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TMI Blog2001 (10) TMI 259X X X X Extracts X X X X X X X X Extracts X X X X ..... ance mark of ISO 9002. 3. As the assessee is an exporter of spices products as stated above, it has been claiming the benefits available under section 80HHC of the Act on a regular basis from year to year. The claim of the assessee has been consistently accepted and allowed by the Department. For the impugned assessment year 1993-94, the assessee has claimed a deduction of Rs. 5,83,375 by way of such benefits available under section 80HHC of the Act. The profit of the business carried on by the assessee was Rs. 10,22,835 as per its profits and loss account. The adjusted profit worked out by the assessee for income-tax purpose was Rs. 10,70,012. In the course of carrying on of the business, the assessee also received a sum of Rs. 19,90,260.40 in the nature of drying/grinding/distillation charges collected from other companies for undertaking job work production. While examining the claim of the assessee towards the deduction of benefit available under section 80HHC, the Assessing Officer made a reference to clause (baa) of Explanation given to section 80HHC. Particularly referring to sub-clause (i) of the above clause (baa), the Assessing Officer observed that the drying/grinding/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 80HHC could be given. Accordingly, he negatived the contention of the assessee towards the claim of deduction of Rs. 5,83,375 made under section 80HHC of the Act. 7. This issue was taken in first appeal before the CIT(Appeals). The assessee-company raised detailed contentions before the CIT(Appeals) (a) Section 80HHC provides for "deduction in respect of the profits retained for export" vide the handnote. (b) Section 80HHC(i) allows deduction of "the profits derived by the assessee from the export of goods or merchandise" where the assessee is engaged in the business of export out of India of any goods or merchandise. (c) Clause (baa) of the explanation to section 80HHC defines the words "profits of the business" and provides that 90 per cent of various receipts such as profits on sale of import licences, cash assistance for exports, customs and excise duty drawback, brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits should be deducted. (d) Section 80HHC(3)(a) provides that for purposes of sub-section (1) of section 80HHC the profits derived from exports shall be the amount which bears to the profits of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the turnover formula. The CIT(Appeals) pointed out that the Board Circular No. 621 dated 19-12-1991 made this position clear by explaining that explanation (baa) was inserted only to check the distortion of export profit by including receipts like interest, commission, etc., which do not have any element of turnover. The CIT(Appeals) held that the drying/grinding/distillation charges accounted by the assessee were purely business turnover and they were directly taken into the trading account of the assessee-company. The CIT(Appeals) pointed out that the word "charges" is a part and parcel of the expression "any receipts by way of brokerage, commission, interest, rent, charges, etc.". The word is to be understood in the context in which the expression in its totality is used and that does not visualise a receipt by way of distillation charges, which are clearly of a turnover nature. Finally, the CIT(Appeals) came to a finding that the receipts which form part of the day-to-day business turnover of the assessee could not be considered as that kind of receipts enumerated in Explanation (baa). Those receipts are in the nature of receipts for manufacturing activity carried on by the as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmula, "profits of business" is explained in clause (baa) of the Explanation provided under section 80HHC. Clause (baa) stipulates that profits of the business means, the profits of the business as computed under the head "profits and gains of business or profession". The above exposition is subject to a condition that certain items which are not in the nature of regular business carried on by the assessee has to be reduced from the income computed under the head "profits and gains of business or profession". Sub-clauses (i) and (ii) of clause (baa) provides for such adjustment factors. As per sub-clause (i), one of such items which has to be reduced from the profit is "charges". The term "charges" has to be construed in its normal and reasonable meaning. The sum of Rs. 19,90,260.40 credited by the assessee-company in its trading account related to drying/grinding/distillation charges received by the assessee-company. They are charges and not business profits of the assessee-company. If the normal and plain meaning of the term "charges" is applied to examine the nature of drying/grinding/distillation charges received by the assessee-company, it is obvious that those receipts are co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and for own processing. (3) For the exemption under section 80HHC, to arrive at the 'profits of the business', 90 per cent of items under section 28(iiia), (iiib) and (iiic) and any receipt by way of brokerage, commission, interest, charges or any other receipt of a similar nature is to be reduced from the profit. (4) Item in (iiia), (iiib) and (iiic) are profits on the sale of import licence, cash incentive and duty drawback which arc in the nature of business income, but 90 percent of these items arc to be excluded since a further benefit of income tax exemption is not intended to be given on those amounts which are already incentive from export. These items of business income are excluded only because these items are specifically mentioned in the section and a double advantage is not intended under section 80HHC. (5) Any receipt by way of brokerages, commission, interest, rent, charges or any other receipt of a similar nature are also to be deducted to the extent of 90 per cent. At this juncture, a reference to the CBDT Circular No. 621 dated 19-12-199l is relevant '32.11. It has, therefore, been clarified that "profits of the business" for purpose of section 80HHC will n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t and loss account and forming part of domestic business income. When the deduction is decided by the above formula, by dividing the export turnover by the total turnover and multiplying the profit of the business, the exemption will be only for the income from the proportionate export turnover. 12. We heard both sides in detail. We have gone through the detailed orders passed by the lower authorities. We have also perused the argument note filed by the learned Chartered Accountant accompanied by written submissions filed by the respondent-assessee. Section 80HHC of the Act provides for deduction in respect of profits retained for export business. The computation of that deduction is provided in sub-section (3) of section 80HHC. It is to be worked out on the basis of the following formula: Profits of business X Export turnover --------------- Total turnover. What is arrived at by applying the above formula is the profit retained by the assessee from the export of goods and merchandise. 13. Even if the benefit of deduction worked out on the basis of the above formula provided in section 80HHC(3) is meant for the profits from export business, the quantum of deduction is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... overall profit relates to export business and the balance profit relates to domestic business. The division is made in the ratio of export business to total turnover. This statutory proposition has created certain distorted circumstances, inasmuch as the formula gives a distorted figure of export profits when receipts like interest, commission, etc. which do not have an element of turnover are included in the profit and loss account. It is to alleviate such a situation that clause (baa) of Explanation to section 80HHC has been inserted in the Act by Finance (No. 2) Act, 1991 with effect from 1-4-1992. The object of inserting clause (baa) has been stated in the circular No. 621 dated 19-12-1991 issued by the C.B.D.T. The relevant portion of the said circular in paragraphs 32.10 and 32.11 read as follows "32.10 The existing formula Often gives a distorted figure of export profits when receipts like interest, commission, etc. which do not have element of turnover are included in the profit and loss account. 32.11 It has, therefore, been clarified that "profits of the business" for the purpose of section 80HHC will not include receipts by way of brokerage, commission, interest, rent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... manufacturing activity carried on by the assessee is one and the same. The activities necessary for exporting assessee's own merchandise and the activities necessary for carrying out the job works are one and the same as far as its processing and manufacturing part is concerned. Therefore, one cannot say that the job works undertaken by the assessee-company is not an integral part of the business carried on by the assessee-company. When the manufacturing process carried on by the assessee-company to execute the job works undertaken by it forms part of the core business of the assessee, then the corresponding receipts obtained by the assessee-company against such processing are in the nature of business receipts of the assessee-company. They form part of the business turnover of the assessee-company. 17. As explained in the Circular of the C.B.D.T. cited the purpose of excluding receipts like interest, Commission, etc. from the ambit of the profits of the business is to exclude such receipts which do not have an element of turnover. If we examine the genesis of the job works undertaken by the assessee-company, it could be seen that the activities of drying/grinding/distilling are e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... "charges" provided in sub-clause (i) of clause (baa) is nowhere similar or comparable to the charges received by the assessee-company in the nature of drying/grinding/distillation charges. They are functionally quite different in character. 19. The word "charges" used in sub-clause (i) of clause (baa) is found in the company of expressions like "brokerage", "commission", "interest", "rent". If we apply the principle of "ejusdem generis", the term "charges" has to be read in the company of the preceding words, such as brokerage, commission, interest, rent, etc. The brokerage or commission or interest, or rent does not have any nexus with any manufacturing or processing or the core business activity that could be carried on by the assessee. Similarly, the word "charges" appearing in the company of those words also will not have any nexus with manufacturing or processing or core business activity of an assessee. The word "charges" appearing in the company of brokerage, commission, interest, rent etc. cannot be singled out and imputed with a different meaning alleging a nexus with manufacturing or processing or core business activities. Ejusdem generis rule is the rule of generic wor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t not be entitled to any deduction at all, when in fact the purpose of section 80HHE is to provide deduction in such cases. 21. We find that it would give rise to an absurd result if the interpretation given by the Assessing Officer in this case is applied to a situation arising out of section 80HHE. The interpretation given by the Assessing Officer creates an anomaly in the application of section 80HHC itself. The formula prescribed by the statute in computing the deduction available under section 80HHC provides for an eligible deduction if the assessee has derived profit from the business carried on by it which included export turnover also. The nexus of the export turnover for the purpose of computing the deduction is directly with the composite profit of the business carried on by the assessee. In the present case, the result of the business carried on by the assessee is a positive income. The assessee has carried on export business. All the three factors necessary to fill up the formula, such as profit of the business, export turnover and total turnover are present in the case of the assessee. Inspite of the fact that the result of the business carried on by the assessee was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eld as receipts covered by the term "charges". Likewise, in the present case also the drying/grinding/distillation charges were not received by the assessee as reimbursement of any expenses incurred by it. On the other hand, the assessee had incurred substantial expenditure in earning such charges by way of undertaking job works as an integral part of the core business carried on by it. 24. In the circumstances, the drying/grinding/distillation charges received by the assessee were to be treated as part of its business turnover. Those business receipts do not come under sub-clause (i) of clause (baa) of Explanation to section 80HHC. The word "charges" appearing in sub-clause (i) of clause (baa) are charges similar to receipts in the nature of brokerage, commission, interest, rent, etc. which are not earned out of the business carried on by an assessee, but that may be obtained in the course of carrying on of that business. Therefore, the Assessing Officer was not justified in making a further reduction of 90 per cent of the sum of drying/grinding/distillation charges accounted by the assessee-company. As rightly pointed out by the CIT(Appeals), once the formula in section 80HHC(3 ..... 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