TMI Blog2013 (8) TMI 369X X X X Extracts X X X X X X X X Extracts X X X X ..... der section 80IB – Held that:- There has to be a direct or first degree connection of the income and the business of the eligible undertaking in order to be eligible for deduction u/s 80IB of the Act - Three items of other income are such that the immediate source thereof cannot be said to be the business of eligible undertaking and this being so, all these items of income cannot be said to be eligible for deduction u/s 80IB of the Act – Decided against the Assessee. Reducing the amount eligible for deduction u/s 80IB of the Act while computing profits of the business for the purposes of deduction u/s 80HHC of the Act – Relying upon the decision in the case of Hon'ble Bombay High Court in the case of Associated Capsules (P.) Ltd. vs. DCIT [2011 (1) TMI 787 - BOMBAY HIGH COURT], it was held that profits of business for computation of deduction u/s 80HHC of the Act are not to be reduced by the profits of business allowed u/s 80IA of the Act – Decided in favor of Assessee. Deduction under section 80IB - Assessee is engaged in the business of manufacturing of agro chemical products and seeds and processing charges received by the assessee – Held that:- Nature of processing charge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 29,64,91,568/-. In the said return, dividend income of Rs. 1,02,86,569/- was claimed to be exempt from tax by the assessee. No disallowance on account of expenses incurred in relation to the earning of the said exempt income, however, was made by the assessee as per section 14A of the Act on the ground that the investment in the corresponding mutual fund was made out of its own funds and there were no other expenses incurred for earning the dividend income on mutual fund. The A.O. did not accept this stand of the assessee. According to him, some of the expenses directly attributable to the earning of the dividend exempt income such as stamp duty, bank commission etc. must have been incurred by the assessee. He also observed that even the portion of indirect expenses such as salary and other overheads was partly attributable to the earning of dividend income. He, therefore, estimated such expenses at Rs. 5,14,328/- being 5% of the exempt dividend income and made the disallowance to that extent u/s 14A of the Act. 5. The disallowance made by the A.O. u/s 14-A of the Act was challenged by the assessee in an appeal filed before the ld. CIT(A) and besides challenging the action o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... salaries and other administrative accounts was partly attributable to the earning of exempt dividend income, the disallowance u/s 14A of the Act was rightly made in the case of the assessee on proportionate basis. He contended that even the disallowance so made @ 5% of exempt dividend income is quite fair and reasonable in the facts and circumstances of the case. 8. We have considered the rival submissions and also perused the relevant material available on record. It is observed that the investment in units of mutual funds made by the assessee stood at Rs. 6.03 crores as on 31-03-2001 which was increased to Rs. 18.32 crores as on 03-03-2002 which clearly shows that the investment activity was substantial activity of the assessee and sizeable new investment was made in the units of mutual funds by the assessee during the year under consideration. Keeping in view of this factual position of the assessee's case, we are of the view that although the investment in mutual funds had been made by the assessee out of its own funds and there was no interest expenditure incurred in relation to the earning of dividend income, the portion of administrative expenses incurred by the assessee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for deduction u/s 80IB of the Act and restricted the claim of the assessee for the said deduction to that extent. On appeal, the ld. CIT(A) allowed part relief to the assessee on this issue upholding the action of the A.O. in excluding five items of other income for the purpose of computing profits eligible for deduction u/s 80IB of the Act which are the subject matter of appeal before us. The main reason given by the ld. CIT(A) in support of his conclusion on this issue was that the said five items of other income did not originate from the eligible undertaking of the assessee inasmuch as their immediate source was not the said undertaking. 10. We have heard the arguments of both the sides and also perused the relevant material available on record. As regards the sale of raw materials and packing materials, it is observed that income from sale of scrap has been held to be eligible for deduction u/s 80IB of the Act by the ld. CIT(A) vide his impugned order relying on various judicial pronouncements. In our opinion, the ratio of the said judicial pronouncements is equally applicable to sale of raw materials and packing materials which is nothing but the recovery of cost incurred b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 2003-04, royalty to Hoechst on sale of cotton dhaval variety debited to the P L account was stated to be the expenditure of earlier year. During the course of assessment proceedings for A.Y. 2002-03, the assessee therefore claimed deduction on account of the said expenses stating that the same were pertained to A.Y. 2002-03. Since the provision for the said expenses was not made by the assessee in its books of account in A.Y. 2002-03, the A.O. disallowed the deduction claimed by the assessee in A.Y. 2002-03. On appeal, the ld. CIT(A) confirmed the disallowance made by the A.O. on this issue observing that there was nothing in the tax audit report for A.Y. 2003-04 to show that the expenditure on royalty was related to A.Y. 2002-03. 13. We have heard the arguments of both the sides and also perused the relevant material available on record. It is observed that the royalty amount in question was claimed by the assessee in A.Y. 2003-04 and the A.O. disallowed the same in that year on the basis of tax audit report wherein it was stated that the royalty debited by the assessee to the P L account was related to earlier year. The relevant extract from the said audit report is placed at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court in the case of CIT vs. Bangalore Clothing Company [2003] 260 ITR 371), he held that the said six items of other income were liable to be excluded from the profits of the business for computing deduction u/s 80HHC of the Act as per Explanation ("baa"). As regards the remaining amount of miscellaneous income of Rs. 12,91,163/-, the ld. CIT(A) found that no details were furnished by the assessee of such miscellaneous income and he therefore upheld the exclusion of 90% of the said amount from the profits of the business for computing deduction u/s 80HHC of the Act. 16. We have heard the arguments of both the sides and also perused the relevant material available on record. It is observed that the exclusion of miscellaneous income from the profits of the business for the purpose of computing deduction u/s 80HHC of the Act to the extent of Rs. 12,91,163/- was upheld by the ld. CIT(A) in the absence of any details furnished by the assessee in respect of the said income. Even before us, the ld. counsel for the assessee has not furnished any such details and in the absence of the same, we confirm the exclusion of miscellaneous income amounting to Rs. 12,91,163/- from the profi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly 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 assessee 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 assessee was entitled to a deduction only on the sale price of its goods and the premium received could not be held to be derived from the business of export. Before the Supreme Court reliance was placed by the assessee on the judgment of the Division Bench of this cour ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Bangalore 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 deduction under section 80HHC. What provision should be made consistent with the legislative policy underlying section 80HHC is evidently a matter for Parliament to determine. The duty of the court is to interpret the language of the provision. In the present case the interpretation of the provision by the Supreme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is included in the profits of business. To be susceptible to a reduction the receipt must be of a nature similar to brokerage, commission, interest, rent or charges." The Hon'ble Bombay High Court thus has laid down the guidelines in the decisions rendered in the case of Dresser Rand India (P) Ltd (supra) Pfizer Ltd. (supra) and the issue as to whether a particular item of income is liable to be excluded from the profits of the business for the purpose of computing deduction u/s 80HHC of the Act is required to be considered and decided in the light of the said guidelines. Since the benefit of the said two decisions of the Hon'ble Bombay High Court rendered subsequently was not available either to the A.O. or to the ld. CIT(A), we consider it just and proper to restore the issue relating to the exclusion of the remaining four items of other income from the profits of the business for computing the deduction u/s 80HHC of the Act to the file of the A.O. for deciding the same afresh in the light of the said two decisions of the Hon'ble Bombay High Court. 20. As regards the alternative contention of the ld. counsel for the assessee that if any item of other income is to be exclude ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nal transactions with its AEs. In this regard, a reference was made by the A.O. u/s 92CA(2) of the Act to the TPO for determining the ALP of the said transaction. The said transactions, inter alia, were comprised of royalty of Rs. 2.84 crores paid by the assessee to its holding company M/s Syngenta, Switzerland. All the international transactions with its AEs were bench marked by the assessee by applying TNMM. For this purpose, the profit of its crop protection business was compared by the assessee with profits earned by other entity engaged in the similar business. In its transfer pricing report, the assessee had taken 21 comparable companies whose average operating margin was worked out at 5.21% and since the operating profit margin of the assessee in this segment was 6.21%, the international transactions entered into in its crop protection business were claimed to be at arm's length price. Similarly, the operating profit margin of its seeds business was compared by the assessee with operating profit margin of other entities engaged in the same line of business and since the average operating profit margin in the case of such comparables selected by the assessee was 11.06% as aga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o by the assessee was relating to the Foreign Exchange Regulation and the same was framed from time to time considering the foreign exchange situation. She held that such regulation or permission to remit the Foreign currency does not imply that the relevant transactions were in accordance with the transfer pricing provisions. She also did not find merit in the other contention raised by the assessee that the overseas entity having invested substantial amount on the R D of the product manufactured by the assessee, it was required to be compensated by paying the royalty. She held that the pesticide industry was a generic industry as stated in the TP study report furnished by the assessee with most of the molecules off the patent and there was nothing to show that any of the products on which royalty was paid is a patented product. 27. Having rejected the contentions of the assessee justifying the payment of royalty, the TPO proceeded to examine the profit margin of its product separately on which royalty was paid and recorded her findings in respect of each such products as under:- "9.1 Pretilachlor: Total export sales of this product to Associate Enterprises is of Rs. 7.20 cror ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by applying comparable margin on third party sales of 4.71% on costs is Rs.152.68 The International Transaction of export is not within 5% range of the arms length price determined. Hence, even on the export transaction, an adjustment is required @ Rs. 9.79 per kg which is more than the Royalty paid @Rs. 5.20. 9.3 Lava : Total sales (export) of this product to Associate Enterprise is Rs.4,11,516/-. Royalty paid is @ 7% on export sales of Rs.28,806/. The assessee has provided the profit margin on this product. Assessee has earned a profit margin on cost @ 1.2%. As against the same, the average margin on local sales of the assessee is 6.23%. Thus, it is seen that even on this product, the margin is less after payment of Royalty. 9.4 Actara Export sales of this is Rs.1,50,49,6021-. Royalty @ 3% is Rs.4,51,488/-. Assessee's margin on export sales of 46.93% on costs is less than local margin of 53.07% (in the local sales, the assessee has in fact paid 5% Royalty) Hence, this clearly shows that the assessee has lower margins on export sales to the associated enterprise on which Royalty is paid. If the Royalty paid on local sales is excluded, the export margins would be still les ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... automatic route to overseas entities. The amount is therefore, the maximum permissible limit and can only be taken to be Government order in force as per Rule 1OB(2)(d) for the maximum permissible amount and not an approval for the quantum of royalties. The Appellant has relied on LIC vs. Escorts Ltd. Others, (1986) 1 SCC 264 which was a case in which the provisions of the Foreign Exchange Regulation Act were so structured as to make it clear that it is for the Reserve Bank of India alone to consider whether the requirements of the provisions of the Foreign Exchange Regulation Act and the Rules, directions and orders issued from time to time have been1iIfihIed and whether permission should be granted or not. The Hon'ble Supreme Court further observed that there is no provision of the Act [FERA] which enables an individual or authority functioning outside the Act [FERA] to determine for his own or its own purpose whether the Reserve Bank of India was right or wrong in granting permission uls.29(l) of the Act [FERA] and that it is certainly not open to a company whose shares have been purchased by a non-resident company to refuse to register the shares even after permission is obt ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny of the products on which royalty is paid is a patented product in India and that even in the study report furnished by the assessee, it is stated that the pesticide,, industry is a generic industry with most of the molecules off the patent". 30. After rejecting the main contentions of the assessee raised on the issue of transfer of pricing adjustment, the ld. CIT(A) proceeded to verify the produce-wise adjustment worked out by the TPO and recorded his findings in respect of royalty paid for each item separately as under:- "3. As regards Rifit, the appellant's contention is that the quantity sold in the local market 42,000 litres] is significantly lower than the quantity sold in the export market [1,6 1,200 litres], volume discount is required to be considered along with differences which cannot be quantified with reasonable accuracy relating to differential functions and risks, geographical markets, size of the markets, contractual terms, and level of market. Taking into account the appellant's submissions, it is felt that the provisions of Rule 10B(1)(e)(iii) are applicable and the comparable margin of 4.7 1% computed by the TPO is required to be adjusted to the extent of 0 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... non- royalty beating products would serve as a better comparable which 5.41% and after exercising the option under the proviso to Section 92C(2), the International transaction meets the arm's length standard as required under the TP Regulations. The appellant's contention regarding application of proviso to Section 92C(2) are not being accepted since more than one price is not being determined by the most appropriate method [refer discussion supra]. However, the appellant is justified in stating that the net margin on local sales of non-royalty bearing products of 5.41% would serve as a better comparable. The AO is therefore, directed to compute the arm's length price for export sales of LAPA by applying comparable margin of 5.41% and make adjustment for royalty on export sales of LAPA accordingly. 37. For Actara, the TPO has observed that the export sa1e is Rs.1,50,49,6021-, royalty at 3% is Rs4,51,488/- and assessee's margin on export sales of 46.93% on cost is less than local margin of 53.07% [on which royalty of 5% was paid]. The assessee's explanation is that sale of Actara to AE and non-AE cannot be compared due to differences in pack size; smaller packs tend to have higher ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lty rates applied in the third party arrangements without which the analysis was meaning less. He submitted that the TPO has not brought any material on record to prove that the royalty paid by the assessee to its AE per se was unreasonable. He contended that the royalty, on the other hand, was paid by the assessee at the rate lower than the rates approved by the RBI under FERA and since the objective of the FERA was to regulate the foreign exchange resources, the RBI looked at the rate of royalty from reasonableness perspective. He contended that although the RBI approval is not conclusive for determining of arm's length price of international transactions as held inter alia by the Hon'ble Delhi High Court in the case of Nestle India reported in 337 ITR 103, the same has to be given consideration while determining the arm's length price of the transaction as held by the Delhi Tribunal of ITAT in the case of Reebok India Company (ITA No. 5857/Del/2012). He contended that the TPO has neither disputed the benefit derived by the assessee from the licensing of crop technology nor has placed any material on record to show that the royalty rate charged to the assessee by its AEs was unre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness" for the purposes of deduction u/s 80HHC, by reducing the amount of deduction u/s 80IB there from." 34. In the application filed before the Tribunal seeking admission of the aforesaid additional ground, the assessee has submitted that the issue involved in the additional aground is purely a legal issue and all the relevant facts for adjudication thereof are available on record. It is further submitted that this issue was not raised before the ld. CIT(A) in view of string of adverse rulings available at the relevant time but the same is now being raised in view of the decision of Hon'ble Bombay High Court in the case of Associated Capsules (P.) Ltd. vs. DCIT reported in [2011] 332 ITR 42 (Bom) which is in favour of the assessee. Keeping in view of the submissions made by the assessee and since there was no objection raised by the ld. D.R., we have admitted the additional ground raised by the assessee and now, we proceed to decide the same on merit. 35. As agreed by the ld. Representatives of both the sides, the issue raised by the assessee in the additional ground is squarely covered in favour of the assessee by the decision of the Hon'ble Bombay High Court in the case of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CIT(A) in upholding the action of the A.O. in disallowing the deduction claimed by the assessee u/s 80IB of the Act in respect of the following items of other income on the ground that the same was not derived from the eligible undertaking:- Sr. No. Particulars Topik Multipurpose Formulator Unit (Rs) Total (i) Repacking charges 6,49,496/- 5,59,509/- 12,09,005/- (ii) Credit for duty drawback 59,814/- 4,04,903/- 4,64,717/- (iii) Interested on employee loans 2,39,330/- 1,28,691/- 3,68,021/- Total 9,48,640/- 10,93,103/- 20,41,743/- 40. We have heard the arguments of both the sides and also perused the relevant material available on record. As already held by us while deciding a similar issue involved in assessee's own case for A.Y. 2002-03, there has to be a direct or first degree connection of the income and the business of the eligible undertaking in order to be eligible for deduction u/s 80IB of the Act. In the year under consideration i.e. A.Y. 2003-04, all the three items of other income are such that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... clude scrap sales from the profits of the business for computing deduction u/s 80HHC of the Act. 44. As regards the remaining items of other income, we follow our conclusion drawn in A.Y. 2002-03 and restore the matter to the file of the A.O. with a direction to decide the same in the light of the decision of the Hon'ble Bombay High Court in the case of Dresser Rand India P. Ltd. (supra) and Pfizer Limited (supra). 45. As regards the alternative claim of the assessee to exclude only the net amount of business income, we direct the A.O. to consider the same after verifying the claim of the assessee of having incurred the expenses for earning the other income. Ground No. 2 of assessee's appeal is accordingly treated as partly allowed. 46. As regards ground No. 3, it is observed that the issue raised therein relating to the assessee's claim for not reducing the amount eligible for deduction u/s 80IB of the Act while computing profits of the business for the purposes of deduction u/s 80HHC of the Act is squarely covered in favour of the assessee by the decision of Hon'ble Bombay High Court in the case of Associated Capsules (P.) Ltd. vs. DCIT (supra) wherein it was held that when ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d. CIT(A) that consistent with the stand by the Department in A.Y. 2002-03, the expenditure on royalty should be allowed in A.Y. 2003-04 wherein the same was duly accounted for in the books of account. The ld. CIT(A) accepted this contention of the assessee and allowed the expenditure claimed on royalty. 50. We have heard the arguments of both the sides and also perused the relevant material available on record. It is observed that the relief given by the ld. CIT(A) to the assessee by allowing the expenditure on royalty has been challenged by the Revenue in its appeal on the ground that the assessee has kept alive the claim for royalty in A.Y.2002-03 by filing an appeal before the Tribunal. The said appeal of the assessee has already been disposed of by us confirming the disallowance made on account of royalty in A.Y. 2002-03. The ld. D.R. has also fairly agreed that the expenditure on account of royalty being genuine business expenditure is to be allowed in either of the years. Accordingly, we uphold the impugned order of the ld. CIT(A) allowing the claim of the assessee for royalty in A.Y. 2003-04 and dismiss ground No. 1 of Revenue's appeal. 51. As regards ground No. 2 of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... accordingly dismissed. 55. As regards the third item of other income i.e. miscellaneous income of Rs. 79,553/-, the ld. Counsel for the assessee has not raised any argument in support of the assessee's claim. 56. As regards the 4th item of other income i.e. interest on employee loans amounting to Rs. 1,14,63,847/-, it is observed that a similar issue was decided by the Tribunal in assessee's own case for A.Y. 2001-02 vide an order dated 9-11-2012 passed in ITA No. 7699/Mum/2004 holding that the interest on employee's loan cannot be said to be income derived from the industrial undertaking for the purpose of computing deduction u/s 80IB of the Act. Ground No. 4 is accordingly dismissed. 57. As regards the second item of other income i.e processing charges received by the assessee amounting to Rs. 84,51,548/-, the ld. Counsel for the assessee has relied on the decision of Hon'ble Madras High Court in the case of CIT vs. Taj Fire Works Industries [2007] 288 ITR 92 (Mad.). In the said case, the assessee was engaged in the business of fire works on job work basis with material supplied by its customers. The A.O. disallowed the claim made by the assessee for deduction u/s 80HH of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Exports (supra). Accordingly, we direct the A.O. to recompute the deduction u/s 80HHC by applying the ratio of the decision of the Hon'ble Apex Court in this regard. Ground No. 2 of assessee's appeal is accordingly allowed. 60. In ground No. 3, the assessee has challenged the action of the ld. CIT(A) in upholding the action of the A.O. in excluding the following items of miscellaneous income from the "profits of business" for the purpose of computing the deduction u/s 80HHC of the Act. Break up of income Rs. (i) Miscellaneous credit balance written back and bad debts recovered 1,84,34,000/- (ii) Miscellaneous income consisting of income from sale of farm products, sale of scrap, cash discount, excise duty refund, miscellaneous write off etc. 2,85,31,000/- (iii) Provision no longer required consisting of write back of superannuation provision etc. 36,69,000/- 61. We have heard the arguments of both the sides and also perused the relevant material available on record. As regards item No. 1 3 of other income, the ld. Counsel for the assessee has submitted that the decision of the T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t are similar to section 80IB of the Act, we respectfully follow the decision of the Hon'ble Bombay High Court in the case of Associated Capsules (P.) Ltd. (supra) and direct the A.O. to recompute the deduction u/s 80HHC of the Act keeping in view the ratio of the decision of the Hon'ble Bombay High Court in the case of Associated Capsules (supra). Ground Noo. 4 of the assessee's appeal is accordingly allowed. 65. As regards the issue raised in ground No. 5 relating to assessee's claim for interest u/s 244A of the Act upto the date of receipt of refund voucher instead of the date of issue of refund order as granted by the A.O., the ld. Counsel for the assessee has contended that the decision of Hon'ble "Bombay" (Calcutta High Court in the case of CIT vs. Sri Jagannath Steel Corporation 191 ITR 676 fully supports this claim of the assessee. The A.O. is accordingly directed to grant interest u/s 244A of the Act keeping in view the decision of Hon'ble Bombay High Court in the case of Sri Jagannath Steel Corporation (supra) after verifying the relevant facts from record. Ground No. 5 of assessee's appeal is accordingly treated as allowed. 66. As regards ground No. 6, it is observed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , Ministry of Science Technology recognizing in-house R D units of the assessee. 70. We have heard the arguments of both the sides and also perused the relevant material available on record. As submitted by the ld. D.R., the certificate issued by the Govt. of India, Ministry of Science Technology recognizing the in-house R D Unit of the assessee was produced by the assessee before the ld. CIT(A) for the first time and relying on the same, the claim of the assessee for deduction u/s 35(1)(iv) of the Act was allowed by the ld. CIT(A) without giving any opportunity to the A.O. to verify the same. The ld. counsel for the assessee has not been able to dispute this position. The ld. D.R. has also contended that the capital expenditure incurred by the assessee on account of Green House Land in any case was not entitled for deduction u/s 35(1)(iv) of the Act. In this regard, the ld. counsel for the assessee has submitted that the said expenditure was incurred by the assessee on Green House installation and not on purchase of land. Keeping in view the submissions made by both the parties, we consider it fair and proper to restore this issue to the file of the A.O. with a direction to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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