Liberty India vs. CIT (Supreme Court)

DATE: (Date of pronouncement)
DATE: September 2, 2009 (Date of publication)

Click here to download the judgement (liberty_india_depb_duty_drawback_80IB.pdf)

DEPB and Duty Drawback are not eligible for deduction u/s 80-IB

The assessee claimed that profit from Duty Entitlement Passbook Scheme (DEPB) and Duty Drawback Scheme are “derived from the business of the Industrial Undertaking” and consequently eligible for deduction u/s 80-IB. On appeal by the assessee, HELD, rejecting the plea:

(1) The Act broadly provides for two types of tax incentives, namely, investment linked incentives and profit linked incentives. Ch VI-A essentially belongs to the category of “profit linked incentives”;

(2) When ss. 80-IA/80-IB refer to profits derived from eligible business, it is not the ownership of that business which attracts the incentives but the generation of profits (operational profits). It is for this reason that Parliament has confined deduction to profits derived from eligible businesses;

(3) Each of the eligible business in sub-sections (3) to (11A) 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);

(4) Ss. 80-IB/80-IA are a Code by themselves as they contain both substantive as well as procedural provisions. S. 80-IB allows deduction of profits and gains derived from the eligible business. The words “derived from” is narrower in connotation as compared to the words “attributable to”. By using the expression “derived from”, Parliament intended to cover sources not beyond the first degree;

(5) Though the object behind DEPB etc is to neutralize the incidence of customs duty payment on the import content of export product DEPB credit/duty drawback receipt do not come within the first degree source as the said incentives flow from Incentive Schemes enacted by the Government or from s. 75 of the Customs Act. Such incentives profits are not profits derived from the eligible business u/s 80-IB. They are ‘ancillary profits’ of such undertakings;

(6) Even as per AS-2 and the ICAI Guidance Note, duty drawback, DEPB benefits, rebates etc. cannot be credited against the cost of manufacture of goods but have to be shown as an independent source of income beyond the first degree nexus between profits and the industrial undertaking.