Topman Exports v. CIT - Taxpublishers.in

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The Tax Publishers2012 TaxPub(DT) 1033 (SC) : (2012) 046 (I) ITCL 0002 : (2012) 342 ITR 0049 : (2012) 247 CTR 0353 : (2012) 205 TAXMAN 0119 : (2012) 067 DTR 0185 INCOME TAX ACT, 1961 --Deduction under section 80HHC--ComputationTreatment of profits on sale of DEPB licence--The assessee was a manufacturer and exporter of fabrics and garments. During the previous year relevant to the assessment year 2002-2003, the assessee sold the DEPB (Duty Entitlement Pass Book) and DFRC (Duty Free Replenishment Certificate) which had accrued to the assessee on export of its products. The assessee filed a return for the assessment year 2002-2003 claiming a deduction of Rs. 83,69,303 under section 80HHC. The AO held that if the profit on transfer of the export incentives was deducted from the profits of the assessee, the figure would be a loss and there will be no positive income of the assessee from its export business and the assessee will not be entitled to any deduction under section 80HHC as has been held by this Court in IPCA Laboratory Ltd. v. Dy. CIT (2004) 266 ITR 521 (SC) : 2004 TaxPub(DT) 1472 (SC). Aggrieved, the assessee filed an appeal before the CIT(A) and contended that the profits on the transfer of DEPB and DFRC were not the sale proceeds of DEPB and DFRC amounting to Rs. 2,06,84,841 and Rs. 1,65,616 respectively, but the difference between the sale value and face value of DEPB and DFRC amounting to Rs. 14,35,097 and Rs. 19,902 respectively and if these figures of profits on transfer of DEPB and DFRC are taken, the income of assessee would be positive and the assessee would be entitled to the deduction under section 80HHC. The CIT(A) rejected this contention of the assessee and held that the assessee had received an amount of Rs. 2,06,84,841 on sale of DEPB and an amount of Rs. 1,65,612 on sale of DFRC and the costs of acquisition of the DEPB and DFRC are to be taken as nil and hence the entire sale proceeds of DEPB and DFRC realized by the assessee are to be treated as profits on transfer of DEPB and DFRC for working out the deduction under section 80HHC and directed the AO to work out the deduction under section 80HHC accordingly. Aggrieved, the assessee filed an appeal before the Tribunal. A Special Bench of the Tribunal heard the appeal and held that there was a direct relation between the entitlement under the DEPB Scheme and the customs duty component in the cost of imports used in the manufacture of the export product. The Tribunal further held that DEPB accrues to the exporter soon after export is made and application is filed for DEPB and DEPB is a 'cash assistance' receivable by the assessee and is covered under clause (iiib) of section 28, whereas profit on the transfer of DEPB takes place on a subsequent date when the DEPB is sold by the assessee and is covered under clause (iiid) of section 28. The Tribunal compared the language of section 28(iiib) in which the expression 'cash assistance' is used, with the language of section 28(iiia), (iiid) and (iiie) in which the expression 'profit' is used and held that the words 'profit on transfer' in section 28 (iiid) and (iiie) would not represent the entire sale value of DEPB but the sale value of DEPB less the face value of the DEPB. With these reasons, the Tribunal set aside the orders of the AO and the CIT(A) and directed the AO to compute the deduction under section 80HHC accordingly. Against the judgment and orders of the Tribunal, the CIT, Mumbai filed appeals in all the cases under section 260A before the High Court and by the impugned orders the High Court disposed of the appeals in terms of the judgment delivered in CIT v. Kalpataru Colours & Chemicals (2010) 192 Taxman 435 (Bom) : 2010 TaxPub(DT) 2051 (Bom-HC). In its judgment, on the first question of law formulated under (a), the High Court held that the Tribunal was not justified in holding that the entire amount received on the sale of the DEPB does not represent profits chargeable under section 28(iiid) and in holding that the face value of the DEPB shall be deducted from the sale proceeds of the DEPB. On the second question of law formulated under (b), the High Court in its judgment did not agree with the Tribunal that the face value of DEPB is chargeable to tax as income of the assessee under section 28(iiib) and instead held that the entirety of sale consideration for transfer of DEPB would fall within the purview of section 28(iiid). In some of the cases, the appellants filed review petitions before the High Court, but the High Court dismissed the review petitions. Held: 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. SUBSCRIBE FOR FULL CONTENT

The Tax Publishers2012 TaxPub(DT) 1033 (SC) : (2012) 046 (I) ITCL 0002 : (2012) 342 ITR 0049 : (2012) 247 CTR 0353 : (2012) 205 TAXMAN 0119 : (2012) 067 DTR 0185

INCOME TAX ACT, 1961

--Deduction under section 80HHC--ComputationTreatment of profits on sale of DEPB licence--The assessee was a manufacturer and exporter of fabrics and garments. During the previous year relevant to the assessment year 2002-2003, the assessee sold the DEPB (Duty Entitlement Pass Book) and DFRC (Duty Free Replenishment Certificate) which had accrued to the assessee on export of its products. The assessee filed a return for the assessment year 2002-2003 claiming a deduction of Rs. 83,69,303 under section 80HHC. The AO held that if the profit on transfer of the export incentives was deducted from the profits of the assessee, the figure would be a loss and there will be no positive income of the assessee from its export business and the assessee will not be entitled to any deduction under section 80HHC as has been held by this Court in IPCA Laboratory Ltd. v. Dy. CIT (2004) 266 ITR 521 (SC) : 2004 TaxPub(DT) 1472 (SC). Aggrieved, the assessee filed an appeal before the CIT(A) and contended that the profits on the transfer of DEPB and DFRC were not the sale proceeds of DEPB and DFRC amounting to Rs. 2,06,84,841 and Rs. 1,65,616 respectively, but the difference between the sale value and face value of DEPB and DFRC amounting to Rs. 14,35,097 and Rs. 19,902 respectively and if these figures of profits on transfer of DEPB and DFRC are taken, the income of assessee would be positive and the assessee would be entitled to the deduction under section 80HHC. The CIT(A) rejected this contention of the assessee and held that the assessee had received an amount of Rs. 2,06,84,841 on sale of DEPB and an amount of Rs. 1,65,612 on sale of DFRC and the costs of acquisition of the DEPB and DFRC are to be taken as nil and hence the entire sale proceeds of DEPB and DFRC realized by the assessee are to be treated as profits on transfer of DEPB and DFRC for working out the deduction under section 80HHC and directed the AO to work out the deduction under section 80HHC accordingly. Aggrieved, the assessee filed an appeal before the Tribunal. A Special Bench of the Tribunal heard the appeal and held that there was a direct relation between the entitlement under the DEPB Scheme and the customs duty component in the cost of imports used in the manufacture of the export product. The Tribunal further held that DEPB accrues to the exporter soon after export is made and application is filed for DEPB and DEPB is a 'cash assistance' receivable by the assessee and is covered under clause (iiib) of section 28, whereas profit on the transfer of DEPB takes place on a subsequent date when the DEPB is sold by the assessee and is covered under clause (iiid) of section 28. The Tribunal compared the language of section 28(iiib) in which the expression 'cash assistance' is used, with the language of section 28(iiia), (iiid) and (iiie) in which the expression 'profit' is used and held that the words 'profit on transfer' in section 28 (iiid) and (iiie) would not represent the entire sale value of DEPB but the sale value of DEPB less the face value of the DEPB. With these reasons, the Tribunal set aside the orders of the AO and the CIT(A) and directed the AO to compute the deduction under section 80HHC accordingly. Against the judgment and orders of the Tribunal, the CIT, Mumbai filed appeals in all the cases under section 260A before the High Court and by the impugned orders the High Court disposed of the appeals in terms of the judgment delivered in CIT v. Kalpataru Colours & Chemicals (2010) 192 Taxman 435 (Bom) : 2010 TaxPub(DT) 2051 (Bom-HC). In its judgment, on the first question of law formulated under (a), the High Court held that the Tribunal was not justified in holding that the entire amount received on the sale of the DEPB does not represent profits chargeable under section 28(iiid) and in holding that the face value of the DEPB shall be deducted from the sale proceeds of the DEPB. On the second question of law formulated under (b), the High Court in its judgment did not agree with the Tribunal that the face value of DEPB is chargeable to tax as income of the assessee under section 28(iiib) and instead held that the entirety of sale consideration for transfer of DEPB would fall within the purview of section 28(iiid). In some of the cases, the appellants filed review petitions before the High Court, but the High Court dismissed the review petitions. Held: 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.