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CASE NO.: Appeal (civil)  4409 of 2005

PETITIONER: Commissioner of Income Tax, Coimbatore

RESPONDENT: M/s. Lakshmi Machine Works

DATE OF JUDGMENT: 25/04/2007

BENCH: S.H. KAPADIA & B. SUDERSHAN REDDY

JUDGMENT: J U D G M E N T

WITH Civil Appeal Nos. 4411/2005, 5370/2005, 5372/2005, 5939/2005, 6145/2005,  3037/2006, 2596/2006, 917/2006, 919/2006, 920/2006, 1494/2006, 1495/2006,  3389/2006, 4572/2006, 5157/2006, 3616/2006, 3911/2006, 3913/2006,  3615/2006, 3169/2006, 4738/2006, 5688/2006, 2907/2006, 3496/2006,  5860/2006, 165/2007, 683/2007, 431/2007, 991/2007, 248/2007, 1162/2007,  163/2007, 1636/2007, 1637/2007, 1529/2007, 1530/2007, 1532/2007, 1533/2007,  1266/2007, 1536/2007 Civil Appeal No.   2145   of 2007 arising out of S.L.P. (C)No.16085/2006, Civil Appeal No.   2146   of 2007 arising out of S.L.P. (C)No.16752/2006, Civil Appeal No.   2147   of 2007 arising out of S.L.P. (C)No.18239/2006, Civil Appeal No.   2148   of 2007 arising out of S.L.P. (C)No.6633/2006, Civil Appeal No.   2149   of 2007 arising out of S.L.P. (C)No.3513/2007, Civil Appeal No.   2150   of 2007 arising out of S.L.P. (C)No.7911/2007                                           arising out of CC 10725-10726/2005

Kapadia, J.

       Leave granted in special leave petitions.         All the above civil appeals deal with a common  question of law and, therefore, they are decided together  by this judgment.  For the sake of convenience, the facts  in C.A. No.4409 of 2005 are mentioned hereinbelow.

       For the assessment year 1993-94 M/s. Lakshmi  Machine Works (assessee) filed its return of income  declaring its taxable income of Rs.50.80 lakhs.  On  10.6.94 intimation under Section 143(1)(a) of the Income  Tax Act, 1961 (for short, ’the Act’) was sent by the  Department accepting the returned income.  Later on the  Department issued notice under Section 143(2) of the  Act.  One of the items for issuing the said notice was the  quantum of deduction under Section 80HHC of the Act.   The assessee had computed the allowable deduction  under Section 80HHC without taking into account in the  total turnover the sales tax and excise duty.  The  assessee was asked to explain why the total turnover  should not be recomputed by including sales tax and  excise duty.  In this connection, the Department placed  reliance on the judgment of this Court in the case of M/s.  Chowringhee Sales Bureau (P) Ltd. v. C.I.T. West  Bengal \026 [1973] 83 ITR 542(SC).  The assessee objected  to the above inclusion.  However, that objection was  dismissed by the A.O. on the ground that under Section  80HHC(ba) deduction from "total turnover" was restricted  only to three items, namely, profit on sale of import  licence, duty drawback and CCS.  The A.O. further held

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that from the profits of business, the assessee was  entitled to deduct the above three items and also  brokerage, commission, interest, rent, charges or any  other receipt of similar nature.  Before the A.O., the  assessee contended that items which cannot be regarded  as profits, the question of treating those items as part of  "total turnover" did not arise.  The A.O. treated certain  miscellaneous receipts and interest receipts as part of  business profits to which the assessee objected.  The  assessee pointed out that under Section 80HHC as it  stood in the assessment year 1993-94, a deduction of  10% was allowed whereas the balance 90% stood  excluded from the business profits.  However, the  assessee’s argument for non-inclusion of sales tax and  excise duty was not accepted by the A.O.   

Aggrieved by the above decision, the matter was  carried in appeal to the C.I.T. (Appeals).  The appellate  authority agreed with the submissions made on behalf of  the assessee.  It was held that sales tax and excise duty  were liabilities of the assessee to the Government.  They  were shown separately from the value of the goods,  therefore, they were not included in the "total turnover"  for working out the deduction under Section 80HHC.   

Aggrieved by the said decision, the Department  carried the matter in appeal to the Tribunal.  Following  the judgment of the Bombay High Court in the case of  Commissioner of Income-Tax v. Sudarshan Chemicals  Industries Ltd. and another \026 (2000) 245 ITR 769  (Bom.), the Department’s appeal stood dismissed.  Hence,  this civil appeal.

       The short point which arises for consideration in  this civil appeal is: whether excise duty and sales tax  were includible in the "total turnover", which was the  denominator in the formula contained in Section  80HHC(3) as it stood in the material time.  For the sake  of convenience we quote hereinbelow Section 80HHC: "Deduction in respect of profits retained for export  business. 80HHC. (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 : 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 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.

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(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 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. (2)(a) This section applies to all goods or merchandise,  other than those specified in clause (b), if the sale  proceeds of such goods or merchandise exported out of  India are received in, or brought into, India by the  assessee other than the supporting manufacturer in  convertible foreign exchange, within a period of six  months from the end of the previous year or, where the  Chief Commissioner or Commissioner is satisfied (for  reasons to be recorded in writing) that the assessee is,  for reasons beyond his control, unable to do so within  the said period of six months, within such further period  as the Chief Commissioner or Commissioner may allow in  this behalf: (b) This section does not apply to the following goods or  merchandise, namely :- (i) mineral oil ; and (ii) minerals and ores (other than processed minerals  and ores specified in the Twelfth Schedule). Explanation 1.-The sale proceeds referred to in  clause (a) shall be deemed to have been received in  India where such sale proceeds are credited to a  separate account maintained for the purpose by the  assessee with any bank outside India with the  approval of the Reserve Bank of India. Explanation 2.-For the removal of doubts, it is  hereby declared that where any goods or  merchandise are transferred by an assessee to a  branch, office, warehouse or any other establishment  of the assessee situate outside India and such goods  or merchandise are sold from such branch, office,  warehouse or establishment, then, such transfer  shall be deemed to be export out of India of such  goods and merchandise and the value of such goods  or merchandise declared in the shipping bill or bill of  export as referred to in sub-section (1) of section 50  of the Customs Act, 1962 (52 of 1962), shall, for the  purposes of this section, be deemed to be the sale  proceeds thereof. (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 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 ; (b) where the export out of India is of trading goods,  the profits derived from such export shall be the  export turnover in respect of such trading goods as  reduced by the direct costs and indirect costs  attributable to such export ; (c) where the export out of India is of goods or  merchandise manufactured or processed by the

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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.-For the purposes of this sub- section,- (a) "adjusted export turnover" means the  export turnover as reduced by the export  turnover in respect of trading goods ; (b) "adjusted profits of the business" means  the profits of the business as reduced by the  profits derived from the business of export out  of India of trading goods as computed in the  manner provided in clause (b) of sub-section  (3) ; (c) "adjusted total turnover" means the total  turnover of the business as reduced by the  export turnover in respect of trading goods ; (d) "direct costs" means costs directly  attributable to the trading goods exported out  of India including the purchase price of such  goods ; (e) "indirect costs" means costs, not being  direct costs, allocated in the ratio of the export  turnover in respect of trading goods to the  total turnover ; (f) "trading goods" means goods which are not  manufactured or processed by the assessee. (3A) For the purposes of sub-section (1A), profits  derived by a supporting manufacturer from the sale of  goods or merchandise shall be,- (a) 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 profits of the business   [***] ; (b) 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. (4) The deduction under sub-section (1) shall not be  admissible unless the assessee furnishes in the  prescribed form, along with the return of income, the

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report of an accountant, as defined in the Explanation  below sub-section (2) of section 288, certifying that the  deduction has been correctly claimed in accordance with  the provisions of this section: (4A) The deduction under sub-section (1A) shall not be  admissible unless the supporting manufacturer  furnishes in the prescribed form along with his return of  income,- (a) the report of an accountant, as defined in the  Explanation below sub-section (2) of section 288,  certifying that the deduction has been correctly  claimed on the basis of the profits of the supporting  manufacturer in respect of his sale of goods or  merchandise to the Export House or Trading House ;  and (b) a certificate from the Export House or Trading  House containing such particulars as may be  prescribed and verified in the manner prescribed that  in respect of the export turnover mentioned in the  certificate, the Export House or Trading House has  not claimed the deduction under this section : Provided that the certificate specified in clause (b)  shall be duly certified by the auditor auditing the  accounts of the Export House or Trading House  under the provisions of this Act or under any other  law. Explanation.-For the purposes of this section,- (a) "convertible foreign exchange" means foreign  exchange which is for the time being treated by  the Reserve Bank of India as convertible foreign  exchange for the purposes of the Foreign  Exchange Regulation Act, 1973 (46 of 1973), and  any rules made thereunder; (aa) "export out of India" shall not include any  transaction by way of sale or otherwise, in a shop,  emporium or any other establishment situate in  India, not involving clearance at any customs  station as defined in the Customs Act, 1962 (52 of  1962) ; (b) "export turnover" means the sale proceeds,  received in, or brought into, India by the assessee  in convertible foreign exchange in accordance  with clause (a) of sub-section (2) of any goods or  merchandise to which this section applies and  which are exported out of India, but does 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) ; (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 ; (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,

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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 ; (c)     "Export House Certificate" or "Trading House  Certificate" means a valid Export House Certificate  or Trading House Certificate, as the case may be,  issued by the Chief Controller of Imports and  Exports, Government of India ; (d) "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 merchandise to an Export  House or a Trading House for the purposes of  export."                              (emphasis supplied)

       A brief analysis of the above Section 80HHC of the  Act, as amended with effect from 1.4.1992, indicates  rationalization of provisions relating to tax concession for  export profits.  Under Section 80HHC, the exporters were  allowed, in the computation of their total income, a  deduction of the entire profits derived from exports.   During the relevant year, there existed a dual system for  computation of export profits.  The first method operated  in cases where the export was of goods manufactured by  the tax payer.  In those cases the export profit had to be  computed on the basis of the ratio of "export turnover" to  "total turnover".  In effect, the formula was as follows: 80HHC concession = export profits = total profits x export turnover    total turnover         Where the export consisted of goods purchased from  third parties (trading goods) there was a second method  of computation in which the export profits were to be  calculated by deducting from the export turnover, direct  and indirect costs attributable to such exports.  In that  case the formula was as under: 80HHC concession = export profits = export turnover \026 (costs  attributable to such exports)     By the Finance Act, 1992, one more amendment  was made by which the legislature declared that  commission received on assignment of export orders,  brokerage, interest, rent and items mentioned in Section  28(iiia), (iiib) and (iiic), should not be treated in toto as  profits of the business relatable to exports and only 10%  thereof should be considered as the profit of the business  and the balance 90% should not be included in the  profits.  These amendments took place with effect from  1.4.92, the date from which the dual system of  computation of export profits came into effect.            All assessable entities were not eligible for  deduction under Section 80HHC of the Act.  According to  Section 80HHC only an Indian company or a non- company assessee who was the resident in India was  eligible for deduction provided he was engaged in the  export business of eligible goods.  Under the Income Tax  Rules, 1962, Form No.10CCAC was prescribed.  We quote  hereinbelow Annexures A & B to the said Form 10CCAC: "FORM NO.10CCAC [See rule 18BBA(3)] Report under section *80HHC(4)/80HHC(4A) of the Income-tax  Act, 1961

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1.              xxx             xxx             xxx

2.      (a) *I/We certify that the deduction to be claimed  by the assessee under sub-section (1) of Section  80HHC of the Income-tax Act, 1961, in respect of the  assessment year\005\005\005.is Rs\005\005\005\005\005. which has  been determined on the basis of the sale proceeds  received by the assessee in convertible foreign  exchange.  The said amount has been worked out on  the basis of the details in Annexure A to this Form.

(b)     *I/We certify that the deduction to be claimed by  the assessee, as supporting manufacturer, under sub- section (1A) of section 80HHC of the Income-tax Act,  1961, in respect of the assessment year\005\005\005.. is  Rs.\005\005\005\005.., which has been determined on the basis  of sales to Export House/Trading House* made during  the year, in respect of which a certificate has been  issued by the Export House/Trading House under the  proviso to sub-section (1) of section 80HHC of the  Income-tax Act, 1961.  The said amount has been  worked out on the basis of the details in Annexure B  to this Form.

3.              xxx             xxx             xxx

Date\005.                                               Signed                                                         Accountant

Notes:          xxx             xxx             xx

ANNEXURE A [See paragraph 2(a) of Form No.10CCAC] Details relating to the claim by the exporter for  deduction under section 80HHC of the Income- tax Act, 1961

1.      Name of the assessee 2.      Assessment year 3.      Total turnover of the business 4.      Total export turnover 5.      Total profits of the business 6.      Export turnover in respect of trading goods 7.      Direct cost of trading goods exported 8.      Indirect cost attributable to trading goods  exported 9.      Total of 7 + 8 10.     Profits from export of trading goods [6 minus 9] 11.     Adjusted total turnover (3 minus 6) 12.     Adjusted export turnover (4 minus 6) 13.     Adjusted profits of the business (5 minus 10) 14.     Profits derived by  assessee from export of goods  or merchandise to which section 80HHC applies,  computed under sub-section (3) of section  80HHC 15.     Export turnover, deduction in respect of which  will be claimed by a supporting manufacturer in  accordance with proviso to sub-section (1) of  section 80HHC 16.     Profit from the export turnover mentioned in  item 15 above, calculated in accordance with  proviso to sub-section (1) of section 80HHC 17.     Deduction under section 80HHC to which the

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assessee is entitled (Item 14 minus Item 16) 18.     Remarks, if any

ANNEXURE B

[See paragraph 2(b) of Form No.10CCAC] Details relating to the claim of the supporting  manufacturer for deduction under section  80HHC of the Income-tax Act, 1961

SECTION A

1.      Name of the assessee 2.      assessment year 3.      Total turnover of the business  4.      The amount of profit under the head "Profits and  gains of business of profession" 5.      Total turnover in respect of sale of Export  House/Trading House for which certificate is  received from Export House/Trading House 6.      Profit from the turnover mentioned in item 5  above, computed under sub-section (3A) of  section 80HHC 7.      Remarks, if any

SECTION B Details of sale of Export House/Trading House

SL  No. Name and  address of the  Export  House/Trading  House to  whom goods or  merchandise  were sold Sale  Invoice  No.  and  date Sale  price Invoice No.  and date by  which Export  House/Trading  House has  exported Date of  certificate  issued by  the  Export  house/  Trading  House

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under  clause (b)  of sub- section  (4A) of  section  80HHC Amount  of  disclaimer 1 2 3 4 5 6 7

ACTION POINTS 1.      Report is to be filed along with return of income. 2.      "Total turnover" does not include cash compensatory  support, duty drawback and profit on sale of import  entitlement licences. 3.      "Export turnover" means the sale proceeds (excluding freight  and insurance) receivable in convertible foreign exchange \026  See Circular No.564, dated 5-7-1990. 4.      Report is to be obtained in respect of each year for which  deduction is claimed."

       Analysing the above formula, as it stood at the  relevant time, it is clear that the amount of deduction  under Section 80HHC had to be computed as under: Business profit x export turnover w total turnover + 90 per cent of  export incentive x export turnover w total turnover  

       Therefore, in the above formula there were three  concepts, namely, "business profit", "export turnover"  and "total turnover".  The first step was to find out the  business profit.  This was to be done in accordance with  the provisions of Section 28 to Section 43 of the Act.   Under Section 80HHC the above three export incentives,  namely, CCS, duty drawback and profit on sale of import  licence, were includible in the "business profits" and,  therefore, they were taxable.  The Finance Act, 1992,  restricted the term "export turnover" to FOB sale  proceeds.  However, the said Act excluded CCS, Duty  Drawback and profit on sale of import entitlement from  the term "total turnover".

To sum up, the amount of deduction under Section  80HHC is to be computed as under: "1.   Profit of the business \026 To find out "profit of  the business", the first step is to determine  income under the head "Profits and gains of  business or profession" [as per section  28(iiia), (iiib), (iiic) this includes three export

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incentives.  From the income so arrived at,  deduct the following: a.    90 per cent of export incentive. b.      90 per cent of receipts by way of  brokerage, commission, interest, rent,  charges or other receipts of a similar  nature; and  c.  profits of any branch, office, warehouse or  any similar establishment of the assessee  situate outside India.

2.      Export turnover \026 Sale proceeds received in, or  brought into India, in convertible foreign  exchange within the prescribed time (or within  the extended time limit) minus freight and  insurance attributable to the transportation of  goods/merchandise beyond the customs  station is export turnover for this purpose.

3.      Total turnover \026 From the turnover (as per  books of account) the following should be  deducted if these are part of turnover:

a.      freight/insurance attributable to the  transport of goods or merchandise  beyond customs station in India; and b.      export incentives.

4.      Export incentives -  Export incentives are:

a.      profits on sale of a licence granted  under the Imports (Control) Order, 1955  made under the Imports and Exports  (Control) Act, 1947 [sec.28(iiia)]; b.      cash assistance (by whatever name  called) received or receivable by any  person against exports under any  scheme of the Government of India  [sec.28(iiib)]; c.      any duty of customs or excise re-paid or  re-payable as drawback to any person  against exports under the Customs and  Central Excise Duties Drawback Rules,  1971 [sec.28(iiic)]."

To simplify the matter we quote hereinbelow  paragraph 107.13-3P1 of the Direct Taxes Ready  Reckoner by Taxmann for the year 1993-94:

"107.13-3P1 X Ltd. is engaged in manufacturing  and/or processing of heavy chemical for export.  For  the year ending March 31, 1993, the summarized  profit and loss account is as follows:

                 Rs.                                            Rs. Expenses     32,60,000 Net profit     10,30,000

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                  __________                    42,90,000

Total turnover (of goods  exported)                          30,50,000 Freight and insurance  attributable to transport of goods beyond customs  station                               2,40,000 Export incentive under  Section 28(iiia), (iiib),(iiic)   6,50,000 Brokerage, commission, rent, interest                       2,70,000 Profit of foreign branch           80,000                                          42,90,000

Other information \026  1.      Out of total expenses of Rs.32,60,000 debited to  profit and loss account, Rs.51,600 is not deductible  by virtue of sections 40 and 40A.  The balance  amount is, however, deductible. 2.      On January 13, 1993, Rs.86,920 is paid on  account of excise duty of the previous year 1991- 92.  Since this amount pertains to the previous  year 1991-92, it has not been debited to the  aforesaid profit and loss account. 3.      The company has received Rs.24,90,000 in  convertible foreign exchange till September 30,  1993.  The company’s application for obtaining  extension of time under section 80HHC has been  rejected by the Commissioner. 4.      During the previous year 1992-93, the company  gets a short-term gain of Rs.20,000. 5.      The company is entitled for deduction under  section 80-I.

Compute the net income of the company for the  assessment year 1993-94.

Profits and gains of business of profession:       Rs. Net profit as P & L account Add: Amount not deductible by virtue of secs.40 and 40A       10,30,000            51,600

Less: Excise duty of 1991-92, deductible by virtue of  section 43B [see para 49.10]       10,81,600 (-)        86,920 Business income (under section 28) Capital gains         9,94,680            20,000 Gross total income       10,14,680 Less: Deduction Under section 80HHC [see Note]

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Under section 80-I [i.e., 25% of Rs.9,94,680] Net income (rounded off)

       5,48,355         2,48,670         2,17,660 Note: Computation of deduction under section 80HHC 1. Profit of the business -  It will be calculated as follows: Income under the head "Profits and gains of business or  profession"

       9,94,680 Less: 90% of export incentives (i.e., 90% of Rs.6,50,000) 90% of brokerage, commission, rent and interest (i.e.,  90% of Rs.2,70,000) Profit of the foreign branch Profit of the business

(-)     5,85,000

(-)     2,43,000 (-)        80,000            86,680

2. Export turnover \026 It is Rs.24,90,000 being the  brought to India (within the time limit), in the  convertible foreign exchange. 3.   Total turnover \026 It is Rs.30,50,000. 4.   Export incentive \026 Export incentive is Rs.6,50,000.

Amount of deduction is as follows:

(Rs.86,680 x Rs.24,90,000 w Rs.30,50,000) + (90% of  Rs.6,50,000 x Rs.24,90,000 w Rs.30,50,000) =

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Rs.5,48,355.

107.13-4 ASSESSEE WHOSE EXPORTS GOODS  MANUFACTURED/PROCESSED BY OTHERS \026  HOW TO FIND OUT DEDUCTION -  This category  covers those assessees who export goods  manufactured/processed by others:

107.13-4a Conditions \026 In order to get deduction one  has to satisfy conditions specified in paras 107.13-3a.

107.13-4b Amount of deduction \026 Deduction under  section 80HHC will be determined as under: (Export turnover1 minus direct cost2 minus indirect  cost3) + (90 per cent of export incentive5 x Export  turnover w total turnover)

1.      Export turnover \026 Sale proceeds received in, or  brought into India in, convertible foreign  exchange within the prescribed time (or within  the extended time limit) minus freight and  insurance attributable to the transportation of  goods/merchandise beyond the customs  station, is export turnover for this purpose. 2.      Direct cost \026 Under Explanation (d) to section 80  HHC(3), "direct costs" comprises the following: a.      the purchase price of the goods, and b.      costs directly attributable to the trading  goods exported out of India.

Purchase price \026 under the accepted principles of  accounting, purchase price would mean invoice  value, including taxes and duties, as reduced by (i)  value of any purchase returns, (ii)trade discounts  and rebates, if any, allowed, and (iii) value of any  incentives which is passed on to the seller.   Similarly, sales tax set-off available in respect of  exports can also be reduced from purchase costs.   However, cash discount obtained any other rebate  or set-off available after the end of the relevant  previous year cannot be reduced from purchase  cost.  If, as per the terms of the contract, any  export incentives are passed on to the seller, they  would have an effect on purchase price and to that  extent purchase cost would be lower.

Costs directly attributable to trading goods \026 These  costs would generally embrace, apart from the  purchase cost and related costs, such other costs  which have been incurred either in relation to the  purchase, or in relation to the transportation or  storage of the goods prior to their export, or in  relation to the movement of goods from the  exporter’s godown, premises or warehouse to the  customs station.  The use of the word "directly"  signifies that there should be a proximate  connection between the costs and the purchase of  the trading goods.  In other words, they should not  be "overhead costs".

3.      Indirect cost \026 Under Explanation  (e) to section  80HHC(3), the term "indirect costs" means  costs (not being direct costs) allocated in the  ratio of the export turnover in respect of the  trading goods to the total turnover.  In other

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words, indirect cost may be computed as  under: (Total cost minus direct cost) x Export  turnover in respect of trading goods1 w Total  turnover4. 4.      Total turnover \026 From the turnover (as per  books of account) the following should be  deducted if these are part of turnover: a.      freight/insurance attributable to the  transport of goods or merchandise beyond  customs station in India; and b.      export incentives.

5.      Export incentives \026 Export incentives are: a.      profits on sale of a licence granted under  the Imports (Control) Order, 1955 made  under the Imports and Exports (Control)  Act, 1947 [sec.28(iiia)]; b.      cash assistance (by whatever name called)  received or receivable by any person  against exports under any scheme of the  Government of India [sec.28 (iiib)]; c.      any duty of customs or excise re-paid or  re-payable as drawback to any person  against exports under the Customs and  Central Excise Duties Drawback Rules,  1971 [sec.28(iiic)]"   

       The above examples show that the formula under  Section 80HHC was very simple as far as it related to the  sole business of exports.  The formula became  complicated in cases of composite business.  In the case  of direct exporter there were three categories of assessees  \026 (i) an assessee who exported goods manufactured by  him; (ii) an assessee who did not export goods  manufactured by him but exported goods manufactured  by others; and (iii) an assessee who exported  manufactured goods as well as trading goods.  The  formula became complicated in the case of the third  category.  It also became complicated in the cases of an  assessee who did not directly export goods but supplied  goods to an Export House/Trading House for the purpose  of export (subordinate manufacturer).

       The principal reason for enacting the above formula  was to disallow a part of 80HHC concession when the  entire deduction claimed could not be regarded as  relatable to exports.  Therefore, while interpreting the  words "total turnover" in the above formula in Section  80HHC one has to give a schematic interpretation to that  expression.  There is one more reason for giving  schematic interpretation.  The various amendments to  Section 80HHC show that receipts by way of brokerage,  commission, interest, rent etc. do not form part of  business profits as they have no nexus with the activity  of exports.  If interest or rent was not regarded by the  legislature as business profits, the question of treating  the same as part of the total turnover in the above  formula did not arise.  In fact, Section 80 HHC had to be  amended several times since the formula on several  occasions gave a distorted figure of export profits when  receipts like interest, rent, commission etc. which did not  have the element of turnover got included in the profit  and loss account and consequently became entitled to

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deduction.  This was clarified by the above amendment to  Section 80HHC commencing from 1.4.92.  The said  amendment made it clear that though commission and  interest emanated from exports, they did not involve any  element of turnover and merely for the reason that  commission, interest, rent etc. were included in the profit  and loss account, they did not become eligible to  deduction.  We have to give purposeful interpretation to  the above section.  The said section is entirely based on  the formula.  The amendments from time to time indicate  that they became necessary in order to make the formula  workable.  Hence, we have to give schematic  interpretation to Section 80HHC of the Act.

       Shri P.P. Malhotra, leaned senior counsel appearing  for the Department (appellant), submitted that one has to  give plain and unambiguous meaning to the word  "turnover" in the above formula; that there was no need  to call for any rule of interpretation or external aid to  interpret the said word; that having regard to the plain  words of the section, excise duty and sales tax ought to  have been included in the "total turnover".  Learned  counsel submitted that the word "turnover" even in the  ordinary sense would include the above two items.   Learned counsel urged that the formula should be read  strictly.  In this connection, he pointed out that the  legislature had expressly excluded items of freight and  insurance and not sales tax and excise duty from the  said definition.  It was urged that while construing a  taxing statute strict interpretation should be given by the  Courts.  It was urged that the definition of the words  "total turnover" did not include freight/insurance.  He  urged that since the legislature had excluded only  insurance and freight, it was not open to the courts to  exclude excise duty and sales tax from the concept of  "total turnover" in the said formula.  He contended that  the word "turnover" referred to the aggregate amount for  which the goods were sold and since sales tax and excise  duty formed part of the value of the goods, the said two  items were includible in the definition of the words "total  turnover".  In this connection, learned counsel placed  reliance on the judgment of the Supreme Court in the  case of M/s. Chowringhee Sales Bureau (supra).   Reliance was also placed on "The Law and Practice of  Income Tax" by Kanga and Palkhivala (eighth edition) at  page 123.  In support of the contention that a tax or duty  is part of the dealer’s trading/business receipts, even if  the tax or duty is charged separately or credited to a  separate account.  Reliance was also placed on the  judgment of the King’s Bench Division in the case of  Paprika, Ltd., and Another  v.  Board of Trade -  (1944)  1 All E.R. 372, in which it has been held that wherever a  sale attracts purchase tax, that tax affects the price  which the seller who is liable to pay the tax demands, but  it does not cease to be the price which the buyer has to  pay even if the price is expressed as cost x + purchase  tax.  Reliance was also placed on the judgment of the  Court of Appeal in the case of Love  v.  Norman Wright  (Builders), Ltd. \026 (1944) 1 All E.R. 618, in which it has  been held that if a seller quotes a price of ’x’ + purchase  tax, the buyer has to pay the amount of the tax as part of  the price and since the tax is charged on the wholesale  value of the goods the tax element has to be taken into  account.  It was urged that one has to give strict  interpretation to the word "turnover".  It was urged that

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there was no question of giving purposeful interpretation  to the word "turnover" in the said Section 80HHC of the  Act.  It was urged that the legislature had used the  expression "total turnover" from which it became clear  that the said expression referred to the aggregate amount  for which the goods were sold and since the above two  items formed part of the value of the goods, they were  includible in the "total turnover".  Learned counsel urged  that there was no merit in the contention advanced on  behalf of the assessee that excise duty was the liability of  the assessee to the Government and, therefore, it was not  includible in the total turnover.  Learned counsel urged  that there was no merit in the contention advanced on  behalf of the assessee that the components of "export  turnover" and "total turnover" should be the same in the  above formula.  Learned counsel submitted that the  formula would become unworkable if the components in  the "export turnover" and the components in the "total  turnover" are the same.  Learned counsel submitted that  there was no merit in the argument advanced on behalf  of the assessee that excise duty and sales tax did not  form part of trading receipts.  Learned counsel submitted  that there was no merit in the contention of the assessee  that the expression "business profits" in Section 80HHC  did not include receipts which did not emanate for  exports and, therefore, such receipts did not constitute  an element of turnover.            We do not find any merit in the above contentions  advanced on behalf of the Department.  It is important to  note that tax under the Act is upon income, profits and  gains.  It is not a tax on gross receipts.  Under Section  2(24) of the Act the word "income" includes profits and  gains.  The charge is not on gross receipts but on profits  and gains.  The charge is not on gross receipts but on  profits and gains properly so-called.  Gross receipts or  sale proceeds, however, include profits.  According to  "The Law and Practice of Income Tax" by Kanga and  Palkhivala, the word "profits" in Section 28 should be  understood in normal and proper sense.  However,  subject to special requirements of the income tax, profits  have got to be assessed provided they are real profits.   Such profits have to be got to be ascertained on ordinary  principles of commercial trading and accounting.   However, the income tax has laid down certain rules to  be applied in deciding how the tax should be assessed  and even if the result is to tax as profits what cannot be  construed as profits, still the requirements of the income  tax must be complied with.  Where a deduction is  necessary in order to ascertain the profits and gains,  such deductions should be allowed.  Profits should be  computed after deducting the expenses incurred for  business though such expenses may not be admissible  expressly under the Act, unless such expenses are  expressly disallowed by the Act [SEE: page 455 of "The  Law and Practice of Income Tax" by Kanga and  Palkhivala].  Therefore, schematic interpretation for  making the formula in Section 80HHC workable cannot  be ruled out.  Similarly, purposeful interpretation of  Section 80HHC which has undergone so many changes  cannot be ruled out, particularly, when those legislative  changes indicate that the legislature intended to exclude  items like commission and interest from deduction on the  ground that they did not possess any element of  "turnover" even though commission and interest

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emanated from exports.  We have to read the words "total  turnover" in Section 80HHC as part of the formula which  sought to segregate the "export profits" from the  "business profits".  Therefore, we have to read the  formula in entirety.  In that formula the entire business  profits is not given deduction.  It is the business profit  which is proportionately reduced by the above  fraction/ratio of export turnover w total turnover which  constitute 80HHC concession (deduction).  Income in the  nature of "business profits" was, therefore, apportioned.   The above formula fixed a ratio in which "business  profits" under Section 28 of the Act had to be  apportioned.  Therefore, one has to give weightage not  only to the words "total turnover" but also to the words  "export turnover", "total export turnover" and "business  profits".  That is the reason why we have quoted  hereinabove extensively the illustration from the Direct  Taxes (Income tax) Ready Reckoner of the relevant word.   In the circumstances, we cannot interpret the words  "total turnover" in the above formula with reference to  the definition of the word "turnover" in other laws like  Central Sales Tax or as defined in accounting principles.   Goods for export do not incur excise duty liability.  As  stated above, even commission and interest formed a  part of the profit and loss account, however, they were  not eligible for deduction under Section 80HHC.  They  were not eligible even without the clarification introduced  by the legislature by various amendments because they  did not involve any element of turnover.  Further, in all  other provisions of the income tax, profits and gains were  required to be computed with reference to the books of  accounts of the assessee.  However, as can be seen from  the Income Tax Rules and from the above Form  No.10CCAC in the case of deduction under Section  80HHC a report of the auditor certifying deduction based  on export turnover was sufficient.  This is because the  very basis for computing Section 80HHC deduction was  "business profits" as computed under Section 28, a  portion of which had to be apportioned in terms of the  above ratio of export turnover to total turnover.  Section  80HHC(3) was a beneficial section.  It was intended to  provide incentives to promote exports.  The incentive was  to exempt profits relatable to exports.  In the case of  combined business of an assessee having export  business and domestic business the legislature intended  to have a formula to ascertain export profits by  apportioning the total business profits on the basis of  turnovers.  Apportionment of profits on the basis of  turnover was accepted as a method of arriving at export  profits.  This method earlier existed under Excess Profits  Tax Act, it existed in the Business Profits Tax Act.   Therefore, just as commission received by an assessee is  relatable to exports and yet it cannot form part of  "turnover", excise duty and sales tax also cannot form  part of the "turnover".  Similarly, "interest" emanates  from exports and yet "interest" does not involve an  element of turnover.  The object of the legislature in  enacting Section 80HHC of the Act was to confer a  benefit on profits accruing with reference to export  turnover.  Therefore, "turnover" was the requirement.   Commission, rent, interest etc. did not involve any  turnover.  Therefore, 90% of such commission, interest  etc. was excluded from the profits derived from the  export.  Therefore, even without the clarification such  items did not form part of the formula in Section

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80HHC(3) for the simple reason that it did not emanate  from the "export turnover", much less any turnover.   Even if the assessee was an exclusive dealer in exports,  the said commission was not includible as it did not  spring from the "turnover".  Just as interest, commission  etc. did not emanate from the "turnover", so also excise  duty and sales tax did not emanate from such turnover.   Since excise duty and sales tax did not involve any such  turnover, such taxes had to be excluded.  Commission,  interest, rent etc. do yield profits, but they do not partake  of the character of turnover and, therefore, they were not  includible in the "total turnover".  The above discussion  shows that income from rent, commission etc. cannot be  considered as part of business profits and, therefore, they  cannot be held as part of the turnover also.  In fact, in  Civil Appeal No.4409 of 2005, the above proposition has  been accepted by the A.O. [See: page no.24 of the paper  book], if so, then excise duty and sales tax also cannot  form part of the "total turnover" under Section 80HHC(3),  otherwise the formula becomes unworkable.  In our view,  sales tax and excise duty also do not have any element of  "turnover" which is the position even in the case of rent,  commission, interest etc.  It is important to bear in mind  that excise duty and sales tax are indirect taxes.  They  are recovered by the assessee on behalf of the  Government.  Therefore, if they are made relatable to  exports, the formula under Section 80HHC would become  unworkable.  The view which we have taken is in the  light of amendments made to Section 80HHC from time  to time.

       Before concluding we may state that profits are of  three types, namely, book-profits, statutory profits and  actual profits.  The amendments to Section 80HHC(3)  indicate exclusion of book profits.  For example,  commission, interest, etc. do form part of the profit and  loss account but for the purposes of calculation of profits  derived from local sales and exports, they stand  excluded.  The difficulty arises because the formula is  based on the Hybrid System of Profits, namely, actual  and statutory profits.  Therefore, this judgment should be  read in the context of the above parameters. Our  reasoning in this judgment is confined to the workability  of the formula in Section 80HHC(3) of the Act as it stood  at the material time.

       For the above reasons, we see no merit in these  appeals filed by the Department and, accordingly, they  are dismissed with no order as to costs.