2010 (8) TMI 333 - HC - Income Tax

Export Special deduction under 80HHC Computation of business profits - assessee is in the business of export of goods - income is earned by the assessee for his fees towards developmental work - The developmental work is intimately connected with the business of manufacture and sale of goods by the assessee - consideration received for developmental work is not liable to be deducted in computing the profits of the business Appeal dismissed

Summary

Issues Involved:
1. Deduction of fees received towards developmental work under section 80HHC of the Income-tax Act, 1961.
2. Applicability of Explanation (baa) to section 80HHC for the said fees.
3. Nexus between the developmental work fees and export business.

Detailed Analysis:

1. Deduction of Fees Received Towards Developmental Work Under Section 80HHC:

The primary issue revolves around whether the Rs. 64,75,373 received by the assessee as fees for developmental work should be deducted while computing profits under section 80HHC of the Income-tax Act, 1961. The assessee, a public limited company engaged in manufacturing and exporting automobile parts, received this amount from M/s. Robert Bosch, Germany. The Assessing Officer deducted 90% of this amount, applying Explanation (baa) to section 80HHC, which was contested by the assessee. The Tribunal ruled in favor of the assessee, leading to the Revenue's appeal.

2. Applicability of Explanation (baa) to Section 80HHC for the Said Fees:

Explanation (baa) to section 80HHC defines "profits of the business" and mandates that 90% of receipts like brokerage, commission, interest, rent, charges, or any other similar receipts should be deducted from business profits. The Revenue argued that the developmental fees fall under "charges" and should thus be deducted. The Tribunal, however, relied on precedents like CIT v. Hindustan Antibiotics Ltd. and Asst. CIT v. Herbal Isolates P. Ltd., concluding that the deduction was not warranted.

3. Nexus Between the Developmental Work Fees and Export Business:

The court examined whether the developmental work fees had a direct nexus with the export business. The Revenue contended that the fees were not part of the export turnover and had already availed benefits under section 80-O. The assessee argued that the fees were earned in the course of export business, albeit not from the sale of goods, and thus should not be deducted under Explanation (baa). The court highlighted that the legislative intent behind section 80HHC was to incentivize export businesses and that only incomes with no direct nexus to export turnover should be deducted.

Judgment Analysis:

The court referred to several precedents, including K. Ravindranathan Nair's case, which clarified that receipts constituting independent income with no nexus to exports should be excluded from business profits. The court also considered judgments from the Madras High Court (K. R. M. Marine Exports Ltd. v. Asst. CIT) and Bombay High Court (CIT v. Pfizer Ltd.), which supported the view that income directly linked to export activities should not be deducted.

The court concluded that the developmental work fees had an immediate nexus with the export business, as the developmental work was intimately connected with the manufacture and sale of goods. Therefore, the fees were not an independent income and should not be deducted under Explanation (baa). The Tribunal's decision was upheld, and the appeal was dismissed.

Conclusion:

The court ruled in favor of the assessee, holding that the fees received for developmental work were not liable to be deducted under Explanation (baa) while computing profits under section 80HHC. The judgment emphasized the importance of the direct nexus between the income and export activities, aligning with the legislative intent to incentivize genuine export profits.