2014 (7) TMI 216 - HC - Income Tax

Computation of export incentive u/s 80HHC of the Act - Receipt of job charges treated as part of the total turnover Held that - Exports profits were required to be computed in the ratio of export turnover to total turnover - there is no difference in the activity relating to export business and job work carried out by the assessee - There is no difference between manufacture and export of jewellery on one hand and manufacture of jewellery for others on job work basis - the receipt by way of job work is an integral part of the dominant business activity - The only difference between regular manufacturing and processing for others is that the assessee did not own the goods processed by it in the case of job work - The expenses and efforts for the job charges were the same in relation to the regular manufacture on assessee's own account - the assessee has not maintained a separate account for manufacturing and sale of jewellery on one hand and job works undertaken by it - the word 'charges' should be read along with the meaning of those specific words forming themselves into a special category - If so, the word 'charges' should be confined to those charges which do not have anything to do with the business and the related activities carried on by the assessee. The charges credited by the assessee in its turnover were the proceeds of the manufacturing and job work charges carried on by the assessee which is part of its principal business - the charges received by the assessee-company for the job works undertaken as in the nature understood could not be held as similar to the word 'charges' provided in sub-clause (1) of clause (baa) of the Explanation given under Section 80 HHC - the word 'charges' appearing in clause (baa) of Explanation given under Section 80HHC needs to be read as charges similar to receipts in the nature of brokerage, commission, interest, rent. etc. - Relying upon CIT Vs. K. Ravindranathan Nair 2007 (11) TMI 10 - Supreme Court of India - job work charges is the integral part of the business activity of the assessee and charges received by the assessee for the job work undertaken by him cannot be held similar to the word charges provided in Explanation (baa) - The job work charges has to be included in the total turnover There was nothing on record to suggest that the AO did not follow the formula as per the provision of Section 80 HHC while computing the deduction - Decided against Revenue.

Summary

Issues Involved:
1. Whether job charges are an integral part of the main business and cannot be equated with "charges" under sub-clause (baa) of sub-section (4B) of Section 80 HHC.
2. Whether reliance on the ITAT Cochin Bench decision was appropriate and whether the Bombay High Court's decision in CIT vs. K.K. Doshi & Co. was ignored.
3. Whether job receipts should be included in the total turnover, especially when such receipts were earned for services within the country and not related to export activities.
4. Treatment of interest on fixed deposits with MMTC as business income or income from other sources for the purpose of deduction under Section 80 HHC.

Detailed Analysis:

1. Job Charges as Integral Part of Main Business:
The court examined whether job charges should be considered part of the "total turnover" in the business of manufacturing and exporting jewellery. The assessee argued that job work charges are integral to its main business activity. The court agreed, noting that there was no difference between the manufacturing and export of jewellery and the job work carried out by the assessee. It held that job work charges are part of the operational income and should be included in the total turnover. The court emphasized that the term "charges" in Explanation (baa) should be read in the context of brokerage, commission, interest, rent, etc., and not in the context of job work charges, which are integral to the business.

2. Reliance on ITAT Cochin Bench Decision:
The court addressed the department's contention that the ITAT Cochin Bench decision in ACIT vs. Herbal Isolates (P) Ltd. was not applicable and that the Tribunal ignored the Bombay High Court's decision in CIT vs. K.K. Doshi & Co. The court found that the Tribunal's reliance on the ITAT Cochin Bench decision was appropriate given the facts of the case. It also noted that the Bombay High Court's decision did not alter the outcome, as the job work charges in question were integral to the assessee's main business activity.

3. Inclusion of Job Receipts in Total Turnover:
The court analyzed whether job receipts earned for services within the country should be included in the total turnover. It concluded that job work charges are part of the main business activity and must be included in the total turnover. The court referenced the Supreme Court's decision in CIT vs. K. Ravindranathan Nair, which held that processing charges should be included in the total turnover and reduced by 90% as per Explanation (baa) to arrive at business profits.

4. Interest on Fixed Deposits with MMTC:
In ITA No.88 of 2009, the court examined whether interest on fixed deposits with MMTC should be treated as business income or income from other sources. The court held that the fixed deposits were part of the integral business activity, and therefore, the interest accrued should be included in the total turnover. It ruled that the interest income should be considered business income and allowed as a deduction under Section 80 HHC.

Conclusion:
The court dismissed the department's appeals, holding that job work charges are an integral part of the business activity and must be included in the total turnover. It also ruled that interest on fixed deposits related to the business should be treated as business income. The court affirmed the Tribunal's decisions, favoring the assessee and allowing the deductions under Section 80 HHC accordingly. The appeals were dismissed, and the questions of law were answered in favor of the assessee.