TMI Blog2010 (8) TMI 1159X X X X Extracts X X X X X X X X Extracts X X X X ..... he case in directing the AO to include (i) Servicing Commissioning income of ₹ 2,71,005/- and (ii) Excise Modvat of ₹ 42,28,998/- in the business profit considering the same as part of business profit for the purpose of computing deduction u/s.80HHC of the I.T.Act. 4. The ld.CIT(A) erred in law and on facts of the case in directing to exclude excise duty and sales tax amounting to ₹ 1,64,34,268/- and ₹ 60,61,333/- respectively from the total income for the purpose of computation of deduction u/s.80HHC of the Act. 5. On the facts and in the circumstances of the case, the ld.CIT(A) ought to have upheld the order of the Assessing Officer. 6. It is, therefore, prayed that the order of the Ld. CIT(A) may be cancelled and that of the Assessing Officer may be restored to the above effect. 2. Adverting first to ground no.1 in the appeal, facts, in brief, as per relevant orders are that that the return declaring income of ₹ 1,53,59,416/ - filed on 30.11.2003 by the assessee, an engineering company engaged in manufacturing various process control equipments, after being processed on 24.1.2004 u/s 143(1) of the Income-tax Act, 1961 [hereinafter ref ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 60 ITR 493 and the Revenue having not placed before us any material or even contrary decision so as to enable us to take a different view in the matter, we have no alternative but to uphold the findings of the ld. CIT(A). Therefore, ground no.1 in the appeal is dismissed. 6. Ground nos. 2 3 relate to exclusion of receipts on account of interest, servicing and commissioning, packing and forwarding, GST set off excise modvat from the profits of the business while computing deduction u/s 80HHC of the Act. The AO noticed that the assessee claimed deduction of ₹ 19,81,496/- under 80HHC of the Act. Since the receipts on account of interest( ₹ 2,35,069), servicing and commissioning (₹ 2,71,005), packing and forwarding ( ₹ 61,41,862),GST set off(₹ 8,09,046/-) and excise modvat (₹ 42,28,998) were not derived from the export business of the assessee, the AO excluded 90% of these receipts while working out profits of the business in terms of explanation(baa) to sec. 80HHC of the Act, relying inter alia, on the decisions in the case of Nathan Steels Ltd.,57 ITD 584(Mumbai),Hindustan Lever Ltd. vs. CIT,239 ITR 297(SC),Sterling Foods vs. CIT,237 ITR 579 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uded as these were independent incomes which had no element of export turnover. All the four variables in the section are required to be kept in mind. If all the four variables are kept in mind, it becomes clear that every receipt is not income and every income would not necessarily include the element of export turnover. Clause (baa) of the explanation states that 90 per cent. of the incentive profits or receipts by way of brokerage, commission, interest, rent, charges or any other receipt of like nature included in business profits have to be deducted from business profits computed in terms of sections 28 to 44D. In other words, receipts constituting independent income having no nexus with exports were required to be deducted from business profits under clause (baa). Hon ble Supreme Court further observed that a bare reading of clause (baa)(1) indicates that receipts by way of brokerage, commission, interest, rent charges, etc., formed part of the gross total income being business profits. But for the purpose of working out of formula and in order to avoid distortion in arriving at the export profits clause (baa) stood inserted to say that although incentive profits and indepe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... had no nexus with the export turnover. Therefore, in the above formula, we have to read all the four variables. 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 Income-tax 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. Before concluding we state that the nature of every receipt needs to be ascertained in order to find out whether the said receipt forms part of/or that it has an attribute of an export turnover. When an indirect tax is collected by the taxpayer on behalf of the Government the tax recovered is for the Government. It may be an income in the conceptual sense or even under the Income-tax Act but while working out the formula under section 80HHC(3) of the Income-tax Act and while applying the four variables one has to ascertain whether the receipt has an attribute of export turnover. 8.1 Hon ble Gujarat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erefore, the ground raised on behalf of the appellant as regards the interpretation to be placed on clause (baa) of the Explanation to section 8OHHC of the Act does not merit acceptance and fails. 8.2 In view of the aforesaid judgment of the Apex Court in the case of K. Ravindranathan Nair(supra) , it is evident that any independent income which is not derived from the export activities in terms of section 80HHC(2) of the Act but is otherwise assessed as business income , 90% of such receipts have to be reduced from the profits of the business in terms of explanation (baa) to sec. 80HHC of the Act. 8.3 Moreover, Hon ble Punjab and Haryana High Court in the case of Liberty Footwear Company Vs. CIT, 283 ITR 398,held that 90 per cent of receipts from rent and hire charges be excluded from the profits of business as computed under the head Profits and gains of business or profession. 8.4 Hon ble Bombay High Court in the case of CIT Vs S.G.Jhaveri consultancy Ltd., 245 ITR 854 held that labour charges and service charges can not be included in the business profits for the purpose of deduction u/s 80HHC of the Act, as these items do not have any linkage with the export activit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... od to mean only the business income, and not any other income. So long as the company has no business of lending money, and so long as the admitted case of the company is that the income derived is only on account of the peculiar situation arising from the time schedule for repayment of the loans, it cannot be stated that the income yielded by the deposits or investments was received in the course of the company's business so as to be treated as a business profit 8.72 We find that in Urban Stanislaus Co. [2003] 263 ITR 10 (Ker) where the assessee had contended that as a condition for obtaining a loan from the bank, 29 per cent. of the sale receipts had to be deposited by way of security. It was claimed that the interest earned on such deposit was business income for the purpose of section 80HHC. This was negatived by the Hon ble Kerala High Court by observing that: the assessee can claim deduction in respect of the profits derived from the export of goods only when it is established that the income is solely related to the export. The obvious intention behind the provision in section 80HHC is to promote exports. However, the income earned by way of interest from fixed d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ith the export business of the assessee. Hon ble jur isdictional High Court in the case of CIT Vs. Gaskets Radiators Dist r ibutors,296 ITR 440(Guj) relying , inter al ia, on the decision of the Hon ble Supreme Court in Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278 held that receipts on account of interest on deposits is not requi red to be considered for deduct ion u/s 80HHC of the Act. Hon ble High Court held in fol lowing terms: Identical question came to be considered by the Hon'ble Supreme Court in Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278 and the question, which was posed for consideration before the apex court was whether the interest on deposits with the Tamil Nadu Electricity Board should be treated as income derived by the industrial undertaking for the purpose of section 80HH or not, and the hon'ble Supreme Court has observed that section 80HH of the Income-tax Act grants deduction in respect of profits and gains derived from an industrial undertaking and the words derived from in section 80HH of the Income-tax Act, 1961, must be understood as something which has a direct or immediate nexus with the assessee's industrial undertaking. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m source 'A' or source 'B'. Interest from wherever it is earned retains the character of interest. Be it an interest from the customer on delayed payment of dues. 8.8 Recently, Hon ble Bombay High Court in their decision dated 8.4.2010 in ITA no. 2186 of 2009 in the case of M/s Dresser Rand India Pvt. Ltd. while following the aforesaid decision of Hon ble Apex Court in the case of K. Ravindranathan Nair(supra) and distinguishing the decision in Bangalore Clothing(supra) concluded that recovery of freight, insurance and packing receipts, sales tax refund and service income, being independent incomes, 90% of these receipts have to be reduced from the business profits in terms of explanation (baa) to sec. 80HHC of the Act. 8.9. During the course of hearing of the appeal, the ld. AR was pointed out a recent decision dated 18/19/3/2010 of the Hon ble Bombay High Court in the case of CIT Vs. Asian Star Co. Ltd. in ITA no. 200 of 2009 ,wherein it was held that explanation (baa) to s. 80HHC requires that ninety per cent of receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature have to be reduced from the profits. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng, packing and forwarding , GST set off and excise modvat were independent income or were in any manner related to export activities of the assessee and thereafter, adjudicate the matter in accordance with law after allowing sufficient opportunity to the assessee in the light of various judicial pronouncements, including those referred to above. With these directions, ground nos. 2 3 in the appeal are disposed of. 10. Ground no.4 in the appeal relates to the exclusion of excise duty and sales tax from the total turnover for the purpose of computation of deduction u/s 80HHC of the Act. The assessee while calculating total turnover, excluded excise duty of ₹ 1,64,34,268/- and sales-tax of ₹ 60,61,333/- for the purpose of deduction u/s 80HHC of the Act. However, the AO while relying on the provisions of section 145A of the Act and a number of decisions held that the excise duty and sales tax should form part of total turnover for the purpose of deduction under Section 80HHC of the Act. 11. On appeal, the ld.CIT(A) allowed the claim of the assessee, relying on the decision of the Tribunal in the case of Milton Laminates Ltd. Vs. ITO, ITA No.3939/Ahd/2004 wherein the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 80HHC. They were not eligible even without the clarification introduced by the Legislature by various amendments because they did not involve any element of turnover. Further, in all other provisions of the Income-tax Act, profits and gains were required to be computed with reference to the books of account of the assessee. However, as can be seen from the Income-tax Rules and from the above Form No. 10CCAC in the case of deduction under section 80HHC a report of the auditor certifying deduction based on export turnover was sufficient. This is because the very basis for computing section 80HHC deduction was business profits as computed under section 28, a portion of which had to be apportioned in terms of the above ratio of export turnover to total turnover. Section 80HHC(3) was a beneficial section. It was intended to provide incentives to promote exports. The incentive was to exempt profits relatable to exports. In the case of combined business of an assessee having export business and domestic business the Legislature intended to have a formula to ascertain export profits by apportioning the total business profits on the basis of turnovers. Apportionment of profits on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder section 80HHC would become unworkable. The view which we have taken is in the light of the amendments made to section 80HHC from time to time. 13.1 Section 80HHC of the Income-tax Act, 1961 is a beneficial section and was intended to provide incentive to promote exports. The intention was to exempt profits relatable to exports. As observed by the Hon ble Apex Court, one cannot interpret the words total turnover with reference to the definition of the word turnover in other laws like the Central sales tax or as defined in accounting principles. The words total turnover in section 80HHC have to be read as part of the formula which sought to segregate the export profits from the business profits . Therefore, we are of the opinion that excise duty and sales tax also cannot form part of the total turnover under section 80HHC(3) of the Act. 13.2 In the case of Sony India Pvt. Ltd. Vs. DCIT, in ITA no. 1181/Del/2005 dated 23/9/2008 for the AY 2001-02 ,ITAT Delhi Bench, following the aforesaid decision of the Hon ble Supreme Court directed to exclude excise duty while working out total turnover for the purpose of deduction u/s 80HHC of the Act. 13.3. In view of af ..... X X X X Extracts X X X X X X X X Extracts X X X X
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