India: D.E.P.B., (Duty Entitlement Pass Book) Its Taxability – Issues Therein

Last Updated: 10 March 2004
Article by Sanjeev Malhotra

By Sanjeev Malhotra, F.C.A, F.C.S, A.I.C.W.A.

The case of Sadhu Overseas, Faridabad Vs State of Haryana decided by Haryana Tax Tribunal on 21.10.03 has held DEPB as equal to money and thus not goods taxable under HGST Act, 1973. DEPB was earlier decided as taxable goods liable to tax by Delhi High Court. Whether DEPB is eligible goods under Central Sales Tax Act, 1956 for charging of lower rate of tax? Whether form C under CST Act can be issued for purchase of DEPB? Whether Tax invoice can be issued by seller of DEPB in the State of Haryana under Haryana Value Added Tax Act, 2003? And Whether a buyer registered dealer of DEPB avail the input tax credit of tax paid on such purchase?

Hon’ble Haryana Tax Tribunal in its judgement in the case of Sadhu Overseas, Faridabad Vs State of Haryana has held that DEPB is not ‘Goods’ and are not chargeable to tax under the provisions of Haryana General Sales Tax Act, 1973. Earlier, Hon’ble Supreme Court of India, in the case of Vikas Sales Corporation had held that ‘REP licenses’ are goods and are chargeable to tax under the State sales tax Act. In the case of Philco Exports, Hon’ble Delhi High Court held that ‘DEPB’ as goods and upheld the right of the State of Delhi to tax this. In the case of KMA Finished leather private Limited, Hon’ble Madras High Court held that ‘ Duty drawback’ availed of by the exporter dealer is not goods and should not be subject to tax as goods.

The Haryana State Cabinet approved proposal of Excise and Taxation Department Haryana on 7th January 2004 to amend Section 61 of Haryana Value Added Tax Act, 2003 to reduce tax rate on DEPB under Haryana General Sales Tax Act. In view of the judgement of Hon’ble Tax Tribunal of Haryana, the question of rate of tax on DEPB does not arise. Thus, the move of Haryana cabinet on the issue is not very clear.

Before analyzing the above judgements and their impact, let us first look at various export benefit schemes provided to the exporters. Idea behind all the schemes is to make exports free from the impact of excise duties paid on domestic inputs.

Rep License / Exim Scrips

The scheme of issuance of REP Licenses (Replenishment licenses) was in vogue till around six years back. Under this Scheme exporter of goods was given benefit to replenish his stocks of inputs by importing the same without payment of customs duty, used in the exports made by him. In other words, an exporter making export of goods by using domestic inputs on which excise duty has been paid is given the facility to import inputs without payment of customs duty, which virtually replenish the input stocks used by the exporter in making that export. The said REP licenses were transferable.

DEPB Scheme

DEPB (Duty Entitlement Pass Book) Scheme is an export incentive scheme provided in Import and Export policy. The objective of the scheme is to neutralize the incidence of basic custom duty on the import content of the exported products. Under the scheme, an exporter is eligible to claim credit as a specified percentage of value of exported product and is available at a rate of exported product as may be determined by Director General of Foreign Trade (DGFT). The credit amount in DEPB only entitles you to adjust that amount for payment of customs duty and is not permitted to be withdrawn or adjusted in some other manner. There is no bar for transfer of this credit to another person and from him to another person ie this credit amount is freely tradable.

Duty Drawback Scheme

The duty drawback scheme is another option available to exporters. Instead of opting for DEPB, an exporter can choose to take Duty drawback also. Under this scheme, exporter of goods is allowed to take back refund of money at a rate of exported products as may be determined by DGFT. It neutralizes the duty impact in the goods exported. In comparison to DEPB, this is the refund of money to exporter and is not an instrument which can be transferred to anybody.

Let us now consider the definition of goods under Haryana Value Added Tax Act, 2003 and under Central Sales Tax Act, 1956.

Definition Of ‘Goods’

The term "goods" in Haryana Value Added Tax Act, 2003 in Section 2(1)( r ) has been defined to mean Every kind of movable property, tangible or intangible, other than newspapers, actionable claims, money, stocks and shares or securities but includes growing crops, grass, trees and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale;

In Central Sales Tax Act, 1956, it has been defined as including materials, articles, commodities and all other kinds of movable property, but does not include newspapers, actionable claims, stocks, shares and securities.

In Haryana General Sales Tax Act, 1973, it was defined as Every kind of movable property other than newspapers, actionable claims, money, stocks and shares or securities but includes growing crops, grass, trees and things attached to or forming part of the land which are agreed to be severed before sale or under the contract of sale.

Nature Of DEPB

REP license were held as goods by the Hon’ble Supreme Court of India in the case of Vikas Sales Corporation Vs Commissioner of Commericial Taxes, (1996) 102 STC 106 (SC).

In the case of KMA Finished Leather private Limited Vs State of Tamil Nadu and others (2004) 184 STC 185, the Hon’ble Madras High Court held Duty Draw back as not goods. The Court held that " The drawback which is effected by issue of cheque by the Government for the amount of the drawbak, or by crediting the amount to the bank account of the exporter, is in effect a refund of the monies that had been paid by the exporter towards customs duty. What is refunded is only money. The amounts refunded are not traded and there is no sale of those monies."

DEPB has been held to be goods liable to tax in a land mark judgement of Hon’ble Delhi High in the case of Philco Exports Vs STO (2001) 124 STC 503 (Del). A contrary view has been taken by Haryana Tax Tribunal, Chandigarh in the case of Sadhu Overseas, Faridabad Vs State of Haryana decided on 21.10.03. This case decided under the provisions of Haryana General Sales Tax Act, 1973 held that DEPB is sort of money which can be used by the dealer himself or any body else to discharge the custom duty liability. As money is not goods, DEPB is therefore not covered by the definition of goods. In the said case, the judgments of Delhi High Court in the case of Philco Exports (Supra) and also of Hon’ble Supreme Court in the case of Vikas Sales Corporation (Supra) were not referred and not considered for arriving at the above decision. In the case of Philco Exports (Supra) before Delhi High Court, the petitioner had argued that even if it is conceded, for the sake of argument, that the same can be equated with goods they are part of excluded items either as actionable claim or money. The Hon’ble court in this connection referred to the judgement of apex court in the case of Vikas Sales Corporation and held that "As was observed by the apex Court in Vikas Sales' case [1996] 102 STC 106, when there is no restriction on the purchase and sale of DEPB freely and it has a value unrelated to the goods there is no scope of their being treated as actionable claim. DEPB for all practical purposes represent merchandise and is treated and dealt with as such in the commercial world. DEPB is neither a chose in action nor an actionable claim. It has a value of its own." After the land mark judgment of Delhi High Court on this issue, It looked that the issue of taxability of DEPB has been settled but the above judgment of Hon’ble Haryana Tribunal seemed to have created another controversy.

Though the words "Tangible or Intangible" has been included in the definition of ‘goods’ in HVAT Act, 2003, the same was not there in the definition of goods in HGST, 1973. But the above judgement equaled the DEPB with money while excluding it from the definition of goods under HGST Act. On the same ratio, DEPB should not be treated as " goods even under HVAT Act, 2003.

Further DEPB is an " Incorporeal" Property.

Salmond (Jurisprudence, Eleventh Edition, P. 156) says: "Corporeal property is the right of ownership in material things; incorporeal property is any other proprietary right in rem."

Paton in his Text Book of Jurisprudence (Second Edition, p. 408) states:

(1) A thing in the material sense which is corporeal and tangible and has an organic or physical unity, e.g., a horse or a block of marble.

(4) A thing which is neither material, corporeal, nor tangible but is an element of wealth, e.g., a copyright or a patent...

Applicable Rate Of Taxation On DEPB

Under Haryana Value Added Tax Act, 2003

"Incorporeal or Intangible goods" appear at entry no. 38 in Schedule C of Haryana Value Added Tax Act, 2003. The taxability of items appearing in Schedule C is provided in Sub clause (iii) of clause (a) of sub section (1) of Section 7, which providing for the rates of tax states that

7(1)(a)(iii) – in the case of goods specified in Schedule C, shall be calculated at four percent or such other rate not exceeding ten percent as the State Government may, by notification in the Official Gazette, direct ;

As no notification has been issued in respect of rate under the provisions of above section. The applicable rate of tax is 4%.

Thus DEPB is taxable at the rate of 4% under the Haryana Value Added Tax Act, 2003.

Under Central Sales Tax Act. 1956

Section 8 of Central Sales Tax Act, 1956 provides the applicable rate of tax on declared and undeclared goods. As DEPB is not a declared goods, the applicable rate of tax on it has been provided in clause (b) of sub section (2) of Section 8 as under ;

" in the case of goods other than declared goods, shall be calculated at the rate of ten percent or at the rate applicable to the sale or purchase of such goods inside the appropriate state, whichever is higher."

Thus, in the case of inter state sales, DEPB is taxable at the rate of 10% under the provisions of Central Sales Tax Act, 1956.

Lower Rate Of Tax

Under Haryana Value Added Tax Act, 2003

All sales made to Government or to VAT dealers is covered by sub section (2) of Section 7 of the Act. Clause (b) of sub section (2) of section 7 provides the rate of 4% or such lower rate applicable on the sale of such goods had it been a sale falling under clause (a) of sub section (1) :

As the rate of applicable tax rate on DEPB is 4%, the benefit given by sub section (2) becomes irrelevant, thus not discussed further.

Under Central Sales Tax Act. 1956

All inter state sales made to registered dealers are covered by clause (b) of sub section (1) of Section 8, which provides that sale to registered dealer other than Government of the goods of the description referred to in sub section (3) shall be liable to tax at a rate of 4% or at the rate applicable to the sale or purchase of such goods inside the appropriate state under the sales tax law of that state, whichever is lower.

The goods for which a registered dealer is eligible for lower rate of tax are provided under sub section (3) of Section 8 which states as

(b) "the goods of the class or classes specified in the certificate of registration of the registered dealer purchasing the goods as being intended for re-sale by him or subject to any rules made by the Central Government in this behalf, for use by him in the manufacture or processing of goods for sale or in the telecommunication network or in mining or in the generation or distribution of electricity or any other form of power."

Clause ( c ) and (d ) deal with containers and packing material, thus not discussed.

Sub section 4 requires the selling dealers covered by sub section (1) to procure form ‘C’ from Buying dealer in respect of the sales so made.

Rule 13 of Central Sales Tax (Registration & Turnover) Rules in respect of eligible goods under Sub section 3 of Section 8 prescribes as under.

"(13) The goods referred to in clause (b) of sub section (3) of section (8), which a registered dealer may purchase, shall be goods intended for use by him as raw materials, processing materials, machinery, plant, equipment, tools, stores, spare parts, accessories, fuel or lubricants, in the manufacture or processing of goods for sale, or in mining, or in the generation or distribution of electricity or any other form of power."

Eligibility To Purchase DEPB On Form C

In the light of above discussions, let us now analyse the eligibility of any dealer to buy DEPB at lower rate of tax ie 4% on the strength of declaration in Form ‘C".

The case of trader in DEPB, who buys it for the purpose of selling the same is squarely covered by first part of Section 8(3)(b), thus such dealer is eligible to buy DEPB at lower rate of tax on the strength of declaration in form ‘C".

A manufacturer of goods to be eligible to buy at lower rate of tax has to ensure that the goods or class of such goods are listed in his registration certificate and also are one from goods listed in Rule 13. Going by the nature of DEPB, it cannot be said to be anything provided in Rule 13. Taking the plea, that it is a medium for use of goods which fall under the rule 13 will also not hold good because of the following 1. DEPB can be used to pay off custom duty on imported goods only, which are not covered by any tax in the country.

2. DEPB may be used to import any goods, which may not be used in manufacture or processing of goods for sale.

It may be noted in this connection that Rule 13 has been worded in this manner that it excludes all other items and any thing to be eligible has to fall in any of the items provided in Rule.

In view of the above, it may be concluded that a manufacturer of goods is not eligible to use form C for purchase of DEPB at lower rate of tax ie 4% in inter state purchase.

Eligibility Of VAT Tax Paid On DEPB As Input Tax Credit

Under the Haryana Value Added Tax (HVAT), a manufacturer of goods is eligible to take credit of tax paid on the eligible inputs (input tax) used in the manufacture.

Input tax has been defined in Section 2(1)(w) as the amount of tax paid to the State in respect of goods sold to a VAT dealer, which such dealer is allowed to take credit of as payment of tax by him, calculated in accordance with the provisions of section 8;

VAT dealer has been defined in Section 2(1)(zs) as a registered dealer who is not a casual trader and in whose case composition of tax under section 9 is not in force, whether by choice or exclusion of law;

Registered dealer has been defined in Section 2(1)(zc) as a dealer registered under the Act.

Section 8(1) prescribes " Input tax in respect of any goods purchased by a VAT dealer shall be the amount of tax paid to the State on the sale of such goods to him and ………………………………… but shall not include tax paid in respect of goods specified in Schedule E used or disposed of in the circumstances mentioned against such goods."

Sub section (2) prescribes " A tax invoice issued to a VAT dealer showing the tax charged to him on the sale of invoiced goods shall, subject to the provisions of sub – section (3), be sufficient proof of the tax paid on such goods for the purpose of sub – section (1)."

Sub section (3) deals with a situation when input tax credit is called into question in any proceeding under the Act .. not relevant for our discussion.

Tax Invoice has been defined in Section 2(1)(zl) as an invoice required to be issued according to the provisions of sub – section (2) of section 28 by a VAT dealer for sale of taxable goods to another VAT dealer for re-sale by him or for use by him in manufacture or processing of goods for sale, and which entitles him to claim input tax in accordance with the provisions of section 8;

Section 28(2) relates to requirements of issuance of invoice for every sale ……….. not relevant to our discussion.

Retail Sale Invoice in Rule 54(1) has been prescribed to be issued by a VAT dealer ………….. when making sale of goods in the State to a consumer or to an unregistered dealer.

From the above it emerges that to avail of input tax credit, the VAT purchasing dealer needs to have a tax invoice issued by the selling VAT dealer. Considering that both the dealers ie Buyer and Seller of DEPB are registered under the Act, question remains that

  1. Can tax invoice be issued by registered dealer for sale of DEPB or Retail invoice needs to be issued for sale of DEPB considering buying dealer as Consumer of DEPB?
  2. On what basis a selling VAT dealer decides that buying VAT dealer is buying the concerned item (DEPB in this case) for re-sale or use by him in manufacture or processing of goods for sale?
  3. Should selling VAT dealer agree with the declaration in form VAT – D1 submitted by buying VAT dealer that DEPB purchased by him is meant for use by him in manufacture or processing of goods for sale?

Thus only in the case of sale of DEPB to a VAT dealer who intends to buy this for resale, a tax invoice can be issued. No declaration has been prescribed in the rules to be submitted by buying VAT dealer to Selling VAT dealer certifying that the proposed goods are meant for re sale by him. In the given scenario, all the selling dealers before issuing TAX invoice are advised to take a declaration from the buying dealers that the DEPB purchased but them are meant for resale. Such buying dealer of DEPB is also eligible to take input tax credit of tax paid by Selling VAT dealer.

The manufacturer dealers have to submit a declaration in form VAT – D1 to the selling dealer that they intend to use the goods (DEPB) in manufacture or processing of goods for sale. There does not seem to be any basis for issuance of such declaration in D1 for purchase of DEPB by manufacturing dealer.

At the same time, denial of input tax credit on DEPB is also against the spirit of Value Added Tax. When DEPB has been determined to be goods by the judicial pronouncements, it remains to be now determined whether user of these goods will be treated as final consumer of these or will these be related to the goods purchased with it ie in case goods meant to be used in manufacture are purchased by it, the input credit should be allowed and in case goods meant for consumption are purchased, input tax credit should be denied.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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