COMMISSIONER OF INCOME TAX DELHI Vs. SHRI RAM HONDA POWER EQUIP
LAWS(DLH)-2007-1-170
HIGH COURT OF DELHI
Decided on January 12,2007

COMMISSIONER OF INCOME TAX,COMMISSIONER OF INCOME TAX DEL,ATUL ANAND,COMMISSIONER OF INCOME TAX DELHI,COMMR.OF INCOME TAX,COMMISSIONER OF INCOME TAX-V N,J.R.SHRAMA OVERSEAS LTD.,COMMISISONER OF INCOME TAX DEL,C.I.T Appellant
VERSUS
COMMISSIONER OF INCOME TAX,RAM KISHAN,GURCHARAN KAUR,SHRI RAM HONDA POWER EQUIP,DAMANJIT SINGH,NEE TEE CLOTHING P.LTD,ALANKAR EXPORTS,DETAILS PROP.TARA KOCHHAR,ANAND KUMAR,TARUN CREATIONS P. LTD.,RAHUL MERCHANDISING LTD.,MAC EXPORTS (INDIA),KRISHAN KUMAR AGGARWAL,LALSONS ENTERPRISES,EASTERN EXPORTS,PAUSHAK,SHIVNATH RAI NARAIN (I) CO,LATE SHRI R.S.BATRA,BENARAS HOUSE LTD.,BANARAS HOUSE LTD.,S.K.TRADING CORPORATION,C.L.CHAUDHARI,DOON VALLEY RICE LTD.,INDIAN HANDICRAFTS,SUNDER JHUREMALANI,HONDA SIEL POWER PRODUCTS,NEELAM KOCHHAR,HARISH KOCHHAR,KAJARIA CERAMICS LTD.,H.P.LABS LTD.,PRADEEP KUMAR SAHNI,PUNJAB STAINLESS STEEL INDUSTR,EXOTIQUE EXPORTS,BHARAT RASAYAN LTD.,KAJARIA CEREMICS LTD.,SANJIV PURI,JYOTI APPARELS,ANAND INTERNATIONAL,MOKUL OVERSEAS LTD.,KRAFT LAND INDIA,GNB BROS. P.LTD.,D.C.I.T. CIRCLE 15 (I),D.C.I.T. CIRCE 15 (I),PUNJAB STAINLESS STEEL IND Respondents

JUDGEMENT

S.Muralidhar, J. - (1.) These appeals involve substantial questions of law concerning the interpretation of Section 80HHC of the Income Tax Act, 1961 (`Act'), and in particular sub-section (1) read with sub-section (3) and clause (baa) of the Explanation below sub-section (4C) thereto.
(2.) Section 80HHC was first inserted by the Finance Act 1983 with effect from 1.4.1983 and has since undergone several changes. The portions of the provision, as presently found in the Act, relevant to the present batch of cases, read 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: (1B) For the purposes of sub-sections (1) and (1A), the extent of deduction of the profits shall be an amount equal to" " (i)" eighty per cent thereof for an assessment year beginning on the 1st day of April, 2001; (ii)" seventy per cent thereof for an assessment year beginning on the 1st day of April, 2002; (iii)" fifty per cent thereof for an assessment year beginning on the 1st day of April, 2003; (iv)" thirty per cent thereof for an assessment year beginning on the 1st day of April, 2004, and no deduction shall be allowed in respect of the assessment year beginning on the 1st day of April, 2005 and any subsequent assessment year. (3) For the purposes of sub-section (1), " "(a) where the export out of India is of goods or merchandise manufactured [or processed] by the assessee, the profits derived from such export shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee"; (b)" where the export out of India is of trading goods, the profits derived from such export shall be the export turnover in respect of such trading goods as reduced by the direct costs and indirect costs attributable to such export ; (c) where the export out of India is of goods or merchandise manufactured or processed by the assessee and of trading goods, the profits derived from such export shall," (i)" in respect of the goods or merchandise manufactured or processed by the assessee, be the amount which bears to the adjusted profits of the business, the same proportion as the adjusted export turnover in respect of such goods bears to the adjusted total turnover of the business carried on by the assessee"; and (ii)" in respect of trading goods, be the export turnover in respect of such trading goods as reduced by the direct and indirect costs attributable to export of such trading goods : Provided that the profits computed under clause (a) or clause (b) or clause (c) of this sub-section shall be further increased by the amount which bears to ninety per cent of any sum referred to in clause (iiia) (not being profits on sale of a licence acquired from any other person), and clauses (iiib) and (iiic) of section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee : (4) The deduction under sub-section (1) shall not be admissible unless the assessee furnishes in the prescribed form, along with the return of income, the report of an accountant, as defined in the Explanation below sub-section (2) of section 288, certifying that the deduction has been correctly claimed in accordance with the provisions of this section: (4B) For the purposes of computing the total income under sub-section (1) or sub-section (1A), any income not charged to tax under this Act shall be excluded. Explanation."For the purposes of this section," (a)" "convertible foreign exchange" means foreign exchange which is for the time being treated by the Reserve 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 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 ; (emphasis supplied) Analysis of Section 80HHC"
(3.) The background to the introduction of Section 80HHC with effect from 1.4.1983, has been adverted to in paragraph 42.1 of the CBDT Circular No. 372 dated 8.12.1983 in the following words: "With a view to encouraging a larger export of goods, the Finance Act, 1982 had inserted Section 89A in the Income Tax Act with effect from 1.6.1982 for providing tax relief to Indian companies and non-corporate tax payers resident in India whose exports turnover for a year exceeds the export turnover for the immediately preceding year more than 10% thereof. The Finance Act, 1983, has omitted the aforesaid provision with effect from 1.4.1983. Simultaneously, a new Section 80HHC has been inserted with effect from the same date for providing deduction with reference to export turnover." The subsequent amendments in 1992 by which clause (baa) to the Explanation to Section 80HHC was introduced, were explained in the CBDT Circular No. 621 dated 19.12.1991. Paras 32.5 to 32.7 of this Circular explain the purpose of introduction of the aforementioned Explanation and read as under: "32.5 Under the existing provisions of sub-section (3) of Section 80HHC of the Income-tax Act, profit derived from the export of goods is computed in the following manner: Profits of the business x Export turnover Total turnover 32.6 The application of this formula has given rise to some misuse. Many cases have come to notice where persons, who are not chargeable to income-tax, transfer their export turnover to business houses merely by endorsement of letter of credit received by them. Business houses which "buy" these export turnover, get the benefit of deduction under Section 80HHC without any physical export of goods. 32.7 The tax concession under Section 80HHC is intended to compensate an exporter for the comparative disadvantage faced by him in the international market. With a view to ensuring that the tax concession is not misused, sub- section (3) of section 80HHC of the Income-tax Act has been amended." This Circular also clarifies certain other concepts that will be presently discussed. A plain reading of the provision is indicative of the overall scheme which appears to be as follows: (a) The assessee has to be an Indian company engaged in the business of exports out of India of any goods or merchandise. (b) In computing the total income of such assessee, a deduction is allowed "to the extent of profits", referred to in sub-section (1B) "derived by the assessee from the export of such goods or merchandise". (c) Sub-section (1B) specifies the extent of deduction of profits. In a graded scale this has been progressively reduced by the legislature from 80 per cent for the Assessment Year 2001-02 to 30 per cent for the Assessment Year 2004-05, after which this deduction has been done away with. Effectively, therefore, the benefit under Section 80HHC is no longer available to an assessee after the beginning of the Assessment Year on 1.4.2005. (d) Where the business of the assessee is not exclusively of exports, sub- section (3) of Section 80HHC sets out a formula for determining the "profits derived from such export" for the purposes of sub-section (1). There are three situations envisaged here. The first is under clause (a) of sub-section (3) where the export out of India is of goods or merchandise manufactured by the assessee. In such a case the formula is as under: Profits derived from exports = Profits of the business x export turnover total turnover The expression "export turnover" has been defined in clause (b), `total turnover" in Clause (ba) and "profits of the business" in clause (baa) of the Explanation. The second situation as envisaged by clause (b) of sub-section (3) is where the export out of India is of trading goods. The formula in such instance is straightforward. It is as under: Profits derived from exports = Export turnover in respect of trading goods " direct costs " indirect costs attributable to such export. The third situation is in clause (c) of sub-section (3) where the export out of India is both of goods manufactured by the assessee and trading goods. In such event, to the extent of the manufactured goods the formula in the first situation will be adopted and in respect of the trading goods, the formula in the second situation will be adopted. Then in each of the above instances the profits derived from exports is increased by an amount, which is derived by applying a multiplier to 90% of the export incentives, and is worked out as under: 90% of amounts in S. 28 (iiia) to (iiic) x export turnover total turnover (e) Many of the present cases do not involve the second and third situations. They deal with the first situation where the export out of India is of goods or merchandise manufactured by the assessee. As already noticed in such a case the formula as spelt out by clause (a) of sub-section (3) of Section 80HHC is as under: Profits derived from exports = Profits of the business x export turnover total turnover (f) The expression "profits of the business" has been defined in Clause (baa) of the Explanation as under: Profits of the business (POB) = Profits computed under the head "profits and gains of business and profession" [`PAGBP'] " 90% sums referred to in S.28 (iiia) to (iiie) ["A] " 90% receipts by way of brokerage, commission, interest, rent, charges or any other receipts of a similar nature included in such profits ["B"] " Profits of any branch, office, warehouse or any other establishment of the assessee situate outside India [`C'] In other words, by using the symbols in the above equation, it can be further represented as under: POB = PAGBP " 90 % A " 90% B " C Thus profits derived from exports would be: [PAGBP " 90 % A " 90% B " C] x export turnover total turnover The use of the words "computed under the head "profits and gains of business and profession" in clause (baa) is a direct reference to the exercise of computation of business income in accordance with Sections 28 to 44 of the Act. Questions and Issues;


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