IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE B.P.RAY TUESDAY, THE 24TH MAY 2011 / 3RD JYAISHTA 1933 ITA.No. 204 of 2001() --------------------- AGAINST THE ORDER DATED 19/06/2001 IN COCH. IN ITA.222/1996 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT / APPELLANT -------------------- THE COMMISSIONER OF INCOME TAX, KOTTAYAM. BY ADV. SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) RESPONDENT(S): / RESPONDENT --------------- THE MIDLAND RUBBER & PRODUCE COMPANY LIMITED, ALLEPPEY. BY ADV. SRI.A.K.JAYASANKAR NAMBIAR THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 24/05/2011, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ITA NO.204/2001 APPENDIX APPELLANT'S EXHIBITS ANNEXURE-A : COPY OF ORDER OF THE ASSESSING OFFICER DATED 15/03/1995. ANNEXURE-B : COPY OF ORDER OF THE COMMISSIONER OF INCOME TAX (APPEALS) DATED 18/12/1995. ANNEXURE-C : COPY OF ORDER OF THE APPELLANTE TRIBUNAL DATED 03/07/2001. //TRUE COPY// PA TO JUDGE. jg C.R. C.N.RAMACHANDRAN NAIR & BHABANI PRASAD RAY, JJ. ---------------------------------- I.T.A. No.204 of 2001 --------------------------------- Dated, this the 24th day of May, 2011 J U D G M E N T Ramachandran Nair, J. The short question arising in the appeal filed by the Department is whether the Tribunal was justified in holding that the assessee was engaged in export of processed goods entitling it for deduction of export profit under Section 80HHC (3)(a) of the Income Tax Act (hereinafter referred to as the Act for short). 2. We have heard learned Standing Counsel appearing for the appellant and learned counsel appearing for the respondent assessee. 3. The facts leading to the controversy are the following:- The assessee is a plantation company, which is also engaged in trading of goods. The assessee purchases cardamom from ITA No.204/2001 -2- farmers, clean up the same by washing, sort and grade it, and exports the best quality cardamom. However, the net result of the trading activity for the previous year relevant for the assessment year was a loss, that disentitles the assessee to claim exemption on export profit in respect of trading of goods covered by clause (b) of Section 80HHC(3) of the Act. Even though the assessee is entitled to deduction of profit derived from export of goods i.e. cardamom, the assessee put forward a case before the Assessing Officer that before export of the cardamom purchased by the assessee, it processed the same by cleaning and grading, and exported only the best quality cardamom, and therefore, it is entitled to exemption on profit of export of processed goods provided under clause (a) of Section 80HHC(3) of the Act. The Assessing Officer noticed that the assessee is engaged only in trading of goods in as much as the purchased cardamom was graded to separate the inferior quality, and the assessee had in fact exported cardamom in the same form in which it was purchased. So much so, the Assessing Officer found that ITA No.204/2001 -3- cleaning and grading done by the assessee did not involve any 'processing' within the meaning of sub clause (a) of Section 80HHC(3) of the Act because there is no change, physical or otherwise, whatsoever of the goods processed, and so much so, the assessee is not entitled to deduction under sub clause (a) of Section 80HHC(3) of the Act. In an appeal filed by the assessee, the CIT (Appeals) accepted the contention of the assessee that cleaning, drying and grading of cardamom done by the assessee come within the meaning of “processing” that entitles the assessee for exemption on export of “processed goods” under sub clause (a) above referred, and the claim was allowed. This was confirmed by the Tribunal, against which this appeal is filed by the Revenue. 4. The relevant statutory provisions with reference to which we have to decide the case are extracted hereunder for easy reference. “80 HHC. 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 ITA No.204/2001 -4- 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 of the profits derived by the assessee from the export of such goods or merchandise: ----- ----- (3) For the purposes of sub-section(1),- (a) where the export out of India is of goods or merchandise manufactured or processed by the assessee, the profits derived from such export shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee; (b) where the export out of India is of trading goods, the profits derived from such export shall be the export turnover in respect of such trading goods as reduced by the direct costs and indirect costs attributable to such export; ----- ----- Explanation .- For the purposes of this sub- section,- ----- ----- (f) “trading goods” means goods which are not manufactured or processed by the assessee.” What is clear from the above provision is that the assessee is entitled to exemption on profit derived from export of goods either in the course of trading of goods or goods ITA No.204/2001 -5- manufactured or processed by the assessee. The formula provided in the above provision in the Act is to work out the proportionate profit attributable to export and to allow the same. This is to cover persons like the assessee, who are engaged in local sale as well as in export sale of manufactured or processed goods or trading goods. 5. In this case, the position conceded by the Department is that as the assessee is a merchant exporter it is entitled to deduction under clause (b) above stated, if the export of trading goods resulted in profit. However, the assessee suffered a loss in the trading of goods, and so much so, it is not entitled to any deduction under clause (b) above stated. It is to overcome this difficulty, the assessee canvassed for the position that the cardamom exported by it is “processed goods” entitling it for deduction under clause (a) above stated. Therefore the only question to be considered is whether the cardamom purchased by the assessee and exported is “processed goods” falling within the meaning of clause (a) above stated entitling the assessee for deduction as ITA No.204/2001 -6- held by the first appellate authority and confirmed by the Tribunal. 6. Learned Standing Counsel for the Revenue relied on the decision of the Honourable Supreme Court of India in the case of Delhi Cold Storage P. Ltd. v. Commissioner of Income Tax, reported in Vol. 191 (1991) ITR 656, wherein the Honourable Court explained “Processing” in the following lines:- "In common parlance, "processing" is understood as an action which brings forth some change or alteration of the goods or material which is subjected to the act of processing. The dictionary meaning of the term is not very different from this meaning in one sense, while various other meanings of wider amplitude are also available. The view taken by the Allahabad and Calcutta High Courts did not find favour with the three judge Bench of this Court and, in clear terms, the judgment indicates that processing involves bringing into existence a different substance from what the material was at the commencement of the process." Learned counsel for the assessee, on the other hand, relied on the court decisions followed by the Tribunal and the findings of the Tribunal on the facts in regard to the “processing” done ITA No.204/2001 -7- by the assessee. What is clear from the conclusion drawn by the Honourable Supreme Court in the above decision and from the meaning of the word “processing” found in dictionaries is that processing should involve some change or alteration in the goods. Certainly processing is quite distinct from manufacturing and the same does not amount to manufacturing. However, it should result in some form of change in the goods processed. In other words, after the processing the original goods should not retain its characteristics including the physical form. We do not think there is any need for us to consider exhaustively which are the activities that amount to “processing”. We have to only consider whether the activities carried on by the assessee on the cardamom purchased before the export or sale amount to “processing of goods” or the goods exported is “processed goods”. While considering the claim of the assessee we have to keep in mind the scope of clause (b) read with clause (f) of the explanation to the said Section above stated, and if the assessee falls within those clauses then certainly the assessee ITA No.204/2001 -8- cannot be said to be an exporter of processed goods. In other words, what is first to be considered is whether the assessee is engaged in export of goods in the form in which it is purchased (trading goods) and if so then the assessee cannot be said to be engaged in export of processed goods. 7. We have gone through the details of the activities carried on by the assessee in the purchase and export of cardamom. Matured cardamom plucked from plants is green in colour containing extraneous matters and particles. The only processing done by the planters is drying the cardamom without smoking. Invariably drying is done by sending hot air through pipes in the chamber cardomom. On drying, the best quality cardamom will acquire dark green colour while the not so good quality will have light yellow colour. What is clear from the orders of the first appellate authority and the Tribunal is that the assessee purchased uncleaned dried cardamom and all what the assessee has done is washing, drying and grading the cardamom between the best quality for export and the inferior quality not fit for export. No colour or ITA No.204/2001 -9- addition of any material is permissible to the cardamom and the cardamom which is obtained from the plant in the form of a capsule is exported in same form. The assessee has no case that the assessee either changed the physical form or made any change whatsoever to the cardamom purchased before export, and what was done by the assessee is that it just washed the cardamom to remove extraneous matters and particles, if any, on the surface of the cardamom, and exported the same. In our view, since the commodity purchased was exported in the same form, the transaction falls under trading of goods falling under clause (f) read with clause (b) above referred, and therefore, we cannot say that the very same item falls under clause (a) above referred which provides for export of manufactured or processed goods. In other words, the purchased commodity is exported in the same form and prior to such export the assessee washed and cleaned the product which does not involve any change physically or otherwise whatsoever to the commodity. In our view, the first appellate ITA No.204/2001 -10- authority as well as the Tribunal did not consider the issue in the correct perspective because if they have considered as to whether the assessee was engaged in trading of goods i.e. purchase and export of the commodity in the same form, there was no escape from the conclusion that the assessee's activities squarely fall under trading of goods within the meaning of clause (f) above referred. In our view, the finding of the lower authorities that the cleaning and grading of cardamom before export involve processing within the meaning of clause (a) above referred cannot be sustained. This is because the commodity purchased has not undergone any change in the course of washing, drying or grading done by the assessee and the goods even after processing retained all the characteristics and physical form to call it processed goods. In our view, what is required to be considered is not whether the assessee has done any processing of purchased goods before export, but the processing of the goods resulted any change to the original form of the goods to treat it as a processed goods, export of which alone will entitle the ITA No.204/2001 -11- assessee for deduction of profit under clause (a) above referred. Since the washing, drying and grading of dried cardamom purchased by the assessee before export do not make the cardamom exported as processed cardamom within the meaning of clause (a) above stated, the assessee is not entitled to deduction. Consequently, we allow the Income Tax Appeal by reversing the orders of the first appellate authority and the Tribunal, and by restoring the assessment order. (C.N.RAMACHANDRAN NAIR, JUDGE) (BHABANI PRASAD RAY, JUDGE) jg