Full Judgment Text
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CASE NO.:
Appeal (civil) 5436-5437 of 1998
PETITIONER:
SEA PEARL INDUSTRIES & ORS.
Vs.
RESPONDENT:
COMMISSIONER OF INCOME TAX, COCHIN
DATE OF JUDGMENT: 09/01/2000
BENCH:
S.P.Bharucha, Doraswamy Raju, Ruma Pal
JUDGMENT:
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RUMA PAL, J.
The question to be decided in this appeal is whether
the appellant was an exporter for the purposes of Section
80HHC of the Income Tax Act, 1961. The appellant processes
sea foods. It exported some of its products directly to
foreign buyers but it was not an eligible export house under
the Import and Export Policy 1982-83 (referred to as the
Policy) and it could not avail of the special facilities
granted to eligible export houses under the Policy. An
agreement was entered into between an export house and the
appellant on 24th August, 1982 by which the appellant agreed
to export the processed sea food in the name of the export
house against purchase orders placed on the export house by
foreign buyers so that the export house could claim the
benefits under the Policy in consideration for which the
appellant would be paid 2.25% of the FOB value of the goods
exported. In terms of the agreement, the appellants
processed sea foods were to be sold to the export house
after the goods crossed the customs barrier. All
formalities of export were to be completed by the appellant
but the shipment would be on account of the export house.
The Letter of Credit opened in favour of the export house by
the foreign purchases would be endorsed in favour of the
appellant. While the benefits from the agreement as far as
the export house was concerned were limited to those
available under the Policy, the appellant would not only be
entitled to the entire sale proceeds realised by the export,
but in terms of the agreement it could alone claim all the
privileges available under other statutory provisions to an
exporter, in addition to the commission of 2.25% . The
particular transaction with which we are concerned began
with a purchase order placed on the export house by a buyer
in California. The buyer opened a Letter of Credit in
favour of the export house. The goods were duly shipped and
the documents were handed over by the appellant to the
export house for negotiation. The Letter of Credit was
endorsed in favour of the appellant by the export house and
the entire amount of the foreign exchange credited in the
appellants account. The appellant then claimed deductions
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permissible to an exporter under Section 80 HHC of the
Income Tax Act, 1961 for the assessment year 1983- 84.
Prior to its amendment in 1989, Section 80HHC in so far as
it is relevant read: 80HHC (1) Where the assessee, being
an Indian company or a person (other than a company) who is
resident in India, exports out of India during the previous
year relevant to an assessment year any goods or merchandise
to which this section applies, there shall, in accordance
with and subject to the provisions of this section, be
allowed, in computing the total income of the assessee, the
following deductions, namely: -
(a) a deduction of an amount equal to one per cent of
the export turnover of such goods or merchandise during the
previous year; and
(b) a deduction of an amount equal to five per cent of
the amount by which the export of such goods or merchandise
during the previous year exceeds the export turnover of such
goods or merchandise during the immediately proceeding year.
(2) (a) This section applies to all goods or
merchandise (other than those specified in clause (b) if the
sale proceeds of such goods or merchandise exported out of
India are receivable by the assessee in convertible foreign
exchange.
The appellants claim for deduction was rejected by
the respondent. The appellant preferred an appeal before
the Income Tax Appellate Tribunal. The Tribunal allowed the
appeal relying on the definition of the word export in
Section 2 (18) of the Customs Act which says that export
means taking out of India to a place outside India.
According to the Tribunal, when the goods cleared the
customs barrier, the export house was nowhere on the scene
and that the export process having been actually done by the
appellant/ assessee and not the export house, the appellant
was the exporter within the meaning of Section 80HHC. In
the context of these facts, the following question came to
be referred to the High Court at the instance of the
respondent: Whether, on the facts and in the circumstances
of the case, the assessee is entitled to deduction under
Section 80HHC of the Income Tax Act, 1961 in respect of
exports (not done directly by the assessee) done through
export house?
The High Court answered the reference against the
assessee and in favour of the Revenue. The decision of the
High Court is now impugned before us. It was contended by
the appellant, relying on C.T. Ltd. and Another V.
Commercial Tax Officer and Others 104 STC 94, that it was
entitled to the benefits of the Section because it had, in
fact, exported its products by selling them to the export
house after the goods had crossed the customs barrier.
According to the appellant, the export applications were in
the name of the appellant, the certificate issued by the
export inspection agency showed the name of the appellant
against the column Name and address of the exporter; the
bill of charges of shipping was in the name of the
appellant, the Marine Products Development Authority had
recognised the appellant as the exporter in respect of the
exports done in the name of the export house; the GR I form
issued by the Reserve Bank of India under Section 18 of the
Foreign Exchange Regulation Act, 1973 was in the name of the
appellants, the Customs authorities had recognised the
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appellant as the exporter under Section 75 of the Customs
Act in granting draw back on custom duties and the Bill of
Lading showed both the appellant and the export house as the
shipper. All this, it was argued, showed that the appellant
was the real exporter although for the purposes of the
Import Export Policy, the export house had been shown as the
exporter. The only interest of the export house in the
entire transaction was the benefit granted to an exporter by
way of Import Replenishment (REP) licences as the foreign
exchange realised by the export house for the sea foods
exported had in fact been credited to the appellants
account. The respondents on the other hand contended that
the documents showed that the appellant was acting as the
agent of the export house and that there was no privity of
contract between the foreign buyer and the appellant. It
was pointed out that although the foreign exchange was
ultimately credited in the appellants account in terms of
the agreement between the export house and the appellant,
the letter of credit was in the name of the export house.
The appellant had been party to the declaration under
paragraph 165 of the Import Export Policy that the export
house was the exporter and had received from the export
house the commission of 2.25% for this. It was submitted
that the question of title was irrelevant for the purposes
of Section 80 HHC and that what was important under the
Section was by whom the foreign exchange was receivable.
Finally it was submitted that the Central Board of Direct
Taxes in circular No. 466 dated 14.8.86 had clarified that
the payment received from export houses by any manufacturer
whose goods were exported through export houses would not be
included in the total income of the manufacturer if such
claim for non-inclusion was supported by a certificate of
the export house. In this case, there was no such
certificate. On the other hand the export house had claimed
and had been allowed deductions under Section 80HHC in
respect of the export in question. Section 80 HHC requires
(i) the assessee to export the goods and ( ii ) the sale
proceeds to be receivable by the assessee in convertible
foreign exchange. The foundation of the appellants
arguments before us, as far as the first requirement is
concerned, is the agreement between the appellant and the
export house and in particular the clause which provides
that the property in the goods would pass to the export
house only after they had crossed the Customs barrier.
However, as rightly contended by the respondent, the
question of title or property in the goods exported is not
relevant to Section 80 HHC. The Section does not in terms
require the exporter to be the owner of the goods. Even
Section 2(18) of the Customs Act does not include the idea
of ownership within the definition of the word export.
This may be contrasted with Section 5 (3) of the Central
Sales Tax Act, 1956 where the emphasis is on the transfer of
title by a last sale or purchase. preceding the sale
or purchase occasioning the export. That is why in C.T.
Ltd. and Another V. Commercial Tax officer and Others 104
(1997) STC 94 relied on by the appellant, this Court held
that although the State Trading Corporation (STC) was shown
as the exporter of goods, since there was no sale to STC,
STC merely acted as an agent of the assessee who had
purchased the goods for export. This decision cannot be
relied on to construe Section 80 HHC of the Income Tax Act.
The object of Section 80 HHC is to grant an incentive to
earners of foreign exchange. The matter will, therefore,
have to be considered with reference to this object. The
transaction commenced with the agreement between the
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Californian buyer and the export house. But for this
contract, there would be no export and no receipt of foreign
exchange at all. In fulfillment of its obligation under the
contract the export house had entered into an independent
contract with the appellant. The appellant was not a party
to the first contract. If the first contract were breached,
the assessee could not demand the foreign exchange from the
buyer. Again, if the goods were not exported, the foreign
buyer could not look to the appellant for reimbursement.
Admittedly, the shipment was also made by the appellant on
account of the export house. This was in accordance with
the agreement which specifically provided: 9. The
Processors hereby agree to export in the name of the Export
House frozen fish, Shrimps, Lobster Tails of the minimum
F.O.B. value of Rs.5 to 6 lacs (Rupees five to six lacs
only)
Furthermore, the appellant was party to a declaration
to the concerned authorities under the Policy that the
export house was the exporter. It may be that this was for
the purposes of enabling the export house to reap the
benefit of the Policy but it was also for the added
advantage of the commission earned by the appellant from the
export house. The export house had also claimed and been
allowed deductions in respect of the amount realised by the
export under Section 80HHC. The appellant having allowed
the authorities to act on that basis, did so at its peril.
It cannot now disclaim the position. A somewhat similar
situation was considered by this Court in Mineral and Metal
Trading Corporation V. R.C. Mishra and Others 201 (1993)
ITR 851. In order to avail of the benefits of the barter
system which entitled imports to be made against the goods
exported, inter-alia, through Mineral and Metal Trading
Corporation(MMTC), Ferro-Alloys Corporation Ltd. had
exported goods to foreign buyers through MMTC. The purchase
order which was initially placed on Ferro-Alloys by the
foreign buyer was split into two contracts, one between the
local supplier and the MMTC and the second between MMTC and
Ferro-Alloys. Letters of credit were opened by the foreign
buyer in the name of MMTC and were endorsed by MMTC in
favour of Ferro-Alloys. As in the case before us both
Ferro-Alloys and MMTC claimed Tax Credit Certificates under
Section 280 ZC of the Income Tax Act, 1961. The High Court
held that the Ferro Alloys was the real exporter. This
Court reversed the decision of the High Court and held that
MMTC was the exporter for the purposes of Section 280 ZC.
All this was done as required by the system of barter.
Ferro Alloys availed of this system presumably because it
was to its advantage. In fact, it appears that it was not
able to sell the said goods otherwise. Be that as it may,
whether by choice or by lack of alternative, it chose to
route its goods through MMTC. Is it open to the Ferro-
Alloys now to say that all this must be ignored in the name
of external appearances and it must be treated as the real
exporter for the purposes of Section 290 ZC. It wants to be
the gainer in both the events. A case of heads I win,
tails you lose.Ferro-Alloys cannot come to the MMTC when
it is profitable to it and disavow it when it is not
profitable to it. It cannot have it both ways.
Secondly, the phrase sale proceeds .. receivable by
the assessee in Section 80 HHC sub-section (2), cannot be
construed to mean sale proceeds ultimately received.
Payment for the export was by the Letter of Credit. The
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Letter of Credit being in favour of the export house, the
foreign exchange was receivable by it. That the export
house may have chosen to transfer the foreign exchange to a
third party under some independent arrangement would not
make the third party the exporter. Whatever be the internal
arrangement between the export house and the appellant, as
far as the Income Tax authorities were concerned, the export
house would clearly be the exporter. Finally, different
statutes have conferred benefits and cast obligations on an
exporter but none of the statutory provisions allows more
than one person either to claim the benefit given or be
subjected to the obligation cast. For example, Paragraph
165 of the Import and Export Policy for the year 1982-83
states: In respect of third party exports, i.e. where
all or any of the export documents contained the names of
two parties, the import replenishment licence as admissible
under the import policy for Registered Exporters may be
claimed by any of these two parties provided (i) the
claimant is a Registered Exporter and is otherwise eligible
under the Policy, (ii) the claimant produces a certificate
of disclaimer from the other party in his favour, and
(iii) the party granting the disclaimer is not itself
debarred from receiving licences etc. under the Import
(Control) Order, 1955.
The paragraph recognises that there may be a situation
where the export documents contain more than one name but
the privilege of obtaining a REP licence can be claimed by
only one. Similarly, the Circular No. 446 dated 14.8.1986
issued by the Central Board of Direct Taxes as well as the
amendment in 1989 to Section 80 HHC, allow a supporting
manufacturer to claim deductions in respect of profits of
the export provided the supporting manufacturer furnishes a
certificate from the export house, inter-alia, stating that
the export house had not claimed deductions under the
Section. Both the Circular as well as the amendment
indicate that were it not for the clarification/ amendment,
it would be the export house alone which could have claimed
deductions under the Section: a right which could be waived
in favour of the supporting manufacturer. It was for this
reason that the agreement between the appellant and the
export house had divided the benefits and obligations
obtainable by an exporter between them. Under clauses 7 and
8 of the agreement, the export house was alone entitled to
claim the REP import licence benefits and all the benefits
accruing to an eligible merchant exporter under the terms of
the Import Trade Control Policy. On the other hand, in
clause 10 the export house confirmed that it would not claim
benefits available from the Customs and Central Excise
authorities and or any other Government Departments in
respect of the export of shrimps. It may be that in
claiming the deduction under Section 80 HHC, the export
house has violated this term of the agreement but that
cannot make the appellant the exporter. The logical
consequence of the Tribunals view would be that both the
export house and the original manufacturer could claim to
have exported the goods and be entitled to receive the
foreign exchange, and both could consequently claim at
different stages deductions under Section 80 HHC in respect
of the same amount an outcome contrary to the language of
the Section itself. For all these reasons, we affirm the
decision of the High Court and dismiss the appeals with
costs.
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