Hon'ble Bachchoo Lal, J.
(Per: Tarun Agarwala, J.) (Delivered on 4th July, 2014) We have heard Sri Shambhoo Chopra, the learned counsel for the appellant and Sri Rahul Agrawal, the learned counsel for the assessee. For facility, the facts in ITA No.86 of 2003 is being taken into consideration.
The assessee is a manufacturer and exporter of gold jewellery and is also doing job work. For the assessment year 1997-98, the returns were processed under Section 143 (3) of the Income Tax Act. The Assessing Officer treated the receipt of job charges as part of the "total turnover" in the business of manufacture and export of jewellery. The Assessing Officer computed the net profits at Rs.48,31,251/- against which a deduction of Rs.40,83,526/- was claimed under Section 80 HHC. While examining the records, it was found that the order under Section 143 (3) of the Act was erroneous and prejudicial to the interest of revenue, inasmuch as the Assessing Officer had not made proper inquiries before quantifying the allowable deductions under Section 80 HHC of the Act. The Commissioner of Income Tax was of the opinion that job charges is not part of turnover. The Commissioner of Income Tax, accordingly passed an order under Section 263 of the Act setting aside the assessment order on the ground that it was prejudicial to the interest of the revenue and directed the Assessing Officer to pass a fresh assessment order. The assessee, being aggrieved, filed an appeal before the Tribunal, which was allowed and the order passed by the Commissioner of Income Tax under Section 263 of the Act was set aside. The department, being aggrieved by the order of the Tribunal, has filed the present appeal under Section 260A of the Act, which was admitted on the following questions of law:-
"1. Whether, on the facts and in the circumstances of the case, ITAT was correct in law and on the facts in holding that job charges are integral part of main business and charges received for job undertaken cannot be held as similar to word "Charges" provided in sub-clause (baa) of sub-section (4B) of Section 80 HHC.
2. Whether on the facts and in the circumstances of the case, ITAT was correct in law and on facts in relying upon the ITAT Cochin Bench decision of the case of ACIT vs. Herbal Isolates (P) Ltd. (89 ITD 310) which is not applicable in the facts of the present case and, thereafter cancelling of the order passed under Section 263 for the assessment year 1997-98 and 1998-99 altogether ignoring the decision of the Hon'ble Bombay High Court in CIT vs. K.K. Doshi & Co. (245 ITR 859 (2009) before arriving at the above finding.
3. Whether on the facts and in the circumstances of the case, ITAT was correct in law and on facts directing to include job receipts in total turnover particularly when such job receipts were earned for rendering services within country and have no nexus with export activity."
The core issue in this appeal is how export incentive under Section 80 HHC (3) of the Act is to be computed.
Section 80 HHC has been the subject matter of frequent amendments. The said section was inserted in 1983 and, since then, the section has undergone a series of amendments till 2005. Therefore, while considering the applicability of Section 80 HHC, it is necessary to keep in mind the applicability of section as it existed in that relevant assessment year.
For the sake of convenience, the relevant portion of Section 80 HHC as it existed in the relevant assessment year 1997-98 is extracted hereunder:
"80HCC. (1) Where an assessee, being an Indian company or a person (other than a company) resident in India, is engaged in the business of export out of India of any goods or merchandise to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of the [profits] derived by the assessee from the export of such goods or merchandise :
[(3) For the purposes of sub-section (1),--
(c) where the export out of India is of goods or merchandise manufactured [or processed] by the assessee and of trading goods, the profits derived from such export shall,
(i) in respect of the goods or merchandise manufactured [or processed] by the assessee, be the amount which bears to the adjusted profits of the business, the same proportion as the adjusted export turnover in respect of such goods bears to the adjusted total turnover of the business carried on by the assessee ; and
(ii) in respect of trading goods, be the export turnover in respect of such trading goods as reduced by the direct and indirect costs attributable to export of such trading goods :
Provided that the profits computed under clause (a) or clause (b) or clause (c) of this sub-section shall be further increased by the amount which bears to ninety per cent of any sum referred to in clause (iiia) (not being profits on sale of a licence acquired from any other person), and clauses (iiib) and (iiic) of section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee.
Explanation.-- For the purpose of this section.--
(ba) "total turnover" shall not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962 (52 of 1962) 90a:
Provided that in relation to any assessment year commencing on or after the 1st day of April, 1991, the expression "total turnover" shall have effect as if it also excluded any sum referred to in clauses (iiia), (iiib) and (iiic) section 28.
(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--
(1) ninety per cent of any sum referred to in clauses (iiia), (iiib) and (iiic) of section 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits ; and (2) the profits of any branch, office, warehouse or any other establishment of the assessee situate outside India ;]"
Section 80 HHC is an incentive provision and is not a charging section. It provides that in computing the "total income", a deduction of the profits derived by the assessee from the export of goods shall be made. Therefore, profits derived from the export of goods becomes the basis for working out the formula in Section 80 HHC(3) of the Act. By the Finance Act No.2 of 1991, w.e.f. 1.4.1992, the expression "profits of the business" was defined to mean the "profits of the business" as computed under the head "Profits and gains of business" under Section 28 to 44D of the Act. Thus, before giving deduction under Section 80HHC(3)(c) of the Act, the gross total income of the assessee being profits from business had to be arrived at in terms of clause (baa) of the said Explanation.
Explanation (baa) states that "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 the receipts of the nature mentioned in clauses (1) and (2) of Explanation (baa). Therefore, profits of the business of an assessee will have to be computed under the heads "Profits and gains of business or profession" in accordance with Section 28 to 44D of the Act as reduced by 90 % of any sum referred to in clauses (iiia), (iiib) and (iiic) of Section 28 or receipts by way of brokerage, commission, interest, rent charges or any other receipt of a similar nature included in such profits.
The formula for calculation of the concession as given in CIT Vs. K. Ravindranathan Nair, (2007) 295 ITR 228 (SC) is as under:
Export Profits= Profits of the business (Baa) X Export turnover Total turnover (Ba) Thus in the computation of such profits of business, all receipts of income which are chargeable as profits and gains of business under Section 28 of the Act will have to be included. While computing such profits of business, different expenses which are allowable under Section 30 to 44D have to be allowed as expenses. After including such receipts of invoice and after deducting such expenses, the total of the net receipts are "profits of the business or profession" from which deduction are to be made under clauses (1) and (2) of the Explanation (baa). Under clause (1) of the Explanation (baa), 90% of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits are to be deducted from the profits of the business as computed under the head "Profits and gains of business or profession". The expression "included any such profits" in clause (1) of Explanation (baa) would mean only such receipts by way of brokerage, commission, interest, rent, charges or any other receipt, which are included in the profits of the business as computed under the head "Profits and gains of business and profession".
In the present case, we are concerned with profits from the business of exports of goods manufactured by the assessee. Therefore, the exports profits were required to be computed in the ratio of export turnover to total turnover. The Assessing Officer will have to ascertain whether receipt of interest, commission, charges, etc. is part of operational income and, for this purpose, the Assessing Officer will have to consider the nature of the business and its dominant activity, namely, whether receipts such as interest, commission, charges, etc. accrue as a part of the main business activity or whether they accrue out of incidental business.
In the instant case, there is no difference in the activity relating to export business and job work carried out by the assessee. There is no difference between manufacture and export of jewellery on one hand and manufacture of jewellery for others on job work basis. Therefore, the receipt by way of job work is an integral part of the dominant business activity. The only difference between regular manufacturing and processing for others is that the assessee did not own the goods processed by it in the case of job work. The expenses and efforts for the job charges were the same in relation to the regular manufacture on assessee's own account. Admittedly, the assessee has not maintained a separate account for manufacturing and sale of jewellery on one hand and job works undertaken by it. Therefore, one cannot say that job works undertaken by the assessee was not an integral part of the business. Such job work charges are in the nature of business receipts of the assessee and, therefore, form part of the operational income and has to be included in the profit of business.
Since the job work charges forms part of the gross total turnover, the same has to be reduced by 90% as contemplated in clause (baa) to arrive at "business profits". Explanation (baa) cannot be invoked in every matter involving receipts by way of brokerage, commission, interest, rent, charges, etc. These items of income have got to be seen in the context of the business activity of the assessee.
The word 'charges' used in sub-clause (1) of clause (baa) is found in the company of expressions like 'brokerage', 'commission', 'interest', 'rent'. If one applies the principle of '"ejusdem generis", the term 'charges' has to be read in the company of the preceding words, such as brokerage, commission, interest, rent, etc. The brokerage or commission or interest, or rent does not have any nexus with any manufacturing or processing or the core business activity that could be carried on by the assessee. Similarly, the word "charges" appearing in the company of those words also will not have any nexus within manufacturing or processing or core business activity of an assessee. The word 'charges' appearing in the company of brokerage, commission, interest, rent, etc. cannot be singled out and imputed with a different meaning alleging a nexus with manufacturing or processing of core business activities. Ejusdem generis rule is the rule of generic words following more specific ones. The rule is that when general words follow specific words of the same nature, the general words must be confined to the things of the same kind as those specified. The specified words must form a distinct genesis or category. The rule reflects an attempt to reconcile incompatibility between specific and general words. In sub-clause (1) of clause (baa), the word "charges" are preceded by words of specific nature, such as brokerage, commission, interest, rent, etc. These specific words form a distinct genesis or category, inasmuch as all those items relate to receipts earned by an assessee other than for its regular and principal business activity. In such circumstances, the word 'charges' also should be read along with the meaning of those specific words forming themselves into a special category. If so, the word 'charges' should be confined to those charges which do not have anything to do with the business and the related activities carried on by the assessee.
In the present case, the charges credited by the assessee in its turnover were the proceeds of the manufacturing and job work charges carried on by the assessee which is part of its principal business. Therefore, the charges received by the assessee-company for the job works undertaken as in the nature understood in this case could not be held as similar to the word 'charges' provided in sub-clause (1) of clause (baa) of the Explanation given under Section 80 HHC. Therefore, the word 'charges' appearing in clause (baa) of Explanation given under Section 80HHC needs to be read as charges similar to receipts in the nature of brokerage, commission, interest, rent. etc. In the light of the aforesaid, under Explanation (baa) profits of the business for the purpose of Section 80 HHC does not include receipts which do not have an element of turnover like rent, commission, interest, etc. Since job works forms part of the main business activity and has to be included in the total turnover, the provision of Explanation (baa) cannot be invoked involving receipts by way of job work charges.
In CIT Vs. Banglore Clothing Company, 260 ITR 371, the Bombay High Court held that job work charges formed part of the business profits and that Explanation (baa) could not be invoked since job work charges did not come within the meaning of the word "charges" used in Explanation (baa).
In CIT Vs. K. Ravindranathan Nair, 295 ITR 228, the Supreme Court held that processing charges was required to be included in the total turnover under Section 80 HHC(3) of the Act and the same had to be reduced by 90% as contemplated under Explanation (baa) to arrive at business profits.
In the light of the aforesaid, job work charges is the integral part of the business activity of the assessee and charges received by the assessee for the job work undertaken by him cannot be held similar to the word "charges" provided in Explanation (baa). The job work charges has to be included in the total turnover.
In the light of the aforesaid, we do not find anything on record to suggest that the Assessing Officer did not follow the formula as per the provision of Section 80 HHC while computing the deduction. We do not find that the order of the Assessing Officer was prejudicial to the interest of the revenue.
In view of the aforesaid, the appeal of the department fails and is dismissed. The question of law is answered in the affirmative in favour of the assessee and against the department.
Identical issues has been raised in ITA No.466 of 2009, ITA No.39 of 2012, ITA No.563 of 2012 and the same are also dismissed.
In ITA No.88 of 2009, the assessee was mainly exporting gold jewellery through MMTC which is a government undertaking. The assessee had to make a fixed deposit with MMTC as a security. The assessee claimed interest on FDR's as a business income and claimed deduction under Section 80 HHC. The Assessing Officer disallowed the interest in view of Explanation (baa) and treated the interest income as income from other sources while computing the deduction under Section 80 HHC.
Having heard the learned counsel for the parties, we are of the view that deposit of FDR's was part of the integral business activity of the assessee and, therefore, interest accrued on FDR's was liable to be included in the total turnover. Income from interest cannot be assessed as income from other sources and has to be taken as an allowable deduction under Section 80 HHC of the Act. Consequently, for the aforesaid reasons, ITA No.88 of 2009 fails and is dismissed.
In view of the fact that ITA No.563 of 2012 has been dismissed by us, the appeal of the assessee, being ITA No.92 of 2010 which arises for the same assessment year is allowed.
In the circumstances of the case, there shall be no order as to cost.