TMI Blog2012 (5) TMI 313X X X X Extracts X X X X X X X X Extracts X X X X ..... irst ground being general in nature, warranting no adjudication, challenges the addition in the sum of Rs. 23.72 lacs effected by the Assessing Officer (AO) on assessment u/s. 92C(4) of the Income-tax Act, 1961; the arm's length price determined by him being in excess of the reported value of the assessee's international transactions by that amount. 3.1 Opening the arguments, it was submitted by the ld. AR, the assessee's counsel, that the reference by the AO to the Transfer Pricing Officer (TPO) in the instant case, whose report in the matter stands adopted by him, is itself bad in law inasmuch as the same is in violation of Instruction No. 3 of 2003 dated 20/5/2003 by CBDT. The same requires such reference only where the value of the international transactions exceeds Rs. 5 crores, while in the instant case the same admittedly aggregate to Rs. 301.50 lacs, i.e., at less than the threshold limit, so that the reference is without a valid basis in law, vitiating the proceedings. Reliance was placed by him on the decision in the case of Sony India (P.) Ltd. v. CBDT [2007] 288 ITR 52/[2006] 157 Taxman 125 (Delhi). 3.2 The assessee's said objection, it was averred by the ld ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its withdrawal. The same was then in the nature of a regulatory, interim measure for promoting the qualitative aspect of the TPO's work by concentrating on high value transactions, envisaged to operate only for limited period. The same, does not represent an interpretation of a provision/s of law, which can be said to be binding on the subordinate authorities involved in the administration of the Act, even where the same is not consistent therewith. Also, it cannot be said, and neither has been, and that merely because the value of the transactions, which have to be even otherwise examined separately, is less than the prescribed limit, there would be a qualitative decline in the examination, for which, firstly, there are inbuilt checks in the form of opportunities for raising objections, both before the TPO and the AO and, secondly, as the workload of TPOs would itself vary, and considerably, from place to place and from time to time; the said limit having been disbanded, as envisaged, subsequently. That is, the very nature and character of the Instruction does not lend itself being construed as reading a provision in the manner beneficial to the assessees, so as to be considered a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out of total eleven (11) international transactions. The reference to the TPO, as explained by the CBDT vide the said Instruction, which stands endorsed as laying down the correct position of law by the hon'ble court in Sony India (P.) Ltd. ( supra ), is transaction and enterprise specific. His report, accordingly, would also be, nay, has to be, transaction specific. As such it is not understood as to how his action in accepting some transactions and not others, of course, after hearing the assessee, could be faulted with. The ld. CIT(A) has observed that the TPO found difference in some transactions, i.e., in comparison with similar purchases from other (non-associated) enterprises. As such, his impinging only those transactions, and suggesting the price obtaining for transactions with non-associate concerns; the difference being more than a tolerance limit of 5% provided by the Act (PB pgs 1-5), is in conformity, both with the provision of law and the Rules (r. 10A) framed thereunder. The assessee, as aforenoted, has not agitated the same before us, bringing out any infirmity therein. The same is, accordingly, rejected. We decide accordingly. 4.5 Lastly, it is contended, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... up to that stage. The decision would, thus, cover the issue under reference in all its aspects, and we may reproduce the concluding part of the said order for ready reference, as under: 'Conclusion 5. The exclusion (from allocation) could thus only obtain qua direct costs. This we find to be the admitted position. This is also borne out by the fact that the allocation of 'indirect cost' is with reference to the total turnover (of the business), so that it includes manufacturing turnover as well, and not the turnover arrived at after excluding the manufacturing/processing turnover. Only like can be compared with like; as such, when the allocation process excludes the direct costs attributable to export of trading goods, the same, by implication, excludes other direct costs as well. The said exclusion (from allocation) would however require being preceded by a finding that a particular cost is a direct cost, and for which the general notions following the standard, accepted accounting norms/principles, as well as the assessee's record and valuation method; followed consistently, would be a useful guide. Once so found, the particular expense is not liable for allocation. The scope ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... authority, we only consider it fit and proper, as well as in the interest of justice, to restore the matter back to his file, for an adjudication on merits in accordance with law, and after affording an opportunity of hearing to the assessee. We decide accordingly. 10. Ground # 5 relates to the levy of interest u/s. 234D at Rs. 1853/-. It was fairly conceded by the ld. AR that the issue stands decided in favour of the Revenue by the hon'ble jurisdictional high court in the case of CIT v. Kerala Chemicals and Proteins Ltd. [2010] 323 ITR 584/[2011] 9 taxmann.com 295 ( Ker.). The said ground is accordingly dismissed. 11. In the result, the assessee's appeal is partly allowed for statistical purposes. N. Vijayakumar, Judicial Member - After perusing the order of the ld. A.M I could not agree with the findings of my ld. Brother in respect of Ground No. 2(2) which concerns the computation of deduction u/s.80HHC. The fact that the assessee is a manufacturer and exporter of cashew kernels and working of the indirect costs of trading goods which the assessee besides undertook is the issue. 2. The definition of indirect cost as per section 80HHC(3) Explanation (e) means ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... export is to be reduced for computing the deduction u/s.80HHC in respect of the export of trading goods and not all costs other than direct costs. Explanation (e) to sub-s.(3) of s.80HHC cannot override the provision of cl.(b) of s.80HHC(3). The Assessing Officer misunderstood the Explanation (e) which defines indirect costs means costs not being direct costs. The nexus of the proportionate working out of the indirect costs with relevance to export of trading goods value is the ratio to be followed and no other way as the Assessing Officer adopted. To this extent, I disagree with the proposition arrived at by the ld. A.M. and accordingly to this extent Ground No. 2(2) is to be modified and restore the matter back to the file of the Assessing Officer, for which portion of the restoring matter I am in agreement and only the proportionate quantum working on which I disagree. Reference under section 255(4) of Income tax Act, 1961 As there is a difference of opinion between the Members who heard the above appeal, the following question is referred to the Hon'ble President, Income-tax Appellate Tribunal:- Whether Explanation (e) to Sub-Sec.(3) to Section 80HHC can override the cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Income-tax Act, 1961 [hereinafter referred to as "the Act"]. 2. Though there were more than one issue in the appeal raised by the assessee, the learned Members have agreed with all other issues except one issue relating to allocation of indirect cost to be reduced from the export turnover of trading goods. I am concerned only with this issue and the questions referred by the learned Members are as under: Ld. Judicial Member: "Whether Explanation (e) to sub-sec. (3) to section 80HHC can override the clause (b) to section 80HHC(3) of the Income-tax Act, 1961 ?" The learned Accountant Member, not being able to agree with the question referred by the ld. Judicial Member, has proposed the following questions: "( i ) Whether there is any inconsistency between sec.80HHC(3) and Explanation thereto? ( ii ) Whether the Indirect cost' that is to be reduced from the export turnover of trading goods, in terms of s.80HHC(3)(b), is to be determined by apportioning such costs in the statutorily prescribed formula of the ratio of the said turnover to the total turnover, or is it liable to any reduction before applying the said ratio thereto? ( iii ) Whether the decision by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m of the view that the questions raised by both the Ld, Members ultimately hinge around this issue only. 5. I have heard Shri A.S. Narayana Moorthy, Chartered Accountant for the assessee and also learned Departmental Representative representing the revenue at length. Learned Chartered Accountant has also filed a small compilation consisting of (i) argument Note (ii) statement of allocation of indirect costs and (iii) working for allocation of indirect costs and has also claimed that all these papers were available before the assessing authority also. Section 80HHC(3)(b) reads as under: "where the export out of India is of trading goods, the profits derived from such export shall be the export turnover in respect of such trading goods as reduced by the direct costs and indirect costs attributable to such export" Explanation (e) to sec. 80HHC(3) reads as under: "indirect costs" means costs, not being direct costs, allocated in the ratio of the export turnover in respect of trading goods to the total turnover;" The relevant sections are extracted for the sake of convenience. 6. Learned C.A. argued that the main part of the section lays down the substantive law reflecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rect costs in relation to sales as well. 7. The learned C.A. further submitted that the assessee had incurred costs on all the three activities viz. export of manufactured goods, income from export of trading goods and income from domestic sales and receipts from export incentive. The assessee had rightly segregated the costs into those attributable to trading goods and those which are not so attributable while arriving at the deduction u/s 80HHC. For example, manufacturing wages, expenses on sale on consignment basis etc., were not reckoned as attributable to trading goods exported. In other words, these costs had no relation to trading goods exported. The costs which were attributable to trading goods other than direct purchase costs were then scaled down as stipulated in Explanation (e) in the ratio of export turnover of trading goods to total turnover. He pleaded that the method of computation followed by the assessee is thus strictly according to the statutory principles prescribed i.e. first attribution and then scaling down in the proportion. The learned C.A. relied on the decision of the Apex Court in the case of Hero Exports v. CIT [2007] 295 ITR 454/165 Taxman 445 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... applied to the facts of the present case in hand. Per contra, learned Departmental Representative, out and out supported the order of the Ld. AM who also relied on the decision in the case of Parry Agro Industries Ltd. ( supra ). 8. I have carefully gone through the detailed order of both the Members, the decisions relied upon therein and considered the submissions made by both the parties. The Special Bench (Mumbai) of the Tribunal, had an occasion to consider this point at issue in the case of Surendra Engg. Corpn. ( supra ) and held as under: "The amendment made by substituting sub-section (3) of section 80HHC has introduced a different basis for allowing deduction in respect of export profits. Whereas prior thereto, the deduction was allowed in respect of that portion of the 'profits and gains of the business' as per the assessment which is proportionate to the ratio which the export turnover bears to the total turnover, after the amendment a different basis was provided depending on whether the assessee is an exporter of manufacturing goods exclusively or of trading goods exclusively or a combination of both. In the instant case, the assessee was undisputedly an e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uns through clause (b) of the sub-section and clauses (d) and (e) of the Explanation below the sub-section is that the indirect costs should be attributable to the export turnover in respect of the trading goods. As a corollary, it follows that indirect costs which are not attributable to the export turnover of trading goods, are not taken in by those provisions. It, therefore, follows that any indirect costs which can reasonably be attributed to receipts other than the export turnover of trading goods will have to be left out of consideration at the threshold itself." The Hon'ble Apex Court, in the case of Hero Exports ( supra ) had observed as under: "The question of allocation of costs also arises in cases falling under section 80HHC(3)(b). Firstly, clause (e) of the Explanation which refers to allocation of costs applies to section 80HHC(3)(a), section 80HHC(3)(b) and section 80HHC(3)(c). Secondly, section 80HHC(3)(b) equates export profits to export turnover over less direct and indirect costs attributable to the exports of goods. Therefore, the principle of attribution is retained. Thirdly, keeping in mind the provisions of section 80HHC(3)(b) read with clauses (d) and ..... X X X X Extracts X X X X X X X X Extracts X X X X
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