SEA PEARL INDUSTRIES AND ORS., ETC ..

COMMISSIONER OF INCOME TAX, COCHIN

JANUARY 9, 2001

[S.P. BHARUCHA, DORAISWAMY RAJU AND

MRS. RUMA PAL, JJ:)

Income Tax Act, 1961-Section 80HHC-Company exporting goods through export house- Deduction for exports- Entitlement to-- Held, deduction C is available to export house and not to company.

Words and Phrases:

"Sale Proceeds .... receivable by assessee "- Meaning of in the context of Section 80HHC of the Income Tax Act, 1961.

Appellant-assessee is a processor and exporter of sea foods. It is not an 'export house' under Import and Export Policy (Policy). The assessee entered into an agreement with an eligible Export house under the Policy for export of processed sea food on behalf of the export house in consideration E for a commission of2.25% of the FOB value of the goods exported. As per the agreement, a purchase order was placed on the export house by a foreign buyer. The buyer opened a Letter of Credit in favour of the export house. The goods were shipped to the destination of the foreign buyer by the assessee and the documents were given to the export house. The Letter of Credit, which was opened in the name of the export house, was endorsed in favour F of the assessee and the entire amount of foreign exchange was credited in the assessee's account by the export house. The assessee claimed deduction available for an exporter under Section SOHHC of the Income Tax Act, 1961 in its income tax return. Revenue disallowed the deduction. Income Tax Tribunal allowed the appeal of the assessee However, High Court answered the reference in favour of the Revenue.

In appeal, the assessee contended that it was entitled to the benefit of deduction under Section SOHHC of the Act as the export was done by selling them to the export house after the goods had crossed the customs barrier; that all the export formalities were done in the name of the assessee; that H the GR-1 form was issued in the name of the assessee by the Reserve Bank 184

SEA PEARL INDUSTRIES v. C.l.T. 185 • oflndia under the Provisions of the Foreign Exchange Regulation Act, 1973; A that Customs authorities recognised the assessee as an exporter under the provisions of the Customs Act, 1962; that bill of Lading indicated the assessee and the export house as the shipper; that for the purposes of the Policy, the export house is the exporter to avail the benefit for getting Import Replenishment (REP) licences; that the foreign exchange realised by the B export house for the export had been credited to the assessee's account.

Revenue contended that the documents relating to export disclosed that the assessee was acting as an agent of the export house; that there was no contract between the foreign buyer and the assessee; that the Letter of Credit was opened in the name of the export house even though foreign exchange C was ultimately received by the assessee; that the assessee received a commission of2.25% of the Fob value of the goods exported by the export house; that the question of title was irrelevant for claiming deduction under Section 80HHC of the Income Tax Act; that no certificate has been given by the export house to the assessee as per Circular No. 446 dated 14.8.86 issued by the Central Board of Direct Taxes; that the export house had claimed D deductions under Section 80HHC of the Act for the same export in its income tax returns.

Dismissing the appeals, the Court

HELD: 1.1. The question of title or property in the goods exported is E not relevant to Section 80HHC of the Income Tax Act, 1961. The Section does not require the exporter to be the owner of the goods. Section 2(18) of the Customs Act, 1962 also does not include the idea of ownership within the definition of the word 'export'. This is contrasted with Section 5(3) of the Central Sales tax Act, 1956 where the emphasis is on the transfer of title F by a last sale or purchase.1190-H; 191-AI

1.2. The object of Section 80HHC of the Income Tax Act is to grant an incentive to earners of foreign exchange. The transaction commenced with the agreement between the foreign buyer and the export house. But for this contract, there would be no export and no receipt of foreign exchange at all. G

In fulfilment of its obligation under the contract, the export house entered into an independent contract with the assessee, who 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 assessee for reimbursement.

The shipment was also made by the assessee on 'account or the export house. H

SUPREME COURT REPORTS

[2001] I S.C.R. • A This was in accordance with the agreement. [191-C-D-El

1.3. The assessee was a party to a declaration to the concerned authorities under the Policy that the export house was the exporter. 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 had been allowed deduction in respect of the amount realised by the export under Section 80HHC. The assessee having allowed the authorities to act on the basis, did so at its peril. It cannot now disclaim the position. [191-G[

C 1.4. The phrase "sale proceeds ..... reccivablc by the assessee" in subsection (2) of Section 80HHC of the Income Tax Act 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 D independent arrangement would not make the third party, the exporter.

Whatever be the internal arrangement between the export house and the assessee, as far as the Income tax authorities were concerned, the export house would clearly be the exporter. [ 192-F-Gl

E 1.5. Different Statutes have conferred benefits and cast obligations on an exporter but none of he statutory provisions allows more than one person either to claim the benefit given or be subject to the obligation cast. The Policy 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 F issued by the Central Board of Direct Taxes as well as the amendment in

1989 to Section 80HHC of the Income Tax Act indicate that the export house alone could claim 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 assessee and the export house had divided the benefits G and obligations obtainable by an exporter between them. Under the clauses of the agreement, the export house alone is 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. The export house confirmed in the agreement that it would not claim benefits available from the Customs and Central Excise authorities and or any other Government H departments in respect of the export of sea foods. It may be that in claiming

( I

the deduction under Section SOHHC, the export house has violated this term A of the agreement but that cannot make the assessee the exporter.

1192-G; 193-C-D-E-F'I

1.6. The Tribunal's view that both 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 B deductions under Section SOHHC of the Income Tax Act in respect of the same amount is an outcome contrary to the language of the Section itself.

1193-G-HI

Mineral and Metal Trading Corpora/ion v. R.C. Mishra & Ors., 201 I 19931 ITR 851, relied on.

C. T Ltd. & Anr. v. Commercial Tax Officer & Ors., 104119971STC94, ._\ distinguished. '

CIVIL APPELLATE JURISDICTION: Civil Appeal Nos. 5436- 5437 of 1998.

From the Judgment and Order dated 25.6.98 of the Kerala High Court in l.T.R. Nos. 5/92 and 19 I of 1991.

With

C.A. Nos. 239-244of1999.

K.K. Venugopal, Romy Chacko and Raj iv Mehta for the Appellants.

K.N. Shukla, Kamlendra Mishra, S.K. Dwivedi and Ms. Susma Suri for the Respondent.

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 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 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 H

' ~·

A 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 B 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 C 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 D 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 E permissible to an expoiter 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:

F "80HHC (I) 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 sh<)ll, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, the following G 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 tlie export of such goods or merchandise during the A: ) 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 E 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 (I 8) of the Customs Act which says that '"export' means taking C 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) E 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 F

v. Commercial Tax Officer and Others, I 04 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 G 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 H

A 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 B 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 expo11er 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.

C 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 crer:lit was in the D 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 E 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-

F 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 SOHHC requires (i) the assessee to export the goods and (ii) the G 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 H 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 A 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. r Ltd and Another. v B Commercial Tax officer and Others, I 04 ( 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 expo11. This decision cannot be relied on to construe Section SOHHC of the Income tax Act. c

The object of Section SOHHC 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 he no export and no receipt of foreign exchange at all. In fulfilment D 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. E 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 F 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 G 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 SOHHC. 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 H

A and Metal trading Corporation v. R.C. Mishra and Others, 201 (1993) !TR

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 expo11ed goods to foreign buyers through MMTC. The purchase order which B 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, C 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 D fact, it appears that it was not able to sell the said goods otherwise.

Be that as it may, whether by choice or ay 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 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 G 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.

H For example, Paragraph 165 of the Import and Export Policy for the year 1982-

SEA PEARL IND.LJSTRIES v. C.l.T. [RUMA l>AL. J.) 193

1983 states: A

"In respect of 'third party' exports, i.e. where all or anyofthe export documents contained the Jlames 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 Expo11er and is otherwise B 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 l111port (Control) Order, 1955."

The paragraph recognises that there 111ay 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 D furnishes a certificate from the export house, inter-alia, stating that the export house had not cairned deductions under the Section. Both the Circular as well as the amendment indicate that were it not for the clarfication/amendment, it

)ti: would be the export house alone which could have claimed deduction under the Section : a right which could be waived in favour of the supporting E 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

I 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 F confirmed that it wou Id 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 diferent stages deductions under SOHHC in respect of the same amount-an outcome contrary to the language of the Section itself. H

A For all these reasons, we affirm "the decision of the High Court and dismiss the appeals with costs.

B.S.

Appeals dismissed.