Section 80HHC export deduction: export incentives are not indirect costs and cannot be reduced as such

Section 80HHC distinguishes direct cost from indirect cost in computing deduction for trading exports: direct cost is limited to costs directly attributable to the exported goods, while indirect cost covers other allocated business costs. Export incentives arise after export and are not costs attributable to the trading goods exported, so they cannot be treated as indirect cost for export-profit computation. Clause (baa) in the Explanation, which requires reduction of 90% of specified receipts, does not justify reducing 10% of export incentive income as indirect cost.

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Issues: Whether, while computing deduction under section 80HHC of the Income-tax Act, 1961 for trading exports, 10% of export incentive income could be reduced as indirect cost.

Analysis: The statutory scheme of section 80HHC distinguishes between direct costs and indirect costs in relation to trading goods exported out of India. Direct cost is confined to costs directly attributable to the exported trading goods, including purchase price, while indirect cost means costs other than direct costs, allocated in the prescribed ratio of export turnover to total turnover. The court held that these definitions do not extend to expenses allegedly incurred for earning export incentives, because such incentives arise after export and are not costs attributable to the export of trading goods. Clause (baa) in the Explanation, which requires reduction of 90% of specified receipts for computing profits of the business, does not support treating 10% of such incentive income as indirect cost for export-profit computation.

Conclusion: The assessee was not entitled to reduce 10% of export incentive income as indirect cost under section 80HHC; the Revenue's contention was accepted.

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