M/S. HERO EXPORTS, G.T. ROAD, LUDHIANAversusCOMMISSIONER OF INCOME TAX, (CENTRAL), LUDHIANA

 ~




                 MIS. HERO EXPORTS, G.T. ROAD, LUDHIANA                            A
                                           v.
        COMMISSIONER OF INCOME TAX, (CENTRAL), LUDHIANA

                               NOVEMBER 20, 2007
                                                                                   B
 '""·
              [S.H. KAPADIA AND B. SUDERSHAN REDDY, JJ.]


              Income Tax Act, 1961-s.80HHC(3)(b) r/w clauses (d) and (e) of
        Explanation to s.80HHC(3)-Assessment Years 1994-95to1997-98-
        Assessee engaged in export of trading goods-Deriving income from           c
        such export and also other income on account of export incentives
        etc. -Common pool ofexpenses with regard to both incomes-Claim
        for adjustment of 10% of other income from export incentives etc.
        against indirect cost of trading goods-Entitlement for-Held:
  >
        Entitled-Guidance value of 10% of other income from export D
        incentives etc. is fair estimate-This guidance value flowing from the
        scheme of s. 80HHC rlw Memorandum to Finance Act of 1991-
        Principle of attribution.

              Words and Phrases--"attributable", "direct costs" and "indirect E
        costs "-Meaning of-In context to s. 80HHC(3) (b) rlw clauses (d) and
        (e) of the Explanation to s.80HHC(3) of the Income Tax Act, 1961.

--~
            The instant appeals filed by assessee related to the Assessment
        Years 1994-95, 1995-96, 1996-97and1997-98.                          F
             Assessee was engaged in the business of export of trading goods.
        In addition to the income derived from export of trading goods, assessee
        also earned other income from export incentives etc.. Assessee had one
        common pool of expenses with regard to both incomes. It claimed for
                                                                               G
        adjustment of10% of other income from export incentives etc. against
        indirect cost of trading goods while seeking deduction under s.80HHC
        oflncome Tax Act, 1961.
             Department attempted to prevent the aforesaid claim of the
                                     337                                H
    338            SUPREME COURT REPORTS                  [2007] 12 S.C.R.

A assessee by taking the stand that expenses incurred for earning export
  incentives etc. were not liable to be reduced/deducted from indirect costs
  under s.80HHC(3)(b) r/w clause (e) of the Explanation to Section
  80HHC(3).

         The Assessing Officer and Commissioner (Appeals) disallowed the
B
    claim of assessee. Tribunal allowed the claim which was again reversed
    by the High Court. Hence the present appeal.

          Allowing the appeals, the Court

C       HELD: 1. Under s.80HHC(3)(b) which is the main section, the
   Legislature has provided that in cases falling under s. 80HHC(3)(b)
   direct and indirect costs attributable to such exports have to be deducted
   from the export turnover to arrive at Export Profits. Similar provision
   is made in clause (d) of the Explanation to Section 80HHC(3) which
D defines the words "direct costs" to mean costs attributable to exports
  of trading goods. Moreover, clause (e) of the said Explanation defines
  "indirect costs" as costs which is not direct costs as defined in clause
  (d). The word "attributable" is wider than the word 'derived'
                                                         (Para 11] (349-B-D]
E
        2. There is no merit in contention of department that the question
  of allocation does not arise in cases falling under s.80HHC(3)(b). Firstly
  clause (e) to the Explanation which refers to allocation of costs applies
  toss. 80HHC(3)(a), 80HHC(3)(b) and 80HHC(3)(c). Secondly,
F s.80HHC(3)(b) equates export profits to export turnover less direct and
  indirect costs attributable to the exports of trading goods. Therefore,
  the principle of attribution is retained. Thirdly, keeping in mind the
  provisions of s.80HHC(3)(b) read with clauses (d) and (e) of the
  Explanation it is clear that Legislature intended allocation of costs
G between export turnover and total turnover. It is true that in most cases
  the apportionment may not apply to cases under s.80HHC(3)(b). But
  in certain cases falling under s.80HHC(3)(b), ratio still applies.
                                                 (Para 12] (349-G-H; 350-A]
        3. The word "attributable" in s.80HHC(3)(b) in the main section
H itselfindicates that apportionment (principle ofattribution) is not omitted
     HERO EXPORTS, G.T. ROAD, LUDHIANA v. COMMNR. 339
              OF INCOME TAX, (CENTRAL)
     from the said provision of s.80HHC(3)(b). Assessee has two incomes A
     with one Common Pool of expenses and since "principle ofattribution"
     has been retained in the scheme of section 80HHC, both in terms of
     s: 80HHC(3), clause (e) to the Explanation to s.80HHC(3)(a), (b) and
     (c) and in clause (baa) to the Explanation to s. 80HHC, instead of going
     into lengthy exercise of dividing such Common Expenses, the assessee B
     has estimated the reduction of export turnover by 10% of the other
     income. Ultimately, clause (baa) to the Explanation is itself based on
     the assumption that 10% of the income would be an expense.
                                                  [Para 14) [350-F-H; 351-A)

           4. As a Guidance/Factor, 10% of the total Other Income would be
                                                                              c
     fair estimate. This guidance value is not flowing from clause (baa) to
     the Explanation to s. 80HHC but from the scheme of s. 80HHC read
     with the Memorandum to the Finance Act of 1991.
                                                        [Para 14) [351-A-B) D
           5. Under s. 80HHC(3)(b) one has to balance the "principle of
     attribution" with the concept of"allocation". The concept ofallocation
     is meant to reduce the incentive. However, when "allocation" has to be
     balanced with the "principle of attribution", the object is to reduce the
     incentive and notto eliminate it [Para 15] [351-C-D]                      E
         CIVIL APPELLATE JURISDICTION: Civil Appeal No. 5315 of
     2007.
_,       From the final Judgment and Order dated 22.12.2006 of the High
     Court of Punjab and Haryana at Chandigarh in LT.A. No. 103/2004.   F
                                     WITH
          C.A. Nos. 5317, 5318 and 5319 of2007.
         S. Ganesh, Satyan Sethi and Rameshwar Prasad Goyal for the G
     Appellant.
         Vikas Singh, A.S.G., Amrita Narayan and B.V.B. Das for the
     Respondent.
          The Judgment of the Court was delivered by                         H
    340            SUPREME COURT REPORTS                    [2007] 12 S.C.R.


A         KAPADIA, J. 1. Leave granted.
        2. This batch of civil appeals is filed by the assessee for assessment
  years 1994-95, 1995-96, 1996-97 and 1997~98. A short question which
  arises for determination in this batch of civil appeals is whether the A.O.
B and CIT(A) were right in disallowing the claim of the assessee for
  adjustment of 10% of export incentive against indirect cost of trading
  goods while allowing deduction under section 80HHC of the Income-tax
  Act as it stood at the relevant time.
       Facts in the Civil Appeal arising out ofS.L.P. (C) No. 741112007
C (lead matter):
        3. Assessee was engaged in the business of export of "trading
  goods". Under section 80HHC(3)(b), an exporter of trading goods was
  entitled to deduction in respect of profits derived from such export (export
D turnover) as reduced by the direct costs and the indirect costs attributable
  to such export. The smaller the figure of direct and indirect costs, the larger
  is the profits derived from the export and, consequently, larger is the
  deduction under section 80HHC. By attributing a part of the indirect costs
  to the export incentives, interest etc. the assessee sought to reduce the
E indirect costs attributable to the export of trading goods so that it would
  be left with the larger amount of export profits which it can deduct from
  the gross total income. On the other hand, the attempt of the Department
  was to prevent the aforestated claim of the assessee by holding that
  expenses incurred for earning incentives, commission etc. were not liable
F to be reduced/deducted from Indirect Costs under section 80HHC(3)(c)
  read with clause (e) to the Explanation.
      4. The following example will clarify the position (figures assumed):
                                       Rs.              Rs.
G FOB value of trading goods          6,50,000
    Export incentives                 80,000 }
    Miscellaneous income & Brokerage 50,000               1,60,000
    Interest Income                   30,000
    Direct cost                     5,00,000
H
           HERO EXPORTS, G.T. ROAD, LUDHIANA v. COMMNR. 341
              OF INCOME TAX, (CENTRAL) [KAPADIA, J.]
          Indirect cost                          50,000                             A
          Assessee 's working of deduction under section 80HHC:
                                             Rs.            Rs.
          FOB value of exports                            6,50,000
          Less: Direct costs                 5,00,000                               B
    -\       Proportionate indirect costs
             (Rs. 50,000 minus 10% of
             expenses attributable to export
             incentives, miscellaneous
             income & interest income                                               c
             i.e. 10% of Rs.1,60,000
             =Rs.16,000)                       34,000     5,34,000
          Balance (export profits)                        1,16,000
          A.O's. working of deduction under section 80HHC:
     -'
                                                                                    D
                                                Rs.          Rs.
          FOB value of exports                              6,50,000
          Less: Direct costs                  5,00,000
             Indirect costs                     50,000      5,50.000
                                                                                    E
          Balance (export profits)                          1,00,000
                5. The analysis of the aforestated example indicates that assessee
          claims to reduce FOB value of exports amounting to Rs. 6,50,000 by
. _..,    direct cost of Rs. 5,00,000 plus proportionate indirect costs of Rs.
          34,000, in all amounting to Rs. 5,34,000, whereas the Department F
          reduces the FOB value of exports of Rs.6,50,000 by the direct cost of
          Rs.5,00,000 plus 100% indirect cost ofRs.50,000, in all amounting to
          Rs.5,50,000, which is sought to be reduced from FOB value of
          Rs.6,50,000. In other words, according to the assessee, its export profits
          should be Rs. I, 16,000 whereas, according to the Department, its export G
   -t     profit is Rs.1,00,000.
              , 6. According to the assessee, apart from export turnover, it had
          earned income on account of export incentives, miscellaneous income and
          interest income. According to the assessee, it had two incomes, namely,
                                                                                    H
    342            SUPREME COURT REPORTS                  [2007] 12 S.C.R.


A export income and income from export incentives. 'n the above example,
  assessee had incurred direct cost of Rs.5,00,000 and indirect cost of
  Rs.50,000. According to the assessee, the Department was right in
  reducing Rs.5,00,000 from FOB value of exports amounting to
  Rs.6,50,000, however, according to the assessee, the Department had
B erred in reducing further the FOB value of exports by Rs.50,000 instead
  ofRs.34,000 because, according to the assessee, although it had incurred
  indirect cost ofRs.50,000, from that figure ofRs.50,000 it was entitled
  to deduction of 10% of expenses attributable to export incentives,
  miscellaneous income and interest income amounting to Rs.1,60,000 (100/o
C of Rs.1,60,000 is Rs.16,000) as mentioned in the above example.
  Therefore, according to the assessee, it was entitled to total deduction of
  only Rs.5,34,000 and not Rs.5,50,000 from FOB value of exports
  amounting to Rs.6,50,000.
D        7. Shri S. Ganesh, learned senior counsel appearing for the assessee,
   submitted that under section 80HHC(3)(b) only indirect costs whicp are
   "attributable to such export" can be deducted from export turnover.
   According to the learned counsel, in the present case, assessee had export
   turnover plus export incentives. According to the learned counsel, the
E assessee had, under the circumstances, two incomes, namely, incentives
   income and income from export sales for which it had one Common Pool
   of expenses. According to the learned counsel, clause (baa) of the
   Explanation to section 80HHC specifically excludes 90% of incentive
   receipts from the business profits leaving 10% of such receipts assumed       ,.. .
F to have been incurred by the Legislature for earning such receipts and,
   therefore, there is no reason why a similar assumption cannot be validly
   made while interpreting clause (b) of sub-section (3) to section 80HHC
   read with clause (e) of the Explanation to section 80HHC(3). Learned
  counsel submitted that, every receipt has a corresponding expense.
G Learned counsel submitted that, under clause (e) in the Explanation to
  sub-section (3) of section 80HHC(3), indirect costs have been defined
  to mean costs, not being direct costs, allocated in the ratio of export
  turnover in respect of trading goods to the total turnover. In this
  connection, it is submitted that the Legislature has given recognition to
H the fact that 10% of certain receipts had to be incurred for earning them
HERO EXPORTS, G.T. ROAD, LUDHIANA v. COMMNR. 343
   OF INCOME TAX, (CENTRAL) [KAPADIA, J.]
and, therefore, it excluded only 90% of such receipts from the purview A
of business profits. According to the learned counsel, one has to read
Explanation (e), which defines indirect costs as applicable to apply to the
entire section 80HHC and even if that argument is not accepted, still there
is no reason why the assumption made by the Legislature of treating 10%
of certain receipts as expenditure under clause (baa) of the Explanation B
to section 80HHC is not applicable to cases falling under section
80HHC(3)(b) read with clause (e) to the Explanation to sub-section (3)
of section 80HHC.
       8. Mr. Vikas Singh, Additional Solicitor General, learned counsel C
appearing on behalf of the Department submitted that the modality under
section 80HHC(3)(a) for computing business profits was different from
the modality for computing export turnover in respect of trading goods
under section 80HHC(3)(b). According to the learned counsel, nothing
contained in sub-section (3)(a) can be read into sub-section (3)(b). D
According to the learned counsel, sub-section (3)(b) was a stand alone
sub-section. According to the learned counsel, the two sub-sections
operated in different spheres. In this connection, learned counsel urged
that in case of section 80HHC(3)(a), incentives are required to be
deducted to the extent of90% by a deeming fiction from business profits E
which methodology would not apply in computation of export turnover
reduced by direct and indirect costs as contemplated by section
80HHC(3)(b), which, as stated above, applied only to trader exporter.
In the present case, we are concerned with section 80HHC(3)(b) alone.
According to the learned counsel, the definition of the words "direct costs" F
and "indirect costs" in the Explanation to sub-section (3) of section
80HHC, the Legislature has indicated the ratio for allocation of costs
between export turnover and total turnover only in cases where the tax
payer is engaged in the business of exports and also in the business of
making domestic sales. According to the learned counsel, the word costs G
being attributable to exports would attract the allocation ratio only in such
cases where the tax payer is engaged in earning income in foreign exchange
from exports and simultaneously earning income from domestic sales and,
that, such ratio is not applicable in cases falling under section 80HHC(3 )(b)
because that sub-section categorically states that the profits derived from H
    344            SUPREME COURT REPORTS                   [2007] 12 S.C.R.


A exports shall be the export turnover minus direct and indirect costs.
  Therefore, according to the learned counsel, the methodology of section
  80HHC(3)(a) should not be read into section 80HHC(3)(b). In this
  connection, learned counsel also urged that in the case falling under section
  80HHC(3)(b), export turnover and total turnover are identical and,
B therefore, the allocation ratio contemplated by the definition of indirect
  costs has no application to the cases falling under section 80HHC(3)(b).
  According to the learned counsel, in cases of exports of trading goods,
  the methodology only indicates that profits derived from export shall be
  export turnover minus costs. Therefore, according to the learned counsel,
C the ratio of allocation of costs in the definition of the words indirect costs
  in the Explanation to sub-section (3) would apply only to cases falling
  under section 80HHC(3)(a) and section 80HHC(3)(c)(i). Learned counsel
  further urged that in clause (e) in the Explanation to sub-section
  80HHC(3), which defines the words indirect costs to be allocated in the
D ratio of export turnover upon total turnover, the denominator, namely, total
  turnover would not include incentives and, therefore, while computing total
  turnover, one has to take the entire indirect expense into account. In short,
  learned counsel submits that the said ratio will not apply to cases falling
  under section 80HHC(3)(b).
E
        9. Learned counsel further submitted that as a matter of policy that
  the Government thought it fit to exclude only 90% of the receipts from
  the business profits as per Explanation (baa) instead of 100% and from
  this it cannot be inferred that the Legislature has assumed that 10% of          ,-
F such receipts has to be treated as costs or expenses to earn receipts by
  way of incentives, commission, interest etc .. According to the learned
  counsel, clause (baa) was inserted for an entirely different purpose. It was
  not meant for interpreting clause (b) of section 80HHC(3) and, therefore,
  it cannot be assun1ed that 10% of export incentives should be considered
G as costs or expenses incurred to earn such receipts. According to the
  learned counsel, the definition of"indirect costs" as per clause (e) in the
  Explanation below sub-section(3) does not exclude such costs incurred
  for earning export incentives. Therefore, there is no justification for
  excluding indirect costs, if any, incurred for earning export incentives,
H commission etc .. According to the learned counsel, the assessee in the
       HERO EXPORTS, G.T. ROAD, LUDHIANA v. COMMNR. 345
          OF INCOME TAX, (CENTRAL) [KAPADIA, J.]
      present case is a 100% exporter and, therefore, the entire expenses, both A
      direct and indirect, can be only in respect of export turnover. According
      to the learned counsel, the definition of"indirect costs" in clause (e) of
      the Explanation below sub-section (3) was to apply only in cases where
      the tax payer had export business plus domestic business, in which case,
      allocation between export turnover and total turnover is contemplated. B
 -\   According to the learned counsel, in the present case falling under section
      80HHC(3)(b), question of such apportionment did not arise because in
      cases of the present type, export turnover and total turnover are identical
      and in such cases question of apportionment or allocation did not arise.
      Therefore, the assumption on which the assessee is placing reliance is not c
      applicable to cases falling under section 80HHC(3)(b).
            10. Before coming to the controversy in hand, we quote hereinbelow
      section 80HHC(3) as it stood at the relevant time:
             "Deduction in respect ofprofits retained for export business D
            80HHC (3) For the purposes of sub-section (1 ),--
            (a) where the export out of India is of goods or merchandise
            manufactured or processed by the assessee, the profits derived
            from such export shall be the amount which bears to the profits of E
            the business, the same proportion as the export turnover in respect
            of such goods bears to the total turnover of the business carried
            on by the assessee;
            (b) where the export out ofindia is of trading goods, the profits F
            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 ;
            (c) where the export out of India is of goods or merchandise
            manufactured or processed by the assessee and of trading goods, G
-)          the profits, derived from such export shall,--
            (i) in respect of the goods or merchandise manufactured or
            processed by the assessee, be the amount which bears to the
            adjusted profits of the business, the same proportion as the adjusted H
    346          SUPREME COURT REPORTS                     [2007] 12 S.C.R.

A         export turnover in respect of such goods bears to the adjusted total
          turnover of the business carried on by the assessee; and
          (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 :
B
          Provided that the profits computed under clause (a) or clause (b)
          or clause (c) of this sub-section shall be further increased by the
          amount which bears to ninety per cent of any sum referred to in
          clause (iiia) (not being profits on sale of a licence acquired from
c         any other person), and clause (iiib) and (iiic) of section 28, the same
          proportion as the export turnover bears to the total turnover of
          the business carried on by the assessee.
          Explanations.- For the purposes of this sub-section,--
D         (a) 'adjusted export turnover' means the export turnover as
          reduced by the export turnover in respect of trading goods;
          (b) 'adjusted profits of the business' means the profits of the
          business as reduced by the profits derived from the business of
E         export out oflndia of trading goods as computed in the manner
          provided in clause (b) of sub-section (3);
          (c) 'adjusted total turnover' means the total turnover of the business
          as reduced by the export turnover in respect of trading goods;
                                                                                    ~--


F         (d) 'direct costs' means costs directly attributable to the trading
          goods exported out oflndia including the purchase price of such
          goods;
          (e) 'indirect costs' means costs, not being direct costs, allocated
          in the ratio of the export turnover in respect of trading goods to
G         the total turnover;
          (f) 'trading goods' means goods which are not manufactured or             '-
          processed by the assessee.
          (3A) ...
H
       HERO EXPORTS, G.T. ROAD, LUDHIANA v. COMMNR. 347
          OF INCOME TAX, (CENTRAL) [KAPADIA, J.]
            (4) ...                                                                  A
            (4A) ...
           Explanation. -For the purposes of this section,--
           (a) 'convertible foreign exchange' means foreign exchange which B
4
           is for the time being treated by the Reserve Bank of India as
           convertible foreign exchange for the purposes of the Foreign
           Exchange Regulation Act, 1973 (46of1973), and any rules made
           thereunder;
            (aa) 'export out oflndia' shall not include any transaction by way       c
            of sale or otherwise, in a shop, emporium or any other
            establishment situate in India, not involving clearance at any customs
          . station as defined in the Customs Act, 1962 (52of196~);
           (b) 'export turnover' means the sale proceeds, received in, or D
           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 E
           station as defined in the Customs Act, 1962 (52of1962);
           (ba) 'total turnover' shall 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):                                                           F

          Provided that in relation to any assessment year commencing on
          or after the l st day of April, 1991, the expression "total turnover"
          shall have effect as if it also excluded any sum referred to in clauses
          (iiia), (iiib) and (iiic) of section 28;                                G
 -;.
          (baa) 'profits of the business' means the profits of the business as
          computed under the head 'Profits and gains of business or
          profession' as reduced by-
               (1) ninety per cent of any sum referred to in clauses (iiia), (iiib) H
    348           SUPREME COURT REPORTS                    [2007] 12 S.C.R.


A              and (iiic) of section 28 or of any receipts by way of brokerage,
               commission, interest, rent, charges or any other receipt of a
               similar nature included in such profits; and
               (2) the profits of any branch, office, warehouse or any other
               establishment of the assessee situate outside India;
B
           (c) 'Export House Certificate' or 'Trading House Certificate' means
           a valid Export House Certificate or Trading House Certificate, as
           the case may be, issued by the Chief Controller oflmports and
           Exports, Government oflndia;
c          (d) 'supporting manufacturer' means a person being an Indian
           company or a person (other than a company) resident in India,
           manufacturing (including processing) goods or merchandise and
           selling such goods or merchandise to an Export House or a Trading
           House for the purposes of export."                                      ..
D
        11. We have considered the rival submissions. It is not disputed by
  the Department that the assessee, in addition to the income derived from
  export of trading goods, also derived income from Export Incentives etc.
  of Rs.1,60,000 against FOB value of exports amounting to Rs.6,50,000
E in the above illustration. It is not the case of the Department that the
  assessee could have earned Rs.1,60,000 without incurring any expenditure.
  (Rs.50,000 in the above example). It is not in dispute that the case falls
  under section 80HHC(3)(a). It is not the case of the Department that
  assessee had no income by way of incentive, interest etc. (Rs.1,60,000
                                                                                   ..
F in the example). The basic case of the Department was that the words
  "indirect costs" in clause (e) in the Explanation did not provide for
  exclusion of expenses incurred for earning incentives, commission, rent
  etc. and, therefore, the entire amount of expenses (Rs.50,000 in the above
  example) spent for earning such Other Incomes did not fall within the
G meaning of the word "indirect cost" in clause (e). According to the
  Department, section 80HHC(3)(b) provides for a statutory formula to
  calculate export profits by deducting direct and indirect costs from export
  turnover, however, expenses incurred for earning incentives, commission
  etc. (other incomes) does not fall in the definition of"indirect cost''. That,
H the assessee was not entitled to claim 10% of the receipts from its Other
  HERO EXPORTS, G.T. ROAD, LUDHIANA v. COMMNR. 349
     OF INCOME TAX, (CENTRAL) [KAPADIA, J.]
  Income (Rs.16,000 in the above example) as expense to be deducted A
 from the indirect cost (Rs.50,000 in the above example). Accordingly,
 the AO. deducted full Rs.50,000 as indirect cost from the export turnover.
 Therefore, even according to the Department, it is not in dispute that the
 assessee had incurred an expense of Rs.16,000 (in th" above example)
 to earn Other Incomes of Rs.1,60,000 but it denied the Proportionate B
 Deduction from Rs.50,000 on account of strict interpretation of the words
 "indirect cost" in clause (e). However, in the above stand of the
 Department, there is a fallacy. Under section 80HHC(3)(b) which is the
 main section, the Legislature has provided that in cases falling under section
 80HHC(3)(b) direct and indirect costs attributable to such exports have C
 to be deducted from the export turnover to arrive at Export Profits. Similar
provision is made in clause (d) which defines the words "direct costs" to
mean costs attributable to exports of trading goods. Moreover, clause
(e) of the Explanation defines "indirect costs" as costs which is not direct
costs as defined in clause (d). The word "attributable" is wider than the D
word "derived". The Department in this case, as can be seen from above
example, itself says that Rs.50,000 in full is the Indirect Cost which has
to be deducted in full as clause (e) does not provide for proportionate
deduction. According to the Department, the definition of"indirect costs"
will not cover expenses incurred for earning Other Incomes. However, E
at the same time, Department concedes that the assessee had earned
export turnover of Rs.6,50,000 plus Rs.1,60,000 as Other Incomes. It
also concedes that Rs.50,000 is the indirect expense. If so, what should
be the expense allocated to the earning of the two incomes and in what
proportion is the question?                                                     F
       12. According to the Department, the question of allocation does
not arise in cases falling under section 80HHC(3)(b). We do not find merit
in this contention. Firstly, clause (e) to the Explanation which refers to
allocation of costs applies to sections 80HHC(3)(a), 80HHC(3)(b) and G
80HHC(3)(c). Secondly, section 80HHC(3)(b) equates export profits to
export turnover less direct and indirect costs attributable to the exports
of trading goods. Therefore, the principle of attribution is retained. Thirdly,
keeping in mind the provisions of section 80HHC(3)(b) read with clauses
(d) and (e) of the Explanation it is clear that Legislature intended allocation
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   350            SUPREME COURT REPORTS                   [2007] 12 S.C.R.


A of costs between export turnover and total turnover. It is urged that the
  apportionment would not apply to cases under section 80HHC(3)(b). It
  is true that, in most cases, it may not. But in certain cases falling under
  section 80HHC(3)(b), ratio still applies. For example, in the case where
  the assessee exports all bought-out items but brings back only a part of
B the export proceedings into India, in such cases, the ratio will apply and,
  therefore, if one is to read clause (e), it retains the words indirect costs
  to be allocated in the ratio of export turnover to total turnover.
        13. The question which, however, needs to be decided is whether,
C in the above example, the assessee is entitled to reduction ofRs.16,000
  from Rs.50,000 being the total indirect expenses for earning both the
  incomes. Department reduces the FOB value by Rs.50,000 whereas
  assessee contends that it should be reduced by Rs.34,000 (Rs.50,000 -
  Rs.16,000). Assessee claims apportionment at the rate of 10% of Other
D Income ofRs.1,60,000 (in the above example). This is opposed by the
  Department saying that since apportionment does not apply to section
  80HHC(3)(b ), there is no question of applying the yardstick of 10%.
  According to the Department, the words "indirect costs" does not take
  into account the expenses to earn Other Incomes. In this case, reliance is
E placed on clause (e). However, the Department has failed to notice the
  words "attributable to exports" in section 80HHC(3)(b).
        14. As stated above, in our opinion, the words "attributable" in
  section 80HHC(3)(b) in the main section itself indicates that apportionment
  (principle of attribution) is not omitted from the said provision of section   •-
F 80HHC(3)(b). As stated above, assessee has earned Other Income of
  Rs.1,60,000 apart from FOB value of exports ofRs.6,50,000. Therefore,
  some expense has to be attributed to earning ofRs.1,60,000. If so, the
  next question which arises is how to allocate the costs? As stated above,
  assessee has two incomes with one Common Pool of expenses and since
G "principle of attribution" has been retained in the scheme of section
  80HHC, both in terms of section 80HHC(3), clause (e) to the Explanation        ,-
  to section 80HHC(3Xa), (b) and (c) and in clause (baa) to the Explanation
  to section 80HHC, instead of going into lengthy exercise of dividing such
  Common Expenses, the assessee has estimated the reduction of export
H turnover by I 0% of the other income of Rs. l ,60,000 (in the above
      ~I

            HERO EXPORTS, G.T. ROAD, LUDHIANA v. COMMNR. 351
 _,
               OF INCOME TAX, (CENTRAL) [KAPADIA, J.]
           example). Ultimately, clause (baa) to the Explanation is itselfbased on A
           the assumption that 10% of the income would be an expense. We make
           it clear that we are not reading Explanation (baa) into section
           80HHC(3)(b). What we say is as a Guidance Value/Factor, 10% of the
           total Other Income ofRs.1,60,000 would be fair estimate. This guidance
           value is not flowing from clause (baa) but from the scheme of section B
           80HHC read with the Memorandum to the Finance Act of 1991. Take a
           reverse case, if allocation of expenses is to be done on Actual Basis, it
           would not only be very difficult but in some cases actual apportionment
           may not be in the interest even of the Department.
                 15. In conclusion, we may state that under section 80HHC(3)(b)
                                                                                          c
           one has to balance the "principle of attribution" with the concept of
           "allocation". The concept of allocation is meant to reduce the incentive.
           However, when "allocation" has to be balanced with the "principle of
  ...
           attribution", the object is to reduce the incentive and not to eliminate it.
                                                                                          D
                 16. For the above reasons, we set aside the impugned judgments
           of the High Court are re aride dated 22.12.2006 and the orders of the
           TATA restore the orders of the Income Tax Appellate Tribunal dated
           30.9.2003, 24.10.2003, 13.2.2004 and 26.8.2004.
                                                                                          E
                17. Accordingly, the civil appeals filed by the assessee stand allowed
           with no order as to costs.

-'         B.B.B.                                                  Appeals allowed.




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