Income Tax Act, 1961 Section 80-IB

ORDER

A.N. Pahuja, AM.

1. This appeal filed on 24th Feb., 2011 by the assessee against an order dt. 12th Nov., 2010 of the learned CIT(A), Bareilly, raises the following grounds :

1. That on the facts and circumstances of the case and in the law, the CIT(A) has grossly erred in denying deduction under s. 80-IB on Cenvat availed;

2. That on the facts and circumstances of the case and in the law, the CIT(A) has grossly erred in not appreciating the clear fact that Cenvat does not arise out of any incentive scheme; Cenvat is not realized in cash and that the same arises only by way of book entry the net impact of which is nil in the P&L a/c;

3. That on the facts and circumstances of the case and in the law, the CIT(A) has grossly erred in not appreciating that the assessees claim of deduction under s. 80-IB on Cenvat availed is covered by the decision of Delhi High Court in the case of CIT vs. Dharam Pal Prem Chand Ltd. : (2009) 221 CTR (Del) 133 : (2008) 16 DTR (Del) 130 : (2009) 317 ITR 353 (Del) being subsequently approved by the apex Court.

That the appellant craves leave to add to and/or amend, modify or withdraw the grounds outlined above before or at the time of hearing of the appeal.

Facts, in brief, as per relevant orders are that e-return declaring income of Rs. 6,86,420 filed on 13th Oct., 2007 by the assessee, manufacturing mentha products, after being processed under s. 143(1) of the IT Act, 1961 (hereinafter referred to as the Act) was selected for scrutiny with the service of a notice under s. 143(2) of the Act, issued on 25th Sept., 2008. During the course of assessment proceedings, the AO noticed that the assessee claimed deduction under s. 80-IB of the Act. To a query by the AO, the assessee replied that the unit is eligible for deduction under s. 80-IB(3)(ii) of the Act, since it fulfilled all the stipulated conditions and similar claim have been allowed in asst. yrs. 2001-02 and 2003-04. To a further query by the AO, seeking to disallow deduction under s. 80-IB on Cenvat, the assessee replied that the Cenvat credit was merely a book entry and did not comprise any real income as such. The unit received Cenvat on excise duty paid on purchase of raw material and accordingly, excise duty on the purchases is debited in the Cenvat adjustment (recoverable amount). The excise duty payable on sale of goods is adjusted against this account alone. However, during the year under consideration, they had shown the purchases in P&L a/c, including excise duty instead of directly debiting the duty in Cenvat adjustment account and Cenvat availed on raw material consumed has been credited in the P&L a/c as Cenvat availed and debited in the Cenvat adjustment recoverable account. Since nothing has been received by the assessee as incentive from the Government or from any other agency, value of closing stock of raw material inclusive of excise duty paid on purchases remains the same. The Cenvat availed is nothing, but merely a presentation of Cenvat of excise duty through P&L a/c. Therefore, deduction under s. 80-IB of the Act is allowable, the assessee submitted. Inter alia, the assessee enclosed calculation of Cenvat availed. However, the AO did not accept these submissions and disallowed the claim for deduction under s. 80-IB of the Act on the ground that Cenvat is nothing, but like a scheme of duty drawback while following the decision of Honble Supreme Court in the case of Liberty India vs. CIT : (2009) 225 CTR (SC) 233 : (2009) 28 DTR (SC) 73 : (2009) 317 ITR 218 (SC)

2. On appeal, the learned CIT(A) while referring to the decision in Liberty India (supra) upheld the findings of the AO in the following terms :

In this case the main issue before the apex Court was regarding treatment of incentive received from the Government in the form of DEPB or duty drawback. This benefit increased the profit of the owner of the enterprise and not of the industrial undertaking. The focus in the said decision was to lay down the ratio that trade discounts, rebate, duty drawback, and such similar items are deducted in determining the costs of purchase. Therefore, they should not be treated as adjustment (credited) to cost of purchase or manufacture of goods. They should be treated as separate items of revenue or income and accounted for accordingly. It was, therefore, held that for the purposes of AS-2, Cenvat credits should not be included in the cost of purchase of inventories of raw material consumed. This decision was passed after the decision in the case of CIT vs. Dharam Pal Prem Chand Ltd. : (2009) 221 CTR (Del) 133 : (2008) 16 DTR (Del) 130 : (2009) 317 ITR 353 (Del) reversing the ratio laid down by the Delhi High Court regarding treatment of exemption of excise duty by means of Cenvat adjustment account. The Honble apex Court has held that any incentive or rebate including reimbursement amounts to separate items of income or revenue to be accounted for in the P&L a/c accordingly.

3. The assessee is now in appeal before us against the aforesaid finding of the learned CIT(A). At the outset, the learned Authorised Representative on behalf of the assessee while relying upon decision of Honble Delhi High Court in the case of CIT vs. Dharam Pal Prem Chand Ltd. : (2009) 221 CTR (Del) 133 : (2008) 16 DTR (Del) 130 : (2009) 317 ITR 353 (Del); decision dt. 29th April, 2011 of the Tribunal in the case of J.K. Aluminium Co. vs. ITO in ITA No. 3303/Del/2010; decision dt. 4th Nov., 2011 of the Tribunal, Mumbai Bench in Addl. CIT vs. Total Packaging Services in ITA No. 5364/Mum/2009, following the decision of Honble Gauhati High Court in the case of CIT vs. Meghalaya Steels Ltd. : (2011) 241 CTR (Gau) 384 : (2011) 55 DTR (Gau) 27 : (2011) 332 ITR 91 (Gau), contended that Cenvat scheme is only a mechanism to compute final excise duty on sales, based on the value addition undertaken by the seller and does not represent income liable to be taxed. While explaining the nature of entries made in the books of accounts and referring to page Nos. 3 and 4 of the paper book and the decision of Honble apex Court in the case of CIT vs. Indo Nippon Chemicals Co. Ltd. : (2003) 182 CTR (SC) 291 : (2003) 261 ITR 275 (SC) , the learned Authorised Representative contended that Cenvat scheme is totally distinguishable and distinct from DEPB and the decision of Honble apex Court in the case of Liberty India (supra) relied upon by the AO and the learned CIT(A) is not applicable to the facts and circumstances in the case under consideration. On the other hand, the learned Departmental Representative supported the findings of the learned CIT(A) while contending that Cenvat scheme is akin to DEPB and thus decision of Honble apex Court in the case of Liberty India (supra) was squarely applicable.

4. We have heard both the parties and gone through the facts of the case as also the aforecited decisions relied upon by both the parties. Though the AO/learned CIT(A) and the learned Departmental Representative pointed out that Cenvat scheme is similar to DEPB scheme, they did not analyse the terms and conditions of the two schemes in order to establish their similarity. As observed by the Honble apex Court in their decision dt. 31st Aug., 2009 in Liberty India (supra), 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 product as per basic customs duty and special additional duty payable on such deemed imports. After analyzing the DEPB scheme, Honble apex Court concluded that DEPB and duty drawback are incentives which flow from the schemes framed by Central Government or from s. 75 of the Customs Act, 1962 and hence, incentive profits are not profits derived from the eligible business under s. 80-IB of the Act. They belong to the category of ancillary profits of such undertaking, Honble apex Court observed.

5.1 As regards duty drawback, it was observed in Liberty India (supra) that s. 75 of the Customs Act, 1962, and s. 37 of the Central Excise Act, 1944, empower 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-s. (2) of s. 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 fact situation relevant in respect of each of various classes of goods imported. Basically, the source of the duty drawback receipt lies in s. 75 of the Customs Act and s. 37 of the Central Excise Act. After analysing the concept of remission of duty drawback and DEPB, the Honble apex Court held 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 and therefore, the profits derived by way of such incentives do not fall within the expression "profits derived from industrial undertaking" in s. 80-IB of the Act.

5.2 Now as regards Cenvat, it is an acronym for Central Value Added Tax. The scheme was originally called Modvat (modified VAT) and the purpose of this was to allow the manufacturer to take credit of excise duty paid on raw materials that they use to make their products. The Modvat scheme was later renamed Cenvat; it also changed slightly because Cenvat had less restrictions than Modvat. In terms of Cenvat Credit Rules, 2004 (copy placed in paper book on pp. 5-9) a manufacturer or producer of final products and a provider of output service is allowed to take credit (known as Cenvat credit) of the duty of excise, as mentioned in the rules, paid on specified inputs and capital goods used in or in relation to the manufacture of specified final products. The Cenvat credit so allowed can be utilized for payment of : (i) any duty of excise on any final product; or (ii) an amount equal to Cenvat credit taken on inputs, if such inputs are removed as such or after being partially processed; or (iii) an amount equal to the Cenvat credit taken on capital goods, if such capital goods are removed as such; or (iv) service-tax on any output service, as per the conditions laid down in the rules.

5.3 In the instant case before us, not only that the learned Departmental Representative did not demonstrate before us as to how the schemes relating to DEPB and duty drawback on one hand and Cenvat on the other, are similar, as observed by AO/CIT(A), she did not even dispute the facts that net impact of entries made by the assessee in the P&L a/c is nil and that the assessee did not receive any incentive on this account from the Government, as revealed from computation on pp. 3 and 4 of the paper book filed by the assessee.

5.4 Even otherwise, as is apparent from the facts of the case, the assessee received Cenvat on excise duty paid on purchases of raw material and debited in the Cenvat adjustment recoverable account. The excise duty payable on sales was also adjusted against the said Cenvat adjustment recoverable account. The assessee reflected purchases in the P&L a/c inclusive of excise duty and consequently Cenvat availed during the year has been credited in the P&L a/c. As is apparent from undisputed calculations detailed on pp. 4 and 5 of the paper book, impact of Cenvat is nil on the profits for the purpose of deduction under s. 80-IB of the Act.

5.5 Honble jurisdictional High Court while adjudicating a claim for deduction under s. 80-IB of the Act on account of receipts relating to duty drawback, explained the difference between the language used in ss. 80HH and 80I of the Act on the one hand and s. 80IB of the Act on the other, in the following terms :

A perusal of the above would show that there is a material difference between the language used in s. 80HH of the Act and s. 80IB of the Act. While s. 80HH requires that the profits and gains should be derived from the industrial undertaking, s. 80IB of the Act requires that the profits and gains should be derived from any business of the industrial undertaking. In other words, there need not necessarily be a direct nexus between the activity of an industrial undertaking and the profits and gains.

5.6 Following the view taken in the aforesaid decision, Honble jurisdictional High Court in CIT vs. Dharam Pal Prem Chand Ltd. (supra) in the context of deduction under s. 80IB of the Act on the amount of excise duty refund, concluded on page No. 362 as under :

4.9 In these circumstances, the submission of the learned counsel for the Revenue is that there is no direct nexus between refund of excise duty paid or that the refund of excise duty paid was dependent on the said notifications is, to say the least, completely untenable. As a matter of fact as found by the Tribunal as well as the CIT(A) in the instant case, the assessee has adopted an incorrect accounting methodology. The assessee as found by the authorities below had on the payment of excise duty debited the P&L a/c and upon receipt of refund credited the P&L a/c. The net effect on the profit and loss was nil on account of the methodology followed by the assessee. There was thus, according to us, no reason to exclude the amount of refund of excise duty in arriving at profit derived for the purposes of claiming deduction under s. 80IB of the Act.

5.6.1 The Court further at p. 364 held :

4.14 The fourth case cited by the learned counsel for the Revenue was CIT vs. Ritesh Industries Ltd. : (2004) 192 CTR (Del) 81 : (2005) 274 ITR 324 (Del) . A Division Bench of this Court was called upon to construe the provisions of s. 80I of the Act in the context of the claim of the assessee for inclusion of amounts received as duty drawback for the purposes of ascertainment of profits or gains derived from the industrial undertaking within the meaning of provision of s. 80I of the Act. The Division Bench of this Court applying the ratio of the judgments of the Supreme Court in the cases of Sterling Foods (supra), Cambay Electric Supply (supra) as also the judgment of Madras High Court in the case of CIT vs. Viswanathan & Co. : (2003) 181 CTR (Mad) 335 : (2003) 261 ITR 737 (Mad) came to the conclusion that duty drawback could not be regarded as profit or gain derived from an industrial undertaking as the immediate and proximate source was not the industrial undertaking but the claim for duty drawback. The view of the Division Bench of this Court to which one of us (i.e. Badar Durrez Ahmed, J.) was a party, was based in the context of the facts obtaining in the said case. In the instant case the proximity with industrial activity is clear and there is no scope for holding otherwise.

5.6.2 At p. 366, the jurisdictional High Court held :

5.1 An important aspect of the matter which clearly distinguishes the instant case from the facts of the other cases cited before us is, that the net effect of the accounting methodology employed by the assessee was that it did not, in sum and substance, impact the derivation of profits and gains ascertainable for the purposes of deduction under s. 80IB of the Act.

5.2 As noted by the Division Bench of this Court in CIT vs. Eltek SGS (P) Ltd. : (2008) 215 CTR (Del) 279 : (2008) 3 DTR (Del) 241, the language of s. 80IB is materially different from those obtaining in the cases cited by the counsel for the Revenue in Sterling Foods (supra), Cambay Electric Supply (supra), J.B. Exports (supra), Vishwanathan & Co. (supra) as well as Ritesh Industries (supra). The language with respect to the provisions referred to in such cases except Cambay Electric Supply (supra), read as profits and gains derived from an industrial undertaking as against the language appearing in s. 80IB of the Act which is profits and gains derived from any business. We respectfully agree with the view of the Division Bench in Eltek SGS (supra) which has held that the test of proximity, i.e., direct nexus with the industrial activity is not necessary while claiming deduction under s. 80IB of the Act.

5.7 Following the aforesaid decision of Honble jurisdictional High Court in Dharam Pal Prem Chand Ltd. (supra) against which SLP is stated to have been dismissed, a Co-ordinate Bench in their decision dt. 29th April, 2011 in J.K. Aluminium Co. vs. ITO in ITA No. 3303/Del/2010 concluded in the context of claim for deduction under s. 80IB in relation to refund of excise duty as under :

6.5 As we have observed from the papers in the paper book, the exempt amount has been paid as is evident from the orders granting the refund which are placed. The Supreme Court after examining the affidavits passed on 11th Jan., 2010 in the case of CIT vs. Dnaram Pal Prem Chand Ltd. and after hearing both the parties, eventually dismissed the appeal of the Department against order of Delhi High Court on 22nd Feb., 2010. As is clear, the Notification dt. 14th Nov., 2002 exempts the amount of excise duty paid by the assessee as such excise duty per se is not leviable. In order to ensure proper control over the transactions, the notification only requires the manufacturers to first deposit the excise duty and then claim the refund of the same next month. Thus the refund is assessees own money itself in a way security deposit which is being refunded on submission of the evidence depositing the same. Therefore, in our view this is not an income at all. Therefore, the AO, in our view, was not justified in making a separate addition of income and thereby denying the relief eligible under s. 80IB of the Act on that amount.

7. Before we part with the matter, we think it fit to deal with the contention of the Revenue that the decision of the apex Court in Liberty India, (supra) concludes the issue in favour of the Revenue. We may say the judgment in the case of Liberty India was on the issue of DEPB/duty drawback which was an incentive and was not concerned with the refund of the amount paid. The Court in that case has negated the contention of the assessee at p. 234 by observing as under :

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-s. (2) of s. 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 fact situation relevant in respect of each of various classes of goods imported.

7.1 The case of the assessee before us is concerned with the refund of excise duty and consideration of the same for deduction under s. 80IB of the Act. The scheme as well as the methodology of the operations are all discussed so as to highlight the distinction of this case from the decision of Liberty India (supra). In any case, the decision of CIT vs. Dharam Pal Prem Chand Ltd. : (2009) 221 CTR (Del) 133 : (2008) 16 DTR (Del) 130 : (2009) 317 ITR 353 (Del) of Delhi High Court has been affirmed by the Supreme Court which fact itself cannot be ignored as the case of Dharampal Premchand Ltd. (supra) was concerned with the issue relating to s. 80IB of the Act.

5.8 We further find that while examining the issue of deduction under s. 80IB in relation to the amount of Modvat credit, the Tribunal in the case of Addl. CIT vs. Total Packaging Services (supra), while referring to the decision of Honble Gauhati High Court in CIT vs. Meghalaya Steels Ltd. (supra), concluded in their order dt. 4th Nov., 2011 in ITA No. 5364/Mum/2009 as under :

6.1 On the issue whether this benefit of Modvat credit is the income derived from the industrial undertaking or not, the Honble Gauhati High Court in the case of Meghalaya Steels Ltd. (supra), has held as under : Insofar as the second question is concerned, the Central excise duty refund claimed by the assessee is on the basis of an exemption notifications issued by the Ministry of Finance (Department of Revenue) being Notification No. 32 of 1999 and Notification No. 33 of 1999 both dt. 8th July, 1999. In terms of these notifications, a manufacturer is required to first pay the Central excise duty and thereafter claim a refund on fulfilment of certain conditions. In the next month, after the claim, the Central excise duty so deposited is refunded to the assessee if the conditions laid down in the notifications are fulfilled. In the present case, there is no dispute that the assessee was entitled to the Central excise duty refund.

The Central Board of Excise and Customs in its Circular dt. 19th Dec, 2002 clarified that the refund is not on account of excess payment of excise duty but is basically designed to give effect to the exemption and to operationalise the exemption given by the notifications. In that sense, the Central excise duty refund does not appear to bear the character of income since what is refunded to the assessee is the amount paid under the modalities provided by the Department of Revenue for giving effect to the exemption notifications. There is also nothing to suggest that the assessee has recovered or passed on the excise duty element to its customers.

Even assuming the refund does amount to income in the hands of the assessee, a profit or gain directly derived by the assessee from its industrial activity, the payment of Central excise duty has a direct nexus with the manufacturing activity and similarly, the refund of the Central excise duty also has a direct nexus with the manufacturing activity. The issue of payment of Central excise duty would not arise in the absence of any industrial activity. There is, therefore, an inextricable link between the manufacturing activity, the payment of Central excise duty and its refund. In the circumstances, we are of the opinion that question No. 2 must be answered in the affirmative in favour of the assessee and against the Revenue.

5.2 The Honble High Court has decided the issue in favour of the assessee after considering the decision of the Honble Supreme Court in the case of Liberty India vs. CIT : (2009) 225 CTR (SC) 233 : (2009) 28 DTR (SC) 73 : (2009) 317 ITR 218 (SC). Accordingly, following the decision of the Honble Gauhati High Court in the case of Meghalaya Steels Ltd. (supra), we decide this issue against the Revenue and in favour of the assessee."

6. In the light of view taken in the aforesaid decisions, especially when the net effect of the accounting methodology employed by the assessee, as revealed from calculations on pp. 3 and 4 of the paper book is that, it did not, in sum and substance, impact the derivation of profits and gains ascertainable for the purposes of deduction under s. 80IB of the Act while the Revenue has not demonstrated before us as to how the Cenvat scheme is parallel to the scheme of DEPB or duty drawback, we have no hesitation in holding that the learned CIT(A) was not justified in upholding the disallowance of deduction under s. 80IB of the Act made by the AO in relation to the Cenvat credit of excise duty. In view thereof, ground Nos. 1 to 3 in the appeal are allowed.

7. No additional ground having been raised before us in terms of residuary ground in the appeal, accordingly, this ground is dismissed.

8. No other argument or plea was made before us. In the result, appeal is allowed.