TMI Blog2002 (12) TMI 199X X X X Extracts X X X X X X X X Extracts X X X X ..... to be attributed to the export incentives received by the assessee during the year. These incentives consisted of the following: Rs. (1) Duty drawback 3,94,655 (2) Central Excise Duty refund 1,16,154 (3) International Price Reimbursement Scheme 3,68,235 (4) Octroi duty refund 94,757 (5) Sales tax refund 1,20,868 -------- Total 10,95,669 -------- 2.1 The assessee claimed that 10 per cent of the above viz., ₹ 1,09,567 must be attributed as indirect costs to the earning of the aforesaid export incentives and to that extent, the indirect expenses debited in the profit loss account should be reduced for the purpose of computing the deduction in accordance with the formula laid down in section 80HHC(3)(b). 2.2 The significance of the claim made by the assessee may be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Proportionate indirect costs (Rs. 10,000 minus 10% of export incentive i.e., 6,000) 4,000 5,04,000 Balance (Export profits) 46,000 Deduction under section 80HHC Export turnover = 46,000 + 90% of Export incentives X -------------- Total turnover = 46,000 + 54,000 X 1 = 1,00,000 From the above comparative working, it may be seen that if the assessee's contention regarding the indirect costs to be deducted is accepted the deduction under section 80HHC comes to ₹ 1 lakh, whereas if the Assessing Officer's working is accepted, the deduction comes to ₹ 94,000 only. This, in a nutshell, explains the significance of the rival positions. In the present case the Assessing Officer has computed the deduction at ₹ 83,77,711. The difference is ₹ 1,09,567, which is solely due to the fact that the assessee reduced the indirect costs by 10 per cent of the export incentives, which comes to ₹ 1,09,567. 3. In support ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the profits of the business and therefore, irrespective of the actual amount of the indirect costs attributable to the export incentives, only 10 per cent may be taken to be so. Our attention was also invited to the following orders of the Mumbai Benches of the Tribunal which have taken a view in favour of the assessee's claim: (a) Jamnadas G. Hundalani(ITA No. 5348/M/2001-'E' Bench) (b) Chemocid Impex (P.) Ltd. (ITA No. 5348/M/2001--SMC Bench) (c) S. Mansukhlal Co.(ITA No.4370/M/2000-'J' Bench) (d) Jafferbhoy Salewbhoy Co. (ITA No. 1521/M/01--'C' Bench) (e) Gill Co. Ltd. (ITA No. 8749/B/95 -'F' Bench) 4. The learned CIT (DR) put forth his case like this. It is a matter of policy that the Government have thought it fit to exclude only 90 per cent of the receipts by way of commission, interest, rent etc. and receipts of similar nature from the profits of the business as per Explanation (baa) to subsection (4B) instead of 100 per cent of such receipts and from this it cannot be inferred that the Legislature has assumed that 10 per cent of such receipts has to be treated as costs or expenses to earn such receipts. That E ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the basis for the claim of the assessee. 6. We have carefully considered the issue. Section 80HHC makes provision for the deduction of the export profits subject to certain conditions. The section has been amended several times since its introduction. Subsection (3) was substituted with effect from 1-4-1992 by the Finance (No. 2) Act, 1991. It made a distinction between export of goods manufactured or processed by the assessee and export of trading goods and also provided for deduction in the case of an assessee who export both types of goods. Clause (b) provides for deduction in the case of an assessee who exports trading goods. It is as follows: (b) 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. There is also a proviso to sub-section (3) which is as under: Provided that the profits computed under clause (a) or clause (b) of clause (c) of this sub-section shall be further increased by the amount which bears to ninety per cent of any sum referred to in clause (iiia) (not being profits on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of common expenses, it is proper to provide ad hoc 10 per cent deduction from such incomes to account for these expenses. 7. The Circular No. 621 dated 19-12-1991, in paragraphs 32.10 and 32.11, expresses the same view in identical language. 8. The amendment made by substituting sub-section (3) 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 different bases were provided depending on whether the assessee is an exporter of manufacturing goods exclusively or of trading goods exclusively or a combination of both. We are concerned with an assessee who undisputedly is an exporter of trading goods exclusively and therefore clause (b) of sub-section (3) applies. In the case of such an exporter, the export profits shall be the export turnover in respect of such trading goods as reduced by (1) the direct costs and (2) the indirect costs. Both these costs should however be attributable to such e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... are not attributable to the export turnover of trading goods, are not taken in by these 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. 9. The conclusion we have reached above is purely on the interpretation of the language employed in clause (b) of sub-section (3) and clauses (a) and (e) of the Explanation below the sub-section. There are other reasons to think that even the Legislature took note of the possibility of a part of the expenses incurred by an assessee being referable to receipts other than the receipts by way of export turnover. We are referring to clause (baa) of the Explanation below sub-section (4B) which was also introduced by the Finance No. 2 Act, 1991, with effect from 1-4-1992. While explaining the amendment, the memorandum, the relevant portion of which has already been extracted by us, recognized that some expenditure might be incurred in earning the receipts by way of brokerage, commission, interest, rent, charges or any other receipt of similar nature and that such expenditure is gene ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f India, excluding freight and insurance attributable to the transport of the goods. All these provisions strengthen the view that the Legislature itself thought that 10 per cent of such receipts must be assumed to be expenses incurred for earning the same. Exclusion of such receipts from the export business or export turnover or export profits lends credibility to the contention of the assessee that the entire indirect costs cannot be attributed to export of trading goods and a part thereof, which must be taken at 10 per cent of such receipts, because that is the standard applied by the Legislature, should be attributed to activities giving rise to receipts other than receipts by way of export of trading goods. 10. The ld. CIT(DR) is no doubt right in his contention that Explanation (baa) below sub-section (4B) has no relevance to the computation of the deduction allowable under clause (b) of sub-section (3), but at the same time, it cannot be looked at as an aid to fathom the mind of the Legislature. It shows that not all indirect costs are referable only to the export of trading goods and a part thereof may be reasonably considered to be attributable to other activities or re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee's attempt to allocate or apportion a part of the indirect costs to the export incentives must fail. With respect, this view appears to us to overlook the import of the words attributable to such export appearing in clause (b) of sub-section (3). The definition of indirect costs must be governed or controlled by the words attributable to such export appearing in clause (b) of sub-section (3) since the attempt is to find out, in a reasonable manner, the profits derived from the export of trading goods and therefore whatever expenditure is not relevant or cannot be reasonably stated to have been incurred in connection with the exports or can be reasonably said to have been incurred in connection with other activities or receipts, will have to be excluded. The so called definition of indirect costs must receive a reasonable interpretation having regard to the language used in clause (b) of sub-section (3); it cannot certainly override the main clause whose object and purpose it is to sub-serve. If indirect costs are interpreted to mean also those costs which are not attributable to the export of trading goods, that would be clearly contrary to the express langua ..... X X X X Extracts X X X X X X X X Extracts X X X X
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