Case Law Details
ITAT MUMBAI BENCH ‘L’
Aventis Pharma Ltd.
versus
Deputy Commissioner of Income-tax
IT Appeal NO. 4179 (MUM.) OF 2003
ASSESSMENT YEAR 1998-99
Date of Pronouncement – 12.12.2012
ORDER
Vijay Pal Rao, Judicial Member
This appeal by the assessee is directed against the order dated 23.3.2003 of the Commissioner of Income Tax (Appeals) arising from the order giving effect to Commissioner of Income Tax (Appeals)’s order dated 18.5.2001 for the Assessment Year 1998-99.
2. The assessee company is engaged in the business of pharmaceutical products. It had filed its return of income for the assessment year under consideration on 30.11.1998 disclosing the income of Rs. 30.73 crores. The original assessment was completed u/s 143(3) on 28.2.2001 determining the total income at Rs. 63.04 crores. While completing the assessment, the Assessing Officer made certain additions and dis allowances which were disputed by the assessee in the appeal before the Commissioner of Income Tax (Appeals). The Commissioner of Income Tax (Appeals) inter alia restored the issue of adopting indirect cost for computing the profits of trading exports to Assessing Officer for the purpose of deduction u/s 80HHC vide order dated 18.5.2001. Pursuant to the order of the Commissioner of Income Tax (Appeals), the Assessing Officer has passed the order giving to effect to Commissioner of Income Tax (Appeals)’s order whereby the Assessing Officer computed the indirect costs attributable to the trading goods exported at Rs. 2,65,79,211/-.
3.1 Apart from allocating the indirect costs against the profit from export of trading goods, the Assessing Officer, while passing the order giving to effect to CIT(A)’s order also applied clause (baa) of Explanation to Sec. 80HHC (4C) and thereby reduced 90% of other income, which includes processing charges, sales tax refund and income on sale of scrap from business profits.
3.2 Aggrieved by the action of the Assessing Officer in the order giving effect to the order of the Commissioner of Income Tax (Appeals), the assessee filed appeal before the Commissioner of Income Tax (Appeals) raising objection against the jurisdiction of the Assessing Officer in the remand proceedings for reducing 90% of other income under clause (baa) of Explanation to sec. 80HHC(4C), which was neither an issue in the original assessment nor remanded by the Commissioner of Income Tax(Appeals) in the first round of litigation. Apart from this, the assessee has also challenged the allocation of indirect cost amounting to Rs. 2.65 crores.
3.3 The Commissioner of Income Tax (Appeals) has turned down the objection of the assessee with regard to the jurisdiction of the Assessing Officer for making certain additions in the order giving to effect proceedings which was not made in the original assessment.
3.4 The Commissioner of Income Tax (Appeals) has alternatively issued a notice u/s 251 of the Act for enhancement of assessment with respect to the additions by reducing 90% of other income under clause (baa) of Explanation to sec. 80HHC(4C). Accordingly, out of the three receipts, the Commissioner of Income Tax (Appeals) has confirmed the exclusion of 90% in respect of two receipts namely sales tax refund and processing charges under clause (baa) of Explanation to sec. 80HHC(4C).
3.5 As regards the sale of scrap, the Commissioner of Income Tax (Appeals) has held that the action of the Assessing Officer is not in terms of provisions of law and therefore, the addition on this account was allowed.
3.6 On the issue of indirect cost attributable to export of traded goods, the Commissioner of Income Tax (Appeals) has given partial relief to the assessee by holding that the items of expenditure can be taken as cost only, if it has some connection, link to the export and therefore, if the expenditure is totally disconnected with the export activity, it cannot be taken as part of the indirect costs. Accordingly, the Commissioner of Income Tax (Appeals) has directed the Assessing Officer to rework the indirect costs for working out the deduction u/s 80HHC (3(b) of the Act.
3.7 Aggrieved by the order of the Commissioner of Income Tax (Appeals), the assessee has filed this appeal before us and raised the following grounds:
1. On the facts and in the circumstances of the case and in law, the learned Commissioner of Income-tax (Appeals) (hereinafter referred to as the learned CIT(A), has erred in issuing a notice dated 18th February, 2003 for enhancement under section 251(2) of the Act read with explanation thereto which has consequently resulted in lesser deduction being allowed to the appellant company under the provisions of section 80HHC(3)(c)(i) of the Act. He ought not to have done so.
2. Without prejudice to Ground No. 1, on the facts and in the circumstances of the case and in law, the learned CIT(A), has erred in holding that in computing the deduction under section 80HHC(3)(c)(i), 90% of the following receipts had to be excluded from the profits of business/adjusted profits of business:
| (i) Sales-tax refund |
Rs. 65,20,908 |
| (ii) Processing charges |
Rs.1,85,80,156 |
|
Rs. 2,51,01,064 |
3. On the facts and in the circumstances of the case and in law, the learned CIT(A), has erred in confirming that the learned assessing officer had correctly excluded the processing charges of Rs. 1,85,80,156, and sales-tax set off/refund of Rs. 65,20,908 from the business profits by treating these receipts as covered under clause (baa) of the Explanation to section 80HHC for the purpose of computing the deduction under that section. He ought not to have done so.
4. On the facts and in the circumstances of the case and in law, the learned CIT(A), has erred in holding that in computing the deduction in respect of export of trading goods under section 80HHC, the expenditure incurred at Hyderabad branch office of the appellant company to the extent not directly related to domestic sales was liable to be treated as part of indirect cost of trading exports without appreciating the fact that the said branch office did not carry out any activity relating to trading exports. He ought not to have done so.
4. Ground nos 1 to 3 relating to the reduction of 90% of the receipts on account of sales tax refund and processing charges from the profit of business under clause (baa) of Explanation to section 80HHC.
4.1 The ldSr counsel Shri J D Mistry has submitted that in the first round of litigation, the Commissioner of Income Tax(Appeals) remanded the matter to the record of the Assessing Officer with respect to the deduction u/s 80HHC only on two aspects viz (i) the total turnover figure and (ii) computation of total direct cost attributable to the export of trading goods. The Assessing Officer, while passing the order giving effect to Commissioner of Income Tax(Appeals)’s order has exceeded his jurisdiction and made certain additions with respect to the income on account of sales tax refund, processing charges and scrap sale by reducing 90% from the profit of business under clause (baa) of Explanation to sec. 80HHC. Therefore, the Assessing Officer, while making these additions has acted illegally and without jurisdiction. The ldSr counsel has submitted that the Commissioner of Income Tax(Appeals) confirmed the action of the Assessing Officer with respect to the receipts on account of sales tax refund and processing charges and alternatively under the power of enhancement of assessment, which is also against the provisions of law. The ldSr counsel has submitted that the power of the Commissioner of Income Tax(Appeals) for enhancement of the assessment are restricted to the power of the Assessing Officer and if the Assessing Officer has no jurisdiction in the remand proceedings to make addition, which was not made in the original assessment, then in the appeal against the order giving effect, the Commissioner of Income Tax(Appeals) has no jurisdiction beyond the jurisdiction of the Assessing Officer on the subject matter. He has relied upon the decision of the Hon’ble jurisdictional High Court in the case of CIT v..Indo-Aden Salt Works Co. [1959] 36 ITR 429 (Bom.).
4.2 The LdSr counsel has submitted that the directions of the Commissioner of Income Tax(Appeals) while setting aside the issue of deduction u/s 80HHC was explicit to consider the claim of the amount that are to be taken as direct cost and indirect cost in relation to the goods exported out of India for computation of deduction u/s 80HHC(3)(b). While deducting 90% of the certain receipts while working out the eligible deduction u/s 80HHC, the Assessing Officer has gone beyond the direction and thereby exceeded his jurisdiction.
4.3 The ldSr counsel has alternatively submitted that even other wise, the processing charges received by the assessee are operating receipts and cannot be held as the income falls under clause III(a),(b),(c),(d) and (e) of section 28 as provided under clause (baa)of Explanation to section 80HHC. He has further contended that even other wise, the exclusion of 90% of such receipts should be net and not gross as held b y the Hon’ble Supreme Court in the case of ACG Associated Capsules (P.) Ltd. v. CIT [2012] 343 ITR 89.
4.4 On the other hand, the ld DR has submitted that the Commissioner of Income Tax(Appeals) has given a finding that the direction given in the first round of appeal are not clear and therefore, when the issue of deduction u/s 80HHC was remanded to the Assessing Officer, then the Assessing Officer, in the remand proceedings can decide all the aspects relating to the issue of deduction u/s 80HHC and therefore, the Assessing Officer was having jurisdiction to decide the issue of exclusion of 90% of the other income as per clause (baa) of Explanation to Section 80HHC. The ld DR has further submitted that the jurisdiction for the enhancement of assessment exercised by the Commissioner of Income Tax (Appeals) is only an alternative action after confirming the action of the Assessing Officer. Therefore, there is no illegality in the order of the Commissioner of Income Tax (Appeals) in confirming the action of the Assessing Officer in reducing 90% of the other income with respect to sales tax refund and processing charges which is very much part and parcel of the same issue of deduction u/s 80HHC.
4.5 On merits, the ld DR has submitted that the sales tax refund and processing charges are the receipts/income similar to the income as provided under clause III(a),(b),(c),(d) and (e) of section 28. He has relied upon the decision of the Honorable Supreme Court in the case of CIT v. K. Ravindranathan Nair [2007] 295 ITR 228 as well as the decision of the Honorable jurisdictional High Court in the case of CIT v. Dresser rand India (P.) Ltd. [2010] 323 ITR 429. He has relied upon the orders of the authorities below.
5. We have considered the rival submissions as well as the relevant material on record. The power and jurisdiction of the Assessing Officer in the remand proceedings are circumscribed by the directions of the appellate authorities. In the original assessment, though, the Assessing Officer applied clause (baa) of Explanation to Section 80HHC(4C) with respect to sale of import license, duty drawback, DEPB entitlements, rent, interest, service charges, commission, other miscellaneous income and discount. Therefore, it is not the case where the Assessing Officer has completely overlooked the provisions of section 80HHC and particularly clause (baa) of Explanation to sec. 80HHC while completing the original assessment. However, the clause (baa) of Explanation to sec. 80HHC was not applied with respect to the sales tax, processing charges and miscellaneous income on sale of scrap, the details of which are as under:
| (i) Sales Tax Refund |
Rs. 65,20,908/- |
| (ii) Processing Charges |
Rs. 1,85,80,156/- |
| (iii) Sale Value of scrap included in Misc. Income |
Rs. 1,16,989/- |
|
Total |
Rs.2,52,18,053/- |
5.1 The assessee has not challenged the action of the Assessing Officer in the original assessment to the extent of applying clause (baa) of Explanation to sec. 80HHC on certain income but has challenged the action of the Assessing Officer only with respect to the figure of total turnover and allocation of indirect cost to the export of traded goods. The Commissioner of Income Tax(Appeals) vide his order dated 18.5.2001 has remitted these two issues in paras 26 to 26.5 as under:
“26.1 In working out the deduction allowable u/s.80HH-C, the assessee took the total turnover at a figure of Rs. 5,35,79,38,457/. The assessing officer held that export turnover of Rs.7.67 crores not realised by 30/9/98 was not included in the total turnover as mentioned above. He accordingly added this amount of Rs. 7.67 crores to be total turnover taken by the assessee. The A.R. has clarified that the sum of Rs. 7.67 crores was in fact included in the total turnover as shown in the annexure to the certificate in Form No.10 CCAC, and that the AO made a double addition of the same amount. The assessee also filed a petition u/s. 154 on this point. The contention of the assessee appears to be correct. The A.O. is directed to verify this and compute the allowable deduction u/s 80HHC accordingly.
26.2 In its computation, the assessee took the total indirect costs attributable to total exports at Rs. 29,04,71,861/- out of which the indirect costs attributable to the exports of trading goods was taken at Rs. 32,19,550/-. The A.O. took these figures at Rs.1,73,00,11,000/- and Rs 1,90,26,756/- respectively as a result of which the deduction allowable u/s.80HHC in respect of exports of trading goods wan considerably reduced.
26.3 This computation of total indirect costs at Rs. 1,73,00,11,000/-, the A.O took the general expenses at Rs. 1,46,69,78,000/- after excluding from the general expenses of Rs. 1,40,13,51,441/- (as per Schedule 17 of the Annual Report), the following expenses :
| (a) Power, fuel & lighting |
Rs. 16,65,02,833 |
| (b) Stores and spares |
Rs. 2,60,85,809 |
| (c) Repairs to plant & machinery |
Rs. 3,17,83,650 |
|
Total |
Rs. 22,43,72,222/- |
26.4 The contention of the assessee is that for this determination of the indirect cost attributable, to the exports of trading good, costs unrelated to exports of trading goods should not be taker into account. In this view of the matter, it is contended that the following expenses also included in the general expenses of .Rs. 1,69,13,51,411/-, should be excluded for purpose of computing deduction allowable u/s 80HHC in respect of exports of trading goods ; –
(i) Manufacturing expenses, not considered by the A.O. like salaries, wages, rates, taxes, rent, traveling, insurance, repacking and processing charges, royalties, etc.
(ii) Branch expenses like salaries, wages, rent, rates, taxes, power and fuel, lighting, insurance, traveling, advertisement, packing, freight, forwarding, local commission etc.
(iii) Certain Head Office expenses.
(iv) As against interest of Rs. 12,66,85,000/- considered by the Assessing Officer why interest of Rs. 96,97,538/- should be considered.
26.5 After going through the workings of the A.O and the A.R., I find that the A.O, worked out the indirect costs at Rs. 1,73,00,11,000/- without giving a proper opportunity of being hoard to the assessee. It is not possible to decide in this appellate order, what items should be included or excluded in the indirect costs without the Assessing Officer discussing them thoroughly in the assessment order. The Assessing Officer is, therefore, directed to re-compute the deduction allowable u/s 80HHC after discussing each and every claim of the assessee before coming to a decision on each point. For this purpose, the matter is restored to the AO, with a direction to determine the deduction allowable u/s. 80HHC after giving proper opportunity of being heard to the assessee.”
5.2 It is clear that as regards to the dispute of turnover, the Commissioner of Income Tax(Appeals) has accepted the claim of the assessee and directed the Assessing Officer just to verify and compute the deduction u/s 80HHC accordingly. Whereas the issue of indirect cost allocated to the export of goods traded as per sec.80HHC(3)(b), the Commissioner of Income Tax(Appeals) has remanded the issue to the record of the Assessing Officer to compute the deduction after discussing each and every claim of the assessee. Thus, so far as the issue of deduction u/s 80HHC which was remanded to the Assessing Officer pertains only to the computation of attributable indirect cost to the export of trading goods.
5.3 Since the issue of reduction of 90% under clause (baa) of Explanation to sec. 80HHC was neither raised before the Commissioner of Income Tax(Appeals) in the appeal of the assessee nor It was taken up by the Commissioner of Income Tax(Appeals) in the first round of litigation; therefore, the said issue was not at all involved and consider in the appeal of the assessee by the Commissioner of Income Tax(Appeals) while passing the order dated 18.5.2001 whereby the issue of indirect cost allocable to the export of traded goods was remanded to the Assessing Officer.
6. In view of the facts and circumstances of the case when the limited aspect/dispute of allocation of indirect cost to the export of trading goods was remanded to the record of the Assessing Officer, then in the giving effect proceedings in pursuant to the directions of the Commissioner of Income Tax (Appeals), the jurisdiction and power of the Assessing Officer is confined only to the issue and aspect, which has been remanded for reworking and re-determination. Hence, in the proceedings pursuant to the directions of the Commissioner of Income Tax (Appeals), the Assessing Officer cannot go beyond the issue and aspect which was directed to be reconsidered and decided. Thus, in our view, by taking up the issue of reduction of 90% of the receipts arising from sales tax refund, processing charges and sale of scrap, the Assessing Officer has traveled beyond his jurisdiction limited to the direction of the Commissioner of Income Tax (Appeals).
6.1 No doubt, the power and jurisdiction of the Commissioner of Income Tax (Appeals) are co-terminus with that of the Assessing Officer; but the same cannot be expanded beyond the jurisdiction of the Assessing Officer on the subject matter. When the Assessing Officer’s jurisdiction is limited in the remand proceedings to consider and decide a particular issue and aspect as per the directions of the Commissioner of Income Tax (Appeals), then in the appeal proceedings against the giving effect order, the jurisdiction of the Commissioner of Income Tax (Appeals) cannot be enlarged to that of the Assessing Officer.
6.2 The Honorable jurisdictional High Court in the case of Indo-Aden Salt Works Co (supra), has observed at pages 435 and 436 as under:
“That brings us to the consideration of the real contention of the assessee which turns on the interpretation of the Tribunal’s order when it directed the Appellate Assistant Commissioner to dispose of the appeal on its merits. It appears from that order that it was a common ground before the Tribunal at the hearing of that appeal that it was a case of succession within the meaning of section 25(4). It is also clear that the only question which the Tribunal was asked to consider and which the Tribunal had jurisdiction to consider was whether the Appellate Assistant Commissioner was right in deciding the appeal on the sole legal contention that there was no right in the assessee to claim relief in respect of super-tax. The Tribunal having reached the conclusion that the Appellate Assistant Commissioner had taken a technical and narrow view of the matter would have proceeded to go into the merits of the claim for relief in respect of super-tax. It was at that stage that counsel for the assessee stated that he wanted to lead certain evidence in respect of the claim for assessee firm for relief from super-tax. That this was what happened before the Tribunal is expressly stated in the order of the Tribunal and it is only in this background and in this context that the words relating to vacating the order of the Appellate Assistant Commissioner and restoring of the appeal must be read. It is true that read by itself the last sentence of the order would suggest that the Appellate Assistant Commissioner was being directed to deal with the entire appeal on its own merits. The order of the Tribunal must, however, be read and understood in the proper context and in the light of all that is stated in the order itself and if we do so, as indeed we should do so, there is considerable force in the submission on behalf of the assessee that the order must be read as restricting the scope of the inquiry by the Appellate Assistant Commissioner only to the question of merits affecting the claim for relief from super-tax. We must, however, observe that there is in this case scope for the contention very strongly pressed before us by Mr. Joshi. On a consideration of the matter, we prefer to take the view that the order of the Tribunal required the Appellate Assistant Commissioner to inquire only into the matter of relief from super-tax on its merits.”
6.3 Thus, it has been held by the Honorable High Court that the scope of the inquiry is restricted only to the question of merit related to the matter of relief from super tax as directed by the Tribunal.
7. Therefore, in view of the above discussion, we hold that the Assessing Officer while making certain additions by restricting 90% of the receipts by applying clause (baa) of Explanation to sec. 80HHC has traveled beyond his jurisdiction and scope of inquiry as directed by the Commissioner of Income Tax (Appeals) because it was not the subject matter of remand proceedings. Since the Assessing Officer was lacking the jurisdiction in the remand proceedings to go into the issue other than directed to be re-examined, the Commissioner of Income Tax (Appeals), in the appeal proceedings against the order giving effect also has no jurisdiction to go into the said issue because under the provisions of sec. 251, the Commissioner of Income Tax (Appeals) can exercise his jurisdiction on the issue on which the Assessing Officer could have exercised but did not do so. In the case when the Assessing Officer has no jurisdiction over an issue, then in the appellate proceedings, the jurisdiction of the Commissioner of Income Tax (Appeals) cannot be enlarged beyond the jurisdiction of the Assessing Officer. Hence, we set aside the orders of the authorities below on this issue as without jurisdiction.
8. Ground no.4 regarding indirect cost allocable to export of trading goods.
8.1 In computing deduction u/s 80HHC in respect of export of trading goods, the assessee submitted before the Assessing Officer that the indirect cost of trading export was allowable to be reduced only to the extent of Rs. 32,19,550/- as computed in the computation as per Form 10CCAC. In the giving effect to the order of the Commissioner of Income Tax(Appeals), the Assessing Officer has computed the indirect cost allocable to the export of trading goods at Rs. 2,65,79211/- .
8.2 On appeal, the CIT(A) has held that for the purpose of Sec 80HHC (3)(b),an item of expenditure can be taken as cost for the said purpose only, if it has connection, link, attributes to export and if the expenditure is totally disconnected with the export activity, it cannot be taken as a part of indirect cost. Thus, the CIT(A) has observed that the Assessing Officer has gone beyond what is provided in the Act to work out the indirect cost attributable to export of trading goods.
8.3 As regards the HO expenditure, the CIT(A) has accepted the claim of the assessee regarding the amount to be taken as attributable as indirect cost to exports of trading goods. However, since the assessee exported the trading goods during the year which were procured from Hyderabad and Mumbai and the assessee has Branch offices at both the places apart from the HO in Mumbai; therefore, the expenditure incurred at Hyderabad Branch Office, to the extent not directly related to domestic sale, was held to be taken as direct cost for working out the deduction u/s 80HHC(3)(b) of the Act. It is on this part of the finding of the CIT(A), the assessee is aggrieved and challenged the same under this ground.
9. Before us, the ldSr counsel for the assessee has submitted that the Assessing Officer committed the factual error in determining the indirect cost in the present year because he has reduced only material cost from the total expenditure and the balance has been treated as representing indirect cost. He has ignored all other cost related to manufacturing and domestic sales activities and has not arrived at any direct cost. The ldSr counsel has referred the details of the expenditure pertaining to Hyderabad branch at page 70 of the paper book and submitted that all these expenses are pertaining to local sales and not to the export sales. Thus, the ldSr counsel has submitted that the CIT(A) has committed an error in directing the AO to workout the direct cost by taking into account the expenditure incurred at Hyderabad branch as part of indirect cost.
9.1 On the other hand, the ld DR has submitted that the CIT(A) had proceeded on the premises that the indirect cost allowable to the export of trading goods u/s 80HHC(3)(b) shall be taken only those items of expenditure to have directly relating or to have nexus with the export of goods. Thus, the ld CIT(A) has held that an item of expenditure taken as cost for the said purpose, if it has some connection, link, attributable to export, which is totally against the provisions of sec. 80HHC. He has referred the Explanation to sub-sec (3) of section 80HHC and submitted that as per clause (e) of Explanation the indirect cost should be allocated in the ratio of export turnover in respect of trading goods to the total turnover, which clearly means that the total indirect cost for local sales as well as export sales has to be taken into consideration for allocating in the ratio of export turnover of trading goods to the total turnover. Therefore, the ld DR has submitted that the indirect cost of branches of the assessee has to be taken into consideration for the purpose of allocating as per sec. 80HHC(3)(b) of the Act. The ld DR has forcibly contended that the impugned order of the CIT(A) on this issue is not sustainable as the same is contrary to the provisions of sec. 80HHC. He has referred the computation of indirect cost by the AO in the giving effect order and submitted that the AO has applied the correct formula as per Explanation to sub-sec (3)of sec. 80HHC and therefore, the order of the Assessing Officer has to be restored.
9.2 In rebuttal, the ldSr counsel has submitted that for the purpose of computation of indirect cost allocable to export of goods u/s 80HHC(3)(b), the expenses which had nothing to do with the export of trading goods should be excluded. The ldSr counsel has submitted that those expenses which relate to either to manufacturing of goods or to domestic sales should not be considered as ind9rect expenses for the purpose of calculation of deduction u/s 80HHC.
10. We have considered the rival submissions as well as the relevant material on record. Though, the issue before us is limited only to the extent of a finding of the CIT(A) pertaining to the expenditure incurred at Hyderabad branch office to be taken as part of indirect cost for working out the deduction u/s 80HHC (3)(b). However, the said finding of the CIT(A) is based on the view taken by the Commissioner of Income Tax(Appeals) that u/s sub-sec. (3)(b) of sec. 80HHC, indirect cost attributable to export includes the items of expenditure only if it has some connection, link, attributes to export. This proposition propounded by the CIT(A) is apparently against the provisions of section 80HHC(3)(b). If the provisions of sec 80HHC(3)(b) are read in conjunction with clause (e) of Explanation to the said sub-section, it is clear that the indirect cost for the purpose of allocation under sub-sec (3) shall be taken as the total indirect cost incurred for the total turnover (local + export) and the same has to be allocated in the ratio of export turnover of trading goods to the total turnover.
10.1 For ready reference, we quote sec 80HHC(3)(b) and clause (e) of Explanation as under:
[(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 turnover45 in respect of such trading goods as reduced by the direct costs and indirect costs attributable to such export;
(c) ** ** **
Explanation.- For the purposes of this sub-section,-
(a) ** ** **
(b) ** ** **
(c) ** ** **
(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) ** ** **
10.2 It is clear from the combined reading of sub. Sec. (3)(b) and clause (e) of Explanation to sec. 80HHC(3) that the profit derived from export of trading goods shall be the export turnover of trading goods minus direct cost and indirect cost attributable to such exports. The indirect cost has been defined under clause (e) of Explanation which means the indirect cost which is not direct cost and allocated in the ratio of export of trading goods to the total turnover.
10.3 The total turnover further defined under clause (ba) of Explanation to sub sec. (4C). Therefore, the total turnover includes the local sales as well as the export sales regarding manufacturing goods and trading goods except certain items which shall be included as per clause (ba). When the indirect cost has to be allocated in the ratio of export turnover of trading goods to the total turnover, then the indirect cost subjected to be allocated in the said ratio includes all items of indirect cost incurred for the total turnover.
10.4 It is manifest from the plan reading of the relevant provisions that the indirect cost for the purpose of sec. 80HHC (3)(b) r.w.s clause (e) of Explanation does not restrict the items of expenditure incurred in relation to export of trading goods only; but the entire indirect cost incurred for the total turnover has to be allocated in the ratio of export turnover of trading goods to the total turnover which itself makes it clear that only such portion of the total indirect cost in the ratio of export turnover of the trading goods to the total turnover shall be allocated for the purpose of computing the profits derived from such export u/s 80HHC(3)(b).
10.5 Though the revenue has not filed any appeal against the findings of the CIT(A); however, the revenue, being the respondent can raise an plea against sustainability of the order of the CIT(A); but the effect of such plea would be only to the extent of defence against the appeal and if the respondent/revenue succeeds in the said ground/plea, then the appeal of the appellant/assessee would fail.
10.6 The scope of raising a plea against the sustainability of the impugned order as the respondent defended against the appeal filed by other party has been provided under Rule 27 of ITAT Rules; therefore, though the impugned order of the CIT(A) would stand and will have full effect in so far as it is against the revenue; but if the plea raised by the revenue is accepted as regards the validity of the impugned order but then the revenue succeeds only to the extent that the appeal of the assessee would fail.
10.7 The scope of Rule 27 of ITAT Rules has been discussed by the Honorable jurisdictional High Court in the case of B.R. Bamasi v. CIT [1972] 83 ITR 223 (Bom.)as under;
“But even if the assessee had not made such a statement, the above judgment shows that the assessee would be entitled to raise a new ground, provided it is a ground of law and does not necessitate any other evidence to be recorded, the nature of which would not only be a defence to the appeal itself, but may also affect the validity of the entire assessment proceedings. If the ground succeeds, the only result would be that the appeal would fail. The acceptance of the ground would show that the entire assessment proceedings were invalid, but yet the Tribunal which hears that appeal would have no power to disturb or to set aside the order in favour of the appellant against which the appeal has been filed. The ground would serve only as a weapon of defence against the appeal. If the respondent has not himself taken any proceedings to challenge the order in appeal, the Tribunal cannot set aside the order appealed against. That order would stand and would have full effect in so far as it is against the respondent. The Tribunal refused to allow the assessee to take up this ground under an incorrect impression of law that if the point was allowed to be urged and succeeded, the Tribunal would have not only to dismiss the appeal, but also to set aside the entire assessment. The point would have served as a weapon of defence against the appeal, but it could not be made into a weapon of attack against the order in so far as it was against the assessee.”
10.8 The CIT(A) has given the findings on the issue in paras 28 to 30 as under;
“28. After careful consideration of the submission, it has to be said that the section of the Assessing Officer does not appear to be correct. What cannot be ignored is that subsection (3)(b)deduction inter-alia of indirect cost attributable to such exports. The phrase attributable to such export cannot be missed out. Therefore, an item of expenditure can be taken as cost for the purpose only if it has some connection, link, attributes to the export. If the expenditure is totally disconnected with the export activity, it cannot be taken as part of the indirect costs, Therefore, the Assessing Officer has definitely gone beyond what is provided in the Act to workout the indirect cost attributable to export of trading goods.
29. In order to determine correctly the indirect cost, the appellant’s representative was asked to furnish the details of trading export activities. In this regard the details reveal that the trading goods exports comprise partly of goods imported and partly purchased locally either from Mumbai or elsewhere. It was submitted that the material department of the company procured items of trading exports. All actions and formalities for exports are carried out by Export Department. Expenses of both these departments are booked as Head Office Expenses. The appellant’s representative furnished the details of Head Office Expenses. It was claimed that some of the expenses incurred therein are for domestic activities and only expenditure amounting to Rs. 29,04,71,863/- is such that is to be taken as somehow attributable to exports to be taken as part direct expenses. A perusal of the details show that as far as the Head Office Expenses is concerned, the working thereof is correct and hence needed to be accepted.
30 However, the appellant company exported trading goods during the year that were procured from Hyderabad and Mumbai. At both the places the appellant company has branch offices apart from the head office being located in Mumbai. Though it was claimed that the job of procurement of trading goods exported are carried out from head office that is having separate procurement and export divisions, while the involvement of branch office at Mumbai can be ruled out with a specific office for the purpose located therein, in respect of the branch office at Hyderabad, the other place for procurement, the same cannot be accepted. Hence the expenditure incurred at Hyderabad branch office to the extent not directly related to domestic sales is also required to be taken as part of the indirect cost for working out deduction under section 80 HHC (3)(b) of the Act, The Assessing Officer shall rework out the indirect cost under the section accordingly.”
10.9 The assessee has challenged the findings of the CIT(A) in para 30; however, the said finding is passed on the finding of the CIT(A) in para 28 so far s holding that the expenditure incurred at Hyderabad branch not related to domestic sale is also required to be taken as part of indirect cost for working out the deduction u/s 80HHC(3)(b) of the Act. Under the provisions of sec 80HHC(3), there is no scope of categorization of indirect cost incurred for local sale and export sales separately; but the entire indirect cost shall be allocated in the ratio of export turnover of trading goods to total turnover. Therefore, for the purpose of this section, it is not relevant to divide the indirect cost as per the nexus or connection with the local sales or export sales.
10.10 As we have already discussed that for the purpose of sec. 80HHC(3)(b) r.w. clause (e) of Explanation, the indirect cost to be allocated in the ratio of export turnover of trading goods to the total turnover has to be taken as the total figure of the indirect cost incurred for the total turnover and not the indirect cost directly related to the export turnover as held by the CIT(A).
10.11 The assessee has not furnished the details showing the direct and indirect cost item wise. The only detail furnished before us is the expenditure incurred at Hyderabad office which also does not give a clear picture about the direct and indirect cost. Therefore, as far as the factual aspect of the computation of indirect cost, neither the CIT(A) has segregated the same nor the assessee filed any material in support of its claim. The Assessing Officer has computed the indirect cost in the giving effect order as under:
| Indirect cost attributable to trading goods exported |
26579211 |
Total cost of business |
5071127564 |
| Less: | |||
| Cost of goods |
2637907315 |
||
|
2433220249 |
|||
| Less: | |||
| Disallowaaable as per computation |
222859690 |
||
| Add: | |||
| Allowable as per computation |
179333623 |
||
|
2389694182 |
|||
| Indirect cost for trading goods exported | |||
|
2389694182 × 59386649 |
= 26579211 |
||
|
5339358301 |
10.12 It is clear from the working of the Assessing Officer that for determining the indirect cost, the AO has reduced from the total cost of business, cost of goods as well as the other items. Therefore, we do not find any error as far as the formula adopted by the Assessing Officer for computation of indirect cost allocated to the export of trading goods.
11. In view of the above facts as well as the discussion, we are of the opinion that the CIT(A) has proceeded on wrong principle which is contrary to the provisions of sec. 80HHC(3)(b) r.w. clause (e)of Explanation and therefore, the revenue succeeds in its objections/plea/ground raised against the order of the CIT(A) and in support of the order of the AO; but the effect of those objections would be limited only to the extent that the appeal of the assessee would fail as the revenue has not filed any appeal or cross objection against the impugned order. Hence, the order of the CIT(A), so far as its is against the revenue will have full effect, though the objection/plea raised by the revenue has resulted that the appeal of the assessee, qua this issue is liable to be dismissed and accordingly, ground no.4 stands dismissed.
12. In the result, the appeal filed by the assessee is partly allowed.
