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TMI Blog2002 (12) TMI 199X X X X Extracts X X X X X X X X Extracts X X X X ..... that a part of the "indirect costs" has 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 briefly explained. Under the above-mentioned section, an exporter of trading goods is entitled to the deduction in respect of the profits derived from such export which shall be the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e learned counsel for the assessee argues like this. Under section 80HHC(3Xb) only indirect costs which are "attributable to such export" can be deducted from the export turnover. Export incentives are not export of goods. They cannot be considered as "export turnover" as defined iii clause (b) of the Explanation below sub-section (4B), because they do not represent any "sale proceeds". They cannot be considered as part of the "total turnover" also, within the meaning of clause (ba) of the said Explanation, as they have been specifically omitted from the definition by the proviso thereto. Therefore, export incentives cannot, for the purposes of the deduction under section 80HHC, be considered as "export turnover". Further, clause (baa)(1) of the said Explanation specifically excludes 90 per cent of the "non-export" receipts, which should include export incentives also, from the "profits of the business". Thus, not only are the export incentives excluded from export turnover, but they are also excluded from the profits of the business to the extent of 90 per cent. If that is so, it would be irrational to consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as assumed that 10 per cent of such receipts has to be treated as costs or expenses to earn such receipts. That Explanation was inserted for an entirely different purpose and is not relevant for the purpose of interpreting clause (b) of sub-section (3). In fact, neither the Explanation nor the Memorandum explaining the provisions of the relevant Finance Bill nor even the circular issued by the CBDT has referred to export incentives and therefore it cannot be assumed that 10 per cent of the export incentives should be considered as costs or expenses incurred to earn them. Further, the export incentives are not treated either as "export turnover" or as part of "total turnover" or as part of the "export profits". The definition of "indirect costs" as per explanation (e) below sub-section (3) does not exclude such costs incurred for earning export incentives. Therefore there is no justification for excluding indirect costs, if any, incurred for earning export incentives. The assessee in the present case is a 100 per cent exporter and therefore the entire expenses, both direct and indirect, can be only in respect of the export turnover or activity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 sale of a licence acquired from any other person), and clauses (iiib) and (iiic) of section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee." Direct and indirect costs are defined in clauses (a) and (e) respectively of the Explanation below the sub-section: "(d) 'direct costs' means costs directly attributable to the trading goods exported out of India including the purchase price of such goods; (e) '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;" We may also reproduce clause (baa) of the explanation below sub-section (4B) which was also introduced simultaneously with the present subsection (3) by the Finance (No. 2) Act, 1991 with effect from 1-4-1992: "(baa) 'profits of the business' means the profits of the business as computed under the head 'Profits and gains of business or profession' ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h trading goods as reduced by (1) the direct costs and (2) the indirect costs. Both these costs should however be "attributable to such export", which means the export of trading goods. By using these words in clause (b) of sub-section (3) and thereby introducing a condition that both the direct and the indirect costs must be attributable to the export of trading goods, the Legislature has manifested an intention that any costs, which are attributable to receipts other than the export turnover of trading goods must be left out of reckoning at the threshold itself. This condition thus forms the substratum or bedrock of the computation of the export profits. Therefore, if any part of the direct or indirect costs are attributable not to the export of the trading goods--in other words, the export turnover--that part should be left out of consideration. The definition of "direct costs" is a little articulate in the sense that it expressly says that these are "costs directly attributable to the trading goods exported out of India including the purchase price of such goods". The definition of "indirect costs" is however not so articulate and merely ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 generally part of common expenses. In recognition of this position, it was stated that it would be proper to provide ad hoc 10 per cent deduction from such incomes to account for these expenses. Accordingly, clause (baa) of the Explanation below sub-section (4B) excluded 90 per cent of such receipts from the profits of the business, because these receipts had nothing to do with the exports. It did not exclude the entire receipts. Similarly, when it came to the proviso to sub-section (3), by which the deduction for export profits was to be increased by the export incentives, the Legislature restricted the increase to 90% of the export incentives. Here, the entire 90 per cent of the export incentives was not given as additional deduction but the same was restricted to the proportion which the export turnover bears to the total turnover of the business. By restricting the additional deduction under the proviso to 90 per cent of the export incentives, the Legislature impliedly recognised that 10 pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thom 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 receipts. 11. One important point which the ld. CIT (DR) raised was that there is no evidence or proof in the present case to show that a part of the indirect costs incurred by the assessee is attributable to the earning of the export incentives. It must be clarified at this juncture that in the present case the claim of the assessee has been put forth only on the basis that even the Legislature has recognised the position that 10 per cent of the receipts arising out of activities other than export of trading goods may be considered as expenditure for earning them. In fact the ld. counsel for the assessee fairly stated that in a given case, such expenditure may be either less or more than the above percentage and it can be assumed that the Legislature did not want to undertake a minute examination of such expenses to find out how much can be attributed to activities other than export of trading goods and thought in their wisdom, that a flat rate or ad hoc percentage may be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 language used in clause (b) of sub-section (3), which is not permissible. Again, it is no doubt true, as held by the CIT(A), that the Circular issued by the Board (cited supra) does not lay down that the indirect costs of export turnover are required to be reduced by 10 per cent. But, it is equally true that the Circular, which explains the definition of "profits of the business" as per clause (baa) of the Explanation below sub-section (4B), takes note of the possibility that some expenses, which it fixes at 10 per cent ad hoc, are necessary to earn such income. The assessee is only trying to take inspiration from that logic and wants the same to be extended to the interpretation of clause (b) of sub-section (3). In our opinion, the assessee can be permitted to do so. 13. The ld. CIT (DR) has referred to three orders of the Mumbai Benches of the Tribunal in which a view in favour of the Department was taken. They are: (i) ..... X X X X Extracts X X X X X X X X Extracts X X X X
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