Exports — Taxability of profits u/s.28 — Deduction under Chapter VIA — DEPB is ‘cash assistance’ receivable by a person against exports and fall under clause (iiib) of section 28 and is chargeable to tax even before it is transferred by the assessee (in the year of entitlement) and profit on transfer of DEPB fall under clause (iiid) of section 28 and were chargeable to tax in the year of transfer — If the assessee having export turnover of more than Rs.10 crore does not satisfy the two conditio<

During the previous year relevant to the A.Y. 2002- 03, the assessee, a manufacturer and exporter of fabrics and garments, sold the DEPB and DFRC (Duty Free Replenishment Certificate) which had accrued to it on export of its productions. The assessee filed a return for the A.Y. 2002-03 claiming a deduction of Rs.83,69,303 u/s.80HHC of the Act. The Assessing Officer held that if the profit on transfer of the export incentive 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 u/s.80HHC of the Act as has been held by this Court in IPCA Laboratory Ltd. v. Deputy CIT, (2004) 266 ITR 521 (SC). Aggrieved, the assessee filed an appeal before the Commissioner of Income-tax (Appeals) and contended that the profits on the transfer of DEPB and DFRC were not the sale Kishor Karia Chartered Accountant Atul Jasani Advocate Glimpses of supreme court rulings proceeds of the DEPB and the 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 the DEPB and the DFRC amounting to Rs.14,35,097 and Rs.19,902, respectively, and if these figures of profits on transfer of the DEPB and the DFRC are taken, the income of the assessee would be positive and the assessee would be entitled to the deduction u/s.80HHC of the Act. The Commissioner of Income-tax (Appeals) rejected this contention of the assessee and held that the assessee had received an amount of Rs.2,06,84,841 on sale of the DEPB and an amount of Rs.1,65,612 on sale of the DFRC and the costs of acquisition of the DEPB and the DFRC are to be taken as nil and hence the entire sale proceeds of the DEPB and the DFRC realised by the assessee are to be treated as profits on transfer of the DEPB and the DFRC for working out the deduction u/s.80HHC of the Act and directed the Assessing Officer to work out of the deduction u/s.80HHC of the Act accordingly.

Aggrieved, the assessee filed an appeal before the Income-tax Appellate Tribunal (for short ‘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 products. The Tribunal further held that the DEPB accrues to the exporter soon after export is made and application is filed for the DEPB and the DEPB is a ‘cash assistance’ receivable by the assessee and is covered under clause (iiib) of section 28 of the Act, whereas profit on the transfer of the DEPB takes place on a subsequent date when the DEPB is sold by the assessee and is covered under clause (iiid) of section 28 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 the DEPB but the sale value of the DEPB less the face value of the DEPB. With these reasons, the Tribunal set aside the orders of the Assessing Officer and the Commissioner of Incometax (Appeals) and directed the Assessing Officer to compute the deduction u/s.80HHC of the Act accordingly.

Against the judgment and order of the Tribunal, the Commissioner of Income-tax, Mumbai, filed appeal u/s.260A of he Act before the High Court and by the impugned order the High Court disposed of the appeal in terms of the judgment delivered in CIT v. Kalpataru Colours and Chemicals, [ITA(L) 2887 of 2009] (328 ITR 451). In Commissioner of Income-tax v. Kalpataru Colours and Chemicals (supra), the High Court formulated the following two substantial questions of law (page 454 of 328 ITR):

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

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 u/s.28(iiid) of the Act 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 the DEPB is chargeable to tax as income of the assessee u/s.28(iiib) of the Act and instead held that the entirety of sale consideration for transfer of the DEPB would fall within the purview of section 28(iiid) of the Act.

Against the judgment and order of the High Court the assessee appealed before the Supreme Court under Article 136 of the Constitution. The Supreme Court on a reading of the Hand Book on the DEPB and the Export and Import Policy of the Government of India, 1997-2002, observed that it was clear that the objective of the DEPB Scheme was to neutralise the incidence of customs duty on the import content of the export productions. Hence, it had direct nexus with the cost of the imports made by an exporter for manufacturing the export products. The neutralisation of the cost of customs duty under the DEPB Scheme, however, was by granting a duty credit against the export product and this credit could be utilised for paying customs duty on any item which is freely importable. DEPB was issued against the exports to the exporter and was transferable by the exporter.

It was clear from reading of 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 was a kind of assistance given by the Government of India to an exporter to pay customs duty on its imports and it was receivable once exports were made and an application was made by the exporter for the DEPB. The Supreme Court therefore, held that the DEPB was ‘cash assistance’ receivable by a person against exports under the scheme of the Government of India and fell under clause (iiib) of section 28 and was chargeable to Income-tax under the head ‘Profits and gains of business or profession’ even before it was transferred by the assessee.

It was further held that ‘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 had a direct nexus with the cost of imports for manufacturing an export product, any amount realised by the assessees over and above the DEPB on transfer of the DEPB would represent profit on the transfer of the DEPB.

The Supreme Court therefore held 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 and the High Court was not right in taking the view in the impugned judgment 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.

(i)    The Supreme Court further held that: (i) cost of acquiring the DEPB was not nil, because the person acquired it by paying customs duty on the import content of the export product and the DEPB which accrues to a person against exports had a cost element in it. Accordingly, when the DEPB is sold by a person, his profit on transfer of the DEPB would be the sale value of the DEPB less the face value of DEPB which represents the cost of the DEPB.

(ii)    The DEPB represents part of the cost incurred by a person for manufacture of the export product and hence even where the DEPB is not utilised by the exporter but is transferred to another person, the DEPB continues to remain as a cost to the exporter. When, therefore, the 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.

(iii)    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 the 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 the 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.

The Supreme Court then held that s.s (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 s.s (IB), derived by him from the export of such goods or merchandise. S.s (IB) of section 80HHC gives the percentages of deduction of the profits allowable for the different assessment years from the A.Ys. 2001-02 to 2004-05. S.s (3)(a) of section 80HHC provides that where the exports 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.

Explanation (baa) u/s.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’.

To the figure of profits derived from exports worked out as per the aforesaid formula u/ss. (3) (a) of section 80HHC, the additions as mentioned in first, second, third and fourth proviso u/s.(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 export turnover bears to the total turnover 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 the DEPB or the DFRC are not be added under the first proviso.

The second proviso to s.s (3) of section 80HHC states that in case of an assessee having export turnover not exceeding Rs.10 crore 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 assesses. The third proviso to s.s (3) states that in case of an assessee having export turnover exceeding Rs.10 crore, similar addition of ninety per cent of the sums referred to in clause (iiid) of section 28 only if the asses-see 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 or 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 crore 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 s.s (3) of the section 80HHC.