2007 (1) TMI 85 - HC - Income Tax

Special deduction - AO included the amount of shipment incurred by assessee and collected from the foreign buyer as a part of indirect cost for the purpose of calculation of export turnover in terms of section 80HHC(3)(b) - Held that amount of shipment not included in the indirect cost

Summary

Issues:
1. Interpretation of 'Indirect Cost' for calculation of export turnover under Section 80HHC (3)(b) of the Income Tax Act, 1961.

Analysis:
The judgment revolves around a dispute concerning whether freight charges incurred by the Assessee and recovered from a foreign buyer should be considered as part of 'Indirect Cost' for calculating export turnover under Section 80HHC (3)(b) of the Income Tax Act, 1961. The Assessee initially included the freight charges as part of its indirect cost but later corrected this in a revised audit report. The Assessing Officer disagreed with the correction and included the freight charges in the indirect cost. However, the Commissioner of Income Tax (Appeals) ruled in favor of the Assessee, a decision upheld by the Tribunal, leading to the appeal before the High Court.

The High Court analyzed Section 80HHC (3)(b) which stipulates that direct and indirect costs should not be included in calculating export turnover for trading goods. The definition of export turnover excludes freight attributable to the transport of goods beyond the customs station. The Court highlighted that the recovered shipment freight was deducted from the total turnover to determine the FOB value of exported goods, indicating it should not be considered a cost incurred by the Assessee.

The Court referred to a similar ruling by the Calcutta High Court, emphasizing that shipment freight, being recovered from the foreign buyer, does not constitute a direct cost. The definition of 'Indirect Costs' in the Act clarifies that costs allocated based on export turnover to total turnover should not include direct costs. Therefore, the Court concluded that shipment freight should not be included in the indirect cost incurred by the Assessee, as it does not form part of the export turnover and is not a cost borne by the Assessee in relation to the exported goods.

Ultimately, the High Court dismissed the Revenue's appeal, stating that no substantial question of law was raised warranting consideration under Section 260 A of the Act. This decision was based on the understanding that shipment freight, being recovered and not incurred by the Assessee, does not qualify as an indirect cost under the relevant provisions of the Income Tax Act, 1961.