Royalty Income Should Be Excluded From Business Profits For Calculating Deductions U/S 80HHC Of Income Tax Act: Madras High Court

Justice R Mahadevan and Justice Sathya Narayana Prasad observed that the appellant could not produce concrete evidence to assert that the royalty income received from a subsidiary company was related to export business. Thus, the decision of the tribunal did not warrant any interference.

The court relied on the decision of the Madras High Court in CIT v. Shiva Distilleries Ltd [(2007) 293 ITR 108 (Madras)]. In this case, the court had relied on the decision in CIT v. Madras Motors Ltd / M.M.Forgings Ltd[(2002) 257 ITR 60] in which it was held that scraps and other waste materials which did not relate to the export business of the assessee had to be excluded from business profits for the purpose of calculation of deduction under Section 80HHC of the Act.

The court had also relied on the decision of Bombay High Court and Madras High Court in CIT v. Bangalore Clothing Co. [(2003) 260 ITR371] and CIT v. Sundaram Clayton Ltd [(2006) 281 ITR 425] respectively to hold that guarantee commission, as well as royalty, have to be excluded from the business profit for the purpose of calculation of deduction.

In the present case, the appellant was engaged in the business of manufacture and sale of V and Fan Belts, Oil Seals Etc. They filed a return for the assessment year 2004-2005 admitting a total income of Rs. 14,02,65,870 which was revised at Rs. 13,93,08,090. Upon scrutiny, a notice was issued by the Assistant Commissioner of Income Tax under Section 143(2) of the Act. The assessment was completed determining a total income of Rs. 14,67,27,610.

The assessing officer excluded 90% of royalty receipts from the profits of the business. This order was challenged by the appellant before the Commissioner of Income Tax (Appeals) who partly allowed the appeal. Aggrieved, the Revenue preferred an appeal wherein the Income Tax Appellate Tribunal set aside the order of the commissioner and directed the assessing officer to exclude royalty receipts.

The appellant contended that the royalty was received for providing the know-how, secret formula, manufacturing process and methods to the subsidiary company to ensure that the same quality of goods was manufactured. Thus, they were directly related to the goods exported by the appellant and could not be deducted from the profits of the business.

The respondents contended that the legal position was already settled in the Shiva Distilleries case.

Observing that the substantial question of law was already answered against the appellant, the court dismissed the appeal.

Case Title: M/s. Fenner (India) Limited v. The Assistant Commissioner of Income Tax

Case No: TCA No. 184 of 2012

Citation: 2022 LiveLaw (Mad) 251

Counsel for the Appellant: Mr. Subbaraya Aiyar

Counsel for the Respondent: Mr. M Swaminathan, Senior Standing Counsel and Mrs. V. Pushpa, Junior Standing Counsel