Turbo Impex and Others vs CIT

M.M. Kumar, J.—This order shall dispose of a bunch of appeals* filed u/s 260A of the IT Act, 1961 (for brevity, the Act) against the order(s)** passed by the Amritsar and Chandigarh Benches of the Tribunal because common question of law and facts are involved. The primary issue in these appeals relates to computation of deduction u/s 80HHC of the Act on export incentive Duty Entitlement Pass Book (DEPB); Duty Draw Back (DBK); and Duty Free Remission Scheme (DFRC). The Tribunal following the view of the Bombay High Court in the case of Commissioner of Income Tax Vs. Kalpataru Colours and Chemicals, , held that the entire amount received by an assessee on sale of DEPB represents profit on transfer of DEPB, u/s 28(iiid) of the Act. In Topman Exports Vs. Commissioner of Income Tax, Mumbai, , Hon''ble the Supreme Court has, however, held that the entire amount received by the assessee less the face value of the DEPB would represent profit on transfer of DEPB by the assessee. The view taken by Bombay High Court stands overruled and the judgment of Bombay High Court in CIT v. Topman Exports [IT Appeal No. (L) 3019 of 2009, decided on 29th June, 2010], has been reversed. It also follows that the view of this Court in CIT v. F.C. Sondhi & Company (P) Ltd. (ITA No. 299 of 2010, decided on 16-8-2010) [reported at Commissioner of Income Tax Vs. F.C. Sondhi and Co. P. Ltd., and in any other connected matter would no longer holds the field and is deemed to be overruled since the view of this court is based on the judgment of Bombay High Court in the case of Kalpataru Colours & Chemicals (supra). The facts are being referred from IT Appeal No. 361 of 2011 wherein the common order, dt. 30th June, 2011, passed by the Chandigarh Bench of the Tribunal is subject-matter of challenge. On 27th Oct., 2004, the appellant-M/s Turbo Impex filed its return for the asst. yr. 2004-05, declaring the income at Rs. 1,72,90,748. It was processed u/s 143(1) and selected for scrutiny. Keeping in view retrospective amendment of section 80HHC of the Act w.e.f. 1st April, 1998, the AO asked the assessee-appellant to justify its claim under that section. The submission made by the assessee-appellant with regard to deduction u/s 80HHC of the Act on export incentive DEPB was rejected and the assessment order dt. 26th Dec, 2006 was passed (A-1). The appeal filed by the assessee-appellant was also rejected by the CIT(A), vide order dt. 11th Jan., 2008 (A-II).

The assessee-appellant then filed an appeal before the Chandigarh Bench of the Tribunal. On 31st Aug., 2009, the aforementioned appeal along with a bunch of others appeals were disposed of in terms of the decision of a Special Bench of the Mumbai Tribunal, dt. 11th Aug., 2009, rendered in the case of (2010) 124 ITD 1 . Accordingly, the Chandigarh Bench of the Tribunal set aside the orders of the CIT(A) and remanded the matter to the AO for fresh adjudication for the purpose of recomputing the deduction under section80HHC (A-III).

Feeling aggrieved, the Revenue filed various appeals before this Court. The Division Bench of this Court rendered its judgment in the case of F.C. Sondhi & Company (P) Ltd. (supra). On the issue of treatment of receipts of DEPB/DFRC entitlements and deduction allowable on such receipts u/s 80HHC of the Act, the Division Bench has found that the view taken by the Special Bench of the Mumbai Tribunal was reversed by the Bombay High Court in the case of Kalpataru Colours & Chemicals (supra). Bombay High Court formulated the following two substantial questions of law:

(a) Whether the Tribunal is justified in holding that the entire amount received on the sale of the DEPB does not represent profits chargeable u/s 28(iiid) of the IT Act, 1961 and that the face value of the DEPB shall be deducted from the sale proceeds?

(b) Whether the Tribunal is justified in holding that the face value of the DEPB is chargeable to tax u/s 28(iiib) at the time of accrual of income i.e. when the application for DEPB is filed with the competent authority pursuant to the exports made and that the profits on the sale of DEPB representing the excess of the sale proceeds over the face value is liable to be considered under s, 28(iiid) at the time of sale?

In its judgment, on the first question of law formulated under (a), the Bombay High Court held that the Tribunal was not justified when it held that the entire amount received on the sale of the DEPB did not represent profits chargeable u/s 28(iiid) of the Act and 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 Bombay High Court in its judgment did not agree with the Tribunal that the face value of DEPB is to tax u/s 28(iiib) at the time of accrual of income of the assessee. The High Court, thus, held that the entire sale consideration for transfer of DEPB would fall within the purview of section 28(iiid) of the Act. In some of the cases, review petitions were filed before the Bombay High Court, but the same were dismissed.

Agreeing with the view taken by the Bombay High Court, the Division Bench of this Court answered the questions holding that the entire income from DBK, DEPB and DFRC has to be treated as business income and has to be taken into account for deduction u/s 80HHC. The matter was remanded to the Tribunal for fresh decision in accordance with law. Subsequently, the other appeals were also disposed of by the Division Bench following the decision rendered in F.C. Sondhi & Company (P) Ltd. (supra) and the matters were remanded back to the respective Benches of the Tribunal.

In view of the aforesaid directions issued by this Court, the appeals were listed before the Tribunal. After noticing the arguments of the parties, provisions of section 28 and 80HHC of the Act and various observations made by the Bombay High Court in the case of Kalapataru Colours & Chemicals (supra), the Tribunal decided the issue of value of DEPB against the assessee, vide impugned order dt. 30th June, 2011. In para 47, the following observations have been made by the Chandigarh Bench of the Tribunal:

Respectfully following the abovesaid ratio laid down by the Hon''ble Bombay High Court in Kalaptaru Colours & Chemicals (supra), we find no merit in the stand of the assessee that DEPB credit has a face value and while determining the profits eligible for deduction u/s 80HHC of the Act, only the profits arising on the transfer of DEPB credit are to be excluded. As observed by us in para 42 above the DEPB credit being an export incentive received by the assessee in proportion to the FOB value of its export has no face value and the amount received on its transfer is to be considered while computing the profits allowable for deduction u/s 80HHC of the Act. Admittedly, in the case of the assessees before us the turnover exceeds Rs. 10 crores and the provisions of third proviso to sub-section (3) of section 80HHC of the Act are applicable and the assessee having not fulfilled the conditions laid down under the said proviso, the total amount received on transfer of DEPB credit is to be excluded from the profits eligible for deduction u/s 80HHC of the Act. However, the amount received by the assessee on the transfer of DEPB credit is includible as business profit in the hands of the assessee u/s 28(iiid) of the Act.

Eventually, the Tribunal directed the AO to compute the deduction u/s 80HHC of the Act in line with the aforementioned observations after affording reasonable opportunity to the assessee (A-6).

Having heard learned counsel for the parties at length and perusing the paper books with their able assistance, we are of the considered view that the matter is no longer res integra as the same has been finally settled by Hon''ble the Supreme Court in a recent judgment rendered in the case of Topman Exports (supra).

It would be profitable to first notice a few facts of the case of Topman Exports (supra). Topman Exports, assessee was a manufacturer and exporter of fabrics and garments. During the previous year relevant to asst. yr. 2002-03 it sold DEPB and DFRC (Duty Free Replenishment Certificate), which had accrued on export of its products. The assessee filed a return for asst. yr. 2002-03 claiming a deduction of Rs. 83,69,303 u/s 80HHC of the Act. 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 would be no positive income of the assessee from its export business and the assessee would not be entitled to any deduction u/s 80HHC of the Act. Aggrieved, the assessee filed an appeal before CIT(A) contending 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 only 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 DFRG were taken, the income of the assessee would be positive and the assessee would be entitled to the deduction u/s 80HHC of the Act. 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 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 u/s 80HHC of the Act and directed the AO to work out the deduction u/s 80HHC of the Act accordingly.

Aggrieved, the Topman Exports, assessee, filed an appeal before the Tribunal. A Special Bench of the Tribunal 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 u/s 28(iiib) of the Act, whereas profit on the transfer of DEPB takes place on a subsequent date when DEPB is sold by the assessee and is covered u/s 28(iiid) of the Act. The Tribunal compared the language of section 28(iiib) of the Act in which the expression "cash assistance" is used, with the language of section 28(iiia), (iiid) and (iiie) of the Act in which the expression "profit" is used and held that the words "profit on transfer" in section 28(iiid) and (iiie) of the Act would not represent the entire sale value of DEPB but the sale value of DEPB less the face value of DEPB. With these reasons, the Tribunal set aside the orders of the AO and CIT(A) and directed the AO to compute the deduction u/s 80HHC of the Act accordingly.

Against the judgment and orders of the Tribunal, CIT filed appeals in all the cases before the Bombay High Court, which disposed of the appeals in terms of the judgment rendered in the case of Kalpataru Colours & Chemicals (supra). The judgment rendered by the Bombay High Court was subject-matter of challenge before Hon''ble the Supreme Court. Affirming the reasoning of the Tribunal and allowing the appeals of the assessees, their Lordships of Hon''ble the Supreme Court overruled the judgment of Bombay High Court rendered in the case of Kalpataru Colours & Chemicals (supra). After noticing paras 4.37 and 4.42 of the handbook on DEPB issued by the Government of India and paras 7.14, 7.15, 716 and 7.38 of the Export and Import Policy, 1997-2002, as notified by the Central Government vide Notification dt. 31st March, 2000, in para 17 of the judgment, it has been observed as under:

17....... 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.

Their Lordships of Hon''ble the Supreme Court then proceeded to consider the relevant provisions of section 28 of the Act, for determining whether DEPB would fall under clause (iiib) or under clause (iiid) of section 28 and in para 19 of the judgment it has been held as under:

It will be clear from the aforesaid 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. We have, therefore, 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.

It has been further observed that u/s 28(iiid) of the Act, 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 u/s 28(iiib). The word profit means the gross proceeds of a business transaction less the costs of the transaction. Profits, therefore, 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 assessees over and above DEPB on transfer of DEPB would represent profit on the transfer of DEPB. It has been, thus, opined that while the face value of the DEPB would fall under clause (iiib) of section 28 of the Act, the difference between the sale value and the face value of the DEPB would fall under clause (iiid) of section 28 of the Act. It has been specifically observed by their Lordships that the Bombay High Court was not right in taking the view that the entire sale proceeds of the DEPB realised 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. In paras 24 and 25 of the judgment, Hon''ble the Supreme Court found following errors in the view taken by the Bombay High Court:

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 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.

On the issue of computation of profit for different assessment years, where accrual value of DEPB differs from its transfer value, it has been held that if DEPB credits accrue and exporter earns profit on transfer of said DEPB in same previous year, face value of DEPB would qualify as business profits u/s 28(iiib) of the Act and difference between sale value of DEPB and their face value would qualify as profits on transfer of DEPB u/s 28(iiid) of the Act. In case, where DEPB credits accrue in one previous year and transfer of DEPB takes place in subsequent previous year, then DEPB would be chargeable as income of exporter for first assessment year u/s 28(iiib) and difference between DEPB and sale value of DEPB would be income for subsequent assessment year u/s 28(iiid). In this manner, the double taxation is avoided,

After elaborately discussing the relevant provisions of section 80HHC, their Lordships finally made the following pertinent observations in paras 37 to 40 of the judgment:

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 subs. (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 of the Act 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 u/s 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 u/s 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 clause (iiid) and (iiie) of section 28, the assessee was entitled to a deduction u/s 80HHC on export profits, the benefit of such deduction cannot be denied to the assessee.

The impugned judgment and orders of the Bombay High Court are accordingly set aside. The appeals are allowed to the extent indicated in this judgment. The AO is directed to compute the deduction u/s 80HHC in the case of the appellants in accordance with this judgment. There shall be no order as to costs.

When the above principles enunciated in the case of Topman Exports (supra) are applied to the facts of present appeals, we find that the impugned orders passed by the Amritsar and Chandigarh Benches of the Tribunal are liable to be set aside because the same have been passed on the basis of the judgment of Bombay High Court rendered in the case of Kalpataru Colours & Chemicals (supra), which has been overruled by Hon''ble the Supreme Court.

As a sequel to the above discussion, these appeals are allowed in terms of the judgment of Hon''ble the Supreme Court rendered in the case of Topman Exports (supra). The impugned order (s) passed by the Amritsar Bench and Chandigarh Benches of the Tribunal are hereby set aside. The matters are remanded back to the concerned AO with a direction to compute the deduction u/s 80HHC of the Act in accordance with law and in the light of the judgment of Hon''ble the Supreme Court in the case of Topman Exports (supra). A photocopy of this order be placed on the files of all the connected appeals.