S. 80-IB: Though Duty Drawback & DEPB were held not eligible for deduction in Liberty India 317 ITR 218 (SC), answer could be different if business model shows dependence on Duty Drawback & DEPB for survival

Arvind Footwear Pvt Ltd vs. DCIT (ITAT Lucknow)

The assessee claimed that the “duty drawback” receipt of Rs. 1.53 crores was eligible for deduction u/s 80-IB on the ground that the said duty drawback refund was a refund of customs and central excise duty on inputs used in manufacturing of its products. The AO & CIT(A) rejected the claim by relying on Liberty India 317 ITR 218 (SC) where it was held that duty drawback was not “derived” from the industrial undertaking. On appeal by the assessee to the Tribunal HELD:

Though in Liberty India it was held that duty drawback and DEPB arises from an independent source and is not “derived” from the industrial undertaking, in Dharam Pal Premchand 317 ITR 353 (Del) (SLP dismissed) it was held that refund of excise duty had a direct nexus with the manufacturing activity & was eligible for s. 80-IB deduction. Accordingly, though duty drawback & DEPB was held in Liberty India to be an independent source of income and to not have a “first degree” nexus with the undertaking, this was in the context of a fact-situation where the duty drawback& DEPB did not arise from core activities of the undertaking and was an additional, ancillary or supplemental profit. There can be situations in which duty drawback itself could be more than the overall profits and in such situations, the duty drawback may not be seen on standalone basis or as an independent source of income because the overall profit is only a part of the duty drawback receipt, and the commercial motivation of running the industrial undertaking is earning only that part of duty drawback receipts. On the present facts, the duty drawback was more than the entire operational profit and so it cannot be an open and shut inference that the duty drawback receipts are an independent source of income and have no first degree nexus with the business activity of the industrial undertaking. There is still room for consideration of the plea that but for the duty drawback the assessee would not have carried out the business activity in the industrial undertaking, because, that would have meant carrying out business for incurring losses. If that be so, the duty drawback receipts can be said to derived from the undertaking and to be eligible for s. 80-IB deduction. The question whether the duty drawback is an incidental profit or a profit of the first degree depends on the business model followed by the assessee.