S.H. Kapadia, J.
1. The short point which arises for consideration in this appeal is : whether reassortment charges were includible in business profits while calculating export profits as per the formula : Business profits X Export turnover/Total turnover.
2. The facts of this appeal are as follows :
3. We are concerned with the assessment year 1989-90. During the said year, the assessee received reassortment charges. According to the trade practice, whenever a foreign buyer approached the assessee who was not able to supply the diamonds, the assessee approached other diamond traders. The said traders would, thereafter, send the goods to the foreign buyer on approval basis. If the foreign buyer approves the goods, the sale, would take place directly between the trader and the foreign buyer for which the assessee got one per cent. commission named as reassortment charges. In substance, the said reassortment charges constitute commit sion received by the assessee from the local parties in India from their sale. The narrow question is : whether such reassortment charges were includible in business profits in the above formula.
4. The assessee has claimed that they were includible in the business profits. The assessee had claimed that, however, the said charges were not includible in the total turnover. The Tribunal had held in favour of the assessee. Hence, this appeal is filed by the Department. In the case of CIT v. K. K. Doshi and Co. : [2000]245ITR849(Bom) , decided vide Income-tax Appeal No. 77 of 2000 this court took the view that the business profits in the above formula will not include receipts by way of brokerage, commission, interest, etc., as they have no linkage with the export activities. In the, said judgment, this court has also discussed the subsequent amendment with effect from April 1, 1992, by which it has been clarified that business profits will not include receipts by way of brokerage, commission, interest, labour charges or any other receipts of similar nature. The Legislature has further provided for ten per cent. deduction from such income to account, for expenses incurred in earning the above incomes. Therefore, in view of our judgment in Income-tax Appeal No. 77 of 2000 (see : [2000]245ITR849(Bom) ), reassortment charges cannot be included in the business profits in the above formula. However, it has been vehemently urged in this appeal that while amending Section 80HHC and in particular business profits, the Legislature has made it clear that the said amendments will take effect from April 1, 1992, and shall apply to the assessment year 1992-93 and subsequent assessment years. Hence, it was contended that the Legislature has made the amendment prospective. It was urged that the amendment was not clarificatory. That it was expressly made prospective and, therefore, it cannot be invoked in this appeal which relates to the assessment year 1988-89. We do not find any merit in the said contention. Firstly, it may be noted that the section had undergone various changes from time to time. Our attention was invited to the note on the Finance Act of 1990 as reported in [1990] 182 ITR 306. It was contended that in the same Amendment Act, the Legislature has specifically provided for different types of amendments ; some of which are expressly made retrospective. As an illustration, it was contended that in the Explanation a new clause was added by way of Clause (ba) defining the expression 'total turnover' so as not to include freight or insurance attributable to the transport of the goods beyond the customs station. This clause was introduced with retrospective effect from April 1, 1987, whereas the definition of business profits was amended with effect from April 1, 1992. Hence, it was contended that in the same enactment, the Legislature has provided for certain amendments which are retrospective in nature and others which are prospective in nature and, therefore, the proposed amendment by way of Clause (baa) which defines 'business profits' will apply only from April 1, 1992. We do not find any merit in the said contention. The memorandum explaining the provisions has discussed this point in detail. In [1991] 190 ITR 300, it has been mentioned that the existing formula distorted the figure of export profits when receipts like interest, commission, etc., are included in the business profits and, therefore, to clarify the meaning of the business profits for the purposes of Section 80HHC, the Legislature has excluded the above items from business profits in the above formula. Therefore, the said amendment was clearly intended to remove the defect in the formula for calculating export profits even before April 1, 1992. In fact, the Legislature have clarified that receipts like interest, commission, etc., have no nexus with the export activity and by including such receipts in the business profits the existing formula became unworkable. Hence, by the amendment, such receipts were excluded. Moreover, the clarification has been introduced by way of Clause (baa) in the Explanation. Hence, the said amendment was clarificatory in nature. It cannot be disputed that there were several conflicting orders passed by the Department as the position was not clear. Hence, the amendment has come into force from April 1, 1992. However, the said amendment is clarificatory in nature. Even without the amendment, with the inclusion of the above receipts in the business profits, the formula became unworkable because the assessees introduced receipts in the business profits which had no nexus with the export activity. In some cases, the result was that sale proceeds from export activity were nominal whereas the income from local sales was proportionately very large and on that basis the assessees who had composite business claimed the benefits of deduction under the said section. After April 1, 1992, the anomaly is removed. Even before April 1, 1992, the Legislature never intended to include such receipts in the business profits. Similarly, prior to April 1. 1992, there was one more distortion. In most cases, the Department used to include receipts whereby total turnover came to be artificially inflated. This brought down the export profits. Prior to April 1, 1992, export turnover excluded freight or insurance. However, such exclusion was not provided for in total turnover. Therefore, by Clause (ba) of the Explanation, total turnover also excluded freight or insurance. A reading of Clause (b) and Clause (ba) of the Explanation clearly indicates that the Legislature has brought on par the components of export turnover and sale turnover. Both the numerator and the denominator show that they refer to sale proceeds. Any receipt which does not form part of sale proceeds cannot come within the ambit of the above ratio. This is also in view of the fact that peroration applies to business profits in order to work out the export profits. Therefore, the numerator and the denominator are required to have a common element which is the sale proceeds. In fact, by the proviso in Clause (ba) to the Explanation, it is further provided that the expression 'total turnover' shall have effect so as to exclude Section 28(iiia), (iiib) and (iiic) which refer to, inter alia, profits on sale of a licence granted under the Import (Control) Order, cash assistance, duty drawback, etc. This exclusion also shows that the Legislature clearly intended to exclude all receipts which have no nexus with sale proceeds from export activity. Hence, total turnover cannot include reassortment charges, labour charges, commission, interest, rent or receipts of similar nature. Therefore, total turnover will not include receipts like labour charges, reassortment charges, etc.
5. Accordingly, the appeal is allowed with no order as to costs.
6. C. C. expedited.