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TMI Blog2012 (5) TMI 336X X X X Extracts X X X X X X X X Extracts X X X X ..... Income-tax (Appeals)-I, Trivandrum ('CIT(A)' for short) dated 11.11.2009. 2. The appeals, raising a common issue, were heard together and are being disposed of by a common, consolidated order. The only issue arising in the appeal/s is the determination of the indirect costs attributable to export of trading goods, which is to be reduced, along with the direct costs, from the export turnover of such goods, for the determination of profits there from, in terms of s. 80HHC(3) of the Income-tax Act, 1961 ('the Act' hereinafter). 3.1 Opening the arguments on behalf of the Revenue, it was submitted by the ld. DR that the assessment - as framed in the first instance - stood on appeal remanded back by the Tribunal to the Assessing Officer (A.O.) to work out the indirect costs towards the 'export of trading goods' afresh. Being an open remand, the matter was examined again. The law in the matter, i.e., sec. 80HHC(3)(b) r/w Explanation (e) there to, is amply clear, and that there is no scope for any 'adjustment', i.e., once an expenditure qualifies as an 'indirect cost'. The assessee has sought to exclude the Head Office expenses in the allocation of the indirect expenses attributab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re the hon'ble jurisdictional High Court, so that it is bound by the same. The decision in the case of Parry Agro Industries Ltd. ( supra ) is not applicable in the facts and circumstances of the present case inasmuch as the said case was of a company with two divisions, being tea estates, one in South India and the other in Assam, with separate accounts. It was in this context that it was clarified by the hon'ble High Court that there is no scope for determining the profits of the business of the Assam tea estate, which was stated to consist exclusively of exports, separately, rejecting the assessee's contention that as the export profit is clearly detectable from the accounts maintained by it, the procedure laid down in s. 80HHC(3) need not be followed. The direction by the Tribunal's to restrict the turnover only to that of Assam tea estates, in case it was engaged only in exports, was, thus, found not consistent with the law. 3.3 In rejoinder, it was submitted by the ld. DR that the Revenue does not dispute the legal proposition as stated by the Tribunal (per para 7 of its order) passed in the first round and, rather, the impugned order seeks to follow the same in letter ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the case of Parry Agro Industries Ltd. ( supra ); it upheld the Revenue's stand that the relief u/s. 80HHC could only be worked out by following the rule of s. 80HHC(3), applying the ratio of export turnover (of traded goods) to the total turnover, i.e., including qua the tea estate/s engaged in domestic trade. Accordingly, once an expense falls to be an indirect expenditure, it is immaterial whether it is in relation to the export of trading goods or in relation to domestic trade or even qua manufacturing, and has to be 'allocated'. Even as observed by the Bench during the hearing, costs such as on packing materials, freight and shipping charges, etc., where the major differences in the allocation obtain, are essentially direct costs. Similarly, consignment expenses also appear to bear a component of direct costs, which are to be reckoned up to the selling stage. Further, costs such as bonus and ESI/EPF contribution, where in relation to factory workers, are only a part of their remuneration and, thus, direct manufacturing expenditure. The same would thus stand to be excluded, and not subject to allocation. The assessee, however, does not do so, but seeks to allocate them on a d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reference may be made to the Accounting Standard 2 (AS 2) by the Institute of Chartered Accountants of India (ICAI). In fact, the assessee would only have valued, and is valuing year after year, its opening and closing stock-in-trade, both for the trading and manufacturing business/activity, so that the same would provide the relevant basis, apart from providing consistency to the working. Could, one may ask, the definition of a cost or the nature of an expense be any different, i.e., for the purpose of determination of profits and for the allocation of the profits so determined (across different business segments)? The same, rather, has necessarily to be unchanged/the same. 4.5 The assessee also relies on the decisions in the case of Surendra Engineering Corpn. v. Asstt. CIT [2003] 86 ITD 121 (Mum) (SB) and Hero Exports Ltd. v. CIT [2007] 295 ITR 454/165 Taxman 445 (SC). Both these decisions relate to the propriety in reducing the indirect expenses as claimed by 10% of the export incentives on the premise that that is the deemed cost of such incentives. The incentives are subject to tax separately u/s. 28, and also not a part of the allocation process. Accordingly, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d for statistical purposes. N. Vijayakumaran, 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 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 while computing deduction u/s.80HHC in respect of export of trading goods allocated the entire administrative expenses in the ratio of export turnover of such goods to the total turnover to determine indirect costs attributable to export of such goods. 4. The decision of Delhi Bench of the Tribunal in the case of Glaxo Smithkline Asia (P) Ltd. v. Asstt. CIT [2006] 6 SOT 113 is directly on the issue and it is against ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mbers who heard the above appeals, 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 Hon'ble President under section 255(4) of the Income-tax Act, 1961 In re: Kerala Nut Food Co., Kollam (in ITA Nos. 174 175/Coch/2010 for Asstt. Yrs. 2002-03 and 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' that are to be reduced in computing the income from export of trading goods, with there being an agreement that the same cannot include the direct costs relating to manufactured/processed goods, including in respect of their sales. Further, again, while both agree that it is only the indirect costs attributable to the export of trading goods that are to be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ase of CIT v. Parry Agro Industries Ltd. [2002] 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 question, then the point of controversy will be resolved. 4. The brief facts are that the appellant-assessee is engaged in the business of manufacture and export of cashew kernels. The assessment was completed u/s 143(3) r.w.s. 147 on 20-3-2006. In the assessment order, the AO restricted the deduction u/s 80HHC by reworking the indirect cost on trading goods exported. The matter was carried in appeal before the CIT(A). The first appellate authority dismissed the appeal. On second appeal, the Tribunal, by order dated 29-10-2007, restored the issue to the file of the AO. Accordingly, the AO vide order dated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t 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 goods. In this case, between the Ld. Members, the only difference is as to what constitutes indirect costs of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hen 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 Ltd. ( supra ) 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 to section 80HHC(3). He also relied on the decision of the Special Bench (Mumbai) of the Tribunal in the case of Surendra Engineering Corpn. ( 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 the present case. According to him, this decision, though on sec.80HHC, was not concerned with the de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 turnover of trading goods must be left out of reckoning at the threshold itself. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 allocation is meant to reduce the incentive. However, when "allocat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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