Hero
Exports, G.T. Road, Ludhiana Vs. Commissioner of Income Tax,(Central), Ludhiana [2007] Insc 1158 (20 November 2007)
S.H.
Kapadia & B. Sudershan Reddy
(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 trading goods. 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):
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 Assessees 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 5,34,000 Balance (export profits) 1,16,000 A.Os. 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 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 attributable to
such export 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
direct costs and indirect costs 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 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 indirect
costs 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 indirect costs 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 80HHC(3)(b).
10.
Before coming to the controversy in hand, we quote hereinbelow section 80HHC(3)
as it stood at the relevant time:
Deduction
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. For the purposes of this sub-section,--
(a)
adjusted export turnover means the export turnover as reduced by the
export turnover in respect of trading goods;
(b)
adjusted profits of the business 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)
adjusted total turnover means the total turnover of the business as
reduced by the export turnover in respect of trading goods;
(d)
direct costs means costs directly attributable to the trading goods
exported out of India including the purchase price of
such goods;
(e)
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;
(f)
trading goods means goods which are not manufactured or processed by
the assessee.
(3A) (4)
(4A) Explanation.For the purposes of this section,--
(a)
convertible foreign exchange 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)
export out of India shall not include any transaction by way of sale
or otherwise, in a shop, emporium or any other establishment situate in India,
not involving clearance at any customs station as defined in the Customs Act,
1962 (52 of 1962);
(b)
export turnover 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)
total turnover 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 total turnover shall have effect as if it
also excluded any sum referred to in clauses (iiia), (iiib) and (iiic) of
section 28;
(baa)
profits of the business means the profits of the business as computed
under the head Profits and gains of business or profession as reduced
by
(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)
Export House Certificate or Trading House Certificate 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)
supporting manufacturer 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.
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 indirect costs 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 indirect
cost 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 indirect cost. 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 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 indirect cost 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
direct costs to mean costs attributable to exports of trading goods.
Moreover, clause (e) of the Explanation defines indirect costs as
costs which is not direct costs as defined in clause (d). The word
attributable is wider than the word derived. 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 indirect costs 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 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 indirect
costs does not take into account the expenses to earn Other Incomes. In
this case, reliance is placed on clause (e). However, the Department has failed
to notice the words attributable to exports in section 80HHC(3)(b).
14. As
stated above, in our opinion, the words attributable 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 principle of attribution 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
principle of attribution with the concept of allocation.
The concept of allocation is meant to reduce the incentive. However, when
allocation has to be balanced with the principle of
attribution, 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.
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