed for the assessment year beginning on the 1st day of April,
2004 or any subsequent year to any undertaking or enterprise
referred to in sub-section (2) of Section 80-IC.
Provided also that in the case of an industrial undertaking in the
State of Jammu and Kashmir, the provisions of the first proviso
351
shall have effect as if for the figures, letters and words “31st day
of March, 2004”, the figures, letters and words “31st day of March,
2012” had been substituted:
Provided also that no deduction under this sub-section shall be
allowed to an industrial undertaking in the State of Jammu and
Kashmir which is engaged in the manufacture or production of
any article or thing specified in Part C of the Thirteenth Schedule.
(5) The amount of deduction in the case of an industrial undertaking
located in such industrially backward districts as the Ce ntral
Government may, having regard to the prescribed guidelines, by
notification in the Official Gazette, specify in this be half as
industrially backward district of category ‘A’ or an ind ustrially
backward district of category ‘B’ shall be,—
(i) hundred per cent of the profits and gains derived from a n
industrial undertaking located in a backward district of category
‘A’ for five assessment years beginning with the initial assessment
year and thereafter, twenty-five per cent (or thirty per cent where
the assessee is a company) of the profits and gains of an industrial
undertaking:
Provided that the total period of deduction shall not exceed ten
consecutive assessment years or where the assessee is a
cooperative society, twelve consecutive assessment years:
Provided further that the industrial undertaking begins to
manufacture or produce articles or things or to operate its cold
storage plant or plants at any time during the period beginning on
the 1st day of October, 1994 and ending on the 31st day of
March, 2004;
(ii) hundred per cent of the profits and gains derived from an
industrial undertaking located in a backward district of category
‘B’ for three assessment years beginning with the initial assessment
year and thereafter, twenty-five per cent (or thirty per cent where
the assessee is a company) of the profits and gains of an industrial
undertaking:
Provided that the total period of deduction does not exceed eight
consecutive assessment years (or where the assessee is a
cooperative society, twelve consecutive assessment years):
M/S. SARAF EXPORTS v. COMMISSIONER OF INCOME TAX,
JAIPUR-III [M. R. SHAH, J.]
Provided further that the industrial undertaking begins to
manufacture or produce articles or things or to operate its cold
storage plant or plants at any time during the period beginning on
the 1st day of October, 1994 and ending on the 31st day of
March, 2004.
XXXXXXXX”
7.1 Thus, as per Sections 28(iiid) and (iiie) any profit on the transfer
of the Duty Drawback and on transfer of DEPB Schemes, etc.,
shall be chargeable to income tax under the head “Profits a nd
gains of business or profession”. It appears that earlier, there used
to be a dispute regarding the receipt by way of incent ives from
the Government being in the nature of cash assistance , duty
drawback, profits on transfer of DEPB Scheme, etc., i.e., a s to
whether these receipts were capital receipt or revenue receipt
and would thus, be taxable. However, thereafter, and in order to
put an end to the dispute, the legislature by way of inserting clauses
28 (iiia), (iiib), (iiic), (iiid) and (iiie) has made the said incentives
taxable under the head of “profits and gains of business a nd
profession”.
7.2 Section 80-IB provides for deductions in respect of p rofits
and gains from certain industrial undertakings. Therefore, as such
for claiming deductions under Section 80-IB, it must be on the
“profits and gains derived from industrial undertakings” mentioned
in Section 80-IB. An identical question came to be considered by
this Court and, more particularly, with respect to the profit from
DEPB and Duty Drawback Schemes, in the case of Liberty
India (supra).
7.3 After taking into consideration the DEPB and Duty Drawback
Schemes, ultimately, it is observed and held in the case of Liberty
India (supra) that DEPB/Duty Drawback Schemes are incentives
which flow from the schemes framed by the Central Government
or from Section 75 of the Customs Act, 1962 and, hence, incentive
profits are not profits derived from the eligible business under
Section 80-IB. It is observed that they belong to the category of
ancillary profits of such undertakings.
7.4 Similar view was also expressed with respect to the Duty
Drawback. Thereafter, in paragraph 43 of the above decision, i t
353
is observed and held that duty drawback, DEPB benefits, rebates,
etc. cannot be credited against the cost of manufacture of goods
debited in the profit and loss account for purposes of Sections 80-
IA/80-IB as such remissions (credits) would constit ute an
independent source of income beyond the first degree nex us
between profits and the industrial undertaking. Thus, it is observed
and held that duty drawback receipts / DEPB benefits do not
form part of the net profits of eligible industrial undertakings for
the purpose of Section 80-IB of the Act, 1961. The re levant
discussions are in paragraphs 24, 28 to 36, 38, 39, 41, 43 and 45,
which are as under:-
“24. Before analysing Section 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 Sections
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 Sections 80-IA/80-IB is t he
generation of profits (operational profits).
XXXXXXXX
28. In the present batch of cases, the controversy which
arises for determination is: whether DEPB credit/duty drawback
receipt comes within the first degree sources?
29. According to the assessee(s), DEPB credit/duty
drawback receipt reduces the value of purchases (co st
neutralisation), hence, it comes within first degree source as it
increases the net profit proportionately.
30. On the other hand, according to the Department, DEPB
credit/duty drawback receipt do not come within the first degree
source as the said incentives flow from the incentive schemes
enacted by the Government of India or from Section 75 of the
Customs Act, 1962. Hence, according to the Department, in the
present cases, the first degree source is the incentive sc heme/
provisions of the Customs Act. In this connection, the Department
M/S. SARAF EXPORTS v. COMMISSIONER OF INCOME TAX,
JAIPUR-III [M. R. SHAH, J.]
places heavy reliance on the judgment of this Court in Sterling
Foods [(1999) 4 SCC 98 : (1999) 237 ITR 579] .
31. 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 manufact ure.
(See CIT v. Kirloskar Oil Engines Ltd. [(1986) 157 ITR 762
(Bom)])
32. Continuing our analysis of Sections 80-IA/80-IB it may
be mentioned that sub-section (13) of Section 80-IB provides for
applicability of the provisions of sub-section (5) and sub-sections
(7) to (12) of Section 80-IA, so far as may be, applicable to the
eligible business under Section 80-IB. Therefore, at the outset ,
we stated that one needs to read Sections 80-I, 80-IA and 80-IB
as having a common scheme.
33. On perusal of sub-section (5) of Section 80-IA, it is
noticed that it provides for the 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 redu ce or
inflate the profits of eligible business has got to be re jected in
view of the overriding provisions of sub-section (5) of Section 80-
IA, which are also required to be read into Section 80-IB. [See
Section 80-IB(13)]. We may reiterate that Sections 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.
34. On an analysis of Sections 80-IA and 80-IB it becomes
clear that any industrial undertaking, which becomes eligible on
satisfying sub-section (2), would be entitled to deduction under
sub-section (1) only to the extent of profits derived from su ch
industrial undertaking after specified date(s). Hence, apart from
eligibility, sub-section (1) purports to restrict the quant um of
deduction to a specified percentage of profits. Thi s is the
importance of the words “derived from industrial undertaking” as
against “profits attributable to industrial undertaking”.
35. DEPB is an incentive. It is given under the Duty
Exemption Remission Scheme. Essentially, it is an export incentive.
355
No doubt, the object behind DEPB is to neutralise the incidence
of customs duty payment on the import content of export product.
This neutralisation 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 materi als,
components, etc. DEPB credit under the Scheme has t o be
calculated by taking into account the deemed import content of
the export product as per the basic customs duty and spec ial
additional duty payable on such deemed imports.
36. Therefore, in our view, DEPB/duty drawback are
incentives which flow from the schemes framed by the Central
Government or from Section 75 of the Customs Act, 1962, hence,
incentives profits are not profits derived from the eligible business
under Section 80-IB. They belong to the category of ancillary
profits of such undertakings.
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38. Section 75 of the Customs Act, 1962 and Section 37 of
the Central Excise Act, 1944 empower the 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 use d 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-section (2) of Section 75 of the Customs
Act requires the amount of drawback to be determined on a
consideration of all the circumstances prevalent in a pa rticular
trade and also based on the facts situation relevant in respec t of
each of various classes of goods imported. Basically, the source
of duty drawback receipt lies in Section 75 of the Custo ms Act
and Section 37 of the Central Excise Act.
39. 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, w e
M/S. SARAF EXPORTS v. COMMISSIONER OF INCOME TAX,
JAIPUR-III [M. R. SHAH, J.]
hold that profits derived by way of such incentives do not f all
within the expression “profits derived from industrial undertaking”
in Section 80-IB.
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41. The cost of purchase includes duties and taxes ( other
than those subsequently recoverable by the enterpri se 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 c ost 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 & GAAP by Dolphy
D’Souza).
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43. 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 profit and loss account for
purposes of Sections 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.
XXXXXXXX
45. 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 Sections 80-I/80-IA /
80-IB of the 1961 Act. The appeals are, accordingly, dismissed
with no order as to costs.”
7.5 Prior thereto, the treatment of “profits and gains derived from
industrial undertakings” for the purpose of determining tax liability came
up for consideration before this Court in the case of Sterling Foods,
Mangalore (supra), which was followed by this Court in the case of
Liberty India (supra) . In the case of Sterling Foods, Mangalore
(supra), in paragraph 7 and 13, it is observed and held as under:-
“7. The question, therefore, was whether the income
derived by the assessee by the sale of the import entitleme nts
357
was profit and gain derived from its industrial undertaking of
processing seafood. The Division Bench of the High Court came
to the conclusion that the income which the assessee had ma de
by selling the import entitlements was not a profit and gain which
it had derived from its industrial undertaking. For that purpose, it
relied upon the decision of this Court in Cambay Electric Supply
Industrial Co. Ltd. v. CIT [(1978) 2 SCC 644 : 1978 SCC (Tax)
119 : (1978) 113 ITR 84]. It was there held that the expression
“attributable to” was wider in import than the expression “derived
from”. The expression of wider import, namely, “attributable to”,
was used when the legislature intended to cover receipts fr om
sources other than the actual conduct of the business. The Division
Bench of the High Court observed that to obtain the benefi t of
Section 80-HH the assessee had to establish that the profi ts and
gains were derived from its industrial undertaking and it was just
not sufficient that a commercial connection was establ ished
between the profits earned and the industrial undertaking. The
industrial undertaking itself had to be the source of the profit. The
business of the industrial undertaking had directly to yield th at
profit. The industrial undertaking had to be the direct source of
that profit and not the means to earn any other profit. Reference
was also made to the meaning of the word “source”, and it was
held that the import entitlements that the assessee had e arned
were awarded by the Central Government under the scheme to
encourage exports. The source referable to the profits and gains
arising out of the sale proceeds of the import entitlement was,
therefore, the scheme of the Central Government and not the
industrial undertaking of the assessee.
XXXXXXXX
13. We do not think that the source of the import entitlements can
be said to be the industrial undertaking of the assessee. The source
of the import entitlements can, in the circumstances, only be said
to be the Export Promotion Scheme of the Central Government
whereunder the export entitlements become available. There must
be, for the application of the words “derived from”, a direct nexus
between the profits and gains and the industrial undertaking. I n
the instant case the nexus is not direct but only incidental. The
industrial undertaking exports processed seafood. By reason of
M/S. SARAF EXPORTS v. COMMISSIONER OF INCOME TAX,
JAIPUR-III [M. R. SHAH, J.]
such export, the Export Promotion Scheme applies. Thereunder,
the assessee is entitled to import entitlements, which it c an sell.
The sale consideration therefrom cannot, in our view, be held to
constitute a profit and gain derived from the assessee’s industrial
undertaking.”
7.6 Therefore, following the law laid down by this Court in t he
case of Sterling Foods, Mangalore (supra) and Liberty India (supra)
as such, no error has been committed by the High Court in holding that
on the profit from DEPB and Duty Drawback claims, the assessee shall
not be entitled to the deductions under Section 80-IB as such income
cannot be said to be an income “derived from” industrial under taking
and even otherwise as per Section 28(iiid) and (iiie), such an income is
chargeable to tax.
7.7 Insofar as reliance placed by the learned counsel f or the
assessee upon the subsequent decision of this Court in the case of
Meghalaya Steels Limited (supra) is concerned, at the outset, it is
required to be noted that in the case of Meghalaya Steels Limited
(supra), it was a case of three subsidies, namely a) Transport Subsidy,
b) Interest Subsidy, and c) Power Subsidy and in that context this Court
observed and held that since these subsidies directly affect the cost of
manufacturing, they have a direct nexus with the profits and gains of the
undertaking and since these subsidies have a direct nexus, they can be
said to be derived from the industrial undertaking. It is to be noted that in
the case of Meghalaya Steels Limited (supra) , this Court did take
note of the decision in the case of Liberty India (supra), however, this
Court specifically observed that the case of Liberty India (supra) was
concerned with an export incentive, which is very far removed from
reimbursement of an element of cost. While dealing with the decision in
the case of Liberty India (supra) , this Court distinguished Duty
Entitlement Pass Book and Duty Drawback Schemes and specifi cally
observed that the DPEB / Duty Drawback Scheme is not related to the
business of an industrial undertaking for manufacturing or s elling its
products and the DEPB entitlement arises only when the undert aking
goes on to export the said product, that is, after it manufa ctures or
produces the same. In paragraph 20, in the case of Meghalaya Steels
Limited (supra), while distinguishing the profit derived from DEPB /
Duty Drawback, it is observed and held as under:-
359
“20. Liberty India [Liberty India v. CIT, (2009) 9 SCC
328] being the fourth judgment in this line also does not help the
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 neutralise 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.”
Thus, from paragraph 20 of the said decision, it can be seen that
this Court did not disapprove of the decision of this Court in the case of
Liberty India (supra). Even in the case of Meghalaya Steels Limited
(supra), this Court did not consider the earlier decision in the cas e of
Sterling Foods, Mangalore (supra). Thus, the decision of this Court
in the cases of Liberty India (supra) and Sterling Foods, Mangalore
(supra), which as such are on DEPB / Duty Drawback Schemes clinch
the issue at hand. It cannot be said that the decision taken in the case of
Meghalaya Steels Limited (supra) is contrary to the decisions in the
case of Sterling Foods, Mangalore (supra) and Liberty India
(supra). On the contrary, the observations made in paragraph 20 can be
said to be in favour of the Revenue and against the assessee .
8. In view of the above and for the reasons stated above, the
High Court has rightly held that the respondent – assessee is not entitled
to the deductions under Section 80-IB on the amount of DEPB as well
as Duty Drawback Schemes. We hold that on the profit earne d from
DEPB / Duty Drawback Schemes, the assessee is not en titled to
deduction under Section 80-IB of the Act, 1961. Any contrary decision
of any High Court is held to be not good law.
M/S. SARAF EXPORTS v. COMMISSIONER OF INCOME TAX,
JAIPUR-III [M. R. SHAH, J.]
Present appeal deserves to be dismissed and is acco rdingly
dismissed. However, in the facts and circumstances of the case, there
shall be no order as to costs.
Ankit Gyan Appeal dismissed.
(Assisted by : Abhishek Pratap Singh and Aarsh Chou dhary, LCRAs)