2014 (7) TMI 1125 - HC - Income Tax

Interpretation on the computation of relief u/s 80HHC - 90 per cent. of the receipts on the sale of scrap and conversion charges were to be excluded as per ITAT - whether the conversion charges earned by the applicant can be deducted from the profits and gains of the business to arrive at the profits of the business - Held that - The view expressed by the Bombay High Court in Bangalore Clothing Co.'s case (2003 (1) TMI 89 - BOMBAY High Court) holds the field in which the assessee not only carried out the activity of manufacture and export of its own but also took up the job work of other manufactures. The question arose as to whether the charges levied for job work can be treated on par with the items mentioned in the clause. The answer was in the negative. If the amount has anything to do with the activity of manufacturing though not of export goods, deduction thereof cannot be made. Otherwise, the proportion of the profit earned through export to the total profit gets disturbed. Amounts that can be treated as falling in the category of brokerage, commission, interest, rent, charges occurring in the clause are only those items, which are unrelated to, and other than the amounts forming part of the total turnover of the business carried on by the assessee occurring in sub-section (3) of section 80HHC of the Act. Since the conversion charges are earned through the activity of manufacturing though for the benefit of other customers, the question of deducting the same from the general profits, in the context of arriving at profits from business under the clause does not arise. - Decided in favour of assessee.

Summary

Issues:
Interpretation of relief computation under section 80HHC
Treatment of conversion charges for deduction under section 80HHC

Interpretation of relief computation under section 80HHC:
The case involved the interpretation of section 80HHC of the Income-tax Act, 1961, specifically regarding the computation of relief under this provision. The applicant, a pharmaceutical company engaged in both domestic sales and exports, faced a dispute regarding the deduction of "conversion charges" from the profits of the business for the purpose of determining relief under section 80HHC. The Tribunal and tax authorities had held that these charges should be excluded, leading to the reference of questions to the High Court for clarification.

The applicant argued that the conversion charges, earned through the manufacturing process, should not be treated as unrelated to the business activity and hence should not be deducted under section 80HHC. They contended that the legislative intent was to allow deduction for profits related to export business and that including such charges would upset the balance intended by the provision. The Department, on the other hand, asserted that these charges fell under the category specified in the clause for deduction, aligning with the objective of the provision to differentiate and permit deductions for specific types of income.

The court delved into the detailed provisions of section 80HHC, emphasizing the need to segregate profits from export business from other activities. The court analyzed the definition of "profits of the business" and the items that should be deducted to arrive at this figure, including brokerage, commission, interest, rent, charges, or similar receipts. The court highlighted the importance of maintaining the balance between export and domestic profits to prevent undue claims for deductions.

Treatment of conversion charges for deduction under section 80HHC:
The court examined relevant case law, such as CIT v. Bangalore Clothing Co. and CIT v. K. Ravindranathan Nair, to determine the treatment of charges related to job work or processing activities in the context of section 80HHC. It was noted that charges earned through manufacturing activities, even if for the benefit of other customers, should not be deducted under the clause if they are related to the core business of the assessee. The court concluded that only amounts unrelated to the manufacturing activity should be deducted to arrive at the profits of the business under section 80HHC.

In light of the arguments presented and the legislative intent behind section 80HHC, the court ruled in favor of the applicant, holding that the conversion charges earned through the manufacturing process should not be deducted from the profits of the business for the purpose of relief computation under section 80HHC. The judgment provided clarity on the treatment of specific receipts and charges in the context of export-oriented businesses, ensuring a balanced approach to deductions under the Income-tax Act.