Section 80HHC: apply sub-section (3)(b) formula when export turnover equals total turnover; allow proportionate export profit deduction

ITAT held that for section 80HHC the formula in sub-s. (3)(b) applies where export turnover constitutes total turnover, and export-related commission forms part of profits derived from export business even if the commission itself was not received in convertible foreign exchange, provided sale proceeds were in convertible exchange. The bench directed proportionate deduction of export profits to total profits as per s.80HHC(3)(b). However, the disallowance of interest (treated as relating to loans used to pay income tax) was upheld. Appeals allowed in part.

---

---

Issues Involved:
1. Interpretation of section 80HHC regarding the aggregation of export and domestic turnovers.
2. Eligibility of commission received on assignment of export orders for deduction u/s 80HHC.
3. Disallowance of interest on loans utilized for payment of income-tax.
4. Consequential deletion of interest levied under sections 234B and 234C.

Summary:

1. Interpretation of section 80HHC:
The principal issue was the interpretation of section 80HHC, specifically whether the aggregation of both export and domestic turnovers for the purpose of apportioning export profits was intended by the legislation. The Tribunal noted that the provision aimed to provide incentives to accelerate exports by granting exemption on export-related profits. The Tribunal held that the term "total turnover" in section 80HHC(3)(b) includes both export and domestic turnover, and the profits should be apportioned based on the ratio of export turnover to total turnover. It was emphasized that this interpretation aligns with the legislative intent to promote exports without curtailing the benefit for those with domestic business as well.

2. Eligibility of commission received on assignment of export orders:
The Tribunal addressed whether the commission received on the assignment of export orders could be considered as profits derived from export business eligible for deduction u/s 80HHC. It was held that such commission has a direct nexus with the export business and should be included in the "profits of the business" for the purpose of calculating the relief under section 80HHC. The Tribunal rejected the argument that there should be profit in the export business for apportionment, stating that the focus is on the export turnover rather than the profit in export.

3. Disallowance of interest on loans utilized for payment of income-tax:
The Tribunal upheld the disallowance of Rs. 65,000 on account of interest payable by the assessee on the ground that the interest pertained to loans utilized for payment of income-tax and not borrowed for the purpose of the assessee's business. The direct nexus between the borrowals and the payment of advance tax was established, justifying the disallowance.

4. Consequential deletion of interest levied under sections 234B and 234C:
The Tribunal directed the Department to give appropriate relief concerning the interest levied under sections 234B and 234C, based on the modifications made in the assessment as per the Tribunal's order.

Conclusion:
The Tribunal concluded that the assessee is entitled to the claim made under section 80HHC, including the commission received from export orders, and upheld the disallowance of interest on loans used for tax payments. The appeals were allowed in part, with directions for consequential relief on interest levied.

---