IMPORTANT POINT
The export house premium received by the assessee, a supporting manufacturer is includible in the ‘profits of the business’ of the assessee while computing the deduction under Section 80 HHC of the Income Tax Act because it is an integral part of business operation of the assessee which consists of sale of goods by the assessee to the export house.

Headnote:Income Tax Act, 1961—Section 80 HHC—Deductions in respect of profits retained for export business—Export house premium received by assessee—Includible in ‘profits of the business’ while computing deduction under Section 80HHC of the Act—Assessee engaged in business of selling marine products both in domestic market and also exporting it—Assessee is exporting directly to the buyers and also through export houses—Assessee entered into contracts with export houses, whereby, as and when assessee sells the goods or merchandise to an export house, as consideration for the sale, receives the entire F.O.B. value of exports plus the export house premium of 2.25% of the FOB value—Assessee showing the export premium as part of sale consideration having an element of turnover and not commission or service charges—Income-tax Officer rejected claim of assessee—Appeal—Whether export house premium will form part of export turnover for the purpose of computing the amount of deduction under the proviso to sub-sec(3) to Section 80 HHC—(Yes)—Export House premium is an integral part of sale price realized by the assessee from the export house.
       Held : 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.(Para 32)
       The respondent 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.(Para 33)
       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.(Para 34)
       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 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. (Para 35)
       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.(Para 36)
       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.(Para 37)
       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 integral part of business operation of the respondent which consists of sale of goods by the respondent to the export house.(Para 39)
       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.(Para 40)

JUDGMENT

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?

2. 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.

3. 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.

4. 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.”

5. 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.

6. The assessee has shown the export premium as part of sale consideration having an element of turnover and not commission or service charges.

7. 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.

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

9. 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?

10. 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 Sec

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2007 Supreme(SC) 433

Cases Referred (3)