Timewell Technics Pvt. Ltd. v. Commissioner of C. Ex., Rajkot

Name Timewell Technics Pvt. Ltd. v.  Commissioner of C. Ex., Rajkot
Citation Civil Appeal Nos. 5820-5821 of 2005
Appellant Timewell Technics Pvt. Ltd.
Respondent Commissioner of C. Ex., Rajkot
Bench Shri M. V. Nayar and Shri D. T. Garasia
Acts Income Tax Act, 1961; Central Excise Act, 1944; Customs Act, 1962

The import-export is a largely monetizing sector in the Indian economy, and it is also one of the most taxed sectors. Import and export directly incline the GDP of a country. 

It was important to decipher if exporters, according to taxation laws in India, were liable for deductions from the Government in terms of tax and what could the new DEPB Scheme and Duty Drawback Scheme mean, and how these schemes are to be applied. The same time around which this case was heard, hence bringing about a turn in the taxing of the export companies. 

Keywords- Deductions; DEPB licenses; Duty Drawback Scheme

Introduction

It was around this time where the need to formulate rational taxing costs on companies that engaged in exports arose. Timewell Technics Pvt. Ltd. was a watch manufacturing company and it sought deductions under the said Sections of Income Tax Act, 1961, in order to reduce its burden financially. Or if it was to be taxed, under what source of income should it classify itself into. It was unclear about how the DEPB and the Duty Drawback Schemes are to be interpreted by the Income Tax Department or the Judiciary, and this case drew a fairly clear picture about the said schemes and how deductions are to be applicable.

Background Of The Case

Timewell Technics Pvt. Ltd. is a closely held Private Limited Company and is “classified as a company limited by shares”, incorporated on 08 February, 1995, in this suit, the Appellant. 

The Appellant had claimed for deduction of Rs. 73,60,557/- under Section 80 HHC of the Income Tax Act, 1961, and a deduction of Rs. 44,46,409/- under Section 80 IB of Income Tax Act, 1961. The Income Tax Assessing Officer, in an order passed on 24.03.2006 held that the Appellant is not liable for any deduction under either provisions of the Act, to the extent of such profits and gains which has been claimed and allowed under these Sections for any assessment year and in no case it shall exceed the profits and gains of such eligible business or undertaking. The Income Tax Assessing Officer also denied deduction u/s. 80IB in respect of DEPB (Duty Entitlement Pass Book) credit and thus, by virtue of Section 80IA (9), he reworked the deduction allowable/eligible u/s. 80IB (3) at Rs 6,98,341/-. For deduction eligible u/s. 80HHC, the Assessing Officer had held that, by virtue of Section 80 IA (9), the Assessee/Appellant will be entitled to deduction u/s. 80HHC to A.Y. 2003-04 the extent of profits and gains reduced by the deduction allowable u/s. 80IB subject to the condition that it shall not exceed the profits and gains of such eligible business. He therefore reworked the deduction u/s. 80HHC after excluding the amount of deduction allowable to the Assessee u/s. 80IB.Thus the deduction u/s. 80HHC was accordingly reworked out at Rs 70,11,577/-.

In the first appeal allowed to the Appellant, before the Commissioner of Income Tax, Ahmedabad, it was ruled that “the objective of the DEPB was to neutralize the exporter of extra expenditure incurred in the form of excise duty so as to make the goods competitive in the international market and whenever the assessee sells DEPB license it has to be treated as income derived from the business of industrial undertaking, since the terms is not profit derived from industrial undertaking but the profit derived from the business of industrial undertaking, which have a wider meaning. Regarding the claim of deduction u/s. 80HHC, the Commissioner of Income Tax, Ahmedabad, directed that the same shall stand modified accordingly”. 

Aggrieved by the order of the Commissioner of Income Tax, Ahmedabad, the Revenue Department, the Respondent in the present appeal, filed an appeal with the Appellate Tribunal, claiming that the Appellant is not liable to any deductions under any Sections of the Income Tax Act, 1961. The Appellate Tribunal vide order dated 08.08.2007, referring to the judgement of the Hon’ble Gujarat High Court in Commissioner Of Income Tax v. India Gelatine And Chemicals Ltd., 2004, held that the Revenue Department’s plea to refuse the deductions was dismissed. 

The Hon’ble Gujarat High Court in Commissioner Of Income Tax vs India Gelatine And Chemicals Ltd., 2004, quoting Section 36 of the Central Excise Act, 1944, held that “The object of the duty drawback scheme is to reimburse exporters for tariffs paid on the imported raw materials and intermediates and Central excise duties paid on domestically produced inputs which enter into export production. Customs duties and excise duties on inputs raise the cost of production in industries and thereby affect the competitiveness of exports. Therefore, exporters need to be assisted for neutralizing the escalation in their costs attributable to such customs and excise duties. Duty drawback is, therefore, intended to reduce the cost of production. Hence, duty drawback is an integral part of the pricing of the goods and, therefore, part of the cost of production of the industrial undertaking and, therefore duty drawback has to be treated as “derived from” the industrial undertaking”. [1]

The Appellant approached the Appellate Tribunal for a cross appeal, under Section 80IA(9), of the Income Tax Act, 1961, this Tribunal, on the basis of the decision of the Hon’ble Supreme Court in JCIT Vs Mandideep Engineering & Packaging Industries Pvt Ltd. held that “Section 80HH and 80I of the Income tax Act 1961 are independent and therefore, deductions can be claimed by a newly established industrial undertaking under both the section 80HH and 80I on the gross total income”. Thus, allowing deductions claimed by the Appellant. 

The Hon’ble Supreme Court in JCIT v. Mandideep Engineering & Packaging Industries Pvt Ltd. held that, “while computing the income under the head “income from other sources” under Section 56 of the Income Tax Act, only those deductions are allowed to be deducted which are enumerated under Section 57 of the Act. The deductions claimed under Section 36 of the Act cannot be allowed to be deducted from the income from other sources while computing the same under Section 56 of the Act. As per Section 57(iii) only those expenditures which are wholly or exclusively incurred for earning the income from other sources are allowed to be deducted from the income from other sources”. [2]

Against this order, the Revenue Department filed an appeal u/s. 260A of the Income Tax Act, 1961, before the Hon’ble High Court of Gujarat, raising only one ground “Whether the Tribunal is right in law and on facts in confirming the order passed by the Commissioner of Income Tax, Ahmedabad, in deleting the disallowance of deduction u/s. 80IB”.

It is seen that the Revenue Department is aggrieved by the order of the Appellate Tribunal favouring the Assesse/Appellant, with respect to the Assesse’s claim of deduction under Section 80IB on sale of DEPB licenses, on the basis of the decision of the Hon’ble High Court of Gujarat in the case CIT Vs India Gelatine & Chemicals Ltd, 2005, and hence this appeal.

Issues

1. Whether the Appellant is liable for deduction under Section 80HHC and 80IB?

Related Provisions

Income Tax Act, 1961- Section 56, Section 57, Section 80HH, Section 80I, 

Section 80 IA (9), Section 80 IB, Section 80 IB (3), Section 80HHC, Section 260A

Central Excise Act, 1944- Section 75

Customs Act, 1962- Section 75

Judgement

The Hon’ble Supreme Court in its judgement while referring to the decision laid down in Liberty India v. CIT, where it was held that Duty Entitlement Pass Book are incentives which flow from the schemes framed by the Central Government or from Section 75 of the Customs Act, 1962 and hence, incentive profits are not profits derived from the eligible business under Section 80IB. They belong to the category of ancillary profits of such undertakings.  

Hence, the Hon’ble Supreme Court held that the Appellant is not liable for claim of deduction under Section 80IB on sale of DEPB licenses and accordingly, the appeal of the Revenue Department is allowed. [3]

The Court stipulated that the Assessment Year 2003-04 duty drawback receipt lies in Section 75, Customs Act, 1944 and Section 37 of Central Excise Act, 1944. In the circumstances, profits derived by way of such incentives does not fall within the expression “profits derived from industrial undertaking” under Section 80IB. Further, duty drawback, rebate, etc 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. Therefore, duty drawback, DEPB benefits, rebates etc cannot be credited against the cost of manufacture of goods debited in the P&L account for purposes of Section 80IA / 80IB as such remissions (credits) would constitute independent sources of income beyond the first-degree nexus between profits and the industrial undertaking.[4]

The Hon’ble Supreme Court held that Timewell Technics Pvt. Ltd. is not liable for any deductions under any provision of the Income Tax Act, 1961, ruling against the previous judgements.

Concepts Highlighted 

DEPB Scheme- the Duty Entitlement Pass Book Scheme is an incentive scheme on exports in order to neutralize or lessen the burden on exporters, the incidence of basic custom duty.

“An exporter is eligible to claim credit as a specified percentage of value of exported product and is available at a rate of exported product as may be determined by the Director General of Foreign Trade (DGFT). The credit amount in DEPB only entitles you to adjust that amount for payment of customs duty and is not permitted to be withdrawn or adjusted in some other manner. There is no bar for transfer of this credit to another person and from him to another person i.e. this credit amount is freely tradable.”

Conclusion

This judgement by the Hon’ble Supreme Court of India resolves the dilemma about the taxing on export goods and export companies, while also classifying taxable export goods and companies based on the DEPB and the Duty Drawback Schemes. It aims to provide a simpler classification into the type of income further easing the tax paying procedure and for calculation of deductions, if any should apply. 

References

TIMEWELL TECHNICS PVT LTD

https://economictimes.indiatimes.com/company/timewell-technics-pvt-ltd-/U72200GJ1995PTC024522

M/S Liberty India v. Commissioner Of Income Tax, Karnal, 2009

https://indiankanoon.org/doc/571205/

C.I.T. v. Mandideep Engg. & Packing, 2013

https://indiankanoon.org/doc/138056056/

Commissioner Of Income Tax v. India Gelatine And Chemicals Ltd., 2004

https://indiankanoon.org/doc/16096/

DEPB. It’s Taxability

http://www.legalserviceindia.com/articles/depb.htm


[1] Commissioner of Income Tax v. India Gelatine And Chemicals Ltd., 2004

[2] C.I.T. vs Mandideep Engg. & Packing, 2013

[3] M/S Liberty India v. Commissioner of Income Tax, Karnal, 2009

[4] M/S Liberty India v. Commissioner of Income Tax, Karnal, 2009

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