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TMI Blog2017 (2) TMI 1009X X X X Extracts X X X X X X X X Extracts X X X X ..... ) which defines “indirect costs” has to be read in conjunction with sub-section (3)(c)(ii) of Section 80HHC, which provides that the profits shall be reduced by the “direct and indirect costs attributable to export of such trading goods.” Since the word “attributable” has been used, it is clear that the indirect costs also must be attributable to the export of such goods; in other words, there must be some nexus that the “indirect costs” have to the export turnover of the assessee. Au contraire, if the term “indirect costs” is interpreted to also include such costs which are not attributable to the export of trading goods, then that would go against the language of the provision, as clarified by the Supreme Court. That being the position, in view of the declaration of the law in Hero Exports (2007 (11) TMI 13 - Supreme Court of India ), “indirect costs” computed must have some nexus (or in other words must be “attributable”) to the export of trading goods. The decision of the ITAT on this question is therefore reversed. Written back amounts would constitute “independent income” having no relation to the export profits of the assessee. They have to be excluded by virtue of Expla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Act for ₹ 48,75,358. It claimed deduction under Section 80HHC(3)(a) of the Act on division-wise basis, i.e. by taking the total profit of each division which had made exports and thereafter computing the deduction in the same ratio as export turnover of the division bore to the total turnover of that division. The profits and turnover derived from other divisions were not considered while computing deduction under Section 80HHC for a particular division. The Assessing Officer (AO), while framing the assessment order clubbed the profits and turnover of all the divisions and allowed deduction under Section 80HHC of the Act by considering the various divisions of the assessee as one business. 4. During the relevant assessment year, the assessee was also engaged in the business of export of trading as well as manufacture of goods. The assessee claimed deduction under Section 80HHC of the Act in respect of its trading activity at ₹ 36,27,283. However, in computing the indirect cost of trading goods, the AO reduced the claim to ₹ 17,42,565 thus denying deduction on a sum of ₹ 18,84,718. The assessee had also written back ₹ 13,80,000 on account of li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to export turnover and total turnover of the exporting division separately, instead of the entire business as a whole. In relation to the quantum of indirect costs , the assessee contended that only those amounts could be considered which had some nexus with the export costs, and not all costs debited to the P L Account including manufacturing expenses, which had no nexus with the export of trading goods. Further, in relation to the exclusion of 90% of the amounts written back, the assessee contended that since such written back liabilities were not in the nature of brokerage, commission, interest rent, charges or any other receipt of a similar nature, such amounts would not fall within Explanation (baa) of Section 80HHC. The CIT (A) however rejected this argument, holding that computation of admissible deduction had to be with reference to the total turnover of the entire business as a whole and not just the export division separately. As regards computation of indirect costs , the CIT(A) held that since deduction under Section 80HHC on merchant export was admissible on merchant export turnover as reduced by direct and indirect cost of export, it would not be appropriate to ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee, being an Indian company or a person (other than a company) resident in India, is engaged in the business of 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 to the extent of profit, referred to is sub-section (1B) 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, (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 subsection 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld be governed by clause (b) of sub-section (3). However, that is not the be all and end all of the matter as the whole section pertains to defined goods. Sub-section (1) very clearly provides a rider for the application of section 80HHC in the opening words itself which are as follows : 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 of 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. The goods or merchandise to which the whole section applies are to be found in clause (a) of sub-section (2). The language is extremely important and hence would reproduce the said subsection. (2)(a) This section applies to all goods or merchandise, other than those specified in clause (b), if the sale proceeds of such goods or merchandise exported out of India are receivable by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se. The formula envisaged by the section would be export turnover/total turnover x profits and gains of business . The business contemplated in the section would be restricted to only the goods to which the section applies and, therefore, by necessary implication even the total turnover of the business would be the total turnover of the business of the goods to which the section applies. If we include the turnover of the goods to which the section does not apply, it would amount to doing violence to the language of the sub-section itself. The sub-section has been created only to see the ratio of the income out of the export to the total income out of the business in respect of those goods because of the obvious difficulty of segregating the profits earned out of export alone vis-a-vis the profits earned otherwise than by export. The total profits earned out of the business of such goods are not exemptible because those profits would include both profits out of exports and the profits earned otherwise than by export but one thing is certain that the business contemplated in the sub-section would be in relation to those goods alone to which the section applies as per clause (a) of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... section applies. Inclusion of turnover of goods to which the section does not apply, would be doing violence to the language of Sub-section (3)(b). Sub-section (3) is inserted only to determine the deductible profits out of the total profits of business which can be attributed to the export business. We are in respectful agreement with the rationale adopted by the Madras High Court in Madras Motors Ltd. (supra). As a matter of fact, there could be a circumstance where one unit is completely engaged in export and not partially as was the case in Madras Motors Ltd. (supra). In those circumstances, there would be no occasion for disallowing a portion of the export earnings by adopting formula provided in Section 80HHC of the Income Tax Act. This view was taken by the Madras High Court not only in Rathore Brothers (supra) but also in M.Gani and Company(supra) which in turn followed yet another judgment of the Madras High Courtin the case of CIT v. Suresh B. Mehta MANU/TN/7542/2007 : (2007) 291 ITR 462. In our opinion, the view taken by the Tribunal is in conformity with the decision of the Madras High Court, with which we are in respectful agreement. Therefore, we do not propos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f attribution is retained. Thirdly, keeping in mind the provisions of Section 80HHC(3)(b) read with Clauses (d) and (e) of the Explanation it is clear that Legislature intended allocation of costs between export turnover and total turnover. 14. It is thus clear that Explanation (e) which defines indirect costs has to be read in conjunction with sub-section (3)(c)(ii) of Section 80HHC, which provides that the profits shall be reduced by the direct and indirect costs attributable to export of such trading goods. Since the word attributable has been used, it is clear that the indirect costs also must be attributable to the export of such goods; in other words, there must be some nexus that the indirect costs have to the export turnover of the assessee. Au contraire, if the term indirect costs is interpreted to also include such costs which are not attributable to the export of trading goods, then that would go against the language of the provision, as clarified by the Supreme Court. That being the position, in view of the declaration of the law in Hero Exports (supra), indirect costs computed must have some nexus (or in other words must be attributable ) to the export ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n back amount was squarely covered by the expression any other receipt of similar nature used in Explanation (baa) of Section 80HHC. Therefore, the question before this Court is with respect to the interpretation of the term any other receipt of a similar nature in Explanation (baa). It is trite to say that such a term occurring in a statute must be interpreted ejusdem generis. In this context, the Supreme Court had the occasion to deal with the interpretation of Explanation (baa) in the case of Commissioner of Income Tax v. K. Ravindranathan Nair, (2007) 15 SCC 1: 18. ..The above discussion indicates that the formula in Section 80HHC(3) of the I.T. Act provided for a fraction of export turnover divided by total turnover to be applied to Business Profits calculated after deducting 90% of the sums mentioned in Clause (baa) to the said Explanation. That, profit incentives and items like rent, commission, brokerage, charges etc. though formed part of gross total income had to be excluded as they were independent incomes which had no element of export turnover. That, the said items distorted the figure of export profits. 19. In our view, for the above reasons, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ependent incomes which have no relation to export activity. That being the case, the phrase any other receipt of a similar nature must necessarily relate to incomes under the Act which are not attributable to the export activity of the assessee. 19. In this context, in order to arrive at the profits of the business in terms of Explanation (baa), the profits and gains of business or profession of the assessee has to be computed under the provisions of Sections 28 to 43C of the Act. With respect to liabilities written back, Section 41 provides: (1) Where an allowance or deduction has been made in the assessment for any year in respect of loss, expenditure or trading liability incurred by the assessee (hereinafter referred to as the first-mentioned person) and subsequently during any previous year, - (a) the first-mentioned person has obtained, whether in cash or in any other manner whatsoever, any amount in respect of such loss or expenditure or some benefit in respect of such trading liability by way of remission or cessation thereof, the amount obtained by such person or the value of benefit accruing to him shall be deemed to be profits and gains of busines ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee under Expln. (baa) to s. 80HHC. 11. For this interpretation of Expln. (baa) to s. 80HHC of the Act, we rely on the judgment of the Constitution Bench of this Court in Distributors (Baroda) (P) Ltd. vs. Union of India Ors. (supra). Sec. 80M of the Act provided for deduction in respect of certain intercorporate dividends and it provided in sub-s. (1) of s. 80M that where the gross total income of an assessee being a company includes any income by way of dividends received by it from a domestic company, 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 from such income by way of dividends an amount equal to a certain percentage of the income mentioned in this section. The Constitution Bench held that the Court must construe s. 80M on its own language and arrive at its true interpretation according to the plain natural meaning of the words used by the legislature and so construed the words such income by way of dividends in sub-s. (1) of s. 80M must be referable not only to the category of income included in the gross total income but also to the quantum of the income ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e whether reasons given by the High Court in its judgment in CIT vs. Asian Star Co. Ltd. (supra) were correct in law. 14. On a perusal of the judgment of the High Court in CIT vs. Asian Star Co. Ltd. (supra), we find that the reason which weighed with the High Court for taking a different view, is that rent, commission, interest and brokerage do not possess any nexus with export turnover and, therefore, the inclusion of such items in the profits of the business would result in a distortion of the figure of export profits. The High Court has relied on a decision of this Court in CIT vs. K. Ravindranathan Nair (2007) 295 ITR 228 (SC) in which the issue raised before this Court was entirely different from the issue raised in this case. In that case, the assessee owned a factory in which he processed cashew nuts grown in his farm and he exported the cashew nuts as an exporter. At the same time, the assessee processed cashew nuts which were supplied to him by exporters on job work basis and he collected processing charges for the same. He, however, did not include such processing charges collected on job work basis in his total turnover for the purpose of computing the deduct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m of any of the aforesaid receipts which are allowed as expenses and therefore not included in the profits of business. 22. In the present case, there is no record of the assessee claiming before the authorities below that the liabilities written back related to or were relatable to its export profits. Thus, the observation that if any quantum of any receipt of the nature mentioned in cl. (1) of Expln. (baa) has not been included in the profits of business of an assessee as computed under the head Profits and gains of business or profession , ninety per cent of such quantum of the receipt cannot be deducted under Expln. (baa) to s.80HHC. in ACG Associated Capsules (supra) squarely applies to the facts of this case. Since such amounts written back would fall within the profits and gains of business or profession as computed under Section 41(1), and considering that such amounts do not have any nexus with the export activity of the assessee, keeping the view adopted by K. Ravindranathan (supra) in mind, they would have to be excluded from the profits of the business under Explanation (baa). In other words, such written back amounts would constitute independent in ..... X X X X Extracts X X X X X X X X Extracts X X X X
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