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TMI Blog2007 (4) TMI 202X X X X Extracts X X X X X X X X Extracts X X X X ..... 4 M/s. Lakshmi Machine Works (the assessee) filed its return of income declaring its taxable income of ₹ 50.80 lakhs. On June 10, 1994 intimation under section 143(1)(a) of the Income-tax Act, 1961 (for short, the Act ) was sent by the Department accepting the returned income. Later on the Department issued notice under section 143(2) of the Act. One of the items for issuing the said notice was the quantum of deduction under section 80HHC of the Act. The assessee had computed the allowable deduction under section 80HHC without taking into account in the total turnover the sales tax and excise duty. The assessee was asked to explain why the total turnover should not be recomputed by including sales tax and excise duty. In this connection, the Department placed reliance on the judgment of this court in the case of Chowringhee Sales Bureau P. Ltd. v. CIT [1973] 87 ITR 542. The assessee objected to the above inclusion. However, that objection was dismissed by the Assessing Officer on the ground that under section 80HHC, Explanation (ba), deduction from total turnover was restricted only to three items, namely, profit on sale of import licence, duty drawback and CCS. The Assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 (hereafter in this section referred to as an Export House or a Trading House, as the case may be), issues a certificate referred 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 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, b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... xport 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 turnover of the business carried on by the assessee; and (ii) in respect of trading goods, be the export turnover in respect of such trading goods as reduced by the direct and indirect costs attributable to export of such trading goods; Provided that the profits computed under clause (a) or clause (b) or clause (c) of this sub-section shall be further increased by the amount which bears to ninety per cent. of ..... 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(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 House has not claimed the deduction under this section: Provided that the certificate specified in clause (b) shall be duly certified by the auditor auditing the accounts of the Export House or Trading House under the provisions of this Act or under any other law. Explanation.- For the purposes of this section, (a) 'convertible foreign exchange' means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the above section 80HHC of the Act, as amended with effect from April 1, 1992, indicates rationalization of provisions relating to tax concession for export profits. Under section 80HHC, the exporters were allowed, in the computation of their total income, a deduction of the entire profits derived from exports. During the relevant year, there existed a dual system for computation of export profits. The first method operated in cases where the export was of goods manufactured by the tax payer. In those cases the export profit had to be computed on the basis of the ratio of export turnover to total turnover . In effect, the formula was as follows: 80HHC concession = export profits = total profits X Export turnover Total turnover Where the export consisted of goods purchased from third parties (trading goods) there was a second method of computation in which the export profits were to be calculated by deducting from the export turnover, direct and indirect costs attributable to such exports. In that case the formula was asunder: 80HHC concession = expo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he exporter for deduction under section 80HHC of the Income-tax Act, 1961 1. Name of the assessee 2. Assessment year 3. Total turnover of the business 4. Total export turnover 5. Total profits of the business 6. Export turnover in respect of trading goods 7. Direct cost of trading goods exported 8. Indirect cost attributable to trading goods exported 9. Total of 7 +/- 8 10. Profits from export of trading goods [6 minus 9] 11. Adjusted total turnover (3 minus 6) 12. Adjusted export turnover (4 minus 6) 13. Adjusted profits of the business (5 minus 10) 14. Profits derived by assessee from export of goods or merchandise to which section 80HHC applies, computed under sub-section (3) of section 80HHC 15. Export turnover, deduction in respect of which will be claimed by a supporting manufacturer in accordance with proviso to sub-section (1) of section 80HHC 16. Profit from the export turnover mentioned in item 15 above, calculated in accordance with proviso to sub-section (1) of section 80HHC 17. Deduction under section 80HHC to which the assessee is entitled (Item 14 minus Item 16) 18. Remarks, if any ANNEXURE B [See para ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t incentives, namely, CCS, duty drawback and profit on sale of import licence, were includible in the business profits and, therefore, they were taxable. The Finance Act, 1992, restricted the term export turnover to FOB sale proceeds. However, the said Act excluded CCS, duty drawback and profit on sale of import entitlement from the term total turnover . To sum up, the amount of deduction under section 80HHC is to be computed as under: 1. Profit of the business.-To find out 'profit of the business', the first step is to determine income under the head 'Profits and gains of business or profession' as per section 28(iiia), (iiib), (iiic) this includes three export incentives. From the income so arrived at, deduct the following: a. 90 per cent. of export incentive. b. 90 per cent. of receipts by way of brokerage, commission, interest, rent, charges or other receipts of a similar nature; and c. profits of any branch, office, warehouse or any similar establishment of the assessee situate outside India. 2. Export turnover.-Sale proceeds received in, or brought into India, in convertible foreign exchange within the prescribed time (or within the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 3, 1993, ₹ 86,920 is paid on account of excise duty of the previous year 1991-92. Since this amount pertains to the previous year 1991-92, it has not been debited to the aforesaid profit and loss account. 3. The company has received ₹ 24,90,000 in convertible foreign exchange till September 30, 1993. The company's application for obtaining extension of time under section 80HHC has been rejected by the Commissioner. 4. During the previous year 1992-93, the company gets a shortterm gain of ₹ 20,000. 5. The company is entitled for deduction under section 80-I. Compute the net income of the company for the assessment year 1993-94. Profits and gains of business of profession : Rs. Net profit as profit and loss account 10,30,000 Add : Amount not deductible by virtue of secs. 40 and 40A 51,600 10,81,600 Less : Excise duty of 1991-92, deductible by virtue of section 43B [see para 49.10] (-) 86,920 Business income (under section 28) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ustoms station, is export turnover for this purpose. 2. Direct cost-Under Explanation (d) to section 80HHC(3), 'direct costs' comprises the following: a. the purchase price of the goods, and b. costs directly attributable to the trading goods exported out of India. Purchase price-Under the accepted principles of accounting, purchase price would mean invoice value, including taxes and duties, as reduced by (i) value of any purchase returns, (ii) trade discounts and rebates, if any, allowed, and (iii) value of any incentives which are passed on to the seller. Similarly, sales tax set-off available in respect of exports can also be reduced from purchase costs. However, cash discount obtained and any other rebate or set-off available after the end of the relevant previous year cannot be reduced from purchase cost. If, as per the terms of the contract, any export incentives are passed on to the seller, they would have an effect on purchase price and to that extent purchase cost would be lower. Costs directly attributable to trading goods-These costs would generally embrace, apart from the purchase cost and related costs, such other costs which have been incurred e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... export (subordinate manufacturer). The principal reason for enacting the above formula was to disallow a part of section 80HHC concession when the entire deduction claimed could not be regarded as relatable to exports. Therefore, while interpreting the words total turnover in the above formula in section 80HHC one has to give a schematic interpretation to that expression. There is one more reason for giving schematic interpretation. The various amendments to section 80HHC show that receipts by way of brokerage, commission, interest, rent etc. do not form part of business profits as they have no nexus with the activity of exports. If interest or rent was not regarded by the Legislature as business profits, the question of treating the same as part of the total turnover in the above formula did not arise. In fact, section 80HHC had to be amended several times since the formula on several occasions gave a distorted figure of export profits when receipts like interest, rent, commission etc. which did not have the element of turnover got included in the profit and loss account and consequently became entitled to deduction. This was clarified by the above amendment to section 80HHC ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r's trading/business receipts, even if the tax or duty is charged separately or credited to a separate account. Reliance was also placed on the judgment of the King's Bench Division in the case of Paprika Ltd. v. Board of Trade [1944] 1 All ER 372, in which it has been held that wherever a sale attracts purchase tax, that tax affects the price which the seller who is liable to pay the tax demands, but it does not cease to be the price which the buyer has to pay even if the price is expressed as cost x + purchase tax. Reliance was also placed on the judgment of the Court of Appeal in the case of Love v. Norman Wright (Builders) Ltd. [1944] 1 All ER 618, in which it has been held that if a seller quotes a price of 'x' + purchase tax, the buyer has to pay the amount of the tax as part of the price and since the tax is charged on the wholesale value of the goods the tax element has to be taken into account. It was urged that one has to give a strict interpretation to the word turnover . It was urged that there was no question of giving purposeful interpretation to the word turnover in the said section 80HHC of the Act. It was urged that the Legislature had used the e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Act must be complied with. Where a deduction is necessary in order to ascertain the profits and gains, such deductions should be allowed. Profits should be computed after deducting the expenses incurred for business though such expenses may not be admissible expressly under the Act, unless such expenses are expressly disallowed by the Act. Therefore, schematic interpretation for making the formula in section 80HHC workable cannot be ruled out. Similarly, purposeful interpretation of section 80HHC which has undergone so many changes cannot be ruled out, particularly, when those legislative changes indicate that the Legislature intended to exclude items like commission and interest from deduction on the ground that they did not possess any element of turnover even though commission and interest emanated from exports. We have to read the words total turnover in section 80HHC as part of the formula which sought to segregate the export profits from the business profits . Therefore, we have to read the formula in entirety. In that formula the entire business profits is not given deduction. It is the business profit which is proportionately reduced by the above fraction/ratio of ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... just as commission received by an assessee is relatable to exports and yet it cannot form part of turnover , excise duty and sales tax also cannot form part of the turnover . Similarly, interest emanates from exports and yet interest does not involve an element of turnover. The object of the Legislature in enacting section 80HHC of the Act was to confer a benefit on profits accruing with reference to export turnover. Therefore, turnover was the requirement. Commission, rent, interest, etc. did not involve any turnover. Therefore, 90 per cent. of such commission, interest etc. was excluded from the profits derived from the export. Therefore, even without the clarification such items did not form part of the formula in section 80HHC(3) for the simple reason that they did not emanate from the export turnover , much less any turnover. Even if the assessee was an exclusive dealer in exports, the said commission was not includible as it did not spring from the turnover . Just as interest, commission etc. did not emanate from the turnover , so also excise duty and sales tax did not emanate from such turnover. Since excise duty and sales tax did not involve any such turnover, s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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