2006 (1) TMI 116 - HC - Income Tax

Interpretation Of Statute - Disallowance under Explanation of section 80HHC(4A) - receipts from the Export House in brokerage or commission or charges - service charges from the export house at 3.5 per cent. FOB value of the invoice price of the product exported - HELD THAT - The term export turnover has been defined in clause (b) of the Explanation to sub-section (4C) of section 80HHC, which means the sale proceeds which are received in or brought into India by the assessee in convertible foreign exchange in accordance with clause (a) of sub-section (2), but does not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962. As per the agreement entered into by the assessee with the Export House, the assessee should be paid over and above the FOB value of the goods exported at 3.5 per cent. service charges. The said amount was paid to the assessee in Indian currency. On the Export House issuing a disclaimer certificate, the assessee received the foreign exchange credited to its account after conversion into Indian rupee. The Export House, in this process received various benefits by way of incentive from the Government of India. The Export House gave certain amount as service charges so as to keep the assessee to have all the exports routed through the Export House. The service charges or export premium thus received are not part of the sale price of the exported goods. The sale price is the invoice price which had been received in foreign exchange from the buyer. The sum received from the Export House in India in Indian currency as service charges or incentive or by whatever name called would not become part of the sales turnover of the assessee. The convertible foreign exchange received by the assessee as sale proceeds or the sale proceeds transferred to the supporting manufacturer by the Export House alone form part of the sales turnover. Nothing in excess of that amount can be regarded as a subject matter of section 80HHC. Thus, we are of the view that the service charges or the incentive received at 3.5 per cent. of the invoice value by the assessee cannot be considered as export turnover as it has not been received in convertible foreign exchange as required in the section. Hence that part of the sum is not eligible for the benefit granted u/s 80HHC and reduction by 90 per cent. as provided under clause (baa) is correct. The freezing and processing charges and labour charges received from the exporters in respect of processing of goods for export by such exporters, is eligible for relief u/s 80HHC? - The export profits are required to be computed in the ratio of export turnover to total turnover as contemplated in the formula i.e., export profit business profit x export turnover/total turnover. If we consider the business of the assessee, which is manufacturing and processing and export of marine products, the income derived for freezing and processing of marine products-but for that operation the export cannot be made-is an income earned by using the entire undertaking of the company i.e., machinery and power and other manufacturing and administrative set up. The sum so received could be regarded as business profit. The said factual findings have not been disputed by any of the authorities. Thus, we are of the view that the freezing and processing charges would definitely form part of one of the components of business profits, as the activity of freezing and processing would have a direct and immediate nexus to the activity of export. Useful reference can be had to the judgments of this court in CIT v. N.S.C. Shoes 2002 (10) TMI 90 - MADRAS HIGH COURT , though concerned about the assessment year prior to the insertion of clause (baa) and of the Bombay High Court in the case of CIT v. Bangalore Clothing Co. 2003 (1) TMI 89 - BOMBAY HIGH COURT . Thus, the common questions of law raised for consideration of this court in all these tax cases are answered in the affirmative against the assessee. However, in respect of freezing and processing charges raised, is partly allowed in favour of the assessee. The tax cases are disposed of accordingly.

Summary

Issues Involved:
1. Whether the Tribunal is justified in holding that the amount received from the Export House in brokerage or commission or charges or any other receipt qualified for disallowance under the Explanation under sub-section (4A) of section 80HHC?
2. Whether the Tribunal is justified in holding that 90 per cent of the receipts from the Export House are deductible from the business profits determined under the Explanation to clause (baa) under subsection (4A) of section 80HHC for the purpose of quantifying relief under section 80HHC?
3. Whether the Tribunal is right in law in holding that the freezing and processing charges and labour charges received from the exporters in respect of processing of goods for export by such exporters, is not eligible for relief under section 80HHC?

Detailed Analysis:

Issue 1: Disallowance under Section 80HHC
The assessee, a company engaged in the manufacture and export of marine products, received service charges from an Export House at 3.5% FOB value of the invoice price of the product exported. The Assessing Officer reduced 90% of the service charges from the profit of the business while computing exemption under section 80HHC, which was upheld by the Commissioner of Income-tax and the Tribunal. The Tribunal's majority concluded that the service charges received from the Export House were not part of the sale price of the exported goods and thus did not qualify for the deduction under section 80HHC as they were not received in convertible foreign exchange. The court agreed with this view, stating that the service charges or export premium received are not part of the sale price and therefore not eligible for the benefit under section 80HHC.

Issue 2: Deduction of 90% of Receipts from Export House
The Tribunal held that 90% of the receipts from the Export House should be deducted from the business profits as per clause (baa) of the Explanation to section 80HHC. The court upheld this decision, emphasizing that the service charges received in Indian currency do not form part of the export turnover as they are not received in convertible foreign exchange. Therefore, the reduction by 90% as provided under clause (baa) was deemed correct.

Issue 3: Freezing and Processing Charges
In T.C. No. 37 of 2003, the assessee also claimed that freezing and processing charges received for processing goods for other exporters should be considered as business profit eligible for relief under section 80HHC. The Assessing Officer and the Tribunal rejected this claim, stating that these charges did not have a direct nexus with the export activity. However, the court disagreed with this view, stating that the freezing and processing charges should be considered as part of the business profits since they are directly linked to the export activity. The court referenced similar judgments from other cases to support this conclusion and partly allowed the appeal in favor of the assessee for this specific issue.

Conclusion:
The court concluded that the service charges received from the Export House do not qualify for deduction under section 80HHC and upheld the reduction by 90% as correct. However, the freezing and processing charges were deemed to have a direct nexus with the export activity and should be considered as part of the business profits eligible for relief under section 80HHC. Thus, the common questions of law were answered against the assessee, but the specific issue of freezing and processing charges was decided in favor of the assessee.