ITA No. 694 of 2009 -1- IN THE HIGH COURT OF PUNJAB AND HARYANA AT CHANDIGARH ITA No. 694 of 2009 Date of Decision: 14.7.2010 The Commissioner of Income Tax Karnal ....Appellant. Versus Dalbir Singh Proprietor M/s Sunny Exports ...Respondent. CORAM:- HON'BLE MR. JUSTICE ADARSH KUMAR GOEL. HON'BLE MR. JUSTICE AJAY KUMAR MITTAL. PRESENT: Mr. Sukant Gupta, Advocate for the appellant. ADARSH KUMAR GOEL, J. 1. This appeal has been preferred by the revenue under Section 260A of the Income Tax Act, 1961 (in short “the Act”) against the order of the Income Tax Appellate Tribunal, Delhi Bench “B”, New Delhi (hereinafter referred to as “the Tribunal”) in ITA No. 2440/Del/2007 dated 27.3.2009 for the assessment year 2004-05 proposing to raise the following substantial question of law:- “Whether in the facts and in the circumstances of the case, the ITAT was right in adopting the total export turnover to be below Rs.10 crores after excluding the sales through export house and allowing deduction u/s 80HHC of the Income Tax Act, 1961 to the assessee, who is a supporting manufacturer, in the ITA No. 694 of 2009 -2- same manner, as in the case of direct exporter, treating the supporting manufacturer at par with direct exporter and ignoring the provisions of section 80HHC (1A) read with section 80HHC (3A) read with clause (baa) of explanation to section 80HHC of the Act?” 2. Facts necessary for adjudicating the present controversy may be noticed. The assessee is engaged in the business of manufacturing and exports of various items and is a supporting manufacturer as well as direct exporter. Deduction under Section 80HHC of the Act had been claimed on both the counts. The Assessing Officer recorded that during the course of assessment proceedings while claiming deduction under Section 80HHC of the Act, the assessee had ignored the provisions of Section 80HHC (1A) read with Section 80HHC (3A) of the Act which governs the deduction under Section 80HHC to the supporting manufacturer. The Assessing Officer disallowed the claim of the assessee under Section 80HHC of the Act on export incentive of Rs.1,65,15,813/- as Duty Entitlement Pass Book (DEPB) and assessed income at Rs.3,23,57,190/- against declared income of Rs.2,32,10,000/-. On appeal by the assessee, the CIT (A) held that the assessee was entitled to the deduction under Section 80HHC of the Act in respect of Duty Draw Back (DDB) as a supporting manufacturer and did not allow deduction on DEPB in view of the amendment to Section 28 of the Act w.e.f 01.04.1998 as the turnover of the assessee was above Rs.10 crores. The CIT (A) recorded as under:- ITA No. 694 of 2009 -3- “5. ......The assessee is a manufacturer and exporter of handloom products, where assessee manufactured the products and exported as well as supplied to another exporter who finally exported these products, therefore, the assessee is a direct exporter as well as supporting manufacturer and exporter. The assessee has received a disclaimer certificate from the main exporter, M/s IKEA Trading (India) Ltd. for the exports made as supporting exporter for claiming benefit u/s 80 HHC. The assessee has claimed to have credited Rs.32,58,700/- as Duty Draw Back and Rs.1,58,26,395/- as DEPB in its books of accounts as per the certificate from a chartered accountant dated 05.03.2007 filed by the assessee during appellate proceedings. The assessee has further claimed that the said total amount credited on account of Duty Draw Back and DEPB related to the good supplied to another exporter, M/s IKEA Trading (India) Ltd., on which AO has not allowed deduction u/s 80HHC, whereas M/s IKEA Trading (India) Ltd. exported the goods and gave disclaimer certificate to the assessee for claiming deduction u/s 80HHC. The export turn over of the assessee for F.Y. 2003-04 is Rs.23,62,25,052/- out of which Rs.21,38,27,194/- is as supporting exporter as per the certificate of the ITA No. 694 of 2009 -4- chartered accountant dated 05.03.2007. The assessee has claimed deduction u/s 80HHC as supporting manufacturer and exporter also and also claimed Duty Draw Back and DEPB as part of the export income and claimed deduction u/s 80HHC on Duty Draw Back and DEPB. The assessee has also clarified regarding 80HHC on DEPB with respect to the amendment to section 28 by Taxation Law (Amendment) Act, 2005, that its turnover is more than Rs.10 crores, but still it is eligible for deduction u/s 80HHC on DEPB even after amendment of section 28 and section 80HHC. 6. The similar issue has been considered by my predecessor in his order dated 29.06.2005 in Appeal No. IT/22/PPT/CIT (A)/KNL/2005-06, A.Y. 2003-04 in the case of the assessee vide para 2 of the Appeal Order in which assessee has been allowed deduction u/s 80HHC as supporting manufacturer and exporter also on duty draw back. I have considered the submissions of the assessee and facts of the case. The facts and circumstances of the case are similar to the case of the assessee in A.Y. 2003-04. Therefore, respectfully following the decisions in Appeal for A.Y. 2003-04, the assessee is eligible for deduction u/s 80HHC as supporting manufacturer and exporter and ITA No. 694 of 2009 -5- accordingly, assessee is allowed deduction u/s 80HHC on the Duty Draw Back received as supporting manufacturer and exporter also. But no deduction is allowed u/s 80HHC on the amount of DEPB received by the assessee because the turnover of the assessee is more than Rs.10 crores and the rate of DEPB is also more than the rate of Duty Draw Back, therefore, it does not fulfil the conditions mentioned in the provisos to sub-section (3) of section 80HHC as introduced by the Taxation Laws (Amendment) Act, 2005. In result, the ground of appeal of the assessee is partly allowed.” 3. Two cross appeals were filed, one by the assessee and the other by the revenue before the Tribunal. The Tribunal while deciding the issue regarding duty draw back involved in the revenue's appeal in favour of the assessee held as under:- “8. The assessee before us also is a supporting manufacturer as understood for the purposes of Section 80HHC (1A) and has exported goods through the Export House. There is no dispute that the export house has given the necessary Disclaimer Certificate in respect of the export turn over in question. The CIT (Appeals) has recorded a finding which is not in dispute that the assessee company has exported goods directly as per the orders of the exports house and that it has received the duty draw ITA No. 694 of 2009 -6- back directly from the Government. The above fact position concerning the exports made through export house is not controverted by the Revenue. In this background a perusal of the order of the Tribunal in the case of Eastern Leather Products Pvt. Ltd. (supra) shows that the stand of the assessee deserves to be upheld. To the similar effect are also the subsequent decisions of the Tribunal in the case of Sharda Exports (supra). In so far as the reliance placed by the learned DR on the decision of the Hon'ble Kerala High Court in the case of Jantha Cashew Exporting Company (supra) is concerned, we have perused the said decision carefully. On this aspect the learned counsel for the respondent assessee has submitted that the said decision had since been considered by the Delhi Bench of the Tribunal in the case of Sharda Exports, ITA 3921/Del/01 (supra) and it has been noted that the same is not applicable to the instant controversy. In our considered view the judgment of the Hon'ble Kerala High Court is not in conflict with the decision of the Tribunal in the case of Eastern Leather Pvt. Ltd. (supra). In fact the Hon'ble High Court duly noted the decision of the Tribunal in the case of Eastern Leather Products Pvt. Ltd. (supra) and held that the said decision did not relate to the controversy ITA No. 694 of 2009 -7- before the Hon'ble High Court. The controversy before the Hon'ble High Court was whether sales through export house also constituted export turnover for the computation of relief in terms of proviso to Section 80HHC (3) or not. Ostensibly the said controversy has not been addressed to by the Tribunal in the case of Eastern Leather Products Pvt. Ltd. (supra) and therefore, there is no conflict between decision of the Delhi Bench of the Tribunal and that of Hon'ble Kerala High Court. Therefore, the distinction sought to be made out by the learned DR on the basis of the Kerala High Court decision in our view does not exist. The controversy in question is covered by the decision of the Tribunal in the case of Eastern Leather Products Pvt. Ltd. (supra) and no other contrary decision thereto has been cited by the learned DR.” 4. Further, the Tribunal while deciding the issue involved in assessee's appeal regarding DEPB receipt followed the Tribunal's decision rendered in the case of Mrs. Kamini Jain in ITA 1821 and 2177 dated 10.8.2007 and DCIT Vs. Kabir Old Tex dated 6th July, 2007 passed in ITA No. 3918/Del/2004. The discussion in paras 10 and 11 of the order of the Tribunal read thus:- “10. Regarding the issue involved in the assessee's appeal i.e. DEPB receipt, we find that in the case of Mrs. Kamini Jain Vs. ACIT (supra) the Tribunal has ITA No. 694 of 2009 -8- decided this issue in favour of the assessee by respectfully following the Tribunal decision rendered in the case of DCIT Vs. Kabir Old Tex dated 6th July, 2007 rendered in ITA No. 3918/Del/2004. Para No.7 of this Tribunal decision was reproduced in that Tribunal decision and the same is reproduced by us herein below:- 7. We have considered relevant facts, arguments advanced and the case laws cited. As regards the first ground of appeal we find that the case falls under second Proviso to section 80HHC (3) and not to third Proviso as contended by the learned DR. A term “export turnover” has been defined under clause (b) of Explanation to section 80HHC. As per definition “export turnover” means sale proceeds received in or brought into India by the assessee in convertible foreign exchange. Since the sale of goods of export house does not satisfy the meaning as defined in clause (b) of Explanation to section 80HHC, the turnover in respect of goods sold through export house is not to be reckoned for the purpose of computing export turnover. Accordingly since the export turnover of the assessee is less than Rs.10 crores, the second Proviso below sub- ITA No. 694 of 2009 -9- section (3) of section 80HHC will apply. Thus the assessee was rightly held as eligible for deduction in respect of the amount received on transfer of DEPB license while computing deduction under sub-section (3) of section 80HHC. 11. From the above, it is seen that Tribunal has decided similar issue in that case on the basis that as per definition of export turnover, it does not include sale of goods to export house because for such sale, proceeds of sale are not received in convertible foreign currency or brought into India by the assessee. In the present case, we find that it is noted by the AO on page No.10 of the asstt. order that turnover of the assessee as direct exporter is of Rs.2,23,97,858/- and the turnover of the assessee as supporting manufacturer is Rs.21,38,27,194/- and hence, as per the definition of export turnover given in Section 80HHC, the export turnover of the assessee is only Rs.2.24 crores and hence, it does not exceed Rs.10 crores. If that be so, second proviso of section 80HHC is applicable and as per the same, profit of business should also include 90% of any sum referred to in clause (iiid) of section 28 in the same proportion as export turnover to the total turnover of the business carried on by the assessee. ITA No. 694 of 2009 -10- We therefore, direct the AO to include 90% of both receipts i.e. Duty Draw Back and DEPB into business profit in the same proportion as export turnover bears to the total turnover of the business carried on by the assessee as provided in second proviso under section 80HHC (3). Profit of business has to be ascertained in this manner and thereafter for working out deduction allowable to the assessee u/s 80HHC as a supporting manufacturer, the AO should work out the same as per sub section 3A of section 80HHC which will be in the same proportion as the turn over in respect of sales to trading house to total turn over of business as per clause (b) of section 80HHC (3A).” 5. The revenue is in appeal against the aforesaid relief granted by the Tribunal to the assessee. 6. We have heard learned counsel for the revenue. He submits that turnover of the assessee as a supporting manufacturer should have been held to be more than ten crores attracting 3rd proviso to 80HHC (3). We are unable to accept the submission. 7. The Tribunal after considering the definition of the term export turnover as given in clause (b) of Explanation 80HHC of the Act concluded that the turnover of the assessee as supporting manufacturer would not be termed as export turnover as the proceeds of sale are not received or brought into India by the assessee in convertible foreign exchange. The Tribunal, thus, concluded that the export turnover of the ITA No. 694 of 2009 -11- assessee would be less than Rs.10 crores and, therefore, second proviso to Section 80HHC (3) would be applicable and third proviso thereto would have no application. 8. Learned counsel for the revenue was unable to point out any illegality or perversity in the impugned order which may warrant interference by this Court. 9. In view of above, the question, thus, raised cannot be held to be a substantial question of law. 10. The appeal is dismissed. (ADARSH KUMAR GOEL) JUDGE July 14, 2010 (AJAY KUMAR MITTAL) gbs JUDGE