18 Industrial undertaking — Deduction u/s.80-IB — DEPB/Duty
drawback benefits flow from the schemes framed by the Central Government or from
S. 75 of the Customs Act or from S. 37 of the Central Excise Act, hence
incentives profits are not profits derived from the eligible business u/s.80-IB.
[Liberty India v. Commissioner of Income-tax, (2009)
317 ITR 218 (SC)]
The appellant, a partnership firm owned a small-scale
industrial undertaking engaged in manufacturing of fabrics out of yarns and also
various textile items such as cushion covers, pillow covers, etc., out of
fabrics/yarn purchased from the market. During the relevant previous year
corresponding to the A.Y. 2001-02, the appellant claimed deduction u/s.80-IB on
the increased profits of Rs. 22,70,056 as profit of the industrial undertaking
on account of DEPB and duty drawback credited to the profit and loss account.
The Assessing Officer denied deduction u/s.80-IB on the
ground that the said two benefits constituted export incentives, and that they
did not represent profits derived from the industrial undertaking. In this
connection, the Assessing Officer placed reliance on the judgment of the Supreme
Court in CIT v. Sterling Foods reported in (1999) 237 ITR 579.
Aggrieved by the said decision, the matter was carried in
appeal to the Commissioner of Income-tax (Appeals), who came to the conclusion
that duty drawback received by the appellant was inextricably linked to the
production cost of the goods manufactured by the appellant; that, duty drawback
was a trading receipt of the industrial undertaking having direct nexus with the
activity of the industrial undertaking and consequently, the Assessing Officer
was not justified in denying deduction u/s.80-IB. According to the Commissioner
of Income-tax (Appeals), the DEPB Scheme was different from the Duty Drawback
Scheme inasmuch as the DEPB substituted value-based Advance Licensing Scheme as
well as the Passbook Scheme under the Exim Policy; that entitlements under the
DEPB Scheme were allowed at pre-determined and pre-notified rates in respect of
exports made under the Scheme and, consequently, DEPB did not constitute a
substitute for duty drawback. According to the Commissioner of Income-tax
(Appeals), credit under DEPB could be utilised by the exporter himself or it
could be transferred to any other party; that such transfer could be made at
higher or lower value than mentioned in the passbook and, therefore, DEPB cannot
be equated with the duty drawback, hence, the appellant who had received Rs.
20,95,740 on sale of DEPB licence stood covered by the decision of the Supreme
Court in Sterling Foods (1999) 237 ITR 579. Hence, to that extent, the appellant
was not entitled to deduction u/s.80-IB.
Against the decision of the Commissioner of Income-tax
(Appeals) allowing deduction on duty drawback, the Revenue went in appeal to the
Tribunal which following the decision of the Delhi High Court in the case of CIT
v. Ritesh Industries Ltd., reported in (2005) 274 ITR 324, held that the amount
received by the assessee on account of duty drawback was not an income derived
from the business of the industrial undertaking so as to entitle the assessee to
deduction u/s.80-IB.
The decision of the Tribunal was assailed by the assessee(s)
u/s.260A of the 1961 Act before the High Court. Following the decision of this
Court in Sterling Foods (1999) 237 ITR 579, the High Court held that the
assessee(s) had failed to prove the nexus between the receipt by way of duty
drawback/DEPB benefit and the industrial undertaking, hence, the assessee(s) was
not entitled to deduction
u/s.80-IB(3).
On a civil appeal(s), the Supreme Court observed 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 S. 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 u/s.80-IA/80-IB is
the generation of Profits (operational profits).
The Supreme Court noted that according to the assessee(s),
DEPB credit/duty drawback receipt reduces the value of purchases (cost
neutralisation), hence, it comes within first degree source as it increases the
net profit proportionately. On the order hand, according to the Department, DEPB
credit/duty drawback receipts do not come within first degree source as the said
incentives flow from the incentive schemes enacted by the Government of India or
from S. 75 of the Customs Act, 1962. Hence, according to the Department, in the
present cases, the first degree source is the incentive scheme/provisions of the
Customs Act.
The Supreme Court held that DEPB is an incentive. It is given
under the Duty Exemption Remission Scheme. Essentially, it is an export
incentive. 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 a percentage of the FOB value of
exports made in freely convertible currency. Credit is available only against
the export product and at rates specified by the DGFT for import of raw
materials, components, etc., DEPB credit under the Scheme has to be calculated
by taking into account the deemed import content of the export product as per
basic customs duty and special additional duty payable on such deemed imports.
Therefore, in view, the Supreme Court DEPB/Duty drawback were incentives which
flow from the schemes framed by Central Government or from S. 75 of the Customs
Act, 1962, hence, incentives profits were not profits derived from the eligible
business u/s.80-IB. They belong to the category of ancillary profits of such
undertakings.
The Supreme Court further held that S. 75 of Customs Act,
1962 and S. 37 of the Central Excise Act, 1944, empower the Government of India
to provide for repayment of customs duty 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 used in the manufacture of export goods of
specified class. The Rules do not envisage a refund of amount of an amount
arithmetically equal to customs duty or Central Excise duty actually paid by an
individual importer-cum-manufacturer. The Supreme Court held that basically the
source of the duty drawback receipt lied in S. 75 of the Customs Act and S. 37
of the Central Excise Act.
In the circumstances, the Supreme Court held that profits
derived by way of such incentives did not fall within the expression ‘profits
derived from industrial undertaking’ in S. 80-IB.
