Commissioner of Income-Tax Thiruvananthapuram Vs. M/S Baby Marine Exports, Kollam
 Insc 340 (30 March 2007)
Ashok Bhan & Dalveer Bhandari
CIVIL APPEAL NOS.281-284 & 286 OF 2006 Dalveer Bhandari, J.
The controversy involved in these appeals revolves around a short but
important question of law - whether the export house premium received by the
assessee is includible in the "profits of the business" of the
assessee while computing the deduction under Section 80HHC of the Income Tax Act,
1961? Since a common question of law arises for consideration in these appeals,
therefore, they are being disposed of by this common judgment. However, for the
sake of reference, the essential facts of Civil Appeal No.
6146 of 2005 are reproduced as under.
The respondent-assessee, M/s Baby Marine Exports, Kollam is engaged in the
business of selling marine products both in domestic market and also exporting
it. The assessee is exporting directly to the buyers and also through export
The assessee in the instant case has entered into contracts with the export
houses, whereby, as and when the assessee sells the goods or merchandise to an
export house, as consideration for the sale, receives the entire F.O.B. value
of the exports plus the export house premium of 2.25% of the F.O.B. value. The
relevant clause dealing with F.O.B. value and incentive commission of the
contract entered into between the assessee and the export house in this case is
reproduced as under:
"Clause (12): The Export House agrees to pay the manufacturer/shipper
an incentive of 2.25% on the F.O.B. value (net of overseas commission) of the
said Frozen Marine products shipped by the manufacturer/shipper."
The assessee has been filing its income tax returns showing the export house
premium as part of its total turnover and, thereby seeking deductions available
to an exporter and/or a supporting manufacturer under Section 80-HHC (1A) of
the Income Tax Act.
The assessee has shown the export premium as part of sale consideration
having an element of turnover and not commission or service charges.
The Income-tax Officer, Ward-I, Quilon rejected the claim of the assessee by
his order dated 30.3.1995. In this connection, the assessing officer referred
to the relevant clause 12 of the agreement entered into between the assessee
and the export house and observed that the narration of the clause shows the
nature of the payment.
According to the assessing officer, this is clearly a "commission or
service charge" for routing the exports through the export houses who
receive import licenses required by them. The assessing officer in support of
his findings referred to and relied upon the decision of ITAT, Cochin Bench in
ITA No.610 (Coch)/1994) dated 21.12.1994 in G. Gangadharan Nair v. ITO Ward-1,
The respondent assessee aggrieved by the said order filed an appeal before
the Commissioner (Appeals).
The Commissioner (Appeals) also examined the main question being whether the
export house premium will form part of the export turnover for the purpose of
computing the amount of deduction under the proviso to sub-section (3) to
Section 80HHC? The Commissioner (Appeals) relying upon the decision of the ITAT
dated 28.3.1995 in Income Tax Officer v. Sea Pearl Industries Ltd. directed the
assessing officer to include the value of export through export houses also in
the export turnover for the purpose of computing deduction under Section 80HHC.
The Commissioner (Appeals) held that "what the appellant has received is
only a reimbursement of certain expenses or payments towards commission or
brokerage. That being the case, the export premium receipts will fall within
the ambit of clause 1 of Explanation (baa) to Section 80HHC and, therefore, the
Assessing Officer was justified in excluding 90% of such receipts to arrive at
the profit of the business as defined in Explanation (baa)".
The Commissioner (Appeals) further held that "the Assessing Officer was
not justified in excluding the indirect export from the export turnover. He is
directed to include the indirect export also in the export turnover for the
purpose of Section 80HHC".
The respondent aggrieved by the order of the Commissioner (Appeals)
approached the Income Tax Appellate Tribunal.
The Tribunal extracted the findings of the Commissioner (Appeals) in its
order in extenso and relied on the decision of the Tribunal.
The Tribunal allowed the appeal of the assessee and upheld the stand of the
assessee that the export house premium received by the assessee is includible
in the "profits of the business" of the assessee while computing the
deduction under Section 80HHC of the Income Tax Act, 1961.
Being aggrieved by the decision of the Tribunal, the Revenue went in appeal
before the High Court. The High Court vide order dated 22.8.2003 dismissed the
appeal of the Revenue by observing that the questions involved in the appeal
were squarely covered by its decision in ITA Nos.251/2002 and 166/2002 dated
01.7.2003, which were decided in favour of the assessee and against the
Revenue. In those cases, the High Court had meticulously examined the issues
involved in these appeals. While answering the questions involved, the High
Court had observed as under:
"In the present case the assessee is getting the deduction not by
virtue of the provision of S.
80-HHC (1) but only by virtue of the provision of S. 80-HHC(1A). The said
sub-section provides that the assessee, being a supporting manufacturer, has
during the previous year, sold goods or merchandise to any export house or
Trading House in respect of which the export house or trading house has issued
a certificate under the provision to sub-section (1), there shall in accordance
with and subject to the provisions of Section 80-HHC be allowed in computing
the total income of the assessee, a deduction of the profits derived by the
assessee from the sale of goods or merchandise to the export house or trading
house in respect of which certificate has been issued. From the above, it would
appear that it is the sale of goods or merchandise to the export house which entitles
the assessee to get the deduction under the sub-section and it is the profits
derived by the assessee from the sale of goods or merchandise to the export
house that is liable to be deducted in the computation of the total income. It
is only by virtue of the agreements between the assessee and the export houses
the assesses got the FOB value of the goods exported and a percentage of the
FOB value as export premium. Thus, both the amounts constituted the
consideration received by the assessee for the sale of goods or merchandise to
the export house. Thus, even applying the principles laid down by the Supreme
Court and of this Court in the decisions relied on by the senior counsel for
the Revenue, it has to be held that the assesses are entitled to the benefits
of section 80HHC on the export premium received from the export houses."
Being aggrieved by the decision of the High Court, the Revenue has come to
this Court by way of filing the instant appeal.
The Revenue has raised many questions of law in this appeal, but we are only
concerned with the following question:
"Whether, on the facts and in the circumstances of the case, the
assessee is entitled to any benefit on the export house premium?"
In appeal, it has been stated by the Revenue that the High Court has erred
in law in holding that the premium received by the assessee from the export
house, which has exported the goods on behalf of the assessee, being the
supporting manufacturer, was profit on which the assessee was entitled to a
benefit of deduction under Section 80-HHC of the Act inasmuch as it did not
form part of the sale proceeds of the goods exported by the assessee through
the export house but it was merely a receipt from the Export House in
consideration of the permits/service rendered to them for facilitating the
export of goods.
According to the Revenue, the High Court has erred in interpreting the term
"profits of the business"
contained in clause (baa) of Explanation to Section 80- HHC by holding that
the premium received by the assessee from the export house was profits of
business and not any sum referred to in clauses (iiia), (iiib) and (iiic) of
Section 28 or any receipt by way of brokerage, commission, interest, rent,
charges or any other receipt of similar nature included in such profits. It has
been further stated that on a proper construction of provisions of sub-section
(1A) and (4A) of Section 80-HHC, the assessee being a supporting manufacturer
is entitled to deduction under this Section only on the sale price of the assessee's
goods exported through the export house inasmuch as the premium received by the
assessee from the export house cannot be held to have been "derived
from" the export business of the assessee.
It was asserted by the appellant that the High Court erred in holding that
the assessee was entitled to deduction under this Section by ignoring the
provisions of sub-section (4A) of Section 80-HHC according to which the
assessee being the supporting manufacturer was required to furnish a
certificate from the Chartered Accountant that the deduction has been correctly
claimed by him on the basis of the profits in respect of the sale of goods to
the export house and also a certificate from the export house about disclaimer
of deduction in respect of export turnover mentioned in the certificate which
could not in any way be construed as including the premium paid by the export
house to the assessee.
Shri Vikas Singh, learned Additional Solicitor General appearing on behalf
of the Revenue contended that to properly comprehend the issues involved in
this case, it is necessary to state in brief the object and the source of money
which is passed on by the export house to the supporting manufacturer. The
assessment years involved in the present case are 1992-93 to 1994-95.
During the relevant years, the EXIM Policy of Ist April, 1992 to 31st March,
1997 was applicable. According to the said policy, export houses were given
various benefits both tangible and intangible under the EXIM Policy, some part
of the said policy is reproduced as under:
"Under Chapter 12 of the EXIM Policy of 1992-97 vide para 137, the
exporting organizations were given recognition as export house/trading house or
star trading house on the basis of average FOB value of physical exports done
by them during the three preceding licensing years. In the original EXIM
policy, an export organization was declared an export house if it did 6 crores
of annual net foreign exchange export in the three preceding years and it was
declared a trading house if it did 30 crores of the same and star trading house
if it did 125 crores of the same.
In the year 1993, the status determined was done on the basis of average FOB
value of physical exports done during the preceding three licensing years. For
export houses, it was 10 crores, for trading houses it was 50 crores and for
star trading houses it was 250 crores.
In the next year i.e. in 1994, the policy provided both options i.e. of
average net foreign exchange export/average FOB value as the basis for
declaration of export house, trading houses etc. and in the year 1994 a new
category was added which was super star trading houses.
Consequent to the recognition as an export house/trading house/star trading
house/super star trading house, the export house was eligible to become a
member of the elite Indian Organization namely Federation of Indian Export
Organization (FIEO) which further entitled the export houses to attend the
various buyers/seller meet all over the world, to participate in the
international exhibitions and as members of delegation with the government and
also to attend international conferences etc. The benefits were many, only some
illustrations have been given above."
Thus, in effect the money which was paid by the export houses to the
supporting manufacturers in the form of premium/incentive is nothing but the
money which was received by the export houses in the form of one incentive or
the other, some of which is cash in the sense that the same can be freely sold
in the market at a premium and the others are long term benefit which accrue to
the export houses over the years.
The source of the money accordingly is within India and the money paid by
the export houses to the supporting manufacturer has no nexus or link to the
foreign buyers who paid the value of the goods on being sold to the supporting
manufacturer through the export houses. The assessee, i.e., the supporting
manufacturer would be entitled to claim the incentive/premium as part of its
export turnover if the origin of the money had been the foreign buyer even if
the said money were to be routed to the supporting manufacturer through the
export house. Since the admitted case of the parties is that the source of
money is within India i.e. out of the incentives being offered by the Government
of India under the EXIM Policy 1992-97, the turnover of the assessee/supporting
manufacturer is merely a domestic turnover and not the export turnover as
claimed by them.
The appellant submitted that under Section 80- HHC, the assessee supporting
manufacturer is entitled to claim deduction only out of the profits earned by
it from the export turnover and not from the domestic turnover which the
assessee may have over and above the export earnings.
Learned Additional Solicitor General also made the following submissions.
(a) The fact that the foreign buyer pays the value of the goods in
convertible foreign exchange whereas, the money which is being paid by the
export house as premium to the supporting manufacturer is in Indian currency
and the said Indian currency has no link or nexus whatsoever with any foreign
(b) The export premium being earned by the assessee is not part of the sale
price or the invoice price of the goods being sold by the assessee to the
foreign buyer but is in effect something over and above the same.
(c) The amount which is being claimed by the assessee as incentive/premium
to be included in his export profit under Section 80HHC is not included in the
certificate issued by the export house or trade house under sub-section (1A) of
Section 80HHC and hence the assessee cannot claim any benefit for the said
amount being outside the scope of deduction under Section 80HHC (1A).
The assessee cannot get the premium/incentive included as his profits under
Section 80-HHC because even the export house that is passing on this premium to
the assessee/supporting manufacturer is not permitted to claim such deduction
as profit from export earning under Section 80-HHC. In terms of Explanation
(baa) to Section 80HHC sub-clause 4(A), even the export house can only claim
10% of such or similar earnings towards deduction and hence it is inconceivable
that the supporting manufacturer could be permitted to claim 100% deduction of
the same money when it comes into his hands. Finally, learned Additional
Solicitor General argued that the premium earned by the assessee is the
domestic earning of the assessee totally unrelated to the export of goods and
hence the assessee cannot claim any deduction whatsoever in respect of such
earning under Section 80-HHC (1A).
Shri S. Ganesh, learned senior Advocate appearing for the respondent -
assessee contended that the claim of the assessee for deduction under Section
80-HHC is by virtue of the provision of Section 80-HHC (1A). He also submitted
that as far as the assessee is concerned, the export premium forms part of the
export transaction between the assessee and the export houses and, therefore,
it forms part of the export transaction and consequently, the income by way of
export premium is profit derived by the assessee from the export of such goods
The export premium received by the assessee from the export house forms part
of the price settled between the parties for sale of the goods and that it is
neither brokerage nor commission nor interest nor rent nor charges etc.
Mr. Ganesh, referred to the decision of Bombay High Court in CST v.
Bangalore Clothing Company reported in 260 ITR 371 wherein the Bombay High
Court has referred to and followed the Circular No.621 issued by the CBDT dated
19th December, 1991. The High Court has explained that the object of the
Explanation (baa) to Section 80-HHC is to exclude profit receipts from the
business which do not have an element of turnover and which are not connected
with the assessee's business operations. If a particular receipt is in the
nature of the operational income then it must be included in business profit
and consequently benefits of Section 80-HHC must be granted in respect thereof.
Ganesh also urged that applying the test enunciated by the judgment of the
Bombay High Court in Bangalore Clothing Company's case (supra) would lead to
irresistible conclusion that the export house premium must necessarily be
included in the business profit because it is part of the assessee's turnover
and has an integral connection with the business operations of the supporting
manufacturer, which consist of sale of goods of the export house.
Mr. Ganesh submitted that the judgment delivered by the Madras High Court in
KRN Marine Exports Ltd.
v. ACIT reported in 2006 (153) Taxman p.437 is not good law as the said
decision did not consider the Board Circular No. 621 which explained the
clarification of the provision of the Explanation (baa) to Section 80HHC (1A)
of the Act. In that case, the High Court completely failed to appreciate the
crucial distinction between Section 80HHC (1) and Section 80HHC (1A) and also
the fact that the supporting manufacturer's claim for the deduction was under
Section 80HHC (1A) which has nothing whatsoever to do with export profit, with
which only the export house is concerned. Mr. Ganesh also contended that the
said decision is required to be overruled by this Court in view of the decision
of this court in Berger Paints India Ltd. v. Commissioner of Income Tax, Calcutta
reported in (2004) 12 SCC 42.
We have heard the learned counsel for the parties at length. Before
critically examining the rival contentions of the learned counsel for the
appellants and the respondents, we deem it appropriate to refer to the provisions
of Section 80-HHC of the Act:
"80HHC. Deduction in respect of profits retained for export business.
(1) Where an assessee, being an Indian company or a person (other than a
company) resident in India, is engaged in the business of export out of India
of any goods or merchandise to which this section applies, there shall, in
accordance with and subject to the provisions of this section, be allowed, in
computing the total income of the assessee, a deduction to the extent of
profits, referred to in sub-section (1B), derived by the assessee from the
export of such goods or merchandise:
Provided that if the assessee, being a holder of an Export House Certificate
or a Trading House Certificate (hereafter in this section referred to as an
Export House or a Trading House, as the case may be,) issues a certificate
referred to in Clause (b) of Sub-section (4A), that in respect of the amount of
the export 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
(1A) Where the assessee, being a supporting manufacturer, has during the
previous year, sold goods or merchandise to any Export House or Trading House
in respect of which the Export House or trading House has issued a certificate
under the proviso to sub-section (1), there shall, in accordance with and
subject to the provisions of this section, be allowed in computing the total
income of the assessee, [a deduction to the extent of profits, referred to in
Sub-section (1B)], derived by the assessee from the sale of goods or
merchandise to the Export House or Trading House in respect of which the
certificate has been issued by the Export House or Trading House.
Section 80HHC was incorporated with the object of granting incentive to
earners of foreign exchange. This Court in Sea Pearl Industries v. CIT Cochin
(2001) 2 SCC 33 also observed that the object of Section 80HHC is to grant
incentive to earners of foreign exchange. In IPCA Laboratory Ltd. v. Dy.
Commissioner of Income Tax, Mumbai reported in (2004) 12 SCC 742 this Court has
taken the same view. This Court in the said judgment observed that Section
80HHC has been incorporated with a view to provide incentive to export houses
and this Section must receive liberal interpretation.
In Bajaj Tempo Ltd. v. Commissioner of Income Tax, Bombay reported in (1992)
3 SCC 78, this Court while interpreting Section 15-C of the Income Tax Act,
1922 observed that the Section, read as a whole, was a provision, directed
towards encouraging industrialization by permitting an assessee setting up a
new undertaking to claim benefit of not paying tax to certain extent on the
capital employed. Similarly, Section 80 HHC has also been incorporated to give
incentive for the earners of the foreign exchange. We must always keep the
object of the Act in view while interpreting the Section. The legislative
intention must be the foundation of the court's interpretation.
According to Section 80HHC (1), the Export House in computing its total
income is entitled to deduction to the extent of the profit derived by the
assessee from the export of the goods or merchandise. Whereas, according to
Section 80 HHC(1A), the supporting manufacturer shall be entitled to a
deduction of profit derived by the assessee from the sale of goods or
merchandise. The term "supporting manufacturer" has been defined in
this section and it reads as under:- "supporting manufacturer" means
a person being an Indian company or a person (other than a company) resident in
India, manufacturing including processing, goods or merchandise and selling
such goods or merchandise to an Export House or a Trading House for the
purposes of export; According to the said definition, the respondent clearly
comes within the purview of supporting manufacturer. On plain construction of
Section 80HHC(1A) the assessee being supporting as manufacturer shall be
entitled to a deduction of the profit derived by the assessee from the sale of
goods or merchandise."
[ The respondent a supporting manufacturer sold the goods or merchandise to
the export house and received the entire FOB value of the goods plus the export
house premium of 2.25% of the FOB value. The relevant Clause 12 of the
agreement has already been extracted in the earlier part of the judgment and
according to the said clause, the export house is under obligation to pay to
the supporting manufacturer an incentive of 2.25% on the F.O.B. value according
to the terms of the agreement.
The respondent, a supporting manufacturer, admittedly sold the goods to the
export house in respect of which the export house has issued a certificate
under proviso to sub-section (1). According to the section, the respondent -
assessee, in computing the total income be allowed a deduction to the extent of
profits referred to in sub-section (1B) derived by the assessee from the sale
of goods to the export house.
The Appellate Tribunal has arrived at definite conclusion that the Export
House Premium is nothing but an integral part of sale price realized by the
assessee 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
The High Court has upheld the findings of the Tribunal. In our considered
view, the order of the Appellate Tribunal is based on proper construction of
Section 80HHC (1A) of the Income Tax Act that the Export House premium is an
integral part of the sale price realized by the assessee from the export house.
We find no merit in the submission of the appellant that Indian currency
could not be subject matter of deduction under Section 80HHC. The requirement
of realizing the sale proceeds of the goods or merchandise in convertible
merchandise is applicable only to the Export House and a claim for deduction
under Section 80HHC (1).
The requirement of realization of sale proceeds in foreign exchange
expressly made inapplicable to the supporting manufacturer by Section 80HHC(2A)
and further the supporting manufacturer's claim of deduction is only under
Section 80HHC(1A) and not under Section 80HHC(1) which applies to export houses
The submission of the appellant that the premium earned by the respondent
assessee is totally unrelated to export is fallacious and devoid of any merit.
This submission of the appellant is also contrary to the specific terms of the
agreement between the appellant and the respondent.
On plain construction of Section 80HHC (1A), the respondent is clearly
entitled to claim deduction of the premium amount received from the export
house in computing the total income. The export house premium can be included
in the business profit because it is an integral part of business operation of
the respondent which consists of sale of goods by the respondent to the export
The order of the Tribunal, which has been upheld by the High Court in the
impugned judgment, is based on proper construction of Section 80HHC of the
Income Tax Act, 1961. The appeal filed by the appellant being devoid of any
merit is accordingly dismissed.
CIVIL APPEAL NOS.281-284 & 286 OF 2006 These appeals stand disposed of
in terms of our judgment in Civil Appeal No. 6146 of 2005.
In the peculiar facts and circumstances of the case, we direct the parties
to all the appeals to meet their respective costs.