Export House Premium can be included in the Business Profit

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Export House Premium can be included in the Business Profit

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The Apex Court vide a recent ruling AIT-2007-120-SC has ruled that 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.

T H E F A C T S:

The controversy involved in the appeals revolved 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?

The respondent-assessee was engaged in the business of selling marine products both in domestic market and also exporting it. The assessee was exporting directly to the buyers and also through export houses.
The assessee in the instant case 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 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 Commissioner (Appeals) 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 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.

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 dated 01.7.2003, which were decided in favour of the assessee and against the Revenue.

T H E R U L I N G:

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 himself.
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 only.

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.

( Click here for full text of ruling AIT-2007-120-SC )