Full Judgment Text
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CASE NO.:
Appeal (civil) 6146 of 2005
PETITIONER:
Commissioner of Income-Tax Thiruvananthapuram
RESPONDENT:
M/s Baby Marine Exports, Kollam
DATE OF JUDGMENT: 30/03/2007
BENCH:
Ashok Bhan & Dalveer Bhandari
JUDGMENT:
J U D G M E N T
WITH
CIVIL APPEAL NOS.281-284 & 286 OF 2006
Dalveer Bhandari, J.
The controversy involved in these appeals revolves
around a short but important question of law - whether
the export house premium received by the assessee is
includible in the "profits of the business" of the assessee
while computing the deduction under Section 80HHC of
the Income Tax Act, 1961?
Since a common question of law arises for
consideration in these appeals, therefore, they are being
disposed of by this common judgment. However, for the
sake of reference, the essential facts of Civil Appeal No.
6146 of 2005 are reproduced as under.
The respondent-assessee, M/s Baby Marine
Exports, Kollam is engaged in the business of selling
marine products both in domestic market and also
exporting it. The assessee is exporting directly to the
buyers and also through export houses.
The assessee in the instant case has entered into
contracts with the export houses, whereby, as and when
the assessee sells the goods or merchandise to an export
house, as consideration for the sale, receives the entire
F.O.B. value of the exports plus the export house
premium of 2.25% of the F.O.B. value. The relevant
clause dealing with F.O.B. value and incentive
commission of the contract entered into between the
assessee and the export house in this case is reproduced
as under:
"Clause (12): The Export House agrees to
pay the manufacturer/shipper an incentive of
2.25% on the F.O.B. value (net of overseas
commission) of the said Frozen Marine
products shipped by the
manufacturer/shipper."
The assessee has been filing its income tax returns
showing the export house premium as part of its total
turnover and, thereby seeking deductions available to an
exporter and/or a supporting manufacturer under
Section 80-HHC (1A) of the Income Tax Act.
The assessee has shown the export premium as
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part of sale consideration having an element of turnover
and not commission or service charges.
The Income-tax Officer, Ward-I, Quilon rejected the
claim of the assessee by his order dated 30.3.1995. In
this connection, the assessing officer referred to the
relevant clause 12 of the agreement entered into between
the assessee and the export house and observed that the
narration of the clause shows the nature of the payment.
According to the assessing officer, this is clearly a
"commission or service charge" for routing the exports
through the export houses who receive import licenses
required by them. The assessing officer in support of his
findings referred to and relied upon the decision of ITAT,
Cochin Bench in ITA No.610 (Coch)/1994) dated
21.12.1994 in G. Gangadharan Nair v. ITO Ward-1,
Mattanchery.
The respondent assessee aggrieved by the said order
filed an appeal before the Commissioner (Appeals).
The Commissioner (Appeals) also examined the
main question being whether the export house premium
will form part of the export turnover for the purpose of
computing the amount of deduction under the proviso to
sub-section (3) to Section 80HHC?
The Commissioner (Appeals) relying upon the
decision of the ITAT dated 28.3.1995 in Income Tax
Officer v. Sea Pearl Industries Ltd. directed the
assessing officer to include the value of export through
export houses also in the export turnover for the purpose
of computing deduction under Section 80HHC. The
Commissioner (Appeals) held that "what the appellant
has received is only a reimbursement of certain expenses
or payments towards commission or brokerage. That
being the case, the export premium receipts will fall
within the ambit of clause 1 of Explanation (baa) to
Section 80HHC and, therefore, the Assessing Officer was
justified in excluding 90% of such receipts to arrive at the
profit of the business as defined in Explanation (baa)".
The Commissioner (Appeals) further held that "the
Assessing Officer was not justified in excluding the
indirect export from the export turnover. He is directed
to include the indirect export also in the export turnover
for the purpose of Section 80HHC".
The respondent aggrieved by the order of the
Commissioner (Appeals) approached the Income Tax
Appellate Tribunal.
The Tribunal extracted the findings of the
Commissioner (Appeals) in its order in extenso and relied
on the decision of the Tribunal.
The Tribunal allowed the appeal of the assessee
and upheld the stand of the assessee that the export
house premium received by the assessee is includible in
the "profits of the business" of the assessee while
computing the deduction under Section 80HHC of the
Income Tax Act, 1961.
Being aggrieved by the decision of the Tribunal, the
Revenue went in appeal before the High Court. The High
Court vide order dated 22.8.2003 dismissed the appeal of
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the Revenue by observing that the questions involved in
the appeal were squarely covered by its decision in ITA
Nos.251/2002 and 166/2002 dated 01.7.2003, which
were decided in favour of the assessee and against the
Revenue. In those cases, the High Court had
meticulously examined the issues involved in these
appeals. While answering the questions involved, the
High Court had observed as under:
"In the present case the assessee is getting the
deduction not by virtue of the provision of S.
80-HHC (1) but only by virtue of the provision
of S. 80-HHC(1A). The said sub-section
provides that the assessee, being a supporting
manufacturer, has during the previous year,
sold goods or merchandise to any export house
or Trading House in respect of which the
export house or trading house has issued a
certificate under the provision to sub-section
(1), there shall in accordance with and subject
to the provisions of Section 80-HHC be allowed
in computing the total income of the assessee,
a deduction of the profits derived by the
assessee from the sale of goods or
merchandise to the export house or trading
house in respect of which certificate has been
issued. From the above, it would appear that
it is the sale of goods or merchandise to the
export house which entitles the assessee to get
the deduction under the sub-section and it is
the profits derived by the assessee from the
sale of goods or merchandise to the export
house that is liable to be deducted in the
computation of the total income. It is only by
virtue of the agreements between the assessee
and the export houses the assesses got the
FOB value of the goods exported and a
percentage of the FOB value as export
premium. Thus, both the amounts constituted
the consideration received by the assessee for
the sale of goods or merchandise to the export
house. Thus, even applying the principles laid
down by the Supreme Court and of this Court
in the decisions relied on by the senior counsel
for the Revenue, it has to be held that the
assesses are entitled to the benefits of section
80HHC on the export premium received from
the export houses."
Being aggrieved by the decision of the High Court,
the Revenue has come to this Court by way of filing the
instant appeal.
The Revenue has raised many questions of law in
this appeal, but we are only concerned with the following
question:
"Whether, on the facts and in the
circumstances of the case, the assessee is
entitled to any benefit on the export
house premium?"
In appeal, it has been stated by the Revenue that
the High Court has erred in law in holding that the
premium received by the assessee from the export house,
which has exported the goods on behalf of the assessee,
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being the supporting manufacturer, was profit on which
the assessee was entitled to a benefit of deduction under
Section 80-HHC of the Act inasmuch as it did not form
part of the sale proceeds of the goods exported by the
assessee through the export house but it was merely a
receipt from the Export House in consideration of the
permits/service rendered to them for facilitating the
export of goods.
According to the Revenue, the High Court has erred
in interpreting the term "profits of the business"
contained in clause (baa) of Explanation to Section 80-
HHC by holding that the premium received by the
assessee from the export house was profits of business
and not any sum referred to in clauses (iiia), (iiib) and
(iiic) of Section 28 or any receipt by way of brokerage,
commission, interest, rent, charges or any other receipt
of similar nature included in such profits. It has been
further stated that on a proper construction of provisions
of sub-section (1A) and (4A) of Section 80-HHC, the
assessee being a supporting manufacturer is entitled to
deduction under this Section only on the sale price of the
assessee’s goods exported through the export house
inasmuch as the premium received by the assessee from
the export house cannot be held to have been "derived
from" the export business of the assessee.
It was asserted by the appellant that the High Court
erred in holding that the assessee was entitled to
deduction under this Section by ignoring the provisions
of sub-section (4A) of Section 80-HHC according to which
the assessee being the supporting manufacturer was
required to furnish a certificate from the Chartered
Accountant that the deduction has been correctly
claimed by him on the basis of the profits in respect of
the sale of goods to the export house and also a
certificate from the export house about disclaimer of
deduction in respect of export turnover mentioned in the
certificate which could not in any way be construed as
including the premium paid by the export house to the
assessee.
Shri Vikas Singh, learned Additional Solicitor
General appearing on behalf of the Revenue contended
that to properly comprehend the issues involved in this
case, it is necessary to state in brief the object and the
source of money which is passed on by the export house
to the supporting manufacturer. The assessment years
involved in the present case are 1992-93 to 1994-95.
During the relevant years, the EXIM Policy of Ist April,
1992 to 31st March, 1997 was applicable. According to
the said policy, export houses were given various benefits
both tangible and intangible under the EXIM Policy, some
part of the said policy is reproduced as under:
"Under Chapter 12 of the EXIM Policy of
1992-97 vide para 137, the exporting
organizations were given recognition as export
house/trading house or star trading house on
the basis of average FOB value of physical
exports done by them during the three
preceding licensing years. In the original
EXIM policy, an export organization was
declared an export house if it did 6 crores of
annual net foreign exchange export in the
three preceding years and it was declared a
trading house if it did 30 crores of the same
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and star trading house if it did 125 crores of
the same.
In the year 1993, the status determined
was done on the basis of average FOB value of
physical exports done during the preceding
three licensing years. For export houses, it
was 10 crores, for trading houses it was 50
crores and for star trading houses it was 250
crores.
In the next year i.e. in 1994, the policy
provided both options i.e. of average net
foreign exchange export/average FOB value as
the basis for declaration of export house,
trading houses etc. and in the year 1994 a new
category was added which was super star
trading houses.
Consequent to the recognition as an
export house/trading house/star trading
house/super star trading house, the export
house was eligible to become a member of the
elite Indian Organization namely Federation of
Indian Export Organization (FIEO) which
further entitled the export houses to attend the
various buyers/seller meet all over the world,
to participate in the international exhibitions
and as members of delegation with the
government and also to attend international
conferences etc. The benefits were many, only
some illustrations have been given above."
Thus, in effect the money which was paid by the export
houses to the supporting manufacturers in the form of
premium/incentive is nothing but the money which was
received by the export houses in the form of one incentive
or the other, some of which is cash in the sense that the
same can be freely sold in the market at a premium and
the others are long term benefit which accrue to the
export houses over the years.
The source of the money accordingly is within India
and the money paid by the export houses to the
supporting manufacturer has no nexus or link to the
foreign buyers who paid the value of the goods on being
sold to the supporting manufacturer through the export
houses. The assessee, i.e., the supporting manufacturer
would be entitled to claim the incentive/premium as part
of its export turnover if the origin of the money had been
the foreign buyer even if the said money were to be
routed to the supporting manufacturer through the
export house. Since the admitted case of the parties is
that the source of money is within India i.e. out of the
incentives being offered by the Government of India
under the EXIM Policy 1992-97, the turnover of the
assessee/supporting manufacturer is merely a domestic
turnover and not the export turnover as claimed by them.
The appellant submitted that under Section 80-
HHC, the assessee supporting manufacturer is entitled to
claim deduction only out of the profits earned by it from
the export turnover and not from the domestic turnover
which the assessee may have over and above the export
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earnings.
Learned Additional Solicitor General also made the
following submissions.
(a) The fact that the foreign buyer pays the value
of the goods in convertible foreign exchange
whereas, the money which is being paid by the
export house as premium to the supporting
manufacturer is in Indian currency and the
said Indian currency has no link or nexus
whatsoever with any foreign exchange earning.
(b) The export premium being earned by the
assessee is not part of the sale price or the
invoice price of the goods being sold by the
assessee to the foreign buyer but is in effect
something over and above the same.
(c) The amount which is being claimed by the
assessee as incentive/premium to be included
in his export profit under Section 80HHC is
not included in the certificate issued by the
export house or trade house under sub-section
(1A) of Section 80HHC and hence the assessee
cannot claim any benefit for the said amount
being outside the scope of deduction under
Section 80HHC (1A).
The assessee cannot get the premium/incentive
included as his profits under Section 80-HHC because
even the export house that is passing on this premium to
the assessee/supporting manufacturer is not permitted
to claim such deduction as profit from export earning
under Section 80-HHC. In terms of Explanation (baa) to
Section 80HHC sub-clause 4(A), even the export house
can only claim 10% of such or similar earnings towards
deduction and hence it is inconceivable that the
supporting manufacturer could be permitted to claim
100% deduction of the same money when it comes into
his hands. Finally, learned Additional Solicitor General
argued that the premium earned by the assessee is the
domestic earning of the assessee totally unrelated to the
export of goods and hence the assessee cannot claim any
deduction whatsoever in respect of such earning under
Section 80-HHC (1A).
Shri S. Ganesh, learned senior Advocate appearing
for the respondent - assessee contended that the claim of
the assessee for deduction under Section 80-HHC is by
virtue of the provision of Section 80-HHC (1A). He also
submitted that as far as the assessee is concerned, the
export premium forms part of the export transaction
between the assessee and the export houses and,
therefore, it forms part of the export transaction and
consequently, the income by way of export premium is
profit derived by the assessee from the export of such
goods or merchandise.
The export premium received by the assessee from
the export house forms part of the price settled between
the parties for sale of the goods and that it is neither
brokerage nor commission nor interest nor rent nor
charges etc.
Mr. Ganesh, referred to the decision of Bombay
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High Court in CST v. Bangalore Clothing Company
reported in 260 ITR 371 wherein the Bombay High Court
has referred to and followed the Circular No.621 issued
by the CBDT dated 19th December, 1991. The High
Court has explained that the object of the Explanation
(baa) to Section 80-HHC is to exclude profit receipts from
the business which do not have an element of turnover
and which are not connected with the assessee’s
business operations. If a particular receipt is in the
nature of the operational income then it must be
included in business profit and consequently benefits of
Section 80-HHC must be granted in respect thereof. Mr.
Ganesh also urged that applying the test enunciated by
the judgment of the Bombay High Court in Bangalore
Clothing Company’s case (supra) would lead to
irresistible conclusion that the export house premium
must necessarily be included in the business profit
because it is part of the assessee’s turnover and has an
integral connection with the business operations of the
supporting manufacturer, which consist of sale of goods
of the export house.
Mr. Ganesh submitted that the judgment delivered
by the Madras High Court in KRN Marine Exports Ltd.
v. ACIT reported in 2006 (153) Taxman p.437 is not
good law as the said decision did not consider the Board
Circular No. 621 which explained the clarification of the
provision of the Explanation (baa) to Section 80HHC (1A)
of the Act. In that case, the High Court completely failed
to appreciate the crucial distinction between Section
80HHC (1) and Section 80HHC (1A) and also the fact that
the supporting manufacturer’s claim for the deduction
was under Section 80HHC (1A) which has nothing
whatsoever to do with export profit, with which only the
export house is concerned. Mr. Ganesh also contended
that the said decision is required to be overruled by this
Court in view of the decision of this court in Berger
Paints India Ltd. v. Commissioner of Income Tax,
Calcutta reported in (2004) 12 SCC 42.
We have heard the learned counsel for the parties at
length. Before critically examining the rival contentions
of the learned counsel for the appellants and the
respondents, we deem it appropriate to refer to the
provisions of Section 80-HHC of the Act:
"80HHC. Deduction in respect of profits
retained for export business. (1) Where an
assessee, being an Indian company or a person
(other than a company) resident in India, is
engaged in the business of export out of India
of 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, a deduction to the extent of profits,
referred to in sub-section (1B), derived by the
assessee from the export of such goods or
merchandise:
Provided that if the assessee, being a holder of
an Export House Certificate or a Trading
House Certificate (hereafter in this section
referred to as an Export House or a Trading
House, as the case may be,) issues a certificate
referred to in Clause (b) of Sub-section (4A),
that in respect of the amount of the export
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turnover specified therein, the deduction
under this sub-section is to be allowed to a
supporting manufacturer, then the amount of
deduction in the case of the assessee shall be
reduced by such amount which bears to the
total profits derived by the assessee from the
export of trading goods. the same proportion
as the amount of export turnover specified in
the said certificate bears to the total export
turnover of the assessee in respect of such
trading goods.
(1A) Where the assessee, being a supporting
manufacturer, has during the previous year,
sold goods or merchandise to any Export
House or Trading House in respect of which
the Export House or trading House has issued
a certificate under the proviso to sub-section
(1), there shall, in accordance with and subject
to the provisions of this section, be allowed in
computing the total income of the assessee, [a
deduction to the extent of profits, referred to in
Sub-section (1B)], derived by the assessee from
the sale of goods or merchandise to the Export
House or Trading House in respect of which
the certificate has been issued by the Export
House or Trading House.
Section 80HHC was incorporated with the object of
granting incentive to earners of foreign exchange. This
Court in Sea Pearl Industries v. CIT Cochin (2001) 2
SCC 33 also observed that the object of Section 80HHC is
to grant incentive to earners of foreign exchange. In IPCA
Laboratory Ltd. v. Dy. Commissioner of Income Tax,
Mumbai reported in (2004) 12 SCC 742 this Court has
taken the same view. This Court in the said judgment
observed that Section 80HHC has been incorporated with
a view to provide incentive to export houses and this
Section must receive liberal interpretation.
In Bajaj Tempo Ltd. v. Commissioner of Income
Tax, Bombay reported in (1992) 3 SCC 78, this Court
while interpreting Section 15-C of the Income Tax Act,
1922 observed that the Section, read as a whole, was a
provision, directed towards encouraging industrialization
by permitting an assessee setting up a new undertaking
to claim benefit of not paying tax to certain extent on the
capital employed. Similarly, Section 80 HHC has also
been incorporated to give incentive for the earners of the
foreign exchange. We must always keep the object of the
Act in view while interpreting the Section. The legislative
intention must be the foundation of the court’s
interpretation.
According to Section 80HHC (1), the Export House in
computing its total income is entitled to deduction to the
extent of the profit derived by the assessee from the export
of the goods or merchandise. Whereas, according to
Section 80 HHC(1A), the supporting manufacturer shall be
entitled to a deduction of profit derived by the assessee
from the sale of goods or merchandise. The term
"supporting manufacturer" has been defined in this
section and it reads as under:-
"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
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merchandise to an Export House or a Trading
House for the purposes of export; According
to the said definition, the respondent clearly
comes within the purview of supporting
manufacturer. On plain construction of
Section 80HHC(1A) the assessee being
supporting as manufacturer shall be entitled
to a deduction of the profit derived by the
assessee from the sale of goods or
merchandise."
[
The respondent \026 a supporting manufacturer sold the
goods or merchandise to the export house and received the
entire FOB value of the goods plus the export house
premium of 2.25% of the FOB value. The relevant Clause
12 of the agreement has already been extracted in the
earlier part of the judgment and according to the said
clause, the export house is under obligation to pay to the
supporting manufacturer an incentive of 2.25% on the
F.O.B. value according to the terms of the agreement.
The respondent, a supporting manufacturer,
admittedly sold the goods to the export house in respect of
which the export house has issued a certificate under
proviso to sub-section (1). According to the section, the
respondent - assessee, in computing the total income be
allowed a deduction to the extent of profits referred to in
sub-section (1B) derived by the assessee from the sale of
goods to the export house.
The Appellate Tribunal has arrived at definite
conclusion that the Export House Premium is nothing but
an integral part of sale price realized by the assessee \026 a
supporting manufacturer from the Export House. The
Tribunal further held that the Export House Premium
cannot possibly be considered to be either commission or
brokerage, as a person cannot earn commission or
brokerage for himself.
The High Court has upheld the findings of the
Tribunal. In our considered view, the order of the
Appellate Tribunal is based on proper construction of
Section 80HHC (1A) of the Income Tax Act that the Export
House premium is an integral part of the sale price
realized by the assessee from the export house.
We find no merit in the submission of the appellant
that Indian currency could not be subject matter of
deduction under Section 80HHC. The requirement of
realizing the sale proceeds of the goods or merchandise in
convertible merchandise is applicable only to the Export
House and a claim for deduction under Section 80HHC (1).
The requirement of realization of sale proceeds in foreign
exchange expressly made inapplicable to the supporting
manufacturer by Section 80HHC(2A) and further the
supporting manufacturer’s claim of deduction is only
under Section 80HHC(1A) and not under Section
80HHC(1) which applies to export houses only.
The submission of the appellant that the premium
earned by the respondent assessee is totally unrelated to
export is fallacious and devoid of any merit. This
submission of the appellant is also contrary to the specific
terms of the agreement between the appellant and the
respondent.
On plain construction of Section 80HHC (1A), the
respondent is clearly entitled to claim deduction of the
premium amount received from the export house in
computing the total income. The export house premium
can be included in the business profit because it is an
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integral part of business operation of the respondent
which consists of sale of goods by the respondent to the
export house.
The order of the Tribunal, which has been upheld by
the High Court in the impugned judgment, is based on
proper construction of Section 80HHC of the Income Tax
Act, 1961. The appeal filed by the appellant being devoid
of any merit is accordingly dismissed.
CIVIL APPEAL NOS.281-284 & 286 OF 2006
These appeals stand disposed of in terms of our
judgment in Civil Appeal No. 6146 of 2005.
In the peculiar facts and circumstances of the case,
we direct the parties to all the appeals to meet their
respective costs.