Excluding freight & insurance from turnover for tax deduction under Section 80HHC upheld

Commissioner of Income-tax Versus HJS Stones Ltd.

Commissioner of Income-tax Versus HJS Stones Ltd. - [2011] 335 ITR 500 Issues Involved:
1. Computation of deduction under section 80HHC based on export turnover (FOB) minus direct cost minus indirect cost.
2. Determination of the value of exports (FOB) for computation purposes.
3. Exclusion of freight and insurance expenditure from both export turnover and total turnover under section 80HHC.

Detailed Analysis:

Issue 1: Computation of Deduction under Section 80HHC
The Revenue challenged the computation method used by the appellate authorities, arguing that the Assessing Officer's method of deducting direct and indirect costs, including freight and insurance charges, from the export turnover should be upheld. The appellate authorities, however, excluded freight and insurance charges from the purview of direct costs, thereby granting a higher relief to the assessee.

The court examined section 80HHC and its relevant sub-sections and explanations, particularly focusing on the definitions of "export turnover" and "total turnover." It was noted that freight and insurance charges attributable to the transport of goods beyond the customs station are excluded from both "export turnover" and "total turnover." Consequently, these charges cannot be deducted again as direct costs. The court emphasized that the object of the definition of export turnover is to consider FOB values and not CIF values. Therefore, once freight and insurance charges are excluded from the export turnover, they cannot be deducted again as direct costs. This interpretation aligns with the Supreme Court's ruling in CIT v. Lakshmi Machine Works, which clarified that direct costs should have a proximate connection to the purchase of trading goods and should not include overhead costs.

Issue 2: Determination of the Value of Exports (FOB)
The appellate authorities determined the value of exports (FOB) to be Rs. 70,29,959, contrary to the audit report submitted by the assessee, which stated Rs. 70,25,959. The court upheld the appellate authorities' determination, emphasizing that the correct computation of export turnover should exclude freight and insurance charges, as previously discussed. This ensures that the FOB value accurately reflects the true export turnover for the purpose of computing deductions under section 80HHC.

Issue 3: Exclusion of Freight and Insurance Expenditure
The court addressed whether section 80HHC contemplates the exclusion of freight and insurance expenditure from both export turnover and total turnover. It was clarified that the definitions provided in the Explanations to section 80HHC explicitly exclude these charges from both export turnover and total turnover. The court referenced the Calcutta High Court's decision in CIT v. H. M. Exports Ltd., which supported this interpretation, stating that freight and insurance charges should not be considered part of direct costs once they are excluded from export turnover.

The court also distinguished the present case from the Supreme Court's decision in Hero Exports v. CIT, which dealt with the allocation of indirect costs and did not specifically address the exclusion of freight and insurance charges from direct costs.

Conclusion:
The court concluded that the appellate authorities were justified in excluding freight and insurance charges from the computation of export turnover and total turnover, and these charges should not be deducted again as direct costs. The substantial questions of law were answered against the Revenue, and the Assessing Officer was directed to recompute the deduction under section 80HHC accordingly. The appeal was disposed of in these terms.