Case: M/s Liberty India Vs. Commissioner of Income Tax

4. The facts in the lead matter (Civil Appeal arising out of SLP(C) No. 5827/07 entitled M/s Liberty India v. CIT) are as follows:5. The appellant, a partnership firm, owns a small scale industrial undertaking engaged in manufacturing of fabrics out of yarns and also various textile items such as cushion covers, pillow covers etc. out of fabrics/yarn purchased from the market. During the relevant previous year corresponding to Assessment Year 2001-02, appellant claimed deduction under Section 80-IB on the increased profits of Rs. 22,70,056.00 as profit of the industrial undertaking on account of DEPB and Duty Drawback credited to the Profit & Loss account. The Assessing Officer denied deduction under Section 80-IB on the ground that the said two benefits constituted export incentives, and that they did not represent profits derived from industrial undertaking. In this connection the AO placed reliance on the judgment of this Court in CIT v. Sterling Food reported in 237 ITR 579 . Aggrieved by the said decision, matter was carried in appeal to CIT(A), who came to the conclusion, that duty drawback received by the appellant was inextricably linked to the production cost of the goods manufactured by the appellant; that, duty drawback was a trading receipt of the industrial undertaking having direct nexus with the activity of the industrial undertaking and consequently, the AO was not justified in denying deduction under Section 80-IB. According to CIT(A), the DEPB Scheme was different from Duty Drawback Scheme inasmuch as the DEPB substituted value based Advance Licencing Scheme as well as Passbook Scheme under the Exim Policy; that entitlements under DEPB Scheme were allowed at pre-determined and pre- notified rates in respect of exports made under the Scheme and consequently, DEPB did not constitute a substitute for duty drawback. According to CIT(A), credit under DEPB could be utilized by the exporter himself or it could be transferred to any other party; that such transfer could be made at higher or lower value than mentioned in the Passbook and, therefore, DEPB cannot be equated with the duty drawback, hence, the appellant who had received Rs. 20,95,740/- on sale of DEPB licence stood covered by the decision of this Court in Sterling Food (supra). Hence, to that extent, appellant was not entitled to deduction under Section 80-IB. Against the decision of CIT(A) allowing deduction on duty drawback, the revenue went in appeal to the Tribunal which following the decision of the Delhi High Court in the case of CIT v. Ritesh Industries Ltd. reported in 274 ITR 324 , held that the amount received by the assessee on account of duty drawback was not an income derived from the business of the industrial undertaking so as to entitle the assessee to deduction under Section 80-IB.6. The decision of the Tribunal was assailed by the assessee(s) under Section 260A of the 1961 Act before the High Court. Following the decision of this Court in Sterling Food (supra), the High Court held that the assessee(s) had failed to prove the nexus between the receipt by way of duty drawback/DEPB benefit and the industrial undertaking, hence, the assessee(s) was not entitled to deduction under Section 80-IB(3), hence this Civil

Reasoning: 18. Analysing the concept of remission of duty drawback and DEPB, we are satisfied 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. In the circumstances, we hold that profits derived by way of such incentives do not fall within the expression "profits derived from industrial undertaking" in Section 80-IB.19. Since reliance was placed on behalf of the assessee(s) on AS-2 we need to analyse the said Standard.20. AS-2 deals with Valuation of Inventories. Inventories are assets held for sale in the course of business; in the production for such sale or in form of materials or supplies to be consumed in the production.The cost of purchase includes duties and taxes (other than those subsequently recoverable by the enterprise from taxing authorities), freight inwards and other expenditure directly attributable to the acquisition. Hence trade discounts, rebate, duty drawback, and such similar items are deducted in determining the costs of purchase. Therefore, 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 (see: page 44 of Indian Accounting Standards & GAAP by Dolphy Dsouza). Therefore, for the purposes of AS-2, Cenvat credits should not be included in the cost of purchase of inventories. Even Institute of Chartered Accountants of India (ICAI) has issued Guidance Note on Accounting Treatment for Cenvat/Modvat under which the inputs consumed and the inventory of inputs should be valued on the basis of purchase cost net of specified duty on inputs (i.e. duty recoverable from the Department at later stage) arising on account of rebates, duty drawback, DEPB benefit etc. Profit generation could be on account of cost cutting, cost rationalization, business restructuring, tax planning on sundry balances being written back, liquidation of current assets etc. Therefore, we are of the view that duty drawback, DEPB benefits, rebates etc. cannot be credited against the cost of manufacture of goods debited in the Profit & Loss account for purposes of Sections 80-IA/80-IB as such remissions (credits) would constitute independent source of income beyond the first degree nexus between profits and the industrial undertaking.In the circumstances, we hold that Duty drawback receipt/DEPB benefits do not form part of the net profits of eligible industrial undertaking for the purposes of Sections 80I/80-IA/80-IB of the 1961