TMI Blog2001 (10) TMI 259X X X X Extracts X X X X X X X X Extracts X X X X ..... essee is an exporter of spices products as stated above, it has been claiming the benefits available under section 80HHC of the Act on a regular basis from year to year. The claim of the assessee has been consistently accepted and allowed by the Department. For the impugned assessment year 1993-94, the assessee has claimed a deduction of Rs. 5,83,375 by way of such benefits available under section 80HHC of the Act. The profit of the business carried on by the assessee was Rs. 10,22,835 as per its profits and loss account. The adjusted profit worked out by the assessee for income-tax purpose was Rs. 10,70,012. In the course of carrying on of the business, the assessee also received a sum of Rs. 19,90,260.40 in the nature of drying/grinding/distillation charges collected from other companies for undertaking job work production. While examining the claim of the assessee towards the deduction of benefit available under section 80HHC, the Assessing Officer made a reference to clause (baa) of Explanation given to section 80HHC. Particularly referring to sub-clause (i) of the above clause (baa), the Assessing Officer observed that the drying/grinding/distillation charges credited in the t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t in the hands of the assessee-company where from deduction under section 80HHC could be given. Accordingly, he negatived the contention of the assessee towards the claim of deduction of Rs. 5,83,375 made under section 80HHC of the Act. 7. This issue was taken in first appeal before the CIT(Appeals). The assessee-company raised detailed contentions before the CIT(Appeals) (a) Section 80HHC provides for "deduction in respect of the profits retained for export" vide the handnote. (b) Section 80HHC(i) allows deduction of "the profits derived by the assessee from the export of goods or merchandise" where the assessee is engaged in the business of export out of India of any goods or merchandise. (c) Clause (baa) of the explanation to section 80HHC defines the words "profits of the business" and provides that 90 per cent of various receipts such as profits on sale of import licences, cash assistance for exports, customs and excise duty drawback, brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits should be deducted. (d) Section 80HHC(3)(a) provides that for purposes of sub-section (1) of section 80HHC the profits ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of those receipts from such export profit already arrived at by applying the turnover formula. The CIT(Appeals) pointed out that the Board Circular No. 621 dated 19-12-1991 made this position clear by explaining that explanation (baa) was inserted only to check the distortion of export profit by including receipts like interest, commission, etc., which do not have any element of turnover. The CIT(Appeals) held that the drying/grinding/distillation charges accounted by the assessee were purely business turnover and they were directly taken into the trading account of the assessee-company. The CIT(Appeals) pointed out that the word "charges" is a part and parcel of the expression "any receipts by way of brokerage, commission, interest, rent, charges, etc.". The word is to be understood in the context in which the expression in its totality is used and that does not visualise a receipt by way of distillation charges, which are clearly of a turnover nature. Finally, the CIT(Appeals) came to a finding that the receipts which form part of the day-to-day business turnover of the assessee could not be considered as that kind of receipts enumerated in Explanation (baa). Those receipts are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... --------------- Total turnover. There is no ambiguity in this. For the purpose of the above formula, "profits of business" is explained in clause (baa) of the Explanation provided under section 80HHC. Clause (baa) stipulates that profits of the business means, the profits of the business as computed under the head "profits and gains of business or profession". The above exposition is subject to a condition that certain items which are not in the nature of regular business carried on by the assessee has to be reduced from the income computed under the head "profits and gains of business or profession". Sub-clauses (i) and (ii) of clause (baa) provides for such adjustment factors. As per sub-clause (i), one of such items which has to be reduced from the profit is "charges". The term "charges" has to be construed in its normal and reasonable meaning. The sum of Rs. 19,90,260.40 credited by the assessee-company in its trading account related to drying/grinding/distillation charges received by the assessee-company. They are charges and not business profits of the assessee-company. If the normal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in profit and loss account since all the expenditure for running the company are totally reflected in profit and loss account and there is no segregation of the expenditure for the job work and for own processing. (3) For the exemption under section 80HHC, to arrive at the 'profits of the business', 90 per cent of items under section 28(iiia), (iiib) and (iiic) and any receipt by way of brokerage, commission, interest, charges or any other receipt of a similar nature is to be reduced from the profit. (4) Item in (iiia), (iiib) and (iiic) are profits on the sale of import licence, cash incentive and duty drawback which arc in the nature of business income, but 90 percent of these items arc to be excluded since a further benefit of income tax exemption is not intended to be given on those amounts which are already incentive from export. These items of business income are excluded only because these items are specifically mentioned in the section and a double advantage is not intended under section 80HHC. (5) Any receipt by way of brokerages, commission, interest, rent, charges or any other receipt of a similar nature are also to be deducted to the extent of 90 per cent. At t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total turnover. The processing charges Rs. 19,90,260 received is having an expenditure of nearly 90 per cent (by taking income/expenditure ratio as per profit and loss account). The net income of approximate Rs. 2 lakhs is included in the income in the profit and loss account and forming part of domestic business income. When the deduction is decided by the above formula, by dividing the export turnover by the total turnover and multiplying the profit of the business, the exemption will be only for the income from the proportionate export turnover. 12. We heard both sides in detail. We have gone through the detailed orders passed by the lower authorities. We have also perused the argument note filed by the learned Chartered Accountant accompanied by written submissions filed by the respondent-assessee. Section 80HHC of the Act provides for deduction in respect of profits retained for export business. The computation of that deduction is provided in sub-section (3) of section 80HHC. It is to be worked out on the basis of the following formula: Profits of business X Export turnover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bed as profits derived from the export of goods or merchandise out of India. The deduction is computed in the following manner: Profits of business X Export turnover --------------- Total turnover. 14. The above formula presupposes that if there is an overall profit for the business carried on by the assessee during the relevant previous year and the assessee has also export turnover, a portion of the overall profit relates to export business and the balance profit relates to domestic business. The division is made in the ratio of export business to total turnover. This statutory proposition has created certain distorted circumstances, inasmuch as the formula gives a distorted figure of export profits when receipts like interest, commission, etc. which do not have an element of turnover are included in the profit and loss account. It is to alleviate such a situation that clause (baa) of Explanation to section 80HHC has been inserted in the Act by Finance (No. 2) Act, 1991 with effect from 1-4-1992. The object of inserting clause (baa) has been stated in the circular No. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sale proceeds of those products as such, the assessee-company is receiving charges towards drying/grinding/distilling involved in the process of its manufacture. The manufacturing process carried on by the assessee is a sophisticated one. The procedures are highly automated and complicated. The extracting of spices products is mainly meant for export and extraction process and its quality control demand a high level of expertise. Whether for its own export or for processing of raw materials of other companies, the core manufacturing activity carried on by the assessee is one and the same. The activities necessary for exporting assessee's own merchandise and the activities necessary for carrying out the job works are one and the same as far as its processing and manufacturing part is concerned. Therefore, one cannot say that the job works undertaken by the assessee-company is not an integral part of the business carried on by the assessee-company. When the manufacturing process carried on by the assessee-company to execute the job works undertaken by it forms part of the core business of the assessee, then the corresponding receipts obtained by the assessee-company against such pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng the entire factory and production system of the assessee. Such charges are earned by the assessee after incurring all expenditure pertaining to a normal business in the form of wages, energy, rent, rates, depreciation, etc. There is no basis to presume that the impugned charges arc received by the assessee after incurring a marginal rate of IO per cent thereof. These charges are received by the assessee by incurring all expenditure as good as its own manufacturing activities, except the raw material costs. So, the term "charges" provided in sub-clause (i) of clause (baa) is nowhere similar or comparable to the charges received by the assessee-company in the nature of drying/grinding/distillation charges. They are functionally quite different in character. 19. The word "charges" used in sub-clause (i) of clause (baa) is found in the company of expressions like "brokerage", "commission", "interest", "rent". If we apply the principle of "ejusdem generis", the term "charges" has to be read in the company of the preceding words, such as brokerage, commission, interest, rent, etc. The brokerage or commission or interest, or rent does not have any nexus with any manufacturing or pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provided in section 80HHE of the Act. The said section is provided for deduction in respect of export of computer software and providing technical services outside India. Explanation (a) to section 80HHE is exactly similar to clause (baa) of Explanation to section 80HHC. in the case of an assessee claiming exemption under section 80HHE and the income of the assessee consisted only of charges received from technical services from outside India, and if the view adopted by the Assessing Officer is taken, then that assessee might not be entitled to any deduction at all, when in fact the purpose of section 80HHE is to provide deduction in such cases. 21. We find that it would give rise to an absurd result if the interpretation given by the Assessing Officer in this case is applied to a situation arising out of section 80HHE. The interpretation given by the Assessing Officer creates an anomaly in the application of section 80HHC itself. The formula prescribed by the statute in computing the deduction available under section 80HHC provides for an eligible deduction if the assessee has derived profit from the business carried on by it which included export turnover also. The nexus of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) to the Explanation under section 80HHC of the Act. 23. This Tribunal had an occasion to consider the meaning of the word "charges" used in clause (baa) of the Explanation at A.M. Moosa v. Asstt. CIT [1996] 54 TTJ (Coch.)193. It has been held by the Tribunal that the provisions, being incentive provisions, should be construed liberally. In that case the assessee entered into agreements with export houses whereunder he received a percentage of f.o.b. value; not as a reimbursement of expenses incurred by him. These were not held as receipts covered by the term "charges". Likewise, in the present case also the drying/grinding/distillation charges were not received by the assessee as reimbursement of any expenses incurred by it. On the other hand, the assessee had incurred substantial expenditure in earning such charges by way of undertaking job works as an integral part of the core business carried on by it. 24. In the circumstances, the drying/grinding/distillation charges received by the assessee were to be treated as part of its business turnover. Those business receipts do not come under sub-clause (i) of clause (baa) of Explanation to section 80HHC. The word "charges" appe ..... X X X X Extracts X X X X X X X X Extracts X X X X
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