M/s. Vishal Tools & Forgings P. Ltd. Vs. The Deputy. Commr. Of Income tax
I.T.A. No. 256(ASR)/2010.
(Assessment year : 2001- 02)
Per H.L. Karwa, Vice President.
This appeal by the assessee is directed against the order of the CIT(A), Jalandhar dated 23-3-2009, relating to the assessment year 2001-02.
2. Ground No.1 reads as under:-
“That the ld. CIT(A) has erred in upholding the assumption of jurisdiction for re-assessment and also the validity of the assessment order. The submissions made have not been properly appreciated.”
3. At the very outset, Shri Sandeep Vijh, C.A., the learned counsel for the assessee, submitted that this ground of appeal is covered against the assessewe by the decision of this Bench of the Tribunal dated 9-10-2009 passed in assessee’s own case in ITA Nos.155, 156 & 157(ASR)/2009, relating to the assessment years 2002-03, 2003-04 and 2004-05.
4. While deciding a similar issue in ITA Nos.155, 156 & 157(ASR)/2009, this Bench of the Tribunal held as under:-
“6.2. We have carefully perused and considered the current submissions made by the assessee and the submissions made before the CIT(A), including the case laws cited therein and found that the assumption of jurisdiction by the AO is within the parameters of the provisions of section 147 read with section 148 of the Act. Therefore, we do not find any justification to interfere with the findings of the Ld. CIT(A), on the issue in question. Consequently, this ground of appeal of the assessee is dismissed.”
5. Respectfully following the order of the Tribunal dated 9-10-2009 passed in assessee’ s own case, we decide this issue against the assessee.
6. Ground No.2 reads as under:-
“2. That on the facts and in the circumstances of the case, the learned CIT(A) has erred in upholding the action of the A.O., that deduction u/s.80IB is not available on Duty drawback and DEPB receipts. Deduction u/s.80IB was available on the entire DEPB receipt and also the duty draw back at Rs. 80,71,030/-.”
7. Shri Sandeep Vijh, C.A., the learned counsel for the assessee, submitted that this issue is also covered against the assessee by the decision of this Bench of the Tribunal dated 9-10-2009 passed in assessee’ s own case in I.T.A. Nos. 155, 156 & 157(ASR)/2009, relating to the assessment years 2002-03, 2003-04 and 2004-05. It is observed that while deciding a similar issue, the Tribunal held as under:-
“7.3. We have carefully perused the rival submissions, orders of the lower authorities below and the decisions quoted and relied before the Ld. CIT(A), including the decision of the Hon’ble Apex Court in the case of M/s. Liberty India Vs. CIT in Civil Appeal No. of 2009 (arising out of S.L.P. (C) No. 5827/07), dated 31st August, 2009. The Honourable Apex Court of the land has finally set at rest, the controversy, on the eligibility of deduction u/s 80IB of the Act, in respect of receipts of DEPB and Duty Drawback under the relevant Schemes.In the case before the Honourable Apex Court, the appellant, a partnership firm engaged in manufacturing of fabrics out of yarns and also various textile items, claimed deduction u/s 80IB of the Act, 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 & Loss account, for the assessment year 2001-02.The issue was decided against the assessee by the Jurisdictional High Court, in the case of Liberty India Vs. CIT (supra). The Honourable Supreme Court, after discussions of the rival submissions, adjudicated the issue, in question, in clear terms against the assessee and in favour of the Revenue, vide para 24 of the impugned decision. However, for the purpose of proper appreciation of the decision, the relevant and operative part of the impugned decision is reproduced here under:
“Discussions and Findings:
12. 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.
13. Before analysing section 80-IB, as a pre factory 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’. Therefore, when Section 80-IA/80-IB refers to profits derived from eligible business, it is not the ownership of that business which 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 shop 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). It is the profits arising from the business of a ship which attracts sub-section (6). In other words, deduction under subsection (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 incentives. It is for this reason that Parliament has confined deduction to profits derived from eligible business mentioned in sub-sections (3) to (11A) [ as they stood at the relevant time]. On more aspect to be highlighted. Each of the eligible business in sub-sections (3) to (1 1A) 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 (ICAI).
14. Analysing Chapter VI-A, we find that Sections 80-IA/80- IA are the Code of 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 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 neutralisation), 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. Hence, 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 judgement 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 Vs. Kirloskar Oil Engines Ltd. reported in (1986) 157 ITR 762.
15. Continuing our analysis of Sections 80-IA/80-IB it may be mentioned that sub-section (13) of Section 80IB provides for applicability of 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 80-IB. Therefore, at the outset, we stated that one needs to read Sections 80-I, 80-IA and 80-IB as having a common Scheme. On perusal of sub-sections (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. Therefore, 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, 80IA 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, subsection(1) purports 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”.
16. 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 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 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 demand 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 to ancillary profits of such undertakings.
17. The next question is – what is duty drawback ? Section 75 of the Customs Act, 1961 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 as refund of an amount arithmetically equal to customs duty or central excise duty actually paid by an individual importer-cummanufacturer. Section –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 particulars 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.
18. 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 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.
19. Since reliance was placed on behalf of the assessee(s) as AS-2 we need to analyse the said Standard.
20. 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.
21. “Inventory” should be valued at the lower of cost and net realisable 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 condition.
22. 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 draw back and such similar terms are deducted in determining the costs of purchase. Therefore, duty drawback, rebate etc. should 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 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 rationalisation, 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 section 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.
23. We are of the view that Department has correctly applied AS-2 as could be seen from the following illustration:
Expenditure Amount Income Amount
Opening Stock 100 Sales 1,000
Purchases (including customs 500 Duty Drawback 100 Duty paid) received
Manufacturing overheads 300 closing stock 200
Net Profit 200
Note: In above example, Department is allowing deduction on profit of Rs. 100 under section 80IB of the 1961 Act.
24. 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/80IA/80IB of the 1961 Act.
25. The appeals are, accordingly, dismissed with no order as to costs.”
7.4 In view of the above discussions, we are of the considered opinion that the issue in question is squarely covered by the decision of the Honourable Apex Court in the case of M/s. Liberty India Vs. CIT, dated 31st August, 2009 (supra), as reproduced above. It is essential to point out here that the binding nature of the judicial mandate of the Honourable Supreme Court of India, as contained in the decision of M/s. Liberty India Vs. CIT (supra), cannot be obliterated by way of shifting the locus and focus, from the core issue which stands adjudicated by the Honourable Supreme Court, in favour of the revenue. Therefore, respectfully following the binding decision of the Honourable Supreme Court, as contemplated under Article 141 of the Constitution of India, in the case of M/s. Liberty India Vs. CIT (supra), we decide the issue, as raised in ground No.2 of the present appeal, on the issue of eligibility of deduction of the receipt of DEPB/ Duty Drawback benefit u/s 80IB of the Act, in favour of the Revenue and against the assessee. Consequently, this ground of appeal of the assessee is dismissed.”
7.1 The facts of the present year are similar to the facts of the assessee’s own case for the earlier years and, therefore, respectfully following the order of the Tribunal dated 9-10-2009 (supra), we dismiss this ground of appeal.
8. Ground No.3 of appeal reads as under:-
“3. That on the facts and in the circumstances of the case the ld. CIT(A), has erred in holding that deduction u/s. 80IB is to be reduced from the profits of business for computing deduction allowed u/s. 80HHC. Deduction u/s. 80HHC is an independent deduction and is available independent of the deduction allowable u/s. 80IB.”
9. After hearing the learned representatives of both the parties, we find that this issue is also covered against the assessee by the decision of this Bench of the Tribunal dated 9-10-2009 passed in assessee’s own case in ITA Nos. 155, 156 & 157(ASR)/2009, relating to assessment years 2002-03, 2003-04 and 2004-05. While deciding a similar issue, the Tribunal has held as under:-
“9.4.. We have carefully perused the rival submissions, facts of the case, orders of the authorities below, the relevant paper book and submissions dated 12.09.2009, including the case laws cited therein and the decision of the Honourable Special Bench in the case of ACIT, R.II, Moradabad Vs. M/s. Hindustan Mint & Agro Products Pvt. Ltd. (supra). On careful perusal and consideration of the decision of the Special Bench, in question, we are of the considered opinion that the issue raised in ground No. 3 by the assessee is directly covered by the decision of the Special Bench, as is evident from the above discussions on the decision of the Special Bench (supra). Therefore, respectfully following the binding decision in the case of ACIT, R.II, Moradabad Vs. M/s. Hindustan Mint & Agro Products Pvt. Ltd. (supra) of the Honourable Special Bench, the ground No. 3 raised by the assessee is adjudicated in favour of the Revenue and against the assessee. Thus, ground No. 3 of the assessee is dismissed.”
9.1 The facts of the present year are similar to that of earlier years and, therefore, respectfully following the order of the Tribunal(supra), we dismiss this ground of appeal.
10. In the result, the appeal of the assessee is dismissed. Order pronounced in the Open Court on 15th June, 2011.