By TIOL News Service

MUMBAI, AUG 20, 2014: THE issue before the Bench is - Whether an exporter is eligible to claim deduction u/s 80HHC for deemed credit under CENVAT Incentive Scheme. And the answer of the High Court is YES.

Facts of the case

The assessee is an Indian company which is engaged in the business of export of any goods or merchandise. It had filed its return, declaring a total income of Rs.88,16,140. The assessee claimed deduction u/s 80HHC of deemed credit of Rs.89,34,887/- under the CENVAT Incentive Scheme as part of business profits. During assessment, the AO held that CENVAT incentives were not eligible profits for claiming a deduction under section 80HHC and thus had to be excluded from the business income while calculating deductions under section 80HHC. Therefore, it determined the total income of the assessee at Rs.1,63,79,073. On appeal, the CIT(A) confirmed the same. Whereas, the Tribunal held that the CENVAT incentives were in the nature of export incentives and hence allowed for the purpose of calculating business income whilst calculating a deduction under section 80HHC.

On appeal before the Tribunal, the counsel appearing on behalf of the Revenue, submitted that though CENVAT incentive was in the nature of export incentives, in order that the same qualify for a deduction under section 80HHC, it should be covered under any of the clauses (iiia) to (iiie) of section 28 of the Act. Admittedly, CENVAT incentives were not covered under any of these clauses, was the submission. According to Mr Ahuja, CENVAT incentive was similar to duty drawback and it was the choice of the exporter either to obtain CENVAT or duty drawback. Since in the present case, the Assessee had chosen the refund of the CENVAT which was not covered under section 28(iiia) to (iiic), the benefit of proportionate increase in business profits for allowing deduction under section 80HHC could not be allowed to the Assessee.

On the other hand, the counsel appearing on behalf of the assessee, submitted that in computing the admissible deduction under section 80HHC, the CENVAT incentive of Rs.89,34,887/-, being the refund of the tax and duty paid on inputs consumed for goods manufactured and exported, should be reduced from the costs of manufacture of the exported goods and correspondingly, the "profit of the business" for quantifying the admissible deduction under section 80HHC of the Act should be enhanced by the said amount, and the admissible deduction under section 80HHC as well as the total income for the year should be determined accordingly.

Having heard the parties, the HC held that,

++ we agree with the submission that the said CENVAT incentive being the refund of tax and duty paid on inputs consumed for goods manufactured and exported would automatically reduce the cost of manufacture of the exported goods, thereby necessarily increasing the profit. In view thereof, the deemed credit under the CENVAT Incentive Scheme at Rs 89,34,887/- would be a part of the business profits eligible for a deduction under section 80HHC. Section 80HHC provides that where an assessee, being an Indian company or a person (other than a company) resident in India, was engaged in the business of export out of India of any goods or merchandise to which section 80HHC applied, then subject to the other provisions of the said section, the Assessee whilst computing it’s total income, was allowed a deduction to the extent of profits, referred to in sub-section (1-B) thereof derived by the assessee from the export of such goods or merchandise;

++ in the present case, it can hardly be argued that the deemed credit under the CENVAT Incentive Scheme would not reduce the material/manufacturing cost of the goods exported by the Assessee. This was not the case of the Revenue also. That being the case, under the provisions of section 80HHC, the Assessee would be entitled to a deduction to the extent of the profits referred to in sub-section (1-B) thereof derived by the Assessee from the export of such goods or merchandise. No other provision was brought to our notice that would justify the disallowance of CENVAT incentive whilst computing the admissible deduction u/s 80HHC of the Act. In this view of the matter, we do not find that in the peculiar facts and circumstances of the present case, the ITAT misdirected itself in coming to the conclusion that the amount of deemed credit under the CENVAT Incentive Scheme was a part of the business profits of the Assessee eligible for a deduction under section 80HHC despite the fact that it did not specifically find place in section 80HHC(3);

++ we are of the view that the order of the ITAT cannot be said to be perverse or vitiated by any error apparent on the face of the record. We find that this Appeal raises no substantial question of law that needs to be answered by this Court.

(See 2014-TIOL-1402-HC-MUM-IT)