(T.C (A) No. 181 of 2004)

Tax Case (Appeals) Nos. 726 and 181 of 2004

Decided on September 21, 2004

The Judgment of the Court was delivered by

K. Raviraja Pandian, J.:— These appeals are filed under section 260A of the Income-tax Act, 1961, against the orders dated February 18, 2004, and July 15, 2003 made in I.T.A No. 701.Mds/96 and I.T.A No. 562.Mds/1996 on the file of the Income-tax Appellate Tribunal Madras “C” and “B” Bench respectively.

2. In both these appeals, a common substantial question of law has been formulated, which is to the following effect:

“Whether on the facts and circumstances of the case, the Tribunal was right in holding that sales tax and excise duty (Appeal No. 726/2004) and excise duty (Appeal No. 181/2004) not to be included in the total turnover while computing the deduction under section 80HHC of the Income-tax Act, 1961?”

3. The assessment years involved are 1990-91 and 1992-93. In these appeals, the Assessing Officer included the excise duty and sales tax collection in the total turnover of the assessee for computing the deduction under section 80HHC. On appeal by the assessee, the Commissioner of Income-tax (Appeals) upheld the action of the Assessing Officer. On further appeal to the Tribunal, the Tribunal following the decision of the Bombay High Court in the case of CIT v. Sudarshan Chemicals Industries Limited, [2000] 245 ITR 769 accepted the contention of the assessee and allowed the appeals. The said order of the Tribunal is put in issue in the present appeals.

4. Mrs. Pushya Sitharaman, learned standing counsel for the Department placed before us the working sheet and contended that the removal of the excise duty and sales tax element from the total turnover would increase the percentage of the export profit which would not be in the same proportion as business profit. She further contended that for the purpose of calculation of the deduction under section 80HHC, the total turnover is to be taken into account and the total turnover, even from the point of view of sales tax laws, would include the excise duty and sales tax paid on the goods. She further contended that the excise duty and sales tax are certainly a trading receipt being part of the sale proceeds of the goods and merely because it is not levied on the goods, which are exported does not mean that it should not be taken into account for the purpose of calculating the total turnover. Having contended so, she fairly submitted that the Bombay, Calcutta and Kerala High Courts, while meeting a similar contention with reference to section 80HHC have taken the view that the excise duty and the sales tax paid on the goods would not form part of the total turnover, while calculating the deduction under the above provision in the cases of CIT v. Sudarshan Chemicals Industries Limited, [2000] 245 ITR 769; CIT v. Chloride India Ltd., [2002] 256 ITR 625 (Cal); Commissioner Of Income-Tax v. (1) K. Rajendranathan Nair, [2004] 265 ITR 35 (Ker). This court also supported the said view in the case of Commissioner Of Income-Tax v. Madras Motors Ltd./M.M Forgings Ltd., [2002] 257 ITR 60 though the issue in that case was somewhat different.

5. Mr. P.P.S Janarthana Raja, learned counsel appearing for the assessee contended that the language employed in the very provision explicitly makes it clear that the statutory out-goings cannot be included in the total turnover so as to inflate the same. While the intention of the Legislature is giving benefit to assessees, who are exporting the goods and earning foreign exchange the authorities erred in reducing the export profit proportion by inflating the total turnover by adding excise duty and sales tax element in it. He placed reliance on the judgment abovereferred to.

6. We anxiously heard the contentions of either parties and carefully perused the provision of the Act. Let us now consider the point in issue. Section 80HHC reads as follows:

“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 ……

(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 suchexport 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 …….

(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:

Provided that the profits computed under clause (a) or clause (b) or clause (c) of this sub-section shall be further increased by the amount which bears to ninety per cent, of any sum referred to in clause (iiia) (not being profits on sale of a licence acquired from any other person), and clauses (iiib) and (iiic) of section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee…….

Explanation —……..

(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;”

7. From the above extract, it is clear that under section 80HHC (1) in the case of an assessee being an Indian company or a person resident in India, who is engaged in the business of export out of India of any goods or merchandise to which this section applies a deduction of the profits derived by the assessee from the export of such goods or merchandise will be allowed subject to the provisions of section 80HHC.

8. Sub-section (3) provides that for the purpose 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. The Explanation to section 80HHC gives the meaning of certain expressions used in the section. Clause (ba) gives the meaning of the words “total turnover”. It says that the total turnover shall not include freight or insurance attributable to the transport of goods or merchandise beyond the customs station as defined in the Customs Act, 1962. The proviso thereto says 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 excludes any sum referred to in clauses (iiia), (iiib) and (iiic) of section 28.

9. The word “turnover”, when it is not specifically defined in the Act, would actually assume the meaning that the consideration received must be for the sale of goods and it must be available with the assessee for being turned over or in other words it must come to the assessee's till as the money belonging to him. In order that an amount can be included in the total turnover it must either be the purchase or the sale price or something incidental to the transfer of the goods dealt with by the assessee. In other words the turnover must relate to the purchase or the sale of the goods made by the assessee. The incidental expenses such as freight and insurance have been specifically excluded.

10. When the definition of total turnover excludes incidental expenses such as freight and insurance, which amount has to be borne by the assessee for safe transportation of his goods from and out of his pocket, it is highly impossible to accept the contention that the term “turnover” would include itself the excise duty and sales tax components which are all indirect taxes and the assessee has to collect and pay it over to the Government and such statutory dues will not have any element of profit of business.

11. The definition “export turnover” read along with “total turnover” would show that they include anything which has nexus with the sale proceeds. On the other hand they would not encompass with them anything which has no connection whatsoever to the sale proceeds. Section 80 HHC is a code by itself and in order to remove difficulties the Legislature thought it fit to explain and give meaning to various expressions employed in that section for the purpose of its working. The object of section 80HHC is required to be kept in mind while considering that section. The language employed in the above said section is for profit derived from export. The profits derived from export shall be the amount which bears with the profits of the business, the same proportion as the export turnover in respect of such goods bears with the total turnover of the goods. Therefore the turnover should be restricted to such receipts which have an element of profit in them. It is only the actual sale price, which is relevant. The element of sales tax and excise duty cannot be included to inflate the total turnover artificially in order to reduce the benefit which an assessee is otherwise entitled to.

12. We draw support to our conclusion from the decision of the Bombay High Court in the case of CIT v. Sudarshan Chemicals Industries Limited, [2000] 245 ITR 769 and the decision of the Calcutta High Court in the case of CIT v. Chloride India Ltd., [2002] 256 ITR 625 and that of the Kerala High Court in the case of Commissioner Of Income-Tax v. (1) K. Rajendranathan Nair, [2004] 265 ITR 35.

13. We are of the view that a reference to the decision of the Bombay High Court in the case of CIT v. Sudarshan Chemicals Industries Limited, [2000] 245 ITR 769, which has been referred to and followed by other High Courts in the cases cited supra is apposite as it supports the above view of ours. The High Court held after referring to the provision of section 80HHC as follows (headnote):

“In fact, the earlier section 80HHC(3) consisted of two parts, namely, where the assessee carried on a business as 100 per cent, exporter and secondly where the assessee carried on a composite business. In the latter case, it was provided that the profits derived from exports shall be the amount which bears to the profits of the business as computed under the head ‘Profits and gains of business’, the same proportion as the export turnover bears to the total turnover. The emphasis is on the words ‘profits derived from the exports’. Therefore, weightage must be given to such profits. Such profits cannot be reduced artificially by including statutory levies in the denominator, namely, total turnover. Therefore, the turnover should be restricted to such receipts which have an element of profit in it. It is only the actual sale price which is relevant. Anything charged by the assessee by way of excise duty and sales tax cannot be taken into account as they do not have any element of profit. Even, according to accounting principles, such levies do not form part of the profit and loss account. In fact, they are shown as liability in the balance-sheet. In the circumstances, the above two items cannot be included in the total turnover.”

14. The Division Bench of this court in which one of us is a party (K. Ravi-raja Pandian J.) in the case of Commissioner Of Income-Tax v. Madras Motors Ltd./M.M Forgings Ltd., [2002] 257 ITR 60, while answering the question in that case, whether the Tribunal was right in its conclusion that the total turnover in section 80HHC of the Act is only the turnover relating to the export business of the assessee and not the turnover relating to other business of the assessee? Agreed with the decision of the Bombay High Court in the following terms (page 73):

“The Bombay High Court in a somewhat similar situation in the decision reported in CIT v. Sudarshan Chemicals Industries Limited, [2000] 245 ITR 769 while interpreting the words ‘total turnover’ has observed as follows:

‘That the total turnover cannot include the sales tax and the excise duty and total turnover should be restricted only to such receipts which have an element of profit in it and it would be only the sale price which should be the relevant figure.’

In that case, the total turnover which is the denominator in the prescribed formula was tried to be inflated by including the sales tax and the excise duty into the same. Though the court was considering the amended section, its observations are apposite. The Bombay High Court in that case took into account the object of the section and observed as under (page 773):

‘In the circumstances, we are of the view that in order to ascertain the export profits, the above two items cannot be introduced to inflate the total turnover artificially in order to reduce the benefit which an assessee is entitled to. Ultimately, the object of section 80HHC is required to be kept in mind in order to encourage exports’.

We are in total agreement with the above observations.”

15. The other two decisions of the Calcutta High Court and Kerala High Court as they follow the Bombay High Court judgment in the case of CIT v. Sudarshan Chemicals Industries Limited, [2000] 245 ITR 769 to come to the conclusion, which we have arrived at above, have not been discussed in detail. The other contention of Mrs. Pushya Sitharaman that the total turnover even from the point of view of the sales tax law would include excise duty and sales tax paid on the goods has to be rejected as section 80HHC is a separate code by itself. The general definition of the word “turnover” or the definition under the sales tax laws or the case law dealing with the definition of turnover under the State levy cannot be imported into section 80HHC of the Income-tax Act, particularly, when such expressions are incorporated and explained in the provision itself.

16. In view of the above discussion and in the light of the preponderance of judicial opinion, the question of law as formulated above is answered in the affirmative, in favour of the assessee and against the Revenue. Accordingly, the above appeals are dismissed. No costs.