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TMI Blog2010 (8) TMI 333X X X X Extracts X X X X X X X X Extracts X X X X ..... the said deduction. The assessee contended that the proviso to Explanation (baa) could be applied only to those items which are specifically mentioned therein. The technical service fees received from Bosch was not one of such specified items. Overruling the said objection, the Assessing Officer held that it is consideration flowing to the assessee for the services rendered by them and therefore it would fall in the category of "any other receipt of similar nature" and deducted the said amount from profits of the business. Aggrieved by the same, the assessee preferred an appeal to the Commissioner of Income-tax (Appeals) which was dismissed. Aggrieved by these two orders, the assessee preferred an appeal to the Tribunal. The Tribunal, relying on the judgment of the Cochin Bench of the Tribunal in the case of Asst. CIT v. Herbal Isolates P. Ltd. [2002] 83 ITD 310 (Cochin) and also the judgment of the Bombay High Court in CIT v. Hindustan Antibiotics Ltd. [1982] 137 ITR 42 held that the said deduction was not warranted. Therefore it set aside the orders and upheld the contention of the assessee. Aggrieved by the same, the Revenue is in appeal. 3. Learned counsel for the Reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Act?" 6. The facts are not in dispute. The total turnover of the assessee for the assessment year 1994-95 is Rs. 621,54,85,841 which includes excise duty and sales tax. Rs. 61,79,08,068 is export turnover. The assessee claimed Rs. 67,47,868 as profits of the business. However, out of the said profits, the assessee gave deduction to export incentives, sale of exim scrips, rent, interest, commission and thereafter the figure arrived at was Rs. 63,72,73,897. However, the Assessing Officer deducted Rs. 64,75,373 towards consideration received from M/s. Robert Bosche for developmental work and arrived at the profits of the business of Rs. 63,14,46,061. This deduction is the bone of contention between the parties. 7. Section 80HHC of the Act provides for deduction in respect of the profits retained for export business. It is not in dispute that the condition precedent for application of this provision is that the assessee must be engaged in the business of export out of India of any goods or merchandise to which the section applies, which condition is fulfilled by the assessee. In computing total turnover income of the assessee, the deduction of the profits derived by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... did intend that income derived by way of brokerage/commission, interest, rent, charges, or any other receipt of a similar nature by the assessee should not be reckoned for the purpose of computing profit or loss earned by a person engaged in the business of export. The purport and reason for enacting section 80HHC of the Act indisputably was to provide incentive to export houses. The formula that existed prior to 1991 often used to provide a distorted figure of export profits when receipts like interest, commission etc., which did not have an element of turnover were included in the profit and loss account. Therefore it was clarified that "profits of the business" for section 80HHC would not include receipts by way of brokerage/commission, interest or any other receipt of a similar nature. The expression "income arising out of business of export" brings within its sweep not only the export of any goods or merchandise manufactured or processed by the assessee but also of trading goods. Parliament, therefore, intended to provide incentive when a positive profit is earned by an exporter. 9. This provision came up for consideration before the Supreme Court in K. Ravindranathan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nder the Income-tax Act and every income may not be attributable to exports. This was the reason for this court to hold that indirect taxes like excise duty which are recovered by the taxpayers for and on behalf of the Government, shall not be included in the total turnover in the above formula. (See : CIT v. Lakshmi Machine Works [2007] 290 ITR 667 (SC))." 10. The question which arose for consideration in the aforesaid judgment was "whether the Department was right in including processing charges in the total turnover while arriving at export profits under section 80HHC(3) of the Act as it stood at the relevant time". After holding that it is to be included in the total turnover, it was observed as, it constituted an independent income in terms of clause (baa), it had to be deducted from gross total income to arrive at business profits to which fraction had to be applied as it constituted an independent income similar to rent, commission, etc., which form part of the gross total income. It was held that all that the incentive profits and "independent incomes" constituted part of gross total income, they had to be excluded from export turnover because such receipts had no n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the profits of business is liable to undergo a reduction of ninety per cent. as stipulated in clause (1) of Explanation (baa), it is necessary for the court to consider whether the receipt is "of a similar nature included in such profits." The rationale for excluding ninety per cent. of the receipts by way of brokerage, commission, interest, rent or charges is that these are independent incomes and their inclusion in the profits of business would result in a distortion. In determining whether any other receipt is liable to undergo a reduction of ninety per cent. the basic prescription which must be borne in mind is whether the receipt is of a similar nature and is included in the profits of business. To be susceptible of a reduction the receipt must be of a nature similar to brokerage, commission, interest, rent or charges. Dealing with the facts of the said case, it was held as under (page 69) : "A contract of insurance is a contract of indemnity. The insurance claim in essence indemnifies the assessee for the loss of the stock-intrade. The indemnification that is made to the assessee must stand on the same footing as the income that would have been realized by the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a nature similar to brokerage, commission, interest, rent or charges." 13. The apex court in the case of CIT v. B. Suresh [2009] 313 ITR 149 (SC) at para 9 has observed under (page 154) : "9. The basic requirement of section 80HHC in earning in foreign exchange and retention of profits for export business. Profits are embedded in the `income' earned. Earning of income depends on sale of goods and services. Today the difference between the two is getting blurred with globalisation and cross-border transaction. Today with technological advancement one has to change our thinking regarding concepts like goods, merchandise and articles." 14. From the aforesaid discussion, it is clear that in computing the profits of the business for the purpose of Explanation (baa), the incomes which are deductible are those which are expressly prescribed in the aforesaid provision and which are similar in nature. If the income is derived out of the activity which would have direct and immediate nexus to the activity of export, then the said income is not deductible from the said profits of the business under the aforesaid provisions. Profits are embedded in the income earned ..... X X X X Extracts X X X X X X X X Extracts X X X X
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