Vildirect: IncomeTax-caselaws-1994-VIL-69-ITAT-CHN

1994-VIL-69-ITAT-CHN

Equivalent Citation: ITD 054, 015,

Income Tax Appellate Tribunal COCHIN

Date: 31.12.1994

G. GANGADHARAN NAIR.

INCOME-TAX OFFICER.

BENCH

Member(s) : G. SANTHANAM., SMT. P. K. AMMINI.

JUDGMENT

Per G. Santhanam, Accountant Member--

The appeal is by the assessee and the cross-objection is by the revenue.

2. The assessee is the proprietor of M/s. Laxmi Marine Products, dealing in marine products. Previous year of the assessee ended on 31-3-1992, relevant to the assessment year 1992-93. During the year, the assessee had exported marine products directly as well as through various export houses. In respect of exports through export houses, the assessee furnished disclaimer certificate under section 80HHC(4A) from the export houses in Form No. 10CCAB. The assessee received a sum of Rs. 5,93,072 from export houses and credited the same in the trading account under the head " export earnings premium ". For determining the profits of the business for purpose of computing deduction under section 80HHC, export earnings premiums was included. There were agreements between the export houses and the assessee in respect of the payment of the said sum. On a scrutiny of the agreements, the Assessing Officer came to the conclusion that the export earnings premium actually represented remuneration given to the assessee for various services rendered by it as enumerated in the agreements. Hence he was of the view that it represented only service charges. Therefore, he held that in arriving at the profits of the business, 90% of the same should be deducted under clause (baa) of the Explanation below sub-section (4A) of section 80HHC. Accordingly, the Assessing Officer computed the deduction allowable to the assessee under section 80HHC as follows :--

Rs. Rs.

Profit and gains from business 12,30,564

Less : 90% of

(i) Export earnings premium 5,93,072

(ii) Import Licence premium 11,23,752

(iii) Freight Brokerage 66,971

------------------

17,83,795

90% .... Rs. 16,05,415

(-) Rs. 3,74,851 (A)

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(a) Profit of business (-) Rs. 3,74,851 (A)

(b) Own export turnover 9,03,119

---------------------

2,61,92,828

--------------------

(d) Total turnover 2,62,58,829

Sales turnover

Add : Export earnings Rs. premium 5,93,072 Freight brokerage 66,971 6,60,043

------------ --------------------

2,69,18,872 Deduction under section 80HHC :

(i) Under sub-section 3(a) : (-) 3,74,851 X 9,03,119

-------------------------------------

= (-) 12,576 2,69,18,872

(ii) Proviso to sub-section (3) :

90 2,52,89,709

11,23,752 X -------X --------------------- = (-) 9,50,167 100 2,69,18,872

(iii) Under sub-section (3A) :2,52,89,709(-) 3,74,851

X -------------------- =(-) 3,22,164

2,69,18,872

Total deduction allowable under section 80HHC : Rs. 5,85,427.

The assessee objected to the computation in respect of the deductions made in arriving at the prof its and gains of the business. It was contended that the assessee did not have any business activity other than exports and as such the income as per the profit and loss account represented only the profits derived from exports. It relied on the terms of the agreement with the exporter and in particular drew the notice of the learned CIT (Appeals) on certain clauses of the agreement with ITC Ltd., and with Escorts Ltd., New Delhi respectively by way of illustration. Clause (9) of the agreement with ITC Ltd., Calcutta, is as follows :--

" Clause (9)--Exporter will pay the processors/shippers the entire proceeds of the exports received from the foreign buyers plus 2.5% of FOB value of such exports. The Exporter shall ask the Bankers nominated by the processors/shippers to credit the entire proceeds of the bills of exports to the account of processors/shippers as soon as the documents are negotiated."

Clause (7) of the agreement with Escorts Ltd., New Delhi is as follows :--

" Clause (7)--Escorts shall pay to the processors incentive/premium at 2% (Two per cent) on the FOB value of the Exports on presentation of the debit notes by the processors after these shipments and negotiation of documents."

In view of the above clauses in the agreements under which payment was made to the assessee, it was contended that these receipts can be treated only as income directly attributable to the exports and the assessee would not have received the amount if the goods were not exported and, therefore, such receipts cannot be treated as other incomes or receipts of a similar nature like that of brokerage, commission, rent, etc., as mentioned in the Explanation given under section 80HHC(4A)(baa). Therefore, it was submitted that the assessing authority went wrong in excluding the above amount from the profits and gains of business and in including the export earnings and freight brokerage in the total turnover. It was also contended that the assessing authority went wrong in not giving deduction under section 80HHC in respect of the REP Licence Premium relating to own exports. As for the freight brokerage credited to the profit and loss account, it was contended that it only represented a rebate or refund received from the principals of the shopping agents in respect of freight payments made for the exports and as such the same has to be deducted from the total freight payments. Further it was contended that as the business activity of the assessee was only that of an exporter any such receipt from the shipping company can be treated only as relating to exports. On a consideration of the submissions made before him, the learned CIT (Appeals) held that the sum of Rs. 5,93,072 credited in the profit and loss account under the head " Export earnings premium " merely represented commission for service charges received by the assessee from the export houses and, therefore, it was in the nature of receipts enumerated in clause (baa) of Explanation below sub-section (4A) and as such its exclusion to the extent of 90% in computing the profits of the business was justified. He held that the deduction of 90% on freight brokerages in a sum of Rs. 66,971 was in order as it was in the nature of receipts enumerated in clause (baa) of the Explanation. Thus, he upheld the computation of profits from the business at a negative figure of Rs. 3,74,851. In other words, he did not grant any relief in respect of the deduction to the extent of 90% of the impugned amounts. Turning to the total turnover of the business, the learned CIT (Appeals) was in agreement with the contention of the assessee that there was no justification to include the export earnings premium and freight brokerages in the same. Accordingly, be revised the total turnover at Rs. 2,62,58,829. Turning to the contention of the assessee that in computing the deduction as per the proviso to sub-section (3), the direct export turnover also should be taken into account, the learned CIT (Appeals) held that this contention was well taken and, therefore, he determined the quantum of export turnover at Rs. 2,61,92,828 as against Rs. 2,52,89,709. Thus, he re-worked the deduction available under section 80HHC as follows :--

Rs.

(a) Profits of business (-) 3,74,851

(b) Export turnover 2,61,92,824

(ii) Under Proviso to sub-section (3) :90 2,61,92,828

11,23,752 X -------

X --------------------- = (-) 10,08,835 100 2,62,58,829

(iii) Under sub-section (3A) :

,52,89,709

(-) 3,74,851 X -------------------- =(-) 3,61,017

2,62,58,829

The deduction allowable under section 80HHC = Rs. 6,34,926.

Not satisfied, the assessee is in second appeal.

3. Sri M. K. Kesavan, the learned counsel for the assessee submitted that the assessee's receipts by way of export earnings premium and freight brokerage are export related profits and thus constituted export profits fully exempt from tax under section 80HHC. The export earnings premium were earned in the course of exports to Export Houses ; it has not been shown that they arose out of own exports. On the other hand, it is seen from the sample copies of the agreements filed before us that the export earnings premium arose by virtue of agreements with the export houses in connection with the export of goods by the assessee as a supporting manufacturer and as such they entered prof its and gains of business. As a supporting manufacturer, the assessee is entitled to deduction under sub-section (1A) of section 80HHC read with subsections (3A) and (4A) of the said section. Sub-section (3A) is in two parts. Clause (a) deals with assessees exporting goods exclusively to the export houses. Obviously, the assessee will not fall under clause (a) as it is owning its own exports also. The case would be governed by clause (b) of sub-section (3A) which is as follows :

" 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."

The deduction is to be computed in respect of the profits of the business as defined in clause (baa) of Explanation under sub-section (4A) of section 80HHC, which is as under :--

"(baa) 'profit of the business' means the profits of the business as computed under the head 'Profits 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 ;"

It is on the interpretation of this particular clause, the dispute,arises before us. Sri Kesavan has fairly agreed that the 'import licence premium' would be governed by the provisions of section 28 and he has no case on that. However, his main thrust of argument is that the export earnings premium and the freight brokerage received will neither come under clauses (iiia), (iiib) and (iiic) of section 28 or any other receipt mentioned in clause (baa) of section 80HHC(4A). None can have any quarrel with Sri Kesavan that export earnings premium and freight brokerage will not fall under sub-sections (iiia), (iiib) and (iiic) of section 28. The question is : will it fall under " any receipts by way of brokerage, commission, interest, rent, charges of any other receipt of a similar nature included in such profits ?" Sri Kesavan's submission is that the expression " similar nature " found in clause (baa) has introduced the principle of ejusdem generis and, therefore, the brokerage received or the export earnings premium received cannot fall under any of the categories mentioned in that clause. We are unable to agree with Sri Kesavan. Apart from the receipts mentioned in clauses (iiia) and (iiib) of section 28, clause (baa) under the Explanation to sub-section (4A) of section 80HHC mentions other types of receipts as follows :

" any receipts by way of brokerage, commission, interest, rent, charges of any other receipt of a similar nature included in such profits."

There is interception of the words " by way of " between the words " any receipts ", " brokerage, etc ". The expression " by way of " cannot be construed as exhaustive in nature, but it is only illustrative in nature. That it is illustrative in nature is also evident by another phrase which has reference to " any other receipt of a similar nature ". One of the items found in this clause is receipts towards " any charge ". From the agreements it is seen that the assessee has been given an incentive or subsidy at 3.5% or 2% or whatever it is, to cover the cost of charges incurred by it. So, the export premium receipts 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 IT Act.

4. Sri Kesavan's next submission is that the assessee is purely an exporter, either exporting on its own or exporting to Export Houses and, therefore, the entire profits should be exempt. We do not accept this contention for the reason that from the profit and loss account submitted before us we notice that apart from the exports of goods directly or to Export Houses, the assessee was having local sales also, though negligible as compared to the export turnover. Therefore, it cannot be said that the assessee was having export turnover only. The assessee's business consisted of direct export, export to Export Houses as a supporting manufacturer and inland sales to some extent. All the same, the exemption under section 80HHC is to be regulated both under the provisions of sub-section (3) and sub-section (3A) read with sub-section (4A) of section 80HHC. Hence, we do not find any reason to interfere with the points held against the assessee by the learned CIT (Appeals).

5. In the cross-objection, the revenue is aggrieved that the learned CIT (Appeals) had held that receipts like export earnings premium and freight brokerage do not form part of the total turnover. The revenue's contention is that as these items are not excluded in clause (ba) of the Explanation to sub-section (4A) of section 80HHC, the total turnover should in its turn include export earnings premium and freight brokerage. " Total turnover " has been defined in clause (ba) of the Explanation to sub-section (4A) of section 80HHC as follows :

" 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)."

and with effect from 1-4-1991 it shall exclude any sum referred to in clauses (iiia), (iiib) and (iiic) of section 28. Thus, the definition of " total turnover " with certain exceptions is an inclusive definition. Though the subsidy or the incentive was given as a percentage on the FOB or C & F value of the goods exported by the assessee as a supporting manufacturer to the Export Houses, nonetheless such receipts do not cease to be receipts forming part of the total turnover. The learned CIT (Appeals) erred in equating the expression " turnover " with " sale proceeds ". The term " turnover " need not end with the list price of the goods. It can take in its sweep the taxes and other levies charged in the invoice or even charged separately. In this view of the matter, we uphold the computation as made by the Assessing Officer so far as export premium is concerned. However, as far as brokerage on freight is concerned, it has the effect of reducing the cost of freight and in the case of FOB contracts--Free on Board the Ship the foreign buyer has not to pay anything towards freight and his liability is only to pay for the goods at the contracted price. Further, the net freight relatable to transport of goods beyond the custom station is to be excluded from the purview of total turnover in terms of (ba) of the Explanation to sub-section (4A) of section 80HHC. In this view of the matter, we hold that even though the brokerage on-freight is shown as a receipt in the profit and loss account, it will not form part of the " total turnover ". To this extent the order of the CIT (Appeals) is upheld. The order of the CIT (Appeals) is thus modified.

6. In the result, the appeal of the assessee is dismissed and the cross-objection preferred by the revenue is partly allowed.

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