Supreme Court rules on deductibility of export profits while computing MAT

Court :Supreme Court

Citation :Ajanta Pharma Ltd. (Taxpayer) (Civil Appeal No. 7518 of 2010)

Brief :In a recent ruling Supreme Court (SC) in the case of Ajanta Pharma Ltd. (Taxpayer) (Civil Appeal No. 7518 of 2010) on the issue of deductibility of export profits from the net profit while computing ‘book profit’ for determining minimum alternate tax (MAT) liability under the Indian Tax Law (ITL) ruled that, while computing ‘book profit’, the net profit has to be reduced by the amount of export profits ‘eligible’ for deduction in the computation under the normal provisions of the ITL (normal computation) and not by the ‘quantum’ of deduction under that provision.

Thus, even though the quantum of deduction was phased out in the normal computation during the tax years 2000-01 to 2003-04, the Taxpayer was entitled to full deduction of such profit from ‘book profit’ for MAT purposes.

Background

• ·MAT provisions, inserted by Finance Act, 2000, substituting the erstwhile comparable provision, apply to a company and provide for taxation based on ‘book profit’. Taxation under MAT provisions is triggered when tax liability, computed at specified percentage of ‘book profit’, is higher than that under the normal computation.
• · The ‘book profit’ is computed by adopting the net profit as per Profit & Loss Account, prepared in compliance with the relevant provisions of the Indian Company Law and further adjusting it by upward and downward adjustments as specified under MAT provisions.
• · One of the downward adjustments is reducing the amount of profits eligible for deduction under Section 80HHC (export incentive provision), computed under the provisions of that Section and subject to the conditions specified therein.
• · Until the tax year 2000-01, in the normal computation, the export incentive provision allowed a deduction of profits derived from Currently 18% exports, where a taxpayer is engaged in the business of export of any goods or merchandise. The Finance Act, 2000 amended the export incentive provision to provide for a phase-out in the normal computation of the allowable deduction of profits derived from exports. It curtailed the allowable deduction to 80%, 70%, 50% and 30% for tax years 2000-01, 2001-02, 2002-03 and 2003-04 respectively. It further provided that no deduction shall be allowed for tax year 2004-05 or for any subsequent year.

Facts

• · The Taxpayer was liable to tax under MAT provisions for tax year 2000-01. While computing ‘book profit’ for MAT purposes, it reduced 100% of export profits computed as per the export incentive provision.
• · The Tax Authority, however, allowed reduction of such export profits only to the extent of 80%, being the percentage applicable in terms of phase- out provision for computing the quantum of deduction in normal computation for the relevant year.
• · The first appellate authority, as well as the Income Tax Appellate Tribunal, upheld the Taxpayer’s claim. The Tax Authority further appealed to the Bombay High Court (HC) which rejected the Taxpayer’s claim and held that the reduction of export profits for MAT purposes needs to be made after considering the phaseout, as is applicable in the normal computation.
• · Aggrieved by the HC ruling, the Taxpayer further appealed to the SC.

Issue before the SC- Whether for determining ‘book profit’ for the purpose of MAT levy, the net profit, as shown in the Profit & Loss Account, is to be reduced by the export profits eligible for deduction under export incentive provision or by the amount of deduction allowable under that provision.

SC ruling:- The SC reversed the HC ruling and upheld the Taxpayer’s claim by adopting the following reasons:

• · MAT provision is a self-contained code and applies notwithstanding the contents of any other provision of the ITL.
• · Though quantification of deduction of export profits in the normal computation is geared to the export turnover, levy of MAT is geared to the ‘book profit’ which is deemed to be the total income. Thus, both provisions operate in different spheres.
• · The export incentive provision requires that the taxpayer must be in the business of export and that sale proceeds of exports should be received in India in convertible foreign exchange. These conditions refer to the ‘eligibility’ of the taxpayer for deduction in the normal computation. For the tax years 2000-01 to 2003-04, the ‘extent’ of deduction of such profits is provided for separately, which is governed by the phase-out provision. For MAT purposes, what is relevant is the condition for ‘eligibility’ in the normal computation and not the ‘extent’ to which the deduction is allowable in the normal computation, after considering the phase-out. This is also supported by the Explanatory Memorandum to the Finance Bill, 2000 which introduced the phase-out provision in the normal computation.
• · The phase-out provision is not a condition which affects the ‘eligibility’ of the export profit for downward adjustment under MAT provisions.
• · If, as urged by the Tax Authority, both the ‘eligibility’ and ‘extent’ of deduction of export profits are applied to ‘book profit’ computation under MAT, then MAT provisions would cease to be a self-contained code.
• · Hence, the entire export profits ‘eligible’ for deduction under the export incentive provision are deductible from the net profit while computing book profit and it cannot be curtailed by the phase-out provision applicable in the normal computation.

Comments: – This ruling would bring relief to those exporters liable to pay tax under MAT provisions during the tax years 2000-01 to 2003-04. The SC, while emphasizing the self-contained nature of MAT provisions, has upheld deduction from MAT in respect of the entire export profits, independent of the phase-out provision applicable in the normal computation.