TMI Blog2010 (8) TMI 333X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant received ₹ 64,75,373 as fees towards developmental work from M/s. Robert Bosch, Germany. The assessee claimed deduction under section 80-O of the Act, which was granted. For the purpose of deduction under section 80HHC of the Act, the Assessing Officer deducted 90 per cent. of the above amount applying the provisions of Explanation (baa) to section 80HHC of the Act. The assessee objected to the said deduction. The assessee contended that the proviso to Explanation (baa) could be applied only to those items which are specifically mentioned therein. The technical service fees received from Bosch was not one of such specified items. Overruling the said objection, the Assessing Officer held that it is consideration flowing to the assessee for the services rendered by them and therefore it would fall in the category of any other receipt of similar nature and deducted the said amount from profits of the business. Aggrieved by the same, the assessee preferred an appeal to the Commissioner of Income-tax (Appeals) which was dismissed. Aggrieved by these two orders, the assessee preferred an appeal to the Tribunal. The Tribunal, relying on the judgment of the Cochin Bench of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... antial question of law that arises for our consideration is : Whether the income received by the assessee towards developmental work in the course of its export business which is different from the income arising out of the business of export out of India of any goods or merchandise, is liable to be reduced by 90 per cent. as provided under clause (1) of Explanation (baa) to section 80HHC of the Act? 6. The facts are not in dispute. The total turnover of the assessee for the assessment year 1994-95 is ₹ 621,54,85,841 which includes excise duty and sales tax. ₹ 61,79,08,068 is export turnover. The assessee claimed ₹ 67,47,868 as profits of the business. However, out of the said profits, the assessee gave deduction to export incentives, sale of exim scrips, rent, interest, commission and thereafter the figure arrived at was ₹ 63,72,73,897. However, the Assessing Officer deducted ₹ 64,75,373 towards consideration received from M/s. Robert Bosche for developmental work and arrived at the profits of the business of ₹ 63,14,46,061. This deduction is the bone of contention between the parties. 7. Section 80HHC of the Act provides for dedu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... imilar nature included in such profits ; and (2) the profits of any branch, office, warehouse or any other establishment of the assessee situate outside India. 8. This provision was inserted by the Finance (No. 2) Act, 1991 with effect from April 1, 1992. In order to appreciate this provision, the legislative intent behind this provision is to be looked into. By reason of such amendment, Parliament did intend that income derived by way of brokerage/commission, interest, rent, charges, or any other receipt of a similar nature by the assessee should not be reckoned for the purpose of computing profit or loss earned by a person engaged in the business of export. The purport and reason for enacting section 80HHC of the Act indisputably was to provide incentive to export houses. The formula that existed prior to 1991 often used to provide a distorted figure of export profits when receipts like interest, commission etc., which did not have an element of turnover were included in the profit and loss account. Therefore it was clarified that profits of the business for section 80HHC would not include receipts by way of brokerage/commission, interest or any other receipt of a si ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Income-tax Act and every income may not be attributable to exports. This was the reason for this court to hold that indirect taxes like excise duty which are recovered by the taxpayers for and on behalf of the Government, shall not be included in the total turnover in the above formula. (See : CIT v. Lakshmi Machine Works [2007] 290 ITR 667 (SC)). 10. The question which arose for consideration in the aforesaid judgment was whether the Department was right in including processing charges in the total turnover while arriving at export profits under section 80HHC(3) of the Act as it stood at the relevant time . After holding that it is to be included in the total turnover, it was observed as, it constituted an independent income in terms of clause (baa), it had to be de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... zing and processing would have a direct and immediate nexus to the activity of export. 12. The Bombay High Court also had an occasion to consider the aforesaid question in the light of the judgment of the apex court, in the case of CIT v. Pfizer Ltd. [2011] 330 ITR 62 (Bom) (Income-tax Appeal (Lodg. No. 128/2009 dated June 18, 2010). In determining whether a receipt which forms part of the profits of business is liable to undergo a reduction of ninety per cent. as stipulated in clause (1) of Explanation (baa), it is necessary for the court to consider whether the receipt is of a similar nature included in such profits. The rationale for excluding ninety per cent. of the receipts by way of brokerage, commission, interest, rent or charges is that these are independent incomes and their inclusion in the profits of business would result in a distortion. In determining whether any other receipt 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 of a reduction the receipt must be of a nature similar to brokerage, commissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hich are specifically prescribed by the Legislature. These are inter alia the incomes referred to in clauses (iiia), (iiib) and (iiic) of section 28 and receipts by way of brokerage, commission, interest, rent, charges or receipts of a similar nature included in such profits. Therefore, before a receipt is liable to be excluded to the extent of ninety per cent., it must be a receipt of a nature similar to brokerage, commission, interest, rent or charges. 13. The apex court in the case of CIT v. B. Suresh [2009] 313 ITR 149 (SC) at para 9 has observed under (page 154) : 9. The basic requirement of section 80HHC in earning in foreign exchange and retention of profits for export business. Profits are embedded in the `income' earned. Earning of income depends on sale of goods and services. Today the difference between the two is getting blurred with globalisation and cross-border transaction. Today with technological advancement one has to change our thinking regarding concepts like goods, merchandise and articles. 14. From the aforesaid discussion, it is clear that in computing the profits of the business for the purpose of Explanation (baa), the incomes which ar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The developmental work is intimately connected with the business of manufacture and sale of goods by the assessee. There is immediate nexus between the activity of export and the developmental work. Admittedly, for the services rendered by way of these developmental work, the assessee has been given the benefit of deductions under section 80-O of the Act. The receipt of consideration from a foreign enterprise is not in dispute. From the very same business that the assessee is carrying on, he is having an income under two heads and therefore, it is not a case where any independent income unrelated to or unconnected with the business carried on by the assessee is sought to be included in the profits of the business. In these circumstances, the Tribunal was justified in holding that the said consideration received for developmental work is not liable to be deducted under clause (baa) in computing the profits of the business. The said order is legal and valid. It does not suffer from any legal infirmity. Therefore, we answer the aforesaid substantial question of law in favour of the assessee and against the Revenue. 16. Accordingly, the appeal is dismissed. No costs. - - Ta ..... 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