INDIA BUSINESS WORLD - APRIL - MAY 2007
The Month that was ...

EXCISE, SALES TAX NOT PART OF REVENUE FOR I-T PURPOSES, RULES SC

IN a significant relief to exporters, the Supreme Court has ruled that excise duty and sales tax cannot form part of total turnover while computing deduction under section 80HHC of the Income-Tax Act, 1961.

The ruling will help exporters claim deduction in respect of larger share of their business income as profit earned from export and would thus reduce their tax liability, wherever the above issue is pending in litigation.

A division bench of Supreme Court, comprising Justices S H Kapadia and B Sudershan Reddy, passed the judgement recently in the Commissioner of Income tax, Coimbatore Vs M/s Lakshmi Machine Works case.

The decision has given exporters lot to cheer about. Federation of Indian Exporters Organisation president Ganesh Kumar Gupta said, "This kind of judgement will help promote export from India."

Under section 80HHC of the Income-Tax Act 1961, exporters are allowed deduction in respect of profits derived from exports, which is computed as the business profit multiplied by the ratio of export turnover to total turnover.

Goods for export do not incur excise duty or sales tax liability while goods for domestic sales do. So while computing deduction, 'export turnover' does not include such duties, but by including them in 'total turnover', it resulted in exporters being allowed smaller share of the business profit for deduction.

"It is important to bear in mind that excise duty and sales tax are indirect taxes. They are recovered by the assessee on behalf of the government. Therefore, if they are made relatable to exports, the formula under section 80HHC becomes unworkable," the court ruled. The court observed that various amendments to section 80HHC show that receipts by way of brokerage, commission, interest, and rent do not form part of business profits as they have no nexus with the activity of exports. The court argued that if interest or rent was not regarded by the legislature as business profits, the question of treating the same as part of the total turnover in the above formula did not arise. Therefore, just as commission received by an assessee is relatable to exports and yet it cannot form part of 'turnover', excise duty and sales tax also cannot form part of the 'turnover', the court said.