Karnataka H.C : The computation of deduction under section 80HHC of the Act worked out by the Assessing Officer based on the export turnover (FOB) minus direct cost minus indirect cost cannot be taken into account, as corresponding deduction in the profit and loss account had to be allowed

High Court Of Karnataka

CIT, Bangalore vs. HJS Stones Ltd.

Assessment Year : 1995-96

Section : 80HHC

N.K. Patil And Mrs. B.V. Nagarathna, JJ.

IT Appeal No. 3150 Of 2005

June 16, 2010

JUDGMENT

Mrs. B.V. Nagarathna, J. – This appeal is filed by the Revenue by challenging the order dated 1-6-2005 passed in ITA No. 48/Bang./1999 by the Income-tax Appellate Tribunal, Bangalore by raising the following substantial questions of law :

“(1) Whether the Appellate Authorities were correct in holding that the computation of deduction under section 80HHC of the Act worked out by the Assessing Officer based on the export turnover (FOB) minus direct cost minus indirect cost cannot be taken into account, as corresponding deduction in the profit and loss account had to be allowed?

(2) Whether the Appellate Authorities were correct in holding that the value of exports (FOB) should be Rs. 70,29,959 as worked out by them and not as admitted in the audit report submitted by the Assessee which was Rs. 70,25,959?

(3) Whether the Appellate Authorities were correct in holding that the provisions of section 80HHC of the Act does not contemplate exclusion of freight and insurance expenditure from both export turnover and total turnover?”

2. The facts leading to filing of this appeal are that the Assessee, which is a company, carrying on business of export of granite, for the assessment year 1995-96 filed its return of income along with the requisite certificate and claimed deduction under section 80HHC of the Income-tax Act, 1961 (in short ‘the Act’). The same was taken up for scrutiny by the Assessing Officer and according to him, the export turnover of Rs. 79,71,201 claimed by the Assessee was not correct and that the FOB value of the Assessee had to be taken into consideration and accordingly computed export value at Rs. 70,25,959. Thereafter, he deducted all the direct and indirect costs from the said amount including freight and insurance charges. Accordingly, the Assessing Officer held that the direct and indirect costs amounting to Rs. 64,83,859 and relief under section 80HHC of the Act was worked out to Rs. 5,42,100 and the said assessment was confirmed by the order dated 26-02-1998.

3. Being aggrieved by the said order the Assessee preferred an appeal before the Commissioner of Income-tax (Appeals) – II, Bangalore, (in short ‘the Commissioner’) who computed the direct and indirect costs at Rs. 55,38,511 and deducted the same from the FOB value of Rs. 70,25,959 and also held that the local sales of Rs. 2,07,864 had to be deducted from the export turnover and directed the Assessing Officer to re-compute the amount for the purpose of deductions under section 80HHC of the Act.

4. The revenue being aggrieved by the said order preferred an appeal before the Income-tax Appellate Tribunal, Bangalore Bench ‘A’ (in short ‘the Tribunal’), which, by its order dated 1-6-1995, confirmed the order of the Commissioner and dismissed the appeal filed by the Revenue. Being aggrieved by the said order the present appeal has been preferred raising the aforesaid substantial questions of law.

5. We have heard the learned counsel for appellants and learned counsel for respondent – Assessee.

6. It is submitted on behalf of the Revenue that the Commissioner and the Tribunal were not right in excluding the freight and insurance charges from the purview of direct costs and thereby granting a higher relief to the Assessee for the purpose of computing deduction under section 80HHC of the Act. He has drawn our attention to sub-section (1), (3)(b) and Explanations (d) and (e) to sub-section (3) of section 80HHC of the Act and has stated that freight and insurance charges have to be deducted as direct costs while computing over all deduction under section 80HHC of the Act. He has also relied upon the decision of the Apex Court in the case of Hero Exports v. CIT [2007] 295 ITR 454 1 , in support of his submissions. Accordingly, he contends that the order of the Commissioner and the Tribunal have to be set aside and the order of the Assessing Officer has to be restored.

7. Per contra, the learned counsel for respondent-assessee has submitted that the substantial questions of law raised in this appeal are identical to questions raised in the decision of the Calcutta High Court in the case of CIT v. H.M. Exports Ltd. [2005] 276 ITR 299 2. He further contend that keeping in mind the definition of “export turnover” and “total turnover” in the Explanations (b) and (ba ) to sub-section 80HHC, the substantial questions of law have to be answered against the Revenue, inasmuch as freight and insurance charges have to be excluded from the purview of “export turnover” and in which case the same cannot be brought within the scope of direct costs while deducting the said amount from export turnover.

8. He further submits that on a reading of the definitions, the Commissioner rightly held that freight and insurance charges cannot come within the scope of direct costs and after deducting the same from “export turnover” has rightly directed the Assessing Officer to re-compute the profits for the purpose of deductions under section 80HHC of the Act, which order has been rightly confirmed by the Tribunal and which do not call for interference in this appeal. He has also referred to the decision of the Apex Court in the case of CIT v. Lakshmi Machine Works [2007] 290 ITR 667 3  to draw our attention to the object and purpose of section 80HHC of the Act and the decision of the Calcutta High Court in the case of H.M. Exports Ltd. (supra).

9. Having heard the counsel on both sides and on perusal of the material on record, the only question that arises for our consideration is as to whether the Commissioner and Tribunal were justified in deleting freight and insurance charges from “export turnover” and “total turnover” and holding that they do not come within “direct costs”, while computing tax under section 80HHC of the Act.

10. In order to answer the said point it is necessary to note the relevant clause of section 80HHC of the Act, which reads as follows :

“Section 80HHC Deduction in respect of profits retained for export business.—(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 to the extent of profits, referred to in sub-section (1B), derived by the assessee from the export of such goods or merchandise.”

11. For the purpose of sub-section (1), sub-section (3)(b), reads as follows :

“(3) For the purposes of sub-section (1)

(a)****

(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;”

12. The relevant explanation for the purpose of sub-section (3)(b), with regard to “direct” and “indirect costs”, read as follows :

“For the purposes of this sub-section,—

(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;”

13. For the purpose section 80HHC of the Act the explanation gives definition of “export turnover” and “total turnover”, which read as follows :

“For the purposes of this section,—

(a) and (aa)

(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), (iiic ), (iiid) and (iiie) of section 28;”

14. On a conspectus reading of the aforesaid provisions it becomes clear that while determining the export turnover with regard to goods exported outside India or trading of the goods as per section 80HHC(3)(b) freight and insurance charges have to be deducted at the first instance. In other words, what the definition of “export turnover” states is that freight and insurance charges attributable to the transportation of goods or merchandise beyond the customs station have to be excluded. Even the definition of “total turnover” does not encompass freight and insurance charges. After excluding such charges the computation of export turnover must be made and it is from the said figure that “direct” and “indirect costs” has to be deducted. While doing so the definition of direct and indirect costs have to be taken into consideration.

15. When from the computation of export turnover freight and insurance charges attributable to the transport of the goods have already been excluded, we do not see any reason to once again deduct the same as coming within the scope of definition of direct costs. In this context, it would be of relevance to note that the object of the definition of export turnover is to take into consideration FOB values and not CIF values. In this view of the matter when once the export turnover has already excluded freight and insurance charges attributable to the transportation of goods or merchandise, it cannot be once again taken into consideration for the purpose of deduction from the export turnover as direct costs. In fact a combined reading of the definitions would make it clear that the direct and indirect costs have to be reduced from the export turnover, which in any case cannot include freight and insurance charges.

16. In the case of Lakshmi Machine Works (supra), while discussing on costs directly attributable and indirect costs which have to be deducted from export turnover, the Apex Court held that direct costs would generally embrace, apart from the purchase cost and related costs, such other costs which have been incurred either in relation to the purchase, or in relation to the transportation or storage of the goods prior to their export, or in relation to the movement of goods from the exporter’s godown, premises or warehouse to the customs station. The use of word “directly” signifies that there should be a proximate connection between the costs and purchase of the trading goods. In other words, they should not be “overhead costs” and while discussing “total turnover”, it was held that from the turnover (as per books of account) the freight/insurance charges attributable to the transport of goods or merchandise beyond customs station in India (i.e., export of goods) and export incentives should be deducted.

17. In this context, it would also be of relevance to refer to the decision of Calcutta High Court in the case of H.M. Exports (supra), wherein it has been held that provisions are clear if read together and in order to compute profit out of the exports, the export turnover is to be reduced by direct and indirect costs. Since freight and insurance charges are not part of export turnover the same would be excluded while arriving at export turnover. In the said decision the Calcutta High Court confirmed the order of the Tribunal, which had also excluded the freight and insurance charges from the export turnover and held that the same cannot come within the scope of direct costs, since it is already excluded from the scope of export turnover. The said decision is squarely applicable to the present case also.

18. It is also necessary to note that in the case of H.M. Exports (supra) it is stated that under the provisions of sub-section (3b) of section 80HHC of the Act, the Legislation has provided that the direct and indirect costs attributable to the said export have to be deducted from export turnover, i.e., to reduce on export costs. While following the said formula, the definition of export turnover has to be considered in which event, freight and insurance charges have to be excluded from the purview of export turnover. The relevant portion of the judgment reads as follows :

“The provision is clear if read together. In order to arrive at the profit out of the export, the export turnover is to be reduced by direct costs and indirect costs. Since freight and insurance are not part of the direct and indirect costs, the same cannot be excluded for arriving at the export turnover, as was rightly done by the learned Tribunal though the expression might be slightly ambiguous.”

19. The Learned Counsel appearing for revenue has drawn our attention to another decision of the Apex Court in the case of Hero Exports (supra). The said decision is with regard to allocation of indirect costs on trading goods to export incentives, under clause (e) of the Explanation  having reference to the clause (b) of section 80HHC(3). The said decision also dealt with the calculation of profits under section 80HHC(3)(b) of the Act by deducting from export turnover, direct and indirect costs attributable to export of trading goods and that the Parliament intended allocation of costs between export turnover and total turnover. The said decision did not concern as to whether while deducting direct costs freight and Insurance charges must be included as part of direct cost. In the said decision the Apex Court held that while computing profits from exports some expenses has to be attributed to earning the income and that as a guidance value, or factor, 10 per cent of the income has to be taken as fair estimate. The question as to whether export turnover exclude freight and insurance charges and therefore could not be taken into consideration under the scope of direct costs or indirect costs did not arise for consideration in the said case. However the instant case raises the question as to whether freight and insurance charges have to be deducted from export turnover while computing the profit under section 80HHC(3)(b) of the Act.

20. In the instant case, no doubt the Commissioner of appeals has at para 4.1 of its order rightly excluded freight and insurance charges from the export turnover and has not taken the same into consideration while deducting direct and indirect costs and has rightly deducted the same. However, at para 4.2 reference made to profit and loss account has perhaps let the Revenue to believe that the said expenses are removed from profit and loss account totally.

21. We clarify that computation for the purpose of section 80HHC of the Act is a specific computation within the entire profit and loss account of the balance sheet and therefore, there can be no apprehension in the mind of Revenue that the freight and insurance charges are totally removed from the profit and loss account. Hence, by clarifying that portion of the order of the Commissioner which has been approved by the Tribunal, we hold that the said authorities rightly did not exclude the freight and insurance charges within the computation of export turnover in the instant case arriving at a figure for the purpose of computation under section 80HHC of the Act.

22. In this view of the matter the substantial questions of law in this appeal have to be answered against the revenue and the Assessing Officer is directed to work out the computation for the purpose of section 80HHC of the Act in the light of the aforesaid observations.

23. Accordingly, appeal is disposed of in the above terms.

[Citation : 335 ITR 500]

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