TMI Blog2010 (12) TMI 944X X X X Extracts X X X X X X X X Extracts X X X X ..... on any activity which has nexus to the export in sofar as the receipt of amount of Rs. 18,45,733/- is concerned, question answered in the affirmative i.e., in favour of the revenue and against the assessee Bifurcate the professional charges between procuring order and rendering other services so as to exclude only that part of professional charges as attributable to procuring order in computing profits of the business - Held that:- When the AO selected the case for scrutiny proceedings and raised queries as to why 90% of the professional charges has not been reduced out of "profits of the business". The assessee has submitted the letter dated 29.1.2003 and contended that these receipts are considered as business income and related to expenses are considered as business expenses. The assessee himself has stated that he will not be able to bifurcate this part of the expenses separately since administrative set up and market set up are common to export business and this activity of indirect exports - AO has deducted 90% of the professional charges received from, profits on business by reducing 10% towards charges attributable to procuring the order and thus question Nos. and 4 form ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dering the said professional charges? FACTS OF THE CASE 2. Assessee is the proprietor of M/s Tycoon International, which firm engaged in the manufacturing and export of garments. For the assessment year 2001-02 return of income was filed and assessee had computed the allowable profits under Section 80HHC of the Act in his return of Income. It was noticed by the Assessing Officer during the Course of assessment proceedings that Assessee had received a sum of Rs.18,45,733/- from M/s Indus Textiles Limited in Indian currency for having passed on the export order to Indus Textiles Limited. Thus, Assessing Officer while computing deduction under Section 80HHC disallowed the same while arriving at the profit from export of goods or merchandise, in view of explanation (baa) to section 80HHC and accordingly determined the total turnover. 3. Being aggrieved by this order assessee carried the matter in appeal, before Commissioner of Income Tax (Appeals) who directed the Assessing Officer to consider exclusion of 90% of professional charges out of Rs.18,45,733/- claimed in full (100%) by assessee and also held that stitching charges of Rs.15,39,707/- and sale of fabrics of Rs.5, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... attributable to procuring order while computing business profits. He would contend that Kerala High Court in the case of Baby Marine (Eastern) Exports (2003) 262 ITR 88 has held that assessee who was exporting the Marine goods through export house and receiving from export house "Premium" or "service charges" in excess of FOB prices is entitled to deduction in respect of such service charges as the same could not be regarded as brokerage, commission, interest or charges or collection of any amount of similar nature as described in 80HHC (4B) which principle is clearly applicable to the facts of the present case. In support of his submissions he also relies upon the following judgements: 1. (2007) ITR 228 (SC) CIT vs K Ravindranathan Nair 2. (2007) 290 ITR 323 (SC) CIT vs Baby Marine Exports 3. (2003) 262 ITR 88 (Kerala) (HC) Baby Marine (Eastern) Exports vs. ACIT 4. 288 ITR 165 (Mad) HC CIT vs. Kiran Processors (2007) 5. (2003) 260 ITR 371 (Bom) HC CIT vs. Bangalore Clothing Co. 6. (2007) 288 ITR 116 (Raj) HC CIT vs. Sharda Gum and Chemicals 8. He would also contend that it is the net receipts which ought to have been deducted while computing the profit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... income came to be filed on 31.12.2001 declaring total income of Rs.4,48,438. During the relevant previous year, as per profit and loss account, sales and other income of the assessee was shown in the return of income as Rs.57,16,453/- and as per schedule VI to the profit and loss account the details there of was shown as under: Export turnover Rs. 4,53,46,289/- Duty draw back Rs.60,94,232/- Interest received on FD Rs.69,195/- Finishing charges Rs.3,61,004/- Professional charges Rs.18,45,733/- 12. Under section 80HHC Exporter are allowed, in the computation of total income, a deduction of the entire profits derived from exports. The Export profits is computed on the basis of the ratio of export turnover to total turnover. The formula as accepted by both the Assessee and Revenue for arriving at export profits is as under: Business Profits X export turnover = Export profits Total turnover 13. As per report under Section 80HHC annexed to the return of income the assessee has computed adjusted total turnover at Rs.4,96,21,221/-, adjusted export turnover at Rs.4,73,46,28 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch goods or merchandise: Provided that if the assessee, being a holder of an Export House Certificate or a Trading House Certificate (hereafter in this section referred to as an Export House or a Trading house as the case may be,) issues a certificate referred to in clause (b) of sub-section (4A), that in respect of the amount of the export turnover specified therein the deduction under this sub-section is to be allowed to a supporting manufacture, then the amount of deduction in the case of the assessee shall be reduced by such amount which bears to the (total profits derived by the assessee from the export of trading goods, the same proportion as the amount of export turnover specified in the said certificate bears to the total export turnover of the assessee in respect of such trading goods.) (1A) xxxxx (1B) xxxxx (2)(a) xxxxx (3) xxxxx (3A) xxxxx (4) xxxxx (4A) xxxxx (4B) xxxxx (4C) (a) and (b) xxxxx Explanation:- For the purposes of this section,- (a) "convertible foreign exchange" means foreign exchange which is for the time being treated by the Reserved Bank of India as convertible foreign exchange for the purposes of the Forei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dition to claim deduction under Section, 80HHC would be that the assessee should have derived profit from export of goods or merchandise and failing to fulfill this primary condition the assessee would not be allowed to compute the total income by deducting profits derived from export. 16. A perusal of explanation (baa) to Section 80HHC which defines "profits of the business" would mean and include the profits of the business as computed under the profits and gains and business and profession as reduced by (i) 90% of any sum referred to in clauses (iiia), (iiib) and (iiic) of Section 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipts of similar nature included in such profits (ii) profits of any branch, office, warehouse or any other establishment of the assessee situated outside India. In the instant case Assessing Officer has included 90% of the Professional charges received by the assessee while arriving at the business profits of the assessee by applying explanation (baa) to the facts on hand. 17. It is contended that tribunal failed to place an interpretation of the aforesaid clause by pressing into service of "Ejesdum Ge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nt, charges etc. formed part of gross total income being business profits. But, for the purposes of working out the formula and in order to avoid distortion of arriving export profits cl. (baa) stood inserted to say that although incentive 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 variable. 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 IT 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 vs. Lakshmi Machine works (supra)]" 18. It has also been held in the above Judgement by the Hon'ble Apex Court that deduction has to be from the profits as understood in common sense and in this background when facts of the present case are examined we find ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring other services so as to exclude only that part of the professional charges as attributable to procuring the order in computing "profits of the business". As against this contention Mr. Seshachala appearing on behalf of the revenue has contended assessee himself has admitted before the assessing Officer that it would not be able to bifurcate expenses separately and as such the calculation adopted by the Assessing Officer as affirmed by the Appellate Authority does not call for any interference. He would also content that in Ravindranathan Nair's case the issue of "Ejusdem Generies" had come up for consideration and relies upon the said judgment. However, in reply Mr. Chaitanya Hegde would contend that as to whether gross or net was not the issue before the apex Court and what was in issue was whether "Process charges" were includable in the total turnover in the formula of Section 80HHC(3) and not with reference to gross or net. In the case of Ravindranathan Nair's case the Hon'ble Apex Court has held as under: "19. In our view for the above reasons, the said processing charges which was part of gross total income was an independent income like rent, commission, brokerage e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t reading explanation (baa) into section 80HHC(3)(b). What we say is as a guidance value/factor, 10 per cent. of the total other income of Rs.1,60,000 would be fair estimate. This guidance value is not flowing from clause (baa) but from the scheme of section 80HHC read with the Memorandum to the Finance Act of 1991. Take a reverse case, if allocation of expenses is to be done on actual basis it would not only be very difficult but in some cases actual apportionment may not be in the interest even of the Department. 14. In conclusion, we may state that under section 80HHC (3)(b) one has to balance the "principle of attribution" with the concept of "allocation". The concept of allocation is meant to reduce the incentive. However, when "allocation" has to be balanced with the "principle of attribution", the object is to reduce the incentive and not to eliminate it." The Hon'ble Apex Court has taken into consideration the scheme of Section 80HHC and held that if allocation of the expenses is done on actual basis it would not only be very difficult but in some cases actual apportionment may not be in the interest of the department also. Even in the instant case, the Assessing Of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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