SEA PEARL INDUSTRIES AND ORS., ETC v. COMMISSIONER OF INCOME TAX, COCHIN

Citation: [2001] 1 S.C.R. 184

Court: Supreme Court of India

Bench: S.P. BHARUCHA, DORAISWAMY RAJU, RUMA PAL

Judgment text

SEA PEARL INDUSTRIES AND ORS. , ETC.. v. COMMISSIONER OF INCOME TAX, COCHIN JANUARY 9, 2001 f iB [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 is available to export house and not to company. Words and Phrases: "Sale Proceeds.... receivable by assessee "- Meaning of in the context ofSection 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 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 ofCredit 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 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 the GR-1 form was issued in the name of the assessee by the Reserve Bank SEA PEARL INDUSTRIES v. C. l. T. 185 • oflndia under the Provisions of the Foreign Exchange Regulation Act, 1973; 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 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 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 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 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) ofthe Central Sales tax Act, 1956 where the emphasis is on the transfer of title 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. 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. • This was in accordance with the agreement. [191-C-D-El ( I 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[ 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 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 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 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 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 departments in respect of the export of sea foods.

It may be that in claiming the deduction under Section SOHHC, the export house has violated this term 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 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 I19931 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 ~·' 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 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: "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 AL. J. ) 193 1983 states: "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 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 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 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 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. A For all these reasons, we affirm "the decision of the High Court and dismiss the appeals with costs. B. S. Appeals dismissed.