Income Tax Appellate Tribunal - Chennai
Jt. Cit Special Range-Ii, Modurai vs Virudhunagar Textiles Mills Ltd. on 7 June, 2005
Equivalent citations: [2005]97ITD306(CHENNAI)
ORDER
T.R. Sood AM.
The revenue has raised the following grounds:-
"2.1 The Commissioner (Appeals) ought to have held that the conversion charges are part of total turnover for the purpose of computation.of deduction under section 80HHC.
2.2 The Commissioner (Appeals) ought to have held that the receipt of conversion charges will form part of turnover since it is also trading/revenue receipt.
Further, since the profit derived from the conversion charges receipts is also included in the press profits of the business for deduction under section 80HHC purpose.
2.3 The Commissioner (Appeals) ought to have held that since the total turnover is a wider term than the gross sales and hence it will include the receipts of conversion charges."
2. In cross objection the assessee has raised the following grounds :
"The Commissioner (Appeals) erred in confirming the following sums as forming part of total turnover as defined under section 80HHC of the Income Tax Act.
Sale of yarn :
Rs. 42,64,575 Sale of condemned material :
Rs. 6,32,125
3. The learned authorised representative submitted that the issues are covered in favour of assessee in respect of sale of yarn and sale of condemned materials by the order of the Tribunal in the case of assessee for the assessment year 1994-95 in ITA No. 337/98 and in respect of the issue whether processing charges can be included in total turnover or not, by the order of the Tribunal in the case of Dy. CIT v. Virudhunagar Textiles in (IT Appeal No. 47 (Mad) of 1997 (copies of both orders filed on record)). He further submitted that in both these cases, the ratio laid down by the Hon'ble jurisdictional High Court in case of CIT v. Madras Motors Ltd./M.M. Forgings Ltd. (2002) 257 ITR 60 (Mad) has been followed and thus the issue is also covered by the decision of jurisdictional High Court in the case of Madras Motors Ltd. (supra).
4. On the other hand, the learned Departmental Representative submitted that these decisions are quite distinguishable and in the assessment order the assessing officer has found that the element of profit was there in case of processing charges as well as local sales. Therefore, these elements have to be included in the total turnover because deduction under section 80HHC can be allowed only in respect of export business as provided in section 80HHC(3)(a). Similar view was taken by Tribunal in IT Appeal Nos. 2704 (Mad.) of 1996 and 51 (Mad.) of 1997 in case of Loyal Textile Mills Ltd.
5. We have considered the rival submissions carefully and have gone through the relevant material on record as well as the decisions cited by the parties. Before we proceed further, it is important to note the observation of the Hon'ble Supreme Court regarding doctrine of precedent in case of CIT v. Sun Engg. Works (P.) Ltd. (1992) 198 ITR 297 at page 299. It was observed as under:-
"It is neither desirable nor permissible to pick out a word or a sentence from the judgment of the Supreme Court divorced from the context of the question under consideration and treat it to be the complete law declared by the court. The judgment must be read as a whole and the observations from the judgment have to be considered in the light of the questions which were before the court. A decision of the Supreme Court takes its colour from the questions involved in the case in which it is rendered and, while applying the decision to a later case, courts must carefully try to ascertain the true principle laid down by the decision."
6. Otherwise also, it is settled principle of law that what is to be followed is the ratio decidendi or principles laid down in a case decided by a higher forum of judiciary.
7. The relevant portion of section 80HHC is 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.
(2)(a) This section applies to all goods or merchandise, other than those specified in clause (b), if the sale proceeds of such goods or merchandise exported out of India are received in, or brought into, India by the assessee (other than the supporting manufacturer) in convertible foreign exchange, within a period of six months from the end of the previous year or, within such further period as the competent authority may allow in this behalf.
(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;"
8. A reading of this provision very clearly shows that 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 is entitled for deduction as prescribed in the section. Sub-section (2) very clearly provides that this section applies to all goods or merchandise other than those specified in clause (b), which means negative goods which consist of mineral oil, minerals and ores. Sub-section (3) provides for the formula for calculating the export profit in case of composite business where export turnover as well as local turnover is also involved because deduction has to be allowed only in case of profit derived from export because deduction is allowed only from export turnover. The need for formula arises wherever separate accounts for export and domestic business are not maintained and proportionate profit is to be determined. In fact, sub-section (3)(a) of section 80HHC is laying down only a simple rule that whenever there is composite business, i.e., export and domestic business carried on by the assessee, deduction to be allowed on export profits is to be calculated by determining proportionate profit on account of export business from the total business profits. Thus, it becomes clear that if assessee is dealing with specified goods on which deduction is available and his whole business consist of exports only, then he is entitled to deduction on whole of such profits. However, if some such specified goods are sold in the local market, then deduction will be available on the proportionate basis as per section 80HHC(3)(a). This provision has been introduced very clearly to meet a situation where separate set of accounts are not available. This can easily be explained by way of following Illustrations:
Illustration 1:
Where assessee's whole business consists of export in specified goods.
(In this case, although there is no need to apply formula given in section 80HHC(3)(a), but for understanding the issue even if formula is applied, result will remain same.) Total turnover Rs. 1,000 Export turnover Rs. 1,000 Business profit Rs. 100 Deduction under section 80HHC = Business profit X Export turnover Total turnover = 100 X 1000 1000 Rs.100 Thus, 'A' is getting deduction on export profit only.
Illustration 2 :
Where assessee is having local sales also in specified goods.
(Here, proportion of export profit has to be determined by aplying the prescribed formula.) Total turnover Rs. 1,500 Export turnover Rs. 1,000.
Domestic sale Rs. 500 Business profit Rs. 150 Deduction under section 80HHC = Business profit X Export turnover Total turnover =105 X 1000 1500 Rs. 100 Thus, A is getting deduction only on export profit.
Illustration 3 :
Where assessee is having export turnover and local turnover of specified goods and unspecified goods.
Total turnover Rs. 2,000 Total turnover of specified goods Rs. 1,500 Export turnover of specified goods Rs. 1,000 Domestic sale of specified goods Rs. 500 Domestic sale of non-specified goods Rs. 500 Business profit Rs. 200
(i) If correct meaning of section is taken, then export profit will be determined as under:-
Deduction under section 80HHC = Business profit X Export turnover Total turnover = 200 X 1000 2000 = Rs. 100
(ii) However, if assessee's interpretation is accepted, then assessee is getting deduction not only on export profit, but also on domestic sale = 200 X 1000 1500 = Rs.133.33 (Turnover of other goods not included in total turnover).
Here, 'A' is getting higher deduction than he is entitled.
9. In the above illustrations, the basic assumption was that the assessee is having 10 per cent profit on all the activities conducted by the assessee. To understand the formula given by the Legislature the simple assumption was made. In actual business scenario, things may not be as simple and assessee may be deriving higher or lower income on various goods and again on export and domestic business, the proportion of profit may be lower or higher. To obviate the difficulty of determining the profit from export business, Legislature has propounded the average theory and proportionate profit from such proportionate export turnover is mandated to be determined by applying the formula.
10. From the above illustrations, it is clear that there is no difficulty, if assessee is engaged in the business of only exports. However, when assessee is engaged in the business of export as well as domestic sales, sub-section (3)(a) would be attracted. Sub-section (3)(a) provides a formula for calculating export profit where clear assumption is that accounts are not segregated for export and other business. Otherwise there is no need for formula at all. According to this provision, whenever there is a composite trade, profit is to be calculated on proportionate basis by the following formula:-
Business profit X Export turnover Total turnover
11. Now if the business profits includes the profit element of domestic turnover, then obviously turnover on account of even non-specified goods is to be included into total turnover to arrive at the correct results, otherwise profit would get inflated as shown in Illustration 3(ii), where Net Profit has gone upto 133.33 because though element of profit has been included in the business profits, but element of turnover on account of non-specified goods has not been included in the total turnover.
12. Before we proceed to examine the decision in the case of the Hon'ble Madras High Court in the case of Madras Motors Ltd. (supra), we would like to note the latest observations of the Hon'ble Madras High Court in the case of CIT v. Sundaram Fasteners Ltd. (2005) 272 ITR 652. At page 656, it is observed as under:-
'It is a settled law that though the "total turnover" may include the receipts of excise duty and sales tax, etc. in its general parlanee and under specific statutes, because of its wider coverage in the definitions given thereunder, it has to be given a restrictive meaning while computing the 'export profit' for the purposes of section 80HHC namely, only that part of the receipt for sale consideration is to , be taken as part of the total turnover which has an element of profit therein, and, accordingly, the receipts of excise duty and sales tax which do not include an element of profit should be excluded from the "total turnover". (Emphasis supplied) The above portion of the judgment makes it clear that the Hon'ble High Court has very clearly said that deduction under section 80HHC can be allowed only on the profits from export of the goods and if element of profit is involved on some transaction same has to be included in total turnover.
13. Now let us consider the decision of the Hon'ble Madras High Court in the case of Madras Motors Ltd. (supra) and on principles we find no contradiction to our findings. At page 72, it is observed as under-
"The sub-section has been created only to see the ratio of the income out of the export to the total income out of the business in respect of those goods because of the obvious difficulty of segregating the profits earned out of export alone vis-a-vis the profits earned otherwise than by export. The total profits earned out of the business of such goods are not exemptible because those profits would include both profits out of exports and the profits earned otherwise than by export but one thing is certain that the business contemplated in the sub-section would be in relation to those goods alone to which the section applies as per clause (a) of sub-section (2). Once we read sub-section (1) of section 80HHC, clause (a) of sub-section (2) and clauses (a) and (b) of sub-section (3), there remains no doubt that the total turnover of the business would contemplate only the business regarding such goods part of which are exported and the others are not so exported. There is just no scope to include the turnover of the business of the goods which are not contemplated by the section. That way, though the Legislature has specified about the applicability of the section to the goods by clause (a) of sub-section (2), we would be unnaturally making the section applicable even to the goods which are outside the limits of clause (a) of sub-section (2) and that will not be permissible."
14. Thus, a combined reading of both the decisions of the Hon'ble Madras High Court makes it clear that wherever there is element of profit involved, then to make numerator and denominator comparable sale of goods in domestic market has to be included in total turnover, if the element of profit is included in the business profit, then turnover pertaining to such profit has to be included in total turnover in denominator.
15. In this connection, we would also like to refer to the decision of the Hon'ble Bombay High Court in CIT v. Sudarshan Chemicals Industries Ltd. (2000) 245 ITR 769, where it was very clearly laid down that as per section 80HHC(3), the formula for calculating the amount of deduction under section 80HHC is as under:-
Profit of the business X Export turnover Total turnover The Hon'ble Bombay High Court went on to hold that the total turnover cannot include the amount of sales tax and excise duty because the same do not involve any profit element. This was done because normally export sales would not involve any sales tax and excise duty and thus the denominator and the numerator will not remain comparable, if the amount of excise duty and sales tax was included in the total turnover, whereas there would be no element of excise duty and sales tax in export sales, i.e., numerator and in any case, there is no element of profit involved in excise duty and sales tax.
16. From the above it becomes clear that element of sales tax and excise duty is not includible in the total turnover, which has been again reiterated by the Hon'ble Madras High Court in the case of Sundaram Fasteners Ltd. (supra) because same does not involve any element of profit.
17. Similar view was taken by Chennai "C" Bench of the Tribunal in ITA No. 2704/Mds./96 and ITA No. 51/Mds./97 in the case of Loyal Textile Mills Ltd. (supra) (copy of order placed on record). Vide para 24, it was observed as under:-
"24. The next ground of appeal is regarding inclusion of processing charges in the total turnover for the purpose of section 80HHC. During the course of hearing, it was submitted by both the representatives of the assessee and the revenue that a similar issue was considered by the Bombay High Court in the case of CIT v. Bangalore Clothing Co. (2003) 260 ITR 371. It appears that the processing charges are received for job work done by the assessee by using the spare capacity of the machine by utilizing the goods supplied by others. Therefore, it is very clear that the job processing activity was linked to the manufacturing activity of the assessee. Therefore, the income owned by the assesse as job work charges or processing charges accrues by way of operational income. Therefore, it has to be included in the total turnover in view of the judgment of the Bombay High Court in the case of Bangalore Clothing Co. (supra) In view of the above we confirm the order of the lower authority on this issue."
18. In this regard, we may also refer to the decision of the Hon'ble Calcutta High Court in CIT v. Chloride India Ltd. (2002) 256 ITR 625 where the issue has been discussed in detail at page 629 and it is observed as under:-
'Having regard to the rival contentions raised by Mr. Mallick and Mr. Agarwal, appearing for the revenue, and Dr. Pal, appearing for the assessee, and the relevant provisions of the Act and the principles of law as laid down in the matter we find merit in the contention raised by Dr. Pal on behalf of the assessee. On a combined reading of clause (b) and clause (ba) of the Explanation to section 80HHC we find that both the export turnover and total turnover include anything which has a nexus with the sale proceeds and they excluded everything which has no nexus with the sale proceeds. It is the intention of the Legislature that under section 80HHC the profits from export should not be taxed and for that purpose a formula was introduced whereby in case the business is of composite nature the proportionate profit relatable to the export business would be found out by multiplying the profits of a business by the export turnover and dividing the product by the total turnover. This formula was introduced in section 80HHC(3) of the Act as it stood at the relevant time. In the above formula the export turnover is the numerator whereas the total turnover is the denominator. There can hardly be any room for skepticism that the said formula had been prescribed to arrive at the profits from exports.
It was rightly contended by Dr. Pal that if the denominator was to include octroi, sales tax and excise duty and if the numerator excluded those items the formula would certainly become unworkable. In the case of CIT v. Sudarshan Chemicals Industries Ltd. (2000) 245 ITR 769 the Division Bench of the Bombay High Court clearly held that in order to ascertain the export profits, the aforesaid items cannot be introduced to inflate the total turnover artificially in order to reduce the benefit which an assessee is entitled to. In this context, it is significant to note that section 80HHC(1) of the Act provides, inter alia that where an assessee engaged in the business of exports out of India of any goods or merchandise, there shall be allowed, in computing the total income of the assessee, a deduction of the profits derived by the assessee from the export of such goods or merchandise. So in the matter of computing the total income of such assessee, profits derived by the assessee from the exports are clearly deductible. Section 80HHC(3)(a) lays down that where the export is of goods 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. So the emphasis should be laid on the words profits derived from the exports" and as such weightage must be given to such profits which cannot be reduced artificially by including statutory levies in the total turnover. In the case of CIT v. Sudarshan Chemicals Industries Ltd. (supra), the Division Bench of the Bombay High Court clearly held that the turnover should be restricted to such receipts which have an element of profit in it and it is only the actual sale price which is relevant. We find no reason to differ from the view of the Division Bench of the Bombay High Court expressed in the above noted case. In our view, octroi, excise duty and sales tax cannot have any element of profit and as such those items cannot be included in the total turnover. If contrary view is taken that will make the object sought to be achieved by the Legislature nugatory.' (Emphasis supplied)
19. From the above para, it becomes clear that wherever there is a composite business and profits of export have to be included for the purpose of deduction under section 80HHC then the formula given under section 80HHC(3) has to be applied and whenever profit element from domestic turnover of specified or non-specified goods is included, then domestic turnover of such goods has to be included in the total turnover. In fact, it becomes clear from the two decisions rendered by the Hon'ble Madras High Court in case of Madras Motors Ltd. (supra) and Sundaram Fasteners Ltd. (supra), that it has been clearly laid down that wherever there is a domestic turnover and that involves element of profit, then such turnover is to be included in the total turnover for determining the proportionate export profit under section 80HHC(3) for the purpose of allowing deduction under section 80HHC(1).
20. It is clear from the records that the assessee had generated profit on sale of cotton as well as sale of condemned material and it also generated profits from process charges which is included in the business profit and, therefore, these elements have to be included in the total turnover.
21. In the result, the revenue's appeal is allowed and the Cross Objection of the assessee is rejected.