DEPB sale proceeds cannot be broken down into “profits” and “face value”.

Title: – DEPB sale proceeds cannot be broken down into “profits” and “face value”. The entire amount is “profits” for the purpose of section 80HHC read with section 28(iiid)

Brief : S. 28 (iiid) provides that “any profit on the transfer” of the DEPB shall be business profits. Under Explanation (baa) to s. 80HHC, 90% of “the sum referred to in s. 28(iiid)” has to be reduced from the business profits. Under the third Proviso to s. 80HHC (3), in the case of an assessee having an export turnover exceeding Rs. 10 crores, the profits referred to in s. 80HHC (3) can be increased by 90% of “the sum referred to in s. 28 (iiid)” only if two conditions are satisfied. If the said conditions are not satisfied, no relief on account of DEPB can be granted u/s 80HHC. In Topman Exports vs. ITO 318 ITR 87 (Mum)(SB)(AT) the Special Bench of the Tribunal held that “the sum referred to in s. 28(iiid)” meant only the “profits” on transfer of the DEPB and not the entire sale proceeds. The Tribunal held that the amount received on account of DEPB had to be bifurcated into the “face value” of the DEPB and the “profit” and that while the “face value” was asses sable u/s 28(iiib), the “profit” was asses sable u/s 28(iiid). The consequence was that only the “profit” suffered the rigors of the third Proviso to s. 80HHC (3) and not the “face value“. On appeal by the Department, HELD reversing the Special Bench:

The argument that s. 28(iiid) covers only the “profit” (difference between sale consideration and face value of the DEPB credit) and that the “face value” is asses sable u/s 28(iiib) is not correct. The entire amount received on transfer of the DEPB credit is “profits” and falls under s. 28(iiid). There was no basis or justification for the Tribunal to hold that the face value of the DEPB credit can be reduced from the sale consideration. It is not permissible to bifurcate the proceeds of the DEPB into “face value” and “excess of face value”. The approach of the Tribunal is misconceived and unsustainable. As the assessee had an export turnover exceeding Rs.10 crores and did not fulfill the conditions set out in the third proviso to s. 80HHC (3), it was not entitled to a deduction u/s 80HHC on the amount received on transfer of DEPB.

Citation : CIT Vs. Kalpataru Colours and Chemicals , INCOME TAX APPEAL (LODG.) NO. 2887 OF 2009

Court : HIGH COURT OF BOMBAY

Backdrop

· As per the provisions of section 80HHC of the Income Tax Act, 1961 (ITA), a taxpayer was entitled to deduction from his gross total income profits derived from the export of goods or merchandise.

· Under the Explanation (baa) to section 80HHC of ITA 90 percent of any incentive earned or independent income received by the exporter, such as, profit on transfer of Duty Entitlement Pass Book (DEPB) entitlement, cash assistance from the government, brokerage, commission, rent etc needs to be excluded from business profits to arrive at the said deduction.

· Further under Proviso to section 80HHC(3), the quantum of deduction would be increased by the prorata share of 90 percent of interalia the cash assistance etc received by the exporter.

· Where there is a profit on transfer of DEPB and export turnover exceeds INR 10 crore, the deduction under section 80HHC would be increased by 90 percent of the profit on transfer of DEPB, only if certain conditions are fulfilled.

Facts

· The taxpayer is a trader and exporter in dyes, chemicals and other products. During Assessment Year (AY) 2003-04 the taxpayer received certain export incentives including DEPB entitlement.

· In the return of income for the year, the taxpayer claimed a deduction under section 80HHC of the ITA on the profit on transfer of DEPB.

· The taxpayer had an export turnover exceeding INR 10 crore, but had not fulfilled the conditions specified for claiming deduction on the profit on transfer of DEPB under section 80HHC. Accordingly, the Assessing Officer (AO) declined to grant deduction on the profit on transfer of DEPB.

Contentions of the taxpayer

· The expression “profits” cannot mean “sale proceeds”, as profit means difference between the sale consideration realized from the transfer of DEPB entitlement and face value of the DEPB entitlement transferred.

· Face value of DEPB is in the nature of cash assistance against exports and should be eligible for deduction under section 80HHC.

· Only the excess of sale proceeds over face value should be considered as profit on transfer of DEPB. Therefore, only such portion should be ignored while computing eligible deduction under section 80HHC.

Contentions of the Revenue

· DEPB entitlement can never have a cost because computation of this benefit is based on the Free on board („FOB?) value of exports.

· Thus, the entire sale proceeds realized on the transfer of DEPB entitlement, constitutes profit for the purpose of computing the deduction under section 80HHC.

Issues before High Court

· Whether the Tribunal is justified in holding that the entire amount received on the sale of the DEPB does not represent profit and that the face value of the DEPB should be deducted from sale proceeds?

· Whether the Tribunal is justified in holding that the face value of DEPB is in the nature of cash assistance, chargeable to tax at the time of accrual of income i.e. when the application for DEPB is filed with the competent authority pursuant to the exports made, and that the profits on the sale of DEPB representing the excess of sale proceeds over the face value is taxable at the time of sale?

Observations and Ruling of the High Court

· DEPB entitlement is a form of export incentive made available to the exporter and there is no cost that is attached to the grant of such incentive.

· No part of the credit that is available under the DEPB scheme can be treated as cash assistance, received or receivable against any scheme of the Government of India.

· DEPB entitlement is given as a percentage of the FOB value of exports so as to neutralize the incidence of customs duty on the import content of the export product.

· Merely because a part of such profits of business (i.e. face value) was offered to tax in the year in which the credit accrued to the taxpayer, would not be a ground to hold that such profit should be treated as cash assistance.

· Entire amount of consideration received on transfer of DEPB entitlement would constitute profits of business and is entitled for deduction from Gross Total Income under section 80HHC only upon fulfillment of the specified conditions.

NF