552. Clarifications regarding calculation of deductions
Circular No. 564 was issued by the Central Board of Direct Taxes on 5 July 1990. Its subject is 552. Clarifications regarding calculation of deductions.
This is a clarification. The Board is stating how it reads a provision. That reading binds the department; it does not bind a court, and where the section says otherwise the section wins.
Explains how the section 80HHC deduction is to be computed and carries the Finance Act, 1990 changes. The deduction is worked statutorily under sub-section (3) as profits of the business multiplied by export turnover over total turnover, whatever might strictly be described as profit derived from export. Cash compensatory support, duty drawback and profit on sale of import entitlement licences, made taxable as business income by the retrospective insertion of clauses (iiia), (iiib) and (iiic) in section 28, must be included in the profits of the business for this computation. 'Export turnover' is narrowed to FOB sale proceeds actually received in convertible foreign exchange within six months of the end of the previous year, or within such further time as the Chief Commissioner or Commissioner may allow on recorded reasons for genuine hardship; and 'total turnover', previously undefined, is now defined in the Explanation. From assessment year 1991-92 a supporting manufacturer includes a processor of goods, so a seafood or other processing unit exporting through an Export House or Trading House can claim on obtaining a disclaimer certificate in Form No. 10CCAB.
Several doubts were expressed about how the deduction was to be allowed, and representations showed a lack of uniformity among assessing authorities, many of whom were treating export incentives as part of total turnover.
552. Clarifications regarding calculation of deductions
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 :—Profit of the business ×
Export turnover
Total turnover
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 :—Profit of the business ×
(including export incentives)
Export turnover (sale proceeds actually received in foreign exchange)
Total turnover (excluding incentives)
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 :—
Case I
Case II
Case III
Case IV
Exclusively export business
2/3 export 1/3 domestic sale
1/2 export 1/2 domestic sale
1/3 export 2/3 domestic sale
(Figures in lakhs of rupees)
(i) Turnover
(a) FOB exports
100
100
100
100
(b) Domestic rate
-
50
100
200
(c) Total turnover
100
150
200
300
(ii) Business profits before incentives (assumed figures)
10
15
20
30
(iii) CCS, DDK, I/L
10
10
10
10
Total profits of the business
20
25
30
40
(iv) Deduction u/s80HHC if entire export proceeds, i.e., Rs. 100 lakhs is brought into India within the stipulated period
—
20.00
25 ×
100
30 ×
100
40 ×
100
150
200
300
=16.67
=15.00
=13.33
(v) Deduction u/s 80HHC if only 50% of the export proceeds, i.e. Rs. 50 lakhs is brought into India
25 ×
50
25 ×
50
30 ×
50
40 ×
50
100
150
200
300
= 10.00
= 8.33
= 7.50
= 6.67
Circular : No. 564, dated 5-7-1990.
On an 80HHC computation dispute where the Assessing Officer includes or excludes export incentives from the turnover figures.
Forms it names. Form No. 10CCAB
Source: the Income Tax Department’s own published text — its page for this instrument.
