TaxTMI 
TaxTMI 
2002 (12) TMI 199
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....he assessee contended that a part of the "indirect costs" has to be attributed to the export incentives received by the assessee during the year. These incentives consisted of the following: Rs. (1) Duty drawback 3,94,655 (2) Central Excise Duty refund 1,16,154 (3) International Price Reimbursement Scheme 3,68,235 (4) Octroi duty refund ....
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....ee seeks to reduce the indirect costs attributable to the export of trading goods so that it will be left with a larger amount of export profits which it can deduct from its gross total income. The attempt of the income-tax authorities is to prevent this by holding that no part of the indirect costs can be attributed to the export incentives. This in brief is the bone of contention. 2.3 The following example will clarify the position (figures assumed): Rs. FOB value of export of trading goods 5,50,000 Export incentives &nb....
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....80HHC(3)] Total turnover = 40,000 + 90% of 60,000 X 5,50,000 ---------- 5,50,000 = 40,000 + 54,000 X 1 = 40,000 + 54,000 94,000 Assessee's working FOB value of exports 5,50,000 Deduct: Direct costs 5,00,000 Proportionate indirect costs (Rs. 10,000 minus....
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.... they do not represent any "sale proceeds". They cannot be considered as part of the "total turnover" also, within the meaning of clause (ba) of the said Explanation, as they have been specifically omitted from the definition by the proviso thereto. Therefore, export incentives cannot, for the purposes of the deduction under section 80HHC, be considered as "export turnover". Further, clause (baa)(1) of the said Explanation specifically excludes 90 per cent of the "non-export" receipts, which should include export incentives also, from the "profits of the business". Thus, not only are the export incentives excluded from export turnover, but they are also excluded from the profits of the business to the extent of 90 per cent. If that is so, it would be irrational to consider the indirect costs attributable to export incentives as part of the indirect costs "attributable to such export", meaning "export turnover". Though "indirect costs" are defined broadly as costs other than direct costs, one should bear in mind the context and the setting of the definition and should interpret the same keeping in view the basic condition of sub-section (3)(b) that indirect costs should be "attribut....
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....t 10 per cent of the export incentives should be considered as costs or expenses incurred to earn them. Further, the export incentives are not treated either as "export turnover" or as part of "total turnover" or as part of the "export profits". The definition of "indirect costs" as per explanation (e) below sub-section (3) does not exclude such costs incurred for earning export incentives. Therefore there is no justification for excluding indirect costs, if any, incurred for earning export incentives. The assessee in the present case is a 100 per cent exporter and therefore the entire expenses, both direct and indirect, can be only in respect of the export turnover or activity. Even factually, considering the nature of the export incentives received by the assessee, it is impossible to conceive of any costs or expenses incurred for the purpose of earning them. Section 80HHC is a special deduction and therefore there is no room for any inference or intendment, as held by the Delhi High Court in CIT v. Sir Sobha Singh Public Charitable 7rust [2001] 250 ITR 475. At any rate, the actual incurring of the expenditure to earn the export incentives is a matter of evidence and proof which ....
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....; means costs directly attributable to the trading goods exported out of India including the purchase price of such goods; (e) 'indirect costs' means costs, not being direct costs, allocated in the ratio of the export turnover in respect of trading goods to the total turnover;" We may also reproduce clause (baa) of the explanation below sub-section (4B) which was also introduced simultaneously with the present subsection (3) by the Finance (No. 2) Act, 1991 with effect from 1-4-1992: "(baa) 'profits of the business' means the profits of the business as computed under the head 'Profits and gains of business or profession' as reduced by (1) ninety per cent of any sum referred to in clauses (iiia), (iiib) and (iiic) of section 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits; and (2) the profits of any branch, office, warehouse or any other establishment of the assessee situate outside India;" While introducing the present sub-section (3), the Memorandum explaining the provisions of the Finance Bill (No. 2), 1991, stated as follows: "Under the ex....
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....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 any 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" is a little articulate in the sense that it 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" is however not so articulate and 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 "direct costs". That is to say all costs whi....
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....t it would be proper to provide ad hoc 10 per cent deduction from such incomes to account for these expenses. Accordingly, clause (baa) of the Explanation below sub-section (4B) excluded 90 per cent of such receipts from the profits of the business, because these receipts had nothing to do with the exports. It did not exclude the entire receipts. Similarly, when it came to the proviso to sub-section (3), by which the deduction for export profits was to be increased by the export incentives, the Legislature restricted the increase to 90% of the export incentives. Here, the entire 90 per cent of the export incentives was not given as additional deduction but the same was restricted to the proportion which the export turnover bears to the total turnover of the business. By restricting the additional deduction under the proviso to 90 per cent of the export incentives, the Legislature impliedly recognised that 10 per cent of the export incentives would have been incurred by the assessee as expenses to earn the same. It is pertinent to note that both in Explanation (baa) below sub-section (4B) and in the proviso to sub-section (3), the export incentives of a particular type have been spe....
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....s no evidence or proof in the present case to show that a part of the indirect costs incurred by the assessee is attributable to the earning of the export incentives. It must be clarified at this juncture that in the present case the claim of the assessee has been put forth only on the basis that even the Legislature has recognised the position that 10 per cent of the receipts arising out of activities other than export of trading goods may be considered as expenditure for earning them. In fact the ld. counsel for the assessee fairly stated that in a given case, such expenditure may be either less or more than the above percentage and it can be assumed that the Legislature did not want to undertake a minute examination of such expenses to find out how much can be attributed to activities other than export of trading goods and thought in their wisdom, that a flat rate or ad hoc percentage may be considered as having been incurred in connection with such receipts. This assumption, in our opinion, is not without basis. it may be recalled that in CIT v. Indian Bank Ltd. [1965] 56 ITR 77, the Supreme Court observed, with reference to section 10(2)(xv) of the 1922 Act, which allowed dedu....