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TMI Blog2015 (4) TMI 195X X X X Extracts X X X X X X X X Extracts X X X X ..... or sale of shares and fees received from arranging finance for the assessee's clients cannot be regarded as turnover, and that by the same token, it should be left out of reckoning for purposes of computing deduction admissible to the assessee under Section 80HHC. In the first instance, it has to be satisfied that there are profits from the export business. That is the pre-requisite as held in IPCA [2004 (3) TMI 9 - SUPREME Court] and A.M. Moosa [2007 (9) TMI 24 - SUPREME COURT OF INDIA] as well. Sub-section (3) comes into picture only for the purpose of computation of deduction. For such an eventuality, while computing the "total turnover", one may apply the formula stated in clause (b) of sub-section (3) of Section 80HHC. However, that would not mean that even if there are losses in the export business but the profits in respect of business carried out within India are more than the export losses, benefit under Section 80HHC would still be available. In the present case, since there are losses in the export business, question of providing deduction under Section 80HHC does not arise and as a consequence, there is no question of computation of any such deduction in the manner ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in cases where the assessee is having turnover and income from business in India as well as from the export business. For the sake of convenience, relevant portions of Section 80HHC are extracted herein below: 80HHC. Deduction in respect of profits retained for export business.-(1) Where an assessee, being an Indian company or a person (other than a company) resident in India, is engaged in the business export out of India of any goods or merchandise to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of the profits derived by the assessee from the export of such goods or merchandise: Provided that if the assessee, being a holder of an Export House Certificate or a Trading House Certificate (hereinafter in this section referred to as an Export to in clause (b) of sub-section (4a), that in respect of the amount of the export turnover specified therein, the deduction under this sub-section is to be allowed to a supporting manufacturer, then the amount of deduction in the case of the assessee shall be reduced by such amount which bears to the total pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ficer to grant relief to the assessee. 6) On remand, the Assessing Officer passed fresh order dated 28.05.1992 giving effect to the orders of the ITAT. While giving the effect, the Assessing Officer found that the appellant had not earned any profits from the export of Marine products and in fact, from the said export business, it had suffered a loss. Therefore, according to the Assessing Officer, as per Section 80AB, the deduction under Section 80HHC could not exceed the amount of income included in the total income. He found that as the income from export of Marine product business was in the negative i.e. there was a loss, the deduction under Section 80HHC would be nil, even when the assessee is entitled to deduction under the said provision. With this order, second round of litigation started. The assessee challenged the order passed by the Assessing Officer before the Commissioner (Appeals) contending that the formula which was applied by the Assessing Officer was different from the formula prescribed under Section 80HHC of the Act and it was also in direct violation of CBDT Circular dated 05.07.1990. The Commissioner (Appeals), however, dismissed the appeal of the assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at no doubt, this Court in the case of IPCA Laboratory Ltd. v. Deputy Commissioner of Income Tax, Mumbai (2004) 12 SCC 742 held that the benefit of Section 80HHC shall not be given in cases where there was loss. He, however, pointed out that the judgment in IPCA Laboratory Ltd. (supra) was explained and clarified subsequently by this Court in A.M. Moosa v. Commissioner of Income Tax, Trivandrum (2007) 9 SCR 831 wherein it was made clear that in arriving at profits earned from export of both self-manufactured goods and trading goods, the profits and losses in both the trades have to be taken into consideration. If after such adjustments there is a positive profit, the assessee would be entitled to deduction under Section 80HHC(1) and if there is a loss, he will not be entitled to any deduction. He, thus, submitted that the term profit of business would not confine to profit from export business but income both from export business as well as from domestic business, had to be taken into consideration. Therefore, even if there was a loss from the export business, but there was profit from the business done within the country and on adjustment of loss from the export business against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as turnover and be part of total turnover . He referred to the same document viz. Provisions Relating to Direct Taxes where following clarification also appears: It is, therefore, proposed to clarify that profits of the business for the purpose of Section 80HHC will not include receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature. As some expenditure might be incurred in earning these incomes, which in the generality of cases is part of common expenses, it is proposed to provide ad hoc 10 per cent deduction from such incomes to account for these expenses. 13) We have considered the submissions of counsel appearing on both sides. 14) There are two facets of this case which need to be looked into. In the first instance, we have to consider as to whether view of the High Court that the deduction is permissible under Section 80HHC only when there are profits from the exports of the goods or merchandise is correct or it would be open to the assessee to club the income from export business as well as domestic business and even if there are losses in the export business but after setting off those losses against th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... include losses and if there were any losses, they were to be ignored. Another submission was that even when the profits were to be reduced by the losses, in cases of disclaimer of its turnover by an assessee export house in favour of a supporting manufacturer, the turnover of the export house got reduced to that extent. Therefore, it could not be taken into consideration for the purposes of computing profits under Section 80HHC(3)(c)(ii). Reliance was also placed on Circular No.421 dated 12.06.1985 of the CBDT to show that Section 80HHC was incorporated with a view to providing incentives to its exporters with requisite resources of modernization, technological upgradation, product development and other activities. 16) None of the aforesaid arguments weighed with this Court. While dismissing the appeal of the appellant, the Court laid down the following law: Although Section 80-HHC has been incorporated with a view to provide incentive to export houses and a liberal interpretation has to be given to such a provision, the interpretation has to be as per the wordings of that section. When the legislature wanted to take exports from self-manufactured goods or trading goods sep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h Sections 80-HHC(1) and 80-HHC(3) means a positive profit worked out after taking into consideration the losses, if any. Thus the word profit has the same meaning in Sections 80-HHC(1) and (3).The proviso to sub-section (1) of Section 80-HHC enables a disclaimer only to enable the export house to pass on deductions. It in no way reduces the turnover of the export house. The disclaimer is only for purposes of enabling the export house to pass on the deduction which it would have got to the supporting manufacturer. It follows that if no deduction is available, because there is a loss, then the export house cannot pass on or give credit of such non-existing deduction to a supporting manufacturer.The Board circular also shows that only positive profits can be considered for purposes of deduction. 17) We find that in A.M. Moosa, this Court, in fact, reiterated IPCA principles, as noted above. That was a case where Assessing Officer had disallowed the deduction claim of the assessee under Section 80HHC of the Act on the ground that the 'profits of the business computed under Section 80HHC indicated a negative figure'. This view was accepted by all the Courts and affirmed b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the assessee will not be entitled to a deduction. Sub-section (3)(c) deals with cases where the export is of both self-manufactured goods as well as trading goods. The opening part of sub-section (3)(c) states profits derived from such export shall . Then follow clauses (i) and (ii). Between clauses (i) and (ii) the word and appears. A plain reading of sub- section (3)(c) shows that profits from such exports has to be profits from exports of self-manufactured goods plus profits from exports of trading goods. The profit is to be calculated in the manner laid down in Sections (3)(c)(i) and (ii). The opening words profit derived from such exports together with the word and clearly indicate that the profits have to be calculated by counting both the exports. It is clear from a reading of sub-section (1) of Section 80-HHC(3) that a deduction can be permitted only if there is a positive profit in the exports of both self-manufactured goods as well as trading goods. If there is a loss in either of the two then that loss has to be taken into account for the purposes of computing profits. 8. Under Section 80-HHC(1), the deduction is to be given in computing the total income of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of trading goods. Thus in calculating the profits under sub-section (3)(c)(i) one necessarily has to reduce profits under sub-section (3)(c)(ii). As seen above, the term profit means positive profit. Thus if there is loss then those losses in export of trading goods have to be adjusted. They cannot be ignored. A plain reading of Section 80-HHC makes it clear that in arriving at profits earned from export of both self-manufactured goods and trading goods, the profits and losses in both the trades have to be taken into consideration. If after such adjustments there is a positive profit, the assessee would be entitled to deduction under Section 80-HHC(1). If there is a loss he will not be entitled to any deduction. 12. It was submitted that the word profit in Section 80-HHC must have the same meaning in the entire section, and that as the word profit in Section 80-HHC(1) means only positive profit, it will have the same meaning in Section 80-HHC(3)(c). It is submitted that thus the word profit in Section 80-HHC(3)(c) would not include losses and if there are any losses, they are to be ignored. The plea is clearly without substance. Firstly, it is not necessary that the word pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ct situation is somewhat different. Here, in so far as export business is concerned, there are losses. However, the appellant-assessee relies upon Section 80HHC(3)(b), as existed at the relevant time, to contend that the profits of the business as a whole i.e. including profits earned from the goods or merchandise within India will also be taken into consideration. In this manner, argues the appellant, even if there are losses in the export business, but profits of indigenous business outweigh those losses and the net result is that there is profit of the business, then the deduction under Section 80HHC should be given. However, having regard to the law laid down in IPCA and A.M. Moosa, we cannot agree with the learned counsel for the appellant. From the scheme of Section 80HHC, it is clear that deduction is to be provided under sub-section (1) thereof which is in respect of profits retained for export business . Therefore, in the first instance, it has to be satisfied that there are profits from the export business. That is the pre-requisite as held in IPCA and A.M. Moosa as well. Sub-section (3) comes into picture only for the purpose of computation of deduction. For such an eve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sactions profit, or, as the case may be, loss is embedded in the gross turnover. The most significant conclusion that flows from the said provision is that when Section 80HHC(3) talks of turnover, it talks of trading receipts and not of receipts which are of the nature of income to start with. It should, therefore, follow that the aggregate sum of ₹ 9,37,693/- referred to supra cannot be regarded as turnover, and that by the same token, it should be left out of reckoning for purposes of computing deduction admissible to the assessee under Section 80HHC. If this exercise is done, we are back to Proposition No.1. This would mean that the deduction admissible to the assessee under Section 80HHC would be nil, especially in view of the fact that the export business of the assessee has resulted in a loss. xx xx xx 19. But a manufacturer may not invariably be able to export, in their entirety, the goods or merchandise manufactured. He may export a part of them and sell the rest in India. Given the paramount need to give fillip to exports, Parliament clearly intended that the benefit of Section 80HHC should not be denied in such cases. But the difficulty in such cases is that t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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