Excise duty and sales tax in "total turnover" for s.80HHC export deduction formula excluded; deduction to be recomputed accordingly

Whether excise duty and sales tax should be excluded from "total turnover" while computing deduction under s. 80HHC(3)(c)(i) was the dominant issue. Applying the restrictive construction adopted in binding HC authorities, the Tribunal held that although such levies may form part of turnover in general commercial parlance, for s. 80HHC the formula must use only sale consideration having an element of profit; excise duty and sales tax, being statutory collections without profit element, cannot inflate the denominator. Consequently, the AO was directed to recompute s. 80HHC deduction by taking export turnover and total turnover net of excise duty and sales tax.

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Issues: Whether, for computing deduction under section 80HHC(3)(c)(i) of the Income-tax Act, 1961, the amounts of excise duty and sales-tax recovered and included in local sales must be excluded from the figure of "total turnover" so as to align the denominator with the "export turnover" which does not include such levies.

Analysis: The statutory framework comprises section 80HHC (including sub-section (3) and the Explanations defining "export turnover" and "total turnover"). "Export turnover" is defined as sale proceeds received in convertible foreign exchange and expressly excludes freight and insurance; Explanation (ba) excludes freight, insurance and certain export incentive receipts from "total turnover". Judicial and commercial meaning of "turnover" ordinarily includes amounts collected as taxes or duties if they form part of the sale consideration, as reflected in earlier authorities and accepted commercial dictionaries. However, the purpose of section 80HHC is to compute export-derived profits and the apportionment formula in sub-clause (i) of clause (c) requires a denominator that reflects only that part of local receipts which bears an element of profit. Where excise duty and sales-tax are mere pass-through levies without an element of profit, including them in "total turnover" would distort the apportionment with "export turnover" which excludes such levies. Precedents and statutory text show that specific exclusions are made where intended; nonetheless, the provision must be construed to produce a fair apportionment of export profit by taking "total turnover" net of receipts that do not carry profit. Applying these principles to the facts, excise duty and sales-tax recovered in local sales are to be excluded from "total turnover" for the purposes of computing deduction under section 80HHC(3)(c)(i).

Conclusion: Deduction under section 80HHC is to be computed by applying the formula in section 80HHC(3)(c)(i) with "total turnover" and adjusted turnover excluding the amounts of excise duty and sales-tax; outcome is in favour of the assessee.

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