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TMI Blog2003 (1) TMI 271X X X X Extracts X X X X X X X X Extracts X X X X ..... materials a/c against the credit of Rs. 3,67,25,867, which was accepted by the CIT (A) IV, Hyderabad while considering the deduction permissible under sections 80HH and 80-I at paragraphs 4.7 and 4.8 of the order. 3. Alternatively, the CIT (A) IV, Hyderabad having held that the sum of Rs. 3,67,25,867 was notional entry ought to have given a clear finding that the entry being notional was not a taxable receipt and therefore ought to have directed it's exclusion from Total Income. 4. Alternatively, the Import entitlement benefit is to be treated as falling under receipts of the nature specified under section 28(iii)(a), iii (b) or iii(c) of the Income-tax Act, 1961 and 90% of such sums should be added to profits in the same proportion as the export Turnover bears to Total Turnover as laid down in proviso to section 80HHC of the Income-tax Act, 1961. 5. The ld. CIT (A) IV, Hyderabad erred in excluding the following receipts from the profits of the Industrial undertaking while computing the deductions under sections 80HH and 80-I of the Income-tax Act, 1961 on the ground that they are not profits derived from the industrial undertaking: - Import entitlement benefit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... : 2,54,852 Interest on Loans : 2,40,616 Foreign Exchange Fluctuation : 3,41,595 4. The brief facts of the case as gathered from the record are as follows. The assessee is a public Ltd. Company and is carrying on the business of manufacture and export of drugs. For the assessment year 1994-95, it filed its return of income on 14-12-1994 declaring 'nil' income. The Assessing Officer while completing the assessment, restricted the relief claimed by the assessee under section 80HHC of the Income-tax Act, 1961. For the assessment year 1995-96, the Assessing Officer rejected the revised claim of the assessee for enhanced deduction under section 80HHC. Aggrieved of the above, the assessee went in appeal without success and thus the matter is before us now. 5. Ld. counsel for the assessee, Shri K.C. Devdas made the following submissions first for the assessment year 1994-95. The first issue as per him is, whether the "Import Entitlement Benefit Account" amounting to Rs. 3,67,28,867 credited by the appellant firm forms part of "turnover" for the purposes of relief under section 80HHC of the Income-tax Act, 1961. He vehemently contended t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Explanation (ba) to section 80HHC is not exhaustive. It merely states what items should not form part of turnover. He referred to financial statements published by the ICAI and submitted that the term "sales turnover" has been defined therein as the aggregate amount for which sales are effected or services are rendered by an enterprise. He thus, argued that by no stretch of imagination, the sum of Rs. 367.25 lakhs can form part of the turnover; He further argued that the export benefit/incentives are accounted for by the assessee company on accrual basis and such benefit of entitlement of customs duty as a result of export has been credited to the Profit and Loss Account and were shown under the Schedule of turnover under the caption "export incentives". He submitted that when imports are made, the customs duty benefit accrued is debited to the Purchase Account. Thus, its claim that out of the total receipt shown of Rs. 3.67 lakhs, an amount of Rs. 3.35 lakhs was debited to Purchase account, which results in a net credit of Rs. 31,99,431. The debit to purchase account, he argued is an integral and invisible part of the transaction. He further argued that the sum of Rs. 3.67 lakhs h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s returned, freights etc. Thus, he submits that the sum of Rs. 3.67 crores does not form part of turnover for purposes of computing deduction under section 80HHC. 7. Alternatively, Shri K.C. Devdas contended that only the net amount of Rs. 31.99 lakhs alone ought to be considered as credit. He further relied on the published accounts of Indian Products Ltd. which is at page 46A of the paper book filed, to show that the net amount was credited to purchase account and therefore the sum of Rs. 3.67 crores should not form part of the turnover. 8. Shri K.C. Devdas has yet another alternative contention that the sum of Rs. 3.67 crores falls under clause 28(iiib) of the I.T. Act, 1961 and can be termed as cash assistance by whatsoever name called, and thus should be deducted and that 90% of this sum is to be added separately under the proviso to section 80HHC. For this proposition, he placed reliance on the judgment of the Ahmedabad Bench of the Tribunal in the case of Asstt. CIT v. Pratibha Syntax Ltd. [1999] 106 Taxman 32 (Ahd.) (Mag.) which is at pages 22 to 32 of the paper-book III. He submitted that the term whatever name called extended the meaning of cash assistance and thus it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce received against exports or any drawback of customs duty or excess duty paid. For the proposition that the credit in question has to be taken as turnover, he relied on the judgment of the Hon'ble Supreme Court in McDowell Co. Ltd. v. CTO [1985] 154 ITR 148. It is his contention that the general meaning of the word "total turnover" should be given a wide connotation wherever it occurs in the Statute. He further submitted that the term "total turnover" defined under Explanation (ba) shall not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962. The expression "total turnover", he submitted also excluded any sum of export incentives referred to in clauses (iiia), (iiib) and (iiic) of section 28 of the I.T. Act, 1961. Thus, he argued that as the sums do not fall within the export incentives referred to in clauses (iiia), (iiib) and (iiic) of section 28, they should be considered in the figure of "total turnover". He urged that the order of the CIT (A) be upheld on this issue. 11. Arguing on ground Nos.5 and 6 of the appeal for the assessment year 1994-95,ld. counsel for the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exclude the amount of export benefit received under advance Licence Scheme of Export Import Policy of the Government of India, wherein an exporter is entitled to import duty-free raw material as a percentage of exports from the figure of "total turnover" of the business of the assessee. The special deduction to an exporter under section 80HHC has to be computed on the basis of the following formula. Export turnover Profits of business x--------------- Total Turnover The benefit of deduction when worked out on the basis of this formula is not strictly confined to the profits derived from the export of goods or merchandise. The results of export business and the domestic business are not independently evaluated for arriving at the profits or loss of each segment for the purposes of this deduction. On the other hand, the export profits are determined as a part of the composite profits of the business. This position is well detailed by the learned Authors Chaturvedi and Pithisaria in the book on Income-tax Law, 5th Edition, II Volume at page 3547, paragraph 4 in Board Circular No.564 of dated 5th July, 1990 is given which is extracted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... see from the export of goods or merchandise. What constitutes "Profits derived from the export of goods or merchandise, out of India", has been defined in sub-section (3) of section 80HHc. This subsection (3) lays down that the profits derived from the export of goods or merchandise shall be the amount which bears to the profits of the assessee (as computed under the head "Profits and gains of business or profession") the same proportion as the "export turnover" bears to the "total turnover" of the business carried on by the assessee. 3. Several doubts have been expressed about how the deduction under section 80HHC is to be allowed. Representations received by the Board show that there is lack of uniformity amongst authorities in respect of allowing the aforesaid deduction. 4. Sub-section (3) of section 80HHC statutorily fixes the quantum of deduction on the basis of a proportion of the profits of business under the head "Profits and gains of business or profession" irrespective of what could strictly be described as "profits derived from the export of goods or merchandise out of India". The deduction is computed in the following manner: - Export t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to arrive at the amount deductible under section 80HHC in the case of an assessee doing export business as well as some other domestic business, the fraction of "export turnover" to "total turnover", will be applied to his profits computed under the head "Profits and gains of business or profession" (which again will include the three export incentives). The operation of section 80HHC read with section 28, as amended by the Finance Act, 1990, can be illustrated by way of the following examples: ----------------------------------------------------------------------- Code I Code II Code III Code IV Exclus- 2/3 1/2 1/3 ively exp- export export export, ort busi- 1/3 1/2 2/3 ness domestic domestic domestic sale sale sale ----------------------------------------------------------------------- (Figures in lakhs of rupees) (i) Turnover (a) FOB ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section 80HHC. 17. With this background we examined the facts of the case of the assessee. For a clear understanding, we extract hereunder the Advance Licence Scheme as stated by the assessee, which is not disputed by the Revenue. "Under the Advance Licence Scheme of the Export Import Policy of the Government of India an exporter exporting goods outside India is entitled to import Duty free Raw Materials as a percentage of exports. As the goods have to be manufactured for exports and as the entitlement to import duty, the Raw Materials is dependent on exports the appellant Primarily purchases locally made Raw Materials for manufacturing goods which are exported. The locally purchased raw materials is higher in cost and is debited to Raw Materials Account. Once Exports are made the right to receive the Import Duty free raw materials is evaluated as otherwise the locally purchased raw materials is higher in cost while the sales viz. exports are made at lower cost. If the import entitlements are not evaluated on the basis of an accounting entry the trading results will show a loss. The Company has a licence to evaluate the Import Entitlement on the following: - (i) Quantit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndium of Opinions-Vol. 10) - Query No. 1.15. 19. The judicial consensus on the issue appears to be that, the emphasis should be on the words "profits derived from exports" and that weightage must be given to such profits and that such special deduction cannot be reduced artificially by introducing or including certain elements in the denominator while excluding the same in the numerator. 20. For examining whether the benefit received by the assessee in the form of export incentives is to be included in the denominator it would be helpful to examine substance of this transaction vis-a-vis the accounting entries passed by the assessee in its books of account. When the assessee imports raw material without payment of any customs duty due to this incentive scheme, what really happens is, the cost of purchase on raw material is reduced. If the accounting of the assessee on this import entitlement is ignored, for a moment, the profits of the assessee would reduce to the extent of that recognised on accrual i.e. Rs. 31,99,431 in the case of this assessee for the assessment year 1994-95 and there would be no inflation either in the figure of "total turn over" or in the figure of "expor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epting this, has inflated turnover by Rs. 3,67,25,867. The Notional buffer entry on both sides of the P L Account, amounting to Rs. 3,35,26,436 has created a situation wherein the export incentive claimed by the assessee company gets reduced. Had these entries not been passed by the assessee company, then even taking accrual system of accounting into consideration, the only amount that would have, come into the credit side of the P L Account would be Rs. 31,99,431. In other words, we can say, the entry of Rs. 3,35,26,436 has no element of profit whatsoever in it. This is a contra entry passed on both sides of the P L A/c. 22. The principle underlying in the method of calculating the export incentive as propounded by various High Courts is, like should be compared with like and when numerator does not include an item than the denominator should not also include the same, to bring parity between the two. Even the CBDT has expressed the same in its Circular No. 621 dated 19-12-1991, at para 32.18, which is, as under: "Whereas the definition of the term "export turnover" excludes freight and insurance attributable to transport, no such exclusion has been specified in respect of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r coverage in the definitions given there under, it has to be given a restrictive meaning while only that part of the receipt for sale consideration is to be taken as part of the total turnover which has an element of profit therein and, accordingly, the receipts of excise duty and sales tax which do not include an element of profit should be excluded from 'total turnover'." The submissions of the Revenue are answered in this judgment, wherein it was held that the judgment of the Hon'ble Calcutta High Court, in the case of McDowell Co. Ltd. and the judgments of the Apex Court in the case of Chowringhee Sales Bureau (P.) Ltd. v. CIT [1973] 87 ITR 542 (SC) and Sinclair Murray Co. (P.) Ltd. v. CIT [1974] 97 ITR 615 (SC) are distinguishable and do not hold good for the purposes of section 80HHC. Thus, ground No.2 of the assessee for the assessment year 1994-95 is allowed. Ground Nos.1 and 3 are dismissed in view of our findings given in ground No.1. Coming to ground No.4 of the assessees that the receipt is in the nature specified under section 28(iiia), (iiib) or (iiic) of the Income-tax Act, 1961, in that it specifically falls under (iiib) of section 28 i.e., cash assistance by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rollatainers Ltd. v. Dy. CIT [2000] 111 Taxman 221 (Mag.), wherein the judgment of the Hon'ble Supreme Court in Ashok Leyland Ltd v. CIT [1997] 224 ITR 122 was followed. The issue of foreign exchange fluctuation, being part of profits of the industrial undertaking is also decided in favour of the assessee by the judgment of the Delhi 'B' Bench of the Tribunal in Smt. Sujata Grover. Respectfully following these judgments, we direct the Assessing Officer to treat all these receipts as derived from the industrial undertaking, while computing the deduction under sections 80HH and 80-I of the I.T. Act, 1961. 24. Coming to ground Nos.1 to 4 of the appeal for the assessment year 1990-91 of the assessee, i.e. against the CIT (A) rejecting the revised claim of the appellant for deduction of Rs. 9,12,371 under section 80HHC(1A) as a supporting manufacturer, we agree with the contention of the assessee that deduction has to be granted as per the provisions of the Act only. The figures determined in the certificate are not binding on the Assessing Officer and on the other hand the Assessing Officer is duty bound to allow the deduction only in accordance with the Act. The Mumbai 'B' Bench of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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