Circular No. 564-Income Tax dated 5-7-1990

1. Under the provisions of section 80HHC of the Income-tax Act, 100 per cent deduction is allowed to exporters in respect of profits derived from export of goods or merchandise. As a measure to provide incentive to supporting manufacturers selling goods or merchandise to an Export House/Trading House for export, the benefit of deduction under section 80HHC was extended with effect from 1-4-1989 to such supporting manufacturers.

2. The essential ingredients of section 80HHC are as follows :—

(i)   the assessee should be an Indian company or a person (other than a company) resident in India;

(ii)   he should be engaged in the business of export out of India of any goods or merchandise (other than mineral oils, minerals and ores);

(iii)   the deduction is also available to a supporting manufacturer who has sold his goods or merchandise to an Export House/Trading House provided the Export House/Trading House has issued a disclaimer certificate in respect of the ‘export turnover’ in Form No. 10CCAB. The term ‘supporting manufacturer’ shall, with effect from assessment year 1991-92, include a processor of goods. Thus, a seafood processor, for example, or any other processing unit exporting goods or merchandise through an Export House/Trading House, will now be eligible to claim deduction under section 80HHC on the condition that he obtains a disclaimer certificate from the Export House/Trading House;

   (iv)   under the existing provisions, deduction under section 80HHC is allowed if the sale proceeds are receivable in convertible foreign exchange. With effect from assessment year 1991-92, the deduction under this section shall be allowed only if the sale proceeds are received in or brought into India within a period of six months from the end of the relevant previous year. However, in case of genuine hardship, the Chief Commissioner or the Commissioner may allow further time for the remittance of foreign exchange if he is satisfied that the assessee was unable to bring the foreign exchange within the period of six months for reasons beyond his control. While allowing further period in this regard, the Chief Commissioner or Commissioner shall record reasons for the same in writing; and

    (v)   the deduction shall be of the profits derived by the assessee from the export of goods or merchandise. What constitutes “profits derived from the export of goods or merchandise out of India” has been defined in sub-section (3) of section 80HHC. This sub-section (3) lays down that the profits derived from export of goods or merchandise shall be the amount which bears to the profits of the assessee (as computed under the head “Profits and gains of business or profession”) the same proportion as the ‘export turnover’ bears to the ‘total turnover’ of the business carried on by the assessee.

3. Several doubts have been expressed about how the deduction under section 80HHC is to be allowed. Representations received by the Board show that there is lack of uniformity amongst assessing authorities in respect of allowing the aforesaid deduction.

4. Sub-section (3) of section 80HHC statutorily fixes the quantum of deduction on the basis of a proportion of the profits of business under the head “Profits and gains of business or profession” irrespective of what could strictly be described as “profits derived from the export of goods or merchandise out of India”. The deduction is computed in the following manner :—

5. The Finance Act, 1990, has amended section 28 by inserting therein, clauses (iiia), (iiib) and (iiic) with retrospective effect with a view to ensuring that cash compensatory support (CCS), duty drawback (DDK) and profit on sale of import entitlement licences (I/L) shall be taxable under the head “Profits and gains of business or profession”. In view of this amendment, it is clarified that the three export incentives shall have to be included in the profits of the business or computing the deduction under section 80HHC.

6. The term “export turnover” under the existing provisions, means the sale proceeds (excluding freight and insurance) receivable by the assessee in convertible foreign exchange. In other words, the FOB value of export. The Finance Act, 1990 has restricted the definition of the term “export turnover” to mean FOB sale proceeds actually received by the assessee in convertible foreign exchange within six months of the end of the previous year or within such further period as the Chief Commssioner/Commissioner may allow in this regard.

7. “Total turnover was not defined earlier. There has been lack of uniformity amongst the assessing authorities and many assessing authorities are trading export incentives to be a part of the total turnover. The Finance Act, 1990 has, therefore, clarified the position by inserting a definition for the term “total turnover” to the Explanation below section 80HHC. According to this definition, “total turnover” shall exclude cash compensatory support, duty drawback and profit on sale of import entitlement licences.

8. To sum up the deduction shall be allowed in the following manner :—

9. Thus, in the case of an assessee who is doing export business exclusively, “export turnover” and “total turnover” would be identical, if the entire sale proceeds are brought into India in convertible foreign exchange within the prescribed time limit. In that case, the entire profit under the head “Profits and gains of business or profession” (which will include the three export incentives) will be deductible under section 80HHC. However, in order to arrive at the amount deductible under section 80HHC in the case of an assessee doing export business as well as some other domestic business, the fraction of “export turnover” to “total turnover” will be applied to his profits computed under the head “Profits and gains of business or profession” (which again will include the three export incentives). The operation of section 80HHC read with section 28, as amended by the Finance Act, 1990, can be illustrated by way of the following examples :—

Circular : No. 564, dated 5-7-1990.

JUDICIAL ANALYSIS

EXPLAINED IN – In Ashwini Kumar Consultants (P.) Ltd. v. Dy. CIT [1993] 147 ITD 1 (Delhi – Trib.), it was observed that circular as issued by CBDT, refers to the term ‘total tumover’as total of ‘export sale’and ‘domestic sale’. In para 9 of the above circular, it has been clearly stated that, in case of exclusive export of goods or merchandise, ‘export turnover’ and ‘total turnover’ would be identical, making it all the more clear that the reference in this section was always to the sale value of goods or merchandise.

Thus, the CBDT’s Circular No. 564 was of no assistance to the assessee because the assessee had no domestic sale of goods or merchandise and hence, clause (b) of sub-section (3) could never be made applicable to it. This conclusion was based on the proposition of reasonable interpretation of the section. In every situation of export business of goods or merchandise and domestic business of goods or merchandise, it would be necessary to carry out the evaluation of the profits from the export business primarily under clause (a) and then compare it with the amount of export profits arrived by applying the formula in clause (b ) as, otherwise, it might lead to a ridiculous result of deduction being allowed from out of profits of domestic trade, rather than from the profits derived from the export of goods or merchandise.

EXPLAINED IN – In International Research Park Laboratories Ltd. v. Asstt. CIT [1994] 50 ITD 37 (SB), the Tribunal held that the Board’s Circular No. 564, dated 5-7-1990 states how the deduction under section 80HHC is to be computed. The said circular clearly shows that where there are profits on export of goods or merchandise out of India or not, the entire profit of the business has to be ascertained and then apportioned in the manner in which the export turnover bears to the total turnover. This circular leaves no doubt both by the clarification and examples given in para 9 that what was contemplated and intended was not the profit relatable to the export of goods exclusively pertaining to those goods but the profit of the entire business including export turnover and domestic turnover, irrespective of the source from which the domestic turnover was derived provided it is in respect of profits and gains of business. The legislative mandate is therefore to compute the profit of the entire business and not to segregate exports or compute the profits of export separately and if they are identifiable adopt them to the entire exclusion of the operation of the provisions of clause (b) of sub-section (3). Therefore, it cannot be said that clause (b) of sub-section (3) applies only when the same nature of goods are dealt in both in exports and locally.

EXPLAINED IN – The above circular was explained in Tayub Mohamed Hajee Moosa & Co. v. First ITO [1991] 40 TTJ (Mad.) 217, with the following observations :

“. . . The CBDT in its Circular No. 564, dated 5th July, 1990 ( supra) clarified that the cash compensatory support, duty drawback and profit on sale of import entitlement licences shall have to be included in the profits of the business for computing the deduction under section 80HHC. When similar words were used in section 80HH also, we fail to see the reason why the said CBDT’s Circular cannot be applied here in the assessee’s case for purposes of section 80HH also. It is true that the High Courts of Karnataka, Kerala and Bombay have taken a different view in the matter. However, we are bound by the decision of the Hon’ble Madras High Court, namely, the jurisdictional High Court. Hence, respectfully following the said decision in the case of Wheel & Rim Co. of India Ltd. (supra) and applying the said Circular of the CBDT, we hold that the Commissioner is not justified in holding that the assessee is not entitled to deduction under section 80HH of the IT Act, 1961 in respect of the impugned four items . . . ” (p. 221)

REFERRED TO IN – The above circular was referred to in Asstt. CIT v. Doshi Exports [1993] 45 ITD 417 (Bom.), with the following observations :

“. . . Clause (a) of sub-section (3) of section 80HHC provides that the profit derived from export of goods would be the profit as computed under the head ‘Profits and gains of business or profession’. The entire business income is deemed as profit derived from export of goods. Could it be said that, the service charges which are admittedly in the nature of business profits are to be excluded ?

In my opinion, the answer is in the negative. It may also be useful to refer to the Board’s Circular No. 564, dated 5th July, 1990, wherein in paragraph 4, it is stated that sub-section (3), of section 80HHC statutorily fixes the quantum of deduction on the basis of a proportion of the profits of business under the head ‘Profits and gains of business of profession’ irrespective of what could strictly be described as ‘profits derived from the export of goods or merchandise out of India’. Deduction to a person falling under clause (a), of section 80HHC(3) would be the amount of profits computed under the head ‘Profits and gains of a business or profession’. On the other hand, the deduction to a person falling under clause (b) thereof is to be computed in the following manner :

10. In these circumstances, in my opinion, the Assessing Officer was not justified in reducing the amount of service charges from the profits of the assessee in arriving at the deduction of the profit derived from the export of goods or merchandise out of India. It is the amount which bears to the profits of the business the same proportion as the export turnover of the assessee in respect of which goods bears to the total turnover of the business carried on by the assessee . . . .” (p. 423)