TaxTMI 
TaxTMI 
2009 (2) TMI 242
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....from the profits of the business of Rs. 13,04,00,973 the sum of 90 per cent of export incentive Rs. 5,18,932, training receipt Rs. 57,77,024, liabilities written back Rs. 11,63,256 and license fee Rs. 1,53,433 aggregating to Rs. 76,12,645, being Rs. 68,51,380 and determined business profit for the purposes of deduction under s. 80HHC at Rs. 12,35,49,592 (Rs. 13,04,00,973-Rs. 68,51,380). He computed deduction under s. 80HHC as under: BP x ET + (90% of EI x ET -- --- TT TT) BP=Business Profits : ET=Export Turnover TT = Total Turnover : EC = Export Incentives 12,35,49,592 x 9,02,90, 920 + (90% of 5,18,932 x 9,02,90,920) -----....
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....rt Promotion Scheme of the Government and that the words "derived from" indicated a direct nexus between the profits and gains on the one hand and the industrial undertaking on the other hand since under s. 80HH the expression used is "derived from the industrial undertaking". In that matter, on the facts, the Supreme Court held that since the export entitlements were made available under the scheme of the Government, the nexus between the profits and the industrial undertaking was only incidental and not direct. The AO further noted that the Bombay High Court has again reiterated this proposition in the case of CIT vs. S.C. Jhaveri Consultancy Ltd. (2000) 163 CTR (Bom) 593 : (2000) 245 ITR 854 (Bom) again in the case of CIT vs. Kantilal Chhotalal (2000) 163 CTR (Bom) 476 : (2000) 246 ITR 439 (Bom) the Bombay High Court held "In fact, the legislature have clarified that receipts like interest, commission, etc., have no nexus with export activity and by including such receipts in the business profits the existing formula became unworkable. Hence, by the amendment, such receipts were excluded." 7. The AO observed that the assessee has made a total sales of Rs. 129.76 crores out of....
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....export business. 11. The CIT(A) upheld the order of AO vide discussion as hereunder: "I have gone through the submission of the appellant and the observation of the AO carefully. In regards to training school receipts, the assessee charges from his clients for providing training to the customer with regard to operation of the system/product sold by the assessee. In this regard. I am inclined to agree with the conclusion of the AO that nature of the training school receipts do not have any element of turnover. Moreover, the training school receipts have no direct nexus with export business. The training school receipts are not derived from the export business of the assessee. The receipts are only incidental to the main business of the assessee. Thus, the receipts are neither part of the turnover nor they are derived from the export business of the appellant. After considering the facts and circumstances of the case, I also incline to agree with the opinion of the AO that the license fees for product of the company is merely a charge in the form of fees collected by the company from the user of his license. The license fees is neither part of the turnover nor they can be said ....
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....o separate existence from the main business carried out by the assessee. It is a constraint for the assessee to impart training to its purchasers for advancement or mere continuation in the business. In case the assessee stops imparting training, there may be a resultant negative effect upon its sales and in the fiercely competitive economy, the business may extinct altogether. Therefore, the imparting of training is in evitable for the business carried on by the assessee and any receipt arising therefrom is in the nature of business receipt and is a part of "profit of business" as contemplated under ss. 80HHC and 80HHE of the Act. The training school receipt is inextricably linked to the business and therefore, the entire earnings through the training school are the profits of the business of the assessee as they are derived from the business of the company. 13. As regards license fees, he submits that the assessee is a licensed user for Sprecher + Schuh (S + S) products which it had outsourced its right to use the above licences to one of its suppliers LECS for manufacture and supply of one of the products-industrial switchgears, in return for a certain fee. It was this fee co....
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....mmission, etc., accrue as a part of the main business activity or whether they accrue out of incidental business. 16. The receipts for training school receipts, license fees for products of the company and liabilities and provisions written back are not in the nature of brokerage, commission, interest, rent or other charges of similar nature mentioned in the cl. (baa) of Expln. to s. 80HHC and the AO erroneously held that the receipts by way of training school receipts are only incidental to main business of the assessee and therefore fall under the nature mentioned in the cl. (baa) of Expln. to s. 80HHC. He himself admitted that the same accrued to assessee from the business activity. Because training school receipts are received from the customers, who require certain stimulated exercises for using equipment. Therefore these services have direct nexus with main business of the appellant manufacturing and sale of equipments. Similarly, license fees for products of the company is not the charge, as stated by the learned AO, but the license fee collected from the company, who manufacture and supply the products i.e. industrial switchgears. Therefore, the license fee received by t....
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.... the Act. 19. We have heard the parties and considered the rival submissions. In K. Ravindranathan Nair's case the question was for treatment to be given to job charge receipts by the assessee. The assessee had a factory in which he processed cashew-nuts which were grown in his farm and thereafter exported them as an exporter. For processing, he had complete infrastructure, plant and machinery in his factory. At the same time, the assessee processed cashew-nuts which were supplied to him by exporters on job work basis. After processing, the assessee returned the processed cashew-nuts to the exporters. He earned processing charges. He made a claim for export incentive under s. 80HHC(3) in his return filed for the asst. yr. 1993-94. He did not include processing charges (receipts) in his total turnover. In his business profits at Rs. 1,94,08,220 processing charges (receipts) amounting to Rs. 1,54,68,811 were included but these processing charges were not included in his total turnover. The AO did not agree as according to him the gross total income of the assessee was Rs. 1,94,08,220 from which an amount of Rs. 1,74,13,200 (90 per cent) was to be deducted in terms of cl. (baa) to ....
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.... income being business profits. This has been clarified by cl. (baa) to the said Explanation which inserted the definition of "profits from business" in the said s. 80HHC(3) of the IT Act. In the present case, the AO had worked out the business profits of Rs. 1,94,08,220 as the gross total income on the basis of income received from cashew business. Even according to the assessee, in the above formula his business profits included the above-mentioned processing charges. However, according to the assessees, the said charges were not to be included in the total turnover. We are not inclined to accept the contention of the assessees. The above discussion indicates that the formula in s. 80HHC(3) of the IT Act provided for a fraction of the export turnover divided by the total turnover to be applied to business profits calculated after deducting 90 per cent of the sums mentioned in cl. (baa) to the said Explanation. That, profit incentives and items like rent, commission, brokerage, charges, etc., though formed part of gross total income had to be excluded as they were "independent incomes" which had no element of export turnover. That, the said items distorted the figure of export pro....
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.... income and every income would not necessarily include element of export turnover. This aspect needs to be kept in mind while interpreting cl. (baa) to the said Explanation. The said clause stated that 90 per cent of incentive profits or receipts by way of brokerage, commission, interest, rent, charges or any other receipt of like nature included in business profits, had to be deducted from business profits computed in terms of ss. 28 to 440 of the IT Act. In other words, receipts constituting independent income having no nexus with exports were required to be reduced from business profits under cl. (baa). A bare reading of cl. (baa)(1) indicates that receipts by way of brokerage. commission, interest, rent, charges, etc., formed part of gross total income being business profits. But for the purposes of working out the formula and in order to avoid distortion of arriving at the export profits, cl. (baa) stood inserted to say that although incentive profits and "independent incomes" constituted part of gross total income, they had to be excluded from gross total income because such receipts had no nexus with the export turnover. Therefore, in the above formula, we have to read all t....
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....." 21. This case in our answers all the questions raised by the assessee against it. The training receipts are independent receipts. Though it may have a relation to the supply made by the assessee's tailor-made specialized products known as Integrated Control Automation Monitoring System, PLC Systems, Static Frequency Converters, Operator Interface, Terminal Blocks, Drives, and Software etc. it may also be that to operate these systems/products, prior training is required to be given to the customers with respect to their usage, which is also mandatory in nature to operate these systems/products effectively and that the training given to the customers requires certain stimulated exercises to upgrade the reflexes of the user, else it may lead to damage to the equipment and loss of production. But these are independent receipts and not a condition precedent for the supply. We have seen some of the bills of the supply and the training receipts. They do not have any correlation. There are supplies without any such training and there are receipts without the supply of the product. These are no doubt business receipts but independent to the main supply and therefore rightly excluded ....
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....T (1991) 100 CTR (SC) 267 : (1992) 193 ITR 321 (SC) upheld the decision of the CIT and the Tribunal that in the absence of any change in the facts and circumstances of the case, the view taken for the earlier assessment years continued to be applicable even for the year under consideration. 26. The AO disallowed the claim vide discussion in para 5.3 as under: "5.3 The reply of the assessee is considered carefully, The assessee has taken various premises all over the country on rent/lease. On taking the premises on rent/lease the assessee carried out substantial alteration and modification in the premises taken on lease/rent. The provision of Expln. 1 to s. 32 of the IT Act unambiguously stipulates that where the business of the assessee is carried on a premises not owned by it but leased, any capital expenditure incurred by the assessee by way of renovation, extension, improvement, will be considered as being incurred on its own premises and the assessee would be entitled to depreciation on that expenditure. This being the express condition in law, the assessee's method of amortising the leasehold improvement expense is an incorrect method. The assessee's reliance on the Supr....
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....l Investment Corporation Ltd. vs. CIT (1997) 139 CTR (SC) 555 : (1997) 225 ITR 802 (SC) is not applicable in the case of the appellant as the facts of the case of the appellant is entirely different. The nature of expenses in the said case was of revenue in nature whereas in the case of the appellant, it has been found by the AO that the expenditure were of capital in nature. The case of Madras Industrial Investment Corporation Ltd. vs. CIT pertaining to expenditure incurred by the assessee on the issue of debentures which were to mature after 12 years. Hence, the Hon'ble Supreme Court allowed the proportionate expenditure incurred in connection with the issuance of debentures over the maturing period. Ordinarily, revenue expenditure which is incurred wholly and exclusively for the purpose of business must be allowed in its entirety in the year in which it is incurred. It cannot be spread over a number of years even if the assessee has written it off in his books over a period of years. In the said judgment, the Hon'ble Supreme Court held that the word "expenditure" covered "a liability which the assessee has incurred in praesenti although payable in futuro" and would also cover no....
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.... the view taken for the earlier assessment years continues to be applicable even for subsequent years. 29. We have heard the parties and considered the rival submissions. The assessee, after taking various premises on rent/lease in different places across the country, carried out substantial alterations and modifications in the said premises. Therefore, prima facie the expenses were of capital in nature. Even if the premises were on lease, because of the provision to Expln. 1 to s. 32 of the Act the expenditure of capital nature on the construction of any structure or doing of any work in or in relation to and by way of renovation or expansion or improvement to the building, it is to be assumed as if the said structure or work is a building owned by the assessee. The case of Madras Industrial Investment Corporation Ltd. vs. CIT cannot be applied to the case of the assessee as the nature of expenses in the said case was of revenue in nature whereas in the present case of the assessee the expenditure is of capital in nature which is deemed to be a building owned by the assessee. A revenue expenditure whose benefit extends over some years which is claimed by the assessee can only b....