TMI Blog2005 (8) TMI 535X X X X Extracts X X X X X X X X Extracts X X X X ..... d the parties. 3. The brief facts, as have been revealed from the records and are relevant for disposal of this appeal are that the assessee-company, which was a recognized Export House had filed its return of income for assessment year 1996-97 declaring an income of Rs. 1,40,44,800 on 30-11-1996 and had claimed deduction under section 80HHC of the Act amounting to Rs. 22,23,53,775. Admittedly, prior to this year, the assessee was exporting only pharmaceutical products which were in the form of tablets, liquids, vials, capsules, ointments, etc. after purchasing the same from the open market, during the previous year relevant to assessment year 1996-97, the assessee, in addition to exporting the usual trading goods, exported Soyabean and Rice after purchasing the same from so-called Supporting Manufacturers (SM). During the course of export business, the assessee earned a profit of Rs. 21,31,27,219 on trading goods exported by it after making purchases from the open market, but suffered a loss of Rs. 3,62,87,480 on the export of goods (Rice and Soyabean) purchased from SM . 3.1 The working of assessee s claim of deduction under section 80HHC as per Annexure I attached to re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Less : Freight and insurance expenses debited to P L A/c. (as given in auditor s report) 3,79,30,073.00 Total Turnover 1,16,15,57,270.00 Less : Local turnover 1,33,89,038.00 Export turnover (98.85%) 1,14,81,68,232.00 Less : Unrealised export turnover 3,80,11,836.00 Export turnover realized (95.57%) 1,11,01,56,396.00 Direct cost of trading goods (as per working in the Auditor s report) 86,71,51,972.00 Direct cost of trading goods of sale proceeds was realized 83,84,43,602.00 Indirect cost (as per working in the Auditor s report filed with R.I.) 9,92,70,749.00 Total Sales Rs. Total indirect expenses allocated in proportion to export turnover (95.57% of Rs. 9,92,70,749) 9,48,73,055.00 Export Profit : Export turnover as above 1,11,01,56,396.00 Less : Direct cost Rs. 83,84,43,602 Indirect cost Rs. 9,48,73,055 93,33,16,657.00 Export Profit 17,68,39,739.00 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 80HHC(2)( a ) refers. Mere submission of a petition to the Commissioner of Income-tax for allowing the assessee to receive the amount of sale proceeds in foreign exchange beyond the specified period of six months, is not enough for the admissibility of deduction under section 80HHC. Unless the Commissioner has communicated his satisfaction that the assessee was, for reasons beyond his control, unable to realize the amount of sale proceeds within the specified period, no deduction on the amount of such sale proceeds can be allowed under section 80HHC. 3.2.2 The second contention of the appellant is to the effect that the Assessing Officer should not have reduced the amount of deduction under section 80HHC by a sum of Rs. 4,33,59,876 on account of disclaimed export turnover passed on to the supporting manufacturers. In this regard, the legal position is as follows. To enable the supporting manufacturers to claim deduction under section 80HHC, the recognized export/trading house has to issue them disclaimer certificate in respect of the export turnover in Form No. 10CCAB. Where the recognised export/trading house disclaims the tax concession in favour of the supporting manufacturer ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Hon ble ITAT that loss in one unit not connected with export unit could not be adjusted against profit of export unit for the purpose of allowing deduction under section 80HHC. In the case of the appellant, as mentioned above, the amount of profit on export turnover passed on to supporting manufacturers has been worked out in accordance with the proviso to section 80HHC(1). 3.2.5 In view of the above, both the contentions raised by the appellant on this ground of appeal are rejected." 4. It was, in the light of above facts and circumstances of the case, that the parties have advanced their respective arguments. The ld. counsel for the assessee (referred to as AR ) first of all, recapitulate the brief facts in his own terms, as under : ( i )That, the assessee is a recognised export house. It exports primarily medicines and medical formulations. However, during the previous year relevant to this appeal it exported rice and soyabean, etc. also which it bought from the supporting manufacturers and issued disclaimer certificates to be concerned supporting manufacturers for the export turnover of the said items of rice and soyabean, etc. ( ii )That, from the export of m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion in IPCA Laboratory Ltd. v. Dy. CIT [2004] 266 ITR 521 1 . Accordingly, the assessee s counsel conceded this issue during the course of this appeal. ( vi )Assessee went in appeal before the CIT(A) but failed. The relevant portion of the order of the CIT(A) as contained in paragraph 3.2.2 reads as under : "The second contention of the appellant is to the effect that the Assessing Officer should not have reduced the amount of deduction under section 80HHC by a sum of Rs. 4,33,59,876 on account of disclaimed export turnover passed on to the supporting manufacturers. In this regard, the legal position is as follows. To enable the supporting manufacturers to claim deduction, under section 80HHC, the recognized export/trading house has to issue them disclaimer certificate in respect of the export turnover in Form No. 10CCAB. Where the recognized export/trading house disclaims the tax concession in favour of the supporting manufacturer, the deduction under section 80HHC to the recognized export/trading house is reduced by the amount which bears to the total export profits of trading goods the same proportion as the disclaimed export turnover bears to the total export turnover ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the issuance of disclaimer certificates. It was further argued that even for computing the specified proportion the phraseology demands that one has to take "the amount of export turnover specified in the said certificate". That certificate is the disclaimer certificate, so in the numerator of that formula in determining the specified percentage would be the disclaimed export turnover only. Assessee argues that even for the denominator the phraseology is "the total export turnover of the assessee in respect of such trading goods" meaning thereby that it is the total export turnover of trading goods for which disclaimer certificates have been issued and this is obvious on account of existence of word "such" towards the end of that proviso. The assessee s counsel supplied the dictionary meaning of the word "such" from the Prem s Legal Dictionary and Oxford University Dictionary. It was emphasized that the existence of that word "such" makes all the difference with the result that the numerator as well as the denominator for determining the specified proportion one has to take the respective figures of export turnover relating to the trading goods for which disclaimer certificates ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs Ltd. [2002] 257 ITR 60 (Mad.) ( vi )A.R s further contention was that proviso itself is relevant only for those trading goods for which disclaimer certificates have been issued and hence the trading goods for which disclaimer certificates have not been issued are totally outside the ambit of that proviso. Assessee emphasizes the existence of word "such" just before the words "trading goods" at the end of the aforesaid proviso to claim that it talks of only those trading goods on which disclaimer certificates have been issued. ( vii )On parity of reasoning, it was obvious that in applying the proviso to section 80HHC(1) words "total profits derived by the assessee from the export of trading goods" would take into its ambit only the profits derived from such trading goods on which disclaimer certificates as required under section 80HHC(4A)( b ) have been issued. On this basis there will be no reduction in the figure of deduction under section 80HHC in this case which is attributable to the issuance of disclaimer certificate. The assessee is entitled to deduction under section 80HH in a sum of Rs. 17.68 crores plus the undisputed component of export benefits in a sum of Rs. 0. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rs to the Export Profit on the goods of the supporting manufacturers whereas the Revenue s case is that no, this term refers to "whole of the Export Profit" i.e., Total export profit earned by the assessee on the Export of Trading goods including the goods purchased from the Supporting Manufacturer ( SM ). 6.3 In other words, the crux of the matter is as to what should be the figure for the term " total profits derived by the assessee from the export of trading goods " and also for the term "total turnover of such Trading goods" for the purpose of formula prescribed under the aforesaid proviso, if the proviso is to be applied and therefore, we are of the opinion that first of all it is desirable to find out the intention and purpose of the Legislation behind the enactment of the provisions of sections 80HHC, as a whole, the proviso to section 80HHC(1), provisions of section 80HHC(1A), 80HHC(3) and 80HHC(4A)( b ) in special and therefore we, first proceed to do this exercise. "80HHC. Deduction in respect of profits retained for export business. (1) Where an assessee, being an Indian company or a person (other than a company) resident in India, is engaged in the business of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... indirect costs attributable to such export; ( c )where the export out of India is of goods or merchandise manufactured or processed by the 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. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... country gets the sufficient Foreign Exchange and balance between Export and Import is maintained. ( ii )To increase the Indian manufacturers to manufacture the goods of international standard so that the Indian goods can compete in the world market. 7.2 We are, further, of the opinion that it was to achieve the addition of aforesaid two objects that the Legislature deemed it fit to grant some concession/exemption to the exporters (known as Export Houses or Trading Houses, as the case may be, and duly authorised by the Government of India) and also to give such concession/exemption to the manufacturers (called as Supporting Manufacturers) who manufactures the goods only for the purpose of Export by so-called Export Houses/Trading Houses and do not export the goods so manufactured. 7.3 Further, the Legislature, in its wisdom, has, by enacting the provisions of sub-section (1A) of section 80HHC, provided concession/exemption to the Supporting Manufacturers ( SM ) and to be sure that these provisions are not misused the Legislature has, further, gone to enact the provisions of sub-section (4A) of section 80HHC of the Act which prescribes the extent of concession/exemption adm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act. 11. After having given our thoughtful consideration to the provisions of section 80HHC as a whole and the intention of the Legislature ( supra ), we are of the opinion that so far as the present case is concerned, if we interpret the proviso in a way as has been claimed by the Revenue, the result will be that "the assessee will be entitled to the deduction under section 80HHC(1) of the Act only to the extent of Rs. 13,65,49,333 as against the deduction of Rs. 21,61,96,689 to which the assessee would have been entitled to had it not, at all, exported the goods of the SM or had it earned profit on the goods of SM also. On the other hand, if we accept the first interpretation of the proviso, as has been made out by the assessee, then the assessee becomes entitled to deduction to the extent of Rs. 21,61,96,689 as against deduction of Rs. 17,68,39,739 to which he would have entitled to (by virtue of provisions of section 80HHC(3) and decision of Hon ble Supreme Court in the case of IPCA Laboratories Ltd. v. Dy. CIT [2004] 266 ITR 521 1 which is more than the deduction to which the assessee is otherwise entitled to. 12. On the other hand, if we consider the L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 80HHC can be applied to achieve the desired results as intended by the Legislature, only when trading goods of SM are same/similar as the trading goods exported by the Export/Trading Houses, i.e., the assessee; after purchasing from the open market and it is so because in that case ( a )if there is profit, then it is not known as to how much profit is on goods purchased from SM and how much is the profit on goods exported by the assessee after purchasing from the open market; in such case the element of profit on trading goods of SM get merged/embedded in the overall total export profit earned by the assessee and since as per the provisions of clause ( b ) to sub-section (4A) read with section the provisions of sub-section (2A) of section 80HHC the benefit under section 80-HHC on such profit, i.e., profit on trading goods of SM ; is admissible to the SM and not to the Export House/Trading House, the Legislature has thought fit to bring the proviso statute and has provided a formula to exclude proportionate profit out of total export profit resulting in denial of benefit of section 80HHC to the Export/Trading House against export profit on trading goods of th ..... 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