High Court Of Karnataka
Anil Dang vs. ITO, Ward 7(1), Bangalore
Assessment Year : 2001-02
Section : 80HHC
Mrs. Manjula Chellur And Aravind Kumar, JJ.
IT Appeal No. 1252 Of 2006
December 30, 2010
JUDGMENT
Aravind Kumar, J. – This appeal is by the asseesee under Section 260A of Income-tax Act, 1961 being aggrieved by the order passed by ITAT, Bangalore Bench in ITA No.l928(Bang)/2004 dated 19-5-2006. This Court by order dated 17-1-2007 has admitted the appeal to answer the following substantial questions of law:
(1) Whether on the facts and in the circumstances of the case, the Hon’ble Tribunal was right in law holding that the professional charges received by the appellant would fall under explanation (baa) below Section 80HHC in spite of its clear finding that such professional charges were received not only for procuring order but also for supervising production and quality and ensuring shipment in time?
(2) Whether on the facts and in the circumstances of the case, the Hon’ble Tribunal was right in law applying the Explanation (baa) in respect of receipts for rendering composite services consisting of procuring order, supervising production and quality and ensuring shipment in time when the said Explanation deals only with the receipts in the nature of brokerage, commission, interest, rent, charges or any other receipt, of a similar nature?
(3) If the answer to question 2 is in the affirmative, whether on the facts and in the circumstances of the case, the Hon’ble Tribunal was right in, law in not issuing directions to bifurcate the professional charges between procuring order and rendering other services so as to exclude only that part of professional charges as attributable to procuring order in computing profits of the business?
(4) Whether on the facts and in the circumstances of the case, the Hon’ble Tribunal was right in law in rejecting the alternative plea of the appellant for exclusion of only net receipts so received in spite of its clear finding that the appellant had incurred certain definite expenses towards rendering the said professional charges?
Facts of the case.
2. Assessee is the proprietor of M/s Tycoon International, which firm engaged in the manufacturing and export of garments. For the assessment year 2001-02 return of income was filed and assessee had computed the allowable profits under Section 80HHC of the Act in his return of Income. It was noticed by the Assessing Officer during the Course of assessment proceedings that Assessee had received a sum of Rs. 18,45,733/- from M/s Indus Textiles Limited in Indian currency for having passed on the export order to Indus Textiles limited. Thus, Assessing Officer while computing deduction under Section 80HHC disallowed the same while arriving at the profit from export of goods or merchandise, in view of Explanation (baa) to Section 80HHC and accordingly determined the total turnover.
3. Being aggrieved by this order assessee carried the matter in appeal, before Commissioner of Income-tax (Appeals) who directed the Assessing Officer to consider exclusion of 90% of professional charges out of Rs. 18,45,733/- claimed in full (100%) by assessee and also held that stitching charges of Rs. 15,39,707/- and sale of fabrics of Rs.5,07,035/- to be treated as part of business profit. The Appellate authority rejected the alternate plea of the assessee to exclude only the net receipts.
4. Aggrieved by the same assessee filed appeal before Income Tax Appellate Tribunal against the order of CIT (Appeals) vide appeal No. 1928(Bang)/2004. Tribunal dismissed the appeal filed by the assessee and confirmed the order of Commissioner of Income Tax (Appeals) by order dated 19.5.2006. On the facts enumerated herein above substantial questions of law came to be framed by this Court by order dated 17-1-2007 while admitting the appeal.
5. Heard arguments addressed by the learned advocates.
6. Sri. Chaitanya Hegde, learned counsel appearing on behalf of the appellant assessee would contend explanation (baa) to section 80HHC is not applicable to the assessee and CIT (Appeals) had erred in including the professional charges received in the business profits and excluding such charges from the total turnover. He would contend that clause (1) of explanation (baa) provides for reduction of profits by 90% 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 similar nature included in such profits and as such the Assessing Officer erred in applying Explanation (baa) to Section 80 HHC to the claim of assessee. He would also contend the principles of Ejesdum Generis would apply to the facts of the case since the amount received by the assessee in the instant case would not fall within the meaning of brokerage, commission, interest, rent, charges or any other receipt of a similar nature and in support; of this proposition he relies upon the judgment of Chunilal V.Mehta &, Sons Ltd., v. Century, Spg. &. Mfg. Co. Ltd. AIR 1962 SC 1314.
7. He would also elaborate his submission to contend that Tribunal has not considered the fact that appellant was able to identify and establish the nexus between the expenses incurred and professional charges earned and thus assessee had clearly bifurcated the expenses incurred by him and Tribunal erred in upholding the order of the Commissioner that 90% of gross receipts should be deducted by computing the profits of the business without directing Assessing Officer to exclude only that part of professional charges as attributable to procuring order while computing business profits. He would contend that Kerala High Court in the case of Baby Marine (Eastern) Exports v. Asstt. CIT [2003] 262 ITR 88/ 131 Taxman 546 has held that assessee who was exporting the Marine goods through export house and receiving from export house “Premium” or “service charges” in excess of FOB prices is entitled to deduction in respect of such service charges as the same could not be regarded as brokerage, commission, interest or charges or collection of any amount of similar nature as described in 80HHC (4B) which principle is clearly applicable to the facts of the present case. In support of his submissions he also relies upon the following judgments:
1. CIT v. K. Ravindranathan Nair [2007] 295 ITR 228/ 165 Taxman 282 (SC).
2. CIT v. Baby Marine Exports [2007] 290 ITR 323 / 160 Taxman 160 (SC).
3. Baby Marine (Eastern) Exports (supra)
4. CIT v. Kiran Processors [2007] 288 ITR 165 / 158 Taxman 407 (Mad.)
5. CIT v. Bangalore Clothing Co. [2003] 260 ITR 371 / 127 Taxman 637 (Bom.)
6. CIT v. Sharda Gum & Chemicals [2007] 288 ITR 116 / 172 Taxman 347 (Raj.)
8. He would also contend that it is the net receipts which ought to have been deducted while computing the profits of the business and not the gross receipts particularly when the assessee had bifurcated the expenses incurred by him and demonstrated same before the CIT (Appeals). In support of this proposition he relies upon the decision in the case of CIT v. Sri Ram Honda Power Equip [2007] 289 ITR 475 / 158 Taxman 474 (Delhi). He therefore submits that substantial questions of law be answered in favour of the assessee and appeal be allowed.
9. In reply it has been argued by Mr. M.V. Seshachala, learned Senior Standing Counsel for revenue that assessee is not a supporting manufacturer as per sub-Section (1A) of Section 80HHC for claiming deduction under Section 80HHC. He would contend that sub-section (1) of Section 80HHC postulates that (i) Assessee should be an exporter and (ii) goods or merchandise should have been exported by the assessee himself and only then assessee would be entitled to claim benefit flowing from section 80HHC(1). He submits that in the instant case assessee having procured an export order did not execute it by himself and export the goods. On the other hand, export order was endorsed or forwarded by M/s Indus Textiles Limited for executing the order and exporting the goods as per the Order placed by the overseas customer and in turn the assessee received charges and thus assessee having not exported any goods or merchandise relating receipt of professional charges of Rs, 18,45,733/- claimed by assessee was not allowable as deduction under Section 80HHHC. He would submit that orders passed by the Assessing Officer as confirmed by the Appellate Authority and the Tribunal does not call for any interference. In support of his submission he relies upon following decisions:
(1) Hero Exports v. CIT [2007] 295 ITR 454 / 165 Taxman 445 (SC)
(2) CIT v. Gokuldas Exports [2011] 333 ITR 214 /[2012] 20 taxmann.com 491 (Kar.).
Our Findings
10. The narrow compass within which we will have to deal with the question in the instant case is whether the Assessing Officer was justified in denying the claim of the assessee under Section 80 HHC for deduction of Rs. 18,45,733/- said to have been received as professional charges and if so whether the gross charges is to be taken into consideration or the net charges.
11. Assessee is engaged in the business of manufacture and export of garments. For the assessment year 2001-02 return of income came to be filed on 31-12-2001 declaring total income of Rs. 4,48,438. During the relevant previous year, as per profit and loss account, sales and other income of the assessee was shown in the return of income as Rs. 5,57,16,453/- and as per schedule VI to the profit and loss account the details thereof was shown as under:
| Export turnover | Rs. 4,53,48,289/- |
| Duty drawback | Rs. 60,94,232/- |
| Interest received on FD | Rs. 69,195/- |
| Finishing charges | Rs. 3,61,004/- |
| Professional charges | Rs. 18,45,733/- |
12. Under section 80HHC Exporter are allowed, in the computation of total income, a deduction of the entire profits derived from experts. The Export profit is computed on the basis of the ratio of export turnover to total turnover. The formula as accepted by both the Assessee and Revenue for arriving at export profits is as under:
| Business Profits × export turnover | = Export profits |
| Total turnover |
13. As per report under Section 80HHC annexed to the return of income the assessee has computed adjusted total turnover at Rs. 4,96,21,221/-, adjusted expert turnover at Rs. 4,73,46,289/- and adjusted business profit at Rs. 16,93,770/-. On query by the Assessing Officer to the assessee to furnish as to how these figures have been worked out the assessee submitted a working sheet during the course of scrutiny proceedings and same has been extracted by the Assessing Officer at paragraph 2.2 of the assessment order. Though the assessee has reduced out of profits of the business 90% of the duty drawback and interest received on FD but assessee has not reduced 90% of professional charges of Rs.18,45,733/-. On further query from Assessing Officer during the assessment proceedings, assessee submitted a letter dated 29-1-2003 contending that these receipts are considered as business income and also related expenses are considered as business expenses and it was further submitted by the assessee that he would not be able to bifurcate this part of the expenses separately since administrative set up are common to export business and the activity of indirect exports.
14. It is not in dispute that assessee received this amount of Rs. 18,45,733/- from M/s. Indus Textiles Limited in Indian currency. It is also not in dispute that it is the assessee who received the order to export the goods and instead of exporting the goods by itself it passed on the order to M/s. Indus Textiles Limited. It has been contended before the Appellate Authority as well as before this Court that the said amount of Rs. 18,45,733/- received by the assessee was professional charges for the activity of getting the export order of readymade garments, supervising the production and quantity, ensuring its shipment on time and also ensuring that sale proceeds are received for the party and for such activity assessee had received charges at 7% of the export proceeds.
15. Section 80HHC and explanation thereto relevant to assessment year reads as under:
Deduction in respect of profits retained for Export business.
“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 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 manufacture, 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) (1B) (2) (a) (3) (3A) (4) (4A) (4B) and (4C) (a) & (b)**
Explanation.- For the purposes of this section,-
(a) “convertible foreign exchange” means foreign exchange which is for the time being treated by the Reserved Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Regulation Act, 1973 (46 of 1973), and any rules made thereunder;
(aa) “export out of India” shall not include any transaction by way of sale or otherwise, in a shop, emporium or any other establishment situate in India, not involving clearance at any customs station as defined in the Customs Act 1962 ( 52 of 1962}:}
(b) export turnover” means the sale proceeds [received in, or brought into, India! by the assessee in convertible foreign exchange] in 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) and (iiic) 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) and (iiic) 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;]
1(c)] “Export house Certificate” or ‘Trading House Certificate” means a valid Export House Certificate or Trading House Certificate, as the case may be issued by the Chief Controller of Imports and Exports, Government of India;
[(b)] ” supporting manufacturer” means a person being an Indian company or a person ( other than a company) resident in India, manufacturing (including processing) goods] or merchandise and selling such goods or merchandise to an Export House or a Trading House for the purposes of export;]
[(e)] “special economic zone” shall have the meaning assigned to it in clause (viii} of the Explanation 2 to section 10A”.
It. would emerge from above that primary condition to claim deduction under Section 80HHC would be that the assessee should have derived profit from export of goods or merchandise and failing to fulfil this primary condition the assessee would not be allowed to compute the total income by deducting profits derived from export.
16. A perusal of explanation (baa) to Section 80HHC which defines “profits of the business” would mean and include the profits of the business as computed under the profits and gains and business and profession as reduced by (i) 90% of any sum referred to in clauses (iiia), (iiib) and (iiic) of Section 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipts of similar nature included in such profits (ii) profits of any branch, office, warehouse or any other establishment of the assessee situated outside India. In the instant case Assessing Officer has included 90% of the Professional charges received by the assessee while arriving at the business profits of the assessee by applying explanation (baa) to the facts on hand.
17. It is contended that Tribunal failed to place an interpretation of the aforesaid clause by pressing into service of “Ejesdum Generis” and Mr. Chaitanya Hegde has pressed into service the judgment of Chunilal V. Mehta Ltd.& Sons (supra), wherein the principles of Ejesdum Generis is considered and submits that professional charges received from M/s Indus Textiles Limited would not fall under the species of brokerage, commission, interest, rent and it is to be held as a separate receipt which would fall under the category of profit arising out of Exports of goods or merchandise. As observed by us herein above to claim deduction under Section 80HHC primary condition which assessee will have to satisfy would be that profit so earned would have nexus to export of goods or merchandise. At this juncture it would be of benefit to extract the judgment of the Hon’ble Apex Court in the case of K. Ravindranathan Nair (supra) which reads as under:
“21. At the outset, we may state that, in the present case, we are dealing with the law as it stood during assessment year. 1993-94. At that time s. 80HHC(3) of the IT Act constituted a code by itself. Subsequent amendments have imposed restrictions/qualifications by which the said provision has ceased to be a code by itself. In the above formula there existed four variables, namely, business profits, export turnover, total turnover and 90 per cent of the sums referred to in cl (baa) to the said Explanation. In the computation of deduction under s. 80HI1C all four variables had to be taken into account. All four variables were required to be given weightage. The substitution of s. 80HHC(3) secures profits derived from the exports of eligible goods. Therefore, 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 element of export turnover. This aspect needs to be kept in mind while interpreting cl. (baa) to the said Explanation. The said clause stated that 90 per cent of incentive profits or receipts by way of brokerage, commission, interest, rent, charges or any other receipt of like nature included in business profits, had to he deducted from business profits computed in terms of ss. 28 to 44D of the IT Act In other words, receipts constituting independent income having no nexus with exports were required to be reduced from business profits under cl. (baa). A bare reading of cl. (baa) indicates that receipts by way of brokerage, commission, interest rent, charges etc. formed part of gross toted income being business profits. But, for the purposes of working out the formula and in order to avoid distortion of arriving export profits cl. (baa) stood inserted to say that although incentive profits and ‘independent incomes’ constituted part of gross total income, they had to be excluded from gross total income because such receipts had no nexus with the export turnover. Therefore, in the above formula, we have to read all the four variables. On reading all the variables it becomes clear that every receipt may not constitute sale proceeds from exports. That every receipt is not income under the IT 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 (See : CIT v. Lakshmi Machine Works (supra)”
18. It has also been held in the above Judgement by the Hon’ble Apex Court that deduction has to be from the profits as understood in common sense and in this background when facts of the present case are examined we find in the instant case what has been received by the assessee is a sum of Rs. 18,45,733/- claiming to be professional charges. As to what professional services it had rendered which would have nexus to the export turnover has not been established either before the Assessing Officer or before the Appellate Authority. On the other hand the assessee in the course of assessment proceedings to the query raised by the revenue as to why 90% of the professional charges so received should not be reduced out of profits has submitted a letter dated 29-1-2003 contending that it will not be able to bifurcate this part of the expenses separately since administrative set up and market set up are common to export business and this activity indirect exports. When such being the stand of the assessee itself, it is to be noticed that the words used in explanation (baa)(l) 90% of any amount referred to in clauses (iiia), (iiib) and (iiic) of Section 28 of Income-tax. Act or any receipts by way of brokerage, commission interest, rent, charges or any other receipt of a “similar nature” is required to be deducted. When rerif, commission, brokerage charges etc., though forms pail; of gross total income, has to be excluded as they are “separate incomes” which had no nexus to export turnover, if included would result in arriving at a distorted figure of export profits. Thus, Assessing Authority and the Appellate Authority have not applied the principles of Ejesdum Generis which has been pressed into service to the facts of the ease and if applied it would lead to a situation where the assessee would he entitled to project an erroneous figure relating to “Export Profits” which is not the intention of the lawmakers. This amount which is claimed as deduction under Section 80HHC by the Assessee would not constitute sale proceeds from exports. The assessee in question except procuring the export order has not carried on any activities which has nexus to the export insofar as the receipt of amount of Rs.18,45,733/- is concerned. Hence, question Nos. 1 and 2 formulated hereinabove has to be answered in the affirmative i.e., in favour of the revenue and against the assessee and they are accordingly answered.
19. Re .Questions 3 and 4: The contention of Mr. Chaitanya Hegde is that the Tribunal ought to have issued direction to bifurcate professional charges between procuring the order and rendering other services so as to exclude only that part of the professional charges as attributable to procuring the order in computing “profits of the business”. As against this contention Mr. Seshachala appearing on behalf of the revenue has contended assessee himself has admitted before the Assessing Officer that it would not be able to bifurcate expenses separately and as such the calculation adopted by the Assessing Officer as affirmed by the Appellate Authority does not call for any interference. He would also contend that in K. Ravindranathan Nair’s case (supra) the issue of “Ejusdem Generis” had come up for consideration and relies upon the said judgment. However, in reply Mr.Chaitanya Hegde would contend that as to whether gross or net was not the issue before the apex Court and what was in issue was whether “Process charges” were ineluctable in the total turnover in the formula of Section 80HHC(3) and not with reference to gross or net. In the case of K. Ravindranathan Nair’s case (supra) the Hon’ble Apex Court has held as under:
“19. In our view, for the above reasons, the said processing charges, which was part of gross total income, was an independent income like rent, commission, brokerage etc. and, therefore, 90 per cent of the said sum had to be reduced from the gross total income to arrive at the business profits and since the said processing charge was an important component of business profits, it also had to be included in the total turnover in the said formula to arrive at business profits in terms of cl. (baa) to the said Explanation.”
20. In the instant case when the Assessing Officer selected the case for scrutiny proceedings and raised queries as to why 90% of the professional charges has not been reduced out of ”profits of the business”. The assessee has submitted the letter dated 29-1-2003 and contended that these receipts are considered as business income and related to expenses are considered as business expenses. The assessee himself has stated that he will not be able to bifurcate this part of the expenses separately since administrative set up and market set up are common to export business and this activity of indirect exports. In a similar situation the Hon’ble Apex Court in Hero Exports (supra) while considering entitlement of the assessee as to what extent of expenses has to be attributed to an earning has held as under:
“13. As stated above, in our opinion, the word “attributable in section 80HHC(3)(b) in the main section itself indicates that apportionment (principle of attribution) is not omitted from the said provision of section 80HHC(3)(b). As stated above, the assessee has earned other income of Rs. 1,60,000 apart from the FOB value of exports of Rs 6,50,000. Therefore, some expense has to be attributed to earning of Rs. 1,60,000. If so, the next question which arises is how to allocate the costs? As stated above, the assessee has two incomes with one common pool of expenses and since the principle of attribution has been retained in the scheme of section 80HHC, both in terms of section 80HHC(3), clause (e) to the Explanation to section 80HHC(3)(a), (b) and (c) and in clause (baa) to the Explanation to section 80HHC, instead of going into lengthy exercise of dividing such common expenses, the assessee has estimated the reduction of export turnover by 10 per cent. Of the other income of Rs, 1,60,000 (in the above example). Ultimately, clause (baa) to the Explanation is itself based on the assumption that 10 per cent of the income would be an expense. We make it clear that we are not reading Explanation (baa) into section 80HHC(3)(b). What we say is as a guidance value/factor, 10 per cent of the total other income of Rs. 1,60,000 would be fair estimate. This guidance value is not flowing from, clause (baa) but from the schema of section 80HHC read with the Memorandum to the Finance Act of 1991. Take a reverse case, if allocation of expenses is to be done on actual basis, it would not only be very difficult but in some cases actual apportionment may not be in the interest even of the Department
14. In conclusion, we may state that under section 80HHC(3)(b) one has to balance the “principle of attribution” with the concept of “allocation”. The concept of allocation is meant to reduce the incentive. However, when “allocation” has to be balanced with the “principle of attribution”, the object is to reduce the incentive and not to eliminate it”
The Hon’ble Apex Court has taken into consideration the scheme of Section 80HHC and held that if allocation of the expenses is done on actual basis it would not only be very difficult but in some cases actual apportionment may not be in the interest of the department also. Even in the instant case, the Assessing Officer has deducted 90% of the professional charges received from profits on business by reducing 10% towards charges attributable to procuring the order and thus question Nos.3 and 4 formulated hereinabove is to be answered in the affirmative namely Tribunal was right in not issuing any directions to the Assessing Officer to bifurcate professional charges between procuring order and rendering other services so as to exclude only that part as attributable to procuring order in computing the profits of the business.
21. In view of the above discussion, the following order is passed:
ORDER
The appeal is dismissed. The substantial questions of law formulated herein above is answered in favour of the revenue and against the assessee. The order of the Tribunal in ITA No. 1928 (Bang.)/2004 is hereby confirmed. No order as to costs.
[Citation : 344 ITR 143]
