Refund of Excise Duty – Not an income if first paid and claimed back

In this case Assessee is a firm engaged in the business of manufacture of aluminum wire rods at IGP,SIDCO, Phase-II Samba, Jammu & Kashmir. During the assessment proceedings, the assessee had filed computation of taxable income wherein deduction u/s 80IB amounting to Rs 5,85,84,089/- was claimed. The A.Owent through the details and found that the assessee had received excise dutyrefund of Rs 5,68,41,800/- during the financial year.

The AO & CIT (A) rejected the claim by relying on Liberty India vs. CIT 317 ITR 218 (SC) where it was held that duty drawback & DEPB were not eligible for deduction u/s 80-IB. The assessee filed the appeal before the Tribunal.  The Tribunal rejected the judgement in Liberty India vs CIT and relied on the CIT vs. Dharam Pal Prem Chand Ltd. contended by the assessee and held that the excise duty paid first and thereafter claimed as refund under any exemption notification shall not be treated as income of the assessee.

 

The test of complete Judgement is provided below :

 

IN THE INCOME TAX APPELLATE TRIBUNAL

DELHI BENCH ˜E

™BEFORE SHRI G.E.VEERABHADRAPPA, VICE PRESIDENT AND

SHRI RAJPAL YADAV, JUDICIAL MEMBER

ITAT No.3303/Del/2010Asstt.Year: 2007-08

M/s J.K.Aluminium Co.

302, Amber Tower

zadpur Commercial Complex

Azadpur, Delhi-110033

vs

Income Tax Officer,,

Ward 20(3), New Delhi

 

O R D E R

This is an appeal filed by the assessee arising out of the order dated24.05.2010 of the CIT (Appeals) for the assessment year 2007-08.

2. The only issue in this appeal relates to the assessee™s claim for deduction u/s 80IB in respect of refund of excise duty. The assessee is a firmengaged in the business of manufacture of aluminum wire rods at IGP,SIDCO, Phase-II Samba, Jammu & Kashmir. During the assessmentproceedings, the assessee had filed computation of taxable income whereindeduction u/s 80IB amounting to Rs 5,85,84,089/- was claimed. The A.O. went through the details and found that the assessee had received excise dutyrefund of Rs 5,68,41,800/- during the financial year. The A.O by applying ratio laid down by the Supreme Court in the case of Liberty India vs. CIT225 CTR 233 and the decision of ITAT, Amritsar Bench, in the case of M/sShree Balaji Alloys vs. ITO in ITA No.255/Asr/2009 for the assessmentyear 2005-06 did not accept the assessee™s claim for relief u/s 80IB of theAct in relation thereto. When this was proposed to the assessee, the assesseefurnished a judgment of Delhi High Court in the case of CIT vs.Dharampal Premchand Ltd. 317 ITR 353 wherein this issue has beenclaimed to have been decided in its favour. The A.O, however, takingsupport from the decision of the Supreme Court, went on to disallow theclaim of the assessee in respect of this excise duty refund.

3. The learned counsel for the assessee pointed out that decision of DelhiHigh Court in CIT vs. Dharampal Premchand Ltd. 317 ITR 353 has sincebeen affirmed by the Hon™ble Supreme Court and, therefore, the issue hasreached finality and the same , according to him, requires to be decided in itsfavour. The same stand is now being reiterated before us.

4. The assessee has also filed copy of the Notification No. 56/2002 ofCentral Excise at pages 26 & 27 of the paper book, copy of the excise refundorders at pages 28 to 45 of the paper book and copy of ledger a/c of exciseduty paid, PLA a/c , PLA (education cess) A/c, PLA recoverable and PLArefund at pages 46 to 55 of the paper book. Relying upon these, it wasstrongly argued that in the light of the decision of Delhi High Court inDharampal Premchand Ltd. (supra), the assessee™s claim must be accepted.

5. The learned D.R, on the other hand, vehemently pointed out althoughthe decision of Delhi High Court which is jurisdictional High Court, has since been affirmed by the Supreme Court, the ratio of the Apex Court inLiberty India 225 CTR 233 supports the departmental stand.

6. We have carefully gone through the records and in our view thedecision rendered by the jurisdictional High Court in the case of DharmpalPremchand Ltd. (supra) covers the issue in favour of the assessee. TheHon™ble Delhi High Curt has clearly set out the procedure for granting ofexemption under the Scheme. The assessee in the first instance paid theexcise duty from its current account. The statement with respect to clearanceis made, is submitted to the concerned authorities i.e. central excise by the7th of the succeeding month. The authorities after verifying the claim of theassessee are required to grant the refund during the month underconsideration to the manufacturer by the 15th of the succeeding month whereit was not possible for the concerned authorities to verify the claim of theassessee; thus has to be made on provisional basis. Explaining the aboveprocedure, the jurisdictional High Court observed as under (page 362):

In these circumstances, the submissions of the learned counsel for the Revenueis that there is no direct nexus between refund of excise duty paid or that therefund of excise duty paid was dependent on the said notifications is, to say theleast, completely untenable. As a matter of fact as found by the Tribunal, as wellas, the CIT(A) in the instant case, the assessee has adopted an incorrectaccounting methodology. The assessee as found by the authorities below had onthe payment of excise duty debited the profit and loss account and upon receipt ofrefund credited the profit and loss account. The net effect on the profit and losswas ˜nil™ on account of the methodology followed by the assessee. There was thus,according to us, no reason to exclude the amount of refund of excise duty inarriving at ˜profit derived™ for the purposes of claiming deduction u/s 80IB of theAct.

6.1 The Court further at page 364 held:

The fourth case cited by the learned counsel for the Revenue was CIT vs. RiteshIndustries Ltd. (2005) 274 ITR 324. A Division Bench of this Court was calledupon to construe the provisions of Section 80.I of the Act in the context of the claim of the assessee for inclusion of amounts received as ˜duty drawback™ for thepurposes of ascertainment of profits or gains derived from the industrialundertaking within the meaning of provision of Section 80I of the Act. TheDivision Bench of this Court applying the ratio of the judgments of the SupremeCourt in the case of Sterling Foods (supra), Cambay Electric Supply (supra) asalso the judgment of Madras High Court in the case of CIT vs. Vishwanathan &Co. (2003) 261 ITR 737 came to the conclusion that ˜duty drawback™ could not beregarded as profit or gain derived from an industrial undertaking as theimmediate and proximate source was not the industrial undertaking but the claimfor ˜duty drawback™. The view of the Division Bench of this Court to which one ofus (i.e. Badar Durre Ahmed J.) was a party, was based in the context of the factsobtaining in the said case. In the instant case the proximity with industrial activityis clear and there is no scope for holding otherwise.

6.2 At page 366, the jurisdictional High Court held:An important aspect of the matter which clearly distinguishes the instant case from the facts of the other cases cited before us is, that the net effect of the accounting methodology employed by the assessee was that it did not, in sum andsubstance, impact the derivation of profits and gains ascertainable for thepurposes of deduction u/s 80IB of the Act.

6.3 The above decision of the Delhi High Court has since been approvedby the Supreme Court where department has filed an SLP. At the firsthearing the assessee was ordered to file an additional affidavit indicatingtherein the accounting treatment that is followed by the assessee as is clearfrom the following order:Supreme Court in the case of CIT vs. Dharam Pal Prem Chand Ltd.order dated 11.1.2010:The special leave petition shall stand over for four weeks in order toenable the assessee herein to file an additional affidavit indicatingtherein the accounting treatment which has been given by the assesseeto the expenses incurred towards payment of excise duty.

6.4 In the present case of the assessee, the rules that are placed in thepaper book clearly envisage refund of the amount arithmetically equal to theexcise duty paid. The excise duty refund order which is placed at pages 29 & 30 are reproduced, just to show how this case is identical to the procedureand the scheme dealt with by the jurisdictional High Court in the case of Dharampal Premchand Ltd.:

BRIEF FACTS OF THE CASE

M/s J&K Aluminum Co., Industrial Growth Centre, SIDCO, Phase-II, Samba, District Jammu, are holding Central Excise Registration No.AAFFJO625FXM001 dated03.03.2006 are engaged in the manufacture of Aluminum Wire Rod falling under Tariffitem No.76011040 of the 1st Schedule to the Central Excise Tariff Act 1985 (5 of 1986).

2. The party has filed a refund claim of Rs.61,05,409/- on account of CentralExcise duty and Education Cess paid through PLA for the month of July 2006under Notification 56/2002-CE dated 14.11.02 as amended. The unit isclaiming refund in the category of new units, commencing production after14.6.2002 as per Notification.

3. The verification report was called for from jurisdictional Range Office, Range Officer vide report C.No.GL-6(65)J/RBC-PBC/Refd/JKA/2006/606 dt.30.8.2006 has confirmed after verification that the unit started its commercial production on 15.5.2006 as per DIC Registration No. MSU/2005/79 dated22/10/2006. The party purchased land for establishing the unit was taken onlease from SIDCO on 11th August 2005 and after this the party installed newmachinery from February 2006 to May 2006. The party has given permissionfor installation to two D.G. sets of (1×500 KVA & 1×82.5 KVA) NOC forwhich ahs been issued by the Chief Engineer, Electric Maintenance and R.E.Wing, PDD Jammu vide his office order No. CEJ/TS-I/83A/9437-41 dated7.11.2005 and certificate of fitness in this regard was issued on 5.5.2006. Asper certificate No.OQ/556 and OQ/719 dated 27.10.2005 and 29.8.2006respectively issued by Tehsildar Samba, unit is located under Khasra No.82min, 83 min falling under IGC Samba, Jammu which is mentioned inannexure to the Notification No. 56/2002-CE dt. 14.11.02 as amended. RangeOfficer has further confirmed that the party cleared goods valued atRs.6,57,22,059/- on payment of Central Excise duty of Rs.1,05,15,521/- andEducation Cess of Rs.2,10,310/- in the following manner:-

(1) Duty paid through PLA Rs.59,85,691/-

(2) Edu.Cess paid through PLA Rs. 1,19,718/

-(3) Duty paid through CENVAT credit account Rs. 45,29,830/-

(4) Ed.cess paid through CENVAT credit account Rs. 90,592/-Range Office has confirmed that there is nil closing balance of Cenvat Credit atthe end of the month and hence the refund claim of Rs.59,85,691/- is admissible to the party, which may be sanctioned by way of Cheque, Refund claim of Rs.1,19,718/- inrespect of education cess is not admissible in terms of notification No.56/2002-CE dated14.11.2002 (as amended).

4. I have carefully gone through the case records including the report ofjurisdictional Range Officer mentioned above. I find that the party hasclaimed refund of Rs.59,85,691/- on account of Central Excise duty andRs.1,19,718/- on account of Education Cess paid through PLA. I also findthat unit started its Commercial Production on 15.5.2006 as per DICRegistration No. MSU/2005/79 dated 22.10.2006. The party purchased landfor establishing the units was taken on lease from SIDCO on 11th August 2005and after this the party installed new machinery from February 2006 to May2006. The party has given permission for installation of two D.G. sets of(1×500 KVA & 1×82.5 KVA) NOC for which has been issued by the ChiefEngineer, Electric Maintenance and R.E. Wing, PDD Jammu vide his officeorder No.CEJ/TS-1/83A/9437-41 dated 7.11.2005 and certificate of fitness inthis regard was issued on 5.5.2006. As per certificate No.OQ/719 dated29.8.2006 of Tehsildar Samba, Jammu, unit is located duenr Khasra No. 82min, 83 min & 84 min (which are parts of Khasra No. 82, 83 & 84respectively) classified during Bandobast under the type of land vizMeredeem Banjar Qadeem, Gair Mumkin situated at industrial growth center,Samba of village Mendhera, Tehsil Samba, which is mentioned in annexure-IIto the Notification No. 56/2002-CE dt. 14/11/02 as amended. I observe thatrefund of Rs 1,19,718/- claimed by the party on account of payment ofEducation Cess paid through Account Current (PLA) is not admissible to theparty on the ground that the Education Cess has been levied under the FinanceBill 2004 and not under any of the Acts mentioned in the subject notification.Therefore, I hold that refund of Rs 1,19,718/- claimed on account ofEducation Cess is not admissible to the party and is liable to be rejected. Therefund of Rs 59,85,691/- claimed on account of Central Excise duty paidthrough Account Current (PLA) during the month of July,2006 is admissibleto the party in terms of Notification No. 56/2002-CE dated 14/11/2002 asamended.

5. Having regards to the above discussion and findings, I pass the followingorder in this case:

O R D E R

(i) I sanction the refund of Rs 59,85,691/- (Rupees Fifty nine lacs eightyfive thousand six hundred ninety one only) by cheque to M/s J&KAluminum Co., Industrial Growth Centre, SIDCO, Phase-II, Samba,District Jammu on account of Excise Duty paid through AccountCurrent (PLA) for the month of July, 2006, in terms of NotificationNo.56/2002-CE dt. 14/11/2002 as amended.

I reject the refund of Rs 1,19,718/- (Rupees one lac nineteen thousandseven hundred eighteen only) claimed on account of Education Cessby the party.Sd/-ASSISTANT COMMISSIONERRegd. A/DM/s J&K Aluminum Co.,Industrial Growth Centre, SIDCO,Phase-II, Samba, District Jammu.

6.5 As we have observed from the papers in the paper book, the exemptamount has been paid as is evident from the orders granting the refundwhich are placed. The Supreme Court after examining the affidavits passedon 11.01.2010 in the case of CIT vs. Dharam Pal Prem Chand Ltd. and afterhearing both the parties, eventually dismissed the appeal of the Departmentagainst order of Delhi High Court on 22.02.2010. As is clear, theNotification dated 14.11.2002 exempts the amount of excise duty paid by theassessee as such excise duty per se is not leviable. In order to ensure propercontrol over the transactions, the Notification only requires themanufacturers to first deposit the excise duty and then claim the refund ofthe same next month. Thus the refund is assessee™s own money itself in away security deposit which is being refunded on submission of the evidencedepositing the same. Therefore, in our view this is not an income at all.Therefore, the A.O, in our view, was not justified in making a separateaddition of income and thereby denying the relief eligible u/s 80.IB of theAct on that amount.

7. Before we part with the matter, we think it fit to deal with thecontention of the Revenue that the decision of the Apex Court in LibertyIndia (supra) concludes the issue in favour of the revenue. We may say thejudgment in the case of Liberty India was on the issue of DEPB/Duty Draw Back which was an incentive and was not concerned with the refund of theamount paid. The Court in that case has negated the contention of theassssee at page 234 by observing as under:

The Rules do not envisage a refund of an amount arithmeticallyequal to customs duty or central excise duty actually paid by anindividual importer-cum-manufacturer. Sub-section (2) of Section 75of the Customs Act requires the amount of drawback to be determinedon a consideration of all the circumstances prevalent in a particulartrade and also based on the facts situation relevant in respect of eachof various classes of goods imported.

7.1 The case of the assessee before us is concerned with the refund ofexcise duty and consideration of the same for deduction u/s 80IB of the Act.The Scheme as well as the methodology of the operations are all discussedso as to highlight the distinction of this case from the decision of LibertyIndia. In any case, the decision of Dharam Pal Prem Chand Ltd. of DelhiHigh Court has been affirmed by the Supreme Court which fact itself cannotbe ignored as the case of Dharampal Premchand Ltd. was concerned with theissue relating to section 80.IB of the Act

.8. In the result, the appeal is allowed.

Pronounced in Open Court on 29.04.2011.

Sd/

(Rajpal Yadav)

JUDICIAL MEMBER

Sd/

(G.E.Veerabhadrappa)

VICE PRESIDENT

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