Topman Exports vs. ITO (ITAT Mumbai Special Bench)

DATE: (Date of pronouncement)
DATE: August 18, 2009 (Date of publication)

Click here to download the judgement (topman_exports_80HHC_DEPB.pdf)

For s. 80HHC r.w.s 28(iiid), only DEPB ‘profits’ to be reduced / added & not sale value

Expl. (baa) to S. 80HHC defines the term “profits of the business” to mean the profits under the head “profits and gains” as reduced by 90% of the sum referred to in s. 28 (iiid). The 2nd & 3rd Provisos to s. 80HHC (3) provide that the profits computed there under shall be increased by the said 90% amount computed in the proportion of export turnover to total turnover. S. 28 (iiid) refers to “any profit on the transfer of the Duty Entitlement Pass Book Scheme (‘DEPB’)”. The Special Bench had to consider whether the entire amount received on sale of DEPB entitlements represents ‘profits’ chargeable u/s 28 (iiid) or the profit referred to therein requires any artificial cost to be imputed. HELD deciding in favour of the assessee:

(i) The argument of the Revenue that DEPB is a post export event and has no relation with the purchase of goods cannot be accepted. There is a direct relation between DEPB and the customs duty paid on the purchases. For practical purposes, DEPB is a reimbursement of the cost of purchase to the extent of customs duty;

(ii) The DEPB benefit (face value) accrues and becomes assessable to tax when the application for DEPB is filed with the concerned authority. Subsequent events such as sale of DEPB or making imports for self consumption etc are irrelevant for determining the accrual of the income on account of DEPB;

(iii) Though s. 28 (iiib) refers to a “cash assistance against exports”, it is wide enough to cover the face value of the DEPB benefit;

(iv) S. 28 (iiid) which refers to the “profits on transfer of the DEPB” obviously refers only to the “profit” element and not the gross sale proceeds of the DEPB. If the Revenue’s argument that the sale proceeds should be considered is accepted there would be absurdity because the face value of the DEPB will then get assessed in the year of receipt of the DEPB and also in the year of its transfer;

(v) Consequently, only the “profit” (i.e. the sale value less the face value) is required to be considered for purposes of s. 80HHC.