S. 80HHC: It is a pre-requisite that there must be profits from the export business. If the exports business has suffered a loss, deduction cannot be allowed from domestic business

The Supreme Court had to consider two facets of s. 80HHC: (i) whether the view that deduction is permissible under Section 80HHC only when there are profits from the exports of the goods or merchandise is correct or it is open to the assessee to club the income from export business as well as domestic business and even if there are losses in the export business but after setting off those losses against the income/profits from the business in India, still there is net-profit of the business, the benefit under Section 80HHC will be available? (ii) Whether, while applying the formula, we have to see what would comprise “total turnover”? HELD by the Supreme Court:

(i) It stands settled, on the co-joint reading of IPCA (2004) 12 SCC 742 and A.M. Moosa (2007) 9 SCR 831, that where there are losses in the export of one type of goods (for example self-manufactured goods) and profits from the export of other type of goods (for example trading goods) then both are to be clubbed together to arrive at net-profits or losses for the purpose of applying the provisions of Section 80HHC of the Act. If the net result was loss from the export business, then the deduction under the aforesaid Act is not permissible. As a fortiori, if there is net profit from the export business, after adjusting the losses from one type of export business from other type of export business, the benefit of the said provision would be granted.

(ii) In the assessee’s case, in so far as export business is concerned, there are losses. The assessee’s argument relying upon Section 80HHC(3)(b) to contend that the profits of the business as a whole i.e. including profits earned from the goods or merchandise within India will also be taken into consideration and that the losses in the export business, but profits of indigenous business outweigh those losses and the net result is that there is profit of the business, then the deduction under Section 80HHC should be given is not acceptable. From the scheme of Section 80HHC, it is clear that deduction is to be provided under sub-section (1) thereof which is “in respect of profits retained for export business”. Therefore, in the first instance, it has to be satisfied that there are profits from the export business. That is the pre-requisite as held in IPCA and A.M. Moosa as well. Sub-section (3) comes into picture only for the purpose of computation of deduction. For such an eventuality, while computing the “total turnover”, one may apply the formula stated in clause (b) of subsection (3) of Section 80HHC. However, that would not mean that even if there are losses in the export business but the profits in respect of business carried out within India are more than the export losses, benefit under Section 80HHC would still be available. In the present case, since there are losses in the export business, question of providing deduction under Section 80HHC does not arise and as a consequence, there is no question of computation of any such deduction in the manner
provided under sub-section (3).