Full Judgment Text
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CASE NO.:
Appeal (civil) 4409 of 2005
PETITIONER:
Commissioner of Income Tax, Coimbatore
RESPONDENT:
M/s. Lakshmi Machine Works
DATE OF JUDGMENT: 25/04/2007
BENCH:
S.H. KAPADIA & B. SUDERSHAN REDDY
JUDGMENT:
J U D G M E N T
WITH
Civil Appeal Nos. 4411/2005, 5370/2005, 5372/2005, 5939/2005, 6145/2005,
3037/2006, 2596/2006, 917/2006, 919/2006, 920/2006, 1494/2006, 1495/2006,
3389/2006, 4572/2006, 5157/2006, 3616/2006, 3911/2006, 3913/2006,
3615/2006, 3169/2006, 4738/2006, 5688/2006, 2907/2006, 3496/2006,
5860/2006, 165/2007, 683/2007, 431/2007, 991/2007, 248/2007, 1162/2007,
163/2007, 1636/2007, 1637/2007, 1529/2007, 1530/2007, 1532/2007, 1533/2007,
1266/2007, 1536/2007
Civil Appeal No. 2145 of 2007 arising out of S.L.P. (C)No.16085/2006,
Civil Appeal No. 2146 of 2007 arising out of S.L.P. (C)No.16752/2006,
Civil Appeal No. 2147 of 2007 arising out of S.L.P. (C)No.18239/2006,
Civil Appeal No. 2148 of 2007 arising out of S.L.P. (C)No.6633/2006,
Civil Appeal No. 2149 of 2007 arising out of S.L.P. (C)No.3513/2007,
Civil Appeal No. 2150 of 2007 arising out of S.L.P. (C)No.7911/2007
arising out of CC 10725-10726/2005
Kapadia, J.
Leave granted in special leave petitions.
All the above civil appeals deal with a common
question of law and, therefore, they are decided together
by this judgment. For the sake of convenience, the facts
in C.A. No.4409 of 2005 are mentioned hereinbelow.
For the assessment year 1993-94 M/s. Lakshmi
Machine Works (assessee) filed its return of income
declaring its taxable income of Rs.50.80 lakhs. On
10.6.94 intimation under Section 143(1)(a) of the Income
Tax Act, 1961 (for short, ’the Act’) was sent by the
Department accepting the returned income. Later on the
Department issued notice under Section 143(2) of the
Act. One of the items for issuing the said notice was the
quantum of deduction under Section 80HHC of the Act.
The assessee had computed the allowable deduction
under Section 80HHC without taking into account in the
total turnover the sales tax and excise duty. The
assessee was asked to explain why the total turnover
should not be recomputed by including sales tax and
excise duty. In this connection, the Department placed
reliance on the judgment of this Court in the case of M/s.
Chowringhee Sales Bureau (P) Ltd. v. C.I.T. West
Bengal \026 [1973] 83 ITR 542(SC). The assessee objected
to the above inclusion. However, that objection was
dismissed by the A.O. on the ground that under Section
80HHC(ba) deduction from "total turnover" was restricted
only to three items, namely, profit on sale of import
licence, duty drawback and CCS. The A.O. further held
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that from the profits of business, the assessee was
entitled to deduct the above three items and also
brokerage, commission, interest, rent, charges or any
other receipt of similar nature. Before the A.O., the
assessee contended that items which cannot be regarded
as profits, the question of treating those items as part of
"total turnover" did not arise. The A.O. treated certain
miscellaneous receipts and interest receipts as part of
business profits to which the assessee objected. The
assessee pointed out that under Section 80HHC as it
stood in the assessment year 1993-94, a deduction of
10% was allowed whereas the balance 90% stood
excluded from the business profits. However, the
assessee’s argument for non-inclusion of sales tax and
excise duty was not accepted by the A.O.
Aggrieved by the above decision, the matter was
carried in appeal to the C.I.T. (Appeals). The appellate
authority agreed with the submissions made on behalf of
the assessee. It was held that sales tax and excise duty
were liabilities of the assessee to the Government. They
were shown separately from the value of the goods,
therefore, they were not included in the "total turnover"
for working out the deduction under Section 80HHC.
Aggrieved by the said decision, the Department
carried the matter in appeal to the Tribunal. Following
the judgment of the Bombay High Court in the case of
Commissioner of Income-Tax v. Sudarshan Chemicals
Industries Ltd. and another \026 (2000) 245 ITR 769
(Bom.), the Department’s appeal stood dismissed. Hence,
this civil appeal.
The short point which arises for consideration in
this civil appeal is: whether excise duty and sales tax
were includible in the "total turnover", which was the
denominator in the formula contained in Section
80HHC(3) as it stood in the material time. For the sake
of convenience we quote hereinbelow Section 80HHC:
"Deduction in respect of profits retained for export
business.
80HHC. (1) Where an assessee, being an Indian
company or a person (other than a company) resident
in India, is engaged in the business of export out of
India of any goods or merchandise to which this section
applies, there shall, in accordance with and subject to
the provisions of this section, be allowed, in computing
the total income of the assessee, a deduction of the
[profits] derived by the assessee from the export of
such goods or merchandise :
Provided that if the assessee, being a holder of an
Export House Certificate or a Trading House Certificate
(hereafter in this section referred to as an Export House
or a Trading House, as the case may be,) issues a
certificate referred to in clause (b) of sub-section (4A),
that in respect of the amount of the export turnover
specified therein, the deduction under this sub-section
is to be allowed to a supporting manufacturer, then the
amount of deduction in the case of the assessee shall
be reduced by such amount which bears to the total
profits derived by the assessee from the export of
trading goods, the same proportion as the amount of
export turnover specified in the said certificate bears to
the total export turnover of the assessee in respect of
such trading goods.
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(1A) Where the assessee, being a supporting
manufacturer, has during the previous year, sold goods
or merchandise to any Export House or Trading House in
respect of which the Export House or Trading House has
issued a certificate under the proviso to sub-section (1),
there shall, in accordance with and subject to the
provisions of this section, be allowed in computing the
total income of the assessee, a deduction of the profits
derived by the assessee from the sale of goods or
merchandise to the Export House or Trading House in
respect of which the certificate has been issued by the
Export House or Trading House.
(2)(a) This section applies to all goods or merchandise,
other than those specified in clause (b), if the sale
proceeds of such goods or merchandise exported out of
India are received in, or brought into, India by the
assessee other than the supporting manufacturer in
convertible foreign exchange, within a period of six
months from the end of the previous year or, where the
Chief Commissioner or Commissioner is satisfied (for
reasons to be recorded in writing) that the assessee is,
for reasons beyond his control, unable to do so within
the said period of six months, within such further period
as the Chief Commissioner or Commissioner may allow in
this behalf:
(b) This section does not apply to the following goods or
merchandise, namely :-
(i) mineral oil ; and
(ii) minerals and ores (other than processed minerals
and ores specified in the Twelfth Schedule).
Explanation 1.-The sale proceeds referred to in
clause (a) shall be deemed to have been received in
India where such sale proceeds are credited to a
separate account maintained for the purpose by the
assessee with any bank outside India with the
approval of the Reserve Bank of India.
Explanation 2.-For the removal of doubts, it is
hereby declared that where any goods or
merchandise are transferred by an assessee to a
branch, office, warehouse or any other establishment
of the assessee situate outside India and such goods
or merchandise are sold from such branch, office,
warehouse or establishment, then, such transfer
shall be deemed to be export out of India of such
goods and merchandise and the value of such goods
or merchandise declared in the shipping bill or bill of
export as referred to in sub-section (1) of section 50
of the Customs Act, 1962 (52 of 1962), shall, for the
purposes of this section, be deemed to be the sale
proceeds thereof.
(3) For the purposes of sub-section (1),-
(a) 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 turnover in respect
of such goods bears to the total turnover of the
business carried on by the assessee ;
(b) where the export out of India is of trading goods,
the profits derived from such export shall be the
export turnover in respect of such trading goods as
reduced by the direct costs and indirect costs
attributable to such export ;
(c) where the export out of India is of goods or
merchandise manufactured or processed by the
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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 :
Provided that the profits computed under
clause (a) or clause (b) or clause (c) of this
sub-section shall be further increased by the
amount which bears to ninety per cent of any
sum referred to in clause (iiia) (not being
profits on sale of a licence acquired from any
other person), and clauses (iiib) and (iiic) of
section 28, the same proportion as the export
turnover bears to the total turnover of the
business carried on by the assessee.
Explanation.-For the purposes of this sub-
section,-
(a) "adjusted export turnover" means the
export turnover as reduced by the export
turnover in respect of trading goods ;
(b) "adjusted profits of the business" means
the profits of the business as reduced by the
profits derived from the business of export out
of India of trading goods as computed in the
manner provided in clause (b) of sub-section
(3) ;
(c) "adjusted total turnover" means the total
turnover of the business as reduced by the
export turnover in respect of trading goods ;
(d) "direct costs" means costs directly
attributable to the trading goods exported out
of India including the purchase price of such
goods ;
(e) "indirect costs" means costs, not being
direct costs, allocated in the ratio of the export
turnover in respect of trading goods to the
total turnover ;
(f) "trading goods" means goods which are not
manufactured or processed by the assessee.
(3A) For the purposes of sub-section (1A), profits
derived by a supporting manufacturer from the sale of
goods or merchandise shall be,-
(a) in a case where the business carried on by the
supporting manufacturer consists exclusively of sale
of goods or merchandise to one or more Export
Houses or Trading Houses, the profits of the business
[*] ;
(b) in a case where the business carried on by the supporting
manufacturer does not consist exclusively of sale of goods or
merchandise to one or more Export Houses or Trading
Houses, the amount which bears to the profits of the business
[*] the same proportion as the turnover in respect of sale to
the respective Export House or Trading House bears to the
total turnover of the business carried on by the assessee.
(4) The deduction under sub-section (1) shall not be
admissible unless the assessee furnishes in the
prescribed form, along with the return of income, the
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report of an accountant, as defined in the Explanation
below sub-section (2) of section 288, certifying that the
deduction has been correctly claimed in accordance with
the provisions of this section:
(4A) The deduction under sub-section (1A) shall not be
admissible unless the supporting manufacturer
furnishes in the prescribed form along with his return of
income,-
(a) the report of an accountant, as defined in the
Explanation below sub-section (2) of section 288,
certifying that the deduction has been correctly
claimed on the basis of the profits of the supporting
manufacturer in respect of his sale of goods or
merchandise to the Export House or Trading House ;
and
(b) a certificate from the Export House or Trading
House containing such particulars as may be
prescribed and verified in the manner prescribed that
in respect of the export turnover mentioned in the
certificate, the Export House or Trading House has
not claimed the deduction under this section :
Provided that the certificate specified in clause (b)
shall be duly certified by the auditor auditing the
accounts of the Export House or Trading House
under the provisions of this Act or under any other
law.
Explanation.-For the purposes of this section,-
(a) "convertible foreign exchange" means foreign
exchange which is for the time being treated by
the Reserve Bank of India as convertible foreign
exchange for the purposes of the Foreign
Exchange Regulation Act, 1973 (46 of 1973), and
any rules made thereunder;
(aa) "export out of India" shall not include any
transaction by way of sale or otherwise, in a shop,
emporium or any other establishment situate in
India, not involving clearance at any customs
station as defined in the Customs Act, 1962 (52 of
1962) ;
(b) "export turnover" means the sale proceeds,
received in, or brought into, India by the assessee
in convertible foreign exchange in accordance
with clause (a) of sub-section (2) of any goods or
merchandise to which this section applies and
which are exported out of India, but does not
include freight or insurance attributable to the
transport of the goods or merchandise beyond the
customs station as defined in the Customs Act,
1962 (52 of 1962) ;
(ba) "total turnover" shall not include freight or
insurance attributable to the transport of the
goods or merchandise beyond the customs station
as defined in the Customs Act, 1962 (52 of 1962):
Provided that in relation to any assessment year
commencing on or after the 1st day of April,
1991, the expression "total turnover" shall have
effect as if it also excluded any sum referred to in
clauses (iiia), (iiib) and (iiic) of section 28 ;
(baa) "profits of the business" means the profits
of the business as computed under the head
"Profits and gains of business or profession" as
reduced by-
(1) ninety per cent of any sum referred to in
clauses (iiia), (iiib) and (iiic) of section 28 or of
any receipts by way of brokerage, commission,
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interest, rent, charges or any other receipt of a
similar nature included in such profits ; and
(2) the profits of any branch, office, warehouse or
any other establishment of the assessee situate
outside India ;
(c) "Export House Certificate" or "Trading House
Certificate" means a valid Export House Certificate
or Trading House Certificate, as the case may be,
issued by the Chief Controller of Imports and
Exports, Government of India ;
(d) "supporting manufacturer" means a person
being an Indian company or a person (other than
a company) resident in India, manufacturing
(including processing) goods or merchandise and
selling such goods or merchandise to an Export
House or a Trading House for the purposes of
export." (emphasis supplied)
A brief analysis of the above Section 80HHC of the
Act, as amended with effect from 1.4.1992, indicates
rationalization of provisions relating to tax concession for
export profits. Under Section 80HHC, the exporters were
allowed, in the computation of their total income, a
deduction of the entire profits derived from exports.
During the relevant year, there existed a dual system for
computation of export profits. The first method operated
in cases where the export was of goods manufactured by
the tax payer. In those cases the export profit had to be
computed on the basis of the ratio of "export turnover" to
"total turnover". In effect, the formula was as follows:
80HHC concession = export profits = total profits x export turnover
total turnover
Where the export consisted of goods purchased from
third parties (trading goods) there was a second method
of computation in which the export profits were to be
calculated by deducting from the export turnover, direct
and indirect costs attributable to such exports. In that
case the formula was as under:
80HHC concession = export profits = export turnover \026 (costs
attributable to such exports)
By the Finance Act, 1992, one more amendment
was made by which the legislature declared that
commission received on assignment of export orders,
brokerage, interest, rent and items mentioned in Section
28(iiia), (iiib) and (iiic), should not be treated in toto as
profits of the business relatable to exports and only 10%
thereof should be considered as the profit of the business
and the balance 90% should not be included in the
profits. These amendments took place with effect from
1.4.92, the date from which the dual system of
computation of export profits came into effect.
All assessable entities were not eligible for
deduction under Section 80HHC of the Act. According to
Section 80HHC only an Indian company or a non-
company assessee who was the resident in India was
eligible for deduction provided he was engaged in the
export business of eligible goods. Under the Income Tax
Rules, 1962, Form No.10CCAC was prescribed. We quote
hereinbelow Annexures A & B to the said Form 10CCAC:
"FORM NO.10CCAC
[See rule 18BBA(3)]
Report under section *80HHC(4)/80HHC(4A) of the Income-tax
Act, 1961
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1. xxx xxx xxx
2. (a) *I/We certify that the deduction to be claimed
by the assessee under sub-section (1) of Section
80HHC of the Income-tax Act, 1961, in respect of the
assessment year\005\005\005.is Rs\005\005\005\005\005. which has
been determined on the basis of the sale proceeds
received by the assessee in convertible foreign
exchange. The said amount has been worked out on
the basis of the details in Annexure A to this Form.
(b) *I/We certify that the deduction to be claimed by
the assessee, as supporting manufacturer, under sub-
section (1A) of section 80HHC of the Income-tax Act,
1961, in respect of the assessment year\005\005\005.. is
Rs.\005\005\005\005.., which has been determined on the basis
of sales to Export House/Trading House* made during
the year, in respect of which a certificate has been
issued by the Export House/Trading House under the
proviso to sub-section (1) of section 80HHC of the
Income-tax Act, 1961. The said amount has been
worked out on the basis of the details in Annexure B
to this Form.
3. xxx xxx xxx
Date\005. Signed
Accountant
Notes: xxx xxx xx
ANNEXURE A
[See paragraph 2(a) of Form No.10CCAC]
Details relating to the claim by the exporter for
deduction under section 80HHC of the Income-
tax Act, 1961
1. Name of the assessee
2. Assessment year
3. Total turnover of the business
4. Total export turnover
5. Total profits of the business
6. Export turnover in respect of trading goods
7. Direct cost of trading goods exported
8. Indirect cost attributable to trading goods
exported
9. Total of 7 + 8
10. Profits from export of trading goods [6 minus 9]
11. Adjusted total turnover (3 minus 6)
12. Adjusted export turnover (4 minus 6)
13. Adjusted profits of the business (5 minus 10)
14. Profits derived by assessee from export of goods
or merchandise to which section 80HHC applies,
computed under sub-section (3) of section
80HHC
15. Export turnover, deduction in respect of which
will be claimed by a supporting manufacturer in
accordance with proviso to sub-section (1) of
section 80HHC
16. Profit from the export turnover mentioned in
item 15 above, calculated in accordance with
proviso to sub-section (1) of section 80HHC
17. Deduction under section 80HHC to which the
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assessee is entitled (Item 14 minus Item 16)
18. Remarks, if any
ANNEXURE B
[See paragraph 2(b) of Form No.10CCAC]
Details relating to the claim of the supporting
manufacturer for deduction under section
80HHC of the Income-tax Act, 1961
SECTION A
1. Name of the assessee
2. assessment year
3. Total turnover of the business
4. The amount of profit under the head "Profits and
gains of business of profession"
5. Total turnover in respect of sale of Export
House/Trading House for which certificate is
received from Export House/Trading House
6. Profit from the turnover mentioned in item 5
above, computed under sub-section (3A) of
section 80HHC
7. Remarks, if any
SECTION B
Details of sale of Export House/Trading House
SL
No.
Name and
address of the
Export
House/Trading
House to
whom goods or
merchandise
were sold
Sale
Invoice
No.
and
date
Sale
price
Invoice No.
and date by
which Export
House/Trading
House has
exported
Date of
certificate
issued by
the
Export
house/
Trading
House
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under
clause (b)
of sub-
section
(4A) of
section
80HHC
Amount
of
disclaimer
1
2
3
4
5
6
7
ACTION POINTS
1. Report is to be filed along with return of income.
2. "Total turnover" does not include cash compensatory
support, duty drawback and profit on sale of import
entitlement licences.
3. "Export turnover" means the sale proceeds (excluding freight
and insurance) receivable in convertible foreign exchange \026
See Circular No.564, dated 5-7-1990.
4. Report is to be obtained in respect of each year for which
deduction is claimed."
Analysing the above formula, as it stood at the
relevant time, it is clear that the amount of deduction
under Section 80HHC had to be computed as under:
Business profit x export turnover w total turnover + 90 per cent of
export incentive x export turnover w total turnover
Therefore, in the above formula there were three
concepts, namely, "business profit", "export turnover"
and "total turnover". The first step was to find out the
business profit. This was to be done in accordance with
the provisions of Section 28 to Section 43 of the Act.
Under Section 80HHC the above three export incentives,
namely, CCS, duty drawback and profit on sale of import
licence, were includible in the "business profits" and,
therefore, they were taxable. The Finance Act, 1992,
restricted the term "export turnover" to FOB sale
proceeds. However, the said Act excluded CCS, Duty
Drawback and profit on sale of import entitlement from
the term "total turnover".
To sum up, the amount of deduction under Section
80HHC is to be computed as under:
"1. Profit of the business \026 To find out "profit of
the business", the first step is to determine
income under the head "Profits and gains of
business or profession" [as per section
28(iiia), (iiib), (iiic) this includes three export
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incentives. From the income so arrived at,
deduct the following:
a. 90 per cent of export incentive.
b. 90 per cent of receipts by way of
brokerage, commission, interest, rent,
charges or other receipts of a similar
nature; and
c. profits of any branch, office, warehouse or
any similar establishment of the assessee
situate outside India.
2. Export turnover \026 Sale proceeds received in, or
brought into India, in convertible foreign
exchange within the prescribed time (or within
the extended time limit) minus freight and
insurance attributable to the transportation of
goods/merchandise beyond the customs
station is export turnover for this purpose.
3. Total turnover \026 From the turnover (as per
books of account) the following should be
deducted if these are part of turnover:
a. freight/insurance attributable to the
transport of goods or merchandise
beyond customs station in India; and
b. export incentives.
4. Export incentives - Export incentives are:
a. profits on sale of a licence granted
under the Imports (Control) Order, 1955
made under the Imports and Exports
(Control) Act, 1947 [sec.28(iiia)];
b. cash assistance (by whatever name
called) received or receivable by any
person against exports under any
scheme of the Government of India
[sec.28(iiib)];
c. any duty of customs or excise re-paid or
re-payable as drawback to any person
against exports under the Customs and
Central Excise Duties Drawback Rules,
1971 [sec.28(iiic)]."
To simplify the matter we quote hereinbelow
paragraph 107.13-3P1 of the Direct Taxes Ready
Reckoner by Taxmann for the year 1993-94:
"107.13-3P1 X Ltd. is engaged in manufacturing
and/or processing of heavy chemical for export. For
the year ending March 31, 1993, the summarized
profit and loss account is as follows:
Rs.
Rs.
Expenses 32,60,000
Net profit 10,30,000
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__________
42,90,000
Total turnover (of goods
exported) 30,50,000
Freight and insurance
attributable to transport
of goods beyond customs
station 2,40,000
Export incentive under
Section 28(iiia), (iiib),(iiic) 6,50,000
Brokerage, commission,
rent, interest 2,70,000
Profit of foreign branch 80,000
42,90,000
Other information \026
1. Out of total expenses of Rs.32,60,000 debited to
profit and loss account, Rs.51,600 is not deductible
by virtue of sections 40 and 40A. The balance
amount is, however, deductible.
2. On January 13, 1993, Rs.86,920 is paid on
account of excise duty of the previous year 1991-
92. Since this amount pertains to the previous
year 1991-92, it has not been debited to the
aforesaid profit and loss account.
3. The company has received Rs.24,90,000 in
convertible foreign exchange till September 30,
1993. The company’s application for obtaining
extension of time under section 80HHC has been
rejected by the Commissioner.
4. During the previous year 1992-93, the company
gets a short-term gain of Rs.20,000.
5. The company is entitled for deduction under
section 80-I.
Compute the net income of the company for the
assessment year 1993-94.
Profits and gains of business of profession:
Rs.
Net profit as P & L account
Add: Amount not deductible by virtue of secs.40 and 40A
10,30,000
51,600
Less: Excise duty of 1991-92, deductible by virtue of
section 43B [see para 49.10]
10,81,600
(-) 86,920
Business income (under section 28)
Capital gains
9,94,680
20,000
Gross total income
10,14,680
Less: Deduction
Under section 80HHC [see Note]
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Under section 80-I [i.e., 25% of Rs.9,94,680]
Net income (rounded off)
5,48,355
2,48,670
2,17,660
Note: Computation of deduction under section 80HHC
1. Profit of the business - It will be calculated as follows:
Income under the head "Profits and gains of business or
profession"
9,94,680
Less:
90% of export incentives (i.e., 90% of Rs.6,50,000)
90% of brokerage, commission, rent and interest (i.e.,
90% of Rs.2,70,000)
Profit of the foreign branch
Profit of the business
(-) 5,85,000
(-) 2,43,000
(-) 80,000
86,680
2. Export turnover \026 It is Rs.24,90,000 being the
brought to India (within the time limit), in the
convertible foreign exchange.
3. Total turnover \026 It is Rs.30,50,000.
4. Export incentive \026 Export incentive is Rs.6,50,000.
Amount of deduction is as follows:
(Rs.86,680 x Rs.24,90,000 w Rs.30,50,000) + (90% of
Rs.6,50,000 x Rs.24,90,000 w Rs.30,50,000) =
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Rs.5,48,355.
107.13-4 ASSESSEE WHOSE EXPORTS GOODS
MANUFACTURED/PROCESSED BY OTHERS \026
HOW TO FIND OUT DEDUCTION - This category
covers those assessees who export goods
manufactured/processed by others:
107.13-4a Conditions \026 In order to get deduction one
has to satisfy conditions specified in paras 107.13-3a.
107.13-4b Amount of deduction \026 Deduction under
section 80HHC will be determined as under:
(Export turnover1 minus direct cost2 minus indirect
cost3) + (90 per cent of export incentive5 x Export
turnover w total turnover)
1. Export turnover \026 Sale proceeds received in, or
brought into India in, convertible foreign
exchange within the prescribed time (or within
the extended time limit) minus freight and
insurance attributable to the transportation of
goods/merchandise beyond the customs
station, is export turnover for this purpose.
2. Direct cost \026 Under Explanation (d) to section 80
HHC(3), "direct costs" comprises the following:
a. the purchase price of the goods, and
b. costs directly attributable to the trading
goods exported out of India.
Purchase price \026 under the accepted principles of
accounting, purchase price would mean invoice
value, including taxes and duties, as reduced by (i)
value of any purchase returns, (ii)trade discounts
and rebates, if any, allowed, and (iii) value of any
incentives which is passed on to the seller.
Similarly, sales tax set-off available in respect of
exports can also be reduced from purchase costs.
However, cash discount obtained any other rebate
or set-off available after the end of the relevant
previous year cannot be reduced from purchase
cost. If, as per the terms of the contract, any
export incentives are passed on to the seller, they
would have an effect on purchase price and to that
extent purchase cost would be lower.
Costs directly attributable to trading goods \026 These
costs would generally embrace, apart from the
purchase cost and related costs, such other costs
which have been incurred either in relation to the
purchase, or in relation to the transportation or
storage of the goods prior to their export, or in
relation to the movement of goods from the
exporter’s godown, premises or warehouse to the
customs station. The use of the word "directly"
signifies that there should be a proximate
connection between the costs and the purchase of
the trading goods. In other words, they should not
be "overhead costs".
3. Indirect cost \026 Under Explanation (e) to section
80HHC(3), the term "indirect costs" means
costs (not being direct costs) allocated in the
ratio of the export turnover in respect of the
trading goods to the total turnover. In other
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words, indirect cost may be computed as
under: (Total cost minus direct cost) x Export
turnover in respect of trading goods1 w Total
turnover4.
4. Total turnover \026 From the turnover (as per
books of account) the following should be
deducted if these are part of turnover:
a. freight/insurance attributable to the
transport of goods or merchandise beyond
customs station in India; and
b. export incentives.
5. Export incentives \026 Export incentives are:
a. profits on sale of a licence granted under
the Imports (Control) Order, 1955 made
under the Imports and Exports (Control)
Act, 1947 [sec.28(iiia)];
b. cash assistance (by whatever name called)
received or receivable by any person
against exports under any scheme of the
Government of India [sec.28 (iiib)];
c. any duty of customs or excise re-paid or
re-payable as drawback to any person
against exports under the Customs and
Central Excise Duties Drawback Rules,
1971 [sec.28(iiic)]"
The above examples show that the formula under
Section 80HHC was very simple as far as it related to the
sole business of exports. The formula became
complicated in cases of composite business. In the case
of direct exporter there were three categories of assessees
\026 (i) an assessee who exported goods manufactured by
him; (ii) an assessee who did not export goods
manufactured by him but exported goods manufactured
by others; and (iii) an assessee who exported
manufactured goods as well as trading goods. The
formula became complicated in the case of the third
category. It also became complicated in the cases of an
assessee who did not directly export goods but supplied
goods to an Export House/Trading House for the purpose
of export (subordinate manufacturer).
The principal reason for enacting the above formula
was to disallow a part of 80HHC concession when the
entire deduction claimed could not be regarded as
relatable to exports. Therefore, while interpreting the
words "total turnover" in the above formula in Section
80HHC one has to give a schematic interpretation to that
expression. There is one more reason for giving
schematic interpretation. The various amendments to
Section 80HHC show that receipts by way of brokerage,
commission, interest, rent etc. do not form part of
business profits as they have no nexus with the activity
of exports. If interest or rent was not regarded by the
legislature as business profits, the question of treating
the same as part of the total turnover in the above
formula did not arise. In fact, Section 80 HHC had to be
amended several times since the formula on several
occasions gave a distorted figure of export profits when
receipts like interest, rent, commission etc. which did not
have the element of turnover got included in the profit
and loss account and consequently became entitled to
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deduction. This was clarified by the above amendment to
Section 80HHC commencing from 1.4.92. The said
amendment made it clear that though commission and
interest emanated from exports, they did not involve any
element of turnover and merely for the reason that
commission, interest, rent etc. were included in the profit
and loss account, they did not become eligible to
deduction. We have to give purposeful interpretation to
the above section. The said section is entirely based on
the formula. The amendments from time to time indicate
that they became necessary in order to make the formula
workable. Hence, we have to give schematic
interpretation to Section 80HHC of the Act.
Shri P.P. Malhotra, leaned senior counsel appearing
for the Department (appellant), submitted that one has to
give plain and unambiguous meaning to the word
"turnover" in the above formula; that there was no need
to call for any rule of interpretation or external aid to
interpret the said word; that having regard to the plain
words of the section, excise duty and sales tax ought to
have been included in the "total turnover". Learned
counsel submitted that the word "turnover" even in the
ordinary sense would include the above two items.
Learned counsel urged that the formula should be read
strictly. In this connection, he pointed out that the
legislature had expressly excluded items of freight and
insurance and not sales tax and excise duty from the
said definition. It was urged that while construing a
taxing statute strict interpretation should be given by the
Courts. It was urged that the definition of the words
"total turnover" did not include freight/insurance. He
urged that since the legislature had excluded only
insurance and freight, it was not open to the courts to
exclude excise duty and sales tax from the concept of
"total turnover" in the said formula. He contended that
the word "turnover" referred to the aggregate amount for
which the goods were sold and since sales tax and excise
duty formed part of the value of the goods, the said two
items were includible in the definition of the words "total
turnover". In this connection, learned counsel placed
reliance on the judgment of the Supreme Court in the
case of M/s. Chowringhee Sales Bureau (supra).
Reliance was also placed on "The Law and Practice of
Income Tax" by Kanga and Palkhivala (eighth edition) at
page 123. In support of the contention that a tax or duty
is part of the dealer’s trading/business receipts, even if
the tax or duty is charged separately or credited to a
separate account. Reliance was also placed on the
judgment of the King’s Bench Division in the case of
Paprika, Ltd., and Another v. Board of Trade - (1944)
1 All E.R. 372, in which it has been held that wherever a
sale attracts purchase tax, that tax affects the price
which the seller who is liable to pay the tax demands, but
it does not cease to be the price which the buyer has to
pay even if the price is expressed as cost x + purchase
tax. Reliance was also placed on the judgment of the
Court of Appeal in the case of Love v. Norman Wright
(Builders), Ltd. \026 (1944) 1 All E.R. 618, in which it has
been held that if a seller quotes a price of ’x’ + purchase
tax, the buyer has to pay the amount of the tax as part of
the price and since the tax is charged on the wholesale
value of the goods the tax element has to be taken into
account. It was urged that one has to give strict
interpretation to the word "turnover". It was urged that
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there was no question of giving purposeful interpretation
to the word "turnover" in the said Section 80HHC of the
Act. It was urged that the legislature had used the
expression "total turnover" from which it became clear
that the said expression referred to the aggregate amount
for which the goods were sold and since the above two
items formed part of the value of the goods, they were
includible in the "total turnover". Learned counsel urged
that there was no merit in the contention advanced on
behalf of the assessee that excise duty was the liability of
the assessee to the Government and, therefore, it was not
includible in the total turnover. Learned counsel urged
that there was no merit in the contention advanced on
behalf of the assessee that the components of "export
turnover" and "total turnover" should be the same in the
above formula. Learned counsel submitted that the
formula would become unworkable if the components in
the "export turnover" and the components in the "total
turnover" are the same. Learned counsel submitted that
there was no merit in the argument advanced on behalf
of the assessee that excise duty and sales tax did not
form part of trading receipts. Learned counsel submitted
that there was no merit in the contention of the assessee
that the expression "business profits" in Section 80HHC
did not include receipts which did not emanate for
exports and, therefore, such receipts did not constitute
an element of turnover.
We do not find any merit in the above contentions
advanced on behalf of the Department. It is important to
note that tax under the Act is upon income, profits and
gains. It is not a tax on gross receipts. Under Section
2(24) of the Act the word "income" includes profits and
gains. The charge is not on gross receipts but on profits
and gains. The charge is not on gross receipts but on
profits and gains properly so-called. Gross receipts or
sale proceeds, however, include profits. According to
"The Law and Practice of Income Tax" by Kanga and
Palkhivala, the word "profits" in Section 28 should be
understood in normal and proper sense. However,
subject to special requirements of the income tax, profits
have got to be assessed provided they are real profits.
Such profits have to be got to be ascertained on ordinary
principles of commercial trading and accounting.
However, the income tax has laid down certain rules to
be applied in deciding how the tax should be assessed
and even if the result is to tax as profits what cannot be
construed as profits, still the requirements of the income
tax must be complied with. Where a deduction is
necessary in order to ascertain the profits and gains,
such deductions should be allowed. Profits should be
computed after deducting the expenses incurred for
business though such expenses may not be admissible
expressly under the Act, unless such expenses are
expressly disallowed by the Act [SEE: page 455 of "The
Law and Practice of Income Tax" by Kanga and
Palkhivala]. Therefore, schematic interpretation for
making the formula in Section 80HHC workable cannot
be ruled out. Similarly, purposeful interpretation of
Section 80HHC which has undergone so many changes
cannot be ruled out, particularly, when those legislative
changes indicate that the legislature intended to exclude
items like commission and interest from deduction on the
ground that they did not possess any element of
"turnover" even though commission and interest
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emanated from exports. We have to read the words "total
turnover" in Section 80HHC as part of the formula which
sought to segregate the "export profits" from the
"business profits". Therefore, we have to read the
formula in entirety. In that formula the entire business
profits is not given deduction. It is the business profit
which is proportionately reduced by the above
fraction/ratio of export turnover w total turnover which
constitute 80HHC concession (deduction). Income in the
nature of "business profits" was, therefore, apportioned.
The above formula fixed a ratio in which "business
profits" under Section 28 of the Act had to be
apportioned. Therefore, one has to give weightage not
only to the words "total turnover" but also to the words
"export turnover", "total export turnover" and "business
profits". That is the reason why we have quoted
hereinabove extensively the illustration from the Direct
Taxes (Income tax) Ready Reckoner of the relevant word.
In the circumstances, we cannot interpret the words
"total turnover" in the above formula with reference to
the definition of the word "turnover" in other laws like
Central Sales Tax or as defined in accounting principles.
Goods for export do not incur excise duty liability. As
stated above, even commission and interest formed a
part of the profit and loss account, however, they were
not eligible for deduction under Section 80HHC. They
were not eligible even without the clarification introduced
by the legislature by various amendments because they
did not involve any element of turnover. Further, in all
other provisions of the income tax, profits and gains were
required to be computed with reference to the books of
accounts of the assessee. However, as can be seen from
the Income Tax Rules and from the above Form
No.10CCAC in the case of deduction under Section
80HHC a report of the auditor certifying deduction based
on export turnover was sufficient. This is because the
very basis for computing Section 80HHC deduction was
"business profits" as computed under Section 28, a
portion of which had to be apportioned in terms of the
above ratio of export turnover to total turnover. Section
80HHC(3) was a beneficial section. It was intended to
provide incentives to promote exports. The incentive was
to exempt profits relatable to exports. In the case of
combined business of an assessee having export
business and domestic business the legislature intended
to have a formula to ascertain export profits by
apportioning the total business profits on the basis of
turnovers. Apportionment of profits on the basis of
turnover was accepted as a method of arriving at export
profits. This method earlier existed under Excess Profits
Tax Act, it existed in the Business Profits Tax Act.
Therefore, just as commission received by an assessee is
relatable to exports and yet it cannot form part of
"turnover", excise duty and sales tax also cannot form
part of the "turnover". Similarly, "interest" emanates
from exports and yet "interest" does not involve an
element of turnover. The object of the legislature in
enacting Section 80HHC of the Act was to confer a
benefit on profits accruing with reference to export
turnover. Therefore, "turnover" was the requirement.
Commission, rent, interest etc. did not involve any
turnover. Therefore, 90% of such commission, interest
etc. was excluded from the profits derived from the
export. Therefore, even without the clarification such
items did not form part of the formula in Section
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80HHC(3) for the simple reason that it did not emanate
from the "export turnover", much less any turnover.
Even if the assessee was an exclusive dealer in exports,
the said commission was not includible as it did not
spring from the "turnover". Just as interest, commission
etc. did not emanate from the "turnover", so also excise
duty and sales tax did not emanate from such turnover.
Since excise duty and sales tax did not involve any such
turnover, such taxes had to be excluded. Commission,
interest, rent etc. do yield profits, but they do not partake
of the character of turnover and, therefore, they were not
includible in the "total turnover". The above discussion
shows that income from rent, commission etc. cannot be
considered as part of business profits and, therefore, they
cannot be held as part of the turnover also. In fact, in
Civil Appeal No.4409 of 2005, the above proposition has
been accepted by the A.O. [See: page no.24 of the paper
book], if so, then excise duty and sales tax also cannot
form part of the "total turnover" under Section 80HHC(3),
otherwise the formula becomes unworkable. In our view,
sales tax and excise duty also do not have any element of
"turnover" which is the position even in the case of rent,
commission, interest etc. It is important to bear in mind
that excise duty and sales tax are indirect taxes. They
are recovered by the assessee on behalf of the
Government. Therefore, if they are made relatable to
exports, the formula under Section 80HHC would become
unworkable. The view which we have taken is in the
light of amendments made to Section 80HHC from time
to time.
Before concluding we may state that profits are of
three types, namely, book-profits, statutory profits and
actual profits. The amendments to Section 80HHC(3)
indicate exclusion of book profits. For example,
commission, interest, etc. do form part of the profit and
loss account but for the purposes of calculation of profits
derived from local sales and exports, they stand
excluded. The difficulty arises because the formula is
based on the Hybrid System of Profits, namely, actual
and statutory profits. Therefore, this judgment should be
read in the context of the above parameters. Our
reasoning in this judgment is confined to the workability
of the formula in Section 80HHC(3) of the Act as it stood
at the material time.
For the above reasons, we see no merit in these
appeals filed by the Department and, accordingly, they
are dismissed with no order as to costs.