Andhra Pradesh And Telangana H.C : The claims of the respondent, referable to section 80HH, section 80HHC and section 80-I of the Act were not accepted by the Assessing Officer

High Court Of Andhra Pradesh And Telangana

CIT vs. Godavari Drugs Ltd.

Section 80HHC

Assessment Year 1994-95

L. Narasimha Reddy And Challa Kodanda Ram, JJ.

IT Tribunal Appeal No. 17 Of 2004

December 2, 2014

JUDGMENT

L. Narasimha Reddy, J. – This is another case, in which we get an occasion to deal with certain facets of section 80HHC of the Income-tax Act, 1961 (for short “the Act”).

2. The respondent is an exporter and is assessed to income-tax. It has been submitting the returns year after year, claiming the benefits under the relevant provisions of law. For the assessment year 1994-95, it claimed deduction under various heads. An order of assessment was passed on February 28, 1997. The claims of the respondent, referable to section 80HH, section 80HHC and section 80-I of the Act were not accepted by the Assessing Officer. An appeal was filed before the Commissioner (Appeals). That was also rejected on September 15, 2000. Aggrieved by that, the respondent filed I. T. A. No. 757/Hyd/2000 before the Hyderabad Bench of the Income-tax Appellate Tribunal. The Tribunal allowed the appeal through a detailed order dated January 24, 2003, and accepted the claims of the respondent. Hence, this further appeal under section 260A of the Act by the Revenue.

3. Sri J.V. Prasad, learned standing counsel for the Department, submits that the Assessing Officer has taken the correct view of the matter in the context of excluding the interest earned on deposits made in relation to activity, referable to section 80HH and section 80-I of the Act but the Tribunal held that such interest qualifies for deduction under those two provisions, without even verifying the source thereof. He further submits that the respondent was not able to point out that the interest yielding deposits were made in connection with the business activity referred to in section 80HH and section 80-I of the Act. Learned standing counsel further submits that the respondent became eligible for the import duty entitlement benefit (IDEB) to the extent of Rs. 3,67,25,867 for the concerned assessment year and the same was liable to be added to its total turnover and though the Commissioner has assigned cogent reasons for such inclusion, the Tribunal reversed the finding without any proper basis. It is urged that the differentiation between the accrual on the one hand and the actual utilisation thereof on the other hand, is hardly relevant in the context of the application of section 80HHC of the Act and that the order passed by the Tribunal in that behalf deserves to be reversed.

4. Sri Pushyam Kiran, learned counsel for the respondent, on the other hand, submits that the Assessing Officer disallowed the inclusion of interest for the amount covered by section 80HH of the Act without any proper verification and that the Tribunal brought such amount under the purview of section 80HH and section 80-I of the Act after verification of the relevant records. It is also urged that neither the Assessing Officer nor the Commissioner of Income-tax (Appeals) have pointed out as to how the interest does not qualify to be added for the amount under those two provisions.

5. Learned counsel further submits that the Tribunal has undertaken the extensive discussion, not only with reference to the relevant sub-sections and clauses of section 80HHC of the Act but also the circulars issued by the Central Board of Direct Taxes (CBDT) and applied the correct principles. He submits that the IDEB, in a way, falls under clause (iiic) of section 28 of the Act and by operation of the proviso to clause (ba) of the Explanation to section 80HHC of the Act, it deserves to be kept outside the total turnover. He contends that even otherwise, the IDEB would be just in the form of an entitlement and it can be said to have accrued to an assessee, only when it is utilised, as and when the corresponding material is imported. He contends that the order passed by the Tribunal does not suffer from any legal or factual infirmity.

6. The respondent herein undertakes not only business of export but also the indigenous one. On account of the nature of business, as well as the location of the business activity, it is entitled to certain benefits under the provisions of Chapter VI-A of the Act. One of it is, the deduction under section 80HH, in tandem with that under section 80-I of the Act. While the former gets attracted on account of the establishment of business or industrial activity, in the backward areas, the latter becomes relevant in the context of various activities mentioned in sub-section (4) thereof. The specified percentage of the profits derived from such activities is permitted to be deducted from the total income. According to the respondent, the interest earned on deposits made by it also qualifies for such deduction.

7. We perused the order of assessment and the orders passed by the Commissioner of Income-tax (Appeals) and the Tribunal. It is not clear as to whether the interest claimed by the respondent was on any specific deposit or otherwise. This much, however, can be said that in case the amount, on which interest is paid is a deposit made in connection with the activity covered by those two sections, it needs to be added to the profits, thereby becomes eligible for deduction. If on the other hand, the deposits that yielded interest are unrelated to the activity, they do not qualify for deduction.

8. In I. T. T. A. No. 216 of 2003 (CIT v. Indo Aquatics Ltd. [2014] 369 ITR 589/[2015] 230 Taxman 412/55 taxmann.com 535 (T & AP)), we held that unless interest yielding deposits are made in connection with the activity, referred to in the particular provision, it does not qualify for deduction. Therefore, we direct that in case the interest in the instant case which is quantified at Rs. 1,68,466 is from any deposit made in relation to the business activity referred to under section 80-I of the Act, it shall qualify for deduction and otherwise not.

9. The second item is in relation to the foreign exchange fluctuation. By its very nature, the consideration for the exported goods is received in foreign exchange. The fluctuations on account of exchange rates would have their own impact on the income of the assessee. The question as to whether the amount representing the fluctuation of foreign exchange rates can be treated as income of export itself was dealt with by the Gujarat High Court in CIT v. Priyanka Gems [2014] 367 ITR 575/51 taxmann.com 259. It was held that the resultant amount on account of the fluctuation of foreign exchange shall be treated as profit, that becomes eligible for deduction under section 80HH of the Act. We follow the same and uphold the view taken by the Tribunal in this behalf.

10. Now arises, a bit complicated and ticklish issue referable to section 80HHC of the Act. The component in question is IDEB. We are not concerned with the other aspects.

11. Section 80HHC of the Act is intended primarily to provide incentives to Indian companies that undertake the activity of export and earn foreign exchange. The amount that qualifies for deduction is broadly mentioned in sub-section (1). However, working out of such amount is a complicated process. Parliament did not intend to segregate export activity of an assessee, from the rest of his activities, obviously because it may pose several complications. A comprehensive method is stipulated thereunder. The turnover of the assessee, with reference to his export activity as well as the total turnover of all the activities are to be taken into account. The profit of the business, which qualifies for deduction is required to have the same proportion, which the export turnover would have to the total turnover. The amount that qualifies for deduction is to be derived through the following formula.

Profits of business × Export turnover

Total turnover

12. Parliament has taken care to define the three different expressions that are employed in the formula. “Export turnover”, “total turnover” and “profits of the business” are defined under clauses (b) (ba) and (baa), respectively, of the Explanation to section 80HHC of the Act, which read :

“(b) ‘export turnover’ means the sale proceeds, received in, or brought into India by the assessee in convertible foreign exchange in accordance with clause (a) of sub-section (2) of any goods or merchandise to which this section applies and which are exported out of India, but does not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962 (52 of 1962) ;

(ba) ‘total turnover’ shall not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962 (52 of 1962) :

Provided that in relation to any assessment year commencing on or after the 1st day of April, 1991, the expression ‘total turnover’ shall have effect as if it also excluded any sum referred to in clauses (iiia), (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 ;”

13. Once these three figures are arrived at, the amount which qualifies for deduction can be known. However, there are certain grey areas in the context of applying the definitions. Many a time, serious doubt arises as to whether a particular amount must be added to the “export turnover” or the “total turnover”. Since the first happens to be numerator and the second, the denominator, in the formula, the addition to one or the other, would make vast difference. Many a time, the assessees would make endeavour to add amounts to the numerator, so that the resultant figure that qualifies for deduction would be large. The Department, on the other hand, would attempt to add it to the denominator, so that the taxable income would be more.

14. The export and import policy framed by the Government from time to time provides for certain incentives. One of it is that an exporter is extended the facility of importing the required raw material free of customs duty. For instance, if the total cost of the unit of exported item is $ 500, and the raw material accounts for 60 per cent of its cost, the exporter would be entitled to import raw material worth $ 300, without payment of excise duty. If the excise duty payable thereof is 40 per cent, he would stand to the benefit of $120 or its equivalent Indian currency.

15. The accrual of the benefit under such incentives is not immediate. It is always in the form of adjustment and each exporter or assessee would follow his own accounting procedure, to ensure that the benefit is properly derived. In the instant case, the respondent became eligible to the extent of Rs. 3,67,25,867 in the form of IDEB. However, it has utilised the same to the extent of Rs. 3,35,26,436. What remained unused is only Rs. 31,99,431. The assessee did not include any component of these figures in his turnover. The Assessing Officer as well as the Commissioner of Income-tax (Appeals) were of the view that the figure of Rs. 3,67,25,867 deserves to be added to the total turnover. The respondent pleaded that if at all any component of this IDEB is to be added, it is only unused and left over portion of it, and not the notional figure. The Tribunal accepted the contention.

16. It has already been mentioned that the addition of a particular amount either to the numerator or denominator would have its own impact. Obviously, for that reason, the CBDT issued circulars explaining the procedure. The Tribunal took the same into account and granted the relief to the assessee.

17. Broadly stated, the principle is that while arriving at the total turnover, adequate care should be taken to avoid inclusion of the amounts that are mentioned in the proviso. We have already observed that the IDEB is referable to clause (iiic) of section 28 of the Act. Even otherwise, the said amount represents the notional figure and it cannot be treated as part of the turnover of an assessee. The facility to the extent of that figure would be available, only when the raw material used in the export goods is imported. It cannot be claimed as a matter of course. The Tribunal followed the circular. Even in relation to such notional figure, the Tribunal has taken a pragmatic and practical view. It held that from the figure representing IDEB, the figure representing the actual availment of the import duty exemption must be deducted and it is only the remainder that would qualify for addition to the total turnover.

18. Learned counsel for the appellant is not able to convince us as to how the notional figure of IDEB in its entirety can be added to the export turnover. We have already extracted clause (b) of the Explanation to section 80HHC of the Act, which defines export turnover. It represents nothing more than the actual sale proceeds of exported goods. By no stretch of imagination, the incentives of duty exemption on imported goods can be treated as sale consideration for export goods much less can it become part of the export turnover. Once it cannot be added to the export turnover, the only possibility is to add it to the total turnover. There again, the proviso would govern the situation and amounts mentioned in the proviso cannot be added to the total turnover for the purpose of section 80HHC. The IDEB partakes of the character of the amounts covered by clause (iii) of section 28 of the Act. By operation of the proviso to clause (ba) of the Explanation to section 80HHC of the Act, it gets excluded from the total turnover.

19. The Tribunal has taken the view that the balance of the unused IDEB can be added to the total turnover. The respondent did not have any grievance about it. We do not find any basis to interfere with the order passed by the Tribunal. The appeal is accordingly dismissed.

The miscellaneous petition filed in this appeal shall also stand disposed of. There shall be no order as to costs.

[Citation : 371 ITR 379]