2013 (11) TMI 1370 - HC - Income Tax

Head office expenses - Deduction u/s 80HHC - Held that - The assessee had not maintained separate books for the export and the trading goods - Head office expenses are not attributable in entirety to exports to treat them as direct costs - Export is of trading goods and in such cases where direct and indirect cost are not identifiable as attributable to the export of such goods, the Statute prescribes that the formula be adopted as export turnover as reduced by direct and indirect costs attributable to export of such goods - Head office expenses was not attributable to the exports exclusively but only as relatable to exports - Decided against Revenue.

Issues Involved:
1. Calculation of indirect expenditure related to exports under Section 80HHC.
2. Identification and apportionment of indirect costs when separate books of accounts are not maintained.

Issue-wise Detailed Analysis:

1. Calculation of Indirect Expenditure Related to Exports:

The primary issue was whether the Tribunal was correct in holding that the indirect expenditure related to exports should be calculated based on the ratio of export turnover to total turnover under Section 80HHC, given that the assessee had furnished details of indirect costs identified as pertaining to exports. The assessee, a manufacturer of plastic containers and trader in cosmetic goods, claimed deductions under Section 80HHC for the assessment years 2002-2003, 2003-2004, and 2001-2002. The assessee apportioned Rs. 19.80 crores as indirect costs for exports based on the ratio of export turnover to total turnover. However, the Assessing Officer noted total indirect expenses of Rs. 105.06 crores and contended that these should be apportioned as per Section 80HHC (3)(b) read with explanations (d) and (e). The Officer argued that identifiable indirect costs should not be apportioned but directly allocated to exports.

The Tribunal found that the assessee did not maintain separate books of accounts for export and domestic activities. It noted that the indirect expenses identified by the assessee as not related to exports were accepted by the Assessing Officer. The Tribunal agreed with the Commissioner that without proper books of accounts, the only way to allocate costs was by adopting the ratio of export turnover to total turnover. The Tribunal thus upheld the assessee's method of apportionment.

2. Identification and Apportionment of Indirect Costs:

The second issue was whether the Tribunal was correct in holding that indirect expenditure related to exports should be calculated using the formula under Section 80HHC if regular books of accounts are not maintained. The Revenue argued that the assessee could identify expenses related to the head office, exports, and domestic sales, and therefore, the formula was unnecessary. The assessee countered that it had provided a common data for expenses relatable to exports but not attributable to them.

The Tribunal noted that the assessee had not maintained separate books for exports and trading goods. It pointed out that the expenses of Rs. 4,80,47,714/- and Rs. 3,11,71,438/- were not attributable to exports exclusively but were only relatable to them. The Tribunal held that the formula under Section 80HHC (3)(b) should be applied to apportion indirect costs, as the expenses were not intimately related only to exports. The Tribunal's decision was based on the statutory guidelines provided in Section 80HHC (3)(b), which prescribe the formula for arriving at the profit derived from exports when direct and indirect costs are not identifiable as attributable to the export of such goods.

In conclusion, the High Court upheld the Tribunal's decision, confirming that the indirect costs should be apportioned based on the ratio of export turnover to total turnover as prescribed under Section 80HHC (3)(b). The Court dismissed the Revenue's appeals, finding no justification in their contention that the break-up of expenses provided by the assessee should be taken as direct costs without applying the statutory formula.

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