TaxTMI 
TaxTMI 
2017 (2) TMI 1009
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....eed to be reduced from the export turnover of such goods had to be computed with reference to all costs and not only those costs which were attributable to export of trading goods? iii. Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the write back of liabilities is squarely covered by the expression "any other receipt of similar nature" and consequently 90% thereof was to be excluded from profits of the business in terms of explanation (baa) of Section 80HHC of the Act? 2. The assessee is engaged in the business of manufacturing packaging cartons and packaging machinery. It carries out its activities under the following divisions: a) Packaging division b) Paper Board division c) Machine Manufacture division d) Writing and specialty paper division e) Machine Trading Division. 3. During the relevant assessment years i.e. 1994-95, the assessee exported cartons from the packaging division, packaging machines and bought out components from the Machine Trading division. In addition to exports, these divisions also had local sales. The assessee in its return of income for the assessment years 1994-95 claimed deduction u....
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....eduction under Section 80HHC had to be calculated with reference to the profits and turnover of the divisions carrying on export business only, or the entire business of the assessee had to be considered, the ITAT found in favor of the Revenue. In relation to the computation of the "indirect costs", the ITAT found that the method adopted by the assessing officer could not be faulted and therefore, reversed the CIT (A)'s order on that issue. As regards the issue of exclusion of amounts written back by the assessee, the ITAT set aside the order of the CIT(A) and confirmed the AO's order. The assessee therefore appeals to this court. Proceedings before the CIT(A) and ITAT 6. The assessee had contended before the CIT(A), that deduction under Section 80HHC had to be based on the profits and turnover of only the export divisions of its business, without taking into account the entire business, i.e without including those divisions that were unrelated to export activity. The assessee contended that each division of the assessee's business was a separate unit for which separate accounts were maintained and therefore deduction under Section 80HHC should be computed with reference to expor....
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....y Agro Industries Ltd., 257 ITR 41, stating that "total turnover" unambiguously referred to the total turnover of the entire business and not just the turnover of exports. In relation to the computation of "indirect costs", the ITAT found that the computation by the AO was in accordance with the definition of "indirect costs" provided in Explanation (e) to Section 80HHC(3). Therefore, on this issue, the ITAT reversed the findings of the CIT(A) and upheld the computation of the AO. Regarding the amounts written back by the assessee, the ITAT held that such written back liabilities are squarely covered by the expression "any other receipt of similar nature" in Explanation (baa) of Section 80HHC and such amounts had to be excluded from the "profits of the business". Thus, on the third issue as well, the Tribunal found in favour of the Revenue and reversed the order of the CIT(A). Question (a) 8. Section 80HHC was introduced by the Finance Act of 1983, with effect from 01.04.1983 to provide incentives to exporters and allow for deductions for persons involved in the export business. The relevant parts of Section 80HHC are extracted below: "(1) Where an assessee, being an Indian compa....
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....sed by the assessee and of trading goods, the profits derived from such export shall, - (i) in respect of the goods or merchandise manufactured or processed by the assessee, be the amount which bears to the adjusted profits of the business, the same proportion as the adjusted export turnover in respect of such goods bears to the adjusted total turnover of the business carried on by the assessee; and (ii) in respect of trading goods, be the export turnover in respect of such trading goods as reduced by the direct and indirect costs attributable to export of such trading goods." 9. The first question that arises before the court is what is meant by the term, "total turnover of the business carried on by the assessee". On this point, the ITAT has relied on the decision of the Kerala High Court in Parry Agro (supra) as well as the decision of the Special Bench of the ITAT (Delhi) in International Park Research Laboratory (supra) to hold that the expression "total turnover" refers to the total turnover of the entire business of the assessee. The assessee relied on the decision of the Madras High Court in Madras Motors Ltd. (supra) for saying that "total turnover of the business" can ....
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....erminology is used in respect of the goods and merchandise. When a plain meaning has to be given to the opening part of the section, it is clear that the word "business" means the business relating to the goods to which the section applies and the thrust is on the word "exclusively". The sub-section considers a situation where the assessee's business is of exports and the assessee's business is not that of export alone. However, one thing is certain that the business has to be only in respect of the goods or merchandise to which the section applies. As has been stated earlier, the thrust is on the word "exclusively". The legislature has rightly intended the situation where the business could be relating to the goods which would fetch the foreign exchange but there could also be the business in relation to these goods which may not be exported or which may not fetch foreign exchange. However, the whole sub-section speaks only about the goods, which are exportable, exported and fetch foreign exchange. It is, therefore, clear that the thrust of the opening clause of clause (b) of sub-section (3) has a stress on the words "does not consist, exclusively of the export". The sub-s....
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....ich are outside the scope of clause (a) of sub-section (2). Hence, we are of the clear opinion that the turnover from the business of sale of motorcycles, motorcycle spare parts, television sets cannot be introduced to inflate the total turnover artificially in order to reduce the benefit which the assessee is entitled to. That would be clearly going against the object of section 80HHC, which is solely to encourage the exports." 10. The above decision of the Madras High Court was followed and applied by this Court in Commissioner of Income Tax v. Padmini Technologies, 2011 VIII AD (Delhi) 425, where the Court interpreted the term "total turnover of the business" in Section 80HHC. This Court held that: "It is pertinent to note that the revenue has not assailed before us the finding of fact returned by the Tribunal that in so far as the two businesses were concerned, they were carried on in two separate undertakings. It was also not disputed that in respect of the said undertakings, the Assessee maintained separate books of accounts and also prepared separate profit and loss accounts and balance sheets. In the judgment of Madras Motors Ltd. (supra), the rationale given is that the ....
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....#894;" 13. In this case, the AO in computing the "indirect costs" has taken into consideration all costs (other than the direct costs) debited to the Profit and Loss account, such as manufacturing costs, which are not related to the export turnover. The ITAT in its decision held that the same was in conformity to the method prescribed under the statute. On this point, the Supreme Court in Hero Exports v. Commissioner of Income Tax, (2007) 13 SCC 1, had the occasion to interpret the term "indirect costs" as defined in Explanation (e) to Section 80HHC(3). The Court in that case held as follows: "Under Section 80HHC(3)(b) which is the main section, the Legislature has provided that in cases falling under Section 80HHC(3)(b) direct and indirect costs attributable to such exports have to be deducted from the export turnover to arrive at Export Profits. Similar provision is made in Clause (d) which defines the words "direct costs" to mean costs attributable to exports of trading goods. Moreover, Clause (e) of the Explanation defines "indirect costs" as costs which is not direct costs as defined in Clause (d). Firstly, Clause (e) to the Explanation which refers to allocation of costs a....
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....the business same ratio as the export turnover bears to the total turnover of the business carried on by the assessee. Further Explanation (baa) to s. 80HHC defines the "profits of the business" as profits of the business as computed under the head "Profits and gains of business or profession" as reduced by the specified deductions. It is contended that the items to be excluded from the profits of the business have to be seen in the context of the assessee's business activities. In the case of a manufacturing company which undertakes exports, receipt of interest or commission may not be operational income because they do not have the element of turnover and consequently Explanation (baa) will apply. However, that would not be the case if the assessee were carrying on financing business because the interest income which accrues will have the element of turnover and in such a case, receipts like interest will not attract Explanation (baa). Broadly, the Revenue has to consider the memorandum and articles of association of the company, the nature of the business, the nature of the activity and such other tests. It also has to verify what is the dominant business of the company and ....
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....rofits under Clause (baa). A bare reading of Clause (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 export profits Clause (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 the four variables. On reading all the variables it becomes clear that every receipt may not constitute sale proceeds from exports. That, every receipt is not income under the I.T. Act and every income may not be attributable to exports." 18. Therefore, the Supreme Court in K. Ravindranathan (supra)has taken the view that Explanation (baa) deals with such receipts which although constitute "independent incomes" of the assessee, are incomes that are not relatable to the exports of the assessee. Since Section 80HHC aims to incentivize exports, it is necessary that all incomes of the ass....
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....me Court, which held as follows: "10. Under cl. (1) of Expln. (baa), ninety per cent of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in any such profits are to be deducted from the profits of the business as computed under the head "Profits and gains of business or profession". The expression "included in such profits" in cl. (1) of the Expln. (baa) would mean only such receipts by way of brokerage, commission, interest, rent, charges or any other receipt which are included in the profits of the business as computed under the head "Profits and gains of business or profession". Therefore, if any quantum of the receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature is allowed as expenses under ss. 30 to 44D of the Act and is not included in the profits of business as computed under the head "Profits and gains of business or profession", ninety per cent of such quantum of receipts cannot be reduced under cl. (1) of Expln. (baa) from the profits of the business. In other words, only ninety per cent of the net amount of any receipt of the nature mentioned in cl....
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....ins of business and chargeable to tax under s. 28 of the Act, and if any quantum of the rent or interest of the assessee is allowable as an expense in accordance with ss. 30 to 44D of the Act and is not to be included in the profits of the business of the assessee as computed under the head "Profits and gains of business or profession", ninety per cent of such quantum of the receipt of rent or interest will not be deducted under cl. (1) of Expln. (baa) to s. 80HHC. In other words, ninety per cent of not the gross rent or gross interest but only the net interest or net rent, which has been included in the profits of business of the assessee as computed under the head "Profits and gains of business or profession", is to be deducted under cl. (1) of Expln. (baa) to s. 80HHC for determining the profits of the business. 13. The view that we have taken of Expln. (baa) to s. 80HHC is also the view of the Delhi High Court in CIT vs. Shri Ram Honda Power Equip (supra) and the Tribunal in the present case has followed the judgment of the Delhi High Court. On appeal being filed by the Revenue against the order of the Tribunal, the High Court has set aside the order of the Tribunal and direct....
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.... cent deduction is to be made from the gross or net income of any of the receipts mentioned in cl. (1) of the Expln. (baa). 15. The Bombay High Court has also relied on the Memorandum Explaining the Clauses of the Finance Bill, 1991 contained in the Circular dt. 19th Dec., 1991 [(1992) 101 CTR (St) 1] of the CBDT to come to the conclusion that the Parliament intended to exclude items which were unrelated to the export turnover from the computation of deduction and while excluding such items which are unrelated to export for the purpose of s. 80HHC, Parliament has taken due note of the fact that the exporter assessee would have incurred such expenditure in earning the profits and to avoid a distorted figure of export profits, ninety per cent of the receipts like brokerage, commission, interest, rent, charges are sought to be excluded from the profits of the business. In our considered opinion, it was not necessary to refer to the Explanatory Memorandum when the language of Expln. (baa) to s. 80HHC was clear that only ninety per cent of receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits computed under t....