By TIOL News Service

JAIPUR, JULY 06, 2017: THE ISSUE BEFORE THE COURT IS - Whether while calculating the quantum of deduction u/s 80HHC, export turnover has to be reduced by direct and indirect cost attributable to such export in terms of Explanation (e) to Section 80HHC(3). YES is the verdict.

Facts of the case:

The assessee filed this appeal against the order of Tribunal. The Tribunal had dismissed assessee's appeal thereby confirming the order of AO and CIT(A). According to the assessee the Tribunal had acted on total misconception of law in interpreting the provisions contained in Section 80HHC(3)(b) r/w explanation(e) to section 80HHC(3) qua the assessee thereby sustaining the denial of exemption claimed u/s. 80HHC(1). The assessee had filed separate trading accounts in respect of local sales and export sales. However the assessee filed one consolidated P&L A/c wherein total expenses of Rs. 18,00,111/- has been debited. The assessee maintained only one set of books of accounts. For calculating the quantum of deduction u/s 80HHC, from the export turnover of 29,88,282/, total direct & indirect cost was to be reduced. As per clause(e) of the explanation of Section 80HHC(3), indirect cost attributable to export sales was Rs. 9,54,247/ and direct cost amounted to 21,63,678/. After deducting both these cost from export turnover, it was evident that the assessee was not entitled to any deduction u/s section 80HHC since, it had not derived any profit from the export of trading goods. So, claim of deduction u/s80HHC to the extent of Rs.3,53,286/- is rejected.

On appeal, the HC held that,

++ the Delhi High Court in the case of Rollatainers Ltd. vs. Commissioner of Income Tax observed that - “....It is thus clear that Explanation (e) which defines "indirect costs" has to be read in conjunction with sub-section (3)(c)(ii) of Section 80HHC, which provides that the profits shall be reduced by the "direct and indirect costs attributable to export of such trading goods." Since the word "attributable" has been used, it is clear that the indirect costs also must be attributable to the export of such goods; in other words, there must be some nexus that the "indirect costs" have to the export turnover of the assessee. Au contraire, if the term "indirect costs" is interpreted to also include such costs which are not attributable to the export of trading goods, then that would go against the language of the provision, as clarified by the Supreme Court. That being the position, in view of the declaration of the law in Hero Export, "indirect costs" computed must have some nexus (or in other words must be "attributable") to the export of trading goods. The decision of the ITAT on this question is therefore reversed.” Revenue relied upon the decision of Kerala High Court in the case of Indian Spices Co. vs. Commissioner of Income Tax wherein it has been held that "“Held, that the computation had to be made under Section 80HHC(3)(b). The Tribunal was justified in upholding the order of the lower authorities restricting the claim under Section 80HHC of the Act to a sum of Rs.13,54,636.” Taking into account the concurrent finding and invocation clause (e) in our considered opinion is justified and proportionate expenses are calculated by the Assessing Officer. In our considered opinion, none of the authority has committed error. Therefore, the view taken by the Madras High Court in the case of Commissioner of Income Tax vs. M. Gani & Co. cannot be invoked in the present case.

(See 2017-TIOL-1252-HC-RAJ-IT)