Case Law Details
ORAL JUDGEMENT
(PER DR. D.Y. CHANDRACHUD, J.) :
The appeal by the Revenue raises the following substantial questions of law:
“a) Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that, only the profit element of the sale of DEPB that is the amount in excess of sale proceeds over the face value is covered u/s. 28(iiid) and not the entire amount received on sale of DEPB entitlements represents profits chargeable under Section 28(iiid) of the Income Tax Act, 1961;
b) Whether on the facts and in the circumstances of the case and in law, the Tribunal was erred in holding that the entire amount received on sale of DEPB entitlement does not represent profit chargeable u/s.28(iiid) of the Act;
c) Whether on the facts and in the circumstances of the case and in law, the Tribunal was erred in holding that the profit referred to in Section 28(iiid) requires any artificial cost to be interpolated;
d) Whether on the facts and in the circumstances of the case and in law, the Tribunal was erred in holding that while computing direct cost attributable to export the freight and insurance amounting to Rs.1,71,87,614/should be excluded for arriving at export profits while computing the deductions u/s.80HHC.”
2. Counsel appearing on behalf of the Revenue and the Assessee are agreed in stating that the first three questions stand covered in favour of the Revenue and against the assessee by the judgement delivered in C.I.T. vs. Kalpataru Colours and Chemicals, (Income Tax Appeal (L) No. 2887 of 2009 decided by the Division Bench on 29 June 2010). In the circumstances, the first three questions shall stand answered in favour of the Revenue and against the Assessee in terms of the judgement of the Division Bench noted above.
Re: Question (d):
3. Under subsection (1) of Section 80HHC, a deduction is provided to the extent of profits derived by the assessee from the export of goods. Subsection (3) provides a formula for computing profits derived from the export. In the present case, it is an admitted position that the assessee is a trader exporter. Hence, the assessee would be covered by clause (b) of sub- section (3) which provides as follows:
“(3) For the purposes of subsection (1) (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;”
4. Under clause (b) of subsection (3), the export turnover has to be reduced by the direct and indirect costs attributable to export in order to arrive at profits derived from export. Explanation (d) to subsection (3) defines “direct costs” to mean costs “directly attributable to the trading goods exported out of India, including the purchase price of such goods”. Explanation (e) defines “indirect costs” to mean costs, not being direct costs, allocated in the ratio of the export turnover in respect of trading goods to the total turnover.
5. Explanation (b) to subsection (4C) of Section 80HHC defines the expression “export turnover” as follows : “(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).”
6. Now, while defining the expression “export turnover”, Parliament has evinced an intent to exclude freight and insurance attributable to the transport of the goods or merchandise beyond the customs station. Such freight and insurance has to be excluded from the sale proceeds received in India by the assessee in convertible foreign exchange. The object of the exclusion of freight and insurance is to ensure that the benefit of the deduction under Section 80HHC is confined to profits derived from export. Freight and insurance is, therefore, liable to be excluded in computing the export turnover in pursuance of the legislative object of ensuring that Section 80HHC is a provision for incentives to export.
7. The case of the Revenue in appeal is that though freight and insurance is excluded from the export turnover as a result of Explanation (b) to subsection (4C) of the Section, freight and insurance must be treated as part of the direct costs and must then be deducted from the export turnover. According to the Revenue, freight and insurance would be `costs directly attributable to the trading goods exported out of India’ within the meaning of Explanation (d) to sub-section (3).
8. In considering the tenability of the submission which has been urged on behalf of the Revenue, it has to be noted at the outset, that for the purposes of the formula in clause (b) of subsection (3), export turnover has to be reduced by direct and indirect costs attributable to export. Freight and insurance is expressly to be excluded from the sale proceeds received by the assessee, in computing the export turnover. The expression “direct costs” is defined to mean costs directly attributable to the trading goods exported out of India including the purchase price of such goods. Direct costs, therefore, cover the purchase price of the trading goods exported and costs which may be directly attributable to the trading goods. Freight and insurance cannot be regarded as costs directly attributable to the trading goods within the meaning of clause (b) of the Explanation to subsection (3). As a matter of fact, freight and insurance attributable to the transport of goods or merchandise beyond the customs station is already excluded from the sale proceeds in computing the export turnover. Such freight and insurance cannot be regarded as part of the direct costs attributable to the trading goods. To do so, would result in a situation where freight and insurance attributable to the transport of the goods beyond the customs station, which has already been reduced from the sale proceeds received by the assessee, would, in addition, be added back as a part of the direct costs incurred by the assessee. Counsel appearing on behalf of the Revenue submitted that on the language of the Section as it stands, freight and insurance would have to be factored in twice, first while excluding this component from the sale proceeds received by the assessee and once again while reducing the direct costs from the export turnover. The language of the Section, in our view, does not warrant such a conclusion. The plain meaning of the Section must be given effect to by the Court in advancing the legislative intent. As we have observed, freight and insurance attributable to the transportation of goods beyond the customs station does not constitute a part of the direct costs which are defined to mean costs directly attributable to the trading goods exported out of India. The words, “exported out of India” are used in a descriptive sense. In order that the costs can be regarded as direct costs within the meaning of Explanation (b), they must be attributable to the trading goods which are eventually exported out of India.
9. The view which we have taken on the construction of the expression “direct costs” in Explanation (b) to subsection (3) of Section 80HHC is consistent with the interpretation placed by 8 the Supreme Court on the provisions of the Section in C.I.T. vs. Lakshmi Machine Works.1 While defining the ambit of the expression “costs directly attributable to the trading goods”, the Supreme Court observed thus:
“Costs directly attributable to trading goods- These 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 go down, premises or warehouse to the customs station. The use of the word “directly” signifies that there should be a proximate connection between the costs and the purchase of the trading goods. In other words, they should not be “overhead costs.”
10. The Supreme Court has taken the view that apart from the purchase price and related costs, direct costs would include costs which have been incurred either in relation to the purchase, transportation or storage of the goods prior to export. The Supreme Court also included costs incurred in relation to the movement of goods to the customs station. There has to be a proximate nexus between the costs and the purchase of the trading goods. Such a nexus cannot possibly be said to exist in relation to freight and insurance which is incurred after goods have left the customs station.
11. For the aforesaid reasons, we are of the view that the appeal by the Revenue on this question would have to fail. Our attention has been drawn on behalf of the Assessee to the judgement of the Delhi High Court in C.I.T. vs. Crown Computerised Embroideries P. Ltd.2 The Delhi High Court was of the view that shipment freight is recovered by the assessee from its foreign buyer and, therefore, no cost has been incurred by the assessee. The Delhi High Court relied upon the judgement of a Division Bench of the Calcutta High Court in C.I.T. vs. H.M.Exports Ltd.3 In our view, the fact that the seller of the goods stands reimbursed in respect of certain expenses is not a consideration which would indicate that those expenses do not form part of the costs incurred by the seller. Costs do not cease to be costs because they are reimbursed to the seller as part of the sale consideration. In the circumstances, while we agree with the final conclusion which has been arrived at by the Delhi High Court, we have done so for the reasons indicated in our judgement.
12. For the aforesaid reasons, the fourth question of law shall be answered against the Revenue and in favour of the Assessee. In so far as the first three questions are concerned, in terms of the judgment delivered by this Court in C.I.T. vs. Kalpataru Colours and Chemicals (supra), we remand the proceedings back to the Assessing Officer for a fresh disposal in accordance with law. While passing a fresh order, the Assessing Officer shall have due regard to the judgement of this Court in the case of Kalpataru Colours and Chemicals (supra).
13. The Appeal is accordingly allowed to the aforesaid extent. There shall be no order as to costs.
