1. These appeals by the assessee pertain to the assessment years 1993-94 and 1994-95. Though the assessee has urged nine common grounds in these appeals they are, in fact, directed against the order of the CIT (Appeals) in denying the benefit under section 80HHC of the Income-tax Act, 1961.
2. The facts of the case are these : The assessee-firm is engaged in the business of export of marine products. The assessee filed the return of income for the assessment year 1993-94 on 28-2-1994 declaring total income of Rs. 8,57,540. The return was processed under section 143(1)(a) of the Act computing the total income at Rs. 1,19,89,440.
Subsequently, the assessment was made under section 143(3) on 18-3-1997. Similarly, for the assessment year 1994-95 the return of income was filed on 29-12-1995 declaring total income of Rs. 2,41,270.
The return was processed under section 143(1)(a) on 25-3-1996 computing the total income at Rs. 1,24,85,610. While processing the returns, the Assessing Officer noticed that the deduction claimed by the assessee under section 80HHC was very excessive. Therefore, the Assessing Officer formed the opinion that income chargeable to tax has escaped assessment. Notice under section 148 was issued calling for the return.
In response to this notice, the assessee filed revised returns on 18-3-1996 declaring the same income that was shown in the original returns.
3. The Assessing Officer noticed that for both the assessment years, the assessee had effected its export sales through export houses, for which the assessee had entered into agreements with export house. On a perusal of these agreements, it was also noticed by the Assessing Officer that for effecting exports through export houses, the assessee was paid a fixed percentage of f.o.b. value as incentive, service charges, premium etc. by the export house. He also held that these payments are effected in favour of the assessee by the export house.
The licence or additional licence entitled for on account of the export will be received by the export house. This would mean the export benefits are enjoyed by the export house. In these circumstances, the Assessing Officer held that the assessee was not entitled to the deduction envisaged under section 80HHC. He accordingly disallowed the assessee's claim for deduction under section 80HHC. While coming to the above conclusion, the Assessing Officer relied on the decision of the Cochin Bench of the Income-tax Appellate Tribunal in the case of AM.Moosa, Chandiroor, in IT Appeal No. 498 (Coch.) of 1995, dated 14-9-1995 relating to the assessment year 1992-93, to the effect that "since the incentives received by the assessee represent a fixed percentage of the f.o.b. value the export house premium received has the character of turnover of the business". The Tribunal in that case held the view that it is to be included in the total turnover of the business. In the above case, the Tribunal also held that 90% of such premium received need not be deducted from the net business income to compute the profits of the business. According to the Assessing Officer this has not been accepted by the Revenue. In the circumstances, the Assessing Officer deducted 90% of the export house premium received by the assessee from the net business income to work out the 'profits of the business". Aggrieved by the order of the Assessing Officer, the assessee approached the first appellate authority.
4. Before the first appellate authority the assessee disputed the computation of the deduction available to it under section 80HHC. The assessee submitted that the Assessing Officer had failed to appreciate the fact that Explanation (baa) to section 80HHC(4A) was inserted by the Finance Act, 1991 with effect from 1-4-1992. It was the case of the assessee that export house premium could not be treated as 'brokerage', 'commission', 'interest', 'rent' or charges and it is not of the same or similar nature to be treated as similar to it for computation. The assessee by filing a paper book tried to explain the nature of the receipt as below: "To describe the transaction between the Appellant and Export House : the appellant procures marine products, process it, pack it, get it inspected by the concerned authorities and transport to the port from where shipment is to be effected, get it passed by the customs authorities and load on board the ship. All the expenses including shipping charges, customs duty, freight, etc. are paid by the appellant and the goods are exported by them. The purchase orders are procured by the appellant in all cases though it is stated otherwise in the agreement between the Export House and the appellant. The letters of credit are opened in the name of the appellant which is transferable to the Export House. After the goods are on board the ship and after the export, the appellant transfers the shipping documents to the Export Houses. The Export Houses authorises the appellant's bankers to credit the entire proceeds of export "to the packing credit account of the appellant with the designated banks. The appellant obtains the entire proceeds as per the commercial invoice credited to their packing credit account under this authorisation, in converted foreign exchange. In addition to the value of goods obtained in foreign exchange as stated above, the Export House pays a premium over and above the C&F value of exports to the appellant which payment is in Indian rupees itself.
This payment is made by the Export House after the appellant's bank certifying that the exports have been effected and the proceeds credited to the appellant's bank account." In the light of the above facts it was contended by the assessee before the CIT(Appeals) that the amount received as premium was a part of the sale consideration and at the most it could be treated as a discount or rebate on purchases. The assessee also placed reliance on the decision of the Cochin Bench of the Tribunal in the case of Sea Pearl Industries, in [IT Appeal No. 1220 (Coch.) of 1986, dated 3-11 -1987] for the proposition that the relationship between the assessee-exporter and an Export House is not one of principal and agent to call it as commission receipt. The assessee also relied on the decision of the Kerala Sales-tax Appellate Tribunal in the case of Sea Rose Marine (P.) Ltd. 1996 KLJ Tax Cases 39 to contend that sales in such cases are effected in high seas and not within the State of Kerala. It was further claimed by the assessee that the Audit Certificate required in Form No. 10CCAB for Disclaimer based deduction would show the value of the export house premium also as part of purchase price, in all except one case where it is also argued that simply because it is called a premium does not become similar to commission as nomenclature cannot be conclusive of the nature of the service. The assessee also placed reliance on the decision of the Tribunal in the case of A.M. Moosa (supra) for the proposition that since export house premium is calculated on the basis of the f.o.b. value of exports it has the character of turnover of the business and therefore is directly part of profits of business and not commission or similar receipt. However, the first appellate authority held that the decision of the Tribunal in the case of AM. Moosa (supra) has been reversed by the Hon'ble Kerala High Court in the very same case reported in AM Moosa, Bharath Sea Foods \.
CIT [1997] 224 ITR 735. The CIT(Appeals) also noted that the decision of the Tribunal in the case of Smt. Subhadra Ravi Karunakaran in [IT Appeal No. 430 (Coch.) of 1992, dated 31-10-1997] was also against the assessee. Placing reliance on the CBDT Circular No. 621 dated 19-12-1991 reported in 195 ITR (St.) 179 the assessee contended that 9096 of the receipts has no element of turnover and, therefore, it has to be excluded from the computation of deduction under section 80HHC.The assessee submitted that the export house premium was not a part of the turnover. The assessee also quoted the Bombay Chartered Accountant's Journal to contend that the exclusion is with reference to items which have no connection with exports ie., items which have a direct connection with export should not be taken for exclusion. The assessee also relied on the decision of the Kerala High Court in the case of CIT v. A. V. Thomas & Co. Ltd. [1997] 225 ITR 29'. The CIT (Appeals), however, could not agree with the propositions made by the assessee.
5. The first appellate authority observed that the Tribunal has taken a contrary view in the case of Smt. Subhadra Ravi Karunakaran (supra) from that taken in the case of A.M. Moosa (supra). He observed that part of the benefit derived by the export house is diverted to the assessee by way of a premium payment which has nothing to do with the quantum of foreign exchange receipt. The source of this receipt is a pure local transaction between the export house and the assessee.
According to the CIT (Appeals) the crucial issue was that the provisions of section 80AB were not considered while deciding the issue and further the Kerala High Court decision relied on in the present case was not quoted before the Tribunal. He held that in view of the decision of the Tribunal in the case of Smt. Subhadra Ravi Karunakaran (supra), the decision in the case of A.M. Moosa (supra) does not help the assessee. This is because in the case of Smt. Subhadra Ravi Karunakaran (supra), the Tribunal held that section 80HHC exclusively related to the business of export only and any other receipt received by the assessee would not form part of the profits for this purpose. In this case, the Tribunal also held that section 80HHC is subject to the provisions of section 80AB which lays down the principles for granting deductions under Chapter VI-A. The learned first appellate authority further relied on the decision of the Tribunal in the above case on the point that the provisions of section 80HHC does not overrule this general principle setting down the scheme of this deduction. The CIT(Appeals) relied on the decision of the Kerala High Court in the case of CIT v. V.T. Joseph [1997] 225 ITR 731' for the above proposition. The CIT(Appeals) relying on the above decision held that the Tribunal's view will also get support from section 80AB. The CIT(Appeals) summed up - "Total turnover for the purpose of the section meant total turnover of eligible exports plus total turnover if ineligible exports.
However, it does not include the turnover in respect of non-export business." The CIT (Appeals) further held that the decision of the Tribunal in the case of Sea Pearl Industries (supra) is against the assessee as far as it gives credence to the stand of the department that the relationship between the export House and the exporter is mainly for the purpose of deriving certain benefits for the export house, a part of which is parted with for the benefit of the actual exporter. This issue also became irrelevant as the system of disclaimer certificate and deduction thereon has been enacted into the Act. The CIT(Appeals) also distinguished the decision of ITAT in the case of Sea Rose Marine (P.) Ltd. (supra) on the ground that the relevant point in the instant case is the nature of arrangement between the exporter and the export house.
The CIT (Appeals) further held the opinion that items like bad debts written off earlier credited now or discount or rebate need not be deducted from the profits of the business cannot be accepted in the light of the decision of the Tribunal in the case of Smt Subhadra Ravi Karunakaran (supra) that the entire section relates to the business of export and profit from export only and not other items. Further, the CIT (Appeals) relied on the decision of the Hon'ble Kerala High Court confirming the decision of the Tribunal in the case of AM. Mooso, wherein the High Court with regard to the relief due to the assessee under sections 80HH and 80J held that the Tribunal was right in excluding the export house premia and the receipt on the sale of import entitlements, as part of profits from the industrial undertaking for the purposes of sections 80HH and 80J A.M. Moosa, Bharath Sea Food's case (supra). On the same analogy the CIT (Appeals) held that for the purpose of section 80HHC also export house premium cannot be treated as part of the profit of exports directly to say that it is 'derived' from the export as distinguished from 'attributable to'. The CIT (Appeals) placed reliance on the decision of the Supreme Court in Ashok Leyland Ltd. v. CIT [1997] 224 ITR 122' and India Leather Gorpn. (P.) Ltd v.CIT [1997] 227 ITR 552. The CIT (Appeals) noticed that in the case of Pond's Ltd. 1997 TLR 41, the Madras Bench of the Income-tax Appellate Tribunal held the view that interest receipt on deposits out of export sale was not derived from the business in an export zone even though it may be attributable to it and therefore not eligible to the deduction under section 10A. In the light of the above decisions, the CIT (Appeals) held that the income derived directly from export can only be considered for the deduction envisaged under section 80HHC. He further held that after going through the various agreements entered into between the assessee-exporter and the export house, it would be apparent that the responsibility of maintaining the quality and the risk factors remain with the assessee and not with the export house. He also noticed that the fixed percentage of payment has not been given any nomenclature except in one case where it is seen called 'incentive' and in another agreement it is called 'service charges'.
6. The export house premium, whether to be deducted or not to arrive at the profits of the business, was for the first time raised in the case of A.M. Moosa, where even the assessee was not disputing the deduction of this amount for arriving at the business profits. He further held that the export house premium is to be deducted from the profits of the business under the Explanation (baa) to section 80HHC and that it is to be excluded from total turnover for the purpose of computation of the deduction also because in the light of the decision of the Tribunal in the case of Smt. Subhadra Ravi Karunakaran 'total turnover' means total turnover of export business of eligible and ineligible items only.
According to the CIT (Appeals) premium is not a part of such turnover and whether it would be part of turnover of all the business of the assessee taken together is not material for the purpose of section 80HHC. Even for this purpose he held that in the light of the words used in section 44AB such as 'total sales, turnover or gross receipts' it would mean that turnover can only relate to goods wherein gross receipts include all receipts. In this view of the matter, the CIT (Appeals) directed the Assessing Officer to recompute the deduction available on the findings given by him above. The CIT (Appeals) also indicated that the Assessing Officer will see if there is sufficient profit of business out of export is included in the gross total income as decided by the Tribunal in the case of Smt. Subhadra Ravi Karunakaran (supra) and if there is no profit, then the assessee would not be entitled to any benefit under section 80HHC. Aggrieved by the above order of the first appellate authority, the assessee is in second appeal before the Tribunal.
7. The counsel for the assessee submitted that, first of all, the assessee was having only one activity, i.e., export and the assessee derives income only from export and not from any other business. It is with regard to such income generated from this activity that section 80HHC is to be applied. It is to be quantified with reference to the various sub-clauses of section 80HHC(3) read in the light of the Explanation to section 80HHC. The expression 'profits of the business' defined in clause (baa) of the Explanation speaks of the 'profits and gains of business or profession'. From this certain items are to be reduced. Explanation (baa) specifies the items that need be reduced as brokerage, commission, rent, interest, charges or other receipt of similar nature or any profits of branch, office, warehouse or any other establishment, of the assessee situate outside India. The income under the head 'profits and gains of business or profession' includes therein some of items of this nature also. It is not disputed that the so called premium is part of the assessee's business income. Hence while computing the income under the head 'profits and gains of business or profession', it is to be included. Sections 70, 71 and 72 clearly show that the heads of income under section 14 are integral and cannot be split. For example, for an assessee there can be different sources of income under one head while in respect of the business income there cannot be more than one head. To elucidate, if an assessee has ten properties which he has left out, it cannot be said that there are ten 'heads' of property income. It is only one item of income under the head which may comprise of different sources. Similar concept will prevail in respect of business also. The counsel submitted that it is possible to look upon the export business and non-export business as different sources, still for determining the income under the head 'business' all these will have to be aggregated so far as section 80HHC is concerned. The counsel for the assessee referred to the following observations of Kanga and Palkhivala's Income-tax, Eighth Edition, Volume-I, Page 870 : "Except in the three cases noted below, if the net result in respect of any source under any head is a loss, that loss may be set off under section 70 against income from another source under the same head. Income under each head is computed by lumping together the income from various sources which fall under the same head. There was no such express provision in the 1922 Act for setting off losses against income under the same head, but the principle was held to be implicit in that Act. For instance, losses in a business were set off against profits in another business or against professional earnings under the old section 10 itself which corresponded to section 28 of this Act." 8. Inviting our attention to Board's Circular No. 572 dated 3-8-1990, the counsel submitted that the numerical examples to be found at pages 102 and 103 clearly show that even income from non-export business forms a part of the income under the head 'business'. This being a beneficial circular, in the light of the decision of the Hon'ble Supreme Court reported in UCO Bank v. CIT [1999] 237 ITR 889, it has to be considered and enforced since it is in favour of the assessed. The Revenue authorities relied on the decision of the Tribunal in the case of Smt. Subhadra Ravi Karunakaran (supra) to decide the issue against the assessee. The said decision laid down the proposition that export business as such, whether in specified goods, or non-specified goods should be reckoned separately overlooking any other business income because of the expression 'derived from exports' and for the purpose of section 80HHC one cannot look into other business income. The counsel submitted that this decision was rendered for the assessment year 1989-90, prior to the introduction of clause (baa) in the Explanation to section 80HHC. By introducing clause (baa) in the Explanation to section 80HHC, the Legislature has laid down a special formula for computing the income from business. Smt. Subhadra Ravi Karunakaran's case (supra) was for the assessment year 1989-90. After the introduction of clause (bad) in the Explanation the whole percepts have changed. The Delhi Special Bench decision reported in the case of International Research Park Laboratories Ltd. v. Asstt. CIT [1994] 50 ITD 37 deciding the issue for the assessment years 1990-91 and 1991-92, the Tribunal held that the deduction under export turnover/ profits retained for export business as used in section 80HHC(3) unambiguously refers to total turnover of the entire business and not to the total turnover of export business and the Tribunal further held that business includes not only the turnover of exports but also the domestic turnover. Referring to the above Circular of the Board the Tribunal has held so. The learned counsel for the assessee submitted thus: It is clear that the income from all businesses even if it constitutes different sources has to be aggregated for quantifying the relief under section 80HHC. In the light of the decision of the Special Bench of the Tribunal (Delhi Bench D) reported in International Research Park Laboratories Ltd. 's case (supra) the decision of the Tribunal, Cochin Bench, in the case of Smt. Subhadra Ravi Karunakaran is no longer a good law. Relying on the decision of the Hyderabad Bench of the Tribunal reported in the case of V.B. C. Industries Ltd. v. Dy. CIT the learned counsel contended that even if a loss is incurred in the export business, the assessee is entitled to carry forward the loss even if the assessee earns income from other business. The counsel also submitted that one of the Members constituting the Bench which heard the case of Smt. Subhadra Ravi Karunakaran had taken a contrary view at Bangalore in a subsequent decision in ITA No. 994 (Bang.)/93, dated 8-9-1999. Therefore, the counsel submitted that looking from any angle the argument that premium will not be included in the profit derived from export as held in Smt. Subhadra Ravi Karunakaran's case (supra) cannot be upheld.9. The counsel further submitted that even if section 80AB was to apply still there is no bar against the inclusion of this income because it is the income of the nature of export that is dealt with and we need not go into the question whether it is 'derived' or otherwise received.
Even otherwise, the counsel submitted, the premium income is implicitly connected and directly arises from the carrying on of the business routed through export house. There is a clear nexus between the two. If there is no export, the assessee will not have earned this income.
Therefore, this is nothing but export income.
10. Coming to Explanation (baa) of section 80HHC, the counsel submitted that it provides for deduction of 90% of brokerage, commission, interest, rent, charges or any other receipt of a similar nature...".
The premium is an amount which is directly related with the export of the goods in question. In undertaking exports through export house the assessee bargains for profits partly from importer outside India and partly from the export house through which it is routed. It has all the characteristics of a business receipt. The only difference is that it is paid in Indian currency. It is related to the turnover. It envisages all activities of the exporter including the manufacturing activities, carriage of the same, loading on the ship, documentation etc., etc., which are all a part and parcel of the export trade. What contemplates under the Explanation (baa) is receipts which do not involve the activities of this nature thereby meaning only incidental receipts.
Therefore, receipts which have direct links with export business cannot be excluded regardless of the nomenclature.
11. Taking us to the background of the introduction of the Explanation (baa) to section 80HHC, the counsel submitted that the clause is to be understood against the background of the import of other expressions contained therein. The Explanation makes a difference between receipts mentioned in sub-clauses (iiia), (iiib) and (iiic) of section 28 on the one hand and other receipts. The amounts receivable from the export house are actually part of the sale price, i.e. that part which is receivable in Indian currency as distinct from the remaining part which is receivable in foreign currency. The commission or premium received due to the continuity of the activity of export, which involves time, skill, energy, effort etc., are nothing but part of export receipt.
Here the commission not to be included is such commission earned by a businessman whose very business consists of earning commission for others. Receipts of the nature that accrue in a manner which do not involve activities but are merely incidental to the business are deductible. This is all the more clear by the earlier expression (iiia), (iiib) and (iiic) in that sub-clause.
12. The income that can be taxed under the head 'business' can be divided into (a) where it directly springs from the carrying on of the business, and (b) where it is merely incidental to the business. For example, interest is received from fixed deposit, which is incidental to the business. The counsel submitted that every business receipt cannot fall under the expression 'charges or receipt of a similar nature mentioned in the Explanation (baa)(i). Where is the distinguishing line? The answer also lies in the very sub-section. The receipts answering to the description in (iiia), (iiib) and (iiic) directly arise from the business. These are statutory receipts but have a direct and intimate relation with export. If the expression 'charges or receipts of a similar nature' was of the widest amplitude, then it would also include all receipts referred to in (ma), (iiib) and (iiic).
It only indicates that the scope of the expression used is narrowed down. The items referred to in clause (baa) are, no doubt, business receipts. Those receipts falling under clause (b) of sub-section (4A) of section 80HHC are straightaway deductible under that expression. In the normal course all the receipts under (a) above would not have been deductible. But an exception is provided to this. These are enumerated in Explanation (baa)(i) specifically'such as (iiid), (iiib) and (iiic).
If that be so, the direct business receipts not falling under (iiia), (iiib) and (iiic) are not be included under the Explanation. This will lead to the conclusion that service charges, premium, commission etc.
which have a direct nexus with the export business fall outside the purview of the Explanation. The Circular No. 621, dated 19-12-1991 (195 ITR 154 St.) gives an indication that the turnover liable to be excluded is of such nature which does not have an element of turnover of the business and not all the receipts. Item which has the characteristic of turnover of business cannot be excluded.
13. It is not as if all the receipts which are not strictly in the nature of turnover are to be excluded. The receipts which had the character of turnover cannot be and shall not be excluded, if it has a direct link with the export business.
14. The learned counsel for the assessee also submitted that the decisions reported in V. T. Joseph s case (supra) and A. V. Thomas & Co. Ltd. 's case (supra) were related to the assessment years where the terminology used in the section was not different. While deciding the issue in the case of Smt. Subhadra Ravi Karunakaran (supra), the decision reported in A.V. Thomas & Co. Ltd 'scase (supra) was not adverted to. The decision of the Tribunal in the case of Sri G.Gangadharan Nair v. ITO [IT Appeal No. 610 (Coch.) of 1994, dated 31-12-1994 which went against the assessee in respect of premium had been set aside by the Kerala High Court in G. Gangadharan Nair v. CIT [1999] 238 ITR 685 (Ker.). Therefore, now the only decision available is the decision in the case of A.M. Moosa (supra), which is in favour of the assessee.
15. The learned counsel submitted that the Tribunal was not justified in holding in the case of Baby Marine (Eastern) Exports in [IT Appeal Nos. 49 and 50 (Coch.) of 1998] that section 80AB reduces the scope of section 80HHC. Section 80AB was in force from 1 -4-1981, ie. even before section 80HHC was introduced for the first time from 1-4-1983.
Section 80AB is a general provision. Section 80HHC being a special provision, it provides the modes for the determination of the profits derived by the assessee from export. Special provision should override the general provision. If the definition under section 80AB determines the profits and gains of the business, then there would have been no need for the Explanation (baa) to section 80HHC. For the assessment years under consideration, the profits derived from the export business are to be quantified with reference to the various sub-clauses of section 80HHC or 80HHC(3A) read with the Explanation. The expression "profits of the business" in various clauses of section 80HHC, sub-clauses (a), (b) and (c) should receive the same interpretation.
The case of Smt. Subhadra Ravi Karunakaran (supra) pertains to the assessment year 1989-90. The Tribunal was called upon to interpret section 80HHC and 80HHC(3)(b). While interpreting the expression "the amount which bears to the profits of the business (as computed under the head 'profits and gains of business or profession').....", the Tribunal held that the expression under the head "profits and gains of business or profession" should be restricted to export business only, both is specified and non-specified goods and it cannot be extended to non-export business too. This view, as already indicated above, the learned counsel reiterated gets support from the decision of the Special Bench (Delhi Bench D) of the Tribunal reported in International Research Park Laboratories Ltd. 's case (supra). He contended that section 80HHC gives a special formula and it is a self-contained code.
The assessee's sale price is equal to f.o.b. value plus the incentive, commission. It flows from one and the same transaction. It should be treated as such. The counsel also relied on the decision of the Andhra Pradesh High Court in the case of CIT v. Goginerii Tobacco Ltd. [1999] 238 ITR 970.
16. Replying to the above, the learned departmental representative supported the orders of the Revenue authorities and inviting our attention to section 80HHC(1) submitted that the word used in this section is "profits" derived by the assessee from the export of such goods or merchandise and not the profits attributable to. True, incentive, premium, service charges all had a link with the export business of the assessee, but did not derive from. The term 'derive' indicates an immediate source and not secondary. It is different from other receipts of similar nature. What is to be seen is the nature of the receipts and the immediate source it derived from. Before working out the deduction admissible under the section, agreement/agreements executed by the assessee with export house should be taken note of. The assessee routed export of its marine products through some of the export houses. A common agreement was executed by the assessee as well as by the sister concerns, M/s. Baby Marine (Eastern) Exports and M/s.
Baby Products. On going through the agreements, it is seen that the payment was in the nature of incentive whatever be the nomenclature used. It is termed as either 'incentive' or 'premium' or as 'service charges'. The payment mentioned in the agreement is nothing but either a charge or any other receipt of a similar nature as mentioned in clause (i) of Explanation (baa). Therefore, the Assessing Officer reduced 90% of the receipts from the business income to arrive at the profits of the business and the CIT (Appeals) was justified in confirming the same.
17. Premium was received by the assessee for routing the exports received through export houses. The assessee's contention that orders are procured by the assessee directly in all cases, though it is stated in the agreement otherwise, is to be taken note of. The export houses received the benefits out of such routing of exports through them. For getting this benefit, the export houses part with some of their benefits to the assessee by way of premium by whatever name it is called and it is received in local currency only. It may be true that it is on the basis of the exports the premium is calculated, but it has nothing to do with the quantum of foreign exchange received. Hence it is only secondary receipt and not derived from the business of export.
This issue has already been decided by the Tribunal in the case of Sri G. Gangadharan Nair (supra), Mattancherry vide its order dated 31-12-1994 relating to the assessment year 1992-93. In para 3 of its order, the Tribunal while upholding the computation of the Assessing Officer in reducing the profits by 90% of the export earnings premium and the brokerage in computing the profits for purpose of deduction under sub-section (1A) of section 80HHC, held that "so the export premium receipt is only a subsidy received by the assessee to cover the cost. Certainly it will fall within the meaning of the term any receipt towards "charges" that entered the profits of the business. Similar is the case with brokerage on freight. In this view of the matter, we reject the contention of Sri Kesavan and uphold the computation of the Assessing Officer in reducing the profits by 90% of the export earnings premium and the brokerage in computing the profits for purpose of deduction under sub-section (1A) of section 80HHC of the Income-tax Act". The learned departmental representative further submitted that the decision of the Tribunal in the case of Sri A.M. Moosa (supra) has not been accepted by the Revenue. He also relied on the decision of the Kerala High Court in the case of CIT v. Sea Pearl Industries [IT Reference No. 5 of 1992, dated 25-6-1998].
18. Replying to the above, the assessee's counsel reiterated the submission that the decision of the Tribunal in the case of Sri G.Gangadharan Nair (supra) is no more good law as the Hon'ble Kerala High Court has set aside that decision. Further, the counsel submitted that the main thrust of the decision of the Tribunal in the case of Baby Marine (Eastern) Exports (supra) was that the sales-tax authorities had not included the premium or commission or incentive received from the export house as part of the turnover for the purpose of sales-tax. If the assessee now claims that the receipt from the export house forms part of export price then the assessee should have included such receipts for sales-tax purposes also. Having failed to do so, there was no justification, the Tribunal held, for the belated claim of the assessee to include it for the purpose of section 80HHC. The counsel further reiterated that the Tribunal was not justified in placing too much reliance on the decision of the jurisdictional High Court in the case of V. T. Joseph (supra) in the light of the facts that the Hon'ble Kerala High Court in a subsequent decision had taken a contrary view on the same point in the case of A. V. Thomas & Co. Ltd. (supra).
19. We have heard rival submissions and gone through the orders of the Revenue authorities and the decisions cited by the contending parties.
First we will consider whether the issue could be treated as covered by the decision of the Tribunal, Cochin Bench, in the case of Baby Marine (Eastern) Exports (supra), Circle-I, Kollam.
The decision of the Tribunal was based mainly on the ratio of the Kerala High Court decision in V.T. Joseph (supra) while deciding the issue the Tribunal had taken note of the earlier decisions of the Cochin Bench of the Tribunal in the case of Smt. Subhadra Ravi Karunakaran (supra) and also the decision in the case of Sri G.Gangadharan Nair (supra). It appears, the subsequent decision of the Kerala High Court in the same ITR, i.e. in the case of A. V. Thomas & Co. Ltd. (supra) was not brought to the notice of the Tribunal. In the case reported in V. T. Joseph (supra), the Court held that the deduction under section 80AB and the deduction under section 80HHC can be allowed only to the extent of income from exports included in the gross total income; whereas in the case reported in A V. Thomas & Co.
Ltd. (supra) the High Court held the view that-- "A reading of section 80AB would show that computation of deduction was geared to the amount of income, but coming to the provisions contained in section 80HHC quantification of the amount of deduction was geared to the export turnover and not to the income. The term "export turnover was defined as "sale proceeds of any goods, etc.
exported out of India". Section 80HHC was introduced by the Finance Act, 1983 to encourage export. Therefore the assessee was entitled to claim deduction under section 80HHC even if it had suffered loss in its business of export of cardamom." The learned departmental representative tried to make a distinction between the two decisions of the Hon'ble Kerala High Court in V.T.Joseph 'scase (supra) and A V. Thomas & Co. Ltd.'s case (supra) by pointing out that in the case of A. V. Thomas & Co. Ltd. (supra) the High Court was referring to 'export turnover'; while in the case of V.T. Joseph (supra), the High Court was referring to 'gross total income'.
20. We do not find much merit in this distinction. The reason is, in the case of V.T. Joseph (supra) the assessment year involved was 1983-84 and in the case of A. V. Thomas & Co. Ltd. (supra) the assessment year involved was 1985-86 and for both assessment years the same law was applicable, as there was no much difference in the wording of the section since the decision of the Hon'ble Kerala High Court in the case of V.T. Joseph (supra) was dated 26-9-1996 and the decision in the case of A.V. Thomas & Co. Ltd. (supra) was on a subsequent date, i.e. 6-1-1997, the later decision should prevail over the earlier one.
21. It is important to note that section 80AB came into the statute with effect from 1-4-1981 by the Finance (No. 2) Act, 1980; whereas section 80HHC was originally inserted by the Finance Act, 1983 with effect from 1-4-1983 for and from the assessment year 1983-84. With a view to encouraging large exports of certain goods by Finance Act, 1982, a section was inserted for the first time with effect from 1-6-1982 for providing tax relief to companies and corporate tax payers resident in India whose export turnover for a year exceeds export turnover of the immediately preceding year by more than 10%. This was subsequently withdrawn and the present section was introduced. With the 1989 amendment the section for the first time exempted the entire profits derived from exports and made express provision for dividing the exemption between a recognised export house or trading house and the supporting manufacturer.
22. By Finance (No. 2) Act of 1991 clause (bad) was inserted to Explanation to section 80HHC(4A) with effect from 1-4-1992. The clause seeks to provide the definition of the term 'profits of the business' for the purpose of section 80HHC. It reads as under : "(baa) 'profit of the business' means the profits of the business as computed under the head 'Profit 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 suitable outside India;" Clause (ba) to Explanation defines for the purpose of section 80HHC what is total turnover to be arrived at. It states that it shall not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs stations as defined in the Customs Act, 1962. The proviso to clause (ba) is to the effect that "total turnover" shall have effect as if it also excluded any sum referred to in clauses (iiia), (iiib) and (iiic) of section 28. Explanation (baa)(1) states that while computing the profits and gains of business or profession, certain items are to be reduced. In other words, it means that the items which are not specifically mentioned therein are not to be excluded while computing the profits and gains of business or profession. Items to be excluded are brokerage, commission, interest, rent, charges or any other receipt of a similar nature. Explanation (baa)(2) excludes the profits of any branch, office, warehouse or any other establishment of the assessee situate outside India. The expression used in (baa)(1) "any other receipt of a similar nature included in such profits" therefore can only be with regard to items specified in the Explanation (baa)(1) i.e. clauses (iiia), (iiib) and (iiic) of section 28 or brokerage, commission, interest, rent, charges.
What is the nature of the items specified in this Explanation such as brokerage, commission, interest, rent, charges 23. It is nobody's case that the assessee is having any other business other than exports. Premium received by the assessee is a benefit arising from the business of export. In the case of Smt. Subhadra Ravi Karunakaran (supra), it was held by the Tribunal that the expression "income derived from export out of specified and non-specified good" should be reckoned separately. But it is to be also noted that this decision was relevant for the assessment year 1989-90, prior to the introduction of clause (baa) in the Explanation to section 80HHC which specifically states what are the items to be excluded while computing the profits of the business under the head "profits and gains of business or profession". The Explanation (baa) specifically enumerates the items that are to be excluded. Therefore, the decision of the Tribunal in the case of Smt. Subhadra Ravi Karunakaran (supra) is not relevant for the assessment years under consideration. It is also to be noted that a contrary view has been taken by the Delhi Bench of the Tribunal (Special Bench) in the case of International Research Park Laboratories Ltd. (supra). In this case, the Tribunal (Special Bench) held that "the expression 'total turnover' used in section 80HHC(3)(b) unambiguously refers to total turnover of the entire business and not to the turnover of the export business. 'Business' includes not only the turnover of export but also domestic turnover. While clause (a) of sub-section (3) refers to a situation where an exporter has exclusible business of export and not having any local business, clause (6) refers to the situation, where an assessee has both export and local turnover.
If an assessee has therefore local turnover and export turnover there is no escape from the application of the formula provided in clause (6) of sub-section (3). Those profits are computed under the head 'Profits and gains of business or profession' and only such profits as are attributable to exports turnover by apportionment thereof are entitled to the exemption. Thus, when a person has exports as well as local business, the entire profits are to be computed in the manner laid down in that subsection, namely, under the head 'profits and gains of business or profession', and only a part of that amalgamated profits or the result of the computation has to be apportioned on the basis of the turnover. There are no words in sub-section (3) as to limit this apportionment of profit on the basis of turnover in exports or to suggest that the apportionment has to be resorted to only when the same kind of goods exported are also dealt with locally." Coming to the applicability of section 80AB, the Tribunal also held that "section 80AB postulates only the computation of deduction by permitting the revenue to reduce it by the possible expenditure incurred to earn that income" and "section 80HHC deals with a different nature of income as to whether the income is relatable to a business exclusively consisting of export or exports and other local business". As far as section 80HHC is concerned, the Tribunal held that it is a complete code by itself.
Nowhere else in the Act one has to look to and no other provision in that Act has to be followed except applying those rules contained in the provisions of section 80HHC which are applicable to compute the income from profits and gains of business. The Tribunal also held that "if the business does not consist exclusively of exports, irrespective of whether the profits on export business are ascertainable or not, if there is domestic turnover, it is clause (b) of sub-section (3) that would become operational and according to clause (b) the entire turnover of the entire business must be aggregated and then only apportioned". The Tribunal further held that "although reading sections 80HH, 80HHB, 80-I, 80J, 80JJ appearing in the same Chapter VI-A, it will be found that the basis for deduction is on the profits computed separately for the specified business or specific type of industrial undertaking, to which that particular section applies, section 80HHC is related to the nature of activity, totally unrelated to the type of goods". The Tribunal further noted that "another important departure of section 80HHC compared to other sections is that profits and gains of export business are not required to be computed as per the books of account of the assessee but as provided for in rule 18BBA in the prescribed Form No. 10CCAC. The view expressed by the Special Bench of the (Delhi Bench D) Tribunal was tacitly approved by the Hon'ble Andhra Pradesh High Court reported in 238 ITR 970 in the case of CIT v.Gogineni Tobacco Ltd. Though the issue was not exactly the same, the Hon'ble Andhra Pradesh High Court distinguished section 80HHC from other sections in Chapter VI-A saying that the section is a self-contained code and in view of the words expressly used "this section", that means section 80HHC. It does not say that the deduction is to be allowed from the gross total income. Therefore, the interpretation applicable to section 80HH is not relevant to section 80HHC.24. Coming to the decision of the Tribunal in the case of Sri G.Gangadharan Nair (supra) relied on by the learned departmental representative, suffice it to say that this decision is no more reliable in view of the decision of the Hon'ble High Court of Kerala in the case of G. Gangadharan Nair (supra). In this case, the Assessing Officer held that the amount received by the assessee as a result of an agreement entered into with the export house, who agreed to pay a percentage of the F.O.B. value of the export to the assessee constitutes service charges and, therefore, it was deductible from the profits and gains of business for arriving at the profits of the business as defined in the Explanation (baa) to section 80HHC(4A). The CIT (Appeals) and the Tribunal confirmed the order of the Assessing Officer. On reference, the Hon'ble High Court returned the questions unanswered as neither the Assessing Officer nor the CIT (Appeals) or the Tribunal assigned any reasons whatsoever to come to the conclusion that premium/incentive was paid to the assessee for rendering services to the export house and directed the Tribunal to decide the issue afresh.
25. Coming to the decision of the Hon'ble High Court of Kerala referred to by the Revenue authorities in the case of AM Moosa, Bharath Sea Foods (supra), the assessment year involved was 1979-80 and the section considered was 80HH and 80-J and not section 80HHC. Now coming to the decision relied on by the assessee's learned counsel in the case of AM Moosa (supra) the issue was in favour of the assessee and this decision now stands, Coming to the decisions of the Hon'ble Kerala High Court reported in V.T. Joseph's case (supra), A.V. Thomas & Co. Ltd.'s case (supra), we have already noted that since there was no change in the statute though the assessment years involved were different, in view of the above facts, the later decision should prevail. Though apparently there seems to be a conflict between the two decisions, because the stress in one case was with regard to "gross total income" and that in the other case was "export turnover" at page 737 of the report in the case of V. T. Joseph (supra), the Hon'ble High Court also observed-- "Thus, it is abundantly clear that the statutory provision under consideration links the question of deduction inseparably with the export turnover and five per cent of the difference specified in clause (b) thereof additionally." 26. In effect, though in the earlier decision, it was held on one fact against the assessee, the principles laid down by the two Benches do not at a closer look appear to be contradictory.
27. Another important point to be noted is the difference in the wording of section 80HHC, on the one hand, and the wording of sections 80HH, 80HHB, 80-I, 80DJ and 80JJ on the other. Whereas in sections 80HH, 80HHB, 80-I, 80J and 80JJ the words used are "where the gross total income of the assessee includes....", the wording of section 80HHC is "in computing the total income of the assessee.,..". Now the question is, Is there a difference in the expression "gross total income" of the assessee used in sections 80HH, 80HHB, 80-1, 80J and 80JJ and the words "total income" of the assessee used in section 80HHC Section 80B(5) defines what is gross total income. According to this definition "gross total income" means "total income computed in accordance with the provisions of this Act before making any deduction under this Chapter". Section 80HHC on the other hand contemplates a deduction for an assessee being an Indian company or a person resident in India, who is engaged in the business of exports outside India of any goods or merchandise to which this section applies, which in accordance with and subject to the provisions of this section be allowed in computing the total income of the assessee, a deduction of the profit derived by the assessee from the export of such goods or merchandise.
28. We have noted that the words used in section 80HHC are "any goods or merchandise to which this section applies, in accordance with and subject to the provisions of this section 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". The phraseology used in section 80HHC is "in accordance with and subject to the provisions of this section"; whereas the phraseology in other sections mentioned in the other provisions noted above of this Chapter are "in accordance with the provisions of this Act". We can clearly visualise the difference. While computing the deduction under section 80HHC only this section is to be considered and taken note of; whereas in the other sections while computing the deduction the provisions of this Act are to be taken note of. This view also gets support from the decision of the Tribunal, Hyderabad Bench 'A' in the case of V.B.C. Industries Ltd. (supra) and the ITAT Madras Bench 'n' decision in the case S.I.Property Development (P.) Ltd, v. IAC [1992] 40 ITD 494.
29. Now coming to the Explanation (baa) to section 80HHC(4A), the proviso excludes from the "profits and gains of business or profession' ninety per cent of any sum referred to in clauses (iiia), (iiib) and (iiic), which are incentives granted by the Government, to arrive at the "profits of business" so also the receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature. It is to be noted that these receipts had no element of turnover in the strict sense and, therefore, they are to be excluded.
The receipts which had a direct bearing with the export cannot be excluded while applying section 80AB. As we have already held, this is more clear from the wording in section 80HHC, that the deductions are to be computed subject to the provisions of 'this section"; whereas in sections like 80HH, 80HHB, 80-I, 80-J and 80-JJ, the deductions are to be computed in accordance with the provisions of "this Act". In the light of the above, the provisions of law and the decisions relied on by both parties, we are of the, view that the appeal by the assessee is liable to be allowed. We do accordingly.