2008 (1) TMI 97 - HC - Income Tax

On basis of definition of export turnover & total turnover in sec. 80 HHC(4B) comm.(A) held that the receipts shown by way of development charges does not form part either of export turnover or total turnover - Tribunal erred in law in reversing the order of the Commissioner (Appeals) hence held that income from development charges & service charges would not fall and the assessee would not be entitled to the benefit u/s 80 HHC(3) and it had to be computed based on 90 per cent. exclusion

Summary

Issues:
1. Interpretation of section 80 HHC for deduction of export profits.
2. Inclusion of development and service charges in the computation of eligible business profits under section 80 HHC.
3. Application of Supreme Court judgment in CIT v. K. Ravindranathan Nair [2007] 295 ITR 228 to the present case.

Analysis:

Issue 1: Interpretation of section 80 HHC for deduction of export profits
The Commissioner (Appeals) in this case held that export profits for deduction under section 80 HHC(1) should be calculated by allocating profits related to the export of goods manufactured by the taxpayer in the ratio of export turnover to total turnover of manufactured goods. The Commissioner referred to the Finance (No. 2) Act 1991 and Board's Circular No. 621 for clarification on the computation of export profits. It was determined that receipts from development charges did not fall within the ambit of export turnover or total turnover, leading to their exclusion from the profit calculation.

Issue 2: Inclusion of development and service charges in eligible business profits
The Tribunal, on the other hand, found that the taxpayer, a manufacturer of machinery, also provided technical services and collected development and service charges for such activities. The Tribunal considered these charges as part of the business and disagreed with the Assessing Officer's decision to exclude 90% of these charges from the computation of eligible business profits under section 80 HHC. Consequently, the Tribunal directed the assessing authority to compute the benefits without excluding these charges.

Issue 3: Application of CIT v. K. Ravindranathan Nair judgment
The appellant argued that development and service charges should not be included in the benefit of section 80 HHC as they are not related to export turnover. The appellant relied on the Supreme Court judgment in CIT v. K. Ravindranathan Nair, where it was clarified that receipts not attributable to sales should be excluded from the total turnover for deduction purposes. The Court held that independent incomes like development and service charges should be reduced by 90% from the gross total income to calculate business profits under section 80 HHC.

In conclusion, the High Court set aside the Tribunal's decision and upheld the Commissioner (Appeals) order, emphasizing that development and service charges should be excluded from the computation of eligible business profits under section 80 HHC. The judgment reaffirmed the interpretation of the law and the application of relevant case law in determining the scope of deductions for export profits.