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TMI Blog2012 (5) TMI 313X X X X Extracts X X X X X X X X Extracts X X X X ..... ricing Officer (TPO) in the instant case, whose report in the matter stands adopted by him, is itself bad in law inasmuch as the same is in violation of Instruction No. 3 of 2003 dated 20/5/2003 by CBDT. The same requires such reference only where the value of the international transactions exceeds Rs. 5 crores, while in the instant case the same admittedly aggregate to Rs. 301.50 lacs, i.e., at less than the threshold limit, so that the reference is without a valid basis in law, vitiating the proceedings. Reliance was placed by him on the decision in the case of Sony India (P.) Ltd. v. CBDT [2007] 288 ITR 52/[2006] 157 Taxman 125 (Delhi). 3.2 The assessee's said objection, it was averred by the ld. DR, is not maintainable, it was averred by the ld. DR, as the assessee's return for the relevant year was selected by the Assessing Officer (AO) for being subject to the verification procedure, not on the basis of the impugned instruction but following another by the CBDT. The ld. AR did not rebut the argument advanced by the ld. DR on facts. 4. We have heard the parties, and perused the material on record, including the relevant Instruction (PB pg. 6-8), and given our careful conside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... merely because the value of the transactions, which have to be even otherwise examined separately, is less than the prescribed limit, there would be a qualitative decline in the examination, for which, firstly, there are inbuilt checks in the form of opportunities for raising objections, both before the TPO and the AO and, secondly, as the workload of TPOs would itself vary, and considerably, from place to place and from time to time; the said limit having been disbanded, as envisaged, subsequently. That is, the very nature and character of the Instruction does not lend itself being construed as reading a provision in the manner beneficial to the assessees, so as to be considered as binding on, or operate to bind, the revenue authorities. The Instruction, as held in the case of Sony India (P.) Ltd. (supra), is a correct interpretation of the relevant provisions of law (ss. 92C and 92CA), formulated to assist the AOs, and is, thus, both assessee as well as law neutral. That the view of the TPO would bind the AO, an argument which was also raised in the said case, did not find favour with the hon'ble court in view of s. 92CA(3). so that the Instruction can neither be regarded as 'ad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with. The ld. CIT(A) has observed that the TPO found difference in some transactions, i.e., in comparison with similar purchases from other (non-associated) enterprises. As such, his impinging only those transactions, and suggesting the price obtaining for transactions with non-associate concerns; the difference being more than a tolerance limit of 5% provided by the Act (PB pgs 1-5), is in conformity, both with the provision of law and the Rules (r. 10A) framed thereunder. The assessee, as aforenoted, has not agitated the same before us, bringing out any infirmity therein. The same is, accordingly, rejected. We decide accordingly. 4.5 Lastly, it is contended, that the section was not applied in its case for any earlier assessment year, i.e., even though the arrangement is on since August, 2004. The assessee has not shown if the 'assessments' for the earlier years were under s. 143(3), i.e., where the return of income is subject to the verification procedure. The argument would not even otherwise hold as the principle of res judicata is not applicable to the proceedings under the Act, and there is no estoppel against law. 5. Ground No. 2(2) concerns the computation of deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding the manufacturing/processing turnover. Only like can be compared with like; as such, when the allocation process excludes the direct costs attributable to export of trading goods, the same, by implication, excludes other direct costs as well. The said exclusion (from allocation) would however require being preceded by a finding that a particular cost is a direct cost, and for which the general notions following the standard, accepted accounting norms/principles, as well as the assessee's record and valuation method; followed consistently, would be a useful guide. Once so found, the particular expense is not liable for allocation. The scope of 'direct costs' would, however, extend up to cost of sales, at which stage only the revenue is recognized, and not stand restricted up to the , manufacturing/production stage, as sought to be placed thereon by the Revenue. Two, all indirect costs, irrespective of their functional classification, would be subject to allocation. Thirdly, the allocation, where exigible, has to be only by following the basis provided by the Act, i.e., in the ratio of turnover, and there can be no other/alternative basis. The ld. CIT(A) has not passed a speakin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ann.com 295 ( Ker.). The said ground is accordingly dismissed. 11. In the result, the assessee's appeal is partly allowed for statistical purposes. N. Vijayakumar, Judicial Member - After perusing the order of the ld. A.M I could not agree with the findings of my ld. Brother in respect of Ground No. 2(2) which concerns the computation of deduction u/s.80HHC. The fact that the assessee is a manufacturer and exporter of cashew kernels and working of the indirect costs of trading goods which the assessee besides undertook is the issue. 2. The definition of indirect cost as per section 80HHC(3) Explanation (e) means the costs not being direct costs. The meaning of direct costs is available in Explanation (d) to section 80HHC(3). "Direct costs" means costs directly attributable to the trading goods exported out of India including the purchase price of such goods. 3. In this case the Assessing Officer has taken the indirect costs within its fold only those costs which are not direct costs. In other words, the costs which are directly related to the processing activities of the assessee have to be excluded. The Assessing Officer has excluded direct manufacturing wages from indirect co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on arrived at by the ld. A.M. and accordingly to this extent Ground No. 2(2) is to be modified and restore the matter back to the file of the Assessing Officer, for which portion of the restoring matter I am in agreement and only the proportionate quantum working on which I disagree. Reference under section 255(4) of Income tax Act, 1961 As there is a difference of opinion between the Members who heard the above appeal, the following question is referred to the Hon'ble President, Income-tax Appellate Tribunal:- Whether Explanation (e) to Sub-Sec.(3) to Section 80HHC can override the clause (b) to Section 80HHC(3) of the Income-tax Act, 1961? Reference to the Hor'ble President under section 255(4) of the Income-tax Act 1961 In re: B. Parameswaran Bharathan (in ITA No. 159/Coch/2007 for Asstt. Yr. 2003-04 I have carefully perused the dissent order by my ld. brother, as well as the question proposed by him for reference to the hon'ble President. However, with due respect, I am unable to be in agreement therewith 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e to agree with the question referred by the ld. Judicial Member, has proposed the following questions: "(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.80HHC(3)(b), is to be determined by apportioning such costs in the statutorily prescribed formula of the ratio of the said turnover to the total turnover, or is it liable to any reduction before applying the said ratio thereto? (iii) Whether the decision by the Hon'ble jurisdictional High Court in the case of CIT v. Parry Agro Industries Ltd. 257 ITR 41 (Ker) has applicability in the facts and circumstances of the case or not? Since the Hon'ble President has authorized the Third Member to frame a proper point of difference to bring out the real controversy, after going through the questions framed by both the ld. Members, I am of the view that the only point bringing out the real controversy is "as to how to apportion the indirect cost relating to trading goods while computing deduction u/s 80HHC(3) of the Act". 3. In my considered opinion, if I answer this questi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng goods, the profits derived from such export shall be the export turnover in respect of such trading goods as reduced by the direct costs and indirect costs attributable to such export" Explanation (e) to sec. 80HHC(3) reads as under: "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;" The relevant sections are extracted for the sake of convenience. 6. Learned C.A. argued that the main part of the section lays down the substantive law reflecting the intention of the Parliament and any Explanation to section, as the name implies, does not enlarge or limit the scope of the section but it only explains the section. In other words, the Explanation can provide additional support to the dominant object of the Act in order 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 go ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... exported. The costs which were attributable to trading goods other than direct purchase costs were then scaled down as stipulated in Explanation (e) in the ratio of export turnover of trading goods to total turnover. He pleaded that the method of computation followed by the assessee is thus strictly according to the statutory principles prescribed i.e. first attribution and then scaling down in the proportion. The learned C.A. relied on the decision of the Apex Court in the case of Hero Exports v. CIT [2007] 295 ITR 454/165 Taxman 445 for the proposition that the principle that segregation of costs into those attributable to trading goods and others has necessarily to be done at the starting point of computation prior to applying the statutory proportion as prescribed in clause (e) of the Explanation 80HHC(3). He also relied on the decision of the Special Bench (Mumbai) of the Tribunal in the case of Surendra Engg. Corp. (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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction in respect of export profits. Whereas prior thereto, the deduction was allowed in respect of that portion of the 'profits and gains of the business' as per the assessment which is proportionate to the ratio which the export turnover bears to the total turnover, after the amendment a different basis was provided depending on whether the assessee is an exporter of manufacturing goods exclusively or of trading goods exclusively or a combination of both. In the instant case, the assessee was undisputedly an exporter of 'trading goods' exclusively and, therefore, clause (b) of sub-section (3) applied. In the case of such an exporter, the export profits shall be the export turnover in respect of such trading goods as reduced by (1) the direct cost and (2) the indirect costs. Both these costs should, however, 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 turn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion of costs also arises in cases falling under section 80HHC(3)(b). Firstly, clause (e) of the Explanation which refers to allocation of costs applies to section 80HHC(3)(a), section 80HHC(3)(b) and section 80HHC(3)(c). Secondly, section 80HHC(3)(b) equates export profits to export turnover over less direct and indirect costs attributable to the exports of goods. Therefore, the principle of attribution is retained. Thirdly, keeping in mind the provisions of section 80HHC(3)(b) read with clauses (d) and (e) of the Explanation, it is clear that the Legislature intended allocation of costs between export turnover and total turnover. It may be that, in most cases apportionment may not apply; but in certain cases falling under section 80HHC(3)(b) the ratio still applies. For example, where the assessee exports 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 a ..... 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