Liberty India Vs. Commr. of Income Tax, Karnal  INSC 1513 (31 August
SUPREME COURT OF INDIA CIVIL APPELLATE JURISDICTION CIVIL APPEAL No. of 2009
(arising out of S.L.P.(C) No. 5827/07) M/s Liberty India ... Appellant(s)
versus Commissioner of Income Tax ...Respondent(s) with Civil Appeal Nos. /09
(arising out of SLP (C) Nos. 22083-22084/07), Civil Appeal No. /09 (arising out
of SLP (C) Nos. 7956-7957/08), Civil Appeal No. /09 (arising out of SLP (C) No.
11416/08), Civil Appeal No. /09 (arising out of SLP (C) No. 16875/08), Civil
Appeal No. /09 (arising out of SLP (C) No. 11404/08), Civil Appeal No. 5271/07,
Civil Appeal No. 5571/07, Civil Appeal No.
Civil Appeal No. 1499/08, Civil Appeal No. 1500/08, Civil Appeal No. 1438/08,
Civil Appeal No. 1439/08, Civil Appeal No.
Civil Appeal No. 1915/08, Civil Appeal No. 2408/08, Civil Appeal No. 2409/08,
Civil Appeal No. 2411/08, Civil Appeal No.
Civil Appeal No. 5157/07, Civil Appeal No. 3479/08, Civil Appeal No. 2648/08,
Civil Appeal No. 4125/08, Civil Appeal Nos.
Civil Appeal No. 427/09, Civil Appeal No. 430/09, Civil Appeal No. 429/09,
Civil Appeal No. 364-365/09, Civil Appeal No. 1257- 1258/09, Civil Appeal No.
3532/09 and Civil Appeal No. 451/06.
The issue for consideration is: whether profit from Duty
Entitlement Passbook Scheme (DEPB) and Duty Drawback Scheme could be said to be
profit derived from the business of the Industrial Undertaking eligible for
deduction under Section 80-IB of the Income-tax Act, 1961 (1961 Act)?
At the outset, we may indicate that although in the present
judgment we have focused on the analysis of Section 80-IB, the basic Scheme of
Sections 80I, 80-IA and 80-IB (as they then stood) remains the same.
The facts in the lead matter (Civil Appeal arising out of SLP(C)
No. 5827/07 entitled M/s Liberty India v. CIT) are as follows:
The appellant, a partnership firm, owns 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
Assessment Year 2001-02, appellant claimed deduction under Section 80-IB on the
increased profits of Rs. 22,70,056.00 as profit of the industrial undertaking
on account of DEPB and Duty Drawback credited to the Profit & Loss account.
The Assessing Officer denied deduction under Section 80-IB on the ground that
the said two benefits constituted export 3 incentives, and that they did not
represent profits derived from industrial undertaking. In this connection the
AO placed reliance on the judgment of this Court in CIT v. Sterling Food
reported in 237 ITR 579. Aggrieved by the said decision, matter was carried in
appeal to CIT(A), 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;
duty drawback was a trading receipt of the industrial undertaking having direct
nexus with the activity of the industrial undertaking and consequently, the AO
was not justified in denying deduction under Section 80-IB. According to
CIT(A), the DEPB Scheme was different from Duty Drawback Scheme inasmuch as the
DEPB substituted value based Advance Licencing Scheme as well as Passbook
Scheme under the Exim Policy; that entitlements under 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
to CIT(A), credit under DEPB could be utilized 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 4 covered by the decision of this
Court in Sterling Food (supra). Hence, to that extent, appellant was not
entitled to deduction under Section 80-IB.
the decision of CIT(A) 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 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 under Section 80-IB.
The decision of the Tribunal was assailed by the assessee(s) under
Section 260A of the 1961 Act before the High Court. Following the decision of
this Court in Sterling Food (supra), 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 under Section 80-IB(3), hence this Civil Appeal(s).
The submission of the appellant(s) [assessee(s)] in nutshell was
that the amount of duty drawback/DEPB was intended to neutralize the incidence
of duty on inputs consumed/utilized in the manufacture of exported goods
resulting into increased profits derived from the business of 5 the industrial
undertaking which profits qualified for deduction under Section 80-IB.
According to the appellant(s) since no excise duty/customs duty was payable on
raw materials consumed/utilized in manufacturing goods exported out of India,
the duty paid stood refunded under Section 37(2)(xvia) of the Central Excise
Act, 1944 and under Section 75 of the Customs Act, 1962
read with Customs, Central Excise Duties and Service Tax Drawback Rules, 1995.
On the nature of DEPB it was submitted that the amount of DEPB was
granted under Exim-Policy issued in terms of powers conferred under Section 5
of the Foreign Trade (Development and Regulation) Act, 1992.
to the appellant(s), the DEPB Scheme is a Duty Remission Scheme which allows
drawback of import charges paid on inputs used in the export product. The
object being to neutralize the incidence of customs duty on the import content
of the export product by way of grant of duty credit.
benefit is freely transferable. Thus, according to the appellant(s), duty
drawback/DEPB benefit received had to be credited against the cost of
manufacture of goods/purchases debited to the Profit & Loss account. That,
such credit was not an independent source of profit. In this connection reliance
has been placed on Accounting Standard-2 issued by ICAI on "valuation of
inventories" which indicates that while determining cost of 6 purchase,
cost of conversion and other costs incurred in bringing the inventories to
their present location and condition should be considered and that trade
discounts, rebates, duty drawback and such other similar items have to be
deducted in determining the cost of purchase. Placing reliance on AS-2, it was
submitted that where excise duty paid was subsequently recoverable by way of
drawback, the same would not form part of the manufacturing cost. It was
submitted on behalf of the appellant(s) that payment of excise duty/customs
duty on inputs consumed in manufacture of goods by an industrial undertaking
eligible for deduction under Section 80-IB, was inextricably linked to the
manufacturing operations of the eligible undertaking without which
manufacturing operations cannot be undertaken, hence the duty, which was paid
in the first instance and which had direct nexus to the manufacturing activity
when received back, had first degree nexus with the industrial activity of the
eligible undertaking and consequently the reimbursement of the said amount
cannot be treated as income of the assessee(s) dehors the expense originally incurred
by way of payment of duty. Consequently, according to the appellant(s), receipt
of duty drawback/DEPB stood linked directly to the manufacture/production of
goods and therefore had to be regarded as profits derived from eligible
undertaking qualifying for deduction under Section 80-IB of the 1961 Act.
behalf of the appellant(s) it was further submitted that this Court's decision
in Sterling Food (supra) dealt with availability of deduction under Section
80-HH with respect to profit on sale of import entitlements. The said decision,
according to the appellant, had no applicability to the issue under
consideration for the reason that import entitlement/REP licence was granted by
the Government on the basis of exports made; the same were granted gratuitously
without antecedent cost having being incurred by the industrial undertaking,
unlike duty drawback and DEPB, which had direct link to the costs incurred by
such industrial undertaking by way of payment of customs/excise duty in respect
of duty paid inputs used in the manufacture of goods meant for export and in
such circumstances, profit from sale of import entitlements/REP licence was in
the nature of windfall and it was in those circumstances, that the apex Court
held that source of profit on sale of import entitlements was not the
industrial undertaking but the source was the Export Promotion Scheme.
According to the appellant(s), in the case of sale of import entitlements/REP
licence, the source was the Scheme framed by Government of India whereas in the
case of DEPB/duty drawback, the source was the fact of payment of duty in
respect of inputs consumed/utilized in the manufacture of goods meant for
export. That, but for such payments of duty on inputs used in the manufacture
of goods meant 8 for exports, industrial undertaking(s) would not be entitled
to the benefit of duty drawback/DEPB, notwithstanding, the Export Promotion
Scheme of the Government and, therefore, there was a direct and immediate nexus
between payment of duty on such inputs and receipt of duty drawback/DEPB. In
this connection reliance was placed on the judgment of the Gujarat High Court
in the case of CIT v. India Gelatine and Chemicals Ltd. reported in 275 ITR
284. Lastly, it was submitted on behalf of the appellant(s) that there was no
difference between Advance Licence Scheme and duty drawback/DEPB.
connection it was urged that duty drawback regime required the industrial
undertaking to pay in the first instance the duty on inputs and thereafter seek
reimbursement on profit of goods manufactured using such duty paid inputs,
having been exported. The industrial undertaking alternatively could avail of
Advance Licence Scheme whereunder the industrial undertaking could import
inputs to be used for manufacture of goods meant for export without payment of
duty. In the case where the industrial undertaking enjoyed the benefit of
Advance Licence Scheme, the profit as shown in Profit & Loss account was
regarded as income derived from industrial undertaking entitled to deduction
under Section 80-IB of the 1961 Act without any adjustment whereas when the
same industrial undertaking when it opts for duty drawback is denied the
benefit of 9 deduction under Section 80-IB on the duty remitted.
On behalf of the appellant(s) it was submitted that Section 80-IB
was different from Section 80-I in the sense that under Section 80-IB, income
derived from business of an industrial undertaking was admissible for deduction
whereas under Section 80-I deduction was allowable to income derived from
industrial undertaking. Hence, according to the appellant(s) provision of
Section 80-IB was much wider in scope than Section 80-I.
to the appellant(s) Section 80-IB was wider than Section 80-I as the
Legislature intended to give benefit of deduction not only to profits derived
from the undertaking but also to give benefit of deduction in respect of
incomes having direct nexus with the profits of the undertaking, hence, all
incomes that arose during the course of running of the eligible business would
be eligible for deduction under Section 80-IB, which would include income
arising on sale of DEPB at premium.
In reply, Shri Gourab Banerji, learned Additional Solicitor
General, submitted that, for application of the words "derived from"
there must be a direct nexus between the profit and the industrial undertaking.
According to the learned senior counsel, merely because under the Scheme to
encourage exports a certain amount was repaid as "duty drawback", it
cannot be regarded as profit "derived from" the industrial undertaking.
It may 10 constitute profit from business under Section 28, but it cannot be
construed as profits "derived from" the industrial undertaking, for
its immediate and proximate source was not the industrial undertaking but the
scheme for "duty drawback". According to the learned counsel, this
position was placed beyond doubt by a judgment of this Court in Sterling Food
according to the learned counsel, the source of duty drawback was not the
industrial undertaking but the duty drawback scheme of the Central Government
whereunder the duty drawback entitlement became available. According to the
learned counsel, duty drawback, therefore, would stand on the same footing as
import entitlements and could not be said to be derived from industrial
undertaking. Reliance was also placed on the judgment of this Court in Pandian
Chemicals Ltd. v. CIT reported in 262 ITR 278. According to the learned
counsel, duty drawback was a matter of policy, hence, the proximate and
immediate source of duty drawback cannot be industrial undertaking. On
interpretation of Section 80-IB, learned senior counsel submitted that what was
relevant for Section 80-IB(1) was profits derived from an eligible business.
According to the learned counsel, various eligible businesses are enumerated in
sub-sections (3) to (11) of Section 80-IB. A perusal of sub-sections (3), (4)
and (5) would also show that eligible business under those provisions means
certain specific undertakings.
contrast, sub-sections (6) and (7) cover the business of a ship, hotel etc.
all practical purposes, according to the learned counsel, the section has used
the words "eligible business" and "industrial undertaking"
and, therefore, there is no material difference between Section 80-I and Section
80-IB as in both cases profits have to be derived from an industrial
Relevant provisions of the Income Tax Act, 1961:
to be made with reference to the income included in the gross total income.
Where any deduction is required to be made or allowed under any section
included in this Chapter under the heading "C.- Deductions in respect of
certain incomes" in respect of any income of the nature specified in that
section which is included in the gross total income of the assessee, then,
notwithstanding anything contained in that section, for the purpose of
computing the deduction under that section, the amount of income of that nature
as computed in accordance with the provisions of this Act (before making any
deduction under this Chapter) shall alone be deemed to be the amount of income
of that nature which is derived or received by the assessee and which is
included in his gross total income.
in respect of profits and gains from industrial undertakings after a certain
Where the gross total income of an assessee includes any profits and gains
derived from an industrial undertaking or a ship or the business of a hotel or
the business of repairs to ocean-going vessels or other powered craft, to which
this section applies, there shall, in accordance with and subject to the
provisions of this section, be allowed, in computing the total income of the
assessee, a deduction from such profits and gains of an amount equal to twenty
per cent thereof :
Provided that in the case of an assessee, being a company, the provisions of
this sub-section shall have effect in relation to profits and gains derived
from an industrial undertaking or a ship or the business of a hotel as if for
the words "twenty per cent", the words "twenty-five per
cent" had been substituted.
in respect of profits and gains from industrial undertakings or enterprises
engaged in infrastructure development, etc.
Where the gross total income of an assessee includes any profits and gains
derived by an undertaking or an enterprise from any business referred to in
sub-section (4) (such business being hereinafter referred to as the eligible
business), there shall, in accordance with and subject to the provisions of
this section, be allowed, in computing the total income of the assessee, a
deduction of an amount equal to hundred per cent of the profits and gains
derived from such business for ten consecutive assessment years.
This section applies to- (i) any enterprise carrying on the business of (i)
developing or (ii) operating and maintaining or (iii) developing, operating and
maintaining any infrastructure facility which fulfils all the following
conditions, namely :- (a) it is owned by a company registered in India or by a
consortium of such companies;
has entered into an agreement with the Central Government or a State Government
or a local authority or any other statutory body for (i) developing or (ii)
operating and maintaining or (iii) developing, operating and maintaining a new
has started or starts operating and maintaining the infrastructure facility on
or after the 1st day of April, 1995:
that where an infrastructure facility is transferred on or after the 1st day of
April, 1999 by an enterprise which developed such infrastructure facility
(hereafter referred to in this section as the transferor enterprise) to another
enterprise (hereafter in this section referred to as the transferee enterprise)
for the purpose of operating and maintaining the infrastructure facility on its
behalf in accordance with the agreement with the Central Government, State
Government, 13 local authority or statutory body, the provisions of this
section shall apply to the transferee enterprise as if it were the enterprise
to which this clause applies and the deduction from profits and gains would be
available to such transferee enterprise for the unexpired period during which
the transferor enterprise would have been entitled to the deduction, if the
transfer had not taken place.
the purposes of this clause, "infrastructure facility" means- (a) a
road including toll road, a bridge or a rail system;
highway project including housing or other activities being an integral part of
the highway project;
water supply project, water treatment system, irrigation project, sanitation
and sewerage system or solid waste management system;
port, airport, inland waterway or inland port;
undertaking which has started or starts providing telecommunication services
whether basic or cellular, including radio paging, domestic satellite service,
network of trunking, broadband network and internet services on or after the
1st day of April, 1995, but on or before the 31st day of March, 2003.
the purposes of this clause, "domestic satellite" means a satellite
owned and operated by an Indian company for providing telecommunication
undertaking which develops, develops and operates or maintains and operates an
industrial park or special economic zone notified by the Central Government in
accordance with the scheme framed and notified by that Government for the
period beginning on the 1st day of April, 1997 and ending on the 31st day of
that in a case where an undertaking develops an industrial park on or after the
1st day of April, 1999 or a special economic zone on or after the 1st day of
April, 2001 and transfers the operation and maintenance of such industrial park
or such special economic zone, as the case may be, to another undertaking
(hereafter in this section referred to as the transferee undertaking), the
deduction under sub-section (1) shall be allowed to such transferee undertaking
for the remaining period in the ten consecutive assessment years as if the
operation and maintenance were not so transferred to the transferee
undertaking which,- 14 (a) is set up in any part of India for the generation or
generation and distribution of power if it begins to generate power at any time
during the period beginning on the 1st day of April, 1993 and ending on the
31st day of March, 2006 ;
starts transmission or distribution by laying a network of new transmission or
distribution lines at any time during the period beginning on the 1st day of
April, 1999 and ending on the 31st day of March, 2006 :
that the deduction under this section to an undertaking under sub-clause (b)
shall be allowed only in relation to the profits derived from laying of such
network of new lines for transmission or distribution;
Notwithstanding anything contained in any other provision of this Act, the
profits and gains of an eligible business to which the provisions of
sub-section (1) apply shall, for the purposes of determining the quantum of
deduction under that sub-section for the assessment year immediately succeeding
the initial assessment year or any subsequent assessment year, be computed as
if such eligible business were the only source of income of the assessee during
the previous year relevant to the initial assessment year and to every
subsequent assessment year up to and including the assessment year for which
the determination is to be made.
in respect of profits and gains from certain industrial undertakings other than
infrastructure development undertakings 80-IB (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) and (11A) (such business being hereinafter
referred to as the eligible business), there shall, in accordance with and
subject to the provisions of this section, be allowed, in computing the total
income of the assessee, a deduction from such profits and gains of an amount
equal to such percentage and for such number of assessment years as specified
in this section.
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 :
that this condition shall not apply in respect of an industrial undertaking
which is formed as a result of the re- establishment, reconstruction or revival
by the assessee of the business of any such industrial undertaking as is
referred to in section 33B, in the circumstances and within the period
specified in that section;
it is not formed by the transfer to a new business of machinery or plant
previously used for any purpose;
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 :
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 any article or thing specified in the
list in the Eleventh Schedule" had been omitted.
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 fulfilled, namely:- (a) such machinery or plant was not, at any time
previous to the date of the installation by the assessee, used in India;
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.
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 value of the machinery or plant or part so transferred
does not exceed 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 have been
(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.
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 16 consecutive assessment years (or twelve consecutive assessment years
where the assessee is a co-operative society) beginning with the initial
assessment year subject to the fulfillment of the following conditions, namely:
- (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;
where it is an industrial undertaking being a small scale 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 period beginning on the 1st day of April, 1995 and
ending on the 31st day of March, 2002 .
The provisions contained in sub-section (5) and sub- sections (7) to (12) of
section 80-IA shall, so far as may be, apply to the eligible business under
In this batch of Civil Appeals we are concerned with admissibility
of the amounts of duty drawback and DEPB for deduction under Section 80-IB.
Before analyzing 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".
when Section 80-IA/80-IB refers to profits derived from eligible business, it
is not the ownership of that business which attracts the 17 incentives. What
attracts the incentives under Section 80-IA/80-IB is the generation of profits
(operational profits). For example, an assessee company located in Mumbai may
have a business of building housing projects or a ship in Nava Sheva. Ownership
of a ship per se will not attract Section 80-IB(6). It is the profits arising
from the business of a ship which attracts sub-section (6). In other words,
deduction under sub-section (6) at the specified rate has linkage to the
profits derived from the shipping operations. This is what we mean in drawing
the distinction between profit linked tax incentives and investment linked tax
incentives. It is for this reason that Parliament has confined deduction to
profits derived from eligible businesses mentioned in sub-sections (3) to (11A)
[as they stood at the relevant time]. One more aspect needs to be highlighted.
Each of the eligible business in sub-sections (3) to (11A) constitutes a
stand-alone item in the matter of computation of profits. That is the reason
why the concept of "Segment Reporting" stands introduced in the Indian
Accounting Standards (IAS) by the Institute of Chartered Accountants of India
Analysing Chapter VI-A, we find that Sections 80-IB/80-IA are the
Code by themselves as they contain both substantive as well as procedural
provisions. Therefore, we need to examine what these provisions prescribe for
"computation of profits of the eligible business". It is evident that
18 Section 80-IB provides for allowing of deduction in respect of profits and
gains derived from the eligible business. The words "derived from" is
narrower in connotation as compared to the words "attributable to".
In other words, by using the expression "derived from", Parliament
intended to cover sources not beyond the first degree. In the present batch of
cases, the controversy which arises for determination is: whether the DEPB
credit/ Duty drawback receipt comes within the first degree sources? According
to the assessee(s), DEPB credit/duty drawback receipt reduces the value of
purchases (cost neutralization), hence, it comes within first degree source as
it increases the net profit proportionately. On the other hand, according to
the Department, DEPB credit/duty drawback receipt do not come within first
degree source as the said incentives flow from Incentive Schemes enacted by the
Government of India or from Section 75 of the Customs Act, 1962.
according to the Department, in the present cases, the first degree source is
the incentive scheme/provisions of the Customs Act. In
this connection, Department places heavy reliance on the judgment of this Court
in Sterling Food (supra). 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 manufacture. (see CIT v. Kirloskar Oil
Engines Ltd. reported in  157 ITR 762) 19
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
at the outset, we stated that one needs to read Sections 80I, 80-IA and 80-IB
as having a common Scheme. On perusal of sub-section(5) of Section 80-IA, it is
noticed that it provides for 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.
the devices adopted to reduce or inflate the profits of eligible business has
got to be rejected 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 80I, 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. On 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 such industrial undertaking after specified date(s).
Hence, apart from eligibility, sub-section(1) purports 20 to restrict the
quantum of deduction to a specified percentage of profits. This is the
importance of the words "derived from industrial undertaking" as
against "profits attributable to industrial undertaking".
DEPB is an incentive. It is given under Duty Exemption Remission
Scheme. Essentially, it is an export incentive. No doubt, the object behind
DEPB is to neutralize the incidence of customs duty payment on the import
content of export product. This neutralization 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 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 our view, DEPB/Duty Drawback
are incentives which flow from the Schemes framed by 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.
The next question is - what is duty drawback? Section 75 of the Customs Act, 1962 and Section 37 of the Central Excise Act, 1944 empower
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 used 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 particular trade and
also based on the facts situation relevant in respect of each of various
classes of goods imported. Basically, the source of duty drawback receipt lies
in Section 75 of the Customs Act and Section
37 of the Central Excise Act.
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, we hold that profits derived by way of such incentives do
not fall within the expression "profits derived from industrial
undertaking" in Section 80-IB.
Since reliance was placed on behalf of the assessee(s) on AS-2 we
need to analyse the said Standard.
AS-2 deals with Valuation of Inventories. Inventories are assets
held for sale in the course of business; in the production for such sale or in
form of materials or supplies to be consumed in the production.
"Inventory" should be valued at the lower of cost and
net realizable value (NRV). The cost of "inventory" should comprise
all costs of purchase, costs of conversion and other costs including costs
incurred in bringing the "inventory" to their present location and
The cost of purchase includes duties and taxes (other than those
subsequently recoverable by the enterprise 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.
not be treated as adjustment (credited) to cost of purchase or manufacture of
goods. They should be treated as separate items of revenue or income and
accounted for accordingly (see: page 44 of Indian Accounting Standards &
GAAP by Dolphy D'souza). Therefore, for the purposes of 23 AS-2, Cenvat credits
should not be included in the cost of purchase of inventories. Even Institute
of Chartered Accountants of India (ICAI) has issued Guidance Note on Accounting
Treatment for Cenvat/Modvat under which the inputs consumed and the inventory
of inputs should be valued on the basis of purchase cost net of specified duty
on inputs (i.e. duty recoverable from the Department at later stage) arising on
account of rebates, duty drawback, DEPB benefit etc. Profit generation could be
on account of cost cutting, cost rationalization, business restructuring, tax
planning on sundry balances being written back, liquidation of current assets
etc. 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 & 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.
We are of the view that Department has correctly applied AS-2 as
could be seen from the following illustration:
Amount Income Amount (Rs.) (Rs.) Opening stock 100 Sales 1,000 Purchases
(including customs 500 Duty Drawback 100 duty paid) received 24 Manufacturing
overheads 300 Closing stock 200 Administrative, Selling and 200 Distribution
profit 200 1,300 1,300 Note: In above example, Department is allowing deduction
on profit of Rs. 100 under Section 80-IB of the 1961 Act.
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 80I/80-IA/80-IB of the 1961 Act.
The appeals are, accordingly, dismissed with no order as to costs.
......................J. (S.H. Kapadia)
......................J. (Aftab Alam)