Income Tax Appellate Tribunal - Mumbai
Seema Silks And Sarees vs Assistant Commissioner Of Income Tax on 8 March, 2006
Equivalent citations: (2006)103TTJ(MUM)704
ORDER
K.P.T. Thangal, Vice President ITA No. 2147/Bom/1994.
1. This appeal by the assessee is for the asst. yr. 1990-91.
2. The effective ground urged by the assessee is directed against the order of the CIT(A) in confirming the order of the AO, vide which he restricted the deduction under Section 80HHC to Rs. 47,08,796 instead of accepting the claim at Rs. 83,00,505.
3. The case of the assessee is that the Revenue authorities erred in not appreciating firstly, that the assessee being engaged wholly in the business of export; the whole of income earned under the head "Profits and gains of business or profession" therefore should have been exempted under Section 80HHC(3)(a), and secondly, the margin money earned by the assessee by way of importing the goods on the authority of advance licence and reselling the same in the local market in fact constituted recoupment of cost of purchase and the margin money, constituting encashment of export incentive, therefore, should have been exempted as export incentive receipt under Section 28 r/w Sections 2(24) and 80HHC of the IT Act, 1961.
4. The facts leading to the dispute, briefly, are as under:
The assessee filed the return on 30th Nov., 1990 declaring Nil income. Assessee is an exporter of silk sarees and materials and claimed to be a 100 per cent export-oriented unit before the AO. On going through the assessment papers, AO noticed, assessee has shown branch sales at Rs. 5,75,29,284 (goods transferred to actual users and manufacturers). This, assessee treated as export turnover. The Form 10CCAC report of the chartered accountant was referred to, wherein it is stated that the receipt is Rs. 14,50,53,466 including goods transferred to actual users against duty-free import licence of Rs. 5,75,29,284 and export turnover at Rs. 8,75,24,182. Assessee was asked why the branch sales should not be treated as local1 sales. It was submitted, the branch sales are goods transferred to the actual users. It was further stated, as per the Government policy of import and export of sales, assessee treated this transfer to actual user as exempt from total turnover. It was further submitted, assessee was entitled to export incentives in the form of duty-free licences. Assessee exported goods by purchasing from local market and thereafter upon production of evidence about the completion of export; assessee was entitled to apply for duty-free licence. Assessee obtained import licence. Raw silk is the main raw material used in the production of silk sarees, which are exported by the assessee. Later on the assessee imports raw silk and transfer it to the actual user for further production for export. Assessee had no choice and therefore the assessee could not sell the licence in the open market. It is not a local sale. Assessee was forced by the Government policy to import raw silk and transfer it to the actual user under duty-free scheme. The supporting manufacturers of the assessee are not from the arganised sector. Export house, under Appendix 13E of the Import Export Policy, can transfer replenish exempt material in favour of the actual user. Further, the exporter always quoted the price to the buyer after considering all incentives such as cash assistance, duty drawback, licence, etc. To cover up the cost price and profit, the assessee passes import material to the actual user, which is as good as an incentive. It is like indirect incentive. The transfer of raw silk to actual user is not a sale; but it is an incentive earned by the exporter on export sale. This is the basis on which the assessee can encash export incentives. It is like transfer of REP licence.
5. However, AO held, this transfer amounts to local sale. Assessee is importing goods against duty-free import licence and it is sold to the actual user. The transfer is at cost of the goods imported, plus the duty normally charged. The actual profit to the assessee is the difference. AO held, actually there is a profit in the above transaction. Hence, this is to be treated as a local sale and included in the total turnover of the assessee-firm for calculating deduction under Section 80HHC of the Act. Aggrieved by the above order, assessee approached the first appellate authority.
6. The contentions were reiterated before the CIT(A). It was further submitted, the licence issued to the assessee in respect of export of silk fabrics happens to be non-transferable licence. The assessee cannot sell the licence and has to import the goods in his own name and therefore must make available the goods to the actual user. The only mode and manner in which the exporter, who is involved in the business of items to which the scheme is applicable, is that he can encash the incentive by getting the goods and selling the same in the open market. It was submitted that the only manner in which the incentive could be converted into cash form is the manner in which the assessee operated. The assistance desired by the Government of India stood converted into the form of cash through the import effected by the assessee. The margin earned by the assessee by this method is nothing but cash assistance, which is expressly permitted by the policy of the Government.
7. The assessee alternatively contended, export incentive is not a taxable item and it is not part of the total turnover. There is no rationale for discrimination between different items of export incentive. All of them ought to be treated on an equal footing, particularly so when there is no discernible logical reason which the legislature should have in view for discrimination between two different incentives. It was further submitted, as assessee-firm is a cent per cent export-oriented unit, provisions of Section 80HHC(3)(a) apply. The term "business" ought to be construed in a commercial manner and if so construed, it is clear that the only business carried by the assessee is export. As an incident to this business, the assessee has taken certain steps, which cannot be equated with carrying of any separate business. Just as applying for an import licence or sale of licence at a premium is not regarded as a separate business, encashment of export incentive also cannot be treated differently. Sale of scrap does not give rise to a separate business. The same logic applies. It was further contended, while interpreting Section 80HHC, the legislative intent is to offer incentive in respect of what can properly be regarded as profit from export activity. If the profit from export activity is capable to identify independently, the purposive construction of the section would warrant and demand that the profit of export division or export activity be computed separately and deduction be granted in respect of such profit.
8. The CIT(A) held, firstly, deduction to an exporter is available on the profit derived from the export of such goods or merchandise. The deduction will be granted to him if the sale proceeds are receivable in India in convertible foreign exchange. For the purpose of Sub-section (1) to Section 80HHC, profit derived shall be in the case of an exporter the profits of business as computed under the head "Profits and gains from business or profession". In case local sales take place, then the deduction is available on pro rata basis. Export turnover means the sales proceeds received by the assessee in convertible foreign exchange. Thus the CIT(A) held, the basic requirement is that the sales proceeds must be received in convertible foreign exchange. In the case of the assessee, the export turnover is Rs. 8,75,24,182 and not Rs. 14,53,90,901 as claimed by the assessee. Thus the foreign exchange earned is on Rs. 8,75,24,182 and not the higher figure claimed by the assessee. Hence he held, the incentive received by the assessee in the form of local sale of goods to actual user against goods imported under duty-free import licence scheme, by no stretch of imagination can be excludible from the total turnover, as Expln. (bb) very clearly specifies that the three incentives in the Form of CCS, duty drawback and sale of import licence are not includible in the total turnover. The exclusion is in fact deliberate as total sales cannot be treated as exports and does not qualify for deduction. Hence the CIT(A) rejected the claim of the assessee. Aggrieved by the above order, the assessee is in appeal before the Tribunal.
9. Learned Counsel for the assessee submitted, assessee-exporter is entitled to apply for duty-free licence whereby the assessee could import raw silk yarn. These licenses are non-transferable during the year under consideration. The only way to encash was to import the raw material yam duty-free and to sell the same in the local market by adding on the duty element to the cost. The break-up is given as under:
Export turnover of sarees (CIF) Rs. 8,75,24,182 Export turnover of sarees (FOB) Rs. 8,38,33,323 Sale of raw silk yarn Rs. 5,75,29,284 Exchange sale difference Rs. 3,37,435 Business profit Rs. 83,00,504
10. Learned Counsel submitted, assessee is in the business of export of silk sarees exclusively and therefore Clause (a) to Section 80HHC(3) is applicable in the instant case of the assessee. Learned Counsel objected to the stand of the Revenue that the assessee has local sale of raw silk yarn and therefore Clause (b) to Section 80HHC(3) would apply and deduction available to the assessee is only Rs. 47,08,796 against assessee's claim of Rs. 83,00,504.
11. Alternatively, it was submitted that assuming Clause (b) to Section 80HHC(3) is applicable, then whether the sale of raw silk yarn should be included in the total turnover. According to the learned counsel, Clause (a) to Section 80HHC(3) is applicable and not Clause (b). Learned Counsel submitted, since the assessee is a cent per cent exporter of silk sarees, there is no local sale of sarees. As a consequence of exports, assessee was entitled to apply for duty-free licences, whereby the assessee could import raw silk yarn, which is the raw material used in the production of silk sarees. The licences were not transferable in the relevant assessment year and the only way to encash the benefit in the said licences was to import raw silk yarn duty-free and to sell the same in the local market, adding duty element to the cost. In other words, the motive, objective and purpose of assessee's business was to do 100 per cent exports of silk sarees. The sale of raw silk yarn was only incidental to assessee's export business of sarees. Hence, it is the submission of the assessee that the business carried on by the assessee consists exclusively of export. For the above proposition, reliance was placed upon the following decisions:
(1) Siddho Mai & Sons v. CIT wherein the word "wholly" and "exclusively" has been interpreted by the Court, referring to the motive, objective and purpose.
(2) CIT v. Delhi Safe Deposit Co. Ltd. this case the Hon'ble Supreme Court held that "the true test of an expenditure laid out wholly and exclusively for the purposes of trade or business is that it is incurred by the assessee as incidental to his trade for the purpose of keeping the trade going.
(3) CIT v. Rajaram Bandekar (4) Royal Calcutta Turf Club v. CIT .
12. Learned Counsel submitted, Clause (b) to Section 80HHC(3) will not apply because profit on sale of raw silk yarn is eligible for deduction under Section 80HHC, as the same has direct nexus with the export activity. The purpose of the formula in Section 80HHC(3)(b) is to find out the profits earned out of export activity. As the entire profit is from export activity, there is no need to apply the formula as per Clause (b). The profit on sale of raw silk yarn has arisen directly because in view of the exports made, the assessee was entitled to apply for duty-free licences, where the assessee could import duty-free raw silk yarn and could sell the same to the actual users by adding on the duty element to earn profit. Learned Counsel also relied upon the following judgments:
(1) CIT v. K.K. Doshi & Co. ;
(2) CIT v. Bangalore Clothing Co. ;
(3) Baby Marine Exports v. Asstt. CIT (2001) 71 TTJ (Coch) 927 : (2001) 77 ITD 442 (Coch);
(4) A.M. Moosa v. Asstt. CIT (1996) 54 TTJ (Coch) 193;
(5) CIT v. Kantilal Chhotalal ;
(6) CIT v. Chloride India Ltd. ;
(7) Sudarshan Chemical Industries Ltd. v. Dy. CIT (1997) 57 TTJ (Pune) 718 : (1997) 60 ITD 629 (Pune);
(8) CIT v. Sudarshan Chemical Industries Ltd. .
13. Learned Counsel further submitted, where the entire profits of the assessee is from export activity, there is no need to apply the formula as per Clause (b) to Section 80HHC(3). Learned Counsel submitted, Courts held that as the entire profit from export activity is identifiable, the deduction has to be worked out as per Clause (a) to Section 80HHC(3). For the above proposition, again reliance was placed upon the decision of the Hon'ble Madras High Court in the case of CIT v. Rathore Bros. and the decision of the Tribunal in the case of V.D. Swamy & Co. Ltd. v. Dy. CIT (1993) 44 ITD 91 (Mad), because in the case of the assessee as well in these cases the export profits derived is easily identifiable.
14. Coming to the alternate contention that if Clause (b) to Section 80HHC(3) is applicable at all, then the sale of raw silk yarn should not be included in the turnover also, it was submitted, in the turnover only those items/products which are considered for export turnover can be considered for total turnover. That is to say, as the assessee is not engaged in the business of export of raw silk yarn and is engaged only in the export of silk sarees, local sale of raw silk yarn should not be included in the total turnover and only the sale of silk sarees can be included in the turnover. Explaining the above, learned counsel submitted, if an assessee exports 'x' item and also has local turnover in respect of the very same 'x' item, then the local sale of 'x' can be considered as part of the total turnover. However, if the assessee only exports 'x' item and has local sale in terms of 'y' item, then the sale proceeds of 'y' cannot be considered as part of the total turnover. For the above proposition, learned Counsel relied upon the following decisions:
(1) CIT v. Madras Motors Ltd. (2002) 174 CTR (Mad) 221 : (2002) 257 YFR 60 (Mad) (2) Asstt. CIT v. Piatibha Syntex Ltd. (1999) 63 TTJ (Ahd) 409 (3) Pink Star v. Dy. CIT (2000) 66 TTJ (Mumbai) 885 : (2000) 72 TTD 137 (Mumbai) (4) Palam Stove Industries v. ITO (2003) SOT 520 (Mumbai) (5) P. Navinkumar & Co. v. ITO (1998) 62 TTJ (Ahd) 620
15. Without prejudice to the above submission, learned counsel further submitted, if the sale proceeds of raw silk yarn is included in the turnover, the assessee would be denied full deduction under Section 80HHC, even though the assessee is a 100 per cent exporter and the profit on sale of raw silk yarn is nothing but export profit arising from the export activity/operations. It was never the intention of the legislature to deny benefits to such exporters, while interpreting the word "turnover". Learned Counsel submitted, the sale proceeds of the raw silk yarn must be excluded keeping in mind the intention of the legislature. Again he relied upon the following decisions for the above proposition:
(1) Chloride India Ltd. v. Dy. CIT (1995) 53 ITD 180 (Cal) (2) CIT v. Chloride India Ltd. (supra) (3) Associated Banking Corporation of India Ltd. v. CIT (4) Shree Sajjan Mills Ltd. v. CIT (5) CIT v. K.B. Kalikutty (Decd.) ( (6) CWT v. Kripashankar Dayashanker Worah (7) Sevantilal Maneklal Sheth v. CIT (8) Bajaj Tempo Ltd. v. CIT (9) CIT v. G. Krishnan Nail (10) Goel Jewellers v. Asstt. CIT (1992) 43 ITD 725 (Del) (11) A.M. Moosa v. Asstt. CIT (supra) (12) Wolkem India Ltd. v. Dy. CIT (1999) 65 TTJ (Jp) 59 (13) Eastern Leather Products (P) Ltd. v. CIT (1999) 65 TTJ (Del) 603 : (1999) 68 ITD 358 (Del) (14) Kamaljeet Singh Ahulwaha v. Dy. CIT (2000) 69 TTJ (Jp) 399 : (2001) 78 ITD 381 (Jp) (15) McLeod Russel (India) Ltd. v. Dy. CIT (2001) 73 TTJ (Cal) 349 (16) Pratibha Syntex Ltd. v. Jt CIT (2002) 75 TTJ (Ahd) 124 : (2002) 81 ITD 118 (Ahd).
16. The learned Departmental Representative supported the order of the CIT(A) and submitted, the contention of the learned Counsel is without merit. What assessee derived from the export is exclusively the foreign exchange received. The licences received were sold in the market by the assessee. Therefore, it is not strictly from the same source. It has close link and emanates from the export, but it is not derived. Assessee has sold it in the open market and received the cash. Learned Counsel further submitted, the profit on sale is equal to cash assistance, which is excluded from the purview of deduction under Section 80HHC. He relied upon the decision of the Hon'ble Madras High Court in the case of CIT v. Madras Motors Ltd. (supra). The learned Departmental Representative submitted, in this case the Hon'ble High Court held that the turnover from the business of motorcycles, motorcycle spare parts and television sets could not be included in the total turnover of the assessee for the purpose of computation of special deduction under Section 80HHC, which in turn followed the decision of the Hon'ble Bombay High Court in the case of CIT v. Sudarshan Chemicals Industries Ltd. (supra). The learned Departmental Representative submitted the receipts by the assessee is from the sale of goods in the local market to the actual users against duty-free imports made against import licences granted for exports. This is not income derived from export. Assessee earned certain margins from such sale. This is nothing but margins earned from the local sale and not from export as such. Supporting the order of the CIT(A), learned Departmental Representative submitted, deduction under Section 80HHC is to be granted if the sale proceeds of such goods/merchandise exported out of India are receivable in convertible foreign exchange. The learned Departmental Representative submitted, profits on sale of a licence granted under the Imports (Control) Order, cash assistance received or receivable, any duty of customs or excise repaid or repayable is to be computed under the head "Profits and gains of business or profession"; but only to the extent of 90 per cent and 10 per cent is to be treated as export because of the concession given under proviso to Section 80HHC(3). Hence the learned Departmental Representative submitted, the appeal by the assessee is liable to be dismissed.
17. In reply, learned counsel for the assessee submitted, in fact this disallowance has been made by the AO and confirmed by the CIT(A) only for the year under consideration and for all the subsequent assessment years the assessee is getting the benefit.
18. Considering the rival submissions and also going through the orders of the Revenue authorities and the decisions cited, we are of the view that the order of the CIT(A) does not call for any interference.
19. It is true Section 80HHC is a beneficial section. It should be interpreted liberally. But that does not mean that it should go beyond the scope. What is to be considered for deduction under Section 80HHC is what is derived from the export business. Assessee sold certain imported goods either to some of the parties who supplied the export material to the assessee or to some other parties in the market. These goods were imported by the assessee against benefits derived as a result of export. It is the policy of the Government, if an assessee makes export and crosses beyond certain limit, some incentives are given to the assessee. Incentives are derived undoubtedly from export. Assessee sold in the market raw silk yarn, which was received by the assessee due to duty-free licences granted to the assessee in lieu of export of silk sarees. The submission of the learned Counsel that the motive, object and purpose of the assessee was to do 100 per cent export, cannot be accepted. The motive and object of the assessee was to earn additional income by selling the items in the market. This is incidental receipt, which is not derived from the export business.
20. Coming to the cases relied, for example, in the case of Siddho Mai & Sons v. CIT (supra), this was a case where the firm received interest-bearing deposits from the minor sons and at the same time the assessee also entered into an agreement with minor sons for payment of commission on deposits in addition to interest. The Hon'ble High Court held, it was not an expenditure laid out wholly or exclusively for the purpose of business.
21. Coming to the case relied upon by the assessee (supra), in this case a managed company advanced money to the third party at the instance of assessee. The third party denied the liability. Assessee agreed to make good part of loss incurred by the managed company. The Hon'ble Supreme Court held, the amount paid by the assessee was expenditure incurred for the purpose of business.
22. There is clear difference between the expenditure incurred for the purpose of business and income derived from the business. This is particularly clear from the fact that Expln. (baa), which defines "profits of the business", specifically states that profits of the business as computed under the head "Profits and gains of business or profession" is to be reduced to the extent of 90 per cent of any sum referred to in Clauses (iiia), (iiib) and (iiic) of Section 28. In view of the above, we have no hesitation in holding that the order of the CIT(A) does not suffer any infirmity.
23. Coming to the alternate contention of the assessee that only those items/products which are considered for export turnover can be considered for total turnover, i.e., as the assessee is not engaged in the export of raw silk yarn and it is engaged only in the export of silk sarees, the local sale of raw silk yarn should not be included in the total turnover and only the sale of silk sarees whether local or export can be included in the turnover, we are of the view that this contention of the learned Counsel is to be accepted. In the case reported in CIT v. Madras Motors Ltd. (supra), the Hon'ble High Court held as under:
The thrust of the opening clause of Clause (b) of Sub-section (3) of Section 80HHC of the Act, has a stress on the words "does not consist exclusively of the export". The words "total turnover of the business" would be controlled by and have to be read in the colour of the opening clause. 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. 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. Hence, it is impermissible to apply the section even to goods which are outside the limits of Clause (a) of Sub-section (2).
24. The sale of raw silk yarn is a consequence of licence granted to the assessee in lieu of exports; as such the same constitutes cash assistance and therefore should not be included in the turnover. Same view has been taken by the Tribunal in the case of Pink Star v. Dy. CIT (supra).
25. In view of the above, we uphold the order of the learned first appellate authority and at the same time we accept assessee's alternate contention that only those items/products which are considered for export turnover can be considered for total turnover, in the light of the decision of the Hon'ble Madras High Court in the case of Madras Motors Ltd. (supra). Order accordingly.
26. In the result, appeal of the assessee stands allowed as indicated above.
TTA No. 2745/Bom/1994:
27. This appeal by the Revenue is for the asst. yr. 1990-91.
28. The only ground urged by the Revenue reads as under:
On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in holding hat the receipts from interest from banks, interest on loan and insurance claim are to be regarded as business income for working out the deduction under Section 80HHC without appreciating the fact that the aforesaid receipts are clearly income from other sources and cannot be treated as related to export business of the assessee even though assessee is a 100 per cent export-oriented unit.
29. On going through the P&L a/c, AO noticed the assessee-firm received the following amounts:
Insurance claim 54,450 Bank interest1, 62,569 Interest received 75,979
AO held, the above receipts do not fall under the head "business income"; hence they should be treated as "other income". AO further held, interest has been received on fixed deposits kept in banks and loans given to sister concerns; as such it will not be considered for calculation of deduction under Section 80HHC, since it is not income derived from business.
30. Before the CIT(A), the contention of the assessee is that the interest income could not be regarded as income from other sources. It should be treated as income from business or profession. It was further contended that the interest income was earned by the assessee on deposits and these deposits were taken into account by the bank for guaranteeing letters-of credit/packing credit. It was further contended that the funds are used for the purpose of business and do not constitute surplus funds.
31. CIT(A) observed, AO did not give any reasoning regarding the receipt of insurance claim and only stated that the receipts do not fall under the head "Business income" as interest is received on fixed deposits and loans given to sister-concerns. After considering the arguments and the fact that the assessee is a 100 per cent export-oriented unit, CIT(A) held that the receipts from interest from bank interest on loans and insurance claim to be regarded as "income from business" for working out the deduction under Section 80HHC. Being aggrieved, the Revenue is in appeal before the Tribunal.
32. We have heard the rival submissions. We find that the issue stands covered in favour of the assessee by the decision of the Special Bench of the Tribunal in the case of Lalesons Enterprises v. Dy. CIT (2004) 82 TTJ (Del) (SB) 1048 : (2004) 89 ITD 25 (Del) (SB). In this case the Tribunal has held as under:
(iii) For the purpose of applying Expln. (baa) below Sub-section (4B) of Section 80HHC and while reducing 90 per cent of the receipt by way of interest from the profits of the business, it is only the 90 per cent of the net interest remaining after allowing a set off of interest paid, which has a nexus with the interest received, that can be reduced and not 90 per cent of the gross interest.
33. In the light of the above observation of the Tribunal, we remand the matter back to the file of AO to decide the issue afresh, after providing adequate opportunity to the assessee of being heard.
34. In the result, appeal of the Revenue stands allowed for statistical purposes.