Cit Vs. Hero Exports - Court Judgment

Rajesh Bindal, J.

1. The revenue has filed the present appeal raising the following substantial question of law arising out of the order passed by the Income Tax Appellate Tribunal, Chandigarh Bench (B), Chandigarh (hereinafter referred to as 'the Tribunal'), in I. T. A. No. 528/Chandi/99 dated 13-22004, for the assessment year 1996-97.

Whether, on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in directing that indirect cost for computation of deduction under Section 80HHC be reduced by 10 per cent, of incentive income earned ?

2. The assessee is a partnership firm engaged in the business of purchaseand export of goods. The income-tax return for the year in question wasfiled by the assessee on October 30, 1996, declaring nil income. During thecourse of assessment, the assessing officer found that the assessee, whileworking out the indirect cost of goods exported, claimed deduction at 10 per cent, as indirect expenses on account of expenses incurred for earning export incentives, miscellaneous income and brokerage etc. The claim made by the assessee was disallowed by the assessing officer and assessment under Section 143(3) of the Income Tax Act, 1961 (hereinaftere referred to as 'the Act') was framed vide order dated 30-12-1998.

3. Aggrieved against the order of assessment, the assessee preferred an 3 appeal before the Commissioner (Appeals) (hereinaftere referred to as, 'the Commissioner (Appeals)'), who vide his order dated 16-3-1999, dismissed the same by observing that the claim of deduction at 10 per cent, on account of expenses relatable to the earning of export incentives and other miscellaneous income was not permissible under any provision of Section 80HHC of the Act as forming part of the indirect cost.

4. Still aggrieved against the order passed by the Commissioner of 4 Income-tax (Appeals) the assessee preferred further appeal before the Tribunal. The Tribunal accepted the plea of the assessee by referring to Explanation (baa) to Section 80HHC of the Act and also by relying upon an earlier order passed by it in I. T. A. No. 803/Chandi/1997. It is this order of the Tribunal, which is impugned by the revenue in the present appeal.

5. We have heard Sh. S. K. Garg Narwana, advocate counsel for the 5 revenue and Sh. Akshay Bhan, advocate for the assessee and with their consent have proceeded to dispose of the appeal finally.

6. The only contention raised by learned counsel for the revenue is that the 6 plea of the assessee, which has been accepted by the Tribunal is totally misconceived as the same is not borne out from the provisions of Section 80HHC of the Act, rather a result of the assessee's own imagination. He further submitted that the definition of indirect cost, as provided for in Explanation (e) to the fifth proviso to Section 80HHC(3) of the Act, does not postulate the position as is sought to be projected by the assessee, where indirect cost has been denned to mean cost, which is not direct cost, allocated in the ratio of the export turnover in respect of trading goods to the total turnover. Direct cost has been defined in Explanation (d) to the same proviso. Both the clauses are reproduced hereunder for ready reference : '(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.'

7. He further submitted that reliance on the definitions contained at the 7 end of the provision in Clause (baa), which defines 'profit of the business' also does not come to the aid of the assessee for the reason that the same only provides for reduction of 90 per cent, of the profits enumerated therein, as are included under the head of 'Profits and gains of business or profession'. The analogy that the Legislature in its wisdom had directed the assessee to retain 10 per cent, of the profits out of the items enumerated therein will apply even in the case in hand permitting the assessee to deduct 10 per cent, of the income from export incentives etc. as indirect cost will not apply where such a profit is not included in the profits and gains of business and profession.

8. On the other hand, learned counsel for the assessee submitted that the Tribunal has relied upon an earlier order passed by it in I. T. A. No. 803/ Chandi/1997 and the revenue having accepted that order by not challenging the correctness thereof any, further, is barred from challenging the present order of the Tribunal in view of the law laid down by Hon'ble the Supreme Court in Berger Paints India Ltd. v. CIT : [2004]266ITR99(SC) . Still further he submitted that the claim of the assessee is well founded within the provisions of the Act, and even the circular of the Board also supported the claim of the assessee. He submitted that it is borne out from the provisions of Section 80HHC of the Act that 10 per cent, is accepted as the standard expenses for earning income including income from the export incentives. It is for this reason that the same is provided for in Clause (baa) in the Explanation attached to Section 80HHC of the Act. This being an accepted position, the provisions being beneficial in nature, should be given a liberal construction and the assessee should be permitted to claim 10 per cent, of the income from export incentives as indirect cost while working out of the profits.

9. In response to the preliminary objection raised by counsel for the assessee to the effect that the revenue having not challenged the order passed in I. T. A. No. 803/Chandi/1997 earlier, in the case of sister concern of the assessee namely Hero Export Pvt. Ltd., is barred from raising the same plea in the present appeal is liable to be rejected for the reason that the appeal in the case referred to above was not filed for the reason that the tax effect involved in that case was merely Rs. 6,676. It is so mentioned by the revenue in I. T. A. No. 102 of 2004 pertaining to the assessment year 1994-95, which is also being disposed of today by a separate order as involving an identical issue. We found the explanation of the revenue to be valid and accordingly, reject this contention of the assessee that the present appeal deserves to be rejected at the threshold for the reason that the revenue had not challenged the earlier case relied upon by the Tribunal.

10. To appreciate the merits, it would be appropriate to extract the relevant 10 provisions of Section 80HHC of the Act, which are as under :

80HHC.(1) Where an assessee, being an Indian company or a person (other than a company) resident in India, is engaged in the business of export out of India of any goods or merchandise to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of the profits derived by the assessee from the export of such goods or merchandise :

Provided that if the assessee, being a holder of an Export House Certificate or a Trading House Certificate (hereafter in this section referred to as an Export House or a Trading House, as the case may be), issues a certificate referred to in Clause (b) of Sub-section (4A), that in respect of the amount of the export turnover specified therein, the deduction under this sub-section is to be allowed to a supporting manufacturer, then the amount of deduction in the case of the assessee shall be reduced by such amount which bears to the total profits derived by the assessee from the export of trading goods, the same proportion as the amount of export turnover specified in the said certificate bears to the total export turnover of the assessee in respect of such trading goods.(2)(a) This section applies to all goods or merchandise, other than those specified in Clause (b), if the sale proceeds of such goods ormerchandise exported out of India are received in, or brought into,India by the assessee (other than the supporting manufacturer) inconvertible foreign exchange, within a period of six months from theend of the previous year or, where the Chief Commissioner or Commissioner is satisfied (for reasons to be recorded in writing) that theassessee is, for reasons beyond his control, unable to do so within thesaid period of six months, within such further period as the ChiefCommissioner or Commissioner may allow in this behalf.

(b) This section does not apply to the following goods or merchandise, namely :

(i) mineral oil; and

(ii) minerals and ores (other than processed minerals and ores specified in the Twelfth Schedule).

(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 ;

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;

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 Clauses (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.' 11 On a perusal of the above provisions of Section 80HHC of the Act, we find that the contentions raised by learned counsel for the revenue deserve acceptance. The term 'direct cost' as defined under the provision, means cost directly attributable to the trading goods exported out of India including the purchase price thereof, whereas indirect cost mean cost not being direct cost, which is allocated in the ratio of export turnover in respect of trading goods to the total turnover. The above referred definitions do not in any way bring within its fold any expense incurred by an assessee for getting export incentives something which comes into picture after the goods have already been exported. It is admitted that the assessee herein being a trader exporter would fall under Sub-section (3)(b) of Section 80HHC of the Act. The pirofits derived from export of trading goods has been defined to mean export turnover in respect of such trading goods minus direct and indirect cost attributable to such exports.