Commissioner Of Income-Tax-Iii, Ludhiana v. Bicycle Wheels (India

Income-tax Appeal No.31 of 2002 *** IN THE HIGH COURT OF PUNJAB AND HARYANA ATCHANDIGARH Income-tax Appeal No. 31 of 2002 Date of decision: 11.10.2010 Commissioner of Income-tax-III, Ludhiana ...Appellant Versus Bicycle Wheels (India) ...Respondent CORAM: HON'BLE MR.JUSTICE ADARSH KUMAR GOEL `HON'BLE MR.JUSTICE AJAY KUMAR MITTAL Present: Mr. Denesh Goel, Advocate for the petitioner. Mr. Pankaj Jain, Advocate for the respondent. **** AJAY KUMAR MITTAL, J. 1.This order shall dispose of ITA Nos. 31, 28, 32,90, 114 of2002, 42 of 2003, 5 of 2004 and 92 of 2005 as common questionsof law are involved therein. However, the facts are being extractedfrom ITA No.31 of 2002. 2.The Revenue has preferred this appeal under Section260A of the Income Tax Act, 1961 (in short “the Act”) against theorder dated 19.7.2001 passed by the Income Tax Appellate Tribunal,Chandigarh Bench, Chandigarh, (in short “the Tribunal”) in ITANos.1244/Chd/93, ITA Nos. 623 and 624/Chandi/94 for theassessment years 1991-92, 1989-90 and 1990-91 respectively. TheRevenue has claimed the following substantial questions of law for consideration in this appeal:- “(i).Whether on the facts and in the circumstances ofthe case, the Hon'ble ITAT was right in law in holding thatsale of scrap in India is not a part of total turnover of therespondent firm for the purposes of calculation ofdeduction u/s 80 HHC? (ii)Whether on facts and in the circumstances of thecase, the ITAT was justified in ignoring sale of scrap incommuting total turnover, when such generation was aby-product of manufacturing process? (iii)Whether on facts and in the circumstances of thecase, a by-product in a manufacturing process is noteligible for being considered in computation of totalturnover for computing 80 HHC deduction? 3.The aforesaid questions of law being inter-related aretaken-up together for decision. The solitary issue that would requiredetermination is whether the scrap which had been generated duringmanufacturing process and was sold in domestic market would formpart of total turnover. 4.Briefly the facts which are essential for the decision ofthe appeal may be noticed. 5.The assessee is a registered firm. Return of income forthe assessment year 1989-90 was filed on 30.10.1989 declaring 'nil'income. The Assessing Officer during the course of assessmentproceedings noticed that the assessee which was a 100% exportoriented unit had claimed deduction under Section 80 HHC of the Act on the total profit which was derived by it. The assessee had notincluded the sale of scrap amounting to Rs.25,30,378/- which wasgenerated in the manufacturing process in India in the total turnover for the purposes of arriving at the profit from exports. Theassessee had sold the scrap in India which according to theAssessing Officer constituted local sale, therefore, the assessee wasnot entitled to deduction of the entire net profit and the deduction wasto be calculated by adopting the formula :- Export turnover Business profits X ----------------------- Total turnover The Export turnover is the numerator whereas totalturnover is the denominator in the above formula. Act on the total profit which was derived by it. The assessee had notincluded the sale of scrap amounting to Rs.25,30,378/- which wasgenerated in the manufacturing process in India in the total turnover for the purposes of arriving at the profit from exports. Theassessee had sold the scrap in India which according to theAssessing Officer constituted local sale, therefore, the assessee wasnot entitled to deduction of the entire net profit and the deduction wasto be calculated by adopting the formula :- Export turnover Business profits X ----------------------- Total turnover The Export turnover is the numerator whereas totalturnover is the denominator in the above formula. 6.The effect of the aforesaid formula was that the deductionunder Section 80 HHC of the Act which was claimed by the assesseeat Rs.26,81,794/- was restricted to Rs.22,41, 380/- and disallowanceof Rs.4,40,414/- was made. The appeal filed by the assessee wasaccepted by the Commissioner of Income Tax (Appeals), Ludhiana(for short “the CIT (A))” Aggrieved by the order of the CIT(A), theRevenue filed an appeal and the same was dismissed by theTribunal. The Tribunal noticed that the export turnover and the totalturnover of the assessee was identical except for sale of scrap whichwas only incidental to the activity of manufacture and export ofbicycle parts and, therefore, would not constitute total turnover as theassessee was not dealing in purchase/sale of scrap. 7.We have heard learned counsel for the parties and perused the record. 8.Learned counsel for the Revenue submitted thataccording to the provisions of 80 HHC of the Act read with theexplanation thereto, the Assessing Officer had rightly disallowed theclaim partially by taking the sale of scrap forming part of totalturnover of the respondent-assessee and thereafter applying theformula noticed above. Learned counsel for the Revenue placedreliance upon the judgment of Karnataka High Court in CIT Vs.Motor Industries Co. Ltd.326 ITR 358 (Kar.) to buttress hissubmission. Support was also gathered from the decision of theKerala High Court in Commissioner of Income-Tax, Cochin Vs.Kar Mobiles Limited,ITA No. 773 of 2009 decided on 15.1.2010. 9.On the other hand, controverting the submission made bythe learned counsel for the Revenue, learned counsel for theassessee laid stress on the judgments inCommissioner of Income-Tax Vs. Madras Motors Ltd./M.M.Forgings Ltd.(2002) 257 ITR 60(Mad.), CIT Vs. Wheels India Ltd.(2005) 275 ITR 319 (Mad.),Commissioner of Income-Tax Vs. Sundaram Clayton Ltd.(2006)281 ITR 425 (Mad.), Commissioner of Income-Tax Vs. ShivaDistilleries Ltd. (2007) 293 ITR 108 (Mad.), Commissioner ofIncome-Tax Vs. Ashok Leyland Ltd.(2008) 297 ITR 107 (Mad.),CIT Vs. Punjab Stainless Steel Ind.(2007) 162 Taxman 9 (Del.),Commissioner of Income-Tax Vs. Lakshmi Machine Works(2007) 290 ITR 667 (SC) and C.I.T. Vs. Sudarshan ChemicalsIndustries Ltd.(2000) 245 ITR 769 (Bom.). Support was also *** sought from the decisions of this Court in ITA No.362 of 2004decided on 29.10.2009 (The Commissioner of Income-Tax,Faridabad Vs. M/s Porrits & Spencer (A) Ltd.) and CIT Vs.Vardhman Polytex Ltd.(2008)296 ITR 382. 10.In order to effectively resolve the controversy, it would beadvantageous to refer certain provisions of the statute.Section80HHC (3) relevant for this appeal as it existed then reads thus:- “80HHC. Deduction in respect of profits retained forexport business:- (3)For the purposes of sub-section(1), profits derivedfrom the export of goods or merchandise out of India shallbe:- (a)in a case where the business carried on by theassessee consists exclusively of the export out of India ofthe goods or merchandise to which this section applies,the profits of the business as computed under the head'profits and gains of business or profession'; 10.In order to effectively resolve the controversy, it would beadvantageous to refer certain provisions of the statute.Section80HHC (3) relevant for this appeal as it existed then reads thus:- “80HHC. Deduction in respect of profits retained forexport business:- (3)For the purposes of sub-section(1), profits derivedfrom the export of goods or merchandise out of India shallbe:- (a)in a case where the business carried on by theassessee consists exclusively of the export out of India ofthe goods or merchandise to which this section applies,the profits of the business as computed under the head'profits and gains of business or profession'; (b)in a case where the business carried on by theassessee does not consist exclusively of the export out ofIndia of the goods or merchandise to which this sectionapplies, the amount which bears to the profits of thebusiness (as computed under the head 'profits and gainsof business or profession') the same proportion as theexport turnover bears to the total turnover of the businesscarried on by the assessee.” *** “Export turnover” has been defined in Explanation (b) toSection 80HHC whereas Explanation (ba) assigns meaning to totalturnover. It reads thus:- “(b)'export turnover' means the sale proceeds receivedin, or brought into, India by the assessee in convertibleforeign exchange in accordance with clause (a) of sub-section (2) of any goods or merchandise to which thissection applies and which are exported out of India, butdoes not include freight or insurance attributable to thetransport of the goods or merchandise beyond thecustoms station as defined in the Customs Act, 1962 (52of 1962); (ba) 'total turnover' shall not include freight or insuranceattributable to the transport of the goods or merchandisebeyond the customs station as defined in the CustomsAct, 1962 (52 of 1962); Provided that in relation to any assessment yearcommencing on or after the Ist day of April, 1991, theexpression 'total turnover' shall have effect as if it alsoexcluded any sum referred to in clauses (iiia), (iiib) and(iiic) of section 28.” 11.'Export turnover' means amount received in India or isbrought into India in convertible foreign exchange on account of saleproceeds of any goods or merchandise which are exported out ofIndia. However, it does not include freight or insurance. Totalturnover has been described in negative form so as to exclude freight *** or insurance. A conjoint reading of both the clauses leads to oneconclusion that they include anything which has nexus with the saleproceeds. In other words, they exclude everything which has nonexus with the sale proceeds. 12.Having examined the provision relating to 'export turnover'and 'total turnover', it is apt to refer to judicial enunciation on the pointand interpretation placed by various pronouncements. 11.'Export turnover' means amount received in India or isbrought into India in convertible foreign exchange on account of saleproceeds of any goods or merchandise which are exported out ofIndia. However, it does not include freight or insurance. Totalturnover has been described in negative form so as to exclude freight *** or insurance. A conjoint reading of both the clauses leads to oneconclusion that they include anything which has nexus with the saleproceeds. In other words, they exclude everything which has nonexus with the sale proceeds. 12.Having examined the provision relating to 'export turnover'and 'total turnover', it is apt to refer to judicial enunciation on the pointand interpretation placed by various pronouncements. 13 (i)Division Bench of Madras High Court in Madras MotorsLtd.'s case (supra) was seized of the matter relating to twodeductions, i.e. one under Section 80 HH and the other underSection 80 HHC of the Act. Insofar as claim of the assessee inrespect of deduction u/s 80 HH is concerned, it need not be referredto as the same is not relevant for purposes of present case.However, reference is made to controversy relating to deduction u/s80 HHC of the Act. The assessee was an export oriented companywhich was manufacturing forgings and derived income from interestreceipt, modvat credits and international price rationalisation. Theassessee had sold its forgings in India and earned income from localsales and also sold motorcycles, motorcycles spare parts andtelevision sets. It was held that the assessee in addition to exportoriented business of forgings had other business also and theassessee was earning income from that other business. It was heldthat the total turnover should not be the turnover relating to the otherbusiness of sale of motorcycles, spare parts and television sets so asto inflate the total turnover artificially in order to reduce the benefitto which the assessee is entitled. *** (ii)Following this judgment, in Shiva Distilleries Ltd.'scase (supra), it was held by the Madras High Court that excise dutyand sales tax would not form part of total turnover. Besides this, thescrap and waste material which was not relatable to the exportbusiness of the assessee was held to be excluded from businessprofit for the purpose of calculation of deduction under Section 80HHC of the Act. Guarantee Commission and royalty was also heldto be excluded from business profit for determining benefit ofdeduction under Section 80 HHC of the Act. Similar view wasreiterated in Ashok Leyland Ltd.'s case (supra). (iii)Excise duty and sales tax were held not to be includiblein total turnover in Wheels India Ltd.'s case (supra). In SundaramClayton Ltd.'s case (supra), following its earlier judgments inMadras Motors Ltd. & Wheels India Ltd.'s cases (supra), it wasrecorded that for computing deduction under Section 80 HHC, salestax, excise duty, commission and miscellaneous income shall notform part of total turnover. (iv)Delhi High Court in Punjab Stainless Steel Ltd.'s case(supra) while referring to whether sale of scrap generated during themanufacture of goods which were entirely for export affirmed theview of the Tribunal by holding that it was not incidental to the exportactivity and could not be treated to be business income and notincludable for purposes of computation for deduction under Section80 HHC. (v) The issue before the Bombay High Court in C.I.T. Vs. Sudarshan Chemicals Industries Ltd.(Bom.)(2000) 245 ITR 769was as to whether excise duty and sales tax could be included in thetotal turnover so as to increase the dominator in the formula forascertaining the actual deduction admissible to the assessee underSection 80 HHC on export turnover. It was observed thus:- (iv)Delhi High Court in Punjab Stainless Steel Ltd.'s case(supra) while referring to whether sale of scrap generated during themanufacture of goods which were entirely for export affirmed theview of the Tribunal by holding that it was not incidental to the exportactivity and could not be treated to be business income and notincludable for purposes of computation for deduction under Section80 HHC. (v) The issue before the Bombay High Court in C.I.T. Vs. Sudarshan Chemicals Industries Ltd.(Bom.)(2000) 245 ITR 769was as to whether excise duty and sales tax could be included in thetotal turnover so as to increase the dominator in the formula forascertaining the actual deduction admissible to the assessee underSection 80 HHC on export turnover. It was observed thus:- “Under section 80HHC, the Legislature intends that theprofits from exports should not be taxed. For thispurpose, a formula has been introduced whereby if thebusiness is of composite nature then the proportionateprofit relatable to the export business is to be found outby multiplying the profits of a business by the exportturnover and dividing the product by the total turnover.This formula finds place in section 80 HHC(3) as it stoodat the relevant time. Under clause (b) of the Explanationto section 80 HHC, export turnover is defined to meansale proceeds received in India by the assessee inforeign exchange. Under the said definition, exportturnover is defined to mean the sale proceeds of anygoods which are exported out of India but which will notinclude freight or insurance. Clause (ba) defines totalturnover to exclude freight or insurance. This clause (ba)explains the turnover in a negative manner so as toexclude freight or insurance. Therefore, a combinedreading of the above two clauses shows that they includeanything which has nexus with the sale proceeds.Correspondingly, they show that they exclude everything *** which has no nexus with the sale proceeds. Further, themeaning of export turnover in clause (b) of theExplanation to section 80 HHC, therefore, clearly showsthat export turnover did not include excise duty and saletax. The export turnover is the numerator in the aboveformula whereas the total turnover is the denominator.The above formula has been prescribed to arrive at theprofits from exports. In the circumstances, the above twoitems, namely, sales tax and excise duty, cannot formpart of the total turnover. In fact, if the denominator wasto include the above two items and if the numeratorexcluded the above two items then the formula wouldbecome unworkable. In the circumstances, we are of theview that in order to ascertain the export profits, theabove two items cannot be introduced to inflate the totalturnover artificially in order to reduce the benefit which anassessee is entitled to. Ultimately, the object of section80HHC is required to be kept in mind in order toencourage exports. The Legislature has applied theabove formula in order to find out the profits derived fromthe exports. In this connection, section 80HHC(1) mayalso be noticed. Under Section 80HHC(1), it is inter-aliaprovided that where an assessee is engaged in thebusiness of exports of any goods, there shall be allowedin computing the total income of the assessee, adeduction of the profits derived by the assessee from the *** *** export of such goods. In other words, in computing thetotal income of such an assessee, profits derived by theassessee from the exports are deductible. The aboveexpression, namely, “profits derived from exports” alsofinds place in section 80HHC(3)(a). It says that where theexport is of goods, the profits derived from such exportshall be the amount which bears to the profits of thebusiness, the same proportion as the export turnover inrespect of such goods bears to the total turnover of thebusiness. In fact, the earlier section 80HHC(3) consistedof two parts, namely, whether the assessee carried on abusiness as 100 per cent, exporter and secondly whetherthe assessee carried on a composite business. In thelatter case, it was provided that the profits derived fromexports shall be the amount which bears to the profits ofthe business as computed under the head “profits andgains of business”, the same proportions as the exportturnover to the total turnover. The emphasis is on thewords “profits derived from the exports”. Therefore,weightage must be given to such profits. Such profitscannot be reduced artificially by including statutory leviesin the denominator, namely, total turnover. Therefore,the turnover should be restricted to such receipts whichhave an element of profit in it. It is only the actual saleprice which is relevant. Anything charged by theassessee by way of excise duty and sales tax cannot be *** taken into account as they do not have any element ofprofit. Even according to the accounting principles, suchlevies do not form part of the profit and loss account. Infact, they are shown as liability in the balance-sheet. Inthe circumstances, the above two items cannot beincluded in the total turnover. We prefer thisinterpretation as it advances the object sought to beachieved by the Legislature. Lastly, we are of the viewthat sales tax and excise duties are levied under theseparate enactments which have different objects. Weare concerned with section 80HHC which is separatecode by itself. Hence, the general definition of the wordturnover or the the case law dealing with the saiddefinition under the Sales Tax Act which is a State levy,cannot be imported into section 80HHC of the Income-Tax Act.” (vi)The Apex Court in Lakshmi Machine Work's case(supra) interpreting “total turnover” had laid down that excise duty,sales tax, commission received, interest etc. do not emanate fromthe “turn over” and shall not from part of “total turnover” as these donot involve any element of sale and do not partake the character ofturnover. (vii)This Court in ITA No.362 of 2004 decided on 29.10.2009-in The Commissioner of IncomeTax, Faridabad Vs. M/s Porrits &Spencer (A) Ltd. had dismissed the appeal relating to issue of saleof scrap keeping in view low quantum of tax effect of Rs.3797/- *** involved therein in the light of finding of fact recorded by the Tribunaltherein. In Vardhman Polytax Ltd.'s case (supra), this Court heldthat excise duty and sales tax shall not be includible in total turnoverfor purposes of Section 80HHC of the Act. Reference may now be made to the judgments reliedupon by the Revenue. The Karnataka High Court, interpreting theexpressions 'Export turnover' and 'total turnover' with the literalmeaning, concluded that the sale of scrap as a result ofmanufacturing of item which was exported had resulted in Income tothe assessee. It could not be excluded from total turnover for thepurposes of determining actual deduction admissible to the assesseeunder Section 80 HHC of the Act. The relevant observations readsthus:- *** involved therein in the light of finding of fact recorded by the Tribunaltherein. In Vardhman Polytax Ltd.'s case (supra), this Court heldthat excise duty and sales tax shall not be includible in total turnoverfor purposes of Section 80HHC of the Act. Reference may now be made to the judgments reliedupon by the Revenue. The Karnataka High Court, interpreting theexpressions 'Export turnover' and 'total turnover' with the literalmeaning, concluded that the sale of scrap as a result ofmanufacturing of item which was exported had resulted in Income tothe assessee. It could not be excluded from total turnover for thepurposes of determining actual deduction admissible to the assesseeunder Section 80 HHC of the Act. The relevant observations readsthus:- “The learned senior counsel appearing for the assesseerelying upon the judgment of the Madras High Courtreported in the case of CIT Vs. Ashok Leyland Ltd. (2008)297 ITR 107, contends that income from scrap salecannot be treated as part of turnover for the purposecomputing the deduction under Sections 80HHC and80HHE. He further relied upon the judgment of theMadras High Court in CIT Vs. Shiva Distilleries Ltd.(2007) 293 ITR 108. Relying upon the these twodecisions, he contends that if the value of the scrap istaken into consideration under the head total turnover thecost of the raw materials would artificially go up.According to him, while computing the total turnover, the *** value of the scrap received by the assessee cannot betaken into consideration since it is not an export sale. Hefurther contends that the madras High Court in CIT Vs.Madras Motors Ltd./M.M.Forgings Ltd. (2002) 257 ITR 60has fairly held that for the purpose of computing section80HHC, only the turnover relating to export business ofthe assessee shall be taken into account and not theturnover relating to the other business of the assessee.Relying upon these two decisions, he requests the courtto answer the question of law against the Revenue and infavour of the assessee. Having heard the counsel for the parties, we have toconsider whether the value received by the assessee byselling scrap in a domestic market has to be includedtowards its total turnover while calculating deductionunder section 80HHC. By looking into the definition ofexport turnover and total turnover as defined undersection 80HHC(4C)Explanation (b) and (ba), it is clearthey are different and distinct turnovers. The exportturnover includes only the value received by selling theproducts of the assessee from out of country. But totalturnover includes the turnover of the assessee which isinclusive of export turnover and also the domesticturnover. Therefore, we are of the view that in view of thedistinct definition clause of export turnover and totalturnover, while computing the total turnover for the *** purpose of 80HHC, the Assessing Officer is required toconsider the value received by sale of the scrap also, asthe same cannot be excluded as the sale of scrapamounts to a turnover in a domestic market. We have carefully considered the judgments relied uponby the learned senior counsel appearing for theassessee. In the two judgments relied upon by him, theMadras High Court did not actually consider the definitionof export turnover and total turnover while computing thesale of scrap. Without considering the provision of lawproperly, the Madras High Court has taken a view that thevalue of the scrap received by the assessee cannot becomputed for the purpose of sections 80HHC and80HHE, under the sales total turnover. Therefore, weare not in a position to accept the decision relied upon bythe learned counsel for the assessee as the Madras HighCourt did not consider the definition of export turnoverand total turnover as defined under section 80HHC(4C),Explanation (b) and (ba). We have carefully considered the judgments relied uponby the learned senior counsel appearing for theassessee. In the two judgments relied upon by him, theMadras High Court did not actually consider the definitionof export turnover and total turnover while computing thesale of scrap. Without considering the provision of lawproperly, the Madras High Court has taken a view that thevalue of the scrap received by the assessee cannot becomputed for the purpose of sections 80HHC and80HHE, under the sales total turnover. Therefore, weare not in a position to accept the decision relied upon bythe learned counsel for the assessee as the Madras HighCourt did not consider the definition of export turnoverand total turnover as defined under section 80HHC(4C),Explanation (b) and (ba). In the circumstances, we have to answer the question oflaw in this appeal in favour of the Revenue and againstthe assessee.” Kerala High Court taking similar view in Kar Mobiles'case (supra) had observed :- “.....On the other hand, the finding of the Tribunal and the lower authorities is that scrap is generated in the course *** of manufacture of goods and scrap is systematically soldby the assessee forming part of it's business. So muchso, in our view, the income from sale of scrap is part ofthe business profit and it's sales turnover forms part oftotal turnover which will constitute denominator fordetermination of eligible deduction of export profit.” Having examined the provisions of Section 80HHC andthe judgments noted above, we are of the opinion that the exciseduty, sales tax, interest or commission received cannot becharacterized as turnover and, therefore, shall not form part of “totalturnover”. However, the sale of scrap would be on different pedestal.Once an element of sale is involved in the case of scrap, it would fallin separate category and cannot be excluded from “total turnover”which shall increase the denominator of the formula for determiningthe extent of benefit admissible to an assessee under Section80HHC of the Act. In other words, sale of scrap in the domesticmarket shall form part of total turnover whereas excise duty, salestax, commission and miscellaneous income shall not be part of totalturnover for calculating the benefit of deduction under Section80HHC of the Act. Accordingly, we express our concurrence with theview expressed by the Karnataka and the Kerala High Courts anddissent with the judgments taking contrary view of the Madras andthe Delhi High Courts. 14.It is not disputed that in the case in hand the scrap whichhad resulted from the manufacturing of the item exported, was sold inthe local market in India. Once that was so, the assessee was not Income-tax Appeal No.31 of 2002 *** justified in excluding the same from calculating the total turn over ofthe registered firm. Accordingly, the appeals are allowed and substantialquestions of law are answered in favour of the Revenue. (Ajay Kumar Mittal) Judge October 11, 2010Pka (Adarsh Kumar Goel) Judge