2000 (8) TMI 74 - HC - Income Tax

Profits from domestic job-work service charges lack direct nexus to exports and are not deductible under section 80HHC

Commissioner Of Income-Tax Versus KK. Doshi And Co.

HC held that profits from service charges for domestic job-work lacked the required direct nexus with export activity and thus were not deductible under ... Deduction under section 80HHC - manufacture and export of polished diamonds out of India - earned profits from exports - whether service charges constituted business income for the purposes of computing export profits under section 80HHC - HELD THAT:- No reasons have been given by the first appellate authority for setting aside the above finding of fact recorded by the Assessing Officer. The only reason given by the Tribunal is that the judgment of the Gujarat High Court has no application to the facts of the case and that the first appellate authority had rightly allowed the claim of the assessee. Section 80HHC was intended to provide incentives to promote exports to earn foreign exchange for the country. The incentive provided was in the form of exemption of profits relatable to exports. In the present matter, on facts, the Department has clearly established that the assessee-firm exported polished diamonds out of India. However, during the lean season, the assessee-firm undertook work of polishing on job-work/contract basis for third parties in India. For this job work, the assessee charged service charges. The object of section 80HHC is to ascertain the export profits. It may be mentioned that in this case we are concerned with the law prior to the assessment year 1992-93. Section 80HHC(1) clearly states that in computing the total income of the assessee, there shall be a deduction of the profits derived by the assessee from the export of goods. In other words, there should be a direct nexus between the profits on the one hand and the export activity on the other hand. Applying the ratio of the judgment of the Supreme Court in CIT v. Sterling Foods[1999 (4) TMI 1 - SUPREME COURT] to the facts of our case, the profits earned by the assessee on account of service charges cannot be said to have a direct nexus with the export activities of the assessee. Hence, to that extent, the assessee was not entitled to claim deduction under section 80HHC. Issues Involved:The judgment addresses the issue of whether service charges constitute business income for computing export profits under section 80HHC of the Income-tax Act.Summary:The High Court of Bombay heard two appeals concerning the treatment of service charges in calculating export profits under section 80HHC. The Department argued that service charges should be excluded as they did not relate to export activities. The assessee contended that service charges were part of their business income. The court found that the service charges earned during a lean season were not linked to export activities and should be de-linked from business profits for calculating the deduction under section 80HHC.The court analyzed the legislative intent behind section 80HHC, emphasizing the need for profits to be directly derived from export activities. It discussed the formula for computing export profits and highlighted the amendments made to prevent distortion in calculating deductions. Referring to a Supreme Court judgment, the court emphasized the requirement of a direct nexus between profits and export activities. It concluded that the service charges did not have a direct nexus with export activities and, therefore, the assessee was not entitled to claim a deduction under section 80HHC.In light of the above analysis, the court set aside the Tribunal's judgment and allowed both appeals with costs.