Case Law Details

Case Name : M/s. Suzlon Energy Limited Vs DCIT (ITAT Ahmedabad)
Appeal Number : IT Appeal Nos. 3911(Ahd.) of 2007 & 1367 (Ahd.) of 2008
Date of Judgement/Order : 21/09/2012
Related Assessment Year : 2005-06 & 2006-07
Courts : All ITAT (4421) ITAT Ahmedabad (332)

ITAT AHMEDABAD BENCH ‘C’

Suzlon Energy Ltd.

versus

Deputy Commissioner of Income-tax

IT Appeal Nos. 3911(Ahd.) of 2007 & 1367 (Ahd.) of 2008
[ASSESSMENT YEARS 2005-06 & 2006-07]

SEPTEMBER 21, 2012

ORDER

A.K. Garodia, Accountant Member

These are cross-appeals of the assessee and the Revenue for two years which are directed against two separate orders of the learned Commissioner of Income-tax (Appeals)-XIV, Ahmedabad, dated September 27, 2007 for the assessment year 2005-06 and dated March 17, 2008, for the assessment year 2006-07. All these appeals were heard together and are being disposed of by way of this common order for the sake of convenience.

2. First, we take up the appeals of the assessment year 2005-06. Ground No. 1 of the assessee’s appeal and ground No. 1 of the Revenue’s appeal are interconnected as per which the grievance of the Department is regarding deletion of dis allowance of Rs. 9,34,95,200 made by the Assessing Officer on account of sales commission paid under section 37 of the Income tax Act, 1961 and the grievance of the assessee is regarding confirmation of part dis allowance on this account to the extent of Rs. 42,81,600.

3. The brief facts of this issue till the assessment stage are noted by the learned Commissioner of Income-tax (Appeals) in paragraph 2.1 of his order and for the sake of ready reference, the same is reproduced below :

“The first ground is with regard to the dis allowance of sales commission expenditure of Rs. 9,77,76,800. The appellant-company is engaged in the business of manufacturing wind turbine generators (WTGs) at Daman and Pondicherry. During the year, under consideration, the appellant claimed sales commission expense in the sum of Rs. 9,77,76,800 on total sales of Rs. 1917.50 crores. The appellant has paid commission to 27 parties on 137 transactions of sales out of total 451 windmills sales. The Assessing Officer called six customer for personal verification by issuing summons under section 131 of the Act, who were examined and their statements were recorded. The Assessing Officer has discussed these facts in details in the assessment order and concluded that there is no evidence that the assessee- company received inbound services and its claim of payment of commission is not justified, as no services were rendered by the agents. Hence, the Assessing Officer disallowed the entire sales commission expenses of Rs. 9,77,76,800 and added the same to the total income of the assessee.”

4. Being aggrieved, the assessee carried the matter in appeal before the learned Commissioner of Income-tax (Appeals) who has deleted the part dis allowance to the extent of Rs. 9,54,95,200 and confirmed the balance dis allowance of Rs. 42,81,600 and now, the Revenue is in appeal for the amount of dis allowance deleted by the learned Commissioner of Income-tax (Appeals) and the assessee is in appeal for the part dis allowance confirmed by the learned Commissioner of Income-tax (Appeals).

5. The learned authorized representative supported the order of the learned Commissioner of Income-tax (Appeals) with regard to ground raised by the Revenue and with regard to the part dis allowance confirmed by the learned Commissioner of Income-tax (Appeals), in respect of six persons, it was submitted that even after initial introduction, the agent carries out many functions and, therefore, even if the sales is initiated by the customers as alleged by the Revenue, remissiors also provided other business information as stated in the agreement so as to justify the allow ability of the commission expenditure. It was the submission that it was a contractual arrangement with remissiors as stated in the contract and the services were rendered to the assessee and there was no provision for rendering any services to the customers. He also submitted that the assessee is eligible for deduction under section 80-IB to the extent of 100 per cent. and, therefore, even after dis allowance of sales commission, there is no impact on the profit of the assessee and the tax effect is revenue neutral. He also submitted that apart from the introduction of customers, the commission agents were rendering other valuable services such as providing other valuable information such as credibility report of the customers and they were also helping in making collection from the customers and therefore, commission paid by the assessee is allowable in full. Reliance was placed on the following judgments :

(a) Pennzol Investment & Trading Co. (P.) Ltd. v. Asst. CIT [1994] 49 ITD 534 (Hyd.);

(b) Swastic Textile Co. (P.) Ltd. v. CIT [1984] 150 ITR 155 (Guj.);

(c) CIT v. Hewitt Robins (New York) [1983] 141 ITR 278 (Cal.);

(d) CIT v. Ishwar Prakash and Bros. [1986] 159 ITR 843;

(e) ITO v. Shakti Cables [1990] 50 Taxman 329 (Delhi);

(f) Ciba Dyes Ltd. v. CIT [1954] 25 ITR 102 (Bom.); and

(g) Jt. CIT v. Concept Communication Ltd. [2006] 9 SOT 75 (Mum.).

6. As against this, it was submitted by the learned Departmental representative that only customers had approached the assessee and not the other way that the assessee has approached the customers and, therefore, it did not come out from the record that the customers were introduced to the assessee by some other person. He also submitted that no evidence has been produced regarding rendering of any services by these persons and hence, commission was rightly disallowed by the Assessing Officer. Reliance was placed on the judgment of the Honorable Allahabad court rendered in the case of Laxmi Sugar & Oil Mills v. CIT [1972] 84 ITR 439 (All).

7. We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below. We find that this issue was decided by the learned Commissioner of Income-tax (Appeals) as per paragraph 3.2 of his order which is reproduced below :

“3.2 I have considered the facts of the case and the submissions as advanced by the appellant along with the case law as relied upon. The facts emerged that agreements have been entered into for payment of commission in respect of work done by the agents and for providing information which resulted in maturity of sales. The payments were made as per the agreement. As per the agreement, the scope of services depending on type of customer required to be done by the agents were as under :

(a) The remissior based on their internal resources shall among st its business associates identify the buyers who propose to/have intention to buy and have the capacity to buy the WTGs.

(b) The remissior on identifying the buyers would suggest, inform, indicate, introduce, recommend and/or solicit them to the company so as to facilitate the company in carrying out the sales of WTG as per the requirements of the buyer.

(c) The remissior would function as a silent professional to render inbound services to the company and depending upon the circumstances, looking at his reputation, status, financial standing, the company will not reveal the name of remissior to the party referred to by him but any referred source resulting into successful commercial transaction would make the remissior entitled to the commission at the agreed rate referred to hereinafter.

(d) In majority of circumstances the buyer would prefer no intermediate with a view to control his cost and hence it is in the interest of both the party that the remissior would not come on front line.

In the case of the appellant, it is seen that :

(i) all the payments were made by cheques and parties were genuine. The parties have confirmed the receipt of payments and rendering of services in the form of giving information about its customers ;

(ii) all the agents are tax payers and the commission received by the assessee- company is shown in their income-tax returns and the tax has been paid thereon ;

(iii) for the appellant, there is no motive to save taxes as units of appellant are eligible for deduction under section 80-IB ; and

(iv) all the recipients of the commission are independent persons and they are not related to the appellant-company ;

(v) there is increase in the sales this year, which justifies the payment of commission ;

(vi) as per the Honorable Supreme Court’s decision relied on by the appellant, the Assessing Officer cannot sit in the judgment over commercial wisdom of the appellant and determine the reasonableness of the expenditure, unless the person is a related person to the assessee under section 40A(2)(b).

As the appellant has given the evidence that the recipients provided information in respect of the services, which helped the sales to be matured and realized, the payment of commission is justified. However, at the same time, it is also observed that the entire expenditure of commission cannot be allowed, in view of the specific finding brought on record by the Assessing Officer after inquiry in certain cases, wherein he examined the six customers and brought on record that in respect of these customers, the agents played no role in achieving the sales and these customers directly approached the assessee for the transaction :

Name of person called under section 131

Name of party to whom sales made

Commission agent

Commission paid (Rs.)

Shri Somchand Laljibhai Savia Savia Twisters P. Ltd. India Wind Power Ltd.

8,00,000

Shri Dhanjibhai Anandbhai Makvana Makson Pharmaceuticals Ltd. Vishal Corporation

8,00,000

Shri Amrutlal Jethalal Kalaria Intricast P. Ltd. Trikaya Metalic Ltd.

2,00,000

Shri Nirbhaya Krishna Agrawal Harsha Engineers Ltd. Shree Radhika Steel-Chem Ltd.

8,81,600

Shri Pareshkumar Labsankar Vyas Arnbuja Intermediates Ltd. PKM Industries

8,00,000

Shri Nareshbhai Manchand Shah M/s. Sahastra Properties P. Ltd. Sonica Granite P. Ltd.

8,00,000

42,81,600

In respect of the above six transactions, the company has not initiated any dialogue and not approached the customers on the basis of any information received from the agents. Therefore, it is held that the statements recorded from the six persons prove that the initiation of the transaction was from the side of the customers and it negates the claim of the appellant-company of having received the so called inbound services. If the appellant had received any inbound services, then the initiation for the sales would have been made by the appellant-company and not by the customers. Further, there is no evidence in support of the contention that the customers were induced by the agents to approach the appellant-company. Hence, it is held that in respect of the six parties, the payment is not made for receiving the information, which resulted into maturity of sales. Therefore, I hold that the payment is not made in accordance with the terms of contract entered into in this respect and these payments are not made for the business purposes. The Assessing Officer was justified in disallowing the payment of commission in respect of these transactions and the dis allowance of Rs. 42,81,600 is confirmed. However, the entire expenditure cannot be disallowed merely based on the statements of six customers, who form, a very negligible percentage of sales and the commission expenditure. Therefore, the appellant is allowed relief in respect of the balance amount of commission paid.”

8. From the above paragraph of the order of the learned Commissioner of Income-tax (Appeals), we find that a clear finding is given by the learned Commissioner of Income-tax (Appeals) that the assessee has given evidence that the recipient provided information in respect of services which helped the sales to mature and realise and, therefore, payment of commission is justified except for 6 parties. In respect of these 6 parties, it is noted by the learned Commissioner of Income-tax (Appeals) that the Assessing Officer after inquiry has brought on record in respect of these 6 customers, the agents had no role in achieving the sales and these customers directly approached the assessee for all transactions. The income of all the units of the assessee is eligible for deduction under section 80-IB of the Income tax Act, 1961. We also find that in the assessment order, the Assessing Officer has allowed additional deduction under section 80-IB in respect of various additions made by him in the assessment and hence, this contention of the assessee is supported by facts on record that there is no motive to save taxes by paying commission since the units of the assessee are eligible for deduction at 100 per cent. under section 80-IB. In respect of 6 parties, which were not introduced by the commission agent, it was the submission of the learned authorized representative that the agents had furnished other information such as report about reputation, status, financial standings, etc. Regarding these 6 parties, he also submitted that they have also helped in realization. The learned authorized representative was asked to file letters of these agents but the same are not filed by the learned authorized representative and hence, in the facts of the present case, we feel that the order of the learned Commissioner of Income-tax (Appeals) on this issue does not call for any interference from our side because part dis allowance confirmed by him is on this basis of these 6 customers were not introduced by these agents whereas for the balance amount for which dis allowance of commission is deleted by the learned Commissioner of Income-tax (Appeals), he has given a clear finding that these parties were introduced by the commission agents and evidence were filed regarding rendering of the services by them and these findings of the learned Commissioner of Income-tax (Appeals) could not be controverted by the learned Departmental representative. Regarding the judgment of the Honorable apex court on which reliance has been placed by the learned Departmental representative, we find that this judgment is not applicable in the present case because the facts are different. In that case, this finding was recorded by the Tribunal that selling agency firm and the assessee has no genuine existence and such selling agency was found to be make believe document. The facts in the present case are not so. In the present case, a clear finding is given by the learned Commissioner of Income-tax (Appeals) that services were rendered by the commission agents and this finding of the learned Commissioner of Income-tax (Appeals) could not be controverted by the learned Departmental representative. Hence, this judgment of the Honorable apex court does not render any help to the Revenue in the present case. In view of our above discussion, we do not find any reason to interfere in the order of the learned Commissioner of Income-tax (Appeals) on this issue. Accordingly, ground No. 1 of the Revenue as well as ground No. 1 of the assessee’s appeals is rejected.

9. Ground No. 2 and 3 of the Revenue’s appeal and ground No. 2 of the assessee’s appeal are also interconnected which are in connection with the dis allowance made by the Assessing Officer under section 14A of the Income-tax Act, 1961.

10. The brief facts of this issue are noted by the learned Commissioner of Income-tax (Appeals) in paragraph 4.1 of his order which is reproduced below :

“The second, third and fourth grounds of appeal are as under. The Assessing Officer has erred in law and on facts

(i) in applying the provisions of section 14A of the Act in disallowing an amount of Rs. 3,06,48,988 ;

(ii) in disallowing Rs. 3,06,48,988 under section 14A without appreciating that the total dividend income claimed as exempt under section 10(33) of the Act was only Rs. 2,02,56,516 ; and

(iii) alternatively and without prejudice the said dis allowance is highly exaggerated and excessive. In the facts and circumstances of the case, the said dis allowance ought to have been estimated at some reasonable token figure.

The Assessing Officer has found that the assessee had made huge investments in its subsidiary companies in the form of equity and preference shares amounting to Rs. 97,74,38,092. The Assessing Officer has also found that the assessee had taken huge borrowed for which it is paying interest and, therefore, by applying the provisions of section 14A of the Act, he disallowed the interest expenditure made to the sister concerns for an amount of Rs. 2,56,29,212. The Assessing Officer further observed that the assessee had earned dividend income of Rs. 2,02,56,516 and as against this exempt income, the appellant has not shown any expenditure incurred for earning this exempt income. The Assessing Officer has taken the following expenses as related to earning the exempt income and held that these are common expenses incurred for earning dividend income as well as taxable income, and hence, he apportioned on the ratio of turnover of the assessee- company and allocated at 5.2 per cent. of these amounts and calculated an amount of Rs. 50,19,716 as incurred relating to earning dividend income and disallowed the same. Thus, total dis allowance made under section 14A was Rs. 3,06,48,988.

Sr. No.

Particulars

Amount (Rs. in lakhs)

1

Director’s remuneration

163.10

2

Director’s fees and traveling

67.45

3

Staff salary of Corporate office

73.90

4

Audit fees

122.00

5

Building

50.12

6

Rent

278.76

7

Communication

210.00

Total

965.33

11. Out of this dis allowance of Rs. 3,06,48,988 made by the Assessing Officer under section 14A, the learned Commissioner of Income-tax (Appeals) has confirmed the part dis allowance for which the assessee is in appeal and deleted the balance dis allowance for which the Revenue is in appeal before us.

12. It was submitted by the learned authorized representative before us that while working out the dis allowance under section 14A, the Assessing Officer included the amount of investment in foreign subsidiaries also but income of dividend from investment in foreign subsidiaries is taxable and, therefore, this investment in foreign subsidiaries of Rs. 59,07,18,092 out of total investment of Rs. 97,74,38,092 cannot be considered for making dis allowance under section 14A. He further submitted that out of total dis allowance of Rs. 3,06,48,988, dis allowance of Rs. 2,56,29,272 is out of interest expenditure and out of this interests expenditure, the interest considered by the Assessing Officer in respect of investment in foreign subsidiaries is to the extent of Rs. 1,63,36,353 and only the balance amount of interest expenditure of Rs. 92,92,919 is in respect of investment in Indian subsidiaries. Regarding this dis allowance of interest in respect of investment in Indian subsidiaries, it was submitted that rule 8D is not applicable in the present year since the same is applicable from the assessment year 2008-09. He also submitted that own funds of the assessee, i.e., the assessee’s capital and reserves and surplus were to the extent of Rs. 92,957.20 lakhs as per the balance sheet as on March 31, 2005 out of which only an amount of Rs. 3,800 lakhs approximately was invested in Indian subsidiaries and there is no finding of the Assessing Officer that there is any nexus between interest bearing borrowed funds and investment in Indian subsidiaries and, therefore, no dis allowance is justified out of interest expenditure under section 14A. Reliance was placed on the judgment of the Honorable apex court rendered in the case of Munjal Sales Corporation Vs. CIT, 298 ITR 298 and also on the judgment of the Honorable Bombay High Court rendered in the case of CIT Vs. Reliance Utilities & Power Ltd. [2009] 313 ITR 340. Regarding the balance dis allowance of Rs. 50,19,716 under section 14A for administrative expenses, it was submitted that the assessee had incurred those expenses for the purpose of its business and, therefore, no dis allowance is justified.

13. The learned Departmental representative of the Revenue supported the assessment order.

14. We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below. Regarding the grounds raised by the Revenue in respect of dis allowance of interest expenditure made by the Assessing Officer under section 14A and deletion made by the learned Commissioner of Income-tax (Appeals), we find that no interference is called for in the order of the learned Commissioner of Income-tax (Appeals). We hold so because we find that with regard to the investment of Rs. 5907.18 lakhs in foreign subsidiaries, no dis allowance can be made under section 14A because dividend income from foreign subsidiaries is taxable in India. Regarding balance investment of Rs. 38 crores approximately in Indian subsidiaries, we find that interest-free own funds of the assessee is many times more than this investment because interest free funds available with the assessee as on March 31, 2005 as per the balance-sheet as on that date is of Rs. 929.57 crores. There is no finding given by the Assessing Officer regarding any direct nexus between interest bearing borrowed funds and investment in Indian subsidiaries. Hence, in our considered opinion, no dis allowance under section 14A can be made out of interest expenditure in the facts of the present case. Accordingly, ground Nos. 2 and 3 of the Revenue’s appeal are rejected.

15. Regarding ground No. 2 of the assessee’s appeal as per which the learned Commissioner of Income-tax (Appeals) has directed the Assessing Officer to allocate directors’ remuneration fee and traveling allowance toward earning dividend and to make proportionate dis allowance under section 14A of the Income-tax Act, 1961, we are of the considered opinion that the Assessing Officer should make proportionate dis allowance only in respect of dividend income from Indian subsidiaries. We do not find any merit in the submissions of the assessee that no dis allowance is called for out of administrative expenditure because dividend income is exempt and hence, proportionate dis allowance out of administrative expenses is justified. On this aspect, we do not find any reason to interfere in the order of the learned Commissioner of Income-tax (Appeals). Accordingly ground No. 2 of the assessee’s appeal is also rejected.

16. Grounds Nos. 3 and 4 of the assessee’s appeal are in respect of dis allowance of deduction under section 80-IB in respect of interest on FDR and ICD amounting to Rs. 5,07,48,207 as per ground No. 3 and as per ground No. 4 the alternative claim is made that even if some dis allowance is to be made on this account, only net interest income can be reduced from the business profit.

17. The brief facts of this issue till the assessment stage are noted by the learned Commissioner of Income-tax (Appeals) in para 5.1 of his order which is reproduced below :

“The grounds Nos. 5 and 6 are as under :

The learned Assessing Officer has erred in law and on facts in not granting deduction under section 80-IB of the Act on interest on FDR and ICD amounting to Rs. 5,07,48,207. Alternatively and without prejudice, only net interest and not the gross interest as has been done, can be reduced from the profits of the business.

The Assessing Officer has not granted deduction under section 80-IB of the Act on interest income from FDRs and ICDs of Rs. 5,07,48,207. The appellant has submitted that the Honorable Income-tax Appellate Tribunal has decided the issue in favour of the appellant in the assessment year 1999-2000. Further, it was submitted that on similar issue, the Commissioner of Income-tax (Appeals) has decided in favour of the appellant in the assessment years 2003-04 and 2004-05 and held that only net interest income should be excluded for calculation of deduction under section 80-IB of the Act.”

18. Being aggrieved, the assessee carried the matter in appeal before the learned Commissioner of Income-tax (Appeals) but without success and now, the assessee is in further appeal before us.

19. It was submitted by the learned authorized representative that interest earned on bank deposits by opening letters of credit has direct nexus with the activities of industrial undertaking and hence, the same qualifies for the claim of deduction under section 80-IB. Regarding the alternative claim, it was submitted that only net interest should be excluded from profits of business and not the gross interest while computing deduction under section 80-IB of the Income tax Act, 1961. In support of this contention, reliance is placed on the Tribunal decision in the assessee’s own case for the assessment year 2004-05 in I.T.A. No. 2009/Ahd/2006 dated April 29, 2009. He submitted a copy of this Tribunal decision. Reliance was also placed on the decision of the Honorable apex court rendered in the case of ACG Associated Capsules (P.) Ltd. v. CIT [2012] 343 ITR 89 in support of this contention that netting of interest should be allowed.

20. The learned Departmental representative supported the order of authorities below.

21. We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below and the judgment cited by the learned authorized representative. We find that interest income cannot be said to be an income derived from an industrial undertaking and, therefore, section 80-IB deduction is not allowable in respect of interest income. Regarding netting of interest income, we find that this issue is now covered by the judgment of the Honorable apex court rendered in the case of ACG Associated Capsules (P.) Ltd. (supra). In that case, it was held by the Honorable court that only 90 per cent. of the net interest included in the profits of business of the assessee has to be excluded under clause (1) of Explanation (baa) to section 80HHC for determining the profits of business. Although this judgment is in respect of deduction under section 80HHC but we find no reason as to why the same logic should not be applied in respect of deduction under section 80-IB of the Income-tax Act, 1961. We, therefore, hold that net interest only should be considered for reducing from profits of business for computing deduction under section 80-IB and for the purpose of computing net interest, only these expenditure, which are incurred for earning interest income should be considered and reduced from interest income. Ground No. 3 of the assessee is rejected whereas ground No. 4 of the assessee is allowed for statistical purposes.

22. Ground No. 4 of the Revenue’s appeal is regarding granting of deduction under section 80-IB of the Income-tax Act, 1961 on interest of late payment of sale proceeds from debtors amounting to Rs. 1,95,79,481.

23. The learned Departmental representative supported the assessment order whereas it was submitted by the learned authorized representative that this issue is now covered in favour of the assessee by the judgment of the Honorable Gujarat High Court rendered in the case of Nirma Industries Ltd. v. Dy. CIT [2006] 283 ITR 402 and it was also submitted that special leave petition preferred by the Department against this judgment was rejected by the Honorable apex court.

24. We have considered the rival submissions and we find that this issue is now squarely covered in favour of the assessee by this judgment of the Honorable Gujarat High Court and hence, we decline to interfere in the order of the learned Commissioner of Income-tax (Appeals) on this issue. Ground No. 4 of the Revenue is rejected.

25. Ground No. 5 of the Revenue’s appeal is regarding granting of deduction under section 80-IB of the Income-tax Act, 1961 to the extent of Rs. 2,66,698 in respect of duty drawback.

26. The brief facts of this issue are noted by the learned Commissioner of Income-tax (Appeals) in paragraph 7 of his order which is reproduced below :

“7. The grounds Nos. 9 and 10 are against not granting deduction under section 80-IB on duty drawback amounting to Rs. 2,66,698 and alternatively and without prejudice, if the duty drawback is to be excluded, core spending payment of the duty may kindly be allowed to be taken out from the calculation of the profit of the business. Similar issue arose in the earlier years, i.e., 2003-04 and 2004-05, where the issue was decided in favour of the appellant, vide the Commissioner of Income-tax (Appeals)’s order dated March 29, 2006 and June 19, 2006 by following the decision of the Honorable Gujarat High court in the case of CIT v. India Gelatine & Chemicals Ltd. [2005] 275 ITR 284. As the issue is similar, it is divided in favour of the appellant for this year also and the appellant is given relief on this point.”

27. Being aggrieved, the assessee carried the matter in appeal before the learned Commissioner of Income-tax (Appeals) who has decided this issue in favour of the assessee by following the order of his predecessor in the assessee’s own case for the assessment years 2003-04 and 2004-05 in which the judgment of the Honorable Gujarat High Court rendered in the case of CIT v. India Gelatine & Chemicals Ltd. [2005] 275 ITR 284 was followed. Now, Revenue is in appeal before us.

28. It was submitted by the learned Departmental representative that this issue is now covered against the assessee by the judgment of the Honorable apex court rendered in the case of Liberty India v. CIT [2009] 317 ITR 218.

29. As against this, the learned authorized representative submitted brief note on eligibility of duty drawback while computing deduction under section 80-IB of the Income-tax Act, 1961. The same is reproduced below :

“A brief note on eligibility of income on account of duty drawback while computing deduction under section 80-IB of the Act. Scheme of Duty Drawback.

The grant of duty drawback is governed by the Customs and Central Excise Duty Drawback Rules, 1995 (Drawback Rules) (copy at Exhibit I). The duty drawback is of two kinds :

(1) All Industry Rates (AIR)

(2) Brand rate

The AIR is a general rate notified by the Government through duty drawback scheme every year after assessment of average incidences of Customs and Central Excise suffered by the export product after extensive discussion with all the stakeholders of industry and data collected from Customs and Central Excise Department. The manner for determination of the rate is given in rule 3(2) of Drawback Rules.

A plain reading of the said rule 3(2), the following features emerge:

The rates are determined on general analysis of industry data and not specific to any individual exporter ;

The schedule entry rates are standard general rates having no nexus with the actual amount of duty suffered on input and raw material used in product exported ;

The claim of drawback is to be made as per the schedule entry rate which has no correlation with the actual amount of the duty paid by an individual exporter in respect of the raw material used in the product exported ;

The claim is available whether or not exporter has in fact paid duty or not.

Thus, when the claim of duty drawback is made applying AIR it has no correlation with actual amount of duty paid by an individual exporter as well as will not be arithmetically equal to the customs duty or central excise duty actually paid by the exporter. In contrast to the above brand rate of duty drawback a manufacture exporter is compensated by paying the amount of customs and central excise duties incidence actually incurred by the exporter and suffered by product exported. For this purpose claimant has to produce documents/proof about the actual quantity of inputs utilized in the manufacture of export product along with evidence of payment of duties thereon. This scheme can be opted by the manufacturer exporter where export product is not notified under AIR or where the exporter considers the AIR duty drawback insufficient to fully neutralize the duties suffered by his export product. Rules 6 and 7 of the Duty Drawback Rules provides manner of determination and claim of duty drawback under this scheme. A perusal of the said rules reveals the following distinct features:

• Though it is called brand rate but in fact it is a refund of actual amount of duty paid on the inputs used in export of product.

• It is not general one but is given specific to the individual exporter having direct nexus with the actual amount of duty paid by him and is arithmetically equal to the actual amount of duty incurred on export product.

• The claim is available only if the input has been used in manufacture of product exported and has also suffered customs duty or central excise duty.

It may be noted that we have not opted for AIR duty drawback but have claimed refund of actually paid duty on input used in manufacture of product exported by us by making detailed application for each export submitting evidence/proof of input consumed in product exported and amount of customs duty and central excise duty paid by us on the same. A copy of one such sample application giving details of the duty paid is attached herewith as exhibit 2.

Scheme of DEPB is different from scheme of duty drawback : Even the scheme of DEPB, i.e., Duty Entitlement Pass Book Scheme wherein the exporter is given pass book containing a credit on the FOB value at rates prescribed under export import policy and handbook is also different and as a matter of fact has no nexus with the actual amount of duty paid. The credit can be used for payment of import duties while importing the goods. The DEPB itself is transferable and can be sold in open market and purchaser of DEPB can also use such credit for import of material. In almost all States sale of DEPB is considered as sale of goods liable for value added tax (VAT). Thus the case of DEPB is quite different from the duty drawback. Copy of scheme of DEPB is annexed hereto and marked as exhibit 3.

Thus even on this count the case of the appellant is quite different from the facts of case dealt by the Honorable Supreme court in the case of Liberty India [2009] 317 ITR 218 (SC) as the appellant has received exactly arithmetically equal amount of duty paid by it on the material actually consumed in manufacture of export product as refund. Thus there is recovery of cost only and no question of any profit arising from such duty drawback.

B. Principle of gross receipt vs income

It is submitted that the deduction under section 80-IB of the Act is on income from industrial undertaking and not on gross receipt. Income is nothing but gross receipts less expenditure. The profit as per the profit and loss account, subject to certain adjustments, is the beginning point in so far as computation of eligible income is concerned. Therefore, while excluding any particular type of income from the eligible income, what has to be excluded is what is included therein. In other words, what is included is the income, i.e., gross income on the credit side and gross expenditure on debit side of the profit and loss account and therefore if only gross receipts are excluded, leaving expenditure in the profit and loss account, the profits and/or income becomes distorted. Hence only income component from the gross receipts can be excluded. Reliance can be placed on the following decisions wherein the principle of difference between gross receipt and income has been duly explained :

(i) CIT v. Govinda Choudhury and Sons [1993] 203 ITR 881 (SC) ;

(ii) CIT v. President Industries [2002] 258 ITR 654 (Guj) ;

(iii) CIT v. Balchand Ajit Kumar [2003] 263 ITR 610 (MP) ; and

(iv) CIT v. S.M. Omer [1993] 201 ITR 608 (Cal).

In the facts of the present case, therefore, while excluding duty drawback from the eligible income, only income component, if any, can be excluded. However, as stated herein above, there is no income component embedded in the duty drawback in the facts of the present case as the assessee has opted for refund of duty actually paid on input used in manufacture of product.

C. Effect of the decision in the case of Liberty India [2009] 317 ITR 218 (SC)

1. The decision in the case of Liberty India is not at all applicable to the facts of the present case since while rendering the said decision, the Honorable the Supreme Court denied the benefit of section 80-IB in respect of duty drawback as it found that duty drawback was claimed under AIR and was not arithmetically equal to the actual amount of duty paid. The relevant paragraph 17 of the judgment of the Honorable Supreme Court is reproduced herein below for immediate reference (page 234) :

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 the 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 . . .’

Thus, in subject case of the Honorable Supreme Court gave a finding to the above effect as the duty drawback was claimed at general AIR rates which are prescribed by the Government and is not arithmetically equal to customs duty or central excise duty actually paid by an individual exporter. Contrary to the decision of Liberty India [2009] 317 ITR 218 (SC), the case of the assessee is quite different inasmuch as in the facts of the present case, the assessee has not claimed duty drawback under AIR but has claimed the same as refund of actual amount of duty paid, to the last rupee. In that view of the matter, when actual amount of duty which was paid earlier is being refunded back to the assessee, the decision in the case of Liberty India cannot have any application whatsoever. Copy of section 75 of the Customs Act, 1962 is annexed hereto and marked as exhibit 4.

2. In fact this view is also supported by the subsequent decision of the Honorable Supreme Court while dismissing the special leave petition against the Delhi High Court’s decision and the Income-tax Appellate Tribunal, Delhi bench wherein it was held that where eligible undertakings received refund of the duty actually paid then there is no income arising out of it and therefore question of excluding the said refund while working out the deduction under section. 80-IB does not arise at all. Reliance is placed on the following decisions :

Special leave to Appeal (Civil) No. 24055 of 2009, dated February 22, 2010

(copy enclosed at Exhibit 5) hereinafter hearing both parties, the Honorable the Supreme Court dismissed the special leave petition on merits and thereby confirmed the decision of the Delhi High Court in the case of CIT v. Dharam Pal Prem Chand Ltd. [2009] 317 ITR 353 (Delhi) wherein it was held that excise duty refund was eligible under section 80-IB on the ground that (a) there was a direct nexus between the refund of excise duty and the undertaking and (b) if the proper accounting methodology was followed for the payment and refund of excise duty, the net effect on the profit and loss account was nil.

J.K. Aluminum Co. v. ITO I. T. A. 3303/Del/2010 dated April 29, 2011 (copy enclosed at exhibit 6).

3. In any case, in the case of Liberty India [2009] 317 ITR 218 (SC), it was never argued before the Honorable Supreme Court that for earning DEPB or duty drawback, the assessee has to incur expenditure and therefore, while excluding such receipt, only the income portion, if any, embedded in such receipts can be excluded and not the gross receipts. This issue of DEPB or duty drawback having cost and the same has to be reduced to find out the profit or income from the gross receipts has been accepted and explained by the Honorable the Supreme Court in later decisions in the following cases : Top man Exports v. CIT [2012] 342 ITR 49 (SC) the relevant extract is reproduced herein below for ready reference (page 61) :

’15. We may now point out the errors in the impugned judgment of the High Court. The first reason given by the High Court is that clause (iiia) of section 28 treats profits on the sale of an import license as income chargeable to tax and when the license is sold, the entire amount is treated as the profits of business under clause (iiia) of section 28 and thus there is no justification to treat the amount which is received by an exporter on the transfer of the DEPB any differently than the profits which are made on the sale of an import license under clause (iiia) of section 28 of the Act. In taking the view that when the import license is sold the entire amount is treated as profits of business, the High Court has visualized a situation where the cost of acquiring the import licence is nil. The cost of acquiring DEPB, on the other hand, is not nil because the person acquiring it by paying customs duty on the import content of the export product and the DEPB which accrues to a person against exports has a cost element in it. Accordingly, when the DEPB is sold by a person, his profit on the transfer of DEPB would be the sale value of the DEPB less the face value of DEPB which represents the cost of the DEPB. The second reason given by the High Court in the impugned judgment is that under the DEPB scheme, the DEPB is given at a percentage of the FOB value of the exports so as to neutralize the incidence of the customs duty on the import content of the export products, but the exporter may not himself utilise the DEPB for paying customs duty but may transfer it to someone else and therefore the entire sum received on transfer of DEPB would be covered under clause (iiid) of section 28. The High Court has failed to appreciate that DEPB represents part of the cost incurred by a person for manufacture of the export product and hence even where the DEPB is not utilized by the exporter but is transferred to another person, the DEPB continues to remain as a cost to the exporter. When, therefore, DEPB is transferred by a person, the entire sum received by him on such transfer does not become his profits. It is only the amount that he receives in excess of the DEPB which represents his profits on transfer of the DEPB.

In the facts of the present case also the assessee got refund, in form of duty drawback, of the customs duty and CVD paid on imported raw material used in the manufacturing of goods. The assessee has given voluminous charts corelating amount of duty paid and refund received on back to back basis. Thus in the present case also if the cost of duty drawback is removed from the amount received, there would be nil surplus as the assessee has received exactly the same amount of duty paid by it.

4. In fact, this principle of excluding only the net income, if any, and not the gross receipts has been duly explained recently by the Honorable the Supreme Court in the context of provisions of section 80HHC wherein the provisions of Explanation (baa) lay down exclusion of ‘receipts’. Despite that, the Honorable the Supreme Court held that what can be excluded is the profit or income and not the gross receipt. Relevant extract of the said decision are reproduced herein below for ready reference :

ACG Associated Capsules P. Ltd. [2012] 343 ITR 89, 94, 97 (SC).

‘3. For appreciating the second issue, we may refer very briefly to the facts of the case. For the assessment year 2003-04, the assessee filed a return of income claiming a deduction of Rs. 34,44,24,827 under section 80HHC of the Act. The Assessing Officer passed the assessment order deducting ninety per cent. of the gross interest and gross rent received from the profits of business while computing the deduction under section 80HHC and accordingly restricted the deduction under section 80HHC to Rs. 2,36,25,053. The assessee filed an appeal against the assessment order before the Commissioner of Income-tax (Appeals), who confirmed the order of the Assessing Officer excluding ninety per cent. of the gross interest and gross rent received by the assessee while computing the profits of the business for the purposes of section 80HHC. Aggrieved, the assessee filed an appeal before the Income-tax Appellate Tribunal (for short “the Tribunal”). The Tribunal held, relying on the decision of the Delhi High Court in CIT v. Shri Ram Honda Power Equip [2007] 289 ITR 475 (Delhi), that netting of the interest could be allowed if the assessee is able to prove the nexus between the interest expenditure and interest income and remanded the matter to the file of the Assessing Officer. The Tribunal also remanded the issue of netting of the rent to the Assessing Officer with the direction to find out whether the assessee has paid the rent on the same flats against which rent has been received from the staff and if such rent was paid then such rent is to be reduced from the rental income for the purpose of exclusion of business income for computing the deduction under section 80HHC. Against the order of the Tribunal, the Revenue filed an appeal before the High Court and the High Court has directed that on remand the Assessing Officer will decide the issue in accordance with the judgment of the High Court in CIT v. Asian Star Co. Ltd. [2010] 326 ITR 56 (Bom) in which it has been held that while determining the profits of the business as defined in Explanation (baa) to section 80HHC, ninety per cent. of the gross receipts towards interest and not ninety per cent. of the net receipts towards interest on fixed deposits in banks received by the assessee would be excluded for the purpose of working out the deduction under section 80HHC of the Act . . .’

9. Explanation (baa) extracted above states that ‘profits of the business’ means the profits of the business as computed under the head ‘Profits and gains of business or profession’ as reduced by the receipts of the nature mentioned in clauses (1) and (2) of Explanation (baa). Thus, profits of the business of an assessee will have to be first computed under the head ‘Profits and gains of business or profession’ in accordance with provisions of sections 28 to 44D of the Act. In the computation of such profits of business, all receipts of income which are chargeable as profits and gains of business under section 28 of the Act will have to be included. Similarly, in computation of such profits of business, different expenses which are allowable under sections 30 to 44D have to be allowed as expenses. After including such receipts of income and after deducting such expenses, the total of the net receipts are profits of the business of the assessee computed under the head ‘Profits and gains of business or profession’ from which deductions are to made under clauses (1) and (2) of Explanation (baa).

10. Under clause (1) of Explanation (baa), ninety per cent. of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in any such profits are to be deducted from the profits of the business as computed under the head ‘Profits and gains of business or profession’. The expression ‘included any such profits’ in clause (1) of Explanation (baa) would mean only such receipts by way of brokerage, commission, interest, rent, charges or any other receipt which are included in the profits of the business as computed under the head ‘Profits and gains of business or profession’. Therefore, if any quantum of the receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature is allowed as expenses under sections 30 to 44D of the Act and is not included in the profits of business as computed under the head ‘Profits and gains of business or profession’, ninety per cent. of such quantum of receipts cannot be reduced under clause (1) of Explanation (baa) from the profits of the business. In other words, only ninety per cent of the net amount of any receipt of the nature mentioned in clause (1) which is actually included in the profits of the assessee is to be deducted from the profits of the assessee for determining ‘profits of the business’ of the assessee under Explanation (baa) to section 80HHC.

11. For this interpretation of Explanation (baa) to section 80HHC of the Act, we rely on the judgment of the Constitution Bench of this court in Distributors (Baroda) P. Ltd. v. Union of India [1985] 155 ITR 120 (SC). Section 80M of the Act provided for deduction in respect of certain inter corporate dividends and it provided in sub-section (1) of section 80M that ‘where the gross total income of an assessee being a company includes any income by way of dividends received by it from a domestic company, 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 income by way of dividends an amount equal to’ a certain percentage of the income mentioned in this section. The Constitution Bench held that the court must construe section 80M on its own language and arrive at its true interpretation according to the plain natural meaning of the words used by the Legislature and so construed the words ‘such income by way of dividends’ in sub-section (1) of section 80M must be referable not only to the category of income included in the gross total income but also to the quantum of the income so included. Similarly, Explanation (baa) has to be construed on its own language and as per the plain natural meaning of the words used in Explanation (baa), the words ‘receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits’ will not only refer to the nature of receipts but also the quantum of receipts included in the profits of the business as computed under the head ‘Profits and gains of business or profession’ referred to in the first part of Explanation (baa). Accordingly, if any quantum of any receipt of the nature mentioned in clause (1) of Explanation (baa) has not been included in the profits of business of an assessee as computed under the head ‘Profits and gains of business or profession’, ninety per cent. of such quantum of the receipt cannot be deducted under Explanation (baa) to section 80HHC.

12. If we now apply Explanation (baa) as interpreted by us in this judgment to the facts of the case before us, if the rent or interest is a receipt chargeable as profits and gains of business and chargeable to tax under section 28 of the Act, and if any quantum of the rent or interest of the assessee is allowable as an expense in accordance with sections 30 to 44D of the Act and is not to be included in the profits of the business of the assessee as computed under the head ‘Profits and gains of business or profession’, ninety per cent. of such quantum of the receipt of rent or interest will not be deducted under clause (1) of Explanation (baa) to section 80HHC. In other words, ninety per cent of not the gross rent or gross interest but only the net interest or net rent, which has been included in the profits of business of the assessee as computed under the head ‘Profits and gains of business or profession’, is to be deducted under clause (1) of Explanation (baa) to section 80HHC for determining the profits of the business.’

5. Lastly, if at all it emerges that the decision of Liberty India [2009] 317 ITR 218 (SC) and the decisions in the case of Topman Exports [2012] 342 ITR 49 (SC) and ACG Associated Capsules P. Ltd. [2012] 343 ITR 89 (SC) have conflicting views, the assessee submits that :

(i) The decisions of Topman Exports [2012] 342 ITR 49 (SC) and ACG Associated Capsules P. Ltd. [2012] 343 ITR 89 (SC) were rendered by a Bench having headed by three judges whereas the decision of Liberty India [2009] 317 ITR 218 (SC) was rendered by a Division Bench therefore a larger Bench would prevail upon a Division Bench ;

(ii) the decisions of Topman Exports [2012] 342 ITR 49 (SC) and ACG Associated Capsules P. Ltd . [2012] 343 ITR 89 (SC) were rendered on February 8, 2012 whereas the decision of Liberty India [2009] 317 ITR 218 (SC) was rendered on August 31, 2009, therefore a later decision prevails upon earlier one ; and

(iii) if two views are possible, the view in favour of the assessee should be adopted.

In view of the above discussion, the assessee most respectfully submits that even otherwise while computing the deduction under section 80-IB of the Act not only receipt of duty drawback should be excluded but also the amount of actual duty paid and debited to the profit and loss account should also be excluded. In the facts of the present case, since the assessee has only received back to back reimbursement of duty paid by it as duty drawback it is in the nature of refund of duty and therefore it does not affect the profit of the undertaking eligible for deduction under section 80-IB of the Act in any manner whatsoever, and hence no part of the said duty drawback can be excluded.”

30. In rejoinder, it was submitted by the learned Departmental representative that in the case of Liberty India (supra), the issue was decided not in respect of DEPB only but in respect of duty drawback also and on both the accounts, the issue was decided by the Honorable apex court against the assessee and in favour of the Revenue.

31. We have considered the rival submissions, perused the material on record and have gone through the orders of authorities below and the judgment cited by both the sides. When we go through paragraphs 16, 17 and 18 of the judgment of the Honorable apex court rendered in the case of Liberty India (supra) we find that this decision is on this basis that the rules do not envisage a refund of the amount arithmetically equal to customs duty or central excise duty actually paid by an individual importer-cum-manufacturer. It is also stated by the Honorable apex court in paragraph 17 of this judgment that 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. We, therefore, feel that paragraphs 16, 17 and 18 of this judgment of the hon’ble apex court should be reproduced below for ready reference (page 233) :

“16. DEPB is an incentive. It is given under the 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 a percentage of the FOB value of exports made in freely convertible currency. Credit is available only against the export product and at rates specified by the 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 products 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 the 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.

17. The next question is-what is duty drawback ? Section 75 of the Customs Act, 1962, and section 37 of the Central Excise Act, 1944, empowers the Government of India to provide for repayment of customs duty 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 the duty drawback receipt lies in section 75 of the Customs Act and section 37 of the Central Excise Act.

18. Analyzing 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.”

32. Since it is held by the Honorable apex court that section 75 of the Customs Act is relevant of the purpose of duty drawback, we reproduce clause (a) of sub-section (2) of section 75 of the Customs Act, 1962, which is as under :

“(a) for the payment of drawback equal to the amount of duty actually paid on the imported materials used in the manufactured or processing of the goods or carrying out any operation on the goods or as is specified in the rules as the average amount of duty paid on the materials of that class or description used in the manufacture or processing of export goods or carrying out any operation on export goods of that class or description either by manufacturers generally or by persons processing or carrying on any operation generally or by any particular manufacturer or particular person carrying on any process or other operation, and interest if any payable thereon.”

33. We also reproduce the relevant portion of the Customs and Central Excise Duties and Service Tax Drawback Rules, 1995 as per Notification No. 37 of 1995, dated May 26, 1995.

34. In the beginning to the notification, it is stated that on exercise of powers conferred by section 75 of the Customs Act, 1962, section 37 of the Central Excise Act, 1944, and section 93A read with section 75 of the Finance Act, 1944 these rules are made by the Central Government. Rule 6 is relevant and the same is reproduced below :

“Rule 6. Cases where amount or rate of drawback has not been determined.-(1)(a) Where no amount or rate of drawback has been determined in respect of any goods, any manufacturers or exporter of such goods may, within sixty days from the date relevant for the applicability of the amount or rate of drawback in terms of sub-rule (3) of rule 5 apply in writing to the Commissioner of Central Excise or the Commissioner of Customs and Central excise, having jurisdiction over the manufacturing unit, of the manufacturer exporter or, of the supporting manufacturers, as the case may be, for determination of the amount or rate of drawback thereof stating all the relevant facts including the proportion in which the materials or components or inputs services are used in the production or manufacture of good and the duties paid on such materials or components or the tax paid on input services.”

35. We have gone through clause (a) of sub-section (2) of section 75 of the Customs Act, 1962 and we find that there are two types of duty drawback which can be allowed. The first category is that payment of duty drawback is equal to the amount of duty actually paid on an imported material used in manufacturing or processing of goods or carrying out any operation of the goods. The second category is that as specified in the rule, an average amount of duty paid on the material of that class or description used in manufacturing or processing of export of goods or carrying out any operation on export goods of this case, etc. In the first category, the duty drawback is arithmetically equal to the duty paid by the assessee on import of material used in the manufacture or processing of the goods. In the second category, the average amount of duty drawback is paid without any correlation with the actual duty paid by the assessee on import. As per rule 6 of Customs and Central Excise Duties and Service Tax Duty Drawback Rules, 1995, where no amount or rate of drawback has been determined in respect of any goods, any exporter of such goods may within 60 days from the date of relevant of the applicability of amount apply in writing to the Commissioner of Central Excise or the Commissioner of Customs and Central Excise having jurisdiction over the manufacturing unit or manufacturer exporter or the supporting manufacturer, etc., to determine the amount and rate of drawback thereof stating all the relevant facts, etc. In the present case, the duty drawback is available to the assessee as per the first category and as per the details given by the assessee, an amount of Rs. 2,72,395 was paid by the assessee as customs duty, out of which Rs. 5,697 was deducted being at Rs. 3 per kg. for 1899 kg. being recoverable wastage and the balance amount was paid as duty drawback being Rs. 2,66,698. Similarly, for the assessment year 2006-07 also, the assessee has submitted complete details about duty drawback, as per which, duty paid by the assessee is of Rs. 15,71,42,086 and duty drawback received is Rs. 15,48,64,977. This goes to show that in both the years, there is direct and arithmetic correlation between the duty paid by the assessee and duty drawback received by the assessee. These facts along with relevant provisions of the Customs Act, 1962 and Custom and Central Excise Duty and Service Tax Drawback Rules, 1995 of which relevant portion is reproduced above, we find that the facts in the present case are distinguishable from the facts in the case of Liberty India (supra). In the case of Liberty India (supra), the issue was decided by the Honorable apex court against the assessee on this basis that since the rule does not envisage refund of an amount arithmetically equal to customs duty paid by the individual exporter/manufacturer, the duty drawback and DEPB receipt of the assessee is on account of statutory policy and the provisions in the Customs Act by the Government of India and hence, this profit derived by way of some incentive does not fall within the expression ‘profits derived from industrial undertaking’ in section 80-IB. In the present case, duty drawback received by the assessee has a direct and arithmetic correlation with the customs duty paid by the assessee and, therefore, there is no income as such on account of duty drawback received by the assessee because whatever customs duty is paid by the assessee has been received back by the assessee and it leaves no income with the assessee.

36. The assessee has also placed reliance on the Tribunal decision rendered in the case of J.K. Aluminum Co. v. ITO in I.T.A. No. 3303/Del/2010 dated April 29, 2011. In that case also, the issue involved was with regard to allow ability of deduction under section 80-IB in respect of excise duty refund of Rs. 5,68,41,800 received by the assessee. The Tribunal has duly considered this judgment of the Honorable apex court rendered in the case of Liberty India (supra) and the Tribunal has also considered another judgment of the Honorable apex court rendered in the case of CIT v. Dharam Pal Prem Chand Ltd. [2009] 317 ITR 353 and thereafter, it was held by the Tribunal that the assessee is eligible for deduction under section 80-IB in respect of refund of excise duty because the rules clearly envisage refund of amount arithmetically equal to excise duty paid. It was held by the Tribunal in that case that there is distinction of facts as compared to the facts in the case of Liberty India (supra) because as per the facts in the case of Liberty India (supra) the issue was not concerned with the refund of amount paid. We have seen that in the present case, the assessee is getting refund of customs duty paid by the assessee in the form of duty drawback and the duty drawback relief are of two types. The first category of duty drawback is as per all India rates where the duty drawback has no correlation with the actual duty paid by the assessee and under these facts, it was held by the Honorable apex court in the case of Liberty India (supra) that the assessee is not eligible for deduction under section 80-IB with regard to duty drawback. As per the same, duty drawback has no arithmetical correlation with actual duty paid by the assessee but in the present case actual duty paid is refunded as duty drawback and hence, the facts of the present case are distinct than the facts in the case of Liberty India (supra) and, therefore, this judgment of the Honorable apex court rendered in the case of Liberty India (supra) cannot be applied in the present case because we have seen that factually, all duty drawback received by the assessee is almost arithmetically equal to the duty paid by the assessee wherein some amount for which drawback was not allowed is on this basis that the same is relatable to recoverable wastage. Under these facts, it is established by the assessee that the duty drawback received by the assessee is arithmetically equal to the duty paid by the assessee and, therefore, in the facts of the present case, we are of the considered opinion that duty drawback in the present case is nothing but refund of duty paid by the assessee and, therefore, respectfully following the Tribunal decision rendered in the case of J.K. Aluminum Co., (supra) we decide this issue in favour of the assessee and hold that in the facts of the present case, duty drawback received by the assessee is eligible for deduction under section 80-IB. This ground of the assessee is allowed.

37. The next issue is regarding allow ability of deduction in respect of employees contribution to provident fund and employees’ State insurance. This issue is raised by the Revenue as per ground No. 6 and also by the assessee as per ground No. 7. It was submitted by the learned authorized representative that this issue is now covered in favour of the assessee by the Tribunal decision rendered in the case of Om Singh v. ITO in I.T.A. No. 1908/Ahd/2009 dated September 18, 2009. Respectfully following this Tribunal decision, we decide this issue in favour of the assessee and accordingly ground No. 6 of the Revenue’s appeal is rejected and ground No. 7 of the assessee is allowed because the entire amount was paid prior to the due date of filing of the return of income.

38. The next issue is raised by the assessee as per ground Nos. 5 and 6 regarding set off of loss of Rs. 468.34 lakhs of Dhuneta unit against profits of other eligible units. These grounds were not pressed by the assessee and accordingly rejected as not pressed.

39. The remaining grounds, i.e., ground Nos. 7 and 8 of the Revenue’s appeal and grounds Nos. 8 to 10 of the assessee’s appeal are general and do not call for any adjudication.

40. In the result, the appeal of the assessee is partly allowed and the appeal of the Revenue is dismissed.

41. Now, we take up the appeals for the assessment year 2006-07.

42. Ground No. 1 of the Revenue’s appeal is regarding deletion of dis allowance of Rs. 23,24,72,100 on account of sales commission paid under section 37 of the Income-tax Act, 1961. Both sides agreed that this issue is identical to ground No. 1 of the Revenue’s appeal in the assessment year 2005-06 and the same can be decided on similar lines. In the assessment year 2005-06, this issue was decided by us in favour of the assessee and accordingly in the present year also, this issue is decided in favour of the assessee. Ground No. 1 of the Revenue’s appeal is rejected.

43. The next issue is regarding dis allowance made by the Assessing Officer under section 14A out of which the learned Commissioner of Income-tax (Appeals) has deleted dis allowance of Rs. 1,23,21,379 on account of interest expenses but confirmed the dis allowance partly in respect of director’s remuneration, director’s fees and traveling expenditure towards earning of dividend income. Regarding this issue also, both sides agreed that this issue is identical to grounds Nos. 2 and 3 of the Revenue’s appeal and ground No. 2 of the assessee’s appeal in the assessment year 2005-06. In that year also, the ground of the Revenue as well as ground of the assessee were rejected. Accordingly, in this year also, ground No. 2 of the Revenue as well as ground No. 1 of the assessee’s appeal are rejected.

44. The next issue is regarding allowability of deduction under section 43B of Rs. 7,12,618 in respect of employees contribution to provident fund and Employees’ State insurance. Both sides agreed that in this year also, the entire amount was paid prior to the due date of filing of return of income and hence, this issue is identical to ground No. 6 of the Revenue’s appeal in the assessment year 2005-06. In that year, this issue was decided by us in favour of the assessee. Accordingly in the present year also, this issue is decided in favour of the assessee. Ground No. 3 of the Revenue is also rejected.

45. The next issue is regarding the action of the Assessing Officer in not reducing the conditional additional amount of Rs. 20 crores added in computation of income to cover any error, omission, etc. The same is as per grounds Nos. 2 and 3 of the assessee’s appeal whereas the Revenue has raised this issue as per ground No. 4 because the learned Commissioner of Income-tax (Appeals) has directed the Assessing Officer to allow deduction under section 80-IB of the Income-tax Act, 1961 of Rs. 19,16,20,416 out of additional undisclosed income of Rs. 20 crores during the survey under section 133A of the Income-tax Act, 1961.

46. Regarding the assessee’s ground Nos. 2 and 3, it was submitted by the learned authorized representative that this issue is directly and squarely covered in favour of the assessee by the Tribunal decision in group case in I.T.A. Nos. 3761 and 3762/Ahd/2008, I.T.A. No. 1368 and 1629/Ahd/2008 and he submitted copies of both these Tribunal decisions. The relevant paragraph 15 of this tribunal decision rendered in the case of Suzlon Infra Structure v. Asst. CIT in I.T.A. Nos. 3761-3762/Ahd/2008 is reproduced below :

“15. In view of the above facts and case laws referred to by both the sides and discussed above, we find that the assessee- company was subjected to survey action under section 133A of the Act on April 5, 2006 and during the course of survey action, the Department found many documents, books of account, records on electronic media and other materials, which were impounded. There was not a single piece of incriminating paper or document or evidence of any nature were found, which suggests that unaccounted/undisclosed income remains hidden or not likely to be disclosed to the Department. The assessee disclosed additional income of Rs. 7 crores with the condition that the assessee do not want to engage in long drawn protected litigation and want to buy mental peace and to maintain cordial relation with the Department and also to cover any likely errors, omissions, dis allowances, claims, etc., even the Assessing Officer could not find out any discrepancy in the impounded books of account, loose paper, documents, registers, records on electronic media such as CD, hard disk, floppy disk, etc. The Assessing Officer has accepted the voluntary disclosure without pointing out any mistake in the impounded documents. Specifically there is no income for which the assessee has made voluntary disclosure and the Department also could not point out any discrepancy in the books of account and the impounded materials. The voluntary disclosure was made during the course of posts survey proceedings, when the assessee- company filed letters dated June 21, 2006 and June 19, 2006, even though the assessee was not supplied the copies of impounded materials till the finalization of assessment. Even the assessee vide letter dated December 12, 2006 required the Department to provide photo copies of impounded materials but the impounded material was not supplied and disclosure was taken from the assessee- company. From the assessment order it is very clear that the very basis of acceptance of disclosure was that the assessee has made disclosure vide letter dated June 19 and 21, 2006 and paid taxes accordingly. There is no discussion in the assessment order about the incriminating materials found and impounded during the course of survey which indicate that there is undisclosed or unaccounted income emerging out of the same. In the absence of the same, the assessee has specifically retracted the voluntary disclosure during the course of assessment proceedings vide letter dated February 29 and March 17, 2008. The Honorable apex court in the case of CIT v. Shelly Products [2003] 261 ITR 367 (SC) has very categorically recorded a finding that similarly, if he has by mistake or inadvertence or on account of ignorance, included in his income any amount which is exempted from payment of income-tax, or is not income within the contemplation of law, he may likewise bring this to the notice of the assessing authority, which if satisfied, may grant him relief and refund the tax paid in excess, if any. Such matters can be brought to the notice of the concerned authority in a case when refund is under and payable and the authority concerned on being satisfied, shall grant appropriate relief. In the present case also, the assessee has specifically required the Assessing Officer and the Commissioner of Income-tax (Appeals), during the course of proceedings before the respective authorities, that there is no unaccounted or undisclosed income found during the course of survey or from the impounded material and the surrender was subject to the condition that the disclosure is made to cover any errors, omissions, discrepancy that may be found in any manner based on any entries, notes, scribbling, notings etc. in the books of account, other documents, loose papers, transactions, etc., forming part of impounded materials or identified from any other source, records etc., in the hands of the company or any other associated concern/person etc. The assessee has very categorically made these disclosures vide letter dated June 19, 2006 stating that the above disclosure may kindly be considered on logical and judicial interpretation of the definition of income under the Act and as per the normally accepted, interpreted, implemented and understood principles of income in commercial parlance as also based on the judicial pronouncements of various authorities on the subject matter. It may be clarified that the above referred disclosure is made with the condition that no penalty proceedings shall be initiated. In view of the above facts and circumstances, now it is to be discussed, whether the admission made by the assessee- company in the given facts and circumstances, binds the assessee or not. We find that the Honorable apex court has occasioned to deal with the issue of admission in the case of Chikkam Koteswara Rao v. Chikkam Subetan, AIR 1971 SC 1542, wherein the Honorable apex court has stated that an admission, however, binds the person making it only in so far as facts are concerned but an admission is not the conclusive proof of the matter admitted, though it may, in certain circumstances, operate as estoppel. But in such cases, there should be no doubt or ambiguity about the alleged admission. However, an admission or acquiescence on the part of the assessee cannot be the foundation of assessment where the income is returned under an erroneous impression or misconception of law. It is always open to the assessee to demonstrate and satisfy the authority concern that a particular income was not taxable in his hand and that it was returned under an erroneous impression in the present case before us, the assessee has proved that the disclosure made was neither the undisclosed/unaccounted income of the assessee- company and not even a single piece of incriminating paper or document or evidence of any nature was found from the impounded materials. Even the Assessing Officer has made addition just on the basis of statement recorded during the post survey proceedings under section 133A of the Act. There is no iota of evidence, which suggest that there is unaccounted/undisclosed income emerging out of the incriminating documents impounded during the course of survey. There is nothing on record which could co-relate such additional income/disclosure offered by the assessee- company during the course of survey with any other discrepancy. On these facts and circumstances, we allow the claim of the assessee.”

47. From the decision in the case of Suzlon Infrastructure (supra), we find that in that case also, the issue was regarding the reducing of conditional additional amount of Rs. 700 lakhs added in the computation of income to cover any error, omission, discrepancy, etc., made in reference to the All India Survey Action. Hence, it is seen that the facts in the present case are identical and, therefore, by respectfully following this Tribunal decision, we hold that in the present case also, the additional declaration made by the assessee cannot be added to the total income because in the present case also, there is no iota of evidence which suggests that there is unaccounted or undisclosed income emerging out of incriminating documents impounded during the course of survey and the addition was made by the Assessing Officer solely on the basis of the statement in the course of survey as in that case. Accordingly, grounds Nos. 2 and 3 of the assessee’s appeal are allowed.

48. Regarding the next ground No. 4 of the Revenue’s appeal, we feel that this has become infructuous because since no addition was made in respect of additional amount of Rs. 20 crores, on account of conditional disclosure, there is no ground to allow any additional deduction under section 80-IB of the Income-tax Act, 1961. Ground No. 4 of the Revenue’s appeal is allowed.

49. The next issue is regarding allow ability of deduction under section 80-IB in respect of interest on FDR and ICD. This issue has been raised by the assessee as per ground No. 4 and alternative claim is raised as ground No.5 as per which claim is that only net interest can be reduced from the profits of business.

50. Both sides agreed that these grounds are identical to grounds Nos. 3 and 4 of the assessee’s appeal in the assessment year 2005-06 and the same can be decided on similar lines. In that year, we have rejected ground No. 3 of the assessee’s appeal by holding that deduction under section 80-IB is not allowable in respect of interest income but only net interest income has to be reduced from the business profit. Accordingly, in the present year also, we reject ground No. 4 of the assessee and regarding ground No. 5, we hold that only net interest income has to be reduced from the profits of business for the purpose of computation of deduction allowable to the assessee under section 80-IB of the Income-tax Act, 1961. We also direct the Assessing Officer that while computing net interest income, only those expenses should be considered which are incurred for earning interest income. Ground No. 5 of the assessee’s appeal is allowed for statistical purposes.

51. Ground No. 5 of the Revenue’s appeal is regarding allow ability of deduction under section 80-IB in respect of duty drawback received by the assessee of Rs. 15,48,64,977. Both sides agreed that this issue is identical to ground No. 5 of the Revenue’s appeal in the assessment year 2005-06 and the same can be decided on similar lines. In that year, this issue was decided by us in favour of the assessee and accordingly in the present year also, this issue is decided in favour of the assessee. Ground No. 5 of the Revenue’s appeal is rejected.

52. Ground No. 6 of the Revenue’s appeal is regarding set off of loss of Rs.4,68,34,166 of Dhuneta unit against the profits of other eligible units. It is submitted by the learned authorized representative that this issue was raised by the assessee in the assessment year 2005-06 also as per grounds Nos. 5 and 6 regarding set off of the same loss. It is submitted that in that year, this ground was not pressed by the assessee and, therefore, the loss was set off in that year and hence, there is no question of any further set off in the present year.

53. The learned Departmental representative supported the orders of the authorities below.

54. We have considered the rival submissions, perused the material on record and have gone through the orders of the authorities below. We find that the amount of loss for which set off is in dispute is the same in the assessment years 2005-06 and 2006-07. In the assessment year 2005-06, this ground was not pressed by the learned authorized representative and accordingly rejected as not pressed. Hence, the loss of Dhuneta unit stands set off against profit of other eligible units in that year and therefore, there is no question of further set off in the present year if the entire amount of loss is set off in that year. This is not coming out from the record as to what was the actual amount of loss of Dhuneta unit and how much out of this was set off in the assessment year 2005-06. Hence, we set aside the order of the learned Commissioner of Income-tax (Appeals) on this issue and restore the matter back to the file of the Assessing Officer for a fresh decision. The Assessing Officer should find out what was the actual amount of brought forward loss of Dhuneta unit in the assessment year 2005-06 and how much loss out of this was set off in that year and if there is any brought forward loss remaining thereafter, only such loss can be set off in the present year against the profits of other eligible units but if the entire amount of such brought forward loss was set off in the assessment year 2005-06 then no further set off of loss can be made in the present year. This ground of the Revenue’s appeal is allowed for statistical purposes.

55. Remaining grounds Nos. 7 and 8 of the Revenue’s appeal and grounds Nos. 6, 7 and 8 of the assessee’s appeal are general for which no adjudication is called for.

56. In the result, the appeal of the Revenue is partly allowed for statistical proposes whereas appeal of the assessee is partly allowed.

57. In the combined result, the appeal of the Revenue in the assessment year 2005-06 is dismissed and for the assessment year 2006-07 is partly allowed for statistical purposes and both appeals of the assessee are partly allowed.

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Category : Income Tax (25488)
Type : Judiciary (10239)
Tags : ITAT Judgments (4601) section 14a (232)

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