2012 (5) TMI 336 - AT - Income Tax

Deduction u/s 80HHC - direct cost - indirect expenses - held that - 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. - Decided in favor of assessee. Decision of Kerala High Court in the case of Parry Agro Industries Ltd. (2002 (3) TMI 9 (HC)) distinguished.

Summary

Issues Involved:
1. Determination of indirect costs attributable to the export of trading goods.
2. Application of Section 80HHC(3) of the Income-tax Act, 1961.
3. Interpretation of Explanation (e) to Section 80HHC(3).
4. Allocation method of indirect costs.
5. Relevance of the decision in CIT v. Parry Agro Industries Ltd.
6. Difference of opinion among Tribunal members.
7. Reference to the Third Member for resolution.

Detailed Analysis:

1. Determination of Indirect Costs Attributable to Export of Trading Goods:
The primary issue is the determination of indirect costs attributable to the export of trading goods, which must be reduced from the export turnover to compute profits under Section 80HHC(3) of the Income-tax Act, 1961. The Revenue argued that all indirect costs, including Head Office expenses, should be allocated proportionately to the export turnover. The assessee contended that only costs directly related to the export of trading goods should be considered.

2. Application of Section 80HHC(3) of the Income-tax Act, 1961:
Section 80HHC(3) outlines the method for computing profits derived from the export of trading goods by reducing direct and indirect costs attributable to such export. The Tribunal had previously remanded the case to the Assessing Officer (AO) for a fresh determination of these costs, emphasizing that only indirect costs attributable to the export of trading goods should be considered.

3. Interpretation of Explanation (e) to Section 80HHC(3):
Explanation (e) defines "indirect costs" as costs other than direct costs, allocated in the ratio of the export turnover of trading goods to the total turnover. The Revenue's interpretation was that all indirect costs should be allocated using this ratio, while the assessee argued that only those costs directly attributable to the export of trading goods should be included.

4. Allocation Method of Indirect Costs:
The Tribunal found that both the assessee and the AO had partially correct approaches. Direct costs related to manufacturing or trading goods should not be allocated, whereas indirect costs should be allocated proportionately. The Tribunal emphasized that the allocation should follow the statutory formula provided in the Act.

5. Relevance of the Decision in CIT v. Parry Agro Industries Ltd.:
The Tribunal considered the decision in CIT v. Parry Agro Industries Ltd., which clarified that the relief under Section 80HHC must follow the statutory formula. The Tribunal noted that the facts of the present case differed from Parry Agro Industries Ltd., as the latter involved separate divisions with distinct accounts, whereas the current case involved a single entity with mixed activities.

6. Difference of Opinion Among Tribunal Members:
There was a difference of opinion between the Judicial Member and the Accountant Member regarding the computation of indirect costs. The Judicial Member argued that only indirect costs attributable to the export of trading goods should be considered, while the Accountant Member believed that all indirect costs should be allocated proportionately without prior segregation.

7. Reference to the Third Member for Resolution:
Due to the difference of opinion, the matter was referred to the Third Member. The Third Member agreed with the Judicial Member's view that only indirect costs attributable to the export of trading goods should be considered and then scaled down proportionately. The Third Member also noted that the decision in Parry Agro Industries Ltd. was not applicable to the present case's facts.

Conclusion:
The Tribunal concluded that the exclusion from allocation could only apply to direct costs. Indirect costs should be allocated based on the statutory formula, and the AO must determine the costs accordingly. The matter was restored to the AO for a fresh determination, considering the Tribunal's observations and providing the assessee with a reasonable opportunity to present its case. The Revenue's appeals were allowed for statistical purposes.