2017 (2) TMI 1009 - HC - Income Tax

Deduction under Section 80HHC - computation of total turnover of the business carried on by the assessee - Held that - By necessary implication, the total turnover of business would only mean total turnover of business of goods to which the section applies. Inclusion of turnover of goods to which the section does not apply, would be doing violence to the language of Sub-section (3)(b). Sub-section (3) is inserted only to determine the deductible profits out of the total profits of business which can be attributed to the export business. We are in respectful agreement with the rationale adopted by the Madras High Court in Madras Motors Ltd. (2002 (3) TMI 10 - MADRAS High Court ). As a matter of fact, there could be a circumstance where one unit is completely engaged in export and not partially as was the case in Madras Motors Ltd. (supra). In those circumstances, there would be no occasion for disallowing a portion of the export earnings by adopting formula provided in Section 80HHC of the Income Tax Act. Interpretation of the term indirect costs - Explanation (e) which defines indirect costs has to be read in conjunction with sub-section (3)(c)(ii) of Section 80HHC, which provides that the profits shall be reduced by the direct and indirect costs attributable to export of such trading goods. Since the word attributable has been used, it is clear that the indirect costs also must be attributable to the export of such goods; in other words, there must be some nexus that the indirect costs have to the export turnover of the assessee. Au contraire, if the term indirect costs is interpreted to also include such costs which are not attributable to the export of trading goods, then that would go against the language of the provision, as clarified by the Supreme Court. That being the position, in view of the declaration of the law in Hero Exports (2007 (11) TMI 13 - Supreme Court of India ), indirect costs computed must have some nexus (or in other words must be attributable ) to the export of trading goods. The decision of the ITAT on this question is therefore reversed. Written back amounts would constitute independent income having no relation to the export profits of the assessee. They have to be excluded by virtue of Explanation (baa), to avoid distortion in the computation of export profits under Section 80HHC.

Summary

Issues Involved:
1. Computation of deduction under Section 80HHC of the Income Tax Act.
2. Calculation of indirect costs for export of trading goods.
3. Exclusion of 90% of amounts written back from profits of the business under Explanation (baa) of Section 80HHC.

Issue-wise Detailed Analysis:

1. Computation of Deduction under Section 80HHC:
The primary issue was whether the deduction under Section 80HHC should be computed by considering the profits and turnover of only the export divisions or the entire business of the assessee. The ITAT had held that the term "total turnover" referred to the entire business, not just the export divisions. The Madras High Court in CIT v. Madras Motors Ltd. and this Court in Commissioner of Income Tax v. Padmini Technologies held that "total turnover" should be restricted to the business of goods to which the section applies, i.e., export goods. The ITAT's decision did not consider this Court's decision from 2011, leading to the reversal of the ITAT’s decision on this issue in favor of the assessee.

2. Calculation of Indirect Costs:
The second issue was whether indirect costs should include all costs or only those attributable to the export of trading goods. The AO had included all costs debited to the Profit and Loss account, which the ITAT upheld. However, the Supreme Court in Hero Exports v. Commissioner of Income Tax clarified that indirect costs must be attributable to the export of trading goods, implying a necessary nexus. Therefore, the ITAT's decision was reversed, holding that indirect costs must relate to the export activity.

3. Exclusion of 90% of Amounts Written Back:
The third issue involved the interpretation of Explanation (baa) to Section 80HHC, specifically whether amounts written back should be excluded from the "profits of the business." The ITAT held that these amounts fell under "any other receipt of similar nature" and should be excluded. The Supreme Court in Commissioner of Income Tax v. K. Ravindranathan Nair and ACG Associated Capsules (P) Ltd. v Commissioner of Income Tax established that such receipts, which are independent incomes not related to export turnover, should be excluded to avoid distortion in computing export profits. Thus, the ITAT’s decision was upheld, confirming that 90% of the written back liabilities should be excluded from the profits of the business.

Conclusion:
The appeal was partly allowed in favor of the assessee for issues (i) and (ii), while the Revenue succeeded on issue (iii). There was no order as to costs.