K.S. Radhakrishnan, Actg. C.J.
1. Whether turnover on sales to export house undertaken by the assessee as a supporting manufacturer be included in the 'export turnover' for the purpose of computation of deduction under the proviso to Sub-section (3) of Section 80HHC of the IT Act, 1961, is the question that has come up for consideration in this case.
2. Assessee is a cashew exporter who had made direct and indirect exports for the asst. yr. 1992-93 and claimed total deduction of an amount of Rs. 97,54,515 under Section 80HHC (1) and (1A) of the IT Act, 1961. The AO granted separate deductions under Section 80HHC(1) and 80HHC(1A) in respect of both direct and indirect exports totalling an amount of Rs. 91,10,306 as against the claim of Rs. 97,54,515; while granting deduction under the proviso to Section 80HHC(3), the AO excluded sales to export houses from 'export turnover' and reworked relief at Rs. 12,63,532. Aggrieved by the said order, assessee took up the matter before the CIT(A). The CIT(A) upheld the order of the AO on the ground that export turnover for the purpose of the proviso to Sub-section (3) includes only direct export since Sub-section (3) deals with the quantification of deduction in the case of direct exports and the quantum of deduction can be computed only on the basis of the direct export turnover. He also took note of the deduction separately granted on indirect exports under Section 80HHC(1A) of the Act. Assessee took up the matter before the Tribunal. Tribunal following the decision of the Delhi Bench of the Tribunal in the case of Eastern Leather Products (P) Ltd. v. Dy. CIT , directed the AO to recompute the income of the assessee and to allow whatever benefits that would have been allowed to the export house had they not issued the disclaimer certificate. CIT is aggrieved by that order and has come up with this appeal.
3. Senior standing counsel for the IT Department Sri P.K. Ravindranatha Menon submits that the Tribunal has committed an error in granting benefits to supporting manufacturer since the export turnover for the purpose of the proviso to Sub-section (3) includes only direct export. Sub-section (3) deals with the quantification of deduction in the case of a direct exporter and the quantum of deduction can be computed only on the basis of the export turnover. Counsel submitted that the Tribunal has not properly understood the scope of Section 80HHC and the provisos thereunder. Counsel appearing for the respondent-assessee, Sri P. Balachandran, on the other hand contended that under Sub-section (1) of Section 80HHC, if an export house or trading house issues a certificate in respect of export turnover specified therein, deduction under the said sub-section is to be allowed to a supporting manufacturer. Counsel submitted that supporting manufacturer is eligible for all deductions as calculated under Sub-section (3) including its proviso. Counsel further submitted that when export house had issued a disclaimer certificate, the export house was prohibited from claiming any deduction in respect of the turnover mentioned in the disclaimer certificate and the supporting manufacturer should get the full benefit. Counsel submitted that Section 80HHC is a beneficial one and be interpreted liberally.
4. Assessee, as we have already indicated, had made direct and indirect exports during the asst. yr. 19.92-93, Assessee had directly exported cashew kernels and also said some quantity to export house who, in turn, exported the same. Assessee as a supporting manufacturer effected sales to ITC Ltd., Calcutta and Britannia Industries Ltd., Bangalore. Assessee had claimed deduction under Sub-section (1A) of Section 80HHC. Form No. 10CCAB issued by the export houses was produced to show that they had exported the goods or merchandise manufactured and sold to them by the assessee during the relevant assessment year. Assessee had, therefore, claimed deduction both under Section 80HHC(1) being an exporter and under Sub-section (1A) in the capacity of a supporting manufacturer. Since assessee had sold kernels locally, computation of deduction under Sub-section (1) has to be made as provided under Clause (c) of Sub-section (3) and also the provisos thereunder. Under the proviso, assessee is entitled to 90 per cent of any sum referred to in Clause (iiia) and Clauses (iiib) and (iiic) of Section 28, same proportion as the export turnover bears to the total turnover of the business carried on by the assessee. We may in this connection extract Section 80HHC for easy reference.
'80HHC. Deduction in respect of profits retained for export business.--(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 of the profits derived by the assessee from the export of such goods or merchandise.
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(1A) Where the assessee, being a supporting manufacturer, has during the previous year, sold goods or merchandise to any Export House or Trading House in respect of which the Export House or Trading House has issued a certificate under the proviso to Sub-section (1), 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 of the profits derived by the assessee from the sale of goods or merchandise to the Export House or Trading House in respect of which the certificate has been issued by the Export House or Trading House.
(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, where the Chief CIT or, CIT is satisfied (for reasons to be recorded in writing) that the assessee is, for reasons beyond his control, unable to do so within the said period of six months, within such further period as the Chief CIT or CIT may allow in this behalf.
(b). This section does not apply to the following goods or merchandise, namely :
(i) mineral oil; and
(ii) minerals and ores (other than processed minerals and ores specified in the Twelfth Schedule)
Explanation 1.--The sale proceeds referred to in Clause (a) shall be deemed to have been received in India where such sale proceeds are credited to a separate account maintained for the purpose by the assessee with any bank outside India with the approval of the Reserve Bank of India.
Explanation 2.--For the removal of doubts, it is hereby declared that where any goods or merchandise are transferred by an assessee to a branch office, warehouse or any other establishment of the assessee situate outside India and such goods or merchandise are sold from such branch office, warehouse or establishment, then such transfer shall be deemed to be export out of India of such goods and merchandise and the value of such goods or merchandise declared in the shipping bill or bill of export as referred to in Sub-section (1) of Section 50 of the Customs Act, 1962 (52 of 1962) shall, for the purposes of this section, be deemed to be the sale proceeds thereof.
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(3) For the purposes of Sub-section (1)--
(a) where the export out of India is of goods or merchandise (manufactured or processed by the assessee), the profits derived from such export shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee;
(b) where the export out of India is of trading goods, the profits derived from such export shall be the export turnover in respect of such trading goods as reduced by the direct costs and indirect costs attributable to such export;
(c) where the export out of India is of goods or merchandise (manufactured or processed by the assessee) and of trading goods, the profits derived from such export shall,--
(i) in respect of the goods or merchandise (manufactured or processed by the assessee) be the amount which bears to the adjusted profits of the business, the same proportion as the adjusted export turnover in respect of such goods bears to the adjusted total turnover of the business carried on by the assessee; and
(ii) in respect of trading goods, be the export turnover in respect of such trading goods as reduced by the direct and indirect costs attributable to export of such trading goods :
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Explanation--For the purposes of this sub-section,--
(a) 'adjusted export turnover' means the export turnover as reduced by the export turnover in respect of trading goods;
(b) 'adjusted profits of the business' means the profits of the business as reduced by the profits derived from the business of export out of India of trading goods as computed in the manner provided in Clause (b) of Sub-section (3).
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(f) 'trading goods' means goods which are not manufactured or processed by the assessee.
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(3A) For the purpose of Sub-section (1A), profits derived by a supporting manufacturer from the sale of goods or merchandise shall be--
(a) in a case where the business carried on by the supporting manufacturer consists exclusively of sale of goods or merchandise to one or more Export Houses or Trading Houses, the profits of the business.
(b) in a case where the business carried on by the supporting manufacturer does not consist exclusively of sale of goods or merchandise to one or more Export Houses or Trading Houses, the amount which bears to the profits of the business the same proportion as the turnover in respect of sale to the respective Export House or Trading House bears to the total turnover of the business carried on by the assessee.
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(4) The deduction under Sub-section (1) shall not be admissible unless the assessee furnishes in the prescribed form along with the return of income, the report of an accountant, as defined in the Explanation below Sub-section (2) of Section 288, certifying that the deduction has been correctly claimed in accordance with the provisions of this section.
(4A) The deduction under Sub-section (1A) shall not be admissible unless the supporting manufacturer furnishes in the prescribed form along with his return of income,--
(a) the report of an accountant, as defined in the Explanation below Sub-section (2) of Section 288, certifying that the deduction has been correctly claimed on the basis of the profits of the supporting manufacturer in respect of his sale of goods or merchandise to the Export House or Trading House; and
(b) a certificate from the Export House or Trading House containing such particulars as may be prescribed and verified in the manner prescribed that in respect of the export turnover mentioned in the certificate, the Export House or Trading House has not claimed the deduction under this section :
Provided that the certificate specified in Clause (b) shall be duly certified by the auditor auditing the accounts of the Export House or Trading House under the provisions of this Act or under any other law.
Explanation--For the purposes of this section,--
(a) 'convertible foreign exchange' means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Regulation Act, 1973 (46 of 1973), and any rules made thereunder;
(aa) 'export out of India' shall not include any transaction by way of sale or otherwise, in a shop, emporium or any other establishment situate in India, not involving clearance at any customs station as defined in the Customs Act, 1962 (52 of 1962).
(b) 'export turnover' means the sale proceeds received in, or brought into India by the assessee in convertible foreign exchange in accordance with Clause (a) of Sub-section (2) of any goods or merchandise to which this section applies and which are exported out of India, but does not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962.
(ba) 'total turnover' shall not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962 (52 of 1962).
Provided that in relation to any assessment year commencing on or after the 1st day of April, 1991, the expression total turnover shall have effect as if it also excluded any sum referred to in Clauses (iiia), (iiib) and (iiic) of Section 28.
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(c) 'Export House Certificate' or 'Trading House Certificate' means a valid Export House Certificate or Trading House Certificate, as the case may be, issued by the Chief Controller of Imports and Exports, Government of India.
(d) 'supporting manufacturer' means a person being an Indian company or a person (other than a company) resident in India, manufacturing including processing goods or merchandise and selling such goods or merchandise to an Export House or a Trading House for the purposes of export.'
AO computed deduction under the proviso to Sub-section (3) at Rs. 12,63,532 applying the following formula.
Export incentive x Export turnover---------------------------------- and calculated as follows :Total turnover ----23,18,874x6,37,05,238---------------------- = 12,63,532 11,69,13,807Rs. 23,18,874 represents 90 per cent of the sums referred to in Clauses (iiia), (iiib) and (iiic) of Section 28 and Rs. 11,69,13,807 being the total turnover. Dispute is with regard to the figure of Rs. 6,37,05,238 in the numerator adopted by the AO as export turnover. We have already pointed out, the assessee Wanted to include sum of Rs. 3,19,47,436 being the indirect exports also in the export turnover. Assessee's contention is that this is the sum representing the goods sold to the export houses and is in the nature of indirect exports made by the assessee as a supporting manufacturer. Further contention of the assessee is that the export houses had issued disclaimer certificate in respect of indirect exports and, therefore, assessee would be entitled to deduction under Sub-section (1) in respect of that turnover.
5. We are of the view, Tribunal has misunderstood the scope and ambit of Section 80HHC and the benefits that are separately made available to direct exports and indirect exports, i.e., sales to export houses by the supporting manufacturer. We have already indicated that under Sub-section (1) of Section 80HHC, assessee is entitled to deduction in respect of profits derived from export of any goods or merchandise. Relief is also available under Sub-section (1A) to assessee being a supporting manufacturer which sold goods or merchandise to any export house or trading house in respect of which the export house or trading house had issued a disclaimer certificate. Similarly, the quantum of deduction in the case of supporting manufacturer is to be computed in the manner provided under Sub-section (3A). We have already indicated that under the proviso to Sub-section (3), assessee would be entitled to deduction in respect of any sum referred to in Clauses (iiia), (iiib) and (iiic) of Section 28 which in fact is granted. However, the dispute in this case is as to whether sales to export houses by the assessee should be treated as export turnover for computing relief under the said proviso. Export turnover for the purpose of the proviso to Sub-section (3) includes only direct export since Sub-section (3) deals with the quantification of deduction in the case of an exporter. The term export turnover has been defined in Expln. (b) below Section 80HHC. The definition of 'export turnover' means the sale proceeds received in or brought into India by the assessee in convertible foreign exchange in accordance with Clause (a) of Sub-section (2) of Section 80HHC of any goods or merchandise to which Section 80HHC applies and which are exported out of India but does not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act. Sub-section (1A) of Section 80HHC provides that the supporting manufacturer who has sold goods or merchandise to any export house, shall be allowed a deduction of the profits derived from the sale of goods or merchandise to the export house or trading house. Method of computing the profit is prescribed in Sub-section (3A) which deals with the deduction allowable to supporting manufacturer. Sub-section (3) deals only with the case of a direct exporter: and hence, the quantum of deduction can be computed only on the basis of the export turnover. So far as the sales by the appellant to the export or trading house are concerned, it cannot be treated as an export at all. The mere fact that the export or trading house exports the goods sold by the appellant does not make the appellant's sales to them as 'export turnover'.
6. We may incidentally refer to the Bench decision of this Court in CIT v. Smt. T.C. Usha : [2004]266ITR497(Ker) , wherein the Division Bench of this Court held that Section 80HHC of the Act is a special provision which provides for a deduction in respect of profits retained for export business and Sub-section (1) provides that the deduction shall be allowed in accordance with and subject to the provisions of the section. The above decision came up for consideration before the apex Court in IPCA Laboratory Ltd. v. Dy. CIT : [2004]266ITR521(SC) and the apex Court overruled the decision of this Court in T.C. Usha's case (supra). The apex Court held :
'Undoubtedly Section 80HHC has been incorporated with a view to providing incentive to export houses. Even though a liberal interpretation has to be given to such a provision, the interpretation has to be as per the wordings of this section. If the wordings of the section are clear then benefits which are not available under the section, cannot be conferred by ignoring or misinterpreting words in the section.'
We are of the view that the benefits available to exporter and supporting manufacturer have to be separately computed in accordance with the specific provisions of the Act. While Section 80HHC(1) read with Section 80HHC(3) provides for computation and deduction of profit on direct exports, 80HHC(1A) read with Section 80HHC(3A) provides for computation and deduction of export profit for a supporting manufacturer. Since sales turnover of sales made by the appellant to the export houses do not answer the description of 'export turnover' provided in the definition clause noted by us above, the AO rightly excluded such turnover from export turnover while computing relief available to the appellant under the proviso to Section 80HHC(3) of the Act. The decision of the Delhi Tribunal relied on by the Tribunal in this case is a case of total disallowance of export incentives and the question whether sales to export houses constitute 'export turnover' or not for computation of relief under the proviso to Section 80HHC(3) did not arise nor was it decided in that case. The decision of the Tribunal is, therefore, not sustainable and we, therefore, allow the appeal filed by the Department by setting aside the order of the Tribunal and restoring the order of the CIT(A).