M/S Saraf Exports Vs. Commissioner Of Income Tax, Jaipur-Iii | Civil Appeal No. 4822 Of 2022

19th February, 2024 - 10:47 am Categories: Legal Issues News & Updates 0 Comments

Brief Facts Of The Case

The present appeal filed before the Hon’ble Supreme Court pertains to assessee being dissatisfied and aggrieved by the disputed judgement passed by Hon’ble High Court of Rajasthan. Herein HC allowed the appeal filed by Revenue and went on to conclude that assessee was not allowed to claim deduction u/s 80- IB of the Income Tax Act, 1961[1] as far as “receipts under Duty Drawback Scheme” and “DEPB” are concerned.

The assessee is a partnership firm which operated in the manufacture and export of wooden handicraft products/ goods. For the export activities undertaken by it, they were entitled to certain benefits from the schemes laid down in Customs Act, 1962 namely DDS and DEPB.  A return was filed by them on 30.09.2009 for the A.Y. 2008-09 wherein the declared nil income and further claimed a deduction of an amount of Rs. 70,197/- owing to DEPB as well as Rs. 76,27,636/- by reason of “receipts under the Duty Drawback.” They credited the said receipts of the mentioned amounts under the Profit and Loss Account, further claiming it to be “Profit/gains of business/ profession” u/s 28 (iiic)[2] and 28(iiib)[3] of the Act. This led to issuance of a notice u/s 143(2)[4] of the Act.

On previous instances, the Deputy Commissioner had disallowed the deductions. Even the Commissioner of IT (Appeals) upheld the previous decision. Further, on appeal to ITAT, deductions claimed by the assessee were allowed. In response to this, Revenue preferred an appeal before the High Court of Rajasthan, who restored the decision/ order passed by the Deputy Commissioner where deductions were disallowed in the wake of section 80- IB of the Act.

Issues

1. Whether the assessee was authorised to claim deduction u/s 80-IB of the Income Tax Act, 1961 on the “income amount received” or profit from “DEPB & Duty Drawback Schemes”?
2. Whether such an income could be classified as income “derived from” by way of industrial undertaking?

RULES

• Income Tax Act, 1961
• Section 28 (iiic), 28(iiib) & 80- IA, 80- IB
• The Customs Act, 1962
• Section 75[5]
• The Central Excise Act, 1944
• Section 37[6]

Judgement

• “Therefore, following the law laid down by this Court in the case of Sterling Foods, Mangalore (supra) and Liberty India (supra) as such, no error has been committed by the High Court in holding that on the profit from DEPB and Duty Drawback claims, the assessee shall not be entitled to the deductions under Section 80-IB as such income cannot be said to be an income derived from industrial undertaking and even otherwise as per Section 28(iiid) and (iiie), such an income is chargeable to tax.”
• “It cannot be said that the decision taken in the case of Meghalaya Steels Limited (supra) is contrary to the decisions in the case of Sterling Foods, Mangalore (supra) and Liberty India (supra). On the contrary, the observations made in paragraph 20 can be said to be in favour of the Revenue and against the assessee.”

[Image Sources: Shutterstock]

Analysis

Section 80-IB of the act speaks for deductions in connection with “profits and gains” derived from “industrial undertakings.” Reliance had been placed on Liberty India vs. Commissioner of Income Tax[7] wherein a similar question was ascertained by the Hon’ble Supreme Court, specifically concerning “profit from DEPB and Duty Drawback Schemes.” The Act speaks for investment linked tax incentives and profit linked tax incentives. Therefore, incentives provided under Chapter VI- A are “profit linked incentives.” So, when talking about section 80-IA/IB, the factor that attracts incentives is “generation of profit (operational profit).” Section 80-IB (13) speaks for application of section 80-IA (5) and 80-IA (7) as far as they hold relevancy to the “eligible business” u/s 80-IB.  If we look into 80-IA (5), it speaks for methods that can be used for computing profits in an “eligible business.” By means of this section, to calculate profits, the eligible business should be calculated as if it is the exclusive source of income for the assessee. Therefore, any tactics which might be employed by the assessee to manipulate the profits arising out of eligible business be dismissed keeping in mind the overriding effect of section 80-IA (5), having its application in section 80-IB. All these sections share a common framework and emphasize on profit -based tax incentive rather than investment.

Further, when section 80-IA[8] and IB are analysed, it is prima facie established that any “qualifying industrial undertaking” fulfilling the criteria laid down in sub-section (2) will be qualified to deductions under sub-section (1), confined to the profits deduced from “industrial undertaking after specific dates.” Therefore, in addition to laying down the eligibility criteria, sub-section (1) sought to limit the amount to be deducted to a “specified percentage of profit.” This highlights the significance of terms “derived from industrial undertaking” in comparison to “profits attributable to industrial undertaking.”

Talking about DEPB, it is an export incentive. The objective of this scheme is to bring neutrality to the “incidence of custom duty payment” on content imported for the product to be exported. This credit is available only when it comes to export product and the rate being whatever has been specified by DGFT for importing raw materials, other components etc. This credit is to be calculated by considering the deemed content to be imported for the product to be exported in accordance with the basic custom duty as well as any unique additional duty to be paid on such deemed imports. Therefore, it can be inferred that DEPB/DDS are schemes flowing from the pool of schemes enacted by the Central Government. Or else flows from the Customs Act, 1962- section 75. Hence it is safe to say that incentives profits do not fall under the category of “profits derived from the eligible business” as provided u/s 80-IB. Rather, they are covered within the brackets of “ancillary profits of undertakings.” The Customs Act and The Central Excise Act by way of section 75 and 37 respectively vests the power to grant “repayment of customs and excise duty” which an assessee pays, with the Government of India. The reimbursement relates to “average amount of duty paid” on material belonging to a specific category or else on goods that are utilised while manufacturing export goods pertaining to specific category and not to an arithmetically equal amount of custom duty or excise duty actually paid.

The purchasing cost is inclusive of taxes and duties, freight inwards and other expenses which may be directly incurred in order to acquire the product. Hence while determining the “cost of purchase”, rebate, trade discounts, DD etc are deducted. Therefore, these factors rather than being treated as adjustment to purchasing cost should be as “separate items of revenue” for the assessee/ undertaking. DD and DEPB cannot be “credited” against the manufacturing cost for goods that are to be debited in the P&L Account u/s 80-IA and IB as they would be considered as “independent source of income”, there being no first -degree nexus between the industrial undertaking and the profits.

For addressing the second issue, Reliance was also placed on Sterling Food Mangalore[9], wherein further reliance was placed on Cambay Electric Supply Industrial Co. Ltd. vs CIT[10] which talked about the terms “attributable to” having a wider import than the term “derived from.” The former term comes into picture when the intent of legislature is to cover “receipts from sources” other than what the conduct of business actually is. In order to actually avail benefit u/s 80-HH[11], a real connection between the profits/hains and industrial undertaking has to be established rather than a mere commercial connection. That industrial undertaking itself has to be the seedbed of profit. Any import entitlements that an assessee receives are provided by the Central Government under various schemes in order to facilitate exports. The source for profits and gains which arise out of the procced from the sale of import entitlement therefore, ought to be attributed the Central Government’s export promotion scheme rather than from industrial undertaking. In order to apply the words “derived from”, the nexus between the profits and undertaking has got be direct but in the instant cases of Sterling Food as well as Saraf Exports, this nexus rather than being direct is only incidental. In the case, the industrial undertaking was involved in exporting wooden handicraft goods. Due to such exports, the schemes for promotion of export are applicable. This made the taxpayer entitled to import entitlement, which are eligible for sale. This therefore in author’s view will not compose profit/gain “derived from” the taxpayer’s industrial undertaking.

Conclusion

The court after considering a series of judgements and mainly Liberty India and Sterling food concluded that no error was committed by the High Court wherein, they denied the deductions claimed by assessee u/s 80-IB on the profits received by way of DDS and DEPB as the said income was not “derived from” industrial undertaking. Export incentives do not as “first degree nexus” in order to claim deductions. Even the provisions of the act by way of section 28(iiid)[12] and (iiie)[13] made the said income was taxable. With these observations, the appeal was dismissed by court. All in all, the court also settled the dispute that the case of “Meghalaya Steel” was not contrary to the other two, i.e. “Liberty India” and “Sterling Foods.” In fact, it can be deduced that the case favoured the Revenue rather than the assessee.

Impact And Current Standing

The verdict of this court in the current case has eased the way of interpreting the meaning (to give it a restrictive meaning) and essence of the word “derived from” which has been used in multiple sections such as S11(a), S12(1), including those also given in the newly brought “regime of taxation” introduced via the Finance Act, 2023 back then and now in 2024 too.

Further if we look into the primary issue related to DEPB and Duty Drawback Schemes, the same had been addressed in earlier decisions of Supreme Court in the case of “Liberty India” and “Sterling Food” and that too against the assessee. But the same was raised again owing to the subsequent decision of the Supreme court in “Meghalaya Steel[14]” which had allowed deductions of transport and interest subsidies, having being derived from the business undertakings. The position is now settled and duty drawbacks and DEPB do not qualify the eligibility criteria and therefore cannot be deducted u/s 80- IB.

The case stands valid in today’s date. This case was referred in Assistant Commissioner of Income Tax vs. Ixia Technologies International Ltd. as well.[15]

Distinguished Judgements

Just like the two sides of the coin, the current debate also a flip side to it which provides for situations where deductions can be claimed and they would be allowed. In Meghalaya Steel Limited dealt with subsidies such as transport, power and interest provided by the state government and they directly affected the manufacturing cost and ultimately had a first degree/ direct nexus with profits as well as gains of the business undertaking. This case was also referred in the present case and it was observed that the verdict of “Liberty India” in no way was disapproved in “Meghalaya Steel.” Apart from this in Saraf Seasoning vs. ITO[16] it was observed that income “derived from” selling of DEPB license falls within the umbrella of “profit and gain from industrial undertaking, thereby entitled to deduction u/s 80-IB of the Act.

INTRODUCTION

Recently, a division bench of Delhi High court in the case of Google LLC V. Make my Trip[i] dealt with the question that whether a trademark used as keyword for advertisement constitutes infringement of trademark. This question is of very significant nature specifically in the current era where commerce is highly driven by electronic means. In the current framework of e-commerce keyword advertising plays a very significant role. Keyword advertising simply refers to the practice where a company bids for a keyword offered by search engine giant Google, after which whenever a person searches the given keyword that company’s sponsored link is being displayed.

BACKGROUND OF THE CASE

• MakeMyTrip (India) Pvt. Ltd. (hereinafter referred as ‘MIPL’) is a company registered under Companies Act,1956. Initially this company was only engaged in airline ticket booking related business but now has expanded its horizons to be one of the largest travel companies present in India. It claims to give a variety of travel services to its customers through its website.
• MIPL claims to be registered proprietor of several trademark, including word marks “MAKE MY TRIP” and “MMT”.
• Google is a company which runs the most used search engine in the world, i.e., (google.com). It also runs an advertisement program which in intermingled with the usage of its search engine.
• To use its search engine, a person has to simply type a word and it shows all relevant information related to that ‘key word’. However, it is pertinent to note that the search results displayed pursuant to any query of two type- ‘organic’ or ‘natural’ and other is ‘inorganic’ or ‘sponsored’. Now it is with regard to the sponsored search result that a company can pay to Google to show its advertised website whenever that specific ‘key word’ is searched for.
• MIPL claims to have subscribed to the Google Ads Program to advertise its website. MIPL contends that when a user searches for ‘MakeMyTrip’ as a keyword in seven cases out of ten, Booking.com’s sponsored link appears in the second position as advertised link.
• Aggrieved by the fact that Booking.com is bidding for ‘MakeMyTrip’ as keyword that is to be advertised by Google is an infringement of their trademark and hence the case.

ISSUE Involved

Whether the use of MIPL’S trademarks: ‘MakeMyTrip’ and ‘MMT’ as keywords in Google Ads Program for displaying the links/ads of Booking.com constitute infringement of its trademark under section 29 of the Trade Marks Act.

STANCE OF SINGLE JUDGE BENCH

• After briefly examining the matter in hand, the learned Single Judge held that prima facie there exists infringement of trademark by the defendant to use the plaintiff’s registered trademark as ‘Keyword’ for advertisement.
• To support this view, the court relied upon the M/s DRS Logistics (P.) Ltd. and Anr. V. Google India Pvt. Ltd. and Ors[ii].
• The learned Single Judge prima facie accepted the contentions of MIPL that the use of its trademark as a keyword for advertisement would amount to infringement of trademark under Sections 2(2)(b), 29(4) (c), 29(6)(d) and 29(8)(a) of the Trade Marks Act.
• The court was of the opinion that such usage of a trademark as keyword for advertisement constitutes infringement of trademark and also that Google was enchasing upon the goodwill of MIPL. It was highlighted that Google was exploiting the goodwill of MIPL by allowing its competitors to use MIPL trademark as keyword.

STANCE Of DIVISION BENCH

• It held that mere use of trademark as keywords per se would not constitute infringement of trademark. The court emphasized on the aspect that there must exist a likelihood of confusion or misleading of internet users for a trademark as keyword to constitute infringement. To support this view the court relied on the case of Google LLC V. DRS Logistics (P.) ltd. and Ors.[iii].
• In the given case, the court had held that mere use of trademark as keyword would not constitute infringement under section 29(1) of the Trademarks Act.
• Further the division bench highlighted on the stance of the single judge bench that held that use of trademark of MIPL as keyword would constitute trademark infringement under section 29(4) of the Trademarks Act is erroneous.
• To support this contention the division bench highlighted that section 29(4)(b) it is explicitly mentioned that it can only be used in relation to goods and service which are not similar to those for which the trade mark is registered. And in the present case both MIPL and Booking.com deals with the similar services. To support this view the court relied upon the case of Renaissance Hotel Holdings Inc. V. B. Vijaya Sai and Ors[iv].
• Further the court rejected to accept the view that use of trademark of MIPL as keyword would fall under section 29(8). The reason behind this stance was that there existed no confusion or misleading of customers due to such usage.
• The court also clarified that the present case cannot fall under the ambit of section 29(7). This is because use of trademark as keyword cannot interpreted by any means as ‘applying the registered trademark to any material intended to be used for labelling or packaging goods, as a business paper, or for advertising goods or services.’

CONCLUSION

In a nutshell, it can be seen that the court emphasized on the aspect that for a trademark used as keyword to constitute trademark infringement under the meaning of Trademark act, there must exist likelihood of confusion or misleading of users by the usage of the same.

Author: Anavi Jain and Sonakshi Pandey, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at  Khurana & Khurana, Advocates and IP Attorney.

[1] Id. S80-IB.

[2] Id. S 28 (iiic).

[3] Id. S28 (iiib).

[4] Id. S143(2).

[5] The Customs Act, 1962, S 75, No. 52, Acts of Parliament, 1962 (India).

[6] The Central Excise Act, 1944, S 37, No. 1, Acts of Parliament, 1944 (India).

[7] Liberty India v. CIT [ 317 ITR 218 (SC)] [31 August 2009].

[8] Supra note 1, S 80-IA.

[9] CIT, Karnataka vs. Sterling Foods, Mangalore [1999] 237 ITR (SC) [15 April, 1999].

[10] Cambay Electric Supply Industrial Co. Ltd v. CIT [1978] 113 ITR 84 (SC) [11 April, 1978].

[11] Supra note 1, S 80-HH.

[12] Supra note 1, S 28 (iiid)

[13] Supra note 1, S 28 (iiie)

[14] CIT vs. Meghalaya Steels Limited [383 ITR 217 (SC)] [9 March, 2016].

[15] LQ/ITAT/2023/4958 [Income Tax Appellate Tribunal, Kolkata] [11 October, 2023].

[16] Saraf Seasoning v. ITO [(2008) 174 Taxman 594 (Rajasthan)] [21 August, 2008].