TaxTMI 
TaxTMI 
2010 (4) TMI 153
X X X X Extracts X X X X
X X X X Extracts X X X X
....urpose of computation of deduction under section 8OHHC of the Income-tax Act, 1961?" 3. The issue that has been the subject-matter of submissions in this appeal is whether 90 per cent. of the recovery of freight, insurance and packing receipts ; sales tax set off/refund and service income are liable to be excluded from the profits of business in view of Explanation (baa) to section 80HHC. Sub-section (1) of section 80HHC contemplates a deduction to an assessee being an Indian company or a person resident in India and engaged in the business of the export out of India of any goods or merchandise to which the section applies. The deduction is to be allowed in computing the total income of the assessee to the extent of profits referred to in sub section (1B) derived by the assessee from the export of such goods or merchandise. Clause (a) of sub-section (3) of section 80HHC provides a formula for determining the profits derived from such export. Where the export out of India is of goods or merchandise manufactured or processed by the assessee, the profits derived from such export "shall be the amount which bears to the profits of the business", the same proportion as the export turn....
X X X X Extracts X X X X
X X X X Extracts X X X X
....anathan Nair that independent incomes which are unrelated to the export activity are liable to be excluded in the computation of business profits by virtue of Explanation (baa) to section 80HHC. The contention of the Revenue is that processing charges were specifically dealt with by the Supreme Court in its judgment and that consequently the view of the Tribunal is ex facie erroneous. Learned counsel submitted that the other items which are referred to in the question formulated would also be governed by the same principle and being independent incomes, unrelated to exports these would be liable to exclusion in accordance with Explanation (baa) to section 80HHC. 7. On behalf of the assessee the contention of the Revenue that the issue would be covered by the decision in Ravindrana than Nair is seriously contested. Learned counsel urged that (i) if an item of income is closely linked with business operations, that is to say, it constitutes operational income, then it cannot be excluded under Explanation (baa) to section 80HHC; (ii) the aforesaid proposition is directly supported by a decision of a Division Bench of this court in Bangalore Clothing [2003] 260 ITR 371 which must be....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... "included in such profits" indicated that the processing charges formed a part of the gross total income, being business profits. The contention of the assessee that the processing charges were liable to be excluded from the total turnover was rejected by the Supreme Court. The question as to whether the processing charges: (i) constitute independent income like rent, commission and brokerage; and (ii) were liable to be excluded to the extent of 90 per cent. from the gross total income while arriving at business profits was dealt with in the following observations (page 240): "In our view, for the above reasons, the said processing charges, which was part of gross total income, was an independent income like rent, commission, brokerage, etc., and, therefore, 90 per cent. of the said sum had to be reduced from the gross total income to arrive at the business profits and since the said processing charge was an important component of business profits, it also had to be included in the total turnover in the said formula to arrive at the business profits in terms of clause (baa) to the said Explanation." 9. The Supreme Court emphasized that Explanation (baa) requires that "receip....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... includible in the total turnover. Hence, it was submitted that the question as to whether processing charges, formed part of the business profits and if so, whether they would be susceptible to a reduction of 90 per cent. did not fall for determination of the Supreme Court. We are unable to accept the sub mission. The question which was formulated in the appeal before the Supreme Court was whether the Department was right in including the processing charges of Rs. 1.54 crores in the total turnover while arriving at export profits under section 80HHC (3). As the Supreme Court noted, in construing the provisions of section 80HHC, there are four variables which are required to be considered, viz., business profits, export turnover, total turnover and 90 per cent. of the sums referred to in Explanation (baa) (paragraph 22 page 241). Consequently, the ambit of the controversy which was raised before the Supreme Court did as a matter of fact require a determination of the nature of the receipts of a similar nature which are liable to be excluded under Explanation (baa) though they constitute a part of the profits of business. The Supreme Court has in several observations more particular....
X X X X Extracts X X X X
X X X X Extracts X X X X
....noted that though the receipt in question was called a labour charge, this nomenclature may not be accurate as the assesse was a manufacturer and exporter of garments. The court noted that there was a finding of fact recorded by the Tribunal that there was no difference between the activities relating to export business carried out by the assessee and the process carried out for manufacturing garments for others under job work contracts. There was a finding of fact in the order of the Tribunal that there was an element of job work turnover and that the receipt of labour charges was not in the nature of brokerage, commission, rent, interest or charges as mentioned in Explanation (baa). The processing charges earned were by using the entire undertaking of the company which was manufacturing garments for domestic sales and export sales and the processing charges were earned by incurring expenditure which was debited to the profit and loss account. In these peculiar facts the Division Bench held that it did not wish to interfere with the finding of fact that was recorded by the Tribunal. 13. We have dealt with the observations of the Division Bench in Bangalore 13 Clothing [ 260 ITR....
X X X X Extracts X X X X
X X X X Extracts X X X X
....selling marine products both in the domestic and international markets in pursuance of a contract which it had entered into with export houses. The assessee received the entire FOB value of the exports together with a payment which was described as an export house premium of 2.25 per cent. of the FOB value. The Tribunal in that case held that the export house premium received by the assessee was includible in the profits of the business under section 80HHC. The contention of the Revenue before the Supreme Court was that as a supporting manufacturer, the assessee was entitled to a deduction only on the sale price of its goods and the premium received could not be held to be derived from the business of export. Before the Supreme Court reliance was placed by the assessee on the judgment of the Division Bench of this court in Bangalore Clothing [2003] 260 ITR 371 in support of the submission that if a particular receipt is in the nature of an operational income, it must be included in business profits. The Supreme Court held that the assessee being a supporting manufacturer under section 80HHC (1A) it was entitled to a deduction of the profit derived from the sale of goods or merchand....
X X X X Extracts X X X X
X X X X Extracts X X X X
....e Clothing [2003] 260 ITR 371 was either expressly or impliedly approved. The submission which has been urged on behalf of the assessee cannot, therefore, be accepted. The ambit of Explanation (baa) has been considered by the judgment of the Supreme Court in Ravindranathan Nair's case [2007] 295 ITR 228. The legislative policy underlying the provision is that items which are unrelatable to the export activity must be excluded in the computation of business profits in order to prevent a distortion in the computation of the deduction under section 80HHC. What provision should be made consistent with the legislative policy underlying section 80HHC is evidently a matter for Parliament to determine. The duty of the court is to interpret the language of the provision. In the present case the interpretation of the provision by the Supreme Court is binding and has to be followed. 16. We may note at this stage that counsel appearing on behalf of the assessee has relied upon the decisions of the Supreme Court in Goodyear India Ltd. v. State of Haryana [1991] 188 ITR 402, CIT v. Sun Engineering Works P. Ltd. [1992] 198 ITR 297, Jayantibhai Manubhai Patel v. Arun Subodhbhai Mehta [1990] 26 ....