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TMI Blog2008 (8) TMI 455X X X X Extracts X X X X X X X X Extracts X X X X ..... id exports and that the said exports are under protocol exports i.e., Government to Government aid programme and that the export consideration was received in Indian rupees from the Ministry of External Affairs. A certificate of disclaimer from STC in the prescribed Form 10CCAB and the bill of lading were also filed before the AO. The copies of these were also filed before us. 3. However, the AO disallowed the assessee's claim of deduction under s. 80HHC on two grounds: (a) The assessee had claimed deduction as a supporting manufacturer. The AO found that the STC had declared loss of Rs. 50,13,25,154 for the asst. yr. 2003-04. In view of the Supreme Court decision in IPCA Laboratory Ltd. vs. Dy. CIT (2004) 187 CTR (SC) 513 : (2004) 266 ITR 521 (SC), the learned AO came to the conclusion that since the STC could not have itself claimed the deduction, it could not pass on the benefit to the assessee and accordingly held that the assessee is not entitled to the claim of deduction under s. 80HHC. (b) The learned AO also observed that export deduction under s. 80HHC is permissible only when the realization is in foreign exchange. The assessee staked its claim with reference to CBD ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... HHC(4)(A), and is thereby entitled to deduction under s. 80HHC as supporting manufacturer. He submitted that the assessee has fulfilled the conditions laid down in cl. (d) of the Explanation to s. 80HHC to be a 'supporting manufacturer'. He has further submitted that the STC, Jalandhar, had issued disclaimer certificate in Form 10CCAB in favour of the assessee. (ii) That the manner of computation of profits derived by a supporting manufacturer is prescribed in s. 80HHC(3)(A), according to which the profits of the supporting manufacturer for the purpose of deduction under s. 80HHC(1A) has to be determined mainly with reference to the sale of goods or merchandise to the export house. There is no requirement that the amount has to be realized in foreign exchange. In support of his contention, the learned Authorised Representative relied on the decision of the Hon'ble Supreme Court in CIT vs. Baby Marine Exports (2007) 209 CTR (SC) 183 : (2007) 290 ITR 323 (SC). (iii) That the AO wrongly applied the decision of the Hon'ble Supreme Court in the case of IPCA Laboratory Ltd. to the assessee's case. The assessee had claimed tax benefit in the status of supporting manufacturer while as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmitted that the assessee's transaction would fall under the category of 'protocol exports' and would be entitled to avail of the benefits provided in Circular No. 562, dt. 23rd May, 1990. The Authorised Representative contended that the eligibility of the assessee to claim deduction should be examined independently taking into account the manner in which and the conditions under which protocol export may have been effected by the Government of India. There may be many consideration for Government of India to make the protocol exports either without considerations or less than normal consideration, which would not obliterate the fact of sale made by the assessee to the Government of India for export to Cambodia. Hence, the benefit should not be denied to the assessee. 6. On the other hand, the learned Departmental Representative strongly relied on the order of the CIT(A) and that of the AO. 7. We have carefully considered the contentions and submissions of the learned Authorised Representative and the arguments pressed by the learned Departmental Representative. We have also perused the records filed before us. As the main issue revolves on the interpretation of s. 80HHC of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for an assessment year beginning on the 1st day of April, 2003; (iv) twenty per cent thereof for an assessment year beginning on the 1st day of April, 2004; and no deduction shall be allowed in respect of the assessment year beginning on the 1st day of April, 2005 and any subsequent assessment year. (2)(a) This section applies to all goods or merchandise, other than those specified in cl. (b), if the sale proceeds of such goods or merchandise exported out of India are received in, or brought into, India by the assessee (other than the supporting manufacturer) in convertible foreign exchange, within a period of six months from the end of the previous year or, within such further period as the competent authority may allow in this behalf. Explanation: For the purposes of this clause, the expression 'competent authority' means the RBI or such other authority as is authorised under any law for the time being in force for regulating payments and dealings in foreign exchange. (b) This section does not apply to the following goods or merchandise, namely: (i) mineral oil; and (ii) minerals and ores (other than processed minerals and ores specified in the Twelfth Schedule). ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erred to in cl. (iiia) (not being profits on sale of a license acquired from any other person), and cls. (iiib) and (iiic) of s. 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee. Explanation: For the purposes of this sub-section,- (a) 'adjusted export turnover' means the export turnover as reduced by the export turnover in respect of trading goods; (b) 'adjusted profits of the business' means the profits of the business as reduced by the profits derived from the business of export out of India of trading goods as computed in the manner provided in cl. (b) of sub-so (3); (c) 'adjusted total turnover' means the total turnover of the business as reduced by the export turnover in respect of trading goods; (d) 'direct costs' means costs directly attributable to the trading goods exported out of India including the purchase price of such goods; (e) 'indirect costs' means costs, not being direct costs, allocated in the ratio of the export turnover in respect of trading goods to the total turnover; (f) 'trading goods' means goods which are not manufactured or processed by the assessee. (3A) For the purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... poses of the Foreign Exchange Regulation Act, 1973 (46 of 1973), and any rules made thereunder; (aa) 'export out of India' shall not include any transaction by way of sale or otherwise, in a shop, emporium or any other establishment situate in India, not involving clearance at any customs station as defined in the Customs Act, 1962 (52 of 1962); (b) 'export turnover' means the sale proceeds received in, or brought into, India by the assessee in convertible foreign exchange in accordance with cl. (a) of sub-s. (2) of any goods or merchandise to which this section applies and which are exported out of India, but does 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 (52 of 1962). (ba) 'total turnover' 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 (52 of 1962): Provided that in relation to any assessment year commencing on or after the 1st day of April, 1991, the expression 'total turnover' shall have effect as if it also excluded any sum referred to in cls. (iii ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 8. Sub-s. (1A) of s. 80HHC provides for deduction to be allowed to a supporting manufacturer, who has sold goods or merchandise to a Trading House or Export House which has issued a certificate of disclaimer under the proviso to sub-s. (1). The profits derived by the assessee from the sale of goods or merchandise to the export house have to be determined in the manner provided in sub-s. (3A), and the extent of profits to be allowed as deduction is provided in sub-s. (1B). This is subject to further condition provided in sub-s. (4A) which requires furnishing by the supporting manufacturer along with his return of income (a) report of an accountant certifying that the deduction has been correctly claimed on the basis of the profits of the supporting manufacturer in respect of his sale of goods or merchandise to the export house and (b) disclaimer certificate of the export house that it has not claimed the deduction and which shall be duly certified by an auditor. 9. It is not in dispute that the assessee is a 'supporting manufacturer' as per cl. (d) of Explanation to s. 80HHC, and that the STC, Jalandhar, is an 'export house' as per cl. (c) of Explanation to s. 80HHC. It is also ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s issue in the following manner observing: "In this case we are concerned with the wordings of sub-s. (3)(c) of s. 80HHC. As noted earlier sub-s. (3)(a) deals with the case where the export is only of self-manufactured goods. Sub-s. 3(b) deals with the case where the export is only of trading goods. Thus, when the legislature wanted to take exports from self-manufactured goods or trading goods separately, it has already so provided in sub-ss. (3)(a) and (3)(b). It would not be denied that the word 'profit' in s. 80HHC(1) and ss. 80HHC(3)(a) and (3)(b) means a positive profit. In other words, if there is a loss then no deduction would be available under s. 80HHC(1) or (3)(a) or (3)(b). In arriving at the figure of positive profit, both the profits and the losses will have to be considered. If the net figure is a positive profit then the assessee will be entitled to a deduction. If the net figure is a loss then the assessee will not be entitled to a deduction. Sub-s. (3)(c) deals with cases where the export is of both self-manufactured goods as well as trading goods. The opening part of sub-so (3)(c) states 'profits derived from such export shall'. Then follow (i) and (ii). Between ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1985, provides that where an assessee, being an Indian company or a person (other than a company) resident in India exports out of India during the previous year, any goods or merchandise to which this section applies, he will be allowed a deduction of an amount not exceeding 50 per cent of the profits derived from the export of such goods of merchandise. 2. Representations have been received to the effect that the manufacturers of goods or merchandise exported through the export houses/trading houses do not derive any benefit under the amended provisions of s. 80HHC. It has further been represented that if the tax benefit derived by the export house/training house under s. 80HHC is passed on to the concerned manufacturer, the amount so passed on should be allowed as a deduction in the computation of the total income of the export house/trading house. 3. The matter has been examined by the Board. It has been decided that if any export house/trading house holding a certificate in this regard issued by the Ministry of Commerce for the relevant accounting period passes on to the manufacturer part or whole of the amount of tax benefit derived by the former on account of deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... wed to a supporting manufacturer, the amount of deduction available to the Export House or the Trading House shall be reduced by such an amount which bears to the total profits of the export business of the Export House or the Trading House issuing the certificate, the same proportion as the amount of export turnover specified in the certificate bears to the total export turnover of the Export House or the Trading House as the case may be. 28.4 As a measure to extend the benefit provided under sub-s. (1) to the supporting manufacturers, a new sub-s. (1A) has been inserted to provide that where the supporting manufacturer has sold goods to any Export House or Trading House in respect of which the latter has issued a certificate in the prescribed form in accordance with the provisions of sub-s. (1) read with the proviso, deduction will be allowed in the computation of the income of the supporting manufacturer, of the whole of the profits derived by it from the sale of goods or merchandise to the Export House or Trading House, as the case may be, in respect of which the certificate was issued by the latter. For this purpose: (i) Export House or Trading House has been defined as be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the export turnover mentioned in the certificate, the Export House or the Trading House has not claimed any deduction under this section. The certificate issued by the Export House or the Trading House shall be certified by the auditor auditing the account of the Export House or the Trading House under the provisions of this Act or under any law. 28.7 The working of the benefit under this section, as can be shared between a recognised export house or a trading house with the supporting manufacturer, has been illustrated in the example below: Total export earning in convertible foreign exchange of an Export House : 50 crores Net profit from exports at 2% : 1 crore Amount of deduction eligible under S. 80HHC(1) : 1 crore Export earnings in convertible foreign exchange in respect of purchases made from supporting manufacturer : 50 lakhs Profit from such exports at 2% : 1 lakh Purchase price of goods in the hands of Export House in respect of item purchased from supporting manufacturer : 45 lakhs Profit to supporting manufactur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r could be higher than the benefit available under s. 80HHC(1) to the Export House in the case where the Export House themselves exported the goods with out the help of supporting manufacturer. This establishes the fact that there is no correlation as regards to profit element of both Export House and supporting manufacturer for the purpose of claiming benefit under the Act. Moreover in the present case the Export House is STC, an organization being the extended limb of the Government created for the purpose of facilitating, promoting and encouraging exports and not only for the purpose of profit motive. 17. The next issue for our consideration would be whether the assessee would be eligible to the benefits of Circular No. 562, dt. 23rd May, 1990. It is said that the assessee had exported rice to Cambodia through the STC, Jalandhar. This transaction was described in the letter of STC, dt. 28th Nov., 2003 as 'protocol exports', Government to Government aid programme, and that the consideration was stated to be received in Indian rupees from the Ministry of External Affairs, Government of India. In the bill of lading, it was mentioned, 'gift from people and Government of India, no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcular, as a result, the exporter will be entitled to claim tax benefit though the export realization was not in foreign currency. The relevant extract of the circular is as follows: "Receipts of sale proceeds in rupees in respect of protocol exports-Whether eligible for deduction under s. 80HHC of the IT Act, 1961. 1. Sec. 80HHC of the IT Act provides for a deduction in the computation of taxable income with reference to the export turnover of certain goods or merchandise out of India in cases where the sale proceeds are receivable in convertible foreign exchange. 2. Representations have been received that exporters engaged in making 'protocol exports', i.e., exports under Government to Government credits, should be eligible for claiming deduction under s. 80HHC of the IT Act. Under protocol exports, the realisation of sale proceeds in the hands of the exporter is from the Government of India and the mode of payment is in Indian currency. Bills sent to foreign parties are settled between the Government of India and the other Government in accordance with the bilateral agreement by adjustment against the credit allowed, which is realised in foreign exchange later. 3. The CB ..... X X X X Extracts X X X X X X X X Extracts X X X X
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