Full Judgment Text
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CASE NO.:
Appeal (civil) 5436-5437 of 1998
PETITIONER:
SEA PEARL INDUSTRIES AND ORS. ETC.
RESPONDENT:
COMMISSIONER OF INCOME TAX, COCHIN
DATE OF JUDGMENT: 09/01/2001
BENCH:
S.P. BHARUCHA & DORAISWAMY RAJU & MRS. RUMA PAL
JUDGMENT:
JUDGMENT
2001 (1) SCR 184
The Judgment of the Court was delivered by
RUMA PAL, J. The question to be decided in this appeal is whether the
appellant was an exporter for the purposes of Section 80HMC 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 and eligible export house under
the Import and Export Police 1982-83 (referred to as the ’Policy’) and it
could not avail for 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 appellant’s 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 appellant’s account. The appellant then
claimed deductions 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
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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 appellant’s claim for deductions 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 oh 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 mean ing o f 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 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 appellant’s 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 appellant’s account in terms of the agreement between the export
house and the appellant, the letter of credit was in the name of the export
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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 80HHC 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 appellant’s 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 80HHC. 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.........."preceeding 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 80HHC of
the Income tax Act.
The object of Section 80HHC 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
Californian buyer and the export house. But for this contract, there would
be no export and no receipt of foreign exchange at all. In fulfilment 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 firs 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.
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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 tack 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 t 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 80HHC sub-section (2), cannot be construed to mean ’sale proceeds
ultimately received’ Payment for the export was by the Letter of Credit.
The 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 1982-1983 states:
"In respect of ’third party’ exports, i.e. where all or anyof 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 undr 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. Similary 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 80HHC, 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 caimed deductions under
the Section. Both the Circular as well as the amendment indicate that were
it not for the clarfication/amendment, it would be the export house alone
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which could have claimed deduction 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
80HHC, the export house has violated this term of the agreement but that
cannot make the appellant the exporter.
The logical consequence of the Tribunal’s view would be that both the
export house and the orginal manufactuer 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 80HHC 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.