Profit element on sale of DEPB, i.e., the amount in excess of sale proceeds over the face value is covered u/s 28(iiid)

S. 80HHC; in favor of taxpayer: Post the amendment by Taxation Law Amendment Act, 2005 (effective from 1 April 1998), controversy had arisen as to whether in case of an exporter having export turnover of more than INR100 million (where generally conditions mentioned in  section 80HHC cannot be satisfied), the entire sale proceeds of DEPB need to be excluded while calculating the deduction under  Section 80HHC or only profit on transfer of DEPB should be  excluded.

To deal with this controversial issue, a Special Bench  was constituted in Mumbai in case of M/s. Topman Exports on following question : “Whether the entire amount received on sale  of DEPB entitlements represents profit chargeable under section 28 (i id) of the Income Tax Act or the profit referred to therein requires any artificial cost to be interpolated?”

The order has been pronounced by the ITAT. The following are  the important conclusions of the Honorable Special Bench:

1. DEPB is after export incentive and its objective is to counterbalance the effect of custom duty included in the cost of purchases, incurred directly or indirectly by the exporter. It cannot be seen as an incentive detached from the cost of goods purchased. However, to compute deduction under Section 80HHC same should not be reduced from cost of purchases but has to be considered as separate species of”business income.”

2. The Taxpayer is entitled to DEPB at the time of filing of application for such incentive (after exports). Thus, the time of accrual of DEPB is the date when application for DEPB is filed with the concerned authority and face value of DEPB will have to be recognized as income at that point of time.

3. The face value of DEPB though not specifically covered under clause (iiia) or (iiic) of Section 28, would fall within the ambit of Section 28(iiib) of the Act.

4. The profit element on sale of DEPB, that is the amount in excess of sale proceeds over the face value, is covered under Section 28(iiid) of the Act.

It would now enable all the exporters (irrespective of their export turnover) in the country to avail deduction under Section 80HHC, in respect of face value of DEPB, which all along was the bone of contention between the Tax Department and the exporters.

Decided by; ITAT – Mumbai In the case of Jindal Drugs Ltd.