THE HONOURABLE SRI JUSTICE L. NARASIMHA REDDY and THE HONBLE SRI JUSTICE CHALLA KODANDA RAM
I.T.T.A.No.46 of 2004
02-12-2014
M/s. Starchik Specialities Ltd., Hyderabad.. Appellant
Dy. Commissioner of Income Tax, Circle 3(1), Hyderabad.. Respondent
Counsel for the Appellant: SRI. Y. RATNAKAR
Counsel for Respondent: SRI S.R. ASHOK, SC FOR INCOME TAX
<Gist :
>Head Note:
? Cases referred:
THE HONBLE SRI JUSTICE L.NARASIMHA REDDY
AND
THE HONBLE SRI JUSTICE CHALLA KODANDA RAM
I.T.T.A.No.46 of 2004
JUDGMENT: (per the Honble Sri Justice L.Narasimha Reddy)
This appeal filed under Section 260 A of the Income Tax Act, 1961
(for short the Act) by an assessee involves the interpretation of certain
important portions of Sections 80HHC of the Act.
The appellant is an assessee under the Act. It undertakes the
activity of manufacturing and trading indigenously as well as outside the
country. The exports made by it yield foreign exchange. Therefore, it is
entitled to claim the deduction under Section 80HHC of the Act. Since it is
a company, it reflects book profits in the profit and loss (P&L) accounts
maintained under the provisions of the Companies Act. Section 115JA of
the Act mandates that if the total income of a company, arrived at under
the Act is less than 30% of the book profits in the P&L accounts of the
previous year, the total income of such assessee company shall be
deemed to equal to 30% of the book profit.
The manner in which the book profit must be arrived at, is dealt
with in the explanation to Section 115JA of the Act. For all practical
purposes, the book profit is nothing but the net profit shown in the
P&L account for the relevant previous year, as increased by the amounts
mentioned in the entries in clauses (a) to (g), or as the case may be,
reduced by those mentioned in clauses (i) to (viii) of explanation to sub-
section (2) of Section 115JA of the Act. Clause (viii) provides for
reduction, to the extent of the profits, eligible for deduction under Section
80HHC, computed under clauses (a), (b) and (c) of sub-section 3 or sub-
section (3A) of the Act, subject to certain conditions.
Since the appellant is undertaking the activities of manufacturing
and trading, sub-section (3B) of Section 80HHC of the Act becomes
relevant. That in turn provides for the deduction of direct as well as
indirect costs incurred for the purpose of trading.
In its return filed for the Assessment Year 1998-99, the appellant
sought deduction of only Rs.1,84,471/- under the head indirect costs.
The Assessing Officer, however, took the figure at Rs.14,57,292/-. In the
appeal preferred by the appellant before the Commissioner of Income Tax
(Appeals), Hyderabad, the view expressed by the Assessing Officer was
affirmed. The appellant filed I.T.A.No.186/Hyd/2003 before the
Hyderabad Bench B of the Income Tax Appellate Tribunal (for short the
Tribunal). The appeal was dismissed by the Tribunal through its order
dated 22.07.2003. Hence, this further appeal.
Sri Y. Ratnakar, learned counsel for the appellant, submits that
Section 80HHC of the Act prescribes a separate procedure to be followed
in arriving at the profits derived from export of trading goods under sub-
section 3 (b) thereof and the indirect costs mentioned therein must be
only those, that are referable to the activity of export and not other
activity including manufacture. He contends that on account of the
indiscriminate deduction of the amount under the heading of indirect
costs from the profits derived from the export turnover, the book profits
referable to Section 115 JA of the Act do not suffer the otherwise
expected level of reduction, and thereby, the appellant is exposed to
higher tax liability.
Sri S.R. Ashok, learned Senior Standing Counsel for the respondent,
on the other hand, submits that the method of calculation of profits
derived from export is not restricted to the particulars relating to export
alone, and those in relation to other activities are also liable to be taken
into account.
Section 80HHC of the Act itself poses almost a challenge for a
proper understanding. Added to that, there is combination of Section
115JA of the Act, in this case. The complexity is not difficult to imagine.
The manner in which, the returns of an assessee of this nature, are
required to be processed, can be summed up as under:
(a) Being a company, it maintains profit and loss account. It is not
uncommon that the book profit is shown in an inflated figure
unrelated to the ground reality obviously, to satisfy or to
encourage the shareholders.
(b) Taking into account, the fact that the book profits cannot be
treated as the figures representing the true state of affairs, the
Parliament introduced Section 115JA of the Act providing for
levy of the income tax on 30% of the book profit, in case the
amount arrived at under the income tax is less than that figure.
The endeavour of an assessee would be to bring the taxable
income arrived at under the Act, below 30% of the book profit, so that the
Income Tax can be paid on the 30% of the book profits.
The expression book profit is defined under Explanation to sub-
section (2) of Section 115JA of the Act, which reads as under:
Explanation.For the purposes of this section, "book profit"
means the net profit as shown in the profit and loss account for
the relevant previous year prepared under sub-section (2), as
increased by
(a) the amount of income-tax paid or payable, and the
provision therefor; or
(b) the amounts carried to any reserves by whatever name
called; or
(c) the amount or amounts set aside to provisions made for
meeting liabilities, other than ascertained liabilities; or
(d) the amount by way of provision for losses of subsidiary
companies; or
(e) the amount or amounts of dividends paid or proposed;
or
(f) the amount or amounts of expenditure relatable to any
income to which any of the provisions of Chapter III
applies;
(g) the amount or amounts set aside as provision for
diminution in the value of any asset,
if any amount referred to in clauses (a) to (g) is debited to the
profit and loss account, and as reduced by,
(i)
(ii).
(iii)
(iv) .
(v) .
(vi).
(vii) ..
(viii) the amount of profits eligible for deduction under Section
80HHC, computed under clause (a), (b) or (c) of sub-section (3)
or sub-section (3A), as the case may be, of that section, and
subject to the conditions specified in sub-sections (4) and (4A) of
that section.
It is in this process that the determination of profits under Section
80HHC of the Act became relevant. Sub-section (3) of Section 80HHC of
the Act reads as under:
(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 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 :
Many of the expressions employed in these provisions are defined in
the Explanation, which is as follows:
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.
It is not necessary to deal with the detailed procedure to be followed
in working out Section 80HHC of the Act. The limited purpose herein is to
ascertain the profits of an exporter in trading covered by sub-section 3(b)
of the Act. A perusal of the provision makes it clear that the profit from
the export of trading goods is nothing but the export turnover as reduced
by direct costs and indirect costs attributable to export. It reads.
where the export out of India is of trading goods, the
profits derived from such export shall be export turnover in
respect of such trading goods as reduced by the direct costs and
indirect costs attributable to such export
The entire controversy is about the purport of the expression indirect
costs. The same is defined under clause (e) of Explanation. The
definition is exclusionary, in nature.
The expression direct costs is defined in clause (d) and it takes in
its fold, the costs attributable to export of trading, including purchase
price. When it comes to the question of indirect costs, it is couched in
residuary terms, namely, not being direct costs. The definition further
makes an indication that the allocation of direct costs shall be in the ratio
between export turnover and total turnover.
Once the costs incurred by an assessee for export of trading is
determined, the figure indirect costs, as defined under clause (e) of
Explanation, can be derived, just by relating the direct costs to the total
costs. It is too well known that the ratio between export turnover over
and the total turnover is an important phenomenon that, cuts across the
gamut of Section 80HHC of the Act.
The argument that indirect costs must be only in relation to the
export of trading goods and not of manufacture cannot be accepted, how
so ever reasonable it may appear to be. The reason is that under Section
80HHC of the Act, the export profits are always determined by taking into
account, the profits of the business, not only of the export activity, but
also the profits of other activities of the assessee, multiplied by the
resultant figure of division by the export turnover by the total turnover.
In other words, the export profit is derived from the formula of profit of
the business export turnover.
total turnover
When the section dissolves the difference between the export
activity and non-export activity to such absolute levels, there is no reason
why the indirect costs referred to in sub-section 3 (b) of Section 80HHC of
the Act must be taken in a restrictive manner. The expression indirect
costs occur only in sub-section 3(b) of the Act.
We are convinced with the reason adopted by the Tribunal and do
not find any basis to interfere with the order under appeal.
The appeal is accordingly dismissed. There shall be no order as to
costs.
The miscellaneous petitions filed in this appeal shall also stand
disposed of.
___________________________
L.NARASIMHA REDDY, J
Date: 02.12.2014
____________________________
CHALLA KODANDA RAM, J
I.T.T.A.No.46 of 2004
02-12-2014
M/s. Starchik Specialities Ltd., Hyderabad.. Appellant
Dy. Commissioner of Income Tax, Circle 3(1), Hyderabad.. Respondent
Counsel for the Appellant: SRI. Y. RATNAKAR
Counsel for Respondent: SRI S.R. ASHOK, SC FOR INCOME TAX
<Gist :
>Head Note:
? Cases referred:
THE HONBLE SRI JUSTICE L.NARASIMHA REDDY
AND
THE HONBLE SRI JUSTICE CHALLA KODANDA RAM
I.T.T.A.No.46 of 2004
JUDGMENT: (per the Honble Sri Justice L.Narasimha Reddy)
This appeal filed under Section 260 A of the Income Tax Act, 1961
(for short the Act) by an assessee involves the interpretation of certain
important portions of Sections 80HHC of the Act.
The appellant is an assessee under the Act. It undertakes the
activity of manufacturing and trading indigenously as well as outside the
country. The exports made by it yield foreign exchange. Therefore, it is
entitled to claim the deduction under Section 80HHC of the Act. Since it is
a company, it reflects book profits in the profit and loss (P&L) accounts
maintained under the provisions of the Companies Act. Section 115JA of
the Act mandates that if the total income of a company, arrived at under
the Act is less than 30% of the book profits in the P&L accounts of the
previous year, the total income of such assessee company shall be
deemed to equal to 30% of the book profit.
The manner in which the book profit must be arrived at, is dealt
with in the explanation to Section 115JA of the Act. For all practical
purposes, the book profit is nothing but the net profit shown in the
P&L account for the relevant previous year, as increased by the amounts
mentioned in the entries in clauses (a) to (g), or as the case may be,
reduced by those mentioned in clauses (i) to (viii) of explanation to sub-
section (2) of Section 115JA of the Act. Clause (viii) provides for
reduction, to the extent of the profits, eligible for deduction under Section
80HHC, computed under clauses (a), (b) and (c) of sub-section 3 or sub-
section (3A) of the Act, subject to certain conditions.
Since the appellant is undertaking the activities of manufacturing
and trading, sub-section (3B) of Section 80HHC of the Act becomes
relevant. That in turn provides for the deduction of direct as well as
indirect costs incurred for the purpose of trading.
In its return filed for the Assessment Year 1998-99, the appellant
sought deduction of only Rs.1,84,471/- under the head indirect costs.
The Assessing Officer, however, took the figure at Rs.14,57,292/-. In the
appeal preferred by the appellant before the Commissioner of Income Tax
(Appeals), Hyderabad, the view expressed by the Assessing Officer was
affirmed. The appellant filed I.T.A.No.186/Hyd/2003 before the
Hyderabad Bench B of the Income Tax Appellate Tribunal (for short the
Tribunal). The appeal was dismissed by the Tribunal through its order
dated 22.07.2003. Hence, this further appeal.
Sri Y. Ratnakar, learned counsel for the appellant, submits that
Section 80HHC of the Act prescribes a separate procedure to be followed
in arriving at the profits derived from export of trading goods under sub-
section 3 (b) thereof and the indirect costs mentioned therein must be
only those, that are referable to the activity of export and not other
activity including manufacture. He contends that on account of the
indiscriminate deduction of the amount under the heading of indirect
costs from the profits derived from the export turnover, the book profits
referable to Section 115 JA of the Act do not suffer the otherwise
expected level of reduction, and thereby, the appellant is exposed to
higher tax liability.
Sri S.R. Ashok, learned Senior Standing Counsel for the respondent,
on the other hand, submits that the method of calculation of profits
derived from export is not restricted to the particulars relating to export
alone, and those in relation to other activities are also liable to be taken
into account.
Section 80HHC of the Act itself poses almost a challenge for a
proper understanding. Added to that, there is combination of Section
115JA of the Act, in this case. The complexity is not difficult to imagine.
The manner in which, the returns of an assessee of this nature, are
required to be processed, can be summed up as under:
(a) Being a company, it maintains profit and loss account. It is not
uncommon that the book profit is shown in an inflated figure
unrelated to the ground reality obviously, to satisfy or to
encourage the shareholders.
(b) Taking into account, the fact that the book profits cannot be
treated as the figures representing the true state of affairs, the
Parliament introduced Section 115JA of the Act providing for
levy of the income tax on 30% of the book profit, in case the
amount arrived at under the income tax is less than that figure.
The endeavour of an assessee would be to bring the taxable
income arrived at under the Act, below 30% of the book profit, so that the
Income Tax can be paid on the 30% of the book profits.
The expression book profit is defined under Explanation to sub-
section (2) of Section 115JA of the Act, which reads as under:
Explanation.For the purposes of this section, "book profit"
means the net profit as shown in the profit and loss account for
the relevant previous year prepared under sub-section (2), as
increased by
(a) the amount of income-tax paid or payable, and the
provision therefor; or
(b) the amounts carried to any reserves by whatever name
called; or
(c) the amount or amounts set aside to provisions made for
meeting liabilities, other than ascertained liabilities; or
(d) the amount by way of provision for losses of subsidiary
companies; or
(e) the amount or amounts of dividends paid or proposed;
or
(f) the amount or amounts of expenditure relatable to any
income to which any of the provisions of Chapter III
applies;
(g) the amount or amounts set aside as provision for
diminution in the value of any asset,
if any amount referred to in clauses (a) to (g) is debited to the
profit and loss account, and as reduced by,
(i)
(ii).
(iii)
(iv) .
(v) .
(vi).
(vii) ..
(viii) the amount of profits eligible for deduction under Section
80HHC, computed under clause (a), (b) or (c) of sub-section (3)
or sub-section (3A), as the case may be, of that section, and
subject to the conditions specified in sub-sections (4) and (4A) of
that section.
It is in this process that the determination of profits under Section
80HHC of the Act became relevant. Sub-section (3) of Section 80HHC of
the Act reads as under:
(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 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 :
Many of the expressions employed in these provisions are defined in
the Explanation, which is as follows:
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.
It is not necessary to deal with the detailed procedure to be followed
in working out Section 80HHC of the Act. The limited purpose herein is to
ascertain the profits of an exporter in trading covered by sub-section 3(b)
of the Act. A perusal of the provision makes it clear that the profit from
the export of trading goods is nothing but the export turnover as reduced
by direct costs and indirect costs attributable to export. It reads.
where the export out of India is of trading goods, the
profits derived from such export shall be export turnover in
respect of such trading goods as reduced by the direct costs and
indirect costs attributable to such export
The entire controversy is about the purport of the expression indirect
costs. The same is defined under clause (e) of Explanation. The
definition is exclusionary, in nature.
The expression direct costs is defined in clause (d) and it takes in
its fold, the costs attributable to export of trading, including purchase
price. When it comes to the question of indirect costs, it is couched in
residuary terms, namely, not being direct costs. The definition further
makes an indication that the allocation of direct costs shall be in the ratio
between export turnover and total turnover.
Once the costs incurred by an assessee for export of trading is
determined, the figure indirect costs, as defined under clause (e) of
Explanation, can be derived, just by relating the direct costs to the total
costs. It is too well known that the ratio between export turnover over
and the total turnover is an important phenomenon that, cuts across the
gamut of Section 80HHC of the Act.
The argument that indirect costs must be only in relation to the
export of trading goods and not of manufacture cannot be accepted, how
so ever reasonable it may appear to be. The reason is that under Section
80HHC of the Act, the export profits are always determined by taking into
account, the profits of the business, not only of the export activity, but
also the profits of other activities of the assessee, multiplied by the
resultant figure of division by the export turnover by the total turnover.
In other words, the export profit is derived from the formula of profit of
the business export turnover.
total turnover
When the section dissolves the difference between the export
activity and non-export activity to such absolute levels, there is no reason
why the indirect costs referred to in sub-section 3 (b) of Section 80HHC of
the Act must be taken in a restrictive manner. The expression indirect
costs occur only in sub-section 3(b) of the Act.
We are convinced with the reason adopted by the Tribunal and do
not find any basis to interfere with the order under appeal.
The appeal is accordingly dismissed. There shall be no order as to
costs.
The miscellaneous petitions filed in this appeal shall also stand
disposed of.
___________________________
L.NARASIMHA REDDY, J
Date: 02.12.2014
____________________________
CHALLA KODANDA RAM, J
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