K.S Radhakrishnan, J.:— Whether the export premium received by a supporting manufacturer from an Export House would fall under the expression “brokerage, commission charges or any other receipts of similar nature” contemplated under sub-clause (i) of clause (baa) of the Explanation to section 80HHC(4A) of the Income-tax Act, 1961 is the question that has come up for consideration in these cases.
2. I.T.A No. 140 of 2001 arises out of the order passed in I.T.A No. 152.Coch/1999 dated March 30, 2001 by the Income-tax Appellate Tribunal, Cochin Bench. Income-tax Appeal No. 62 of 2001 arises out of the order passed in I.T.A No. 183.Coch/2000 dated December 7, 2000, and Income-tax Appeal No. 320 of 2002 arises out of the order passed in I.T.A No. 233.Coch/1996. Common issues arise for consideration in all these cases and hence we are disposing of the same by a common judgment. The assessee in I.T.A No. 140 of 2001 claimed deduction under section 80HHC(3A) of the Income-tax Act at the assessment stage and the Assessing Officer excluded 90 per cent, of the export house premium from the business profits on the ground that export house premium has nothing to do with the exports effected by the assessee. Aggrieved by the said order the assessee preferred appeal before the Commissioner of Income-tax (Appeals). The Commissioner of Income-tax (Appeals) rejected the claim of the assessee on the ground that the premium received was a local receipt. The Assessing Officer after obtaining clarification from the Commissioner passed an order giving effect to the appellate order. That order is dated March 10, 1999 and the order was served on the assessee on March 22, 1999. The assessee took up the matter in appeal before the Appellate Tribunal with a petition for condonation of delay. The claim of the assessee was allowed by the Tribunal holding that the export premium cannot be excluded from the business profits under clause (baa) of the Explanation to section 80HHC. Reliance was placed on the order of the Tribunal in the case of United Marine Exports in I.T.A No. 183.Coch/2000 dated December 7, 2000, against which the Department has filed Income-tax Appeal No. 62 of 2001. The Commissioner of Income-tax has preferred I.T.A No. 140 of 2001 aggrieved by the order passed by the Tribunal in I.T.A No. 152.Coch/1999 dated March 30, 2001.
3. I.T.A No. 320 of 2002 arises out of the order passed in I.T.A No. 233.Coch/1996 dated March 26, 2002, following the order passed by the Tribunal in I.T.A Nos. 152, 153, 154 and 438.Coch/1999 dated March 30, 2001. The Commissioner of Income-tax on the basis of the various grounds decided the preliminary question as to whether the assessee, a supporting manufacturer, is entitled to section 80HHC deduction on export house premium to the exporting manufacturer.
4. The assessee in I.T.A No. 140 of 2001 is engaged in the activity of processing of fish and exporting them to foreign countries through Export Houses as a supporting manufacturer. The assessee is also an exporter. The assessee filed a return of income on February 25, 1994, for the assessment year 1993–94 declaring total income of Rs. 86,010 and the same was processed under section 143(1)(a) on August 28, 1995, accepting the income returned. Later it was noticed that the claim made by the assessee under section 80HHC was very much excessive. Consequently, the Assessing Officer issued notice for reopening the assessment and calling for return of income. The assessee replied to the notice contending that the export house premium received by the assessee was part of the sales turnover and hence it should be considered only as part of the total turnover of the business. The assessing authority did not accept the said argument. Agreements executed by the assessee with the Export Houses were perused by the assessing authority and the assessing authority held as follows:
“It has been described in all these agreements that the assessee shall be paid over and above the FOB value of the goods exported a specified percentage of the FOB value by way of incentive, service charges, commission, etc. It has been specifically mentioned that these amounts will be paid by the Export House and will be in Indian currency. In short, these amounts are not obtained from the importers of the marine products. That clearly suggests that these amounts, generally known as export house premium, have nothing to do with the exports effected by the assessee. In fact, the Export Houses pay this amount to attract exporters like the assessee to export through their Export House. Since the Export Houses stand to gain materially from increasing the export turnover through them, they are offering these amounts to exporters as additional attractions. Definitely, therefore, these amounts have the characteristics of ‘miscellaneous income’ only. Therefore, while calculating profits of the business, 90 per cent, of export house premium received is deducted from the net business income.”
5. The assessee aggrieved by the said order, preferred appeal before the Commissioner of Income-tax (Appeals). The contention was raised that the export premium received was consideration for the transfer of title to the goods and forms part and parcel of the value of goods exported. It was also contended that the disclaimer certificate given by the Export House in Form No. 10CCAB establishes that the assessee had sold the goods to the Export House. The Commissioner found that the action of the assessing authority in excluding 90 per cent, of the export house premium in computing profits of the business under section 80HHC was in order. Aggrieved by the said order, the assessee took up the matter in appeal before the Appellate Tribunal. The Tribunal however allowed the appeal and held that the export house premium cannot be excluded from the business profits under clause (baa) of the Explanation to section 80HHC. The Tribunal took the view that the export house premium should be included in the total turnover in terms of section 80HHC(3A)(b). The Tribunal has taken the same view in the other connected matters as well. The Commissioner of Income-tax is aggrieved by the orders passed by the Tribunal and has come up with these appeals.
6. Learned senior counsel for the Income-tax Department Sri P.K Ravindranatha Menon, contended that the assessee claimed deduction under section 80HHC only to the extent of disclaimer certificate contemplated under section 80HHC(1A) and to the extent of convertible foreign exchange received from the Export House and the sale receipts of the supporting manufacturer sold to the exporting house and in turn to the foreign buyer. Counsel submitted that what is received by the assessee is incentive which is over and above the price for the merchandise. Counsel submitted that the export premium by itself if taken alone is not eligible for deduction under section 80HHC. Counsel submitted that export house premium does not come under any of the clauses in (b), (ba) or (baa) but clause (baa) takes in “profits of the business”. Counsel also submitted that the definition takes in profit, rent charges or any other receipt of similar nature included and hence there is no question of any exclusion of 90 per cent, or inclusion of 10 per cent, of export house premium. Counsel submitted that if the export premium does not come under profits of the business as defined in clause (baa), then there is no question of claiming any deduction under section 80HHC on export house premium. Counsel in support of the contention placed reliance on the decision in IPCA Laboratory Ltd. v. Deputy CIT, [2004] 266 ITR 521 (SC). Counsel also placed reliance on the decisions in Ellerman Lines Ltd. v. CIT, [1971] 82 ITR 913 (SC) and Salem Co-operative Central Bank Ltd. v. CIT, [1993] 201 ITR 697 (SC) and submitted that the Revenue may be permitted to contend that there is no question of exclusion of 10 per cent, export premium as ordered by the Tribunal. Counsel submitted that the assessing authority should have excluded 100 per cent, of the export premium in computing the profits of the business under section 80HHC and the allowance for expenditure to the extent of 10 per cent, was not justified. Being a question of law, counsel submitted that if a mistake has been committed by the Revenue, the same could be set at rest holding that exclusion of 10 per cent, is on an erroneous understanding of the law.
7. Senior counsel appearing for the assessee, Sri P.K Kurian, fully supported the findings of the Tribunal. Counsel submitted that the export premium claimed by the assessee through which the exports of the assessee were routed did not fall under the various items like brokerage, commission charges or any other receipt of similar nature contemplated under sub-clause (i) of clause (baa) of the Explanation to section 80HHC(4A) and therefore, no part of the receipt is liable to be excluded while computing the income. Counsel submitted that the export house premium received was consideration for transfer of the title to the goods on board the ship after the goods crossed the customs frontier of India and is nothing but the value of goods exported. Counsel submitted, apart from routing the exports through the Export Houses, no other service was rendered by the assessee and that the export house premium is in the nature of turnover and cannot be excluded from the profits for working out deduction under section 80HHC.
8. The assessee, as we have already indicated, is a supporting manufacturer and exported goods through Export Houses. The assessee had filed the return in which it had claimed the benefit of section 80HHC. The export house premium received by the assessee is part of the sales turnover of the assessee. Section 80HHC deals with deduction in respect of profits retained for export business. Under section 80HHC in a case where 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 that section applies, there shall, in accordance with and subject to the provisions of that 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. Profits derived from export of the goods or merchandise out of India shall be the profits of the business as computed under the head “Profits and gains of business or profession” under the provisions of sub-section (3) thereof. In a case where the exclusive business of the assessee is export out of India of goods or merchandise manufactured or processed by the assessee, the profits derived from such export shall be the amount which has to be worked out under the provisions of clause (a) of sub-section (3). In a case where the export out of India is of trading goods, the profits derived from such export have to be worked out in accordance with clause (b) of sub-section (3) of section 80HHC. Under sub-clause (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 in respect of 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.
9. The assessee in this case is a supporting manufacturer. Sub-section (1A) of section 80HHC says that where the assessee, being a supporting manufacturer, has during the previous year, sold goods or merchandise to any Export House or Trading House in respect of which the Export House or Trading House has issued a certificate under the proviso to sub-section (1), 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 sale of goods or merchandise to the Export House or Trading House in respect of which the certificate has been issued by the Export House or Trading House. Sub-section (3A) says that for the purpose of sub-section (1A), profits derived by a supporting manufacturer from the sale of goods or merchandise shall be, in a case where the business carried on by the supporting manufacturer consists exclusively of sale of goods or merchandise to one or more Export Houses or trading houses, the profit of the business and 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 shall be the profits derived.
10. The assessee as a supporting manufacturer claimed deduction under section 80HHC(3A) and the Assessing Officer excluded 90 per cent, export house premium on the ground that export house premium has nothing to do with the export effected by the assessee. The assessee as a supporting manufacturer contended that the export premium obtained by it through which exports of the assessee were routed did not fall under the various items like commission charges, brokerage or any other receipt of a similar nature under clause (baa) of sub-section (4A) of section 80HHC and therefore, no export premium is liable to be excluded while computing the income. The Assessing Officer however excluded 90 per cent, of the receipts under clause (baa).
11. The export house premium received and entitled to be received by the Export House by cash or Indian currency is the price of the goods sold by the supporting manufacturer of the Export House which is the excess amount received by the assessee from the supporting manufacturer to whom the sale is effected in high seas over and above the FOB value of the merchandise. Export house premium does not in our view come under any of the enumerated items of clause (baa) to the Explanation defining “profits of the business”. The definition takes in brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits. We may in this connection extract clause (baa) to sub-section (4A) of section 80HHC for easy reference.
“(baa) ‘profits 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; and
(2) the profits of any branch, office, warehouse or any other establishment of the assessee situate outside India.”
12. On going through the above-mentioned definition, export house premium does not come within the ambit of the definition. The assessee has executed various agreements with the exporter for exporting goods to foreign countries. The agreements prescribed that the assessee-manufacturer would export the goods after incurring all the expenses and the bills would be drawn in the name of the Export House. The agreements stipulated that the assessee should be paid over and above the FOB value of goods exported a specified percentage of the FOB value by way of incentive, commission charges, etc. This amount would be paid by the Export House to the assessee in Indian currency. The Export House on receipt of the sale proceeds endorses the same to the assessee which results in foreign exchange being credited to the assessee's account after conversion to Indian rupees. The Export House by this process receives various benefits by way of incentives from the Government of India. The Export House used to give export premium to compensate for the loss of such incentive to the supporting manufacturer. These amounts are not obtained from the foreign importers. Export premium thus received is not part of the sale price of the exported goods and hence would not become part of the sales turnover of the assessee-supporting manufacturer.
13. We are of the view that if no disclaimer is claimed, the entire benefit would go to the Export House for which it is entitled. Premium obtained in addition to the price of the goods or the premium obtained by the supporting manufacturer cannot be characterised as profit of the business. Convertible foreign exchange received by the Export House for the sale proceeds can be transferred to the supporting manufacturer and nothing in excess of that amount can be the subject-matter of section 80HHC as far as the supporting manufacturer is concerned. As per the agreement, Indian currency, in our view, cannot be the subject-matter of deduction under section 80HHC. Further, what is received in convertible foreign exchange by the Export House and passed on to the supporting manufacturer can alone be the subject-matter of deduction under section 80HHC. In our view, on the basis of the same and to that extent alone the supporting manufacturer is entitled to benefits of section 80HHC. The assessing authority has also made a mistake in including 10 per cent. The assessing authority should have excluded the entire 100 per cent, of the export house premium.
14. Standing counsel for the Revenue submitted that he may be allowed to raise the question of law though not raised before the Tribunal or other authorities, placing reliance on the decisions of the Supreme Court in Ellerman Lines Ltd. v. CIT, [1971] 82 ITR 913 and Salem Co-operative Central Bank Ltd. v. CIT, [1993] 201 ITR 697. Counsel submitted that even if the Revenue is a party to the erroneous assumption of law before the Tribunal, it can resile from the erroneous assumption of law that arises before this court. We find force in the contention of senior counsel. For the reasons we have already indicated, the Revenue has made a mistake in allowing deduction of 10 per cent, and the assessing authority ought to have disallowed the entire export house premium. Even if no appeal is filed by the Revenue before the Tribunal on the question of law it can raise it before the High Court or else the court would be carried away by the erroneous question of law which would not be in the interest of justice. Being a pure question of law, we permitted counsel to raise the same though not raised before the Tribunal. Counsel submitted that the sale effected by the supporting manufacturer to the Export House is undoubtedly the business of the supporting manufacturer. Counsel also submitted that the export house premium does not figure in the disclaimer certificate obtained by the assessee from the Export House in terms of section 80HHC(1A). The certificate is to be obtained in Form No. 10CCAB of the Income-tax Rules. The certificate has to mention the export turnover in rupees in respect of which the certificate is issued and also the figure of purchase from the supporting manufacturer in rupees. It is trite that the entitlement of premium is to the Export House and to the extent of disclaimer alone can claim deduction under section 80HHC. If no disclaimer is claimed by the Export House the entire benefit would go to the Export House.
15. The above reasoning would get support from the decision of the Supreme Court in IPCA Laboratory Ltd.'s case, [2004] 266 ITR 521. In that case the apex court was dealing with the question as to whether Export Houses can disclaim such deduction. The court held that it is clear from a reading of sub-section (1) of section 80HHC and sub-section (3) that a deduction can be permitted only if there is a positive profit in the exports of both self-manufactured goods as well as trading goods. The court also concluded that a plain reading of section 80HHC makes it clear that in arriving at the profits earned from export of both self-manufactured goods and trading goods the profits and losses in both the trades have to be taken into consideration. While holding so, the apex court further held as follows (page 532):
“The proviso to sub-section (1) of section 80HHC enables a disclaimer only to enable the Export House to pass on deductions. It in no way reduces the turnover of the Export House. In computing total income, the entire turnover is taken into account even though there is a disclaimer. Thus, even though the disclaimer is made, the taxable income of Rs. 4.39 crores has been arrived at by the appellants after taking into account the entire turnover from export of trading goods. In arriving at the figure of Rs. 4.39 crores admittedly the loss of Rs. 6.86 crores has been taken into account. Even after disclaimer the turnover has remained the turnover of the Export House, i.e, the appellants. The disclaimer is only for the purpose of enabling the Export House to pass on the deduction which it would have got to the supporting manufacturer. It follows that if no deduction is available, because there is a loss, then the Export House cannot pass on or give credit of such non-existing deduction to a supporting manufacturer.” The above decision would indicate that entitlement to premium is to the Export House and to the extent of disclaimer. If no disclaimer is claimed entire benefit would go to the Export House. In other words, benefit to which Export House is entitled alone can be passed on under section 80HHC.
16. In view of the above-mentioned circumstances, we answer the question in favour of the Revenue and hold that the Tribunal is not justified in allowing the claim of the assessee that export premium cannot be excluded from the business profits under clause (baa) of the Explanation to section 80HHC. We hold that the assessee would be entitled to deduction under section 80HHC only to the extent of disclaimer though no disclaimer certificate has been produced and therefore, the assessee is not entitled to get any deduction. It is so declared. The appeals filed by the Revenue would stand allowed and the order of the Tribunal is set aside. We declare that the assessee is not entitled to get any deduction.