High Court Of Karnataka
CIT, Central Circle vs. Garniwal Exports (P.) Ltd.
Assessment Year : 2001-02
Section : 80HHC
D.V. Shylendra Kumar
And Mrs. B.S. Indrakala, JJ.
IT Appeal No. 100 Of 2007
June  6, 2013
JUDGMENT
Shylendra Kumar, J. –Â This appeal under Section 260(A) of the Income-tax Act, 1961 is directed against the order dated 16.6.2006 passed by the Income Appellate Tribunal, Bangalore in ITA 2648/Bang/2004 is by the revenue and being aggrieved by the order of the Tribunal allowing the appeal of the assessee and directing the department to extend the benefit of Section 80HHC to the assessee under the Income-tax Act.
2. The assessee is a private limited company and exporter. The assessment year is 2001-02. This appeal has been admitted to consider, “Whether under the facts and circumstances of the case and law the finding of the Tribunal that the amount received towards premium by way of transfer of the export license is entitled for deduction will not fall within Explanation (baa) of Section 80HHC of the Act is justified or perverse?”
3. The brief facts relevant for the assessment year in question are that the assessee is an exporter of readymade garments. He had carried on export activities in the earlier years and for the accounting year corresponding to the assessment year and had been allotted what is known as quota rights issued in favour of the assessee for export to countries with which our country has reciprocal or bilateral agreement. The assessee did not make use of the quota which had been allotted to it for effecting export but instead transferred these quotas to others who paid a price or a premium to the quota which had been allotted to the assessee. In its return, the assessee had claimed in his returns that the consideration received for transferring the quota is akin to earning from export activity and had claimed the benefit of deduction as is provided under Section 80HHC of the Act. The Assessing Officer disallowed the deduction claimed in respect of the price of Rs. 17,78,155/- received by the assessee by way of transfer of quota opining that the amount represented business income of the assessee; that it cannot be attributed to any export activity as the amount is not by export but received within the country; that Section 80HHC benefit being available only to profits derived from an export activity and earning profits from it and following the ruling of the Supreme Court in the case of CIT v. Sterling Foods [1999] 237 ITR 579/104 Taxman 204 wherein the Supreme Court had examined the expression “derived from” and held in this case that there was no direct nexus between the activity of the export and the profits and amount received was not as a result of direct export but may be incidental to the export effected by the assessee in the earlier years, but that does not qualify for the deduction under Section 80HHC as the amount is not derived from export. The Assessing Officer declined the deduction in terms of the assessment order against which the assessee appealed.
4. The assessee appealed to the Appellate Commissioner but met with partial success in the sense that the appellate commissioner opined that the assessee’s case is covered by Explanation (baa) to section 80HHC and therefore, the amount claimed for incentive i.e., 90% should be excluded and only for 10% the benefit can be extended.
5. As against this decision of the appellate commissioner, the assessee further appealed to the tribunal contending that Explanation (baa) to Section 80HHC is not applicable while the Assessing Officer erred in not granting any relief, the appellate commissioner also committed an error in directing exclusion of 90% of the amount by wrongly relying on Explanation (baa) and therefore, the appeal should be allowed and the assessee be extended full benefit in terms of Section 80HHC.
6. This argument found favour with the appellate Tribunal as the appellate Tribunal opined that the earning of the assessee by the transfer of quotas cannot be said to be covered by the Explanation (baa) to section 80HHC as it had a link to the provisions of Section 28(iiia), (iiib), (iiic), (iiid) and (iiie), assessee’s profits from the business where such income is derived under Section 28(iv) of the Act and therefore, deduction of 90% of the claim was not justified and accordingly, extended full benefit to the assessee.
7. It is against this order of the Tribunal, the present appeal by the revenue and as noticed earlier, the question of law is as indicated above.
8. Notice had been issued to the respondent and respondent is represented by counsel Sri Mahesh Kiran Shetty.
9. Submission of the learned standing counsel appearing on behalf of the appellant/revenue Sri Aravind is that the Assessing Officer had rightly declined the benefit of Section 80HHC to the assessee as the amount earned by the assessee did not represent the income derived by an export activity; that it was an income earned by transfer of the quota within the country and the amount received is not by converting foreign exchange to any local currency; that it does not amount to an export activity; that the very purpose and object of giving benefit in respect of deduction is to augment the earning of foreign exchange; that by the activity of sale of quotas, the assessee had not earned any foreign exchange; that in fact the quota is earmarked fixing the quantity that can be exported by exporter depending on his earlier performances and the assessee has claimed the benefit of Section 80HHC on the actual exports which he had carried out during the earlier assessment year but, he had not carried on any export activities during the relevant year and therefore, the Assessing Officer had rightly declined the claim of the assessee for benefit under Section 80HHC.
10. However, learned standing counsel for the appellant/revenue submits that in the appeal before the Appellate Commissioner the appellate commissioner had extended the benefit to the assessee by invoking the provisions of Explanation (baa) to Section 80HHC but the revenue having not appealed against this part of the order for the purpose of seeking any relief, the relief as extended by the appellate Tribunal cannot be denied to the assessee and the view taken by the Tribunal in the appeal of the assessee being erroneous, the revenue is in appeal and to that extent the matter requires examination. Learned counsel further submits that the issue is not res integra and is covered by 2 direct decisions, rendered in the context of provisions of Section 80HHC (1) by the Division Bench of this Court in the case of Anil Dang v. ITO [2012] 344 ITR 143/209 Taxman 22 (Mag.)/24 taxmann.com 135 and (2) decision of the Delhi High Court in CIT v. Nagesh Knitwears (P.) Ltd. [2012] 345 ITR 135/210 Taxman 145/22 taxmann.com 309 wherein in an identical situation the Delhi High Court has opined that the assessee is not entitled for the benefit of Section 80HHC in the case of transfer of export quotas.
11. Reliance was also placed on the decision of the Supreme Court in the case of Sterling Foods (supra) on which the Assessing Officer also placed reliance wherein the word ‘derived from’ had come iii for interpretation and it has been held that unless there is a direct nexus to the export activity, it cannot be called as ‘derived’ but it may be incidental to the export activity in the sense, the quotas are incidental to the export made by the assessee in the earlier years.
12. Reliance is also placed on another decision of the Supreme Court in the case of Liberty India v. CIT [2009] 317 ITR 218/183 Taxman 349 at paragraphs 13 to 18 wherein the words ‘derived from’ had come in for further examination and the earlier view is also followed and though, these two decisions of the Supreme Court were rendered in the context of the provisions of Sections 80HH, 80-IA and 80-IB of the Act respectively, they are also in the nature of export incentive deductions allowed and assessee’s earnings attributable to an export activity and derived from export has been explained in these two decisions and the ratio equally applies to the deductions of Section 80HHC of the Act. It is therefore submitted that the view taken by the Tribunal is not correct in reversing the order of the appellate commissioner as in the first instance, the assessee was not at all entitled to any benefit under Section 80HHC of the Act having not carried on any export activity nor the amount received from the transfer of quotas, is in the nature of income derived from the nature of export activities. Therefore submits that the question should be answered in the affirmative and appeal be allowed.
13. On the other hand Sri Mahesh Kiran Shetty – learned counsel appearing for the respondent/assessee submits that the assessee had been carrying on the activity of exports that the quota allotted to the assessee was very much incidental to the business of the assessee; that the quota was again only to export goods and earn foreign exchange; instead of the assessee exporting the goods directly, the assessee has transferred the quotas to another manufacturer or exporter who on effective utilization of the same, earned foreign exchange and therefore, the assessee cannot be denied the benefit of Section 80HHC(i) of the Act.
14. Sri Mahesh Kiran Shetty would place reliance on the decision of Supreme Court in the case of CIT v. Baby Marine Exports [2007] 290 ITR 323/160 Taxman 160wherein the Supreme Court had an occasion to examine the provisions of Section 80HHC(1A) of the Act in the case of an assessee who is very much analogous to the assessee herein and the decision of the Supreme Court being later commends itself for acceptance and in this view of the matter, no interference is called for the order passed by the Tribunal. Learned counsel also drew our attention in particular to the observations of the Supreme court in the context of Section 28(iv) of the Act wherein such income earned by assessee by the transfer of export quota rights is also treated as business profits and therefore transfer of such quota being in the nature of a business profit and taxable and explanation (baa) having not made any reference to the provisions of Section 28(4) of the Act, the deduction of 90% from the claim for the benefit is not justified and therefore, the Tribunal having opined that the provisions of Explanation (baa) to Section 80HHC having not been attracted, the view taken by the appellate commissioner being erroneous, the Tribunal has rightly reversed the same and therefore, no interference is called for.
15. However, Sri Aravind, learned counsel seeks to distinguish the Judgment of the Supreme Court in the case of Baby Marine Exports (supra) pointing that the case before the Supreme Court was of a manufacturer selling goods to export house coming under Section 80(HHC)(1) and the ratio of this case is also not applicable as in respect of a supporting manufacturer, the exporter would have issued a certificate to the value of the goods exported/purchased from the supporting manufacturer and the benefit of Section 80HHC(1) is regarding a claim either by the exporter or on the basis of the certificate to the extent of supply made by supporting manufacturer and cannot be claimed by both and therefore, the present case of the assessee/respondent has no comparison to case considered by the Supreme Court. It is further submitted that in the present case, the export activity is yet to take place; that there is no manufacturing of goods which are exported through an export house and no earning of foreign exchange and it is all speculative and at any rate it is not a benefit expressely conferred under Section 80HHC(1) of the Act and therefore, the assessee cannot claim a benefit either by an analogy or by way of extension of a benefit provided under another Section. Section 80HHC and Section 28 reads as under:
“80HHC—(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 to the extent of profits, referred to in 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 Hading 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, 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 House
Explanation : (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;
Section 28: The following income shall be chargeable to income-tax under the head ‘profits and gains of business or profession’
(i) to (iii)** ** **
(iiia) profits on sale of a licence granted under the Imports (Control) Order, 1955, made under the Imports and Exports (Control) Act, 1947 (18 of 1947);
(iiib) cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India;
(iiic) any duty of customs or excise repaid or repayable as drawback to any person against exports under the Customs and Central Excise Duties Drawback Rules, 1971;
(iiid) any profit on the transfer of the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme under the export and import policy formulated and announced under section 5 of the Foreign Trade (Development and Regulation) Act, 1992 (22 of 1992);
(iiie) ** ** **
(iv) the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession;”
16. We have bestowed our attention to the grounds urged in this appeal, submissions made at the bar by the learned counsel for the appellant and the respondent and examined the authorities relied upon by the learned counsel.
17. In the decision of this Court in the case of Anil Dang (supra) it is held that in order to qualify for benefit under Section 80HHC, the profit earned should have a nexus to the export of the goods directly merchandised and assessee who had transferred an export order, did not earn foreign exchange as being part of his business work nor any profits earned from such transfer of export order and therefore, does not qualify for deduction. This Court in fact referred to the decision of the Supreme Court in the case of’ Baby Marine Exports (supra) was distinguished on the premise that the case of assessee was not one of a supporting manufacturer and therefore, extending the benefit was not justified and the Tribunal had rightly done so and no interference at the hands of this Court at the behest of the assessee was called for.
18. The decision of the Delhi High Court in the case of Nagesh Knitwears (P.) Ltd. (supra) wherein it was held that in the case of premium payment received on transferring export quotas, it does not involve any earnings of foreign exchange and does not result in profits attributable to an export activity for the purpose of Section 80HHC and no deduction under Section 80HHC can be claimed. This decision is also identical to the present case wherein in the 2 decisions of the Supreme Court relied upon, the word “derived from” has been interpreted and a direct nexus to the export activity is what is stressed upon.
19. The entitlement to a quota and a premium or price for the transfer of a quota may be incidental to the export activity carried on by the assessee earlier but has no direct nexus in the sense that no export is found in the hands of the assessee in respect of this amount. Though Mr. Mahesh Kiran Shetty has strenuously urged that the activity is incidental in the sense that the export quota is allotted only to an exporter who has effected export and based on the value of the exports of the earlier years, that does not mean that the transfer of export quota has resulted in the earning of foreign exchange in the hands of the assessee or transferor of the quota. It is also to be seen that the assessee in fact had derived the benefit of Section 80HHC already in respect of its exports and may be the transferee of the quota as and when the exports are effected, can claim benefit under this but not the assessee. The assessee does not qualify for the benefit under Section 80HHC(i) of the Act.
20. The reference to provisions of Sec.28(iv) of the Act by the Tribunal which in terms states that the value of any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession shall be chargeable to tax, does not mean that any amount received by way of transfer of export quota is to be taken as a profit and gain of business and therefore does not automatically qualify as profit earned during an export activity to gain the benefit under Section 80HHC(i) of the Act.
21. We find that the reference made to the provisions of explanation (baa) and the corresponding provisions of Section 28((iiia),(iiib),(iiic),(iiid)) etc. by the appellate commissioner and the corresponding benefit to the extent of 10% of the value in our considered opinion was not very apt but as in respect of this part of the order, the revenue has not appealed against further, we do not propose to examine this question any further as it has resulted in some benefit in favour of the assessee and that’s not questioned by the revenue in this appeal nor before the Tribunal.
22. Deduction under Section 80HHC is a specific incentive deduction provided in respect of profits earned directly from export activity resulting in earning foreign exchange under the scheme of this provision, the benefit is extended once and not again and again. It is not in dispute that the assessee had once derived the benefit in respect of its exports. It may be a different possibility that the quota earmarked to an exporter is based on his earlier performance but merely earmarking the quota itself will not result in an export activity of goods or merchandise. If the assessee had utilized the quota himself and should have effected exports for the value to the extent of the quota, the assessee would have definitely been eligible for the deduction but that has not happened in the present case. As earlier noticed, the export activity has fully taken place and if at all, it is only thereafter the question could have arisen, that is not the situation in the present case the provisions of Section 80HHC are in the nature of an incentive deduction provided for a specific performance which should be strictly construed, it cannot be extended by way of analogy or comparison or on an interpretation though an activity otherwise than in respect of which benefit is certainly conferred.
23. We are satisfied that in the present situation the assessee in the first instance was not even entitled to the benefit of Section 80HHC and therefore, the question of applicability or otherwise of explanation (baa) also does not arise. However, as the Tribunal has proceeded to allow the appeal on the premise that the assessee’s case did not fit into Explanation (baa) of Section 80HHC and has allowed the appeal and as we find that the assessee is not at all entitled for any relief, the relief which the assessee has been given to a limited extent which the assessee got before the appellate commissioner and to that extent the order has become final but for the purpose of answering the question, we answer the question in the negative against the assessee and in favour of the revenue.
24. Therefore, this appeal is allowed. The order of the appellate Tribunal is set aside and the order passed by the appellate commissioner is restored.
[Citation :Â 356 ITR 432]
