This article summarizes a recent ruling of the Supreme Court (SC) [2009-TIOL100-SC-IT] in the case M/s Liberty India (Taxpayer), in which the SC held that the receipts, by way of Duty Drawback and sale of Duty Entitlement Pass Book (DEPB) licence by the Taxpayer, do not form part of the profits ‘derived from’ the industrial undertaking (IU), eligible for tax holiday under the Indian Tax Law (ITL). The SC further held that the Duty Drawback and sale of DEPB licence are incentives which flow from the schemes framed by the Government of India (G01) and do not have any direct nexus with the profits derived from the eligible IU of the Taxpayer.
Facts of the case
- The Taxpayer is engaged in the manufacturing of fabrics and various textile items. The Taxpayer is eligible for tax holiday in respect of the profits derived from the business of the eligible IU.
- For the tax year 2000-01, the Taxpayer claimed tax holiday in respect of the Duty Drawback and sale of DEPB licence, claiming it to be directly connected with the eligible IU.
- The Tax Authority denied the tax holiday claimed by the Taxpayer, treating the amounts received as export incentive, under the schemes framed by the GOI and not as profits derived from the eligible IU.
- The first appellate authority held that only the Duty Drawback, and not sale of DEPB licence, was linked to the profits derived from the eligible IU.
- The second appellate authority held that the Duty Drawback was not profit derived from the eligible IU.
- The High Court held that the amounts received were not eligible for tax holiday, as the Taxpayer failed to prove the nexus of the Duty Drawback and sale of DEPB licence with the eligible IU.
Contentions of the Taxpayer
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