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4. The following example will clarify the position (figures assumed):

Rs.
Rs.
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 Indirect cost 50,000 Assessees working of deduction under section 80HHC:
Rs.
Rs.
FOB value of exports 6,50,000 Less: Direct costs 5,00,000 Proportionate indirect costs (Rs. 50,000 minus 10% of expenses attributable to export incentives, miscellaneous income & interest income i.e. 10% of Rs.1,60,000 =Rs.16,000) 34,000 5,34,000 Balance (export profits) 1,16,000 A.Os. working of deduction under section 80HHC:
Rs.
Rs.
FOB value of exports 6,50,000 Less: Direct costs 5,00,000 Indirect costs 50,000 5,50,000 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 reduces the FOB value of exports of Rs.6,50,000 by the direct cost of Rs.5,00,000 plus 100% indirect cost of Rs.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.1,16,000 whereas, according to the Department, its export 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, export income and income from export incentives. In 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 erred in reducing further the FOB value of exports by Rs.50,000 instead of Rs.34,000 because, according to the assessee, although it had incurred indirect cost of Rs.50,000, from that figure of Rs.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 (10% 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.

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 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 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 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, the assessee was not entitled to claim 10% of the receipts from its Other Income (Rs.16,000 in the above example) as expense to be deducted from the indirect cost (Rs.50,000 in the above example). Accordingly, the A.O. 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 the above example) to earn Other Incomes of Rs.1,60,000 but it denied the Proportionate 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 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 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, 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?