J.P MORGAN SERVICES INDIA P.LTD,MUMBAI vs. DCIT CIR 8(2), MUMBAI

आदेश / O R D E R Per Ashwani Taneja (Accountant Member): These cross appeals have been filed against the final assessment order passed by the AO dated 15.10.2012 u/s 143(3) r.w.s. 144C (ii) of the Income Tax Act, 1961, (herein after called as ‘Act’) in pursuance to the directions of the

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Dispute Resolution Panel (DRP) given vide its order dated 07.09.2012 for A.Y. 2008-09.

First we shall take up assessee’s appeal: 2. During the course of hearing, arguments were made by Shri Porus Kaka & Shri Divesh Chawla, Authorised Representative (AR) on behalf of the Assessee and by Shri N.K. Chand, Departmental Representative ( CIT-DR) on behalf of the Revenue.

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unit and accordingly set off of the same against the taxable income computed after allowing exemption under section 10A is denied. 4. On the facts, in law and in circumstances of the case, the DCIT erred in treating the interest income on deposits with banks and other receipts, amounting to Rs.8,19,74,580/- as chargeable to income-tax under the head ‘Income from other Sources’ as against the Appellant’s claim that such interest income and other receipts is chargeable to tax under the head “Profit and Gains of business or Profession” and eligible for deduction under section 10A of the Act. 5. On the facts and in the circumstances of the case and in law, the DCIT erred in restricting the credit for taxes deducted at sources to Rs.3,09,16,615 instead of Rs.3,15,89,080/- as claimed in the return of income. 6. On the facts, in law and in circumstances of the present case, the DCIT erred in levying interest of Rs.55,34,57,352/- under section 234B of the Act. 7. On the facts, in law and in circumstances of the case, the DCIT has erred in initiating penalty proceedings under section 271(1)(c) read with explanation 7 of the Act for furnishing inaccurate particulars and concealment of income.”

3.1. During the course of hearing it was stated at the very out set by the Ld. Counsel of the assessee that all the grounds are covered with the order of the Tribunal of earlier years in assessee’s own case. It was further submitted that revision in the grounds was felt necessary on account of the relief granted to the assessee on the conclusion of Mutual Agreement Procedure (MAP).

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Rs.312,60,63,136 (95.98% of the total TP addition) at arm’s length mark-up of 16.63% and accordingly the international transaction of Back Office Support Service rendered by the assessee has been determined at arm’s length. Hence, the above ground has been revised to cover only the remaining addition of Rs. 13,09,31,171/- i.e. 4.02% of the total addition.

4.1. It has been further submitted that similar issue arose in assessment years 2006-07 & 2007-08 wherein the Tribunal vide its order dated 30.11.2015 in ITA No.8987/Mum/2010 accepted the prayer of the assessee and applied the decision of MAP on remaining 4% transactions of the assessee, as well viz. transactions pertaining to ‘non-US’ entities. Ld. Counsel relied upon the order of the Tribunal. On the other hand, Ld. CIT-DR relied upon the orders of the lower authorities and submitted that decision of the MAP was pertaining to only transactions done with its US-AE and therefore, the same cannot be applied on transactions done with other AE’s.

4.2. We have gone through the orders of the lower authorities as well as order of the Tribunal of A.Ys. 2006-07 and 2007-08 and find that this issue is squarely covered by the order of the Tribunal; relevant portion of the same is reproduced below:

“3.6 We have gone through the arguments made by both the sides and also the material placed before us for our consideration. It is noted that letter dated 9th April 2015 in F-no.480/13/2010-FTD-1 has been issued in the case of the assessee company under MAP proceedings for A.Y.2006-07 to 2010-111 by the DCIT(OSD), APA-I on

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behalf of the Foreign Tax and Tax Research Division -I, Central Board of Direct Taxes, New Delhi wherein it has been confirmed that for A.Y.2006-07, for US related transactions, the margin has been determined at 14.38% as against margin of 21.58%, as was determined by the Transfer pricing officer (TPO). It has been further clarified by way of note in the said letter that apportionment between ‘US’ and ‘non-US’ ALP and TP adjustment had been margined out by the APA section (of FT and TR Division) on the basis of ‘US’ and ‘non-US’ revenue. It is further noted from the perusal of the annual accounts of the assessee company that aggregate turnover has been shown at Rs.47,30,521/-, and no distinction has been made between the ‘US’ and ‘non-US’ transactions. Similarly in the orders passed by the lower authorities also no such distinction as ever been made by any of the authorities. Under these circumstances, in our considered view, whatever margin has been determined for the 96% of the transactions, same margin should be determined for the remaining 4% transactions as well. It is worth noting that, even before us, no distinction in facts or nature of transactions has been brought out on record. Therefore, in our considerate view, mark-up of 14.38% should be determined for the remaining 4% transactions pertaining to ‘non-US’ entities as well. The assessee gets part relief accordingly.”

4.3. It has been further brought to our notice that margin of the assessee @ 16.63% has been found to be at Arm’s Length Price and no adjustment has been suggested under MAP. It is further noted by us that the TPO/AO have treated all of the transactions as ‘one’, by combining the total turnover of the assessee, whether related to US based entities or others. Even before us, no distinction has been made out by the Ld. CIT-DR between the ‘turnover’ made by the assessee with US based entities and others. In view of these facts and respectfully following orders of earlier years, we direct the AO/TPO to apply

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the order of MAP on the remaining 4.02% transactions also and delete the addition. Thus, ground no.1 is allowed in the manner and to the extent of our observations as given above.

6.1. During the course of hearing both the parties fairly agreed that this issue has been arising in earlier years i.e. in assessment years 2005-06, 2006-07 & 2007-08, wherein this issue has been decided by the tribunal in the favour of the assessee.

6.2. We have gone through the orders of the lower authorities of the impugned year as well as earlier years. It is noted that in the order passed for A.Ys. 2006-07 & 2007-08, the Tribunal has relied upon its order for A.Y. 2005-06 and directed the AO to allow the deduction u/s 10A before setting off the brought forward unabsorbed depreciation. The relevant portion of the order of the tribunal is reproduced below: “4.2. We have gone through, with the assistance of the parties, the order of Hon’ble Tribunal for A.Y.2005-06 in

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ITA No.5547/Mum/2009 dated 23.04.2013, in assessee’s own case. The relevant Para’s of the Tribunal’s order are reproduced herein. “12. The grievance relates to the setting off of the unabsorbed depreciation. It is the contention of the assessee that in computing income under the head “Profits & gains of business or profession” deduction u/s. 10A should be allowed before setting off of brought forward business loss and unabsorbed depreciation and the same should be set off of against the balance taxable income if any. 13. The Ld. Counsel for the assessee submitted that these issues are now well settled in favour of the assessee by the decision of the Hon’ble Bombay High Court in the case of CIT VS Black And Veatch Consulting Pvt. Ltd. (2012) 348 ITR 72 (Bom). 14. The Ld. Departmental Representative fairly conceded that the issue stands covered in favour of the assessee. 15. We have carefully perused the facts of the vase vis-a- vis decision of the Hon’ble Jurisdictional High Court (supra). The question before the Hon’ble Jurisdictional High Court was – “whether on the facts and in the circumstances of the case and in law, the Income Tax Appellate Tribunal was correct in holding that the brought forward unabsorbed depreciation and losses of the unit the income which is not eligible for deduction u/s.10A of the Act cannot be set off against the current profit of the eligible unit for computing the deduction u/s. 10A of the I.T. Act.” 16. The Hon’ble High Court thus held as under: “Section 10A is a provision which is in the nature of a deduction and not an exemption. This was emphasised in a judgment of a Division Bench of this court, while construing the provisions of section 10B, in Hindustan Unilever Ltd. v. Deputy CIT [2010] 325 ITR 102 (Bom) at paragraph 24. The submission of the Revenue placed its reliance on the literal reading of section 10A under which a deduction of such profits and gains as are derived by an undertaking from the export of articles or things or computer software for a period of ten consecutive assessment

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years is to be allowed from the total income of the assessee. The deduction under section 10A, in our view, has to be given effect to at the stage of computing the profits and gains of business. This is anterior to the application of the provisions of section 72 which deals with the carry forward and set off of business losses. A distinction has been made by the Legislature while incorporating the provisions of Chapter VI-A. Section 80A(1) stipulates that in computing the total income of an assessee, there shall be allowed from his gross total income, in accordance with and subject to the provisions of the Chapter, the deductions specified in sections 80C to 80U. Section 80B(5) defines for the purposes of Chapter VI-A "gross total income" to mean the total income computed in accordance with the provisions of the Act, before making any deduction under the Chapter. What the Revenue in essence seeks to attain is to telescope the provisions of Chapter VI-A in the context of the deduction which is allowable under section 10A, which would not be permissible unless a specific statutory provision to that effect were to be made. In the absence thereof, such an approach cannot be accepted. In the circumstances, the decision of the Tribunal would have to be affirmed since it is plain and evident that the deduction under section 10A has to be given at the stage when the profits and gains of business are computed in the first instance. So construed, the appeal by the Revenue would not give rise to any substantial question of law and shall accordingly stand dismissed. There shall be no order as to costs.” Respectfully following the decision of the Hon’ble Jurisdictional High Court, we direct the AO to allow deduction u/s. 10A before setting of the brought forward unabsorbed depreciation and business loss. Ground No. 5 to 9 taken together is allowed.”

4.3. It is noted that none of the parties have disputed that facts of both the years are similar. There is no change in the position of law. The Ld. CIT-DR has also not made any distinction in the facts or legal position of these two years.

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Therefore, respectfully following the judgment of coordinate Bench in assessee’s own case and that of Hon’ble Jurisdictional High Court, as has been relied by the Coordinate Bench, we direct the AO to allow deduction u/s 10A before setting off of the brought forward unabsorbed depreciation. Thus, Ground no.2 is allowed in terms of the above directions.”

Thus, respectfully following the order of the earlier years we direct the AO to allow the deduction u/s 10A before setting off of the brought forward unabsorbed depreciation. This ground is allowed.

7.1. During course of hearing, it was submitted by the Ld. Counsel that this issue had also arisen in the earlier years wherein it was held that the impugned interest income was ‘income from business’, but the computation of the availability of deduction u/s 10A was directed to be done in accordance with sub-section (4) of section 10A, whereas, the assessee should have been granted 100% deduction u/s 10A on the full amount of impugned interest income.

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7.2. Per contra, Ld. CIT-DR submitted that assessee was not in the business of giving loans and earning interest there from. Section 10A has an embedded object of earning foreign exchange and bringing the same into India, as is evident from sub-section (3) of section 10A. It was further submitted that the language used in sub-section (1) is very important, which uses the phrase “such profits and gains as are derived from a 100% export oriented undertaking from the export of article or thing or computer software…”. The language of sub-section (1) is very clear and states which profits are to be subjected to deduction.

7.3. He further submitted that there are many judgments wherein it has been held that under such situations the immediate source of interest is deposit/FDRs/loans and the same cannot be termed as ‘derived from’ export oriented undertaking. The connotation ‘derived from’ is much narrower than that of the phrase ‘attributable to’. He placed reliance on following judgments: i. Liberty India 317 ITR 218 (SC) ii. Pandian Chemicals 262 ITR 278(SC) iii. Sterling Foods 237 ITR 579(SC) iv. Shah Originals 327 ITR 19(SC) and v. Swani Spice 332 ITR 288 (SC).

7.4. The Ld. CIT-DR made an alternative argument also that in case impugned interest income is considered as business income then quantification of the amount of deduction

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allowable should be done strictly in accordance with the mechanism of computation provided under sub-section (4) of section 10A, and thus, the assessee cannot be provided 100% deduction on the total amount of interest income of Rs.8.19 crores. The deduction can at the most be allowed proportionately as envisaged u/s 10A(4). In the rejoinder, Ld. Counsel of the assessee relied upon the judgment of Hon’ble Supreme Court in the case of CIT v. Lakshmi Machine Works 290 ITR 667 for the proposition that amount of interest cannot be included in total turnover, and therefore, assessee would be eligible for 100% deduction on the total amount of interest income and earnings made by the assessee from all the sources.

7.5. We have gone through the submissions made by both the sides, orders of the lower authorities; orders of the tribunal of earlier years in assessee’s own case as well as judgments relied upon by both the sides. It is noted by us that this ground has following two facets: i. Whether the impugned amount of interest income received by the assessee should be assessed under the head ‘income from business’ or ‘income from other sources’ ii. Quantification/computation of amount of deduction allowable u/s 10A on the impugned interest income.

7.6. It is noted that for both of the above the said issues, the Tribunal has taken a decision in the earlier years. With regard to the first issue i.e. determination of head of income, the

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Tribunal in its order in assessee’s own case for A.Ys. 2006-07 & 2007-08 dated 30.11.2015 (ITA No.8987/Mum/2010) held as under: “5.3. We have gone through the submissions made by both the sides as well as the orders passed by the Tribunal in earlier years and judgments relied upon before us. It is noted that similar issue came up for adjudication before the Tribunal in assessee’s own case in assessment year 2004-05. The Tribunal has decided this issue in ITA No.7351/M/2007 vide order dated 26th June 2009 relevant para of Tribunal order is reproduced below: “Coming to the next grievance regarding interest income not being considered as income from business, Ld. Counsel for the assessee fairly admitted that sum of Rs.3,63,042/- being interest on income tax refund, relating to software technology Park Unit I would not be eligible for deduction u/s.10A of the act. Hence, we are required to decide on interest on fixed deposit Rs.7,96,223/- and interest on staff loan of Rs.1,377/-. There is no dispute that assessee was hundred per cent exporter. No doubt the ld. Departmental Representative has relied on the decision of the Kerala High Court in the case of CIT v. Jose Thomas (supra) for the proposition that interest from bank deposit could not be considered as income from business for claiming deduction u/s.80HHC of the Act. However, we find that the jurisdictional High Court in the case of CIT vs. Punit Commercial Ltd. (supra) has held that where an assessee was 100% exporter, deduction u/s.80HHC had to be given on the entire business income including interest on fixed deposit. According to the Hon’ble Jurisdictional High Court, entire profits of 100% exporter was entitled for deduction u/s.80HHC of the Act. Again the Hon’ble Delhi High Court in the case of CIT vs. Eltek S.G. (supra) has held that the term “derived by an undertaking from export of articles of things or computer software” used in section 10A was neither as broad as “attributable to’ nor as narrow as “derived from”. Though section 80HHC of the act used the term derived from, Hon’ble jurisdictions High Court in the case of Punit Commercial Ltd. (supra) held that the whole for the business income was eligible for deduction u/s.80HHC of the act. Further to this, we also

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find that Hon’ble Jurisdictional High Court in the case of CIT v. Lok Holding (supra) has clearly held that if surpluses were deposited by the assessee out of its business proceeds interest there from could only be considered as part of profits and gains of business of the assessee. Therefore, we are inclined to allow the claim of the assessee for treating the interest from fixed deposit of Rs.7,96,233/- and interest on staff loan Rs.1,377/- as income falling under the head ‘profits and gains from business or profession’ eligible for deduction u/s.10A of the Act. As far as the contention of the learned DR that section 10A was an exemption provision whereas section 80HHC is a deduction provision, we find that section 10A as substituted by Finance Act 2000, w.e.f 1.4.2000 clearly mentions it to be a deduction from profits and gains derived by an undertaking from export of articles of things or computer software. Therefore, it cannot be deemed as an exemption provision for the impugned assessment year. Ground no.2 of the assessee is therefore, partly allowed. 5.4. Further this issue again came up for consideration before the Tribunal in assessment year 2005-06, wherein in ITA No.5547/M/2009 the Tribunal vide its order dated 23.4.2013 held that under: The second issue relates to the interest on deposits which the lower authorities have taxed under the head “Income from other Sources” rejecting assessee’s contention that interest on deposits is chargeable to tax under the head “Profits & gains of business or profession and therefore eligible for deduction u/s. 10A of the Act. 8. It is the submission of the Counsel that the issue is covered by the decision of the Tribunal in assessee’s own case for A.Y. 2004-05 and to substantiate his claim, the assessee submitted the decision of the Tribunal in assessee’s own case reported in 33 SOT 327. Drawing our attention to Para-11 of the said order of the Tribunal, the Ld. Counsel for the assessee submitted that the Tribunal has directed to tax the interest under the head “Profits & gains of business or profession”. 9. The Ld. Departmental Representative relied upon the findings of the lower authorities.

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7.7. During the course of hearing before us, Ld. CIT-DR did not make out any distinction in the facts of the impugned year as compared to the facts of the earlier years with regard to the nature of interest income earned by the assessee in these years. Thus, we have no option but to follow the orders of the earlier years. Therefore, this issue is decided in favour of the assessee and interest income is directed to be held as assessable under the head income from business.

7.8. With regard to second issue also it is noted that the Hon’ble Bench has discussed this issue in detail and after analyzing the provisions and objects of section 10A, it was

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held giving detailed reasoning that deduction u/s 10A on the amount of domestic interest income shall be allowable proportionately in terms of a specific mechanism as provided under section 10A(4). Before dealing with the new arguments taken up by the Ld. Counsel, we find it appropriate to reproduce the relevant portion of the aforesaid order of the Tribunal: “5.6. Having decided the interest income as income from business, the next step is to compute the amount of deduction available u/s 10A on the amount of aforesaid interest income. It is noted that this aspect has not been decided in earlier years. Therefore, this issue needs to be decided by us, as per provisions of section 10A. It is further noted that it is a case of 100% exporter. There are no other local sales done by the assessee. It has been rightly contended by the Ld. Counsel that sub-section (4) has provided mechanism to compute the amount of profit eligible for deduction u/s 10A. For the sake of ready reference sub-section (4) is reproduced herein: “(4) For the purpose of [sub-sections (1) and (1A)], the profits derived from export of articles or things or computer software shall be the amount which bears to the profits of the business of the undertaking, the same proportion as the export turnover in respect of such articles or things or computer software bears to the total turnover of the business carried on by the undertaking.” 5.7. In our considered view, since the income from interest has been treated as part of business income, it shall be included for determining the amount of total turnover of the business and accordingly the benefit of deduction u/s 10A shall be provided on the amount of interest income proportionately, in terms of mechanism provided in sub- section (4). In other words the amount of profit eligible for deduction u/s 10A shall be the amount which bears to the profits of the business of undertaking, the same proportion as export turnover bears to the total turnover the business of the undertaking of the assessee. The AO is directed to

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grant the benefit of deduction u/s 10A by re-computing the same in terms of our directions as given above. 5.8. Before we part with this issue, we shall like to clarify that we have meticulously pondered over this issue. In case, clear mandate of sub-section (4) is not followed and full deduction is allowed u/s 10A on the interest income, then it may yield absurd results and also provide benefits to assessees which were not intended to have been provided by the legislature, keeping in view objective of enactment of section 10A. At times, there may be situations where interest income would be of sizeable amount, sometimes even more than amount of profits, and in such a situation, if 100% deduction is granted to the assessee, on the interest income or any other similar income, without following mandate of sub-section (4), it may frustrate the objective of section 10A. Therefore, to avoid any such situation, clear mechanism has been provided under sub-section (4) for computation purposes. Therefore, our decision is in line with express as well as implied provisions of section 10A.”

7.9. From the perusal of the above, it comes out that object of section 10A as is embedded in section 10B/10A is to provide the tax concessions to those assessees who are exporting goods out of India and bringing foreign exchange into India. Under these circumstances in case 100% deduction u/s 10A is granted on the domestic income earned by the assessee on account of interest received by it on its surplus funds received through various sources, then such a concession will be far from achievement of the objects of these provisions. It shall amount to misuse of beneficial provisions. In support of his argument for allowing 100% deduction on domestic interest income, Ld. Counsel of the assessee has relied upon the judgment of Hon’ble Supreme Court in the case of CIT vs.

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Lakshmi Machine Works (supra) for the proposition that interest cannot form part of the expression ‘total turnover’.

7.10. We have carefully gone through the submission of the Ld. Counsel but not able to accept the same, especially in view of peculiar provisions of section 10A(4), as has been held by the Tribunal in the earlier years also that since computation mechanism has been specifically provided in the section 10A, therefore, computation/quantification of the amount of deduction allowable to an assessee on the profits of the eligible undertaking has to be done strictly in accordance with law only. The computation mechanism provided in other provisions for computation of deduction allowable therein say in section 80HHC, cannot be copied and blindly applied upon peculiar provisions section 10A. Each set of provisions, especially beneficial provisions, is structured in such manner so as to enable the achievement of objective of enactment of the provisions, and for this purpose lot of material, after a long drawn process, goes into churning while drafting such provisions. Each provision may stand on its own and distinct pedestal and therefore, each of them has to be carefully and separately dealt with, unless the text provides otherwise. It is noted by us that Hon’ble Supreme Court rendered the judgment in the case of Lakshmi Machine Works(supra) specifically in context of peculiar drafting of provisions of section 80HHC, as would be clear from the first reading itself of the judgment. For the sake of ready reference we have

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produced herein some relevant observations from this judgment: “The principal reason for enacting the above formula was to disallow a part of 80HHC concession when the entire deduction claimed could not be regarded as relatable to exports. Therefore, while interpreting the words "total turnover" in the above formula in Section 80HHC one has to give a schematic interpretation to that expression. There is one more reason for giving schematic interpretation. The various amendments to Section 80HHC show that receipts by way of brokerage, commission, interest, rent etc. do not form part of business profits as they have no nexus with the activity of exports. If interest or rent was not regarded by the legislature as business profits, the question of treating the same as part of the total turnover in the above formula did not arise. In fact, Section 80 HHC had to be amended several times since the formula on several occasions gave a distorted figure of export profits when receipts like interest, rent, commission etc. which did not have the element of turnover got included in the profit and loss account and consequently became entitled to deduction. This was clarified by the above amendment to Section 80HHC commencing from 1.4.92. The said amendment made it clear that though commission and interest emanated from exports, they did not involve any element of turnover and merely for the reason that commission, interest, rent etc. were included in the profit and loss account, they did not become eligible to deduction. We have to give purposeful interpretation to the above section. The said section is entirely based on the formula. The amendments from time to time indicate that they became necessary in order to make the formula workable. Hence, we have to give schematic interpretation to Section 80HHC of the Act. The tax under the Act is upon income, profits and gains. It is not a tax on gross receipts. Under Section 2(24) of the Act the word "income" includes profits and gains. The charge is not on gross receipts but on profits and gains. The charge is not on gross receipts but on profits and gains properly so-called. Gross receipts or sale proceeds,

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however, include profits. According to "The Law and Practice of Income Tax" by Kanga and Palkhivala, the word "profits" in Section 28 should be understood in normal and proper sense. However, subject to special requirements of the income tax, profits have got to be assessed provided they are real profits. Such profits have to be got to be ascertained on ordinary principles of commercial trading and accounting. However, the income tax has laid down certain rules to be applied in deciding how the tax should be assessed and even if the result is to tax as profits what cannot be construed as profits, still the requirements of the income tax must be complied with. Where a deduction is necessary in order to ascertain the profits and gains, such deductions should be allowed. Profits should be computed after deducting the expenses incurred for business though such expenses may not be admissible expressly under the Act, unless such expenses are expressly disallowed by the Act [SEE: page 455 of "The Law and Practice of Income Tax" by Kanga and Palkhivala]. Therefore, schematic interpretation for making the formula in Section 80HHC workable cannot be ruled out. Similarly, purposeful interpretation of Section 80HHC which has undergone so many changes cannot be ruled out, particularly, when those legislative changes indicate that the legislature intended to exclude items like commission and interest from deduction on the ground that they did not possess any element of "turnover" even though commission and interest emanated from exports. We have to read the words "total turnover" in Section 80HHC as part of the formula which sought to segregate the "export profits" from the "business profits". Therefore, we have to read the formula in entirety. In that formula the entire business profits is not given deduction. It is the business profit which is proportionately reduced by the above fraction/ratio of export turnover w total turnover which constitute 80HHC concession (deduction). Income in the nature of "business profits" was, therefore, apportioned. The above formula fixed a ratio in which "business profits" under Section 28 of the Act had to be apportioned. Therefore, one has to give weightage not only to the words "total turnover" but also to the words "export turnover", "total export turnover" and "business profits".

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That is the reason why we have quoted hereinabove extensively the illustration from the Direct Taxes (Income tax) Ready Reckoner of the relevant word. In the circumstances, we cannot interpret the words "total turnover" in the above formula with reference to the definition of the word "turnover" in other laws like Central Sales Tax or as defined in accounting principles. Goods for export do not incur excise duty liability. As stated above, even commission and interest formed a part of the profit and loss account, however, they were not eligible for deduction under Section 80HHC. They were not eligible even without the clarification introduced by the legislature by various amendments because they did not involve any element of turnover. Further, in all other provisions of the income tax, profits and gains were required to be computed with reference to the books of accounts of the assessee. However, as can be seen from the Income Tax Rules and from the above Form No.10CCAC in the case of deduction under Section 80HHC a report of the auditor certifying deduction based on export turnover was sufficient. This is because the very basis for computing Section 80HHC deduction was "business profits" as computed under Section 28, a portion of which had to be apportioned in terms of the above ratio of export turnover to total turnover. Section 80HHC(3) was a beneficial section. It was intended to provide incentives to promote exports. The incentive was to exempt profits relatable to exports. In the case of combined business of an assessee having export business and domestic business the legislature intended to have a formula to ascertain export profits by apportioning the total business profits on the basis of turnovers. Apportionment of profits on the basis of turnover was accepted as a method of arriving at export profits. This method earlier existed under Excess Profits Tax Act, it existed in the Business Profits Tax Act. Therefore, just as commission received by an assessee is relatable to exports and yet it cannot form part of "turnover", excise duty and sales tax also cannot form part of the "turnover". Similarly, "interest" emanates from exports and yet "interest" does not involve an element of turnover. The object of the legislature in enacting Section 80HHC of the Act was to confer a benefit on profits

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accruing with reference to export turnover. Therefore, "turnover" was the requirement. Commission, rent, interest etc. did not involve any turnover. Therefore, 90% of such commission, interest etc. was excluded from the profits derived from the export. Therefore, even without the clarification such items did not form part of the formula in Section 80HHC(3) for the simple reason that it did not emanate from the "export turnover", much less any turnover. Even if the assessee was an exclusive dealer in exports, the said commission was not includible as it did not spring from the "turnover". Just as interest, commission etc. did not emanate from the "turnover", so also excise duty and sales tax did not emanate from such turnover. Since excise duty and sales tax did not involve any such turnover, such taxes had to be excluded. Commission, interest, rent etc. do yield profits, but they do not partake of the character of turnover and, therefore, they were not includible in the "total turnover". The above discussion shows that income from rent, commission etc. cannot be considered as part of business profits and, therefore, they cannot be held as part of the turnover also. In fact, in Civil Appeal No.4409 of 2005, the above proposition has been accepted by the A.O. [See: page no.24 of the paper book], if so, then excise duty and sales tax also cannot form part of the "total turnover" under Section 80HHC(3), otherwise the formula becomes unworkable.”

Emphasis supplied by underlying the relevant observations.

7.11. We have gone through the provisions of section 80HHC. It is noted that various types of receipts of the nature of brokerage/commission, interest, rent, etc are excluded from the amount of business profits at the very threshold, and thereafter by way of a formula, which is peculiar to section 80HHC alone, these types of receipts are brought back in the formula for allowing the benefit or deduction u/s 80HHC on proportionate basis i.e. in the proportion of ‘export turnover’ to

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‘total turnover’. In view of peculiar drafting of section 80HHC and its formula, a schematic interpretation has been given by the Hon’ble Supreme Court that since these receipts are excluded from the ‘business profit’ itself, therefore these cannot be made part of ‘turnover’. Thus, interpretation adopted by the court in accordance with the overall scheme of section 80HHC should be applied there only and it cannot be blindly applied upon an altogether different set of provisions.

7.12. It is further noted that a careful reading of provisions of section 10A suggest that nothing has been excluded from the definition of ‘profit of the business of the undertaking” and deduction has been stipulated to be allowable on the amount of the profits of the business of the undertaking in the proportion of the export turnover to total turnover of the business carried on by the undertaking. Under these circumstances, if an interpretation is adopted, as is suggested by the Ld. Counsel of the assessee, that no receipt of the nature of interest shall form part of ‘total turnover’, then clearly it will not only be irrational but apparently such an interpretation shall given rise to absurd results, by allowing the benefit of section 10A even in those receipts which were not intended to be covered u/s 10A by the legislature. It shall undoubtedly provide unintended benefit to the taxpayers. It is noted that in many cases such receipts may be of sizeable amounts and sometimes even more than the amount of business profits of the eligible undertaking. In the case before us also the amount of interest income earned by the assessee

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from the domestic sources is to be extent of Rs.8,19,74,580/-. If submissions of the assesee are accepted and 100% deduction is allowed u/s 10A on this amount then it will amount to providing tax concession without achieving the object of enactment of section 10A. In our considered view, the provision of section 10A does not permit the assessee to avail 100% deduction on the amount of interest income earned by it on deposits with bank and other sources in India. Thus, we direct the AO to grant the benefit of deduction u/s 10A on proportionate basis by including the amount of interest in total turnover, as provided by sub section (4) of section 10A. This ground may be treated as partly allowed.

8.1. During the course of hearing, Ld. Counsel to the assessee requested for appropriate directions to the AO for verification of facts and granting the credit accordingly. Thus, in view of the above, we find it appropriate to send this issue back to the file of the AO and direct him to give adequate opportunity to the assessee to submit details and requisite documents, and after verification of requisite facts an appropriate amount of credit allowable to the assessee should be granted. This ground may be treated as partly allowed for statistical purposes.

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Order pronounced in the open court on 25th May, 2016.

Sd/- Sd/- (Mahavir Singh) (Ashwani Taneja) �या�यक सद�य / JUDICIAL MEMBER लेखा सद�य / ACCOUNTANT MEMBER मुंबई Mumbai; �दनांक Dated: 25/05 /2016 ctàxÄ? P.S/.�न.स. आदेश क� ��त�ल�प अ�े�षत/Copy of the Order forwarded to : 1. अपीलाथ� / The Appellant 2. ��यथ� / The Respondent. 3. आयकर आयु�त(अपील) / The CIT, Mumbai. 4. आयकर आयु�त / CIT(A)- , Mumbai 5. �वभागीय ��त�न�ध, आयकर अपील�य अ�धकरण, मुंबई / DR, ITAT, Mumbai 6. गाड� फाईल / Guard file. आदेशानुसार/ BY ORDER, स�या�पत ��त //True Copy// उप/सहायक पंजीकार (Dy./Asstt. Registrar) आयकर अपील�य अ�धकरण, मुंबई / ITAT, Mumbai