TMI Blog2000 (3) TMI 174X X X X Extracts X X X X X X X X Extracts X X X X ..... l income at Rs. 1,24,85,610. While processing the returns, the Assessing Officer noticed that the deduction claimed by the assessee under section 80HHC was very excessive. Therefore, the Assessing Officer formed the opinion that income chargeable to tax has escaped assessment. Notice under section 148 was issued calling for the return. In response to this notice, the assessee filed revised returns on 18-3-1996 declaring the same income that was shown in the original returns. 3. The Assessing Officer noticed that for both the assessment years, the assessee had effected its export sales through export houses, for which the assessee had entered into agreements with export house. On a perusal of these agreements, it was also noticed by the Assessing Officer that for effecting exports through export houses, the assessee was paid a fixed percentage of f.o.b. value as incentive, service charges, premium etc. by the export house. He also held that these payments are effected in favour of the assessee by the export house. The licence or additional licence entitled for on account of the export will be received by the export house. This would mean the export benefits are enjoyed by the expo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... goods are exported by them. The purchase orders are procured by the appellant in all cases though it is stated otherwise in the agreement between the Export House and the appellant. The letters of credit are opened in the name of the appellant which is transferable to the Export House. After the goods are on board the ship and after the export, the appellant transfers the shipping documents to the Export Houses. The Export Houses authorises the appellant's bankers to credit the entire proceeds of export to the packing credit account of the appellant with the designated banks. The appellant obtains the entire proceeds as per the commercial invoice credited to their packing credit account under this authorisation, in converted foreign exchange. In addition to the value of goods obtained in foreign exchange as stated above, the Export House pays a premium over and above the C F value of exports to the appellant which payment is in Indian rupees itself. This payment is made by the Export House after the appellant's bank certifying that the exports have been effected and the proceeds credited to the appellant's bank account." In the light of the above facts it was contended by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onnection with exports i.e., items which have a direct connection with export should not be taken for exclusion. The assessee also relied on the decision of the Kerala High Court in the case of CIT v. A.V.Thomas Co. Ltd. [1997] 225 ITR 29" The CIT (Appeals), however, could not agree with the propositions made by the assessee. 5. The first appellate authority observed that the Tribunal has taken a contrary view in the case of Smt. Subhadra Ravi Karunakaran from that taken in the case of A.M. Moosa . He observed that part of the benefit derived by the export house is diverted to the assessee by way of a premium payment which has nothing to do with the quantum of foreign exchange receipt. The source of this receipt is a pure local transaction between the export house and the assessee. According to the CIT (Appeals) the crucial issue was that the provisions of section 80AB were not considered while deciding the issue and further the Kerala High Court decision relied on in the present case was not quoted before the Tribunal. He held that in view of the decision of the Tribunal in the case of Smt. Subhadra Ravi Karunakaran , the decision in the case of A.M. Moosa does not help the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court confirming the decision of the Tribunal in the case of A.M Moosa, wherein the High Court with regard to the relief due to the assessee under sections 80HH and 80J held that the Tribunal was right in excluding the export house premia and the receipt on the sale of import entitlements, as part of profits from the industrial undertaking for the purposes of sections 80HH and 80J A.M. Moosa, Bharath Sea Food's case. On the same analogy the CIT (Appeals) held that for the purpose of section 80HHC also export house premium cannot be treated as part of the profit of exports directly to say that it is 'derived' from the export as distinguished from 'attributable to'. The CIT (Appeals) placed reliance on the decision of the Supreme Court in Ashok Leyland Ltd. v. CIT[1997] 224 ITR 122 and India Leather Corpn. (P.) Ltd. v. CIT [1997] 227 ITR 552 The CIT (Appeals) noticed that in the case of Pond's Ltd. 1997 TLR 41, the Madras Bench of the Income-tax Appellate Tribunal held the view that interest receipt on deposits out of export sale was not derived from the business in an export zone even though it may be attributable to it and therefore not eligible to the deduction under section 10A. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Tribunal. 7. The counsel for the assessee submitted that, first of all, the assessee was having only one activity, i.e., export and the assessee derives income only from export and not from any other business. It is with regard to such income generated from this activity that section 80HHC is to be applied. It is to be quantified with reference to the various sub-clauses of section 80HHC(3) read in the light of the Explanation to section 80HHC. The expression 'profits of the business' defined in clause (baa) of the Explanation speaks of the 'profits and gains of business or profession'. From this certain items are to be reduced. Explanation (baa) specifies the items that need be reduced as brokerage, commission, rent, interest, charges or other receipt of similar nature or any profits of branch, office, warehouse or any other establishment, of the assessee situate outside India. The income under the head 'profits and gains of business or profession' includes therein some of items of this nature also. It is not disputed that the so called premium is part of the assessee's business income. Hence while computing the income under the head profits and gains of business or professi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... non-specified goods should be reckoned separately overlooking any other business income because of the expression 'derived from exports' and for the purpose of section 80HHC one cannot look into other business income. The counsel submitted that this decision was rendered for the assessment year 1989-90, prior to the introduction of clause (baa) in the Explanation to section 80HHC. By introducing clause (baa) in the Explanation to section 80HHC, the Legislature has laid down a special formula for computing the income from business. Smt. Subhadra Ravi Karunakaran's case was for the assessment year 1989-90. After the introduction of clause (baa) in the Explanation the whole percepts have changed. The Delhi Special Bench decision reported in the case of International Research Park Laboratories Ltd. v. Asstt. CIT [1994] 50 ITD 37 deciding the issue for the assessment years 1990-91 and 1991-92, the Tribunal held that the deduction under export turnover/ profits retained for export business as used in section 80HHC(3) unambiguously refers to total turnover of the entire business and not to the total turnover of export business and the Tribunal further held that business includes not only ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India and partly from the export house through which it is routed. It has all the characteristics of a business receipt. The only difference is that it is paid in Indian currency. It is related to the turnover. It envisages all activities of the exporter including the manufacturing activities, carriage of the same, loading on the ship, documentation etc., etc., which are all a part and parcel of the export trade. What contemplates under the Explanation (baa) is receipts which do not involve the activities of this nature thereby meaning only incidental receipts. Therefore, receipts which have direct links with export business cannot be excluded regardless of the nomenclature. 11. Taking us to the background of the introduction of the Explanation (baa) to section 80HHC, the counsel submitted that the clause is to be understood against the background of the import of other expressions contained therein. The Explanation makes a difference between receipts mentioned in sub-clauses (iiia), (iiib) and (iiic) of section 28 on the one hand and other receipts. The amounts receivable from the export house are actually part of the sale price, i.e. that part which is receivable in Indian cur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cation that the turnover liable to be excluded is of such nature which does not have an element of turnover of the business and not all the receipts. Item which has the characteristic of turnover of business cannot be excluded. 13. It is not as if all the receipts which are not strictly in the nature of turnover are to be excluded. The receipts which had the character of turnover cannot be and shall not be excluded, if it has a direct link with the export business. 14. The learned counsel for the assessee also submitted that the decisions reported in V.T. Joseph's case and A.V. Thomas Co. Ltd's case were related to the assessment years where the terminology used in the section was not different. While deciding the issue in the case of Smt. Subhadra Ravi Karunakaran , the decision reported in A.V. Thomas Co. Ltd's case was not adverted to. The decision of the Tribunal in the case of Sri G. Gangadharan Nair v. ITO[IT Appeal No. 610 (Coch.) of 1994, dated 31-12-1994 which went against the assessee in respect of premium had been set aside by the Kerala High Court in G. Gangadharan Nair v. CIT[1999] 238 ITR 685 (Ker.). Therefore, now the only decision available is the decision i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resentative supported the orders of the Revenue authorities and inviting our attention to section 80HHC(1) submitted that the word used in this section is "profits' derived by the assessee from the export of such goods or merchandise and not the profits attributable to True, incentive, premium, service charges all had a link with the export business of the assessee, but did not derive from. The term 'derive' indicates an immediate source and not secondary. It is different from other receipts of similar nature. What is to be seen is the nature of the receipts and the immediate source it derived from. Before working out the deduction admissible under the section, agreement/agreements executed by the assessee with export house should be taken note of. The assessee routed export of its marine products through some of the export houses. A common agreement was executed by the assessee as well as by the sister concerns, M/s. Baby Marine (Eastern) Exports and M/s. Baby Products. On going through the agreements, it is seen that the payment was in the nature of incentive whatever be the nomenclature used. It is termed as either 'incentive' or 'premium' or as 'service charges'. The payment me ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... No. 5 of 1992, dated 25-6-1998]. 18. Replying to the above, the assessee's counsel reiterated the submission that the decision of the Tribunal in the case of Sri G. Gangadharan Nair is no more good law as the Hon'ble Kerala High Court has set aside that decision. Further, the counsel submitted that the main thrust of the decision of the Tribunal in the case of Baby Marine (Eastern) Exports was that the sales-tax authorities had not included the premium or commission or incentive received from the export house as part of the turnover for the purpose of sales-tax. If the assessee now claims that the receipt from the export house forms part of export price then the assessee should have included such receipts for sales-tax purposes also. Having failed to do so, there was no justification, the Tribunal held, for the belated claim of the assessee to include it for the purpose of section 80HHC. The counsel further reiterated that the Tribunal was not justified in placing too much reliance on the decision of the jurisdictional High Court in the case of V.T. Joseph in the light of the facts that the Hon'ble Kerala High Court in a subsequent decision had taken a contrary view on the same ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aw was applicable, as there was no much difference in the wording of the section since the decision of the Hon'ble Kerala High Court in the case of V. T. Joseph was dated 26-9-1996 and the decision in the case of A.V. Thomas Co. Ltd. was on a subsequent date, i.e. 6-1-1997, the later decision should prevail over the earlier one. 21. It is important to note that section 80AB came into the statute with effect from 1-4-1981 by the Finance (No. 2) Act, 1980; whereas section 80HHC was originally inserted by the Finance Act, 1983 with effect from 1-4-1983 for and from the assessment year 1983-84. With a view to encouraging large exports of certain goods by Finance Act, 1982, a section was inserted for the first time with effect from 1-6-1982 for providing tax relief to companies and corporate tax payers resident in India whose export turnover for a year exceeds export turnover of the immediately preceding year by more than 1096. This was subsequently withdrawn and the present section was introduced. With the 1989 amendment the section for the first time exempted the entire profits derived from exports and made express provision for dividing the exemption between a recognised export h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arising from the business of export. In the case of Smt. Subhadr'a Ravi Karunakaran it was held by the Tribunal that the expression "income derived from export out of specified and non-specified good" should be reckoned separately. But it is to be also noted that this decision was relevant for the assessment year 1989-90, prior to the introduction of clause (baa) in the Explanation to section 80HHC which specifically states what are the items to be excluded while computing the profits of the business under the head "profits and gains of business or profession". The Explanation (baa) specifically enumerates the items that are to be excluded. Therefore, the decision of the Tribunal in the case of Smt. Subhadra Ravi Karunakaran is not relevant for the assessment years under consideration. It is also to be noted that a contrary view has been taken by the Delhi Bench of the Tribunal (Special Bench) in the case of International Research Park Laboratories Ltd. In this case, the Tribunal (Special Bench) held that "the expression 'total turnover' used in section 80HHC(3)(b) unambiguously refers to total turnover of the entire business and not to the turnover of the export business. 'Busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Tribunal further held that "although reading sections 80HH, 80HHB, 80-I, 80J, 80JJ appearing in the same Chapter VI-A, it will be found that the basis for deduction is on the profits computed separately for the specified business or specific type of industrial undertaking, to which that particular section applies, section 80HHC is related to the nature of activity, totally unrelated to the type of goods". The Tribunal further noted that .another important departure of section 80HHC compared to other sections is that profits and gains of export business are not required to be computed as per the books of account of the assessee but as provided for in rule 18BBA in the prescribed Form No. 10CCAC. The view expressed by the Special Bench of the (Delhi Bench D) Tribunal was tacitly approved by the Hon'ble Andhra Pradesh High Court reported in 238 ITR 970 in the case of CIT v. Gogineni Tobacco Ltd Though the issue was not exactly the same, the Hon'ble Andhra Pradesh High Court distinguished section 80HHC from other sections in Chapter VI-A saying that the section is a self-contained code and in view of the words expressly used "this section", that means section 80HHC. It does not say t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inks the question of deduction inseparably with the export turnover and five per cent of the difference specified in clause (b) thereof additionally." 26. In effect, though in the earlier decision, it was held on one fact against the assessee, the principles laid down by the two Benches do not at a closer look appear to be contradictory. 27. Another important point to be noted is the difference in the wording of section 80HHC, on the one hand, and the wording of sections 80HH, 80HHB, 80-I, 80DJ and 80JJ on the other. Whereas in sections 80HH, 80HHB, 80-I, 80J and 80JJ the words used are "where the gross total income of the assessee includes......" the wording of section 80HHC is "in computing the total income of the assessee ......" Now the question is, Is there a difference in the expression "gross total income" of the assessee used in sections 80HH, 80HHB, 80-I, 80J and 80JJ and the words 'total income" of the assessee used in section 80HHC ? Section 80B(5) defines what is gross total income. According to this definition 'gross total income" means "total income computed in accordance with the provisions of this Act before making any deduction under this Chapter". Section 80HH ..... X X X X Extracts X X X X X X X X Extracts X X X X
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