Full Judgment Text
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CASE NO.:
Appeal (civil) 5315 of 2007
PETITIONER:
Hero Exports,G.T. Road, Ludhiana
RESPONDENT:
Commissioner of Income tax,(Central), Ludhiana
DATE OF JUDGMENT: 20/11/2007
BENCH:
S.H. Kapadia & B. Sudershan Reddy
JUDGMENT:
J U D G M E N T
(Arising out of S.L.P. (C) No. 7411 of 2007)
with
Civil Appeal No. 5317/2007 @ S.L.P.(C) No.7541/2007
Civil Appeal No. 5318/2007 @ S.L.P.(C) No.7613/2007
Civil Appeal No. 5319/2007 @ S.L.P.(C) No.7663/2007
KAPADIA, J.
Leave granted.
2. This batch of civil appeals is filed by the assessee for
assessment years 1994-95, 1995-96, 1996-97 and 1997-98. A
short question which arises for determination in this batch of
civil appeals is whether the A.O. and CIT(A) were right in
disallowing the claim of the assessee for adjustment of 10% of
export incentive against indirect cost of trading goods while
allowing deduction under section 80HHC of the Income-tax
Act as it stood at the relevant time.
Facts in the Civil Appeal arising out of S.L.P. (C) No.
7411/2007 (lead matter):
3. Assessee was engaged in the business of export of
\023trading goods\024. Under section 80HHC(3)(b), an exporter of
trading goods was entitled to deduction in respect of profits
derived from such export (export turnover) as reduced by the
direct costs and the indirect costs attributable to such export.
The smaller the figure of direct and indirect costs, the larger is
the profits derived from the export and, consequently, larger is
the deduction under section 80HHC. By attributing a part of
the indirect costs to the export incentives, interest etc. the
assessee sought to reduce the indirect costs attributable to
the export of trading goods so that it would be left with the
larger amount of export profits which it can deduct from the
gross total income. On the other hand, the attempt of the
Department was to prevent the aforestated claim of the
assessee by holding that expenses incurred for earning
incentives, commission etc. were not liable to be
reduced/deducted from Indirect Costs under section
80HHC(3)(c) read with clause (e) to the Explanation.
4. The following example will clarify the position (figures
assumed):
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Rs.
Rs.
FOB value of trading goods
6,50,000
Export incentives
80,000
}
Miscellaneous income & Brokerage
50,000
1,60,000
Interest Income
30,000
Direct cost
5,00,000
Indirect cost
50,000
Assessee\022s working of deduction under section 80HHC:
Rs.
Rs.
FOB value of exports
6,50,000
Less: Direct costs
5,00,000
Proportionate indirect costs
(Rs. 50,000 minus 10% of
expenses attributable to export
incentives, miscellaneous
income & interest income
i.e. 10% of Rs.1,60,000
=Rs.16,000)
34,000
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5,34,000
Balance (export profits)
1,16,000
A.O\022s. working of deduction under section 80HHC:
Rs.
Rs.
FOB value of exports
6,50,000
Less: Direct costs
5,00,000
Indirect costs
50,000
5,50,000
Balance (export profits)
1,00,000
5. The analysis of the aforestated example indicates that
assessee claims to reduce FOB value of exports amounting to
Rs. 6,50,000 by direct cost of Rs. 5,00,000 plus proportionate
indirect costs of Rs. 34,000, in all amounting to Rs. 5,34,000,
whereas the Department reduces the FOB value of exports of
Rs.6,50,000 by the direct cost of Rs.5,00,000 plus 100%
indirect cost of Rs.50,000, in all amounting to Rs.5,50,000,
which is sought to be reduced from FOB value of Rs.6,50,000.
In other words, according to the assessee, its export profits
should be Rs.1,16,000 whereas, according to the Department,
its export profit is Rs.1,00,000.
6. According to the assessee, apart from export turnover, it
had earned income on account of export incentives,
miscellaneous income and interest income. According to the
assessee, it had two incomes, namely, export income and
income from export incentives. In the above example, assessee
had incurred direct cost of Rs.5,00,000 and indirect cost of
Rs.50,000. According to the assessee, the Department was
right in reducing Rs.5,00,000 from FOB value of exports
amounting to Rs.6,50,000, however, according to the
assessee, the Department had erred in reducing further the
FOB value of exports by Rs.50,000 instead of Rs.34,000
because, according to the assessee, although it had incurred
indirect cost of Rs.50,000, from that figure of Rs.50,000 it was
entitled to deduction of 10% of expenses attributable to export
incentives, miscellaneous income and interest income
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amounting to Rs.1,60,000 (10% of Rs.1,60,000 is Rs.16,000)
as mentioned in the above example. Therefore, according to
the assessee, it was entitled to total deduction of only
Rs.5,34,000 and not Rs.5,50,000 from FOB value of exports
amounting to Rs.6,50,000.
7. Shri S. Ganesh, learned senior counsel appearing for the
assessee, submitted that under section 80HHC(3)(b) only
indirect costs which are \023attributable to such export\024 can be
deducted from export turnover. According to the learned
counsel, in the present case, assessee had export turnover
plus export incentives. According to the learned counsel, the
assessee had, under the circumstances, two incomes, namely,
incentives income and income from export sales for which it
had one Common Pool of expenses. According to the learned
counsel, clause (baa) of the Explanation to section 80HHC
specifically excludes 90% of incentive receipts from the
business profits leaving 10% of such receipts assumed to have
been incurred by the Legislature for earning such receipts
and, therefore, there is no reason why a similar assumption
cannot be validly made while interpreting clause (b) of sub-
section (3) to section 80HHC read with clause (e) of the
Explanation to section 80HHC(3). Learned counsel submitted
that, every receipt has a corresponding expense. Learned
counsel submitted that, under clause (e) in the Explanation to
sub-section (3) of section 80HHC(3), indirect costs have been
defined to mean costs, not being direct costs, allocated in the
ratio of export turnover in respect of trading goods to the total
turnover. In this connection, it is submitted that the
Legislature has given recognition to the fact that 10% of
certain receipts had to be incurred for earning them and,
therefore, it excluded only 90% of such receipts from the
purview of business profits. According to the learned counsel,
one has to read Explanation (e), which defines indirect costs
as applicable to apply to the entire section 80HHC and even if
that argument is not accepted, still there is no reason why the
assumption made by the Legislature of treating 10% of certain
receipts as expenditure under clause (baa) of the Explanation
to section 80HHC is not applicable to cases falling under
section 80HHC(3)(b) read with clause (e) to the Explanation to
sub-section (3) of section 80HHC.
8. Mr. Vikas Singh, Additional Solicitor General, learned
counsel appearing on behalf of the Department submitted that
the modality under section 80HHC(3)(a) for computing
business profits was different from the modality for computing
export turnover in respect of trading goods under section
80HHC(3)(b). According to the learned counsel, nothing
contained in sub-section (3)(a) can be read into sub-section
(3)(b). According to the learned counsel, sub-section (3)(b) was
a stand alone sub-section. According to the learned counsel,
the two sub-sections operated in different spheres. In this
connection, learned counsel urged that in case of section
80HHC(3)(a), incentives are required to be deducted to the
extent of 90% by a deeming fiction from business profits
which methodology would not apply in computation of export
turnover reduced by direct and indirect costs as contemplated
by section 80HHC(3)(b), which, as stated above, applied only
to trader exporter. In the present case, we are concerned with
section 80HHC(3)(b) alone. According to the learned counsel,
the definition of the words \023direct costs\024 and \023indirect costs\024 in
the Explanation to sub-section (3) of section 80HHC, the
Legislature has indicated the ratio for allocation of costs
between export turnover and total turnover only in cases
where the tax payer is engaged in the business of exports and
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also in the business of making domestic sales. According to
the learned counsel, the word costs being attributable to
exports would attract the allocation ratio only in such cases
where the tax payer is engaged in earning income in foreign
exchange from exports and simultaneously earning income
from domestic sales and, that, such ratio is not applicable in
cases falling under section 80HHC(3)(b) because that sub-
section categorically states that the profits derived from
exports shall be the export turnover minus direct and indirect
costs. Therefore, according to the learned counsel, the
methodology of section 80HHC(3)(a) should not be read into
section 80HHC(3)(b). In this connection, learned counsel also
urged that in the case falling under section 80HHC(3)(b),
export turnover and total turnover are identical and, therefore,
the allocation ratio contemplated by the definition of indirect
costs has no application to the cases falling under section
80HHC(3)(b). According to the learned counsel, in cases of
exports of trading goods, the methodology only indicates that
profits derived from export shall be export turnover minus
costs. Therefore, according to the learned counsel, the ratio of
allocation of costs in the definition of the words indirect costs
in the Explanation to sub-section (3) would apply only to
cases falling under section 80HHC(3)(a) and section
80HHC(3)(c)(i). Learned counsel further urged that in clause
(e) in the Explanation to sub-section 80HHC(3), which defines
the words indirect costs to be allocated in the ratio of export
turnover upon total turnover, the denominator, namely, total
turnover would not include incentives and, therefore, while
computing total turnover, one has to take the entire indirect
expense into account. In short, learned counsel submits that
the said ratio will not apply to cases falling under section
80HHC(3)(b).
9. Learned counsel further submitted that as a matter of
policy that the Government thought it fit to exclude only 90%
of the receipts from the business profits as per Explanation
(baa) instead of 100% and from this it cannot be inferred that
the Legislature has assumed that 10% of such receipts has to
be treated as costs or expenses to earn receipts by way of
incentives, commission, interest etc.. According to the learned
counsel, clause (baa) was inserted for an entirely different
purpose. It was not meant for interpreting clause (b) of section
80HHC(3) and, therefore, it cannot be assumed that 10% of
export incentives should be considered as costs or expenses
incurred to earn such receipts. According to the learned
counsel, the definition of \023indirect costs\024 as per clause (e) in
the Explanation below sub-section(3) does not exclude such
costs incurred for earning export incentives. Therefore, there
is no justification for excluding indirect costs, if any, incurred
for earning export incentives, commission etc.. According to
the learned counsel, the assessee in the present case is a
100% exporter and, therefore, the entire expenses, both direct
and indirect, can be only in respect of export turnover.
According to the learned counsel, the definition of \023indirect
costs\024 in clause (e) of the Explanation below sub-section (3)
was to apply only in cases where the tax payer had export
business plus domestic business, in which case, allocation
between export turnover and total turnover is contemplated.
According to the learned counsel, in the present case falling
under section 80HHC(3)(b), question of such apportionment
did not arise because in cases of the present type, export
turnover and total turnover are identical and in such cases
question of apportionment or allocation did not arise.
Therefore, the assumption on which the assessee is placing
reliance is not applicable to cases falling under section
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80HHC(3)(b).
10. Before coming to the controversy in hand, we quote
hereinbelow section 80HHC(3) as it stood at the relevant time:
\023Deduction in respect of profits retained for export business
80HHC (3) For the purposes of sub-section (1),--
(a) where the export out of India is of goods or merchandise
manufactured or processed by the assessee, the profits derived
from such export shall be the amount which bears to the profits of
the business, the same proportion as the export turnover in respect
of such goods bears to the total turnover of the business carried
on by the assessee;
(b) where the export out of India is of trading 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 ;
(c) where the export out of India is of goods or merchandise
manufactured or processed by the assessee and of trading goods,
the profits, derived from such export shall,--
(i) in respect of the goods or merchandise manufactured or
processed by the assessee, be the amount which bears to the
adjusted profits of the business, the same proportion as the
adjusted export turnover in respect of such goods bears to the
adjusted total turnover of the business carried on by the assessee;
and
(ii) in respect of trading goods, 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 :
Provided that the profits computed under clause (a) or clause (b)
or clause (c) of this sub-section shall be further increased by the
amount which bears to ninety per cent of any sum referred to in
clause (iiia) (not being profits on sale of a licence acquired from
any other person), and clause (iiib) and (iiic) of section 28, the
same proportion as the export turnover bears to the total turnover
of the business carried on by the assessee.
Explanations. \027 For the purposes of this sub-section,--
(a) \021adjusted export turnover\022 means the export turnover as
reduced by the export turnover in respect of trading goods;
(b) \021adjusted profits of the business\022 means the profits of the
business as reduced by the profits derived from the business of
export out of India of trading goods as computed in the manner
provided in clause (b) of sub-section (3);
(c) \021adjusted total turnover\022 means the total turnover of the
business as reduced by the export turnover in respect of trading
goods;
(d) \021direct costs\022 means costs directly attributable to the trading
goods exported out of India including the purchase price of such
goods;
(e) \021indirect costs\022 means costs, not being direct costs, allocated
in the ratio of the export turnover in respect of trading goods to
the total turnover;
(f) \021trading goods\022 means goods which are not manufactured or
processed by the assessee.
(3A) \005
(4) \005
(4A) \005
Explanation.\027For the purposes of this section,--
(a) \021convertible foreign exchange\022 means foreign exchange which
is for the time being treated by the Reserve Bank of India as
convertible foreign exchange for the purposes of the Foreign
Exchange Regulation Act, 1973 (46 of 1973), and any rules made
thereunder;
(aa) \021export out of India\022 shall not include any transaction by way
of sale or otherwise, in a shop, emporium or any other
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establishment situate in India, not involving clearance at any
customs station as defined in the Customs Act, 1962 (52 of
1962);
(b) \021export turnover\022 means the sale proceeds, received in, or
brought into, India by the assessee in convertible foreign
exchange in accordance with clause (a) of sub-section (2) of any
goods or merchandise to which this section applies and which are
exported out of India, but does not include freight or insurance
attributable to the transport of the goods or merchandise beyond
the customs station as defined in the Customs Act, 1962 (52 of
1962);
(ba) \021total turnover\022 shall not include freight or insurance
attributable to the transport of the goods or merchandise beyond
the customs station as defined in the Customs Act, 1962 (52 of
1962) :
Provided that in relation to any assessment year commencing on
or after the 1st day of April, 1991, the expression \023total turnover\024
shall have effect as if it also excluded any sum referred to in
clauses (iiia), (iiib) and (iiic) of section 28;
(baa) \021profits of the business\022 means the profits of the business as
computed under the head \021Profits and gains of business or
profession\022 as reduced by\027
(1) ninety per cent of any sum referred to in clauses (iiia),
(iiib) and (iiic) of section 28 or of any receipts by way
of brokerage, commission, interest, rent, charges or any
other receipt of a similar nature included in such profits;
and
(2) the profits of any branch, office, warehouse or any other
establishment of the assessee situate outside India;
(c) \021Export House Certificate\022 or \021Trading House Certificate\022
means a valid Export House Certificate or Trading House
Certificate, as the case may be, issued by the Chief Controller of
Imports and Exports, Government of India;
(d) \021supporting manufacturer\022 means a person being an Indian
company or a person (other than a company) resident in India,
manufacturing (including processing) goods or merchandise and
selling such goods or merchandise to an Export House or a
Trading House for the purposes of export.\024
11. We have considered the rival submissions. It is not
disputed by the Department that the assessee, in addition to
the income derived from export of trading goods, also derived
income from Export Incentives etc. of Rs.1,60,000 against
FOB value of exports amounting to Rs.6,50,000 in the above
illustration. It is not the case of the Department that the
assessee could have earned Rs.1,60,000 without incurring
any expenditure. (Rs.50,000 in the above example). It is not in
dispute that the case falls under section 80HHC(3)(a). It is not
the case of the Department that assessee had no income by
way of incentive, interest etc. (Rs.1,60,000 in the example).
The basic case of the Department was that the words \023indirect
costs\024 in clause (e) in the Explanation did not provide for
exclusion of expenses incurred for earning incentives,
commission, rent etc. and, therefore, the entire amount of
expenses (Rs.50,000 in the above example) spent for earning
such Other Incomes did not fall within the meaning of the
word \023indirect cost\024 in clause (e). According to the
Department, section 80HHC(3)(b) provides for a statutory
formula to calculate export profits by deducting direct and
indirect costs from export turnover, however, expenses
incurred for earning incentives, commission etc. (other
incomes) does not fall in the definition of \023indirect cost\024. That,
the assessee was not entitled to claim 10% of the receipts from
its Other Income (Rs.16,000 in the above example) as expense
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to be deducted from the indirect cost (Rs.50,000 in the above
example). Accordingly, the A.O. deducted full Rs.50,000 as
indirect cost from the export turnover. Therefore, even
according to the Department, it is not in dispute that the
assessee had incurred an expense of Rs.16,000 (in the above
example) to earn Other Incomes of Rs.1,60,000 but it denied
the Proportionate Deduction from Rs.50,000 on account of
strict interpretation of the words \023indirect cost\024 in clause (e).
However, in the above stand of the Department, there is a
fallacy. Under section 80HHC(3)(b) which is the main section,
the Legislature has provided that in cases falling under
section 80HHC(3)(b) direct and indirect costs attributable to
such exports have to be deducted from the export turnover to
arrive at Export Profits. Similar provision is made in clause (d)
which defines the words \023direct costs\024 to mean costs
attributable to exports of trading goods. Moreover, clause (e) of
the Explanation defines \023indirect costs\024 as costs which is not
direct costs as defined in clause (d). The word \023attributable\024 is
wider than the word \023derived\024. The Department in this case,
as can be seen from above example, itself says that Rs.50,000
in full is the Indirect Cost which has to be deducted in full as
clause (e) does not provide for proportionate deduction.
According to the Department, the definition of \023indirect costs\024
will not cover expenses incurred for earning Other Incomes.
However, at the same time, Department concedes that the
assessee had earned export turnover of Rs.6,50,000 plus
Rs.1,60,000 as Other Incomes. It also concedes that
Rs.50,000 is the indirect expense. If so, what should be the
expense allocated to the earning of the two incomes and in
what proportion is the question?
12. According to the Department, the question of allocation
does not arise in cases falling under section 80HHC(3)(b). We
do not find merit in this contention. Firstly, clause (e) to the
Explanation which refers to allocation of costs applies to
sections 80HHC(3)(a), 80HHC(3)(b) and 80HHC(3)(c). Secondly,
section 80HHC(3)(b) equates export profits to export turnover
less direct and indirect costs attributable to the exports of
trading 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 Legislature intended allocation of costs between
export turnover and total turnover. It is urged that the
apportionment would not apply to cases under section
80HHC(3)(b). It is true that, in most cases, it may not. But in
certain cases falling under section 80HHC(3)(b), ratio still
applies. For example, in the case where the assessee exports
all bought-out items but brings back only a part of the export
proceedings into India, in such cases, 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.
13. The question which, however, needs to be decided is
whether, in the above example, the assessee is entitled to
reduction of Rs.16,000 from Rs.50,000 being the total indirect
expenses for earning both the incomes. Department reduces
the FOB value by Rs.50,000 whereas assessee contends that it
should be reduced by Rs.34,000 (Rs.50,000 \026 Rs.16,000).
Assessee claims apportionment at the rate of 10% of Other
Income of Rs.1,60,000 (in the above example). This is opposed
by the Department saying that since apportionment does not
apply to section 80HHC(3)(b), there is no question of applying
the yardstick of 10%. According to the Department, the words
\023indirect costs\024 does not take into account the expenses to
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earn Other Incomes. In this case, reliance is placed on clause
(e). However, the Department has failed to notice the words
\023attributable to exports\024 in section 80HHC(3)(b).
14. As stated above, in our opinion, the words \023attributable\024
in section 80HHC(3)(b) in the main section itself indicates that
apportionment (principle of attribution) is not omitted from
the said provision of section 80HHC(3)(b). As stated above,
assessee has earned Other Income of Rs.1,60,000 apart from
FOB value of exports of Rs.6,50,000. Therefore, some expense
has to be attributed to earning of Rs.1,60,000. If so, the next
question which arises is how to allocate the costs? As stated
above, assessee has two incomes with one Common Pool of
expenses and since \023principle of attribution\024 has been retained
in the scheme of section 80HHC, both in terms of section
80HHC(3), clause (e) to the Explanation to section
80HHC(3)(a), (b) and (c) and in clause (baa) to the Explanation
to section 80HHC, instead of going into lengthy exercise of
dividing such Common Expenses, the assessee has estimated
the reduction of export turnover by 10% of the other income of
Rs.1,60,000 (in the above example). Ultimately, clause (baa) to
the Explanation is itself based on the assumption that 10% of
the income would be an expense. We make it clear that we are
not reading Explanation (baa) into section 80HHC(3)(b). What
we say is as a Guidance Value/Factor, 10% of the total Other
Income of Rs.1,60,000 would be fair estimate. This guidance
value is not flowing from clause (baa) but from the scheme of
section 80HHC read with the Memorandum to the Finance Act
of 1991. Take a reverse case, if allocation of expenses is to be
done on Actual Basis, it would not only be very difficult but in
some cases actual apportionment may not be in the interest
even of the Department.
15. In conclusion, we may state that under section
80HHC(3)(b) one has to balance the \023principle of attribution\024
with the concept of \023allocation\024. The concept of allocation is
meant to reduce the incentive. However, when \023allocation\024 has
to be balanced with the \023principle of attribution\024, the object is
to reduce the incentive and not to eliminate it.
16. For the above reasons, we set aside the impugned
judgments of the High Court dated 22.12.2006 and restore the
orders of the Income Tax Appellate Tribunal dated 30.9.2003,
24.10.2003, 13.2.2004 and 26.8.2004.
17. Accordingly, the civil appeals filed by the assessee stand
allowed with no order as to costs.