Relief to Fenner India: Royalty Income not relatable to Export Business excludable from Business Profit u/s 80HHC, rules Madras HC [Read Order]

The division bench of Madras High Court presided by Mr. Justice R. Mahadevan and Mr. Justice J. Sathya Narayana Prasad has upheld the exclusion of royalty income from business profits for calculation of deduction u/s 80HHC since the assessee fails to prove royalty income is related to export business.

The appellant, M/s. Fenner (India) Limited, is engaged in the business of manufacturing and sale of V & Fan Belts, Oil Seals, etc. While conducting scrutiny assessment the Assessing Officer restricted the claim of deduction under section 80HHC by excluding 90% of the royalty receipts from the profits of the business under clause (baa) to explain to section 80HHC (4) and calculated the total income of the assessee as Rs.14,67,27,610/-.

On appeal, the CIT (A) partly allowed the appeal filed by the appellant. Aggrieved over the same, the Revenue went on appeal before the ITAT. The Tribunal set aside the order of the CIT(A) and directed the assessing officer to exclude the receipt of royalty from business profits for deduction under section 80HHC of the Act. Therefore, the appellant is before High Court with a tax case appeal.

The counsel for the appellant submitted that the appellant entered into an MOU with its 100% subsidiary company; the subsidiary company manufactures the goods as per the specifications given by the appellant and the appellant has also provided the know-how, secret formula manufacturing process, and methods to ensure the same quality of manufactured goods; for providing these services, the subsidiary company paid royalty and hence, the royalty receipts are directly related to the goods exported by the appellant and the same cannot be excluded from the profits of the business.

The counsel for the respondent by relying on the decision of Madras High Court in Commissioner of Income Tax v. Shiva Distilleries Ltd., submitted that guarantee commission as well as royalty, a payment for using a right, have to be excluded from the business profit for calculation of deduction under section 80HHC of the Act.

The High Court by relying on Shiva Distilleries Ltd's case has held that “there is no concrete material produced by the appellant/assessee to prove that the royalty income received from the subsidiary company, is related to export business, this court is of the view that the Tribunal has rightly directed the assessing officer to exclude the royalty income from the business profits for calculation of deduction under section 80HHC of the Act, which warrants no interference”.

Mr. Subbaraya Aiyar appeared for the appellant and Mr. M. Swaminathan appeared for the respondent.

To Read the full text of the Order CLICK HERE

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