Indirect costs under export deduction provisions may be apportioned to non-export receipts, including export incentives, on a reasonable basis.

In computing deduction under section 80HHC(3)(b) for export of trading goods, indirect costs must be confined to costs attributable to export turnover, and a reasonable apportionment is permitted where part of the receipts consists of export incentives. The controlling words "attributable to such export" require exclusion of the portion of common expenditure referable to non-export receipts, and the scheme of the provision, the explanatory memorandum and the Board circular support that approach. On that basis, indirect costs cannot be treated as wholly referable to exports when export incentives are also earned, and the assessee's method of excluding 10 per cent of such incentives from indirect costs is accepted in principle.

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Issues: Whether, for computing deduction under section 80HHC(3)(b), any portion of indirect costs can be attributed to export incentives and excluded from the indirect costs attributable to export of trading goods.

Analysis: The computation under section 80HHC(3)(b) turns on the export turnover of trading goods as reduced by direct costs and indirect costs attributable to such export. The expression "attributable to such export" controls the computation and requires a reasonable exclusion of costs referable to receipts other than export turnover. The scheme of the provision, read with the contemporaneous amendment, the memorandum explaining the Finance (No. 2) Act, 1991, and the circular issued by the Board, shows that the Legislature recognised that some common expenditure may be incurred in earning non-export receipts and that an ad hoc element of 10 per cent was treated as relatable to such receipts. On that basis, indirect costs cannot be treated as wholly and exclusively referable to export of trading goods when part of the receipts arises from export incentives. The view that no apportionment is permissible was rejected as it ignored the controlling words of the main provision.

Conclusion: A part of the indirect costs can be attributed to export incentives, and the assessee's computation reducing indirect costs by 10 per cent of the export incentives was able in principle.

Final Conclusion: The computation of deduction under section 80HHC for exporters of trading goods must exclude from indirect costs the portion reasonably attributable to non-export receipts such as export incentives, and the assessee's claim on that issue succeeds.

Ratio Decidendi: In computing deduction under section 80HHC(3)(b), indirect costs must be confined to costs attributable to export turnover, and costs reasonably referable to non-export receipts may be excluded on a rational apportionment basis.

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