M/S.fenner (India) Limited v. The Assistant Commissioner Of Income Tax,Circle I,Madurai

IN THE HIGH COURT OF JUDICATURE AT MADRASDATED : 08.06.2022CORAM THE HON'BLE MR. JUSTICE R.MAHADEVANANDTHE HON'BLE MR. JUSTICE J.SATHYA NARAYANA PRASAD T.C.A.NO.184 OF 2012 M/s.Fenner (India) Limited,No.3, Madurai Melakkal Road,Kochadai,Madurai – 625 016....Appellant Versus The Assistant Commissioner of Income Tax,Circle I,Madurai. ...RespondentTax Case Appeal filed under Section 260 A of the Income TaxAct, 1961 against the order of the Income Tax AppellateTribunal,“B”Bench,Chennaidated31.03.2009inI.T.A.No.1588/Mds/2007. As against appellate Orders and Grounds of Decision. Orderdated 15.03.2007 made in ITA.No.0290/06-07 by the Commissionerof Income Tax (Appeals)-I, Madurai and As against Assessment order dated 20.12.2006 made inPAN.No.AAACF2348D by the Assistant Commissioner of Income TaxCircle-I, Madurai for the Assessment Year 2004-2005. For Appellant :Mr.R.Vijayaraghava forMr.Subbaraya Aiyar For Respondent :Mr.M.Swaminathan,Senior Standing Counseland Mrs.V.Pushpa,Junior Standing Counsel R.MAHADEVAN, J. This is an appeal filed by the assessee against the order ofthe Income Tax Appellate Tribunal dated 31.03.2009 inI.T.A.No.1588/Mds/2007. 2.The appellant is engaged in the business of manufactureand sale of V & Fan Belts, Oil Seals etc. For the assessmentyear 2004-2005, they filed its return on 01.11.2004 admitting atotal income of Rs.14,02,65,870/-, which was subsequently,revised by them on 20.09.2005, admitting the income atRs.13,93,08,090/-. Upon scrutiny of the same, the respondentissued notice under section 143(2) of the Income Tax Act, 1961(in short, “the Act”) and thereafter, completed the assessmentunder section 143(3) on 20.12.2006 determining the total incomeat Rs.14,67,27,610/- which excludes long term capital gains.While doing so, the assessing officer among others, restrictedthe claim of deduction under section 80HHC by excluding 90% ofthe royalty receipts from the profits of the business underclause (baa) to explanation to section 80HHC(4). Challenging theorder of assessment passed by the assessing officer, theappellant preferred an appeal before the Commissioner of IncomeTax (Appeals)-I, Madurai, who, by order dated 15.03.2007, partlyallowed the appeal filed by the appellant. Aggrieved over thesame, the Revenue went on appeal before the ITAT. By order dated31.03.2009, the Tribunal set aside the order of the CIT(A) anddirected the assessing officer to exclude the receipt of royaltyfrom business profits for the purpose of deduction under section80HHC of the Act. Therefore, the appellant is before this courtwith this tax case appeal. 3.The learned counsel for the appellant contended that theappellant entered into a MOU with its 100% subsidiary company;the subsidiary company manufactures the goods as per thespecifications given by the appellant and the appellant has alsoprovided know-how, secret formula manufacturing process andmethods to ensure the same quality of manufactured goods; forproviding these services, the subsidiary company paid royaltyand hence, the royalty receipts are directly related to thegoods exported by the appellant and the same cannot be excludedfrom the profits of the business. Without considering the saidaspect in a proper perspective, the assessing officer excluded90% of the royalty receipts from the profits of the business.Though the CIT(A) rightly set aside the order of assessment, theTribunal erred in directing the assessing officer to exclude thereceipt of royalty from business profits for the purpose ofdeduction under section 80HHC of the Act. Therefore, thelearned counsel sought to allow this appeal by setting aside the order of the Tribunal. order of the Tribunal. 4.Repudiating the claim so made on the side of theappellant, the learned senior standing counsel appearing for therespondent submitted that the appellant/assessee cannot improvetheir case, when the issue involved herein is covered by adecision of this Court in Commissioner of Income Tax v. ShivaDistilleries Ltd., [(2007) 293 ITR 108], wherein, it wascategorically held that “guarantee commission as well as royaltyviz., a payment for using a right, have to be excluded from thebusiness profit for the purpose of calculation of deductionunder section 80HHC of the Act”. Thus, according to the learnedcounsel, there cannot be any reason for deviating such a view,which has already attained finality. 5.Heard both sides and perused the materials available onrecord. 6.By order dated 20.06.2012, this Tax Case Appeal wasadmitted on the following substantial questions of law: “1. Whether on the facts and in the circumstancesof the case, the Tribunal was right in holding thatthe royalty income received for providing know-how,secret formula manufacturing process and methods inrespect of goods manufactured by the subsidiary andexported by the assessee is not eligible for deductionunder Section 80HHC of the Income Tax Act? 2. Whether on the facts and in the circumstancesof the case, the Tribunal was right in holding thatthe royalty receipts should be excluded from theprofits of the business for the purpose of computationof deduction under Section 80HHC of the Income TaxAct?” 7.Before the assessing officer, the appellant claimed thatthe sale of raw materials, processed waste and scrap, sale ofspares, etc. form part of business activities and hence, itshould be included in the total turnover. Further, the royaltyreceived by them for the services provided to the subsidiarycompany, is related to export activity and therefore, the samecannot be taken into account for 90% exclusion from the businessprofits, while computing deduction under section 80HHC. However,the assessing officer rejected the claim of the appellant, afterhaving held that royalty income claimed by them is not arisingout of any business activity related to export and it isincidental in nature and hence, 90% of the royalty income wasreduced from the profit of the business for computation of deduction under section 80HHC. 8.In the appeal filed by the appellant, the CIT(A) allowedthe claim of the appellant, relating to royalty income, afterfollowing the earlier order of the Tribunal dated 31.07.2006 inITA.No.2669/Mds/04 in respect of the appellant's own case forthe assessment year 2000-01. However, the Tribunal set aside thesame and directed the assessing officer to exclude the receiptof royalty from business profits for the purpose of deductionunder section 80HHC of the Act, based on the decision of thiscourt in CIT v. Shiva Distilleries Ltd [(2007) 293 ITR 108(Madras)]. 9.In the aforesaid decision in Shiva Distilleries Ltd, thiscourt had referred to the earlier order in CIT v. Madras MotorsLtd / M.M.Forgings Ltd [(2002) 257 ITR 60], in which, it washeld that “the turnover from the business of sale ofmotorcycles, motorcycle spare parts and television sets couldnot be included in the total turnover of the assessee for thepurpose of the computation of deduction under section 80HHC ofthe Act as the total turnover in section 80HHC is only theturnover relating to export business of the assessee and not theturnover relating to other business of the assessee”. In thelight of the said order, this court held that the scrap andwaste materials, which would not be relatable to export businessof the assessee, have to be excluded from business profit forthe purpose of calculation of deduction under section 80HHC ofthe Act. 10.Further, in the same decision in Shiva Distilleries Ltdcase, with regard to includibility of royalty as well as theguarantee commission for the purpose of calculation of deductionunder section 80HHC of the Act, this court had referred to twodecisions (i)CIT v. Bangalore Clothing Co. [(2003) 260 ITR 371],wherein, it was held by the Bombay High Court that “theExplanation (baa) to section 80HHC of the Income Tax Act, 1961,was inserted by the Finance (No.2) Act, 1991, with effect fromApril 1, 1992 and under that Explanation, “profits of thebusiness”, for the purposes of section 80HHC does not includereceipts which do not have an element of turnover like rent,commission, interest etc”; and (ii)CIT v. Sundaram Clayton Ltd[(2006) 281 ITR 425], in which, it was held by this court that“the charges of miscellaneous income and commission do not formpart of the turnover for the purpose of calculation of deductionunder section 80HHC of the Act”. Following the said twodecisions, it was categorically held that “guarantee commissionas well as royalty viz., a payment for using a right, have to beexcluded from the business profit for the purpose of calculationof deduction under section 80HHC of the Act”. 11.Applying the ratio laid down in the aforesaid decisionviz., Shiva Distilleries Ltd's case, which is squarelyapplicable to the facts of the present case, wherein, there isno concrete material produced by the appellant / assessee toprove that the royalty income received from the subsidiarycompany, are related to export business, this court is of theview that the Tribunal has rightly directed the assessingofficer to exclude the royalty income from the business profitsfor the purpose of calculation of deduction under section 80HHCof the Act, which warrants no interference. 12.In such view of the matter, the substantial questions oflaw raised herein are answered against the appellant.Accordingly, the tax case appeal stands dismissed. No costs. Sd/- Assistant Registrar //True Copy// Sub Assistant Registrar mrr To 1.The Assistant Commissioner of Income Tax,Circle I, Madurai.2.The Commissioner of Income Tax (Appeals)-IMadurai. 3.The Income Tax Appellate Tribunal,'B' Bench, Chennai. +1cc to Mr.Subbaraya Aiyar, Advocate, S.R.No.33344 T.C.A.No.184 of 2012 KV(CO)PM/04/07/2022