Itta/17/2004 Of The Commissiojner Of Income Tax v. Zm/S. Godavari Drugs Ltd

*THE HON’BLE SRI JUSTICE L.NARASIMHA REDDYAND *THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM+ I.T.T.A.No.17 of 2004 % Dated 02.12.2014 The Commissioner of Income Tax. ….Appellant $ M/s. Godavari Drugs Ltd. ….Respondent ! Counsel for the appellant : Sri J.V.Prasad ^ Counsel for respondent : Sri Pushyam Kiran < GIST: > HEAD NOTE: ? CASES REFERRED:1. (2014) 367 ITR 575(Guj) THE HON’BLE SRI JUSTICE L.NARASIMHA REDDYAND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAMI.T.T.A.No.17 of 2004 JUDGMENT: (Per LNR,J) This is another case, in which we get an occasion to dealwith certain facets of Section 80HHC of the Income Tax Act,1961 (for short ‘the Act’) The respondent is an exporter and is assessed to incometax. It has been submitting returns year after year, claimingbenefits under the relevant provisions of law. For theassessment year 1994-95, it claimed deduction under variousheads. An order of assessment was passed on 28.02.1997. The claims of the respondent, referable to Sections 80HH,80HHC and 80I of the Act were not accepted by the Assessing Officer. An appeal was filed before the Commissioner(Appeals). That was also rejected on 15.09.2000. Aggrieved bythat, the respondent filed I.T.A.No.757/Hyd/2000 before theHyderabad Bench of the Income Tax Appellate Tribunal. TheTribunal allowed the appeal through a detailed order dated24.01.2003 and accepted the claims of the respondent. Hence,this further appeal under Section 260-A of the Act, by theRevenue. S ri J.V.Prasad, learned Standing Counsel for theDepartment submits that the Assessing Officer has taken thecorrect view of the matter in the context of excluding the interestearned on deposits made in relation to activity, referable toSection 80HH and 80I of the Act, but the Tribunal held that suchinterest qualifies for deduction under those two provisions,without even verifying the source thereof. He further submits thatthe respondent was not able to point out that the interest yieldingdeposits were made in connection with the business activityreferred to in Sections 80HH and 80I of the Act. LearnedStanding Counsel further submits that the respondent becameeligible for Import Duty Entitlement Benefit (IDEB) to the extent ofRs.3,67,25,867/- for the concerned assessment year and thesame was liable to be added to its total turnover and though theCommissioner has assigned cogent reasons for such inclusion,the Tribunal reversed the finding without any proper basis. It isurged that the differentiation between the accrual on the onehand and the actual utilisation thereof on the other hand, ishardly relevant in the context of the application of Section80HHC of the Act and that the order passed by the Tribunal inthat behalf deserves to be reversed. Sri Pushyam Kiran, learned counsel for the respondent onthe other hand submits that the Assessing officer disallowed theinclusion of interest for the amount covered by Section 80HH ofthe Act without any proper verification and that the Tribunalbrought such amount under the purview of Sections 80HH and80I of the Act after verification of the relevant records. It is alsourged that neither the Assessing Officer nor the Commissionerhave pointed out as to how the interest does not qualify to beadded for the amount under those two provisions. Sri Pushyam Kiran, learned counsel for the respondent onthe other hand submits that the Assessing officer disallowed theinclusion of interest for the amount covered by Section 80HH ofthe Act without any proper verification and that the Tribunalbrought such amount under the purview of Sections 80HH and80I of the Act after verification of the relevant records. It is alsourged that neither the Assessing Officer nor the Commissionerhave pointed out as to how the interest does not qualify to beadded for the amount under those two provisions. Learned counsel further submits that the Tribunal hasundertaken extensive discussion, not only with reference to therelevant Sub-sections and clauses of Section 80HHC of the Actbut also the Circulars issued by the Central Board of DirectTaxes (CBDT) and applied the correct principles. He submitsthat the IDEB, in a way, falls under Clause (iiic) of Section 28 ofthe Act and by operation of proviso to Clause (ba) of Explanationto Section 80HHC of the Act, it deserves to be kept outside thetotal turnover. He contends that even otherwise, the IDEB wouldbe just in the form of an entitlement and it can be said to haveaccrued to an assessee, only when it is utilised, as and when thecorresponding material is imported. He contends that the orderpassed by the Tribunal does not suffer from any legal or factualinfirmity. The respondent herein undertakes not only business ofexport, but also the indigenous one. On account of the nature ofbusiness, as well as the location of the business activity, it isentitled to certain benefits under provisions of Chapter VIA of theAct. One of it is, the deduction under Section 80HH, in tandemwith that under Section 80I of the Act. While the former getsattracted on account of the establishment of business orindustrial activity, in the backward areas, the latter becomesrelevant in the context of various activities mentioned in Sub-section (4) thereof. The specified percentage of the profitsderived from such activities is permitted to be deducted from thetotal income. According to the respondent, the interest earnedon deposits made by it also qualifies for such deduction. We perused the order of assessment and the orderspassed by the Commissioner and the Tribunal. It is not clear asto whether the interest claimed by the respondent was on anyspecific deposit or otherwise. This much however can be saidthat in case the amount, on which interest is paid is a depositmade in connection with the activity covered by those twoSections, it needs to be added to the profits, thereby becomeseligible for deduction. If on the other hand, the deposits thatyielded interest are unrelated to the activity, they do not qualifyfor deduction. In I.T.T.A.No.216 of 2003, we held that unless interest yielding deposits are made in connection with the activity,referred to in the particular provision, it does not qualify fordeduction. Therefore, we direct that in case the interest in theinstant case which is quantified at Rs.1,68,466/- is from anydeposit made in relation to the business activity referred to underSection 80I of the Act, it shall qualify for deduction and otherwisenot. The second item is in relation to the foreign exchangefluctuation. By its very nature, the consideration for the exportedgoods is received in foreign exchange. The fluctuations onaccount of exchange rates would have their own impact on theincome of the assessee. The question as to whether the amountrepresenting the fluctuation of foreign exchange rates can betreated as income of export itself was dealt with by the GujaratHigh Court in Commissioner of Income Tax vs. Priyanka Gems[[1]]. It was held that the resultant amount on account of thefluctuation of foreign exchange shall be treated as profit, thatbecomes eligible for deduction under Section 80HH of the Act. We follow the same and uphold the view taken by the Tribunal inthis behalf. The second item is in relation to the foreign exchangefluctuation. By its very nature, the consideration for the exportedgoods is received in foreign exchange. The fluctuations onaccount of exchange rates would have their own impact on theincome of the assessee. The question as to whether the amountrepresenting the fluctuation of foreign exchange rates can betreated as income of export itself was dealt with by the GujaratHigh Court in Commissioner of Income Tax vs. Priyanka Gems[[1]]. It was held that the resultant amount on account of thefluctuation of foreign exchange shall be treated as profit, thatbecomes eligible for deduction under Section 80HH of the Act. We follow the same and uphold the view taken by the Tribunal inthis behalf. Now arises, a bit complicated and ticklish issue referable toSection 80HHC of the Act. The component in question is IDEB. We are not concerned with the other aspects. Section 80HHC of the Act is intended, primarily to provideincentives to Indian Companies that undertake the activity ofexport and earn foreign exchange. The amount that qualifies fordeduction is broadly mentioned in Sub-section (1). However,working out of such amount is a complicated process. TheParliament did not intend to segregate export activity of anassessee, from the rest of his activities, obviously because itmay pose several complications. A comprehensive method isstipulated thereunder. The turnover of the assessee, withreference to his export activity as well as the total turnover of allthe activities are to be taken into account. The profit of thebusiness, which qualifies for deduction is required to have thesame proportion, which the export turnover would have to thetotal turnover. The amount that qualifies for deduction is to bederived through the following formula. Profits of Business x Export Turnover Total Turnover The Parliament has taken care to define the three differentexpressions that are employed in the formula. “Export Turnover”,“Total Turnover” and “Profits of the Business” are defined underClauses (b) (ba) & (baa) respectively of explanation to Section80HHC of the ACt, which read: (b) “export turnover” means the sale proceeds,received in, or brought into India] by the assessee inconvertible foreign exchange in accordance with clause (a) ofsub-section (2) of any goods or merchandise to which thissection applies and which are exported out of India, but doesnot include freight or insurance attributable to the transport ofthe goods or merchandise beyond the customsosms station asdefined in the Customs Act, 1962 (52 of 1962); (ba) “total turnover” shall not include freight orinsurance attributable to the transport of the goods ormerchandise beyond the customs station as defined in theCustoms Act, 1962 (52 of 1962): Provided that in relation to any assessment yearcommencing on or after the 1[st] day of April, 1991, theexpression “total turnover” shall have effect as if it alsoexcluded any sum referred to in clauses (iiia), (iiib), (iiic), (iiid)and (iiie) of section 28; (baa) “profits of the business” means the profits ofthe business as computed under the head “Profits and gains ofbusiness or profession” as reduced by- (1)ninety per cent, of any sum referred to in clauses(iiia), (iiib), (iiic) , (iiid) and (iiie) of section 28 or of anyreceipts by way of brokerage, commission, interest,rent, charges, or any other receipt of a similar natureincluded in such profits; and (2)the profits of any branch, office, warehouse or anyother establishment of the assessee situate outsideIndia; Provided that in relation to any assessment yearcommencing on or after the 1[st] day of April, 1991, theexpression “total turnover” shall have effect as if it alsoexcluded any sum referred to in clauses (iiia), (iiib), (iiic), (iiid)and (iiie) of section 28; (baa) “profits of the business” means the profits ofthe business as computed under the head “Profits and gains ofbusiness or profession” as reduced by- (1)ninety per cent, of any sum referred to in clauses(iiia), (iiib), (iiic) , (iiid) and (iiie) of section 28 or of anyreceipts by way of brokerage, commission, interest,rent, charges, or any other receipt of a similar natureincluded in such profits; and (2)the profits of any branch, office, warehouse or anyother establishment of the assessee situate outsideIndia; Once these three figures are arrived at, the amount whichqualifies for deduction can be known. However, there are certaingrey areas in the context of applying the definitions. Many atime, serious doubt arises as to whether a particular amountmust be added to “export turnover” or “total turnover”. Since thefirst happens to be numerator and the second, the denominator,in the formula, the addition to one or the other, would make vastdifference. Many a time, the assessees would make endeavourto add amounts to the numerator, so that the resultant figure that qualifies for deduction would be large. The Department on theother hand would attempt to add it to the denominator, so that thetaxable income would be more. The export and import policy framed by the Governmentfrom time to time provides for certain incentives. One of it is thatan exporter is extended the facility of importing the required raw-material free of customs duty. For instance, if the total cost of theunit of exported item is $500, and the raw material accounts for60% of its cost, the exporter would be entitled to import raw-material worth $ 300, without payment of excise duty. If theexcise duty payable thereof is 40%, he would stand to the benefitof $120 or its equivalent Indian currency. The accrual of the benefit under such incentives is notimmediate. It is always in the form of adjustment and eachexporter or assessee would follow his own accountingprocedure, to ensure that the benefit is properly derived. In theinstant case, the respondent became eligible to the extent ofRs.3,67,25,867/- in the form of IDEB. However, it has utilised thesame to the extent of Rs.3,35,26,436/-. What remained unusedis only Rs.31,99,431/-. T h e assessee did not include anycomponent of these figures in his turnover. The AssessingOfficer as well as the Commissioner were of the view that thefigure of Rs.3,67,25,867/- deserves to be added to the totalturnover. The respondent pleaded that if at all any component ofthis IDEB is to be added, it is only unused and left over portion ofit, and not the notional figure. The Tribunal accepted thecontention. It has already been mentioned that addition of a particularamount either to the numerator or denominator would have itsown impact. Obviously for that reason, the CBDT issuedCirculars explaining the procedure. The Tribunal took the sameinto account and granted the relief to the assessee. Broadly stated, the principle is that while arriving at the totalturnover, adequate care should be taken to avoid inclusion of theamounts that are mentioned in the proviso. We have alreadyobserved that the IDEB is referable to Clause (iiic) of Section 28of the Act. Even otherwise, the said amount represents thenotional figure and it cannot be treated as part of turnover of an It has already been mentioned that addition of a particularamount either to the numerator or denominator would have itsown impact. Obviously for that reason, the CBDT issuedCirculars explaining the procedure. The Tribunal took the sameinto account and granted the relief to the assessee. Broadly stated, the principle is that while arriving at the totalturnover, adequate care should be taken to avoid inclusion of theamounts that are mentioned in the proviso. We have alreadyobserved that the IDEB is referable to Clause (iiic) of Section 28of the Act. Even otherwise, the said amount represents thenotional figure and it cannot be treated as part of turnover of an assessee. The facility to the extent of that figure would beavailable, only when the raw-material used in the export goods isimported. It cannot be claimed as a matter of course. TheTribunal followed the Circular. Even in relation to such notionalfigure, the Tribunal has taken a pragmatic and practical view. Itheld that from the figure representing IDEB, the figurerepresenting the actual availment of the import duty exemptionmust be deducted and it is only the remainder that would qualifyfor addition to the total turnover. Learned counsel for the appellant is not able to convinceus as to how the notional figure of IDEB in its entirety can beadded to the export turnover. We have already extracted Clause(b) of explanation to Section 80HHC of the Act, which defines“export turnover”. It represents nothing more than the actual saleproceeds of exported goods. By no stretch of imagination, theincentives of duty exemption on imported goods can be treatedas sale consideration for export goods much less can it becomepart of the export turnover. Once it cannot be added to theexport turnover, the only possibility is to add it to the totalturnover. There again, the proviso would govern the situationand amounts mentioned in the proviso cannot be added to thetotal turnover for the purpose of Section 80HHC. The IDEBpartakes the character of the amounts covered by Clause (iii) ofSection 28 of the Act. By operation of proviso to Clause (ba) ofExplanation to Section 80HHC of the Act, it gets excluded fromthe total turnover. The Tribunal has taken the view that the balance of theunused IDEB can be added to the total turnover. Therespondent did not have any grievance about it. We do not findany basis to interfere with the order passed by the Tribunal. TheAppeal is accordingly dismissed. The miscellaneous petition filed in this appeal shall alsostand disposed of. There shall be no order as to costs. ____________________ L.NARASIMHA REDDY, J ______________________ CHALLA KODANDA RAM, J Date: 02.12.2014Note: L.R.Copy to be marked. JSU THE HON’BLE SRI JUSTICE L.NARASIMHA REDDYAND THE HON’BLE SRI JUSTICE CHALLA KODANDA RAM I.T.T.A.No.17 of 2004 JSU Date: 02.12.2014