By TIOL News Service

ERNAKULAM, MAY 03, 2018: THE ISSUE IS - Whether a company having both domestic as well as export businesses is entitled to claim benefit u/s 80HHC. AND THE VERDICT IS YES.

Facts of the case:

The assessees were cashew exporters, engaged in both export and domestic business. The assessee had returned income by claiming deduction u/s 80HHC. During the assessment proceedings, the AO noted that the assessee had effected high sea sales and earned substantial profit from such sale on import. Further, the AO found that the same was not includable in the business profits for permitting the assessee's claim. Further, to find that the eligibility was only "to the extent of profits derived by the assessee from the export of such goods or merchandise", the AO referred to the provision of Sec. 80HHC(1). Subsequently, the entire deduction claimed by the independent assessees were disallowed.

On appeal, both the FAA as well as the Tribunal directed the profit from high sea sales to be included to the total business profits and the turnover of high sea sales to the total turnover.

the High Court held that,

++ merely because the assessee is engaged in both export and domestic businesses and suffers a loss in export business, it cannot be said that the earnings by foreign exchange was inconsequential. The benefit of earnings in foreign exchange in the national perspective, occurs, irrespective of whether the exporter derived a profit from his export business or not. There cannot be any dispute that the export business, brings in foreign exchange into the Country; which is sought to be given an incentive. An assessee having both domestic and export business is also entitled to the benefit u/s 80HHC. This is precisely why the provision under sub-section (3) provides for the computation of the benefit at a proportion of the total profits from business, equivalent to the proportion the export turnover bears to the total turnover. The judgment in case of Parry Agro Industries Ltd. states that the profits of export business, separately maintained of an assessee having domestic business also, cannot be separately taken for computation u/s 80HHC;

++ reading the provision under sub-section (1), it is noticed that the incentive, is insofar as a deduction, while computing the total income of the assessee, to the extent of profits, referred to in sub-section (1B), derived by the assessee from the export of such goods or merchandise. As has been held in Parry Agro Industries Ltd., in computing the profit so derived from export, available for deduction, one has to take recourse to Sec. 80HHC(3). The computation of profits derived from export, for an assessee doing both export and domestic business, has to be made by resorting to the formula as available under sub-section (3C) of Section 80HHC. The proportion, which the export turnover bears to the total turnover, has to be applied to the business profits to elicit the exact amount eligible for exemption u/s 80HHC, as profits derived from export. As rightly held by the FAA, the business profits include those derived in the domestic market; that of high sea sales of imported goods, the turnover of which has to be included in the total turnover. This is the incentive permitted by the legislature, for earnings in foreign exchange, whether the export business generated profit or not. Therefore, it is held that in computing the deduction u/s 80HHC, the loss incurred in the export business would be of no consequence.

(See 2018-TIOL-817-HC-KERALA-IT)