TMI Blog2007 (11) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... . (C) No. 7411/2007 (lead matter) : 2. Assessee was engaged in the business of export of "trading goods". Under section 80HHC(3)(b), an exporter of trading goods was entitled to deduction in respect of profits derived from such export (export turnover) as reduced by the direct costs and the indirect costs attributable to such export. The smaller the figure of direct and indirect costs, the larger is the profits derived from the export and, consequently, larger is the deduction under section 80HHC. By attributing a part of the indirect costs to the export incentives, interest etc. the assessee sought to reduce the indirect costs attributable to the export of trading goods so that it would be left with the larger amount of export profits which it can deduct from the gross total income. On the other hand, the attempt of the Department was to prevent the aforestated claim of the assessee by holding that expenses incurred for earning incentives, commission etc. were not liable to be reduced/deducted from Indirect Costs under section 80HHC(3)(c) read with clause (e) to the Explanation. 3. The following example will clarify the position (figures assumed): ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rs.50,000, from that figure of Rs.50,000 it was entitled to deduction of 10% of expenses attributable to export incentives, miscellaneous income and interest income amounting to Rs.1,60,000 (10% of Rs.1,60,000 is Rs.16,000) as mentioned in the above example. Therefore, according to the assessee, it was entitled to total deduction of only Rs.5,34,000 and not Rs.5,50,000 from FOB value of exports amounting to Rs.6,50,000. 6. Shri S. Ganesh, learned senior counsel appearing for the assessee, submitted that under section 80HHC(3)(b) only indirect costs which are "attributable to such export" can be deducted from export turnover. According to the learned counsel, in the present case, assessee had export turnover plus export incentives. According to the learned counsel, the assessee had, under the circumstances, two incomes, namely, incentives income and income from export sales for which it had one Common Pool of expenses. According to the learned counsel, clause (baa) of the Explanation to section 80HHC specifically excludes 90% of incentive receipts from the business profits leaving 10% of such receipts assumed to have been incurred by the Legislature for earning such rece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ounsel, the definition of the words "direct costs" and "indirect costs" in the Explanation to sub-section (3) of section 80HHC, the Legislature has indicated the ratio for allocation of costs between export turnover and total turnover only in cases where the tax payer is engaged in the business of exports and also in the business of making domestic sales. According to the learned counsel, the word costs being attributable to exports would attract the allocation ratio only in such cases where the tax payer is engaged in earning income in foreign exchange from exports and simultaneously earning income from domestic sales and, that, such ratio is not applicable in cases falling under section 80HHC(3)(b) because that sub-section categorically states that the profits derived from exports shall be the export turnover minus direct and indirect costs. Therefore, according to the learned counsel, the methodology of section 80HHC(3)(a) should not be read into section 80HHC(3)(b). In this connection, learned counsel also urged that in the case falling under section 80HHC(3)(b), export turnover and total turnover are identical and, therefore, the allocation ratio contemplated by the definition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... export business plus domestic business, in which case, allocation between export turnover and total turnover is contemplated. According to the learned counsel, in the present case falling under section 80HHC(3)(b), question of such apportionment did not arise because in cases of the present type, export turnover and total turnover are identical and in such cases question of apportionment or allocation did not arise. Therefore, the assumption on which the assessee is placing reliance is not applicable to cases falling under section 80HHC(3)(b). 9. Before coming to the controversy in hand, we quote hereinbelow section 80HHC(3) as it stood at the relevant time : "80HHC Deduction in respect of profits retained for export business-. . . (3) For the purposes of sub-section (1),-- (a) where the export out of India is of goods or merchandise manufactured or processed by the assessee, the profits derived from such export shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee; (b) where the export out of India is of trading g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ans foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Regulation Act, 1973 (46 of 1973), and any rules made thereunder; (aa) export out of India shall not include any transaction by way of sale or otherwise, in a shop, emporium or any other establishment situate in India, not involving clearance at any customs station as defined in the Customs Act, 1962 (52 of 1962); (b) export turnover means the sale proceeds, received in, or brought into, India by the assessee in convertible foreign exchange in accordance with clause (a) of sub-section (2) of any goods or merchandise to which this section applies and which are exported out of India, but does not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962 (52 of 1962); (ba) total turnover shall not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962 (52 of 1962) : Provided that in relation to any assessment year commencing on or afte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d indirect costs from export turnover, however, expenses incurred for earning incentives, commission etc. (other incomes) does not fall in the definition of "indirect cost". That, the assessee was not entitled to claim 10% of the receipts from its Other Income (Rs.16,000 in the above example) as expense to be deducted from the indirect cost (Rs.50,000 in the above example). Accordingly, the Assessing Officer deducted full Rs.50,000 as indirect cost from the export turnover. Therefore, even according to the Department, it is not in dispute that the assessee had incurred an expense of Rs.16,000 (in the above example) to earn Other Incomes of Rs.1,60,000 but it denied the Proportionate Deduction from Rs.50,000 on account of strict interpretation of the words "indirect cost" in clause (e). However, in the above stand of the Department, there is a fallacy. Under section 80HHC(3)(b) which is the main section, the Legislature has provided that in cases falling under section 80HHC(3)(b) direct and indirect costs attributable to such exports have to be deducted from the export turnover to arrive at Export Profits. Similar provision is made in clause (d) which defines the words "direct cost ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... OB value by Rs.50,000 whereas assessee contends that it should be reduced by Rs.34,000 (Rs.50,000 (-) Rs.16,000). Assessee claims apportionment at the rate of 10% of Other Income of Rs.1,60,000 (in the above example). This is opposed by the Department saying that since apportionment does not apply to section 80HHC(3)(b), there is no question of applying the yardstick of 10%. According to the Department, the words "indirect costs" does not take into account the expenses to earn Other Incomes. In this case, reliance is placed on clause (e). However, the Department has failed to notice the words "attributable to exports" in section 80HHC(3)(b). 13. As stated above, in our opinion, the words "attributable" in section 80HHC(3)(b) in the main section itself indicates that apportionment (principle of attribution) is not omitted from the said provision of section 80HHC(3)(b). As stated above, assessee has earned Other Income of Rs.1,60,000 apart from FOB value of exports of Rs.6,50,000. Therefore, some expense has to be attributed to earning of Rs.1,60,000. If so, the next question which arises is how to allocate the costs? As stated above, assessee has two incomes with one Common Po ..... X X X X Extracts X X X X X X X X Extracts X X X X
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