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TMI Blog2010 (8) TMI 1159X X X X Extracts X X X X X X X X Extracts X X X X ..... 42,28,998/- in the business profit considering the same as part of business profit for the purpose of computing deduction u/s.80HHC of the I.T.Act. 4. The ld.CIT(A) erred in law and on facts of the case in directing to exclude excise duty and sales tax amounting to ₹ 1,64,34,268/- and ₹ 60,61,333/- respectively from the total income for the purpose of computation of deduction u/s.80HHC of the Act. 5. On the facts and in the circumstances of the case, the ld.CIT(A) ought to have upheld the order of the Assessing Officer. 6. It is, therefore, prayed that the order of the Ld. CIT(A) may be cancelled and that of the Assessing Officer may be restored to the above effect." 2. Adverting first to ground no.1 in the appeal, facts, in brief, as per relevant orders are that that the return declaring income of ₹ 1,53,59,416/ - filed on 30.11.2003 by the assessee, an engineering company engaged in manufacturing various process control equipments, after being processed on 24.1.2004 u/s 143(1) of the Income-tax Act, 1961 [hereinafter referred to as the "Act "] , was selected for scrutiny with the issue of notice u/s 143(2) of the Act on 28-11-2004. During the course of asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... matter, we have no alternative but to uphold the findings of the ld. CIT(A). Therefore, ground no.1 in the appeal is dismissed. 6. Ground nos. 2 & 3 relate to exclusion of receipts on account of interest, servicing and commissioning, packing and forwarding, GST set off & excise modvat from the profits of the business while computing deduction u/s 80HHC of the Act. The AO noticed that the assessee claimed deduction of ₹ 19,81,496/- under 80HHC of the Act. Since the receipts on account of interest( ₹ 2,35,069), servicing and commissioning (₹ 2,71,005), packing and forwarding ( ₹ 61,41,862),GST set off(₹ 8,09,046/-) and excise modvat (₹ 42,28,998) were not derived from the export business of the assessee, the AO excluded 90% of these receipts while working out profits of the business in terms of explanation(baa) to sec. 80HHC of the Act, relying inter alia, on the decisions in the case of Nathan Steels Ltd.,57 ITD 584(Mumbai),Hindustan Lever Ltd. vs. CIT,239 ITR 297(SC),Sterling Foods vs. CIT,237 ITR 579(SC) and Pandian Chemicals Ltd. vs. CIT,262 ITR 278(SC) 7. On appeal, the learned CIT(A) allowed the claim of the assessee in respect of receipts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 the element of export turnover. Clause (baa) of the explanation states that 90 per cent. of the incentive profits or receipts by way of brokerage, commission, interest, rent, charges or any other receipt of like nature included in business profits have to be deducted from business profits computed in terms of sections 28 to 44D. In other words, receipts constituting independent income having no nexus with exports were required to be deducted from business profits under clause (baa). Hon'ble Supreme Court further observed that a bare reading of clause (baa)(1) indicates that receipts by way of brokerage, commission, interest, rent charges, etc., formed part of the gross total income being business profits. But for the purpose of working out of formula and in order to avoid distortion in arriving at the export profits clause (baa) stood inserted to say that although incentive profits and "independent incomes" constituted part of the gross total income, these had to be excluded from gross total income because such receipts had no nexus with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecomes clear that every receipt may not constitute sale proceeds from exports. That, every receipt is not income under 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." …………………………………………………………………………… "Before concluding we state that the nature of every receipt needs to be ascertained in order to find out whether the said receipt forms part of/or that it has an attribute of an export turnover. When an indirect tax is collected by the taxpayer on behalf of the Government the tax recovered is for the Government. It may be an income in the conceptual sense or even under the Income-tax Act but while working out the formula under section 80HHC(3) of the Income-tax Act and while applying the four variables one has to ascertain whether the receipt has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge nor go behind the language employed by the Legislature so as to ascertain the intention of the Legislature. This would become necessary only when the language employed by the statute is ambiguous in any manner. In the present case that cannot be termed to be the situation. Therefore, the ground raised on behalf of the appellant as regards the interpretation to be placed on clause (baa) of the Explanation to section 8OHHC of the Act does not merit acceptance and fails." 8.2 In view of the aforesaid judgment of the Apex Court in the case of K. Ravindranathan Nair(supra) , it is evident that any independent income which is not derived from the export activities in terms of section 80HHC(2) of the Act but is otherwise assessed as business income , 90% of such receipts have to be reduced from the profits of the business in terms of explanation (baa) to sec. 80HHC of the Act. 8.3 Moreover, Hon'ble Punjab and Haryana High Court in the case of Liberty Footwear Company Vs. CIT, 283 ITR 398,held that 90 per cent of receipts from rent and hire charges be excluded from the profits of business as computed under the head "Profits and gains of business or profession. 8.4 Hon'ble Bombay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rived from the export business, it will not be entitled to claim deduction under section 80HHC in respect of it". 8.71 In another judgment reported in CIT v. Cochin Refineries Ltd. [1985] 154 ITR 345, Hon'ble Kerala High Court held: "Profits and gains are well understood to mean only the business income, and not any other income. So long as the company has no business of lending money, and so long as the admitted case of the company is that the income derived is only on account of the peculiar situation arising from the time schedule for repayment of the loans, it cannot be stated that the income yielded by the deposits or investments was received in the course of the company's business so as to be treated as a business profit" 8.72 We find that in Urban Stanislaus Co. [2003] 263 ITR 10 (Ker) where the assessee had contended that as a condition for obtaining a loan from the bank, 29 per cent. of the sale receipts had to be deposited by way of security. It was claimed that the interest earned on such deposit was business income for the purpose of section 80HHC. This was negatived by the Hon'ble Kerala High Court by observing that: "the assessee can claim ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the nexus theory and declined to treat such interest earned as business income. An assessee who is engaged in the business of exports and invests the surplus funds in fixed deposits will not be able to treat the interest earned thereon as business income since it does not bear any direct nexus with the export business of the assessee. Hon'ble jur isdictional High Court in the case of CIT Vs. Gaskets & Radiators Dist r ibutors,296 ITR 440(Guj) relying , inter al ia, on the decision of the Hon'ble Supreme Court in Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278 held that receipts on account of interest on deposits is not requi red to be considered for deduct ion u/s 80HHC of the Act. Hon'ble High Court held in fol lowing terms: "Identical question came to be considered by the Hon'ble Supreme Court in Pandian Chemicals Ltd. v. CIT [2003] 262 ITR 278 and the question, which was posed for consideration before the apex court was whether the interest on deposits with the Tamil Nadu Electricity Board should be treated as income derived by the industrial undertaking for the purpose of section 80HH or not, and the hon'ble Supreme Court has observed that section 80HH of the Income- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aa), as referred to above, talks of procedures, as to how profits of business are to be computed. It provides that in case, incomes of the kind including interest are included in the profits of business, 90 per cent thereof shall be reduced therefrom. It does not make any distinction between the interest earned from source 'A' or source 'B'. Interest from wherever it is earned retains the character of interest. Be it an interest from the customer on delayed payment of dues." 8.8 Recently, Hon'ble Bombay High Court in their decision dated 8.4.2010 in ITA no. 2186 of 2009 in the case of M/s Dresser Rand India Pvt. Ltd. while following the aforesaid decision of Hon'ble Apex Court in the case of K. Ravindranathan Nair(supra) and distinguishing the decision in Bangalore Clothing(supra) concluded that recovery of freight, insurance and packing receipts, sales tax refund and service income, being independent incomes, 90% of these receipts have to be reduced from the business profits in terms of explanation (baa) to sec. 80HHC of the Act. 8.9. During the course of hearing of the appeal, the ld. AR was pointed out a recent decision dated 18/19/3/2010 of the Hon'ble Bombay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pra) & Dresser Rand India Pvt. Ltd. (supra) , we find merit in the contentions of both the parties and accordingly, vacate the findings of the ld. CIT(A) and restore the matter to the file of the ld. CIT(A) with the directions to ascertain as to whether or not the aforesaid receipts on account of interest, servicing & commissioning, packing and forwarding , GST set off and excise modvat were independent income or were in any manner related to export activities of the assessee and thereafter, adjudicate the matter in accordance with law after allowing sufficient opportunity to the assessee in the light of various judicial pronouncements, including those referred to above. With these directions, ground nos. 2 &3 in the appeal are disposed of. 10. Ground no.4 in the appeal relates to the exclusion of excise duty and sales tax from the total turnover for the purpose of computation of deduction u/s 80HHC of the Act. The assessee while calculating total turnover, excluded excise duty of ₹ 1,64,34,268/- and sales-tax of ₹ 60,61,333/- for the purpose of deduction u/s 80HHC of the Act. However, the AO while relying on the provisions of section 145A of the Act and a number of de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evant word. In the circumstances, we cannot interpret the words "total turnover" in the above formula with reference to the definition of the word "turnover" in other laws like Central Sales Tax or as defined in accounting principles. Goods for export do not incur excise duty liability. As stated above, even commission and interest formed a part of the profit and loss account, however, they were not eligible for deduction under section 80HHC. They were not eligible even without the clarification introduced by the Legislature by various amendments because they did not involve any element of turnover. Further, in all other provisions of the Income-tax Act, profits and gains were required to be computed with reference to the books of account of the assessee. However, as can be seen from the Income-tax Rules and from the above Form No. 10CCAC in the case of deduction under section 80HHC a report of the auditor certifying deduction based on export turnover was sufficient. This is because the very basis for computing section 80HHC deduction was "business profits" as computed under section 28, a portion of which had to be apportioned in terms of the above rat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been accepted by the Assessing Officer, if so, then excise duty and sales tax also cannot form part of the "total turnover" under section 80HHC(3), otherwise the formula becomes unworkable. In our view, sales tax and excise duty also do not have any element of "turnover" which is the position even in the case of rent, commission, interest etc. It is important to bear in mind that excise duty and sales tax are indirect taxes. They are recovered by the assessee on behalf of the Government. Therefore, if they are made relatable to exports, the formula under section 80HHC would become unworkable. The view which we have taken is in the light of the amendments made to section 80HHC from time to time." 13.1 Section 80HHC of the Income-tax Act, 1961 is a beneficial section and was intended to provide incentive to promote exports. The intention was to exempt profits relatable to exports. As observed by the Hon'ble Apex Court, one cannot interpret the words "total turnover" with reference to the definition of the word "turnover" in other laws like the Central sales tax or as defined in accounting principles. The words "total turnover" in section 80HHC have to ..... X X X X Extracts X X X X X X X X Extracts X X X X
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