IN THE INCOME TAX APPELLATE TRIBUNAL
MUMBAI BENCH G
BEFORE S/SHRI K.C. SINGHAL (JM) & A. K. GARODIA (AM)
I.T.A. No. 6035/MUM/02 (Assessment year: 1995-96)

Department by: Shri Ankur Garg

Assessee by: Shri Nilesh Doshi

Only sale proceeds received in or brought into India by the assessee in convertible foreign exchange within prescribed time is considered as export turnover and hence, for reducing export turnover in respect of trading goods from total turnover, only the realized sale proceeds of trading export turnover has to be considered and hence, we are of the considered opinion that the Assessing Officer has correctly calculated the adjusted total turnover by reducing the realized trading export turnover of Rs.57,71,508/- from total turnover of Rs.99,49,072/-

If contention of the assessee is accepted and both realized and unrealized trading export turnover is reduced from total turnover, the assessee will get extra deduction because profit on account of unrealized trading export turnover stands included in adjusted profit to business because only profit on account of realized trading export is excluded from total profit of business to work out adjusted profit of business as per Explanation (b) to section 80HHC (3).

the Assessing Officer was not correct in deducting the direct cost of un-realized trading export also from trading export turnover for the purpose of calculating profit with regard to trading export as per section 80HHC (3)(b)(Para 5)

ORDER

PER A.K. GARODIA, AM:-

This is revenues appeal directed against the order of learned CIT (A)-IX, Mumbai dated 14.8.2002 for A.Y. 1995-96.  Ground No. 1 & 2 of the appeal read as under:-

1)         On the facts and circumstances of the case and in law, learned CIT(A) erred in directing the Assessing Officer to exclude unrealized export proceeds from the total turnover in the computation of deduction u/s. 80HHC, without appreciating the facts that the definition of total turnover in Explanation (ba) below section 80HHC(4B), as distinct from the definition of export turnover in Explanation (b), does not provide for such exclusion and in the mercantile system of accounting followed by the assessee turnover depends on sale and not on the realization of sale proceeds.

2)         On the facts and circumstances of the case and in law, learned CIT(A) erred in directing the Assessing Officer to exclude direct costs pertaining to the export of the goods whose export proceeds were not realized, from the direct cost attributable to export of trading goods in the computation of deduction u/s. 80HHC, without appreciating the facts that the definition of direct costs in Explanation (d) below section 80HHC(3) referring to goods exported out of India and not to export turnover does not warrant such exclusion.

2. Briefly stated, the facts are that the assessee company is engaged in export of pharmaceuticals and the assessee company is exporting both own manufactured goods as well as trading goods. Out of total exports, during the current year, total trading export amounted to Rs.63,55,295/-, out of which the assessee realized during prescribed time the sale proceeds amounting to Rs.57,71,508/- and the balance Rs.583,787/- was not realized. Out of manufacturing export of Rs.3593, 777/- made by the assessee during this year, the assessee could realise only Rs.33, 82,083/- during the prescribed time and the balance Rs.2, 11,694/- could not be realized. While working out deduction u/s. 80HHC on account of trading export, the assessee reduced only direct cost relating to trading export turnover realized Rs.57,71,508/-. Balance direct cost of Rs.422, 845/- which was with regard to unrealized trading export of Rs.583, 787/- was not considered by the assessee for the purpose of working out deduction allowable u/s. 80HHC with regard to trading export; but the Assessing Officer did not accept this contention of the assessee and he reduced the entire direct cost of Rs.46, 03,145/- for this purpose. The Assessing Officer has calculated indirect cost also for the entire trading export including computed by the Assessing Officer at Rs.361, 488/- as against Rs.858, 453/- claimed by the assessee.

On appeal, learned CIT (A) accepted the contention of the assessee that since only trading export, of which sale proceeds is realized, is considered for the purpose of calculating deduction u/s. 80HHC with regard to profit from trading export, direct cost and indirect cost should be considered with regard to realized trading export only; and hence, deduction allowable to the assessee with regard to trading export should be as claimed by the assessee.

Regarding calculation of deduction u/s. 80HHC for export of self manufactured goods, the Assessing Officer took into account the self manufactured export turnover at Rs.33, 82,083/- i.e. realized export turnover of self manufactured goods; but while computing the adjusted total turnover, the Assessing Officer excluded only realized trading export turnover and not total trading export turnover including unrealized trading export turnover of Rs.583, 787/-. ON appeal, learned CIT (A) accepted this contention of the assessee also that for working out the profit on account of export of self manufactured goods, total turnover of self manufactured goods export should not include non-realized trading export of Rs.583,787/-. Now, the revenue is in appeal before us.

3.Regarding the first ground, it is submitted by learned DR of the revenue that the term Direct cost is defined as per Explanation (d) to section 80HHC(3) as per which, direct cost means costs directly attributable to the trading goods exported out of India including purchase price of such goods. It is submitted by him that since, un-realized trading export also stands included in trading goods exported out of India, The Assessing Officer has rightly considered the total direct cost for total trading export and it cannot be restricted to only realized trading export. Regarding adjusted total turnover, it is submitted that this term is defined as per Explanation (c) to section 80HHC (3) and as per the same, total turnover of the business is to be reduced by the export turnover in respect of trading goods and since, export turnover is defined in Explanation (b) to section 80HHC (4C) and as per the same, export turnover means, the sale proceeds received in or brought into India by the assessee in convertible foreign exchange and hence, only the realized trading export turnover has to be reduced from total turnover to arrive at adjusted total turnover. It was submitted that the order of learned CIT (A) on both accounts should be reversed and that of the Assessing Officer should be restored.

4. As against this, learned AR of the assessee supported the order of learned CIT (A).

5. We have considered the rival submissions and perused the materials on record. We find that Explanation (c) to section 80HHC (3) defines adjusted total turnover which reads as under:-

            Adjusted total turnover means total turnover of the business as reduced by the           export turnover in respect of trading goods.

Similarly, direct cost id also defined as per Explanation (d) to section 80HHC (3) which reads as under:-

            Direct cost means costs directly attributable to the trading goods exported out of      India including the purchase price of such goods.

With regard to first issue as to whether only realized trading export turnover should be deducted from total turnover or total trading export turnover should be deducted from total turnover to arrive at adjusted total turnover. We have to see the definition of export turnover in respect of trading goods. Export turnover is defined as per Explanation (b) to section 80HHC (4C), which reads as under:-

            export turnover means the sale proceeds received in, or brought into, India by the     assessee in convertible foreign exchange [in accordance with chaise (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);]

From the above definition of export turnover, only sale proceeds received in or brought into India by the assessee in convertible foreign exchange within prescribed time is considered as export turnover and hence, for reducing export turnover in respect of trading goods from total turnover, only the realized sale proceeds of trading export turnover has to be considered and hence, we are of the considered opinion that the Assessing Officer has correctly calculated the adjusted total turnover by reducing the realized trading export turnover of Rs.57,71,508/- from total turnover of Rs.99,49,072/- and in view of this, Ground No. 1 of the revenue is allowed and order of learned CIT (A) on this aspect is reversed and that of the Assessing Officer is restored. Before parting, we want to point out that if contention of the assessee is accepted and both realized and unrealized trading export turnover is reduced from total turnover, the assessee will get extra deduction because profit on account of unrealized trading export turnover stands included in adjusted profit of business because only profit on account of realized trading export is excluded from total profit of business to work out adjusted profit of business as per Explanation (b) to section 80HHC (3).

Now, we come to the second issue i.e. whether direct cost to be considered for working out deduction u/s. 80HHC with regard to trading export should be only that direct cost which is attributable to realized trading export or total direct cost attributable to realized as well as unrealized trading export. In this regard, we find that direct cost means cost directly attributable to the trading export exported out of India including purchase price of such goods.  Since, direct cost is deducted from export turnover of trading goods, which is only realized trading export turnover, we are the considered opinion that direct cost to be considered for that purpose should be only that portion of the direct cost regarding trading export turnover which is attributable to realized trading export turnover. In this regard, provisions of clause (b) of explanation to sub-section (3) of section 80HHC is relevant and we reproduce the same here below:-

            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.

From the above, it is clear that as per the mandate of this clause, direct cost to be reduced from export turnover of trading goods is direct cost attributable to such export i.e. trading export turnover. Since as per definition of export turnover as per Explanation (b) to section 80HHC (4C), the export turnover means, sale proceeds received in or brought into India by the assessee in convertible foreign exchange, export turnover of trading goods for the purpose of above clause (b) of explanation to section 80HHC (3) should also be realized trading export turnover and direct cost to be considered should be direct costs attributable to such export i.e. realized trading export turnover and in this view of the matter, we have no hesitation in holding that the Assessing Officer was not correct in deducting the direct cost of un-realized trading export also from trading export turnover for the purpose of calculating profit with regard to trading export as per section 80HHC (3)(b). This issue is decided in favour of the assessee. Ground No. 1 is allowed and Ground No. 2 is rejected.

6.In the result, this appeal of the revenue stands party allowed.

Order has been pronounced in the open Court on 11^th Day of July, 2006.