TaxTMI 
TaxTMI 
2013 (12) TMI 8
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....ide. 2. The instant appeals were admitted to consider the substantial question of law framed in the memorandum of appeals. However, with the assistance of learned counsel for the parties, we have reformulated the question, which reads as under:- Whether on the facts and in the circumstances of the case, and in law, the Tribunal was justified in holding that the service income amounting to Rs.1,79,26,506/- for the assessment year 1999-2000; Rs.1,93,70,373/- for the assessment year 2000-2001; Rs.91,26,240/- for the assessment year 2001- 2002 and Rs.1,99,57,875/- for the assessment year 2002-2003 related to technical services rendered by the assessee-Company in India and therefore, there was no justification to exclude 90% of the service income while computing eligible profits under Section 80HHE of the Act, even though, there is a clear finding of the Assessing Officer that the service charges are directly related to the business profit? 3. The assessee is engaged in computer software exports, domestic sales and providing technical services in and outside India and so also in manufacturing and sale of fuel injection pumps. For the assessment years in question, t....
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....pinion that 90% of service income cannot be excluded from global business profit in determining the eligible profit u/s 80HHE. Accordingly, the Assessing Officer is directed not to exclude 90% of the service income from business profit while allowing relief u/s 80HHE for all the three years under appeal." The Tribunal confirmed the order passed by the AA in respect of all the four assessment years vide order dated 21.12.2006. 5. The AA as well as the Tribunal observed that for the relevant assessment years there was no justification to exclude 90% of the service income. Besides this, these authorities also held that the service income forms a part of the income of business of the assessee and was liable to be considered as a part of the profits of business in view of Explanation (d) to Section 80HHE of the Act. The Appellate Authorities, accordingly, were of the view that the service income was not in the nature of brokerage, commission, interest, rent or charges. Accordingly, these authorities directed the Assessing Officer not to exclude 90% of the service income from business profits while granting relief under Section 80HHE for all the four years. 6. We have heard lear....
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....s per Explanation (d). 7. On the other hand, Ms.Tanmayee, learned counsel for the respondent vehemently submitted that the service income earned by the respondent being an integral part of its business, it cannot be excluded to the extent of 90% from the profits of the business as it does not fall within purview of Clause (d) (1) of the explanation i.e., brokerage, commission, interest, rent or charges or any other receipt of similar nature. She submitted that it is clear from Explanation(d) to Section 80HHE that the entire profits of business whether arising in India or outside India are to be taken into account except those specifically mentioned in sub-clause(1) of Clause(d) of the Explanation. Service income is not one of those and merely because the income is earned in India, the same cannot be excluded to the extent of 90% resorting to Clause(1) of Explanation(d). Next, she submitted if the revenue's contention that only the income having nexus to export is to be included in the profits of the business is accepted, the formula for determining the eligible profits under Section 80HHE(3) would become redundant, and the very necessity to apply the proportion of export turnove....
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....arriving 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." (emphasis supplied) The Supreme Court, then, in paragraph 23 observed that the nature of every receipt needs to be ascertained in order to find out whether the said receipt forms part of / or it has an attribute of export turnover. 10. From perusal of the judgment of the Supreme Court in Ravindranathan Nair, it appears to us that receipts by way of brokerage, commission, interest, rent or charges constitute independent incomes. Being independent incomes unrelated to export, Parliament contemplated that 90% of such receipts would have to be reduced from profits of the business as defined in Explanation(baa). The Supreme Court, therefore explained the rational stating that, "profit incentives and items like brokerage, commission, interest, rent or 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, th....
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....pt is liable to undergo a reduction of ninety per cent the basic prescription which must be borne in mind is whether the receipt is of a similar nature and is included in the profits of business. To be susceptible to a reduction the receipt must be of a nature similar to brokerage, commission, interest, rent or charges". "Clause (a) of sub-section (3) specifies that where the export is of goods or mechandise manufactured or processed by the assessee the profits derived from the export shall be the amount which bears to the profits of business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee. In other words, in determining the profits derived from the export of goods or merchandise the proportion of the export turnover to the total turnover of the business is applied to the profits of the business. The profits of the business in turn are defined in Explanation (baa) to section 80HHC. Hence, the element of export turnover is a facet which has been taken care of by the Legislature in the application of the formula which is referred to in sub-section (3) of section 80 HHC. In dete....
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.... of the assessee situate outside India;" Under Explanation (d), the profits of business are defined to mean the profits of the business as computed under the head of profits and gains of business or profession. This has to be reduced under Sub-clause (1) of Clause (d) by 90% of any receipts by way of brokerage, commission, interest, rent or charges of a similar nature included in such profits. Receipts by way of brokerage, commission, interest, rent or charges as noticed earlier have been held, by the Supreme Court in Ravindranathan Nair (Supra) to constitute independent incomes. Being independent incomes unrelated to export 90% of such receipts would have to be reduced from the profit of business as defined under Explanation (d). As observed by the Bombay High Court in PFIZER (supra), in determining in each case as to whether a receipt which forms part of the profits of business is liable to undergo a reduction of 90% as stipulated in Sub-Clause (1) of Clause (d) of the Explanation, it is necessary to consider whether the receipt is of a similar nature included in such profits. The rational for excluding 90% of the receipt by way of brokerage, commission, interest, rent or char....
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....le of fuel injection pumps. This being so, the question is whether 'service income' would also fall in the category of receipts by way of brokerage, commission, interest, rent, charges or any other receipts of similar nature included in such profits. In other words, whether the 'service income' could be treated as receipt of a similar nature. 20. It is true that the Supreme Court in Ravindranathan Nair (supra) observed that the receipts constitute independent income having no nexus with the export would require to be reduced from business profits under Clause (baa) of the explanation appended to Section 80HHC of the Act. At this stage, it is necessary to notice that clause (d) of the explanation does not refer to export turnover. Sub-Section(1) of Section 80HHE of the Act contemplates deduction to the extent of profits derived by the assessee from the export out of India on computer software or its transmission from India to a place outside India by any means or providing technical services outside India in connection with the development or production of computer software to which this section applies. The formula in sub-Section(3) of Section 80HHE of the Act has been provided ....