Chitra Venkatraman, J.@mdashFollowing are the substantial questions of law raised by the Revenue in these Tax Case Appeals:
1. Whether on the facts and circumstances of the case, the Tribunal was right in holding that the indirect expenditure related to exports should only be calculated on the basis of ratio of export turnover to total turnover u/s 80HHC when the details of indirect costs identified as pertaining to exports has been furnished by the assessee?
2. Whether on the facts and circumstances of the case, the tribunal was right in holding that the indirect expenditure related to exports should only be calculated on the basis of the formula u/s. 80HHC if regular books of accounts are not maintained?
The assessment years are 2002-2003, 2003-2004 and 2001-2002 respectively.
The assessee is an manufacturer of plastic containers and trader in cosmetic goods. During the financial years relevant to the appeals under consideration, the assessee had exported trading goods and claimed deduction u/s 80HHC of the Income Tax Act, hereinafter referred to as the Act.
2. For the assessment year 2003 2004, the assessee exported goods of the value of Rs. 9,00,26,096/-. In respect of the cost incurred on exports, the assessee had taken a figure of Rs. 19.80 crores as indirect cost and apportioned them to the exports in the ratio of export turnover and total turnover. However, on going through the Profit and Loss Account of the assessee, the officer noted that the assessee had incurred total indirect expenses at Rs. 105.06 crores and it should be apportioned in terms of 80HHC(3)(b) read with explanation (d) and (e). The assessee submitted that the definition of "Indirect Cost" did not mean that all costs other than the direct cost should be considered as indirect cost attributable to the trading exports. It submitted that a sum of Rs. 19.80 crores alone was attributable as indirect cost to the exports for arriving at the export cost and the same should be allocated in the export turnover and total turnover ratio as per 80HHC(3)(b). The Assessing Officer, pointed out that the assessee was asked to give a break-up of the figure of Rs. 19.80 crores as indirect costs relatable to exports. Accordingly, the assessee had submitted a detail break-up of indirect expenses of which a sum of Rs. 4,80,47,714/- related to export expenses and a sum of Rs. 15,00,30,591/- crores related to head office expenses having a bearing on exports. The assessee classified the total indirect expenses as expenses incurred exclusively for exports at Rs. 4,80,47,814/- and expenses incurred exclusively for domestic sales at Rs. 85,25,57,602/- and head office expenses which are common for both export and domestic sales as Rs. 15,00,30,591/-. On verification of the books of accounts produced it was seen that the assessee had divided expenses among three categories. For example, Advertisement expenses are expenses incurred for advertisement in foreign media. Similarly, travelling and conveyance expenses was in respect of foreign travel, sales promotion expenses for sales outside India, freight for exports, etc. However, for identifying the expenses as relatable to the exports, referring to C.I.T.(A)''s order for the assessment year 2001-2002, where the formula was adopted, the Assessing Officer pointed out that by the application of that formula under 80HHC(3)(b), the assessee could be granted a relief on indirect expenses at a figure much less than the figure of Rs. 4,80,47,714/- identified by the assessee as indirect cost relatable to exports. Thus, the Assessing Officer viewed that indirect costs could be identified without resorting to apportionment as prescribed under 80HHC(3)(b) of the Act, the working had to be based on the guidelines and not resorting to apportionment. Thus, when the costs were easily identifiable they were direct costs allocated to exports and those sum identified as common for both exports and domestic turnover, need to be apportioned under 80HHC(3)(b). Thus viewed, the officer rejected the assessee''s explanation based on the provisions under 80HHC(3)(b) to adopt apportionment.
3. The assessment for assessment year 2002-2003 is also on similar lines. Here again, the assessee provided the break up of the figure of Rs. 14.16 crores claimed as indirect costs relatable to the exports. The assessee submitted a sum of Rs. 11,04,41,299/- was relatable to head office expenses having a bearing on exports and a sum of Rs. 3,11,71,438/- as expenses relatable to exports. Viewing that the apportionment of the costs as provided under explanation to section 80HHC need not be followed when it was possible to identify the expenses incurred for exports and non-exports, the assessing officer rejected the assessee''s claim to follow formula. Aggrieved by this the assessee went on appeal before the Commissioner of Income Tax (Appeals).
4. In the appeal relevant to the assessment year 2002-2003, the First Appellate Authority pointed out that indirect expenses attributable to export goods were not identifiable. Admittedly, there was no documentary evidence filed to prove that the export of goods was effected only through head office for which any exclusive demarcation was done from all other branches of the assessee and there was no indirect expenses incurred at any other branch office that could be directly or indirectly relatable to the export of trading goods. In the circumstances, the Commissioner accepted that the formula as per 80HHC(3)(b) had to be adopted; that the total indirect expenses were required to be apportioned in the ratio of export turnover of the trading goods to the total turnover of the assessee. As far as the assessment year 2003 2004 is concerned, it followed the earlier order passed for assessment year 2002-2003. As against this, the Revenue went on appeal. The assessee also went on appeal as against certain other claims.
5. The Tribunal, pointed out that there was no separate books of accounts maintained by the assessee relating to export and other activities. The export out of India was of trading goods and considering the domestic sale that the assessee had, Section 80HHC3(b) was applicable to the facts of the case. Referring to the definition of "Direct Costs" as cost directly attributable to the trading goods exported out of India and "Indirect Costs" as cost not being direct cost allocated in the ratio of export turnover in respect of trading goods to the total turnover, the Tribunal pointed out that there was no dispute regarding indirect expenses identified as not relating to exports as the Assessing Officer himself had accepted the apportionment of the indirect cost relatable to exports stated as Rs. 3,11,71,438/- for the assessment year 2002-2003. The assessee claimed that the computer software generated the data of certain indirect expenses relatable to export. The assessee contended that going by the nature of expenses they could not be allocated to exports. The assessee claimed that indirect costs were to be allocated according to the ratio of export turnover to total turnover. In the absence of proper books of accounts to separate the expenses of the export division and the domestic division, the Tribunal agreed with the Commissioner''s view that the only manner in which the cost could be allocated would be by adopting the respective ratio. Thus, the Tribunal, agreed with the Commissioner and rejected the revenue''s appeal. The Tribunal, pointed out the admitted fact that the separate books of accounts for export and domestic division had not been maintained and in the circumstances, when the language of Section 80HHC(3)(b) of the Act is plain and simple, the proper course hence would be to resort to the apportionment of indirect costs as prescribed under 80HHC(3)(b). The treatment of Rs. 3,11,71,438/- mentioned by the assessee, (for the assessment year 2002-2003), as relatable to exports hence could not be taken as attributable to exports. The Officer had taken them as tantamounting to cost directly attributable to trading goods exported hence direct costs. The Tribunal pointed out the various description of this expenditure as salaries, staff welfare, interest, advertisement, sales promotion, freight handling and conveyance, repairs and maintenance, phone, postage, printing and stationary, rates and taxes, insurance and general expenses. The term "attributable'' could be used for things intimately related, since they were related to export as well as to the domestic trading, these expenditures could not be termed as intimately related only to export. In the result, the Tribunal agreed with the assessee and held that the only manner in which the expenses could be attributable to export was by apportionment. The reasoning of the Tribunal as far as the next assessment year 2003 2004 on the expenses relatable to the export turnover of Rs. 4,80,47,714/- is concerned, this was also on the same lines. Aggrieved by this, the present appeals are preferred by the Revenue.
6. Learned counsel for the Revenue pointed out that when the assessee is in a position to indicate the expenses incurred as (1) relating to Head Office; (2) expenses relatable exclusively to the exports and (3) expenses exclusively related with domestic sales, it stands to reason that such identification is possible and the question of adoption of the formula for the purpose of working out direct cost and indirect cost did not arise. He, however, submitted that even though the assessee had not maintained separate books of accounts yet, from the books available, it was able to identify the cost incurred as expenses relatable to the exports and in these circumstances, no case is made out by the assessee for adopting the formula.
7. Countering the claim of the Revenue, learned counsel appearing for the assessee, however, submitted that the details were furnished before Assessing Officer as well as before the Tribunal to point out the expenses incurred exclusively for export and expenses relatable to exports. He pointed out that the assessee never denied that it had not maintained separate books of accounts one for domestic sales and the other one for exports; however, when it culled out the details of expenses incurred, it had only given a common data as regards the expenses relatable to exports and not as attributable to exports.
8. Pointing out to the specific provisions contained in 80HHC(3)(c)(2) and to the explanation giving the meaning of direct costs and indirect cost, he submitted that unless the expenditure incurred are attributable to the export of the trading goods, on the mere score of the assessee''s giving expenses related per se would not enable the Revenue to treat the figures given by the assessee as direct cost as attributable to the exports. He pointed out that as far as the expenses relating to the head office is concerned, there is no dispute between the revenue and the assessee. The only question is as regards the expenses relatable to the exports for which the assessee had followed the formula.
9. It is not disputed by both parties that the assessee had not maintained separate books for the export and the trading goods. On an enquiry made by the Assessing Officer, the assessee was asked to provide the break-up of Rs. 19.80 crores for the assessment year 2003-2004 and of the figure of Rs. 14.16 crores for the assessment year 2002-2003. In paragraph 1.10 of the assessment order relevant to the assessment year 2002-2003, the assessing officer extracted the expenses allocated under the head export expenses relatable to export and head office expenses as having some bearing on the exports. Thus, for the assessment year 2002-2003, Rs. 3,11,71,438/- was given as expenses relatable to exports and Rs. 11,04,41,299/- as Head Office expenses having a bearing on exports and for the assessment year 2003 2004, the sum of Rs. 4,80,47,714/- was given as export expenses relatable to exports and a sum of Rs. 15,00,30,591/- was given as Head Office expenses having a bearing on exports. The assessee took the plea that the export expenses of Rs. 4,80,47,714/- and Rs. 3,11,71,438/- were not attributable to exports having no nexus at all to exports in entirety. The entire argument of the Revenue rests on the fact that when the assessee had identified these expenses as relatable to exports there was no need for adopting any formula. The Revenue does not deny the fact that these expenses are not attributable in entirety to exports to treat them as direct costs. Nevertheless, as already pointed out, the reasoning is on the fact that the assessee had shown a detailed analysis of the costs and had given the break-up. We do not think this by itself could support the case of the Revenue that the break-up given had to be taken as only attributable to exports. As rightly pointed out by the learned counsel for the assessee, direct costs under 80HHC(3)(1) explanation (d) is defined as costs directly attributable to the trading costs exported out of India including the purchase price of such goods and explanation (e) defines "Indirect costs" as costs not being direct costs allocated in the ratio of the export turnover in respect of trading goods of the total turnover. In 80HHC a specific provision is made as regard the manner for arriving at the profit derived from export which reads as under:
80HHC(3)(1)(c)(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.
10. Considering the fact that export is of trading goods and in such cases where direct and indirect cost are not identifiable as attributable to the export of such goods, the Statute prescribes that the formula be adopted as export turnover as reduced by direct and indirect costs attributable to export of such goods.
11. Keeping in mind the said guidelines provided in the Statute itself, when on facts the Tribunal has found that the sum of Rs. 4,80,47,714/- and Rs. 3,11,71,438/- was not attributable to the exports exclusively but only as relatable to exports, we do not find any justification in the Revenue''s contention that on the mere score of the assessee giving break-up of the expenses per se would lead to an inference that the entire amount has to be taken as direct costs by not taking recourse to the formula given under 80HHC(3). In the light of the finding of the Tribunal and the data available in the assessment order and further going by the provision of 80HHC(3), we have no hesitation in confirming the order of the Tribunal. In these circumstances, the Tax case appeals are dismissed.
