Case Law Details
Brief of the case
In the case of Sesa Goa Ltd. vs. CIT, High Court has held that that independent income having no nexus with exports would be covered by the words other similar receipts in clause (baa) of the Explanation to Section 80HHC of the Act.
Facts of the case
1. The assessee carries on business of mining and export of iron ore. This ore is not only mined by the appellant from its own mines but also from mines belonging to others. The assessee receives extraction charges from mine owners in respect of the ores mined from mines belonging to others. These ores are thereafter purchased by the assessee from the mine owners in excess of the consideration received for extraction and exported. The assessee for carrying out its mining activities uses equipments/machines, services of engineers, barges for transport and repair facility. These when not required by the assessee are given to/used by others for consideration. Besides exports of ores the appellant also sells pig iron, vessels, engineering products, and material and coke breeze in local market.
2. For the Assessment year 1996-1997, the assessee had in its return of income declared a total income of Rs.9.73 crores. In its return of Income, the assessee had inter alia claimed the benefit of Rs.9.42 crores under Section 80 HHC of the Act.
3. The Assessing Officer by an order dated 29/3/2001 passed under Section 143(3) read with Section 147 of the Act determined the appellant’s income at Rs.19.43crores. However while determining the appellant’s claim for deduction under Section 80HHC of the Act inter alia held that the following receipts:
(1) Sale of pig iron;
(2) Sale of vessels;
(3) Sale of engineering products;
(4) Sale of material;
(5) Sale of coke breeze;
(6)Hire of barges;
(7)Proceeds of services; and
(8)Extraction charges
Above receipts similar to the receipts specified in clause (baa) of Explanation below sub section 4B of Section 80HHC of the Act. Thus out of the above receipts estimated expenses were deducted before reducing 90% of such receipts from profits of business computed under the head “profits and gains of business or profession”. This was necessary to apply the formula in Section 80HHC(3) of the Act to arrive at profits on account of exports for which deduction is available under Section 80HHC of the Act. Thus on carrying out the aforesaid exercise, the Assessment Order arrived at figure of negative deduction under Section 80HHC of the Act. Therefore no deduction in respect of its exports under Section 80HHC of the Act was granted to the assessee.
4. Aggrieved by the order of AO , assessee preferred an appeal before CIT(A), who has held that :-
1. Sale of pig iron; 2. Sale of vessels; 3. Sale of engineering products; 4. Sale of material; and 5. Sale of coke breeze;
need not be deducted from profits of business in terms of clause (baa) of Explanation to sub-Section 4B of Section 80HHC of the Act to arrive at profits of the business;
The receipts on account of following :
6. Hire of barges; 7. Proceeds of services; 8. Repairs of vessels; and 9. Extraction charges
were held to be covered by clause (baa) of Explanation to Sub Section 4B of Section 80 HHC of the Act and 90% of the gross receipts were to be reduced for computing profits of the business in respect of hire of barges and 90% of the net receipts in respect of proceeds of services, repairs of vessels and extraction charges. Moreover, so far as extraction charges are concerned the same were held to be includable in total turnover as defined in clause (ba) of the Explanation to Section 80HHC of the Act.
5. Aggrieved, both the appellant as well as the revenue filed appeals before the Tribunal. This appeal deals only with the appeal of the appellant assessee. On 4/4/2006, the Tribunal by the impugned order inter alia held :
(i) Receipts on hire of barges, proceeds of services, repair of vessels fell within the clause (baa) of the Explanation to Section 80HHC of the Act. Further it held expenses are incurred to earn the receipts. Thus 90% of the net receipts i.e. after deducting expenses on the above account are to be reduced for computing profit of business under Section 80HHC of the Act;
(ii) Receipts by way of sale proceeds i. e. sale of pig iron, of vessels, of engineering products, of materials and coke fell within the ambit of clause (baa) of Explanation of Section 80HHC of the Act. No expenses on the above are deductible. Therefore 90% of the gross receipts are deductible to compute profit of business under Section 80HHC of the Act; and
(iii) The net receipts on account of extraction charges are to be included in profits of business and therefore not hit by clause (baa) of the Explanation to Section 80HHC of the Act. However these receipts are to be included in the total turnover as defined in clause (ba) of Explanation to Section 80HHC of the Act. This figure of turnover is necessary to compute profits on account of exports in terms of Section 80HHC(3) of the Act.
Aggrieved by the decision of Tribunal assessee has filed an appeal in High court.
Issue
A) Whether on the facts and in the circumstances of the case, the receipts forming part of the Appellant’s turnover in its accounts under the head (i) hire of barges; (ii) proceeds of services; (iii) repairs of vessels, which receipts have substantial costs, and arise from the main business activity of the Appellant, could be considered as similar to the specific receipts referred to it in the said clause (baa)?
B) Whether on the facts and in the circumstances of the case, receipts by way of sale proceeds from (i) sale of pig iron, (ii) sale of vessels, (iii) sale of engineering products, (iv) sale of material, and (v) sale of coke breeze could be considered as similar to the specified receipts referred to in the said clause (baa) ?
C) Whether on the facts and circumstances of the case, the receipts under the head extraction charges” could be considered as part of the “total turnover” as defined in the said clause (baa), for the purpose of computation of deduction under section 80 HHC of the Act ?
Assessee’s contention
1. It is submitted that the aforesaid provision i.e. clause (baa) of the Explanation to Section 80HHC of the Act has to be read strictly as only covering receipts which are specified therein i.e. 90% of the receipts by way of brokerage, commission, interest, rent, charges or any other receipts of a similar nature included in such profits.
2. It is submitted that this Court in CIT vs. Pfizer Ltd. reported in 330 ITR 62 has construed clause (baa) of the Explanation to Section 80HHC of the Act to include only items specifically mentioned therein and receipts similar in nature. Although the above view of this Court is at variance with its earlier view in CIT Vs. Dresser Rand India (P) Ltd. reported 323 ITR 429 yet, it is submitted that the decision of this Court in Pfizer Ltd. (supra) being latter in point of time to the decision in Dresser Rand Ltd. (supra), the same must prevail. in Pfizer Ltd. (supra) the decision of this Court in Dresser Rand Ltd. (supra) was considered along with the Supreme Court decision in CIT Vs. K. Ravindranathan Nair reported in 295 ITR 228 which was the basis of the decision in Dresser Rand Ltd. (supra). Thus the decision of this Court in Pfizer Ltd. (supra) not being per incuriam its conclusion that only receipts of nature similar to that specified in clause (baa) of Explanation to Section 80HHC of the Act have to be excluded is binding.
3. that the nature of income which would stand included under clause (baa) of Explanation to Section 80HHC of the Act would only be items of receipts similar to those specified therein and not any other income received by the appellant in carrying of its business classifiable under the head of profits or gains of business and profession.
Regarding Question A
That the barges are not given on hire but the appellant merely renders services by carrying other people’s goods on their barges. Thus, the same is not in the nature of rent or charges. Consequently, they are neither the receipts specified in clause baa (1) of the Explanation to Section 80HHC of the Act nor is it similar to them.
Regarding Question B
The aforesaid receipts would not fall within the province of clause (baa) of the Explanation to Section 80 HHC of the Act as they are not receipts similar to the receipts specified therein. That the aforesaid sales are purely local sales and have no relation to the export sales, yet according to him the same would not be covered by clause (baa) of the Explanation to Section 80 HHC of the Act.
Regarding Question C
It is the contention of the appellant that the amount received on account of extraction of ore from the mine owners was only reimbursement of the expenditure incurred by the appellant and did not have any profit and therefore, did not form part of the assessee’s turn over nor of its profits. The appellant placed reliance upon the decision of the Apex Court in CIT Vs. Punjab Stainless Steel Industries reported in 307 ELT 214, wherein the Supreme Court held that the word “turnover” would only mean the sales proceeds received in respect of goods in which the assessee is dealing in. Therefore, where the manufacturer and exporter of Stainless Steel utensils, sells scrap as well then any amount received on that account, cannot be included within the turnover of the manufacturer and exporter of stainless steel utensils.
Revenue’s Contention
1. That the issue sought to be raised by the appellant is no longer res integra. This is so as the entire issue stands concluded by the decision of the Apex Court in Ravindranathan Nair (supra). In the above case, the Apex Court has categorically held that processing charges which are received by the assessee for processing cashew nuts on job work for local sale being independent of its export income i.e. having no nexus to exports fell within clause (baa) of the Explanation to Section 80HHC of the Act. It is submitted that the decision of Ravindranathan Nair (supra) is the law declared by the Supreme Court under Article 141 of the Constitution of India and is binding on all.
2. Therefore, the principles laid down therein would have to be applied while considering each individual item of receipt which are subject of exclusion to determine what does or does not fall within the true meaning of clause (baa) of the Explanation to Section 80HHC of the Act.
High Court decision / observations
1. The issue of clause (baa) of the Explanation to Section 80HHC of the Act was not before the Supreme Court and therefore, the decision rendered on that aspect would not cover the present controversy. The observations of the Apex Court in Ravindranathan Nair (supra) in respect of what is covered by clause (baa) of the Explanation to Section 80HHC of the Act is not the ratio of the decision. Moreover as the above issue was not argued before the Supreme Court in Ravidranathan Nair (supra) it may be considered as only an observation and of no binding effect. This according to us is not correct.
2. the Apex Court has very much dealt with the issue and the ratio of its decision in Ravindranathan Nair (supra) is that independent income having no nexus with exports would be covered by the words other similar receipts in clause (baa) of the Explanation to Section 80HHC of the Act. In that case, the processing charges received for processing of cashews for local sales was held to be independent income i.e. independent of export and therefore of a nature similar to the receipts specified in clause (baa)(1) of the Explanation to Section 80HHC of the Act. Thus the present controversy would have to be decided keeping in view the above test laid down by the Supreme Court in Ravindranathan Nair (supra).
3. We find that though decisions of this Court in Dresser Rand (supra) and Pfizer Ltd. (supra) appear to be inconsistent to each other, the same on a closer reading is not found to be so. In fact in Pfizer Ltd. (supra) this Court follows the decision of the Apex Court in Ravindranathan Nair (supra) and does not detract from its own decision in Dresser Rand Ltd. (supra).
Regarding Question A
(I) Hire of barges :- The Tribunal by the impugned order held that the barges are given on hire by the appellant/assessee when the same are not required by the assessee for its own activities. The receipts received on hire of barges do not have any nexus with the exports of the appellant. These receipts on hire charges are admittedly a part of profits and gains of business computed under the heads of gains of business profits and being rent, clause (baa) to Explanation of Section 80HHC of the Act would apply. This submission on the part of Mr. Pardiwala is contrary to the submission made before the Assessing Officer wherein the appellant has specifically stated that “whenever barges are idle, we hire them out to third parties.” Therefore, the receipts received on such hire would be in the nature of rent or similar to rent and therefore, would fall in the items specified in clause baa (1) of Explanation to Section 80HHC of the Act.
The appellant has not shown that the aforesaid activity has any nexus with its export activity. Consequently, following the decision of the Supreme Court in Ravindranathan Nair (supra), the aforesaid charges constitute independent income and is a receipt as rent/charges or at the very least similar in nature to it. Therefore, the impugned order of the Tribunal has correctly held these receipts are covered by clause (baa) (1) of Explanation to Section 80 HHC of the Act.
(II) &( III) Proceeds of Services and Repairs of Vessels: So far a receipts on the aforesaid two heads are concerned, we find that the Tribunal in the impugned order has rendered a finding that the same are incidental to the appellant’s export activities. Once, the receipts by the appellant have nexus to export activities then, in view of the decision of the Apex Court in Ravindrathanan Nair (supra), the receipts of the same cannot be reduced to the extent of 90% as provided under clause baa (i) of the Explanation to Section 80HHC.
Regarding Question “B”:
The order of this Court Court in Pfizer Ltd. (supra) does not state that the stock in trade which was lost on account of fire and for which insurance amount was received was in respect of stock in trade to be sold in the local market. Therefore, by following the decision of the Apex Court decision in Ravindranathan Nair (supra) wherein it has been has categorically stated whether or not a particular income constitutes an independent income would depend upon whether or not it has nexus with export. In case the income/receipts has nexus with export then such receipts are not hit by clause (baa) of the explanation to Section 80HHC of the Act. However, if the income is independent of exports, then it would be hit by the clause (baa) of the Explanation to Section 80 HHC of the Act. In this case, admittedly, the sales do not have any nexus with the export earning of the appellant and therefore, would be hit by clause (baa) of the Explanation to Section 80 HHC of the Act.
Regarding Question “C”:
The Tribunal by the impugned order held that the extraction of ore is the core activity of the assessee for exports. Therefore, the profits of such activity would be included in the profits of the business. We find in this case, unlike Punjab Stainless Steel (supra) extraction of ore is an activity in which the appellant is engaged and therefore, any amount received for extraction would certainly be included in the turnover of the appellant and the decision of the Apex Court in Punjab Stainless Steel (supra) would have no application in the present facts . so far as extraction charges are concerned, the impugned order has correctly held them to be includable in total turnover as defined in clause baa of the Explanation to Section 80 HHC of the Act. Therefore, question “C” is answered in the affirmative i.e. in favour of the Revenue and against the Assessee/Appellant.
