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TMI Blog2016 (1) TMI 809X X X X Extracts X X X X X X X X Extracts X X X X ..... tion under Section 80HHC on this entire amount of deemed income. However, the Assessing Officer ('A.O.' ) vide his order passed under Section 143(3) dated 29.06.2005 held that under clause (baa) of the Explanation to Section 80HHC, ninety percent of the amount of deemed income had to be reduced from the profits of business since such income was of a similar nature as brokerage, commission, interest etc. and was not derived from the exports made by the assessee. 3. The assessee filed an appeal against the assessment before the Commissioner of Income Tax (Appeals), Shimla ('CIT (A)', who vide his order dated 17.01.2006 passed in Appeal No.IT/169/2005-06/SML confirmed the assessment made by the A.O. holding that such deemed income is not derived from exports in view of the judgments of the Hon'ble Supreme Court in the cases of CIT vs. Sterling Foods (237 ITR 579) and Pandian Chemicals vs. CIT (262 ITR 278). 4. The assessee thereafter filed further appeal before the ITAT and the ITAT vide impugned order passed in ITA No.211/Chandi/2006 dated 31.07.2008 allowed the assessee's appeal. 5. It is against the aforesaid orders that the present appeal has been filed. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 profits derived by the assessee from the export of trading goods, the same proportion as the amount of export turnover specified in the said certificate bears to the total export turnover of the assessee in respect of such trading goods. (1A) Where the assessee, being a supporting manufacturer, has during the previous year, sold goods or merchandise to any Export House or Trading House in respect of which the Export House or Trading House has issued a certificate under the proviso to sub-section (1), 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 to the extent of profits, referred to in sub-section (1B), derived by the assessee from the sale of goods or merchandise to the Export House or Trading House in respect of which the certificate has been issued by the Export House or Trading ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of section 50 of the Customs Act, 1962 (52 of 1962), shall, for the purposes of this section, be deemed to be the sale proceeds thereof. (3) For the purposes of sub-section (1),- (a) where the export out of India is of goods or merchandise manufactured or processed by the assessee, the profits derived from such export shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee; (b) where the export out of India is of trading goods, the profits derived from such export shall be the export turnover in respect of such trading goods as reduced by the direct costs and indirect costs attributable to such export; (c) where the export out of India is of goods or merchandise manufactured or processed by the assessee and of trading goods, the profits derived from such export shall,- (i) in respect of the goods or merchandise manufactured or processed by the assessee, be the amount which bears to the adjusted profits of the business, the same proportion as the adjusted export turnover in respect of such goods bears to the adjusted total turno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... first proviso, as the case may be, shall be further increased by the amount which bears to ninety per cent of any sum referred to in clause (iiie) of section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee, if the assessee has necessary and sufficient evidence to prove that,- (a) he had an option to choose either the duty drawback or the Duty Free Replenishment Certificate, being the Duty Remission Scheme; and (b) the rate of drawback credit attributable to the customs duty was higher than the rate of credit allowable under the Duty Free Replenishment Certificate, being the Duty Remission Scheme. Explanation.-For the purposes of this clause, "rate of credit allowable" means the rate of credit allowable under the Duty Free Replenishment Certificate, being the Duty Remission Scheme calculated in the manner as may be notified by the Central Government: Provided also that in case the computation under clause (a) or clause (b) or clause (c) of this sub-section is a loss, such loss shall be set off against the amount which bears to ninety per cent of- (a) any sum referred to in clause (iiia) or clause (iiib) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th the provisions of this section: Provided that in the case of an undertaking referred to in subsection (4C), the assessee shall also furnish along with the return of income, a certificate from the undertaking in the special economic zone containing such particulars as may be prescribed, duly certified by the auditor auditing the accounts of the undertaking in the special economic zone under the provisions of this Act or under any other law for the time being in force. (4A) The deduction under sub-section (1A) shall not be admissible unless the supporting manufacturer furnishes in the prescribed form along with his return of income,- (a) the report of an accountant, as defined in the Explanation below sub-section (2) of section 288, 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 or Trading House; and (b) a certificate from the Export House or Trading House containing such particulars as may be prescribed and verified in the manner prescribed that in respect of the export turnover mentioned in the certificate, the Export House or Trading Ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iiib), (iiic), (iiid) and (iiie) of section 28; (baa) "profits of the business" means the profits of the business as computed under the head "Profits and gains of business or profession" as reduced by- (1) ninety per cent of any sum referred to in clauses (iiia), (iiib), (iiic), (iiid) and (iiie) of section 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits; and (2) the profits of any branch, office, warehouse or any other establishment of the assessee situate outside India; (bb) [***] (c) "Export House Certificate" or "Trading House Certificate" means a valid Export House Certificate or Trading House Certificate, as the case may be, issued by the Chief Controller of Imports and Exports, Government of India; (d) "supporting manufacturer" means a person being an Indian company or a person (other than a company) resident in India, manufacturing (including processing) goods or merchandise and selling such goods or merchandise to an Export House or a Trading House for the purposes of export; (e) "special economic zone" shall have the meaning assigned to it in clause (viii) of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l turnover in the formula for arriving at the business profits in terms of the clause (baa) of the Explanation to section 80HHC(3). It was further held by the Hon'ble Supreme Court that:- "In the above formula there existed four variables, namely, business profits, export turnover, total turnover and 90 per cent. of the sums referred to in clause (baa) to the said Explanation. In the computation of deduction under section 80 HHC all four variables had to be taken into account. All four variables were required to be given weightage. The substitution of section 80 HHC(3) secures profits derived from the exports of eligible goods. Therefore, if all the four variables are kept in mind, it becomes clear that every receipt is not income and every income would not necessarily include element of export turnover. This aspect needs to be kept in mind while interpreting clause (baa) to the said Explanation. The said clause stated that 90 per cent of incentive profits or receipts by way of brokerage, commission, interest, rent, charges or any other receipt of like nature included in business profits, had to be deducted from business profits computed in terms of sections 28 to 44D of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for the assessee to canvass that since all liability incurred by the assessee-company in respect of the interest had infact earlier been allowed as deduction while computing the profit of the export business, then merely because such liability ceases to exist, the same will not undergo a change in its nature and become an independent income. 14. In Commissioner of Income-Tax versus Shri Ram Honda Power Equip [2007] 289 ITR 475 (Delhi), after taking into consideration the entire law on the subject, the learned Division Bench of Delhi High Court summarized the legal position as follows:- "To summarise our conclusions: (i) In computing what the profits derived from exports for the purposes of 80HHC(1) read with 80HHC(3) are, the nexus test has to be applied to exclude that which does not partake of profits that can be said to have been derived from the business of exports. (ii) In the specific context of Clause (baa) of the Explanation to Section 80HHC, while determining the 'profits of the business', the AO has to undertake a two-step exercise in the following sequence. He has to first 'compute' the profits of the business under the head "profits and gains of b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ount the net interest i.e. gross interest as reduced by expenditure incurred for earning such interest. The decision of the Special Bench of the ITAT in Lalsons [2004] 8 ITR 25 (Delhi) to this effect is affirmed. In holding as above, we differ from the judgments of the Punjab & Haryana High Court in Rani Paliwal [2004] 268 ITR 220 and the Madras High Court in Chinnapandi [2006] 282 ITR 389 and affirm the ruling of the Special Bench of the ITAT in Lalsons [2004] 8 ITR 25 (Delhi). (ix) Where, as a result of the computation of profits and gains of business and profession, the AO treats the interest receipt as business income, then deduction should be permissible, in terms of Explanation (baa) of the net interest i.e. the gross interest less the expenditure incurred for the purposes of earning such interest. The nexus between obtaining the loan and paying interest thereon (laying out the expenditure by way of interest) for the purpose of earning the interest on the fixed deposit, to draw an analogy from Section 37, will require to be shown by the assessed for application of the netting principle." 15. In Commissioner of Income-Tax versus Bhansali Engineering Polymars Ltd. [2008) 30 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee computed under the head "profits and gains of business or profession" from which deductions are to be made under clauses (1) and (2) of Explanation (baa). 18. It was held that under clause (1) of Explanation (baa), ninety per cent of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in any such profits are to be deducted from the profits of the business as computed under the head "profits and gains of business or profession". The expression "included any such profits" in clause (1) of the Explanation (baa) would mean only such receipts by way of brokerage, commission, interest, rent, charges or any other receipt which are included in the profits of the business as computed under the head "profits and gains of business or profession". Therefore, if any quantum of the receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature is allowed as expenses under Sections 30 to 44D of the Act and is not included in the profits of business as computed under the head "profits and gains of business or profession", ninety per cent of such quantum of receipts canno ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be allowed from the profits derived by the assessee from the exports of goods or merchandise while computing the gross total income and the object of this Section is to grant an incentive to earners of foreign exchange and the matter, therefore, essentially has to be considered with reference to that object. Under sub-section (3) of Section 80 HHC, the mechanism for determination of profits derived from export of goods or merchandise has been prescribed for the purposes of sub-section (1). Clause (a) thereof deals with an assessee where the business is export of goods or merchandise manufactured by the assessee. Clause (b) relates to an assessee whose business is of export outside India of trading goods, whereas, clause (c) applies to an assessee whose business comprised both export of manufactured goods and also of trading goods. The computation referred to above is to be made having regard to the "profits of the business" which are determined in terms of clause (baa) of the Explanation to Section 80 HHC of the Act. The said Explanation provides that the expression "profits of the business" means, the profits as computed under the head "profits and gains of business or professi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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