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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.