Under pressure to deliver on revenue targets before the end of the year, income tax officials have found a new source of revenue -- the Rs 10,000 crore (Rs 100 billion) export benefits given out each year in the form of Duty Entitlement Passbook Benefits.

Taking a their cue from a recent judgment by the Bombay high court in the Rohan Dyes case, the taxman has started sending notices to various pharmaceutical companies, steel exporters, and a host of other industries, asking for taxes to be paid for the past seven years on DEPB benefits claimed by these units as tax exemptions.

The matter has been taken up by the commerce ministry, the finance ministry as well as the Prime Minister's Office.

Exporters are allowed to take their benefits in the form of advance licenses, duty drawback or the DEPB. But Section 28 Para iii(a) of the income tax Act was not amended to take into account the fact that DEPB benefits will also be tax-exempt as was done in the case of duty drawback.

Exporters have been arguing that since DEPB is nothing but a substitute for advance license or duty drawback, and is a refund of actual Customs duty paid on imports made for the purposes of export, it cannot be taxed.

Former FIEO chief Ramu S Deora has sent a memorandum to the Prime Minister, arguing that "in every platform, including WTO and Parliament, the government clarified that DEPB and duty drawback is a reimbursement of Custom duty, but not any subsidy".

Tax officials, however, have been treating DEPB income as local sales in some cases, and argue that this is taxable.

The dispute centres around the fact that in most cases, exporters show two types of accounts. One to do with manufacturing and the other to do with exports.

Since exporters know that they will get certain export benefits, they often sell their products at below-cost and make this up through export benefits. So, the 'manufacturing' account shows losses while the 'export' account shows profit.

As per a recent ruling of the commissioner, appeals of income tax, "If there is a positive profit before export incentive, then only the assessee is eligible for deduction U/s 80HHC . . . (if there is) negative profit or loss ... before considering export incentive . . . the CIT (has) disallowed the deduction U/s 80HHC."

In other words, the taxman is challenging the authenticity of the claim by exporters that they sell below cost and make their profits through various incentives like DEPB.