Definition of “export turnover” given in Explanation 2 to section 10A excludes freight and insurance

 

 

[2010] 6 taxmann.com 2 (Bom.)

HIGH COURT OF BOMBAY

CIT

v.

Gem Plus Jewellery India Ltd.

ITA No. 2426 of 2009

June 23, 2010

FACTS

 

According to the Revenue the exemption under Section 10A is liable to be computed after excluding freight and insurance from the total turnover. The Commissioner (Appeals) affirmed the view of the Assessing Officer and held that Section 10A does not define turnover and that in the  circumstances, the  Assessing Officer was correct in  not  reducing insurance and freight from the total turnover while  computing the deduction under  Section  10A.  In appeal the Tribunal held that (i) The expression “total turnover” has not been defined in Section 10A; (ii) Profits derived from export have to be computed by taking into consideration both the export turnover and  total turnover of the business carried on by the  undertaking; (iii)  Both the  export turnover and total turnover which constitute the numerator and denominator in the application of the formula under sub section (4) of Section 10A should be comparable;   and  (iv)  Freight  and insurance have no element of profit and hence, cannot be included in the  total turnover of the  business  carried  on by the  industrial undertaking. The Tribunal  accordingly  directed that  the deduction under Section 10A should be computed after excluding   freight  and insurance from  the  total  turnover. It is this finding of the Tribunal which is questioned by the Revenue in  appeal

 

HELD.

The submission which has  been  urged on behalf of the  Revenue  is that  while freight  and insurance charges  are liable to be excluded  in computing export turnover, a similar exclusion  has not been  provided  in regard to total  turnover. The submission of the Revenue,  however,  misses the point  that the  expression  “total turnover” has not been defined at all by Parliament  for the purposes of Section   10A.  However, the expression “export turnover” has been defined. The definition of “export turnover” excludes freight and insurance. Since export turnover has been defined by Parliament and there is a specific exclusion of freight and insurance, the expression “export turnover” cannot have a different meaning whenit forms a constituent part of the total turnover for the purposes of the application of the formula. Undoubtedly, it was open to Parliament to make a provision to the contrary. However, no such provision having been made, the principle which has been   enunciated  earlier  must prevail as a matter of correct  statutory interpretation.  Any other interpretation would lead to an absurdity. If the contention of the Revenue were to be accepted, the same expression viz. ‘export turnover’ would have a different connotation in the application of the   same formula.  The submission of the Revenue would  lead to a situation where freight and insurance, though it has been   specifically excluded  from “export  turnover”   for   the   purposes   of the numerator would be brought in as part of the  “export turnover” when  it forms an element of the total turnover as a denominator in the  formula. A construction of a statutory provision which would lead to an absurdity must   be avoided.

 

_______ORAL JUDGMENT _______

 

 

 

 (Per. DR.D.Y.CHANDRACHUD, J.) :

 

1.       Admit.  On the  request   of  counsel   for  the  Revenue   and counsel  for the assessee,  the appeal  is taken  up for final hearing.

 

2.       This appeal   by  the   Revenue   under   Section   260­A  of  the Income Tax Act, 1961  pertains to Assessment  Year 2003­04 and the following  questions of law have been  formulated in support of the appeal  :

 

“a.     Whether on the  facts  and  in the  circumstances of the case, the Tribunal  was justified  in holding  that  the exemption u/s.10A of the  Act should be computed  after excluding freight and insurance from the total turnover;

 

b.   Whether on the facts and in the circumstances of the case, the Tribunal was justified in directing  the Assessing Officer to grant the exemption u/s.10A  of  the  Act on the assessed  income,  which was enhanced dueto disallowance of employer’s as well  as employee’s contribution towards PF/ESIC;

 

c.     Whether on the facts and  in the  circumstances of the case, the Tribunal  was justified in upholding the stand  of the CIT(A) in treating the interest income  as  business  income and   interest  income   should   be  taken   for  the   purpose  of deduction claimed  u/s. 80HHC of the I.T. Act, 1961;

 

d.       Whether  on  the  facts  and  in the  circumstances of the case, the Tribunal  was justified  in upholding the stand  of the CIT(A) considering the net interest and  not gross interest for the  purposes of exclusion  under  clause  (baa) of Explanation to Section 80HHC of the I.T. Act, 1961;

 

e.       Whether on the facts and in the circumstances of the case, the Tribunal was justified  in  directing  the  Assessing Officer to grant exemption u/s. 10A  on  foreign   exchange gain  earned on realization of export  receipts  in   the  year  of export  and to exclude  the gains on sales of earlier  years from the profits of the year under  consideration and allow in those years;”

 

Re Question a :

 

3.            According to the Revenue the exemption under Section 10A is liable to be computed after excluding freight  and insurance from the total turnover.   The Commissioner (Appeals) affirmed the view of the Assessing Officer and held that Section 10A does not define turnover and  that  in the  circumstances, the  Assessing Officer was correct   in  not  reducing  insurance  and   freight   from   the   total turnover while computing the  deduction under  Section  10A.   In appeal the Tribunal held that (i) The  expression “total  turnover” has  not  been defined in Section 10A;  (ii)  Profits  derived from export have to be computed by taking  into  consideration both  the export  turnover and total turnover of the  business  carried  on  by the  undertaking; (iii)  Both the  export  turnover and  total  turnover which  constitute   the  numerator and denominator in   the application of the  formula  under sub  section  (4) of Section 10A should  be  comparable; and (iv)  Freight and insurance have no element of profit and hence, cannot be included in the  total turnover of the business  carried  on by the  industrial undertaking. The Tribunal  accordingly  directed that  the deduction under Section 10A  should   be  computed  after  excluding   freight and insurance from  the  total  turnover. It is this finding of the Tribunal which  is questioned by the Revenue  in  appeal.

 

4.       Under  sub section  (1)  of Section  10A a deduction is allowed from  the  total  income  of the  assessee  of such  profits  and  gains  as are derived  by an undertaking from the export of articles  or things or computer software for a period of ten consecutive assessment years commencing from the  assessment  year   relevant  to   the previous year in which the undertaking begins manufacture or production.  Sub section (4) of Section 10A provides  the manner in which  the  profits  derived  from  the  export  of articles  or things  or computer software  shall be computed.  Sub section  (4)  provides  as follows :

“For the  purposes of sub sections  (1)  and  (1A),  the  profits derived  from export of articles or things or computer software  shall be the amount which bears to the profits of the  business of the  undertaking, the  same proportion as the export turnover in  respect of  such   articles   or  things  or computer  software bears to   the   total turnover of the business  carried  on by the undertaking.”

 

5.       Under sub section   (4)  the  proportion  between  the  export turnover in respect  of the articles  or things,  or as the case may be, computer software exported, to the total turnover of the  business carried over  by the undertaking is  applied  to  the profits  of  the business  of the undertaking in computing the profits  derived  from export.  In other words, the profits of the business of the undertaking are multiplied by the export turnover in respect of the articles,  things  or, as the case may  be,  computer  software and divided by  the total  turnover of  the  business  carried   on  by  the undertaking.  The   formula which is prescribed by sub section  (4) of Section 10A is as follows :

 

Profits derived  from export  of articles  or things  or computer software=

 

Profits of the business

 

export  turnover in respect

of the undertaking

X

of the articles  or things

 

 

or computer software

divided by

 

total turnover of the business  carried  on by the undertaking.

 

The total turnover of the  business  carried  on  by the  undertaking would  consist  of the  turnover from  export  and  the  turnover from local sales. The export turnover constitutes the numerator in the

formula  prescribed by sub section (4).  Export turnover also forms a constituent element of  the  denominator  inasmuch as  the  export turnover is a part of the total turnover.

 

6.       The  export  turnover, in the  numerator must  have  the  same meaning as the export  turnover which is a constituent element of the total turnover in the denominator. The legislature has provided a definition of the expression “export turnover” in Explanation (2) to Section 10A by which  the expression is defined to mean  the  consideration in respect of export by the  undertaking of articles,  things  or computer software  received  in or brought into India  by the assessee  in convertible foreign exchange  but so as not to include inter alia freight, telecommunication  charges or insurance attributable  to the delivery of the articles, things  or software outside  India.  Therefore in computing the export turnover the  legislature has  made  a  specific  exclusion of  freight and insurance charges.

 

7.       The submission   which   has   been   urged   on behalf   of the  Revenue  is that  while freight  and insurance charges  are liable to be excluded  in computing export  turnover, a similar exclusion  has not been  provided  in regard to total  turnover. The submission of the Revenue, however, misses the point that the expression “total turnover” has not been defined at all by Parliament for the purposes of Section 10A.  However, the expression “export turnover” has been defined. The definition of “export turnover” excludes freight and insurance. Since export turnover has been defined by Parliament and there is a specific  exclusion  of freight and  insurance,  the expression  “export turnover”  cannot  have  a different meaning when it forms  a  constituent part of the total turnover for the purposes of the application of the formula. Undoubtedly, it was open to Parliament to make a provision to the contrary. However, no such provision having been made, the principle which has been   enunciated earlier must prevail as a matter of correct statutory interpretation. Any other interpretation would lead to an absurdity. If the contention of the Revenue were to be accepted, the same expression viz. ‘export turnover’ would have a different connotation in the application of the same formula.  The submission of the Revenue would  lead to a situation where freight   and   insurance,  though it  has  been  specifically excluded from “export    turnover”   for the purposes  of  the numerator would  be brought in   as part  of the “export turnover” when  it forms an element of the total turnover as a denominator in the  formula.    A construction of a statutory provision  which  would lead to an absurdity must   be avoided.

 

8.       The view  which  we  have  taken  is consistent with  the  view which  was  taken,  though in the  context  of Section  80HHC,  by a Division Bench  of this  Court  in Commissioner of  Income  Tax v. Sudarshan  Chemicals  Industries  Ltd.   In Sudarshan  Chemicals the question of law that fell for decision was whether sales tax and excise  duty  ought to be included in the total turnover  while working out the deduction under Section 80HHC. For the purposes of Section  80HHC, clause (b) of sub section  (3)  provides that  the  profits  derived  from export  shall be computed in terms  of the  proportion between the  export  turnover  to the  total  turnover as  applied   to  the  profits of business.  Hon’ble  Mr. Justice   S.H. Kapadia  (as  the  Learned  Chief Justice  then  was ) speaking  for   a Division Bench  of this  Court  did  not  accept  the  contention of the Revenue  that  since the legislature had excluded  only insurance and freight  from  the  total turnover, it was not  open to the  assessee  to contend that excise  duty  and  sales tax  should also be excluded. In that context, the Division Bench observed that the meaning of export  turnover in clause  (b)  of the Explanation to Section  80HHC showed  that  export  turnover did not include  excise duty  and  sales tax.  The Division Bench observed that the export  turnover is the numerator  in   the  formula  whereas the total turnover is the denominator. The formula   having been prescribed to arrive at profits  from exports,  sales tax and  excise duty  could not form part of the total turnover.  If the denominator were to include those  two items and  the  numerator excluded them, the formula  (noted the Division Bench), would  become  unworkable. In the circumstances, the  Division Bench held  that while  ascertaining the  export  profits, excise  duty  and  sales  tax  could  not  be  introduced to  inflate  the total  turnover artificially  in  order  to  reduce  the  benefit  to  which the assessee  is entitled. The decision of theDivision Bench of this Court in Sudarshan  Chemical  Industries  has been  cited with approval by the  Supreme Court  in Commissioner  of Income  Tax v. Lakshmi  Machine  Works. The same view has been taken by the Supreme Court  in  Commissioner of  Income  Tax v. Catapharma   (India)  Pvt.  Ltd.  In which the decision of the Division Bench in Sudarshan  Chemical  Industries  has also been adverted to.

 

9.       Moreover,  a receipt  such as freight  and insurance which does not  have  any  element of  profit  cannot   be  included  in  the  total turnover. In Lakshmi Machine  Works (supra)  the Supreme Court held  that  excise duty  and  sales tax did not possess  any element of turnover  since  they  are  merely   recoverable  by  the  assessee   on behalf of the Government.

 

10.     Freight and insurance do not have  an  element of turnover. For this reason in addition, these two items would  have  to  be excluded  from  the  total  turnover particularly in the  absence  of a legislative  prescription to  the  contrary.   The  first  question of law would  therefore have  to be answered against  the  Revenue  and  in favour of the assessee.

 

Re Question b :

 

11.     For the purposes of the  appeal  it is necessary  to refer  to the admitted position  which  is that  the  assessee  had  deposited both the  employer’s and  the  employees’ contribution towards Provident Fund  and  ESIC, though beyond  the  due  date  including  the  grace period.  The Assessing Officer added these payments to the total income  of the assessee  and  made  an addition in the amount of Rs. 71.59 lacs.  However, for the deduction under Section 10A, the addition  made   on  account  of  the   employees’  contribution  was ignored   in  calculating  the profits  eligible  for  deduction  on  the ground that these receipts were not generated out of the manufacturing activity of the assessee  company.

 

12. By reason of the judgment of the Supreme Court in  Commissioner of Income  Tax v. Alom Extrusions  Limited the employer’s  contribution  was  liable  to  be  allowed,   since  it  was deposited by the due date  for the filing of the return.  The peculiar position,  however, as it obtains  in the present case arises out of the fact  that the disallowance which was effected   by  the  Assessing Officer  has  not,  the  Court  is  informed,  been  challenged by  the assessee. As a matter of fact the question of law which is formulated by the Revenue  proceeds  on the basis that  the  assessed income  was enhanced due to the disallowance of the employer’s as well as the employees’ contribution towards Provident Fund /ESIC and the only question which is canvassed on behalf of the Revenue is whether on that  basis the  Tribunal  was justified  in directing the Assessing Officer to grant  the  exemption under  Section  10A.   On this position, in the present case it cannot  be disputed  that  the net consequence of  the disallowance of  the employer’s   and   the employee’s contribution is that  the  business  profits  have  to  that extent  been enhanced. There  was, as we have already  noted, an add  back by the Assessing Officer to the income.  All profits of the unit of the assessee  have been derived  from manufacturing activity. The salaries paid by the  assessee,  it has  not  been  disputed, relate to the  manufacturing activity.   The disallowance of the  Provident Fund/ESIC payments  has been made  because of  the  statutory provisions  – Section  43B in the case of the employer’s contribution and  Section  36(v)  read  with  Section  2(24)(x) in  the  case  of the employee’s contribution which  has been  deemed to be the  income of the assessee. The plain consequence of the disallowance and the  add  back  that  has  been  made by the  Assessing  Officer  is an increase in the  business  profits  of the  assessee. The contention of the  Revenue that  in computing the  deduction under  Section  10A the addition made  on account  of the disallowance of the Provident Fund/ESIC payments ought  to  be  ignored cannot be  accepted. No statutory provision to that effect having been made, the plain consequence of the disallowance made by the  Assessing Officer must    follow.  The second question shall accordingly stand answered against the Revenue  and in favour  of the assessee.

Re Questions c and d:

13.    Counsel  appearing on  behalf  of  the  Revenue   and  counsel appearing on behalf of the assessee are agreed  in stating  that  these two questions of law will stand covered  in favour  of the  Revenue and   against the assessee  by  the  judgment  of  this  Court  dated 18/19 March 2010  in Commissioner of Income  Tax v. Asian Star Company Limited (ITA 200 of 2009).  Both these questions of  law are accordingly  answered in the negative  in favour  of the Revenue and against  the assessee.

Re Question e :

 

14.     The Tribunal has  followed  a decision  of its Special  Bench in coming  to  the  conclusion   that   foreign   exchange   earned on  the realization of export  receipts  in a year other  than  the year in which the  goods  were  exported would  have  to be considered in the  year of export  for the purpose of exemption under  Section 80HHC.  The Tribunal    has,  however,  directed  the   Assessing   Officer,   while granting a deduction to the assessee  under  Section  10A in the year of export  to  exclude  the amount from the profits of the year under consideration simultaneously.   This is to  ensure  that  the  assessee does not obtain  a deduction twice over.

 

15.     For the  purposes  of the  appeal  it has  not  been  disputed on behalf of the  Revenue that  the  foreign  exchange  was  realized  by the  assessee  within the period   stipulated  in  law.  The  assessee realized a larger amount because of a foreign exchange fluctuation.   The fact that   this  forms  part  of the  sale  proceeds would  have to be accepted in view of the judgment of  the Division Bench  of this  Court in  Commissioner of  Income Tax v.  Amber Export (India) (ITA 1249 of 2007  decided  on 18 February  2009). The  judgment of this  Court in  turn  followed  the  decision  of the Gujarat   High  Court  in  Commissioner  of Income   Tax  v.  Amba Impex.  The sole  ground  which  has  been  urged  on  behalf  of the Revenue  in  support of the  appeal on  this  issue  is based  on  the judgment of a Division  Bench  of this  Court  in  Commissioner of Income  Tax v. Shah  Originals (ITA 431  of 2008  decided  on  22 April 2010). The decision in Shah Originals is, however, distinguishable for the reason that the foreign  fluctuation in that case arose after the export transaction  had  been  completed and after  the  export  profits  were  deposited by the  assessee  in an EEFC Account.  This is evident  from the following observations :

“The   assessee  admittedly  in   the   present  case received the entire  proceeds of the  export  transaction. The  Reserve  Bank  of  India, has granted  a  facility  to certain  categories of exporters to maintain a certain proportion of the  export  proceeds in an EEFC Account. The proceeds of the account   are to  be utilized for bonafide  payments by the  account holder subject to the limits and  the conditions prescribed. An assessee  who is an exporter is not under an obligation of law to maintain the  export  proceeds in the  EEFC Account  but, this is a facility which is made  available by  the  Reserve Bank. The transaction of export is complete  in  all  respects upon  the  repatriation of the  proceeds.  It lies within the discretion of the exporter  as  to  whether  the   export proceeds  should  be received  in a rupee  equivalent in the entirety or whether a portion should  be  maintained in convertible foreign  exchange  in the  EEFC Account.   The exchange fluctuation that arises, it must be emphasized, is after the export transaction is complete  and   payment has  been  received  by  the exporter. Upon the completion of the export transaction, what  the  seller does with the  proceeds, upon repatriation, is a matter of his option. The exchange fluctuation in the EEFC Account arises after the  completion of the export activity  and  does   not bear  a  proximate and  direct  nexus  with  the  export transaction so as to fall   within the expression “derived” by the assessee  in  sub   section  (1)  of Section  80HHC.”  (emphasis supplied)

 

In the  present case,  the  assessee  has  realized  a larger  amount in that   took   place   in  the   course   of  the   export   transaction.

 

16. For the aforesaid reasons, the  question of law  is answered against the Revenue  and in favour of  the        assessee. The appeal shall accordingly stand disposed of in the aforesaid terms. There shall be no order as to costs.