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CASE NO.: Appeal (civil)  6146 of 2005

PETITIONER: Commissioner of Income-Tax Thiruvananthapuram

RESPONDENT: M/s Baby Marine Exports, Kollam

DATE OF JUDGMENT: 30/03/2007

BENCH: Ashok Bhan & Dalveer Bhandari

JUDGMENT: J U D G M E N T WITH CIVIL APPEAL NOS.281-284 & 286 OF 2006

Dalveer Bhandari, J.         The controversy involved in these appeals revolves  around a short but important question of law - whether  the export house premium received by the assessee is  includible in the "profits of the business" of the assessee  while computing the deduction under Section 80HHC of  the Income Tax Act, 1961?

       Since a common question of law arises for  consideration in these appeals, therefore, they are being  disposed of by this common judgment.  However, for the  sake of reference, the essential facts of Civil Appeal No.  6146 of 2005 are reproduced as under.

       The respondent-assessee, M/s Baby Marine  Exports, Kollam is engaged in the business of selling  marine products both in domestic market and also  exporting it.   The assessee is exporting directly to the  buyers and also through export houses.                   The assessee in the instant case has entered into  contracts with the export houses, whereby, as and when  the assessee sells the goods or merchandise to an export  house, as consideration for the sale, receives the entire  F.O.B. value of the exports plus the export house  premium of 2.25% of the F.O.B. value.  The relevant  clause dealing with F.O.B. value and incentive  commission of the contract entered into between the  assessee and the export house in this case is reproduced  as under: "Clause (12):   The Export House agrees to  pay the manufacturer/shipper an incentive of  2.25% on the F.O.B. value (net of overseas  commission) of the said Frozen Marine  products shipped by the  manufacturer/shipper."

The assessee has been filing its income tax returns  showing the export house premium as part of its total  turnover and, thereby seeking deductions available to an  exporter and/or a supporting manufacturer under  Section 80-HHC (1A) of the Income Tax Act.

       The assessee has shown the export premium as

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part of sale consideration having an element of turnover  and not commission or service charges.   

       The Income-tax Officer, Ward-I, Quilon rejected the  claim of the assessee by his order dated 30.3.1995.  In  this connection, the assessing officer referred to the  relevant clause 12 of the agreement entered into between  the assessee and the export house and observed that the  narration of the clause shows the nature of the payment.   According to the assessing officer, this is clearly a  "commission or service charge" for routing the exports  through the export houses who receive import licenses  required by them.  The assessing officer in support of his  findings referred to and relied upon the decision of ITAT,  Cochin Bench in ITA No.610 (Coch)/1994) dated  21.12.1994 in G. Gangadharan Nair v. ITO Ward-1,  Mattanchery.   

       The respondent assessee aggrieved by the said order  filed an appeal before the Commissioner (Appeals).

       The Commissioner (Appeals) also examined the  main question being whether the export house premium  will form part of the export turnover for the purpose of  computing the amount of deduction under the proviso to  sub-section (3) to Section 80HHC?                The Commissioner (Appeals) relying upon the  decision of the ITAT dated 28.3.1995 in Income Tax  Officer v. Sea Pearl Industries Ltd. directed the  assessing officer to include the value of export through  export houses also in the export turnover for the purpose  of computing deduction under Section 80HHC.  The  Commissioner (Appeals) held that "what the appellant  has received is only a reimbursement of certain expenses  or payments towards commission or brokerage.  That  being the case, the export premium receipts will fall  within the ambit of clause 1 of Explanation (baa) to  Section 80HHC and, therefore, the Assessing Officer was  justified in excluding 90% of such receipts to arrive at the  profit of the business as defined in Explanation (baa)".   The Commissioner (Appeals) further held that "the  Assessing Officer was not justified in excluding the  indirect export from the export turnover.  He is directed  to include the indirect export also in the export turnover  for the purpose of Section 80HHC".           The respondent aggrieved by the order of the  Commissioner (Appeals) approached the Income Tax  Appellate Tribunal.

       The Tribunal extracted the findings of the  Commissioner (Appeals) in its order in extenso and relied  on the decision of the Tribunal.                   The Tribunal allowed the appeal of the assessee  and upheld the stand of the assessee that the export  house premium received by the assessee is includible in  the "profits of the business" of the assessee while  computing the deduction under Section 80HHC of the  Income Tax Act, 1961.

       Being aggrieved by the decision of the Tribunal, the  Revenue went in appeal before the High Court.   The High  Court vide order dated 22.8.2003 dismissed the appeal of

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the Revenue by observing that the questions involved in  the appeal were squarely covered by its decision in ITA  Nos.251/2002 and 166/2002 dated 01.7.2003, which  were decided in favour of the assessee and against the  Revenue.  In those cases, the High Court had  meticulously examined the issues involved in these  appeals.  While answering the questions involved, the  High Court had observed as under:  "In the present case the assessee is getting the  deduction not by virtue of the provision of S.  80-HHC (1) but only by virtue of the provision  of S. 80-HHC(1A).  The said sub-section  provides that 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 provision to sub-section  (1), there shall in accordance with and subject  to the provisions of Section 80-HHC 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 certificate has been  issued.  From the above, it would appear that  it is the sale of goods or merchandise to the  export house which entitles the assessee to get  the deduction under the sub-section and it is  the profits derived by the assessee from the  sale of goods or merchandise to the export  house that is liable to be deducted in the  computation of the total income.  It is only by  virtue of the agreements between the assessee  and the export houses the assesses got the  FOB value of the goods exported and a  percentage of the FOB value as export  premium. Thus, both the amounts constituted  the consideration received by the assessee for  the sale of goods or merchandise to the export  house.  Thus, even applying the principles laid  down by the Supreme Court and of this Court  in the decisions relied on by the senior counsel  for the Revenue, it has to be held that the  assesses are entitled to the benefits of section  80HHC on the export premium received from  the export houses."

       Being aggrieved by the decision of the High Court,  the Revenue has come to this Court by way of filing the  instant appeal.

The Revenue has raised many questions of law in  this appeal, but we are only concerned with the following  question: "Whether, on the facts and in the  circumstances of the case, the assessee is  entitled to any benefit on the export  house premium?"

In appeal, it has been stated by the Revenue that  the High Court has erred in law in holding that the  premium received by the assessee from the export house,  which has exported the goods on behalf of the assessee,

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being the supporting manufacturer, was profit on which  the assessee was entitled to a benefit of deduction under  Section 80-HHC of the Act inasmuch as it did not form  part of the sale proceeds of the goods exported by the  assessee through the export house but it was merely a  receipt from the Export House in consideration of the  permits/service rendered to them for facilitating the  export of goods.   

According to the Revenue, the High Court has erred  in interpreting the term "profits of the business"  contained in clause (baa) of Explanation to Section 80- HHC by holding that the premium received by the  assessee from the export house was profits of business  and not any sum referred to in clauses (iiia), (iiib) and  (iiic) of Section 28 or any receipt by way of brokerage,  commission, interest, rent, charges or any other receipt  of similar nature included in such profits.  It has been  further stated that on a proper construction of provisions  of sub-section (1A) and (4A) of Section 80-HHC, the  assessee being a supporting manufacturer is entitled to  deduction under this Section only on the sale price of the  assessee’s goods exported through the export house  inasmuch as the premium received by the assessee from  the export house cannot be held to have been "derived  from" the export business of the assessee.   

It was asserted by the appellant that the High Court  erred in holding that the assessee was entitled to  deduction under this Section by ignoring the provisions  of sub-section (4A) of Section 80-HHC according to which  the assessee being the supporting manufacturer was  required to furnish a certificate from the Chartered  Accountant that the deduction has been correctly  claimed by him on the basis of the profits in respect of  the sale of goods to the export house and also a  certificate from the export house about disclaimer of  deduction in respect of export turnover mentioned in the  certificate which could not in any way be construed as  including the premium paid by the export house to the  assessee.    Shri Vikas Singh, learned Additional Solicitor  General appearing on behalf of the Revenue contended  that to properly comprehend the issues involved in this  case, it is necessary to state in brief the object and the  source of money which is passed on by the export house  to the supporting manufacturer.  The assessment years  involved in the present case are 1992-93 to 1994-95.   During the relevant years, the EXIM Policy of Ist April,  1992 to 31st March, 1997 was applicable.  According to  the said policy, export houses were given various benefits  both tangible and intangible under the EXIM Policy, some  part of the said policy is reproduced as under:  "Under Chapter 12 of the EXIM Policy of  1992-97 vide para 137, the exporting  organizations were given recognition as export  house/trading house or star trading house on  the basis of average FOB value of physical  exports done by them during the three  preceding licensing years.  In the original  EXIM policy, an export organization was  declared an export house if it did 6 crores of  annual net foreign exchange export in the  three preceding years and it was declared a  trading house if it did 30 crores of the same

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and star trading house if it did 125 crores of  the same.

In the year 1993, the status determined  was done on the basis of average FOB value of  physical exports done during the preceding  three licensing years.  For export houses, it  was 10 crores, for trading houses it was 50  crores and for star trading houses it was 250  crores.

In the next year i.e. in 1994, the policy  provided both options i.e. of average net  foreign exchange export/average FOB value as  the basis for declaration of export house,  trading houses etc. and in the year 1994 a new  category was added which was super star  trading houses.

Consequent to the recognition as an  export house/trading house/star trading  house/super star trading house, the export  house was eligible to become a member of the  elite Indian Organization namely Federation of  Indian Export Organization (FIEO) which  further entitled the export houses to attend the  various buyers/seller meet all over the world,  to participate in the international exhibitions  and as members of delegation with the  government and also to attend international  conferences etc.  The benefits were many, only  some illustrations have been given above."      

Thus, in effect the money which was paid by the export  houses to the supporting manufacturers in the form of  premium/incentive is nothing but the money which was  received by the export houses in the form of one incentive  or the other, some of which is cash in the sense that the  same can be freely sold in the market at a premium and  the others are long term benefit which accrue to the  export houses over the years.   

       The source of the money accordingly is within India  and the money paid by the export houses to the  supporting manufacturer has no nexus or link to the  foreign buyers who paid the value of the goods on being  sold to the supporting manufacturer through the export  houses.  The assessee, i.e., the supporting manufacturer  would be entitled to claim the incentive/premium as part  of its export turnover if the origin of the money had been  the foreign buyer even if the said money were to be  routed to the supporting manufacturer through the  export house.  Since the admitted case of the parties is  that the source of money is within India i.e. out of the  incentives being offered by the Government of India  under the EXIM Policy 1992-97, the turnover of the  assessee/supporting manufacturer is merely a domestic  turnover and not the export turnover as claimed by them.   

       The appellant submitted that under Section 80- HHC, the assessee supporting manufacturer is entitled to  claim deduction only out of the profits earned by it from  the export turnover and not from the domestic turnover  which the assessee may have over and above the export

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earnings.   

Learned Additional Solicitor General also made the  following submissions. (a)     The  fact that the foreign buyer pays the value  of the goods in convertible foreign exchange  whereas, the money which is being paid by the  export house as premium to the supporting  manufacturer is in Indian currency and the  said Indian currency has no link or nexus  whatsoever with any foreign exchange earning.

(b)     The export premium being earned by the  assessee is not part of the sale price or the  invoice price of the goods being sold by the  assessee to the foreign buyer but is in effect  something over and above the same.     (c)     The amount which is being claimed by the  assessee as incentive/premium to be included  in his export profit under Section 80HHC is  not included in the certificate issued by the  export house or trade house under sub-section  (1A) of Section 80HHC and hence the assessee  cannot claim any benefit for the said amount  being outside the scope of deduction under  Section 80HHC (1A).

The assessee cannot get the premium/incentive  included as his profits under Section 80-HHC because   even the export house that is passing on this premium to  the assessee/supporting manufacturer is not permitted  to claim such deduction as profit from export earning  under Section 80-HHC.  In terms of Explanation (baa) to  Section 80HHC sub-clause 4(A), even the export house  can only claim 10% of such or similar earnings towards  deduction and hence it is inconceivable that the  supporting manufacturer could be permitted to claim  100% deduction of the same money when it comes into  his hands.   Finally, learned Additional Solicitor General  argued that the premium earned by the assessee is the  domestic earning of the assessee totally unrelated to the  export of goods and hence the assessee cannot claim any  deduction whatsoever in respect of such earning under  Section 80-HHC (1A).

Shri S. Ganesh, learned senior Advocate appearing  for the respondent - assessee contended that the claim of  the assessee for deduction under Section 80-HHC is by  virtue of the provision of Section 80-HHC (1A).  He also  submitted that as far as the assessee is concerned, the  export premium forms part of the export transaction  between the assessee and the export houses and,  therefore, it forms part of the export transaction and  consequently, the income by way of export premium is  profit derived by the assessee from the export of such  goods or merchandise.   

The export premium received by the assessee from  the export house forms part of the price settled between  the parties for sale of the goods and that it is neither  brokerage nor commission nor interest nor rent nor  charges etc.    

Mr. Ganesh, referred to the decision of Bombay

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High Court in CST v. Bangalore Clothing Company  reported in 260 ITR 371 wherein the Bombay High Court  has referred to and followed the Circular No.621 issued  by the CBDT dated 19th December, 1991.  The High  Court has explained that the object of the Explanation  (baa) to Section 80-HHC is to exclude profit receipts from  the business which do not have an element of turnover  and which are not connected with the assessee’s  business operations.  If a particular receipt is in the  nature of the operational income then it must be  included in business profit and consequently benefits of  Section 80-HHC must be granted in respect thereof.  Mr.  Ganesh also urged that applying the test enunciated by  the judgment of the Bombay High Court in Bangalore  Clothing Company’s case (supra) would lead to  irresistible conclusion that the export house premium  must necessarily be included in the business profit  because it is part of the assessee’s turnover and has an  integral connection with the business operations of the  supporting manufacturer, which consist of sale of goods  of the export house.   

Mr. Ganesh submitted that the judgment delivered  by the Madras High Court in KRN Marine Exports Ltd.  v.  ACIT reported in 2006 (153) Taxman p.437 is not  good law as the said decision did not consider the Board  Circular No. 621 which explained the clarification of the  provision of the Explanation (baa) to Section 80HHC (1A)  of the Act.  In that case, the High Court completely failed  to appreciate the crucial distinction between Section  80HHC (1) and Section 80HHC (1A) and also the fact that  the supporting manufacturer’s claim for the deduction  was under Section 80HHC (1A) which has nothing  whatsoever to do with export profit, with which only the  export house is concerned.  Mr. Ganesh also contended  that the said decision is required to be overruled by this  Court in view of the decision of this court in Berger  Paints India Ltd. v. Commissioner of Income Tax,  Calcutta reported in (2004) 12 SCC 42.

We have heard the learned counsel for the parties at  length.  Before critically examining the rival contentions  of the learned counsel for the appellants and the  respondents, we deem it appropriate to refer to the  provisions of Section 80-HHC of the Act: "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 to the extent of profits,  referred to in sub-section (1B), derived by the  assessee from the export of such goods or  merchandise: Provided that if the assessee, being a holder of  an Export House Certificate or a Trading  House Certificate (hereafter in this section  referred to as an Export House or a Trading  House, as the case may be,) issues a certificate  referred to in Clause (b) of Sub-section (4A),  that in respect of the amount of the export

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turnover specified therein, the deduction  under this sub-section is to be allowed to a  supporting manufacturer, then the amount of  deduction in the case of the assessee shall be  reduced by such amount which bears to the  total profits derived by the assessee from the  export of trading goods. the same proportion  as the amount of export turnover specified in  the said certificate bears to the total export  turnover of the assessee in respect of such  trading goods. (1A) 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 to the extent of profits, referred to in  Sub-section (1B)], 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.

       Section 80HHC was incorporated with the object of  granting incentive to earners of foreign exchange. This  Court in Sea Pearl Industries v. CIT Cochin (2001) 2  SCC 33 also observed that the object of Section 80HHC is  to grant incentive to earners of foreign exchange. In IPCA  Laboratory Ltd. v. Dy. Commissioner of Income Tax,  Mumbai reported in (2004) 12 SCC 742 this Court has  taken the same view.  This Court in the said judgment  observed that Section 80HHC has been incorporated with  a view to provide incentive to export houses and this  Section must receive liberal interpretation.         In Bajaj Tempo Ltd. v. Commissioner of Income  Tax, Bombay reported in (1992) 3 SCC 78, this Court  while interpreting Section 15-C of the Income Tax Act,  1922 observed that the Section, read as a whole, was a  provision, directed towards encouraging industrialization  by permitting an assessee setting up a new undertaking  to claim benefit of not paying tax to certain extent on the  capital employed.  Similarly, Section 80 HHC has also  been incorporated to give incentive for the earners of the  foreign exchange.  We must always keep the object of the  Act in view while interpreting the Section.  The legislative  intention must be the foundation of the court’s  interpretation.         According to Section 80HHC (1), the Export House in  computing its total income is entitled to deduction to the  extent of the profit derived by the assessee from the export  of the goods or merchandise. Whereas, according to  Section 80 HHC(1A), the supporting manufacturer shall be  entitled to a deduction of profit derived by the assessee  from the sale of goods or merchandise.  The term  "supporting manufacturer" has been defined in this  section and it reads as under:- "supporting manufacturer" means a person  being an Indian company or a person (other  than a company) resident in India,  manufacturing including processing, goods or  merchandise and selling such goods or

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merchandise to an Export House or a Trading  House for the purposes of export;       According  to the said definition, the respondent clearly  comes within the purview of supporting  manufacturer.  On plain construction of  Section 80HHC(1A) the assessee being  supporting as manufacturer  shall be entitled  to a deduction of the profit derived by the  assessee from the sale of goods or  merchandise." [         The respondent \026 a supporting manufacturer sold the  goods or merchandise to the export house and received the  entire FOB value of the goods plus the export house  premium of 2.25% of the FOB value.  The relevant Clause  12 of the agreement has already been extracted in the  earlier part of the judgment and according to the said  clause, the export house is under obligation to pay to the  supporting manufacturer an incentive of 2.25% on the  F.O.B. value according to the terms of the agreement.          The respondent, a supporting manufacturer,  admittedly sold the goods to the export house in respect of  which the export house has issued a certificate under  proviso to sub-section (1).  According to the section, the  respondent - assessee, in computing the total income be  allowed a deduction to the extent of profits referred to in  sub-section (1B) derived by the assessee from the sale of  goods to the export house.         The Appellate Tribunal has arrived at definite  conclusion that the Export House Premium is nothing but  an integral part of sale price realized by the assessee \026 a  supporting manufacturer from the Export House. The  Tribunal further held that the Export House Premium  cannot possibly be considered to be either commission or  brokerage, as a person cannot earn commission or  brokerage for himself.           The High Court has upheld the findings of the  Tribunal.  In our considered view, the order of the  Appellate Tribunal is based on proper construction of  Section 80HHC (1A) of the Income Tax Act that the Export  House premium is an integral part of the sale price  realized by the assessee from the export house.          We find no merit in the submission of the appellant  that Indian currency could not be subject matter of  deduction under Section 80HHC.  The requirement of  realizing the sale proceeds of the goods or merchandise in  convertible merchandise is applicable only to the Export  House and a claim for deduction under Section 80HHC (1).   The requirement of realization of sale proceeds in foreign  exchange expressly made inapplicable to the supporting  manufacturer by Section 80HHC(2A) and further the  supporting manufacturer’s claim of deduction is only  under Section 80HHC(1A) and not under Section  80HHC(1) which applies to export houses only.         The submission of the appellant that the premium  earned by the respondent assessee is totally unrelated to  export is fallacious and devoid of any merit. This  submission of the appellant is also contrary to the specific  terms of the agreement between the appellant and the  respondent.         On plain construction of Section 80HHC (1A), the  respondent is clearly entitled to claim deduction of the  premium amount received from the export house in  computing the total income.  The export house premium  can be included in the business profit because it is an

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integral part of business operation of the respondent  which consists of sale of goods by the respondent to the  export house.         The order of the Tribunal, which has been upheld by  the High Court in the impugned judgment, is based on  proper construction of Section 80HHC of the Income Tax  Act, 1961.  The appeal filed by the appellant being devoid  of any merit is accordingly dismissed.  CIVIL APPEAL NOS.281-284 & 286 OF 2006         These appeals stand disposed of in terms of our  judgment in Civil Appeal No. 6146 of 2005.         In the peculiar facts and circumstances of the case,  we direct the parties to all the appeals to meet their  respective costs.