DCIT 20(2), MUMBAI vs. M.M. INTERNAITONAL, MUMBAI

Date of hearing : 10-01-2017 Date of order : 13 -01-2017 O R D E R

Per ASHWANI TANEJA, AM:

"On the facts and in the circumstances of the case and in (1) law, the Ld. CIT(A) has erred in treating sales tax refund as eligible component for deduction under section 80HHC without appreciating that sales tax refund cannot be considered to be derived out of export activity as there is no direct nexus between such receipts and export business." "On the facts and in the circumstances of the case and (2) in low, the Ld CIT(A) erred in treating sales tax refund as profit from business, as against income from other sources, without taking into cognizance that receipts does not assume the character of export related activity." "On the facts and in the circumstances of the case (3) and in law, the Ld. CIT(A) has erred in placing reliance on the decision of Hon'ble Bombay High Court in the case of valiant Glass Works P Ltd (50 Taxmann 268) which involved CEN VAT incentive and ignoring the decision of Ho'ble Bombay High Court in the case of Dresser Rand (323 ITR 429) which has some facts as in the instant case."

“4.8. I have carefully considered the facts and circumstances of the case. In the present case, the - appellant is a trader of goods. There are 100% export sales and no local sales. An extract of Section 80HHC (3) is as under: "(3) For the purposes of sub-section (1),- (a) where the export out of India is of goods or merchandise manufactured [or processed] by the assessee, the profits derived from such export shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee; (b) where the export out of India is of trading goods, the profits derived from such export shall be the export turnover in respect of such trading goods as reduced by the direct costs and indirect costs attributable to such export;" As per Explanation to Section 80HHC, the term profits of the business is defined as follows:

(baa) "profits of the business" means the profits of the business as computed under the head "Profits and gains of business or profession" as reduced by— ninety per cent of any sum referred to in clquses (1) (iiia), (iiib) [, (iiic), (iiid) and (iiie)] of section 28 or of any receipts by way of brokerage, comnission, interest, rent, charges or any other receipt of a similar nature included in such profits , and the profits of any branch, office, warehouse or any (2) other establishment of the assessee situate outside India; A reading of language of Section 80HHC of the Act would indicate that for manufacturers, the deduction has to be computed based on ratio of profits of business in ratio of export turnover to total turnover. However, in the present case, the appellant is not a manufacturer but a trader. For traders, the profit has to be computed based on export turnover as reduced by direct and indirect costs. Hence, the definition of profits of business as per Explanation (baa) to Section 80HHC is not relevant to the appellant's case. In the case of a trader, export turnover is to be reduced by direct and indirect costs. In the case of Dresser Rand (supra), the Bombay High Court considered the question of ether sales tax refund is to be reduced from profits of the business as per Explanation (baa) to Section 80HHC. In the present case, the appellant is not covered by the said Explanation. That case was relating to a manufacturer of exported goods. The Bombay High Court relied on the ratio of Ravindranathan Nair 295 ITR 228 (SC) and held that Explanation (baa) to s. 80HHC required receipts constituting independent income having no nexus with exports to be reduced from business profits under clause (baa) so as to avoid distortion in the computation of export profits. This case is not relevant to those assessee's who are not manufactures and are not covered by Explanation (baa) to Section 80HHC of the Act.

4.10. In a recent decision in the case of CIT v Valiant Glass Works P Ltd 50 taxmann.com 268 (Bom), the Bombay High Court held that Cenvat credit was eligible for deduction under Section 80HHC of the Act. The Assessing Officer in its assessment order held that CENVAT incentives were not eligible profits for claiming a deduction under section 80HHC and, thus, had] to be excluded from the business income while calculating deductions under section 80FIHC. On appeals, the Commissioner (Appeals) dismissed the same. On further appeal, the Tribunal, partly allowed the appeal filed by the assessee. The Tribunal held that the CENVAT incentives were in the nature of export incentives and, hence, allowed for the purpose of calculating business income while calculating a deduction under section 80HHC. The Bombay High Court held that in the instant case, it can hardly be argued that the deemed credit under the CENVAT Incentive Scheme would not reduce the material/manufacturing cost of the goods exported by the assessee. No other provision vas brought to our notice that would justify the disallowance of CENVAT incentive whilst computing the admissible deduction under section 80HIHC. In this view of the matter, in the peculiar facts and circumstances of the instant case, the Tribunal has not misdirected itself in coming to the conclusion that the amount of deemed credit under the CENVAT Incentive Scheme was a part of the business profits of the assessee eligible for a deduction under section 80HHC despite the fact that it did not specifically find place in section 80HHC(3). 4.11. In view of above Bombay High Court decision in case of Valiant Glass Works P Ltd, I am of the view that the sales tax refund is eligible for deduction under Section 80HHC. Further, the appellant is following inclusive method and claiming refund from Sales Tax Department of sales tax embedded in exports. As per Rule 43C of the Bombay Sales Tax Rules, sales tax can be set off by a Trader Export only if such goods are exported outside the State and that too within specified time period. Thus, such set off has a direct nexus with the export and is eligible for deduction under Section 80HHC of the Act. Hence, all the grounds of appeal are allowed.”

5. During the course of hearing before us, Ld. DR relied upon the order of the AO whereas the Ld. Counsel heavily relied upon Ld. CIT(A) and reiterated the submissions made before Ld. CIT(A) and also submitted copy of judgment of Hon'ble Bombay High Court in the case of CIT vs Valiant Glass Works Pvt Ltd 110 DTR 281 (Bom) which was relied upon by the Ld. CIT(A) while allowing relief to the assessee.

6. We have gone through the submissions made before us as well as orders passed by the lower authorities and also the judgements considered by the AO as well as Ld. CIT(A) while deciding the issue. It was stated that the assessee is a trader and not a manufacturer. Therefore, provisions of Explanation (baa) to section 80HHC are not applicable upon the assessee as were applied by the AO. Further, it is also noticed by us that sales-tax refund received by the assessee was nothing but reduction of cost of purchase. In substance, it does not make a difference in whatever manner the accounting has been done by the assessee. The sales-tax refund received by the assessee clearly goes to reduce the cost of purchases of the assessee. Under these circumstances, we find that the findings of Ld. CIT(A) are well reasoned and justified and in accordance with law and facts. Ld. CIT(A) has followed the aforesaid judgement of Hon’ble Bombay High Court while deciding this issue. This view is also supported by the view taken by Hon’ble Supreme Court in the case of Topman Exports vs CIT 342 ITR 49 (SC). No contrary view was brought before us by the Ld. DR. Therefore, respectfully following the same, we do not find any justification to make interference in the well reasoned findings of the Ld. CIT(A). Therefore, his order is confirmed.

Order was pronounced in the open court at the conclusion of the hearing.