COMMISSIONER OF INCOME TAX vs. M/S. KONCHERRY COIR FACTORIES

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT: THE HON'BLE THE CHIEF JUSTICE DR. MANJULA CHELLUR & THE HONOURABLE MR.JUSTICE A.M.SHAFFIQUE FRIDAY, THE 24TH DAY OF JANUARY 2014/4TH MAGHA, 1935 ITA.No. 171 of 2010 ( ) ------------------------ AGAINST THE ORDER/JUDGMENT IN ITA 732/COCH/2008 of I.T.A.TRIBUNAL,COCHIN BENCH DATED 26-10-2009 APPELLANT(S)/APPELLANT/APPELLANT: --------------------------------- COMMISSIONER OF INCOME TAX,KOTTAYAM.

BY ADV. SRI.JOSE JOSEPH, SC, FOR INCOME TAX RESPONDENT(S)/RESPONDENT: -------------------------------------------------- M/S.KONCHERRY COIR FACTORIES,ALAPPUZHA.

R1 BY ADV. SRI.P.BALAKRISHNAN (E) THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 24-01-2014, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING:

MANJULA CHELLUR, C.J & ALEXANDER THOMAS, J. ---------------------------------------------- I.T.A.No. 171 of 2010 ---------------------------------------------- Dated this the 24th January, 2014 JUDGMENT Manjula Chellur, C.J. Heard learned Standing Counsel for the appellant as well as learned counsel for the respondent assessee. The substantial questions of law that arise for consideration in the appeal are as under: “Whether, on the facts and in the circumstances of the case is not the order of the assessing officer diminishing the export turnover by reducing the foreign commission and thereby reducing the claim under section 80HHC of the Income Tax Act in accordance with law? 2. Whether, on the facts and in the circumstances of the case and also in view of the fact: i) The foreign agent of the assessee operated/rendered service in his own country; ii) No part of his income is derived in India; iii) His commission is remitted directly to him; iv) His commission is not received by him or in his behalf in India;

ITA.171/10 2 the Tribunal is right in law in interfering with the reduction of foreign commission and the reduction of the same from section 80HHC benefit? 2. Respondent assessee is running a coir factory. In respect of assessment year 2003-2004, the assessing officer deducted a sum of 54,70,456/- from the export turnover, which represented ₹ the commission paid to the foreign agent, while computing deduction under Section 80HHC. According to the assessing officer, payment of commission is an instance of charge attached to the export order, therefore, it becomes a pre-charge created on the export orders canvassed by the agent, hence, what the assessee receives in reality is export proceeds and therefore commission amount cannot be included in the export turnover of the assessee. This came to be challenged before the first appellate authority and the first appellate authority found fault with the opinion of the assessing officer and further said that the assessing officer misconstrued the judgment reported in CIT v. Toshoku Ltd. (124 ITR 525), as the facts of the present case are entirely different from the said judgment. The first appellate authority further opined that commission in the hands of the foreign agent has nothing to do with the export turnover of

ITA.171/10 3 assessee. Accordingly, this amount of 54,70,456/- was allowed to ₹ be shown in the export turnover for the calculation purpose under Section 80HHC of the Act. This came to be challenged by the revenue before the Appellate Tribunal. The Appellate Tribunal, by placing reliance in the case of M/s.Travancore Mats and Mattings Co. (ITA.No.587/Coch/2007), opined that the said issue has to go against the revenue and confirmed the order of the Commissioner of Income Tax (Appeals). Aggrieved by the same, the present appeal is filed. 3. The entire controversy arose as the assessing officer disallowed the commission paid to foreign agent on the ground, it is hit by the provisions of Section 40(a) of the Act. He took support from Toshoku Ltd's case (Supra). In order to calculate the actual tax payable and to give deductions under Section 80HHC of the Act, the formula to be adopted definitely has impact so far as the export turnover. If export turnover is more, more benefits will be extended to the assessee, who has export business as well. Depending upon the export turnover, which has to be taken into consideration to arrive at deductions under Section 80HHC of the Act, the formula has to be applied. The formula to be adopted which was adopted by the assessing officer is profits of business multiplied by export turnover and the

ITA.171/10 4 product to be divided by the total turnover of the business of the assessee. If the commission paid to the foreign agent is deducted from the export turnover, the figure that would be arrived by multiplying the profits of business would reduce proportionately when divided by the total turnover. The question is whether the commission paid by the foreign agent has anything to do with the export turnover declared by the assessee. Though such commission paid to the foreign agent could be claimed as expenditure, it cannot go out of the export turnover as indicated by the assessing officer, because the nature of income paid as commission to the foreign agent cannot decide the export turnover of the assessee. The term 'export turnover' is clearly defined under Explanation (b) to Section 80HHC(4C) of the Income Tax Act, which reads as under: “Explanation (b): “export turnover” means the sale proceeds, received in, or brought into, India by the assessee in convertible foreign exchange in accordance with clause (a) of sub-section (2) of any goods or merchandise to which this section applies and which are exported out of India, but does not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962 (52 of 1962);”

ITA.171/10 5 4. As long as the export turnover indicated in the return of income is as per the definition of 'export turnover' under the explanation, there was no reason for the assessing officer to place reliance on the terms of contract between the assessee and the agent in order to deduct the commission amount from the export turnover. Therefore, Commissioner of Income Tax (Appeals) and the Tribunal were justified in rejecting the method of calculation adopted by the assessing officer and allowing the exporter assessee to include commission paid to the agent in the export turnover. The claim of the revenue that the assessing officer was justified cannot be sustained. We uphold the opinion of the appellate authorities. Accordingly, the substantial questions of law are answered against the revenue. MANJULA CHELLUR, CHIEF JUSTICE ALEXANDER THOMAS, JUDGE vgs25.1.14