TaxTMI 
TaxTMI 
2012 (5) TMI 336
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....ents on behalf of the Revenue, it was submitted by the ld. DR that the assessment - as framed in the first instance - stood on appeal remanded back by the Tribunal to the Assessing Officer (A.O.) to work out the indirect costs towards the 'export of trading goods' afresh. Being an open remand, the matter was examined again. The law in the matter, i.e., sec. 80HHC(3)(b) r/w Explanation (e) there to, is amply clear, and that there is no scope for any 'adjustment', i.e., once an expenditure qualifies as an 'indirect cost'. The assessee has sought to exclude the Head Office expenses in the allocation of the indirect expenses attributable to the export of trading goods, and which is untenable both on facts and in law. The Head Office is only a coordinating office, working for the whole organisation, so that the expenses in its respect would merit being considered. Adverting to the relevant provision, she continued, the provision contemplates no such exclusion, and the indirect cost attributable to the export of trading goods has to be worked out in a proportionate manner, i.e., in the ratio of the export turnover in respect of the trading goods to the total turnover, even as clarified b....
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.... separately, rejecting the assessee's contention that as the export profit is clearly detectable from the accounts maintained by it, the procedure laid down in s. 80HHC(3) need not be followed. The direction by the Tribunal's to restrict the turnover only to that of Assam tea estates, in case it was engaged only in exports, was, thus, found not consistent with the law. 3.3 In rejoinder, it was submitted by the ld. DR that the Revenue does not dispute the legal proposition as stated by the Tribunal (per para 7 of its order) passed in the first round and, rather, the impugned order seeks to follow the same in letter and in spirit. The reliance on the decision in the case of Parry Agro Industries Ltd. (supra) stands rightly placed, and the ld. CIT(A) has not passed any speaking order in the matter. 4. We have heard the parties, and perused the material on record, including the order by the Tribunal in the first round as well as the decision by the hon'ble jurisdictional High Court in the case of Parry Agro Industries Ltd. (supra). 4.1 We shall first seek to set out the scope of the present proceedings, which are consequent to the order by the Tribunal in the first round, which is u....
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....h as on packing materials, freight and shipping charges, etc., where the major differences in the allocation obtain, are essentially direct costs. Similarly, consignment expenses also appear to bear a component of direct costs, which are to be reckoned up to the selling stage. Further, costs such as bonus and ESI/EPF contribution, where in relation to factory workers, are only a part of their remuneration and, thus, direct manufacturing expenditure. The same would thus stand to be excluded, and not subject to allocation. The assessee, however, does not do so, but seeks to allocate them on a different basis, i.e., with reference to the underlying transactions, and which is not permissible. At the same time, it also excludes other, indirect manufacturing expenses, viz. on travelling, repairs, gratuity (assuming to be in relation to factory workers), etc., as well, and which is, again, not permissible. Any indirect cost, including a factory/production overhead, is liable for allocation. The AO, on the other hand, has applied the proportion formula, irrespective of whether the expenditure is a direct or an indirect cost. Both the assessee and the assessing authority are, thus, partly c....
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....usiness segments)? The same, rather, has necessarily to be unchanged/the same. 4.5 The assessee also relies on the decisions in the case of Surendra Engineering Corpn. v. Asstt. CIT [2003] 86 ITD 121 (Mum) (SB) and Hero Exports Ltd. v. CIT [2007] 295 ITR 454/165 Taxman 445 (SC). Both these decisions relate to the propriety in reducing the indirect expenses as claimed by 10% of the export incentives on the premise that that is the deemed cost of such incentives. The incentives are subject to tax separately u/s. 28, and also not a part of the allocation process. Accordingly, the apex court held in favour of the reduction of costs incurred in relation to the incentives in arriving at the expenses attributable to the export trade. The same, it would be seen, agrees with our finding of the exclusion of all 'direct costs', being the subject matter of dispute, in determining the costs subject to allocation. The decision in the case of Parry Agro Industries Ltd. (supra) is also applicable in the present case. Conclusion 5. The exclusion (from allocation) could thus only obtain qua direct costs. This we find to be the admitted position. This is also borne out by the fact that the allocat....
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....butable to the trading goods exported out of India including the purchase price of such goods. 3. In this case the Assessing Officer while computing deduction u/s.80HHC in respect of export of trading goods allocated the entire administrative expenses in the ratio of export turnover of such goods to the total turnover to determine indirect costs attributable to export of such goods. 4. The decision of Delhi Bench of the Tribunal in the case of Glaxo Smithkline Asia (P) Ltd. v. Asstt. CIT [2006] 6 SOT 113 is directly on the issue and it is against the findings of the Assessing Officer and in support of the arguments advanced on behalf of the assessee. The decision of the Mumbai Bench of the Tribunal in the case of Surendra Engineering Corpn. (supra) has been followed by the Delhi Bench in the case of Glaxo Smithkline Asia (P.) Ltd. (supra). In other words it has been held in the aforesaid decision that "from a harmonious reading of definition of indirection cost' in Expln. (e) below sub-s. (3) of S.80HHC and cl.(b) of that section it would be appreciated that only indirect cost attributable to the export is to be reduced for computing the deduction from export of trading goods. Ex....
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....with as representing correctly the true nature and scope of the controversy arising out of our separate orders. The issue in my view hinges on the scope of the 'indirect costs' that are to be reduced in computing the income from export of trading goods, with there being an agreement that the same cannot include the direct costs relating to manufactured/processed goods, including in respect of their sales. Further, again, while both agree that it is only the indirect costs attributable to the export of trading goods that are to be reduced, the issue is of their determination. While in the view of the ld. brother, it is only the indirect expenses related to or having a nexus with such business that would qualify for being apportioned, in my view no such prior segregation is permissible, and the relevant quantum is to be determined by allocation per the statutorily prescribed formula only. Accordingly, I propose the following questions for reference to the hon'ble President:- (i) Whether there is any inconsistency between sec. 80HHC(3) and Explanation thereto? (ii) Whether the 'indirect cost' that is to be reduced from the export turnover of trading goods, in terms of s.....
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....ant-assessee is engaged in the business of manufacture and export of cashew kernels. The assessment was completed u/s 143(3) r.w.s. 147 on 20-3-2006. In the assessment order, the AO restricted the deduction u/s 80HHC by reworking the indirect cost on trading goods exported. The matter was carried in appeal before the CIT(A). The first appellate authority dismissed the appeal. On second appeal, the Tribunal, by order dated 29-10-2007, restored the issue to the file of the AO. Accordingly, the AO vide order dated 22-9-2008 held that indirect costs have to be computed proportionately and not directly. The assessee carried the matter to the first appellate authority. The first appellate authority held that only those indirect costs attributable to trading goods exported have to be apportioned as cost of trading goods exported. Being aggrieved, the Revenue carried the matter to the Tribunal. The Id. Members of the then Bench agreed on the point that while working out the export profits of trading goods, only indirect costs attributable to trading goods should be excluded from the export turnover of trading goods. However, the Ld. Members differed on the issue regarding the method of arr....
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....der to make it meaningful and purposeful. According to him, 'the profit derived from trading goods exported would be.....................the export turnover in respect of such trading goods as reduced by the direct and indirect costs attributable to export of such trading goods. He also submitted that there is no dispute with respect to export turnover and direct costs of the trading goods. In this case, between the Ld. Members, the only difference is as to what constitutes indirect costs of trading goods exported. He referred to clause (b) of the Explanation (e) to sub-sec.(3) of section 80HHC. According to him, it is clear that first it would be necessary to arrive at the direct costs and indirect costs attributable to trading goods exported and then scale down the indirect costs in proportion specified in clause (e) to sub-sec.(3) and the aggregate of the two would have to be deducted from the turnover of the trading goods to arrive at the export profits on trading goods exported for the purpose of sec.80HHC. The direct and indirect costs should be attributable to trading goods exported, has been accepted by both the Ld. Members and as such there is no difference on this issue. ....
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....so relied on the decision of the Special Bench (Mumbai) of the Tribunal in the case of Surendra Engineering Corpn. (supra). He strongly relied on this decision as it would directly apply to the facts of the case in hand. He distinguished the decision of the Kerala High Court in the case of Parry Agro Industries Ltd. (supra) stating that it has no application to the facts of the present case. According to him, this decision, though on sec.80HHC, was not concerned with the determination of indirect costs of trading goods. In this case, the assessee, who had both exports and domestic trade claimed full deduction u/s 80HHC on the profits of the export business without scaling down the deduction in the proportion of the export turnover to the total turnover on the ground that profits relating to export business was available as separate books were maintained for the export business. The assessee had argued that as separate books were available, the total turnover should be the turnover of the export division only. It was in this context that the Hon'ble Kerala High Court held that the statutory formula prescribed in the section has to be necessarily followed for the computation of deduc....
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....ver, 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 an 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' 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', however, merely says that these are 'costs, not being direct costs, allocated in the ratio of the export turnover in respect of trading goods to the total turnover'. It is, thus, couched in a somewhat negative form, contrasted with....
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....xports all brought out items but brings back only a part of the export proceeds into India, the ratio will apply and, therefore, if one is to read clause (e), it retains the words indirect costs to be allocated in the ratio of export turnover to total turnover. Under section 80HHC(3)(b) one has to balance the "principle of attribution with the concept of "allocation". The concept of allocation is meant to reduce the incentive. However, when "allocation" has to be balanced with the principle of attribution", the object is to reduce the incentive and not to eliminate it" By combined reading of both the decisions cited supra, I find that the Ld. JM is right in holding that only indirect costs attributable to export have to be reduced for computing the deduction u/s 80HHC in respect of export of trading goods and not all costs other than direct costs. In other words, first, attribution of indirect costs to the export of trading goods is to be made and then only scaling down in proportion is to be resorted to. I also find that the decision of the Kerala High Court in the case of Parry Agro Industries Ltd. (supra) was rendered in a different set of facts and circumstances and is not ap....