2011 (5) TMI 922 - AT - Income Tax

Tribunal decision on tax deductions: Exchange rates, costs calculation, profitability, freight expenses clarified

The Tribunal partly allowed the Revenue's appeal in a case involving various issues related to tax deductions under sections 80HHC. The Tribunal directed ... Treatment of favourable foreign exchange difference as export turnover - rectification of assessment and year-wise allocation of receipts - basis for apportionment of direct cost between export and domestic sales - division-wise profitability for computing deduction under section 80HHC - effect of disclaimer certificates on allowable deduction under section 80HHC - treatment of freight beyond customs clearance point for export turnover and direct costTreatment of favourable foreign exchange difference as export turnover - rectification of assessment and year-wise allocation of receipts - Deletion of disallowance of exchange rate difference of Rs. 6,08,326/- claimed as export turnover in the current year and the year in which deduction under section 80HHC is to be allowed. - HELD THAT: - The Tribunal accepted that the additional sum represented favourable exchange rate realization related to exports of an earlier year and not export turnover of the current year. Given that the amount belongs to the year to which the exports relate, the appropriate remedy is rectification of assessment for that earlier year so that the claim for deduction under section 80HHC can be allowed in the correct year. The Revenue and assessee had no objection to such rectification; accordingly the AO was directed to resort to rectification proceedings and allow the claim in the year to which the receipts relate rather than permitting deduction in the current year. [Paras 4]Direct the Assessing Officer to rectify the relevant earlier year's assessment and allow deduction under section 80HHC for the year to which the exchange gain relates; no deduction to be allowed in the current year.Basis for apportionment of direct cost between export and domestic sales - Validity of AO's method of estimating direct cost by apportioning combined profit on the basis of sales (instead of apportioning purchases) for computing export profit under section 80HHC. - HELD THAT: - The Tribunal upheld the approach of the Commissioner (Appeals) and the assessee that direct cost must be apportioned on a purchases basis where purchases are common for both export and domestic sales. Apportionment on the basis of sales is not a reasonable basis for determining direct cost because sales profitability can vary for many reasons unrelated to the underlying purchase cost. In absence of distinct purchases identified for export and domestic sales, a pro rata allocation of purchase cost is the appropriate and logical method. Accordingly there was no interference with the CIT(A)'s decision reversing the AO's sales-based apportionment. [Paras 6]Upheld the assessee's purchases-based pro rata allocation of direct cost and dismissed the Revenue's challenge to the AO's sales-based estimation.Effect of disclaimer certificates on allowable deduction under section 80HHC - division-wise profitability for computing deduction under section 80HHC - Validity of AO's reduction of deduction by applying a global ratio based on disclaimer turnover, and the proper method of computing the effect of disclaimers on deduction under section 80HHC. - HELD THAT: - The Tribunal held that the question of disclaimer cannot be detached from division-wise profitability because the ultimate object is to work out allowable deduction under section 80HHC after excluding disclaimed turnover. Following the Tribunal's earlier decision in the assessee's own case for Asst. Year 1999-00, the matter requires re-adjudication by the Assessing Officer considering division-wise turnover/profitability as taken in preceding and subsequent years, and then applying the disclaimer reduction proportionately. In view of inter relation between division-wise profits and disclaimer, the Tribunal set aside the order and remitted the issue to the AO for fresh computation and adjudication, allowing the AO to consider judicial precedents and give the assessee opportunity of hearing. [Paras 11]Matter remitted to the Assessing Officer to compute deduction under section 80HHC by considering division-wise profitability and then proportionately reducing deduction on account of disclaimer; ground allowed for statistical purposes.Treatment of freight beyond customs clearance point for export turnover and direct cost - Allowability of freight of Rs. 32,87,842/- claimed by the assessee and whether it is to be excluded from export turnover or treated as direct cost. - HELD THAT: - The Tribunal agreed with the Commissioner (Appeals) that the sum of Rs. 32,87,842/- is freight incurred beyond the customs clearance point and thus must be treated similarly to other freight beyond customs point. As per the explanation below section 80HHC(4C), expenses beyond the customs point are to be excluded from export turnover (not from direct cost), and the direct cost includes costs attributable to trading of goods out of India. The AO had been uncertain about the nature of the sum; the CIT(A)'s finding that it is incurred beyond the customs point and should be excluded from export turnover was upheld. The Revenue failed to demonstrate error in that conclusion. [Paras 13]Held that the freight of Rs. 32,87,842/- is incurred beyond customs clearance point and should be excluded from export turnover (and not reduced from direct cost); Revenue's challenge dismissed.Final Conclusion: The Revenue's appeal is partly allowed and partly allowed for statistical purposes: (i) the exchange rate gain is to be rectified and allowed in the year to which the exports relate; (ii) the CIT(A)'s purchases-based apportionment of direct cost is upheld; (iii) the computation of deduction under section 80HHC in respect of disclaimer certificates is set aside and remitted to the Assessing Officer for division-wise re-computation; and (iv) the freight amount of Rs. 32,87,842/- is to be treated as expenditure beyond the customs point and excluded from export turnover. Issues Involved:1. Deletion of disallowance of Rs. 6,08,326/- being exchange rate difference.2. Deletion of cost of goods estimated by the AO.3. Deletion of disclaimer amount of Rs. 4,76,10,309/- for eligible deduction u/s 80HHC.4. Allowance of freight expenses beyond customs point amounting to Rs. 32,87,842/-.Summary:Issue 1: Deletion of disallowance of Rs. 6,08,326/- being exchange rate differenceThe assessee claimed an additional sum of Rs. 6,08,326/- received due to favorable exchange rate fluctuation as part of the current year's export turnover. The AO treated it as income from other sources, arguing it related to the previous year's exports. The CIT(A) followed precedents and held that the additional sum is part of export profits. The Tribunal directed the AO to rectify the previous year's assessment u/s 155(13) and allow the deduction u/s 80HHC for that year, thus allowing the Revenue's ground.Issue 2: Deletion of cost of goods estimated by the AOThe AO estimated the cost of goods for determining export profit u/s 80HHC by dividing total sales and costs on a pro-rata basis. The CIT(A) upheld the assessee's method of calculating costs based on purchases rather than sales. The Tribunal agreed with the CIT(A), stating that purchase cost is a reasonable basis for determining direct costs, and dismissed the Revenue's ground.Issue 3: Deletion of disclaimer amount of Rs. 4,76,10,309/- for eligible deduction u/s 80HHCThe AO reduced the deduction u/s 80HHC by Rs. 4,76,10,309/- due to disclaimer certificates issued by the assessee for marine product exports. The CIT(A) directed the AO to consider division-wise profitability and proportionate reduction in the deduction u/s 80HHC(1). The Tribunal followed its earlier decision for the assessee's case for AY 1999-00 and restored the matter to the AO for re-adjudication, considering division-wise profitability and disclaimer amounts. This ground was allowed for statistical purposes.Issue 4: Allowance of freight expenses beyond customs point amounting to Rs. 32,87,842/-The AO initially treated Rs. 32,87,842/- as freight expenses up to the customs clearance point, but later found it was beyond the customs point. The CIT(A) clarified this and directed the AO to treat it similarly to other freight expenses beyond the customs point. The Tribunal upheld the CIT(A)'s decision, dismissing the Revenue's ground.General Grounds:Grounds 5 and 6 were general and required no specific adjudication.Conclusion:The appeal filed by the Revenue was partly allowed and partly allowed for statistical purposes.