TMI Blog2010 (4) TMI 153X X X X Extracts X X X X X X X X Extracts X X X X ..... 2-03. The question of law which has been formulated by the Revenue in this appeal under section 260A of the Income-tax Act, 1961 is as follows: "Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that 90 per cent. of recovery of freight, insurance and packing receipts amounting to Rs. 49,14,076, sales tax set off/refund amounting to Rs. 38,33,148 and service income of Rs. 2,89,17,545 are not to be excluded from profits of business within the meaning of clause (baa) of Explanation to section 8OHHC of the Act for the purpose of computation of deduction under section 8OHHC of the Income-tax Act, 1961?" 3. The issue that has been the subject-matter of submissions in this appeal is whether 90 per cent. of the recovery of freight, insurance and packing receipts ; sales tax set off/refund and service income are liable to be excluded from the profits of business in view of Explanation (baa) to section 80HHC. Sub-section (1) of section 80HHC contemplates a deduction to an assessee being an Indian company or a person resident in India and engaged in the business of the export out of India of any goods or merchandise to which the sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal was of the view that the Commissioner was correct in the view which was taken and accordingly held that 90 per cent. of the receipts on account of the recovery of freight, insurance and packing charges ; sales tax refund and service income were liable to be excluded under Explanation (baa) to section 80HHC. 6. The submission which has been urged on behalf of the Revenue is that the issue in the appeal is covered by the judgment of the Supreme Court in CIT v. K. Ravindranathan Nair [2007] 295 ITR 228 (SC). The Revenue submits on the basis of the decision in Ravindranathan Nair that independent incomes which are unrelated to the export activity are liable to be excluded in the computation of business profits by virtue of Explanation (baa) to section 80HHC. The contention of the Revenue is that processing charges were specifically dealt with by the Supreme Court in its judgment and that consequently the view of the Tribunal is ex facie erroneous. Learned counsel submitted that the other items which are referred to in the question formulated would also be governed by the same principle and being independent incomes, unrelated to exports these would be liable to exclus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal turnover while arriving at export profits under section 80HHC(3) as it stood at the material time. The Supreme Court held that the expression "derived from" in sub section (1) of section 80HHC is narrower than the words "attributable to" and consequently it is only profits derived from exports which become the basis for working out the formula provided in sub-section (3). The Supreme Court held that if the processing charges were a part of the gross total income, being profits from business, then they had to be included in the total turnover in the formula provided by sub-section (3). The expression "included in such profits" indicated that the processing charges formed a part of the gross total income, being business profits. The contention of the assessee that the processing charges were liable to be excluded from the total turnover was rejected by the Supreme Court. The question as to whether the processing charges: (i) constitute independent income like rent, commission and brokerage; and (ii) were liable to be excluded to the extent of 90 per cent. from the gross total income while arriving at business profits was dealt with in the following observations (page 240): "In ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... essee urged that the question as to whether processing charges formed part of the business profits and if so, if 90 per cent. of such receipts are liable to be excluded under Explanation (baa) did not fall for determination before the Supreme Court. Learned counsel submitted that in that case the assessee had urged that the formula in section 80HHC (3) should be read to exclude processing charges from the total turnover even though they constitute part of the business profits. On behalf of the Revenue, it was urged that though the proc charges were includible in business profits, they were simultaneously includible in the total turnover. Hence, it was submitted that the question as to whether processing charges, formed part of the business profits and if so, whether they would be susceptible to a reduction of 90 per cent. did not fall for determination of the Supreme Court. We are unable to accept the sub mission. The question which was formulated in the appeal before the Supreme Court was whether the Department was right in including the processing charges of Rs. 1.54 crores in the total turnover while arriving at export profits under section 80HHC (3). As the Supreme Court noted, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to have been excluded from business profits. The contention of the Revenue was that for the purpose of calculating the deduction under section 80HHC only those items of income are to be taken into account as business profits which have relation to export activity and the job work receipts had no nexus with export activity. The Division Bench held that there was no merit in the submission of the Revenue. The Division Bench held that in every case the Assessing Officer would have to determine as to whether a receipt of interest, commission, labour charges, etc., constitutes a part of operational income. The court noted that though the receipt in question was called a labour charge, this nomenclature may not be accurate as the assesse was a manufacturer and exporter of garments. The court noted that there was a finding of fact recorded by the Tribunal that there was no difference between the activities relating to export business carried out by the assessee and the process carried out for manufacturing garments for others under job work contracts. There was a finding of fact in the order of the Tribunal that there was an element of job work turnover and that the receipt of labour cha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht to be urged that the decision in Bangalore Clothing was cited before the Supreme Court in its decision in Baby Marine Exports [2007] 290 ITR 323. The submission of the assessee is that the judgment in Bangalore Clothing must be regarded as being impliedly approved by the Supreme Court in Baby Marine Exports [2007] 290 ITR 323. The issue before the Supreme Court in Baby Marine Exports [2007] 290 ITR 323 was whether an export house premium received by the asses- see is includible in the profits of the business of the assessee while computing the deduction under section 80HHC. The assessee was engaged in the business of selling marine products both in the domestic and international markets in pursuance of a contract which it had entered into with export houses. The assessee received the entire FOB value of the exports together with a payment which was described as an export house premium of 2.25 per cent. of the FOB value. The Tribunal in that case held that the export house premium received by the assessee was includible in the profits of the business under section 80HHC. The contention of the Revenue before the Supreme Court was that as a supporting manufacturer, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pporting manufacturer for an export house. Secondly, the premium, as a matter of fact, was related to the export activity since it formed an integral part of the business of the assessee which consisted of the sale of goods to an export house. The Supreme Court has, as a matter of fact, in the course of the discussion not affirmed the judgment of this court in Bangalore Clothing [2003] 260 ITR 371. The decision undoubtedly was cited on behalf, of the assessee but that in itself is not a ground for this court to hold that it was impliedly approved. There is nothing in the judgment of the Supreme Court to suggest that the judgment in B angalore Clothing [2003] 260 ITR 371 was either expressly or impliedly approved. The submission which has been urged on behalf of the assessee cannot, therefore, be accepted. The ambit of Explanation (baa) has been considered by the judgment of the Supreme Court in Ravindranathan Nair's case [2007] 295 ITR 228. The legislative policy underlying the provision is that items which are unrelatable to the export activity must be excluded in the computation of business profits in order to prevent a distortion in the computation of the deductio ..... X X X X Extracts X X X X X X X X Extracts X X X X
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