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CASE NO.: Appeal (civil) 5436-5437  of 1998

PETITIONER: SEA PEARL INDUSTRIES & ORS.

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX, COCHIN

DATE OF JUDGMENT:       09/01/2000

BENCH: S.P.Bharucha, Doraswamy Raju, Ruma Pal

JUDGMENT:

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     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 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

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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

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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

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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

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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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