SUPREME COURT OF INDIA
Commissioner of Income Tax, Thiruvanantapuram
Vs.
Baby Marine Exports
C.A.No.6146 of 2005
(Ashok Bhan and Dalveer Bhandari,JJ.,)
30.03.2007
JUDGMENT
Dalveer Bhandari, J.,
1. 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 the 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, it receives the entire F.O.B.
value of the exports plus the export house premium of 2.25 per cent. 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 per cent. 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 80HHC(1A) of the Income
Tax Act, 1961.
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 March 30, 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 licences required by them. The
Assessing Officer in support of his findings referred to and relied upon the
decision of the Income-tax Appellate Tribunal, Cochin Bench in I. T. A. No. 610
(Coch)/1994) dated December 31, 1994, in G. Gangadhamn 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 Incometax
Appellate Tribunal dated March 28, 1995, in ITO v. Sea Pearl Industries Ltd.
 1995 Indlaw ITAT 73 (Cochin) 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 per cent. 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".
11. The respondent aggrieved by the order of the Commissioner (Appeals)
approached the Income-tax Appellate Tribunal.
12. The Tribunal extracted the findings of the Commissioner (Appeals) in its
order in extenso and relied on the decision of the Tribunal.
13. 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.
14. Being aggrieved by the decision of the Tribunal, the Revenue went in appeal
before the High Court. The High Court vide order dated August 22, 20031,
dismissed the appeal of the Revenue by observing that the questions involved in
the appeal were squarely covered by its decision in I. T. A. Nos. 251 of 2002
and 166 of 2002 dated July 1, 20032, 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 (page 351) :
"In the present case the assessees are getting the deduction not by virtue
of the provision of section 80HHC(1) but only by virtue of the provision of
section 80HHC(1A). The said sub-section provides that the assessee, being a
supporting manufacturer, has during the previous
1. See CIT v. Baby Marine Exports1 infra.
2. See CIT v. Chemmeens 2infra.
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 section 80HHC 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
assessees got the f.o.b. value of the goods exported and a percentage of the
f.o.b. 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 assessees are entitled to the benefits
of section 80HHC on the export premium received from the export houses."
15. Being aggrieved by the decision of the High Court, the Revenue has come to
this court by way of filing the instant appeal.
16. 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 ?"
17. 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 80HHC 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.
18. According to the Revenue, the High Court has erred in interpreting the term
"profits of the business" contained in clause (baa) of the
Explanation to section 80HHC 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 the provisions of sub-sections (1A) and (4A) of section 80HHC,
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.
19. 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 80HHC 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.
20. 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 April 1, 1992, to March 31, 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 paragraph 137, the
exporting organisations 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 organisation 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 Organisation namely Federation of Indian Export
Organisation (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."
21. 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 benefits which accrue to
the export houses over the years.
22. 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.
23. The appellant submitted that under section 80HHC, 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.
24. The 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 exchange
earning.
(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).”
25. The assessee cannot get the premium/incentive included as his profits under
section 80HHC 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 80HHC. In terms of Explanation
(baa) to section 80HHC, sub-section (4A), even the export house can only claim
10 per cent. of such or similar earnings towards deduction and hence it is
inconceivable that the supporting manufacturer could be permitted to claim 100
per cent. deduction of the same money when it comes into his hands. Finally,
the 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 80HHC(1A).
26. Shri S. Ganesh, learned senior advocate appearing for the respondent
assessee contended that the claim of the assessee for deduction under section
80HHC is by virtue of the provision of section 80HHC(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
or merchandise.
27. 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.
28. Mr. Ganesh, referred to the decision of the Bombay High Court in CIT v.
Bangalore Clothing Co. reported in3 wherein
the Bombay High Court has referred to and followed the Circular No. 621 issued
by the Central Board of Direct Taxes dated December 19, 19911. The High Court
has explained that the object of Explanation (baa) to section 80HHC 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 80HHC must
be granted in respect thereof. Mr. Ganesh also urged that applying the test
enunciated by the judgment of the Bombay High Court in Bangalore Clothing Co.
29. Mr. Ganesh submitted that the judgment delivered by the Madras High Court
in KRM Marine Exports Ltd. v. ACIT reported in4 is
not good law as the said decision did not consider the Board Circular No. 6213
which explained the clarification of the provision of 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. CIT
reported in5
30. We have heard learned counsel for the parties at length. Before critically
examining the rival contentions of learned counsel for the appellants and the
respondents, we deem it appropriate to refer to the provisions of section 80HHC
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 (IB), 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
goods.
(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 (IB), 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.”
(emphasis supplied)
31. Section 80HHC was incorporated with the object of granting incentive to
earners of foreign exchange. This court in Sea Pearl Industries v. CIT6 also
observed that the object of section 80HHC is to grant incentive to earners of
foreign exchange. In IPCA Laboratory Ltd. v. Deputy CIT reported in7 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.
32. In Bajaj Tempo Ltd. v. CIT reported in8 this
court while interpreting section 15C of the Indian Income Tax Act, 1922 observed
that the section, read as a whole, was a provision, directed towards
encouraging industrialisation by permitting an assessee setting up a new
undertaking to claim benefit of not paying tax to certain extent
“1. Here printed in italics.
2. See  .
3. See  .
4. See  2.
on the capital employed. Similarly, section 80HHC 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.
33. 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
80HHC(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.
34. 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 per cent. 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 per cent. 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 (IB)
derived by the assessee from the sale of goods to the export house.
35. The Appellate Tribunal has arrived at the definite conclusion that the
Export House premium is nothing but an integral part of sale price realised 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.
36 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 realised by the assessee from the export house.
37. We find no merit in the submission of the appellant that Indian currency
could not be the subject matter of deduction under section 80HHC. The
requirement of realising 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 realisation of sale
proceeds in foreign exchange is expressly made inapplicable to the supporting
manufacturer by section 80HHC(2)(a) 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.
38. 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.
39. On a plain construction of section 8OHHC(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.
40. 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 and 286 of 2006
41. 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.
Judgment Referred.
1(2007) 290 ITR 352 (Ker)
2(2007) 290 ITR 337 (Ker)
3(2003) Indlaw MUM 0046
4(2005) Indlaw ALL 0268
5(2004) 12 SCC 0424
6(2001) 2 SCC 0332
7(2004) 12 SCC 7423
8(1992) 3 SCC 0784