Sea Pearl Industries & Ors Vs. Commissioner of Income Tax,
Cochin [2000] INSC 9 (9 January 2000)
S.P.Bharucha,
Doraswamy Raju, Ruma Pal
Ruma Pal, J.
L.I.T.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
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 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
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 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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