Commissioner of Income Tax vs SEA PEARL INDUSTRIES

J.B. Koshy J.

In IT Ref. No. 191 of 1991 at the instance of the Revenue the following question has been referred to this Court by the Tribunal, Cochin Bench

"Whether, on the facts and in the circumstances of the case, the assessee is entitled to deduction under s. 80HHC of the Income Tax Act, 1961, in respect of exports (not done directly by the assessee) done through export house ?"

At the instance of the Revenue the following questions of law have been referred to this Court in IT Ref. No. 5 of 1992 :

" 1. Whether, on the facts and in the circumstances of the case, the assessee is entitled to deduction under s. 80HHC of the Income Tax Act, 1961 in respect of exports (not done directly by the assessee) done through export house ?

Whether, on the facts and in the circumstances of the case, the Tribunal is right in law and on facts in holding,-

(i) the assessee was not an agent of the export house ?

(ii) in substance the export house has not purchased the goods ?

(iii) export process has been actually done by the assessee and not the export house ?

(iv) ''both are entitled to the benefit''

As the assessment orders considered in both the cases are relating to 1983-84 with similar set of facts and the real question to be considered is regarding application of s. 80HHC of the Income Tax Act, 1961, as requested by the parties, both the reference cases are answered by this common judgment.

The assessees are processors of frozen sea foods. Some of their processed goods are exported directly to the foreign buyers. Part of their turnover are exported by the export houses. With regard to the direct exports by them to the foreign buyers there is no dispute. The question is whether they are entitled to the benefit of s. 80HHC for the relevant year for the exports done through the export houses. It is not disputed that foreign buyers had contracts only with the recognised export- houses. In their turn, they have independent agreement with the processors (the assessees). As per the agreement with the assessees and the export houses, the assessees would export against the export orders received by the export houses in the name of export houses. Letter of credit is opened in the name of the export houses, but it is later endorsed in favour of the assessees so that it can be credited to the assessees'' bank, as insisted by the assessees. The assessees have to complete all formalities with regard to export and to ship the goods under bills of lading and the documents are completed by the assessee "on account of the export houses". In the agreement between assessees and export houses, export houses are termed as exporters and assessees are termed as processors.

In the statement of the case in IT Ref. No. 5 of 1992 it is stated as follows :

"The Tribunal found that cl. 2 of the preamble of the agreement states that the export houses had approached the assessee to export frozen marine products and the assessee had agreed to undertake such exports. Clause 3 of the preamble states that the assessee would export against export orders received by the export houses provided that the assessee approved all the prices at which these orders have been booked. The assessee also agrees to export the product against export orders in the name of the export house.

....... After each shipment the export houses agreed to negotiate these documents pertaining to the said shipment through the bankers specified by the assessee instructed the bankers to credit the entire proceeds on such documents to the account of the assessee. The Tribunal noticed that in consideration of the services done by the assessee, the export house would pay commission at 2.25 per cent on the FOB value of the products exported. The REP Import Licence benefit would be available as per the policy only for the export houses. It is further provided by cl. 8 that in respect of the exports made by the assessee the export houses will be entitled to claim all the benefits accruing to eligible merchant exporter under the terms of the Import Trade Control Policy. There is also a clause in respect of the drawback benefits available from customs and central excise authorities. The assessee will be eligible for these benefits and the export house will not claim them."

The documents were prepared by the assessees on account of the export houses and goods were put on board by the assessees. The documents were prepared on account of the export houses. It is also not disputed that the benefit of s. 80HHC during the relevant year was claimed by the export houses and they obtained the same. But according to the Tribunal, that will not prevent the assessees from taking the benefit and the assessees being the real exporters are entitled to take the benefit of s. 80HHC.

During the relevant time s. 80HHC was as follows

"80HHC. Deduction in respect of export turnover.-(l) 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 the 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 turnover of such goods or merchandise during the previous year exceeds the export turnover of such goods or merchandise during the immediately preceding previous year. (2)(a) This section applies to all goods or merchandise (other than those specified in cl. (b)) if the sale proceeds of such goods or merchandise exported out of India are receivable by the assessee in convertible foreign exchange.

This section is intended to grant benefits to the exporters for encouraging exports.

In this connection we may refer to the legislative history regarding the benefits granted for exports under s. 80HHC. Originally s. 80A of the Income Tax Act granted relief in respect of export turnover with effect from 1-6-1982. It was replaced by s. 80HHC which came into force on 1-4-1983 and it granted a deduction based on percentage of export turnover. The section was substituted by Finance Act, 1985 with effect from 1st April, 1986 which granted deduction with reference to export profits. During these periods the benefit of s. 80HHC was given only to the real exporters and there were demands from supporting manufacturers/processors for getting the benefit of the section and under Board''s Circular No. 466 dt. 14-8- 1986 Commissioner of Income Tax Vs. Kerala State Road Transport Corporation General Provident Fund Trust, the benefit was given to the supporting manufacturers also provided they produce a disclaimer certificate from export houses. In 1989 the section was amended substantially exempting the entire profits derived from the export and for the first time it makes express provision for dividing the exemption between a recognized export house or trading house and the supporting manufacturer. However, when it was expressly made applicable to supporting manufacturers, it is also made clear that, for claiming the benefits by the supporting manufacturers, they should produce a certificate from the export house or trading house so that both will not get the benefit simultaneously. When express provision was made for enabling the supporting manufacturers to claim the benefit in 1989 sub-section (4A) of the Act (sic-section) provides as follows :

"80.HHC (4A) The deduction under sub-section (1A) shall not be admissible unless the supporting manufacturer furnishes in the prescribed form along with his return of income,

(a) ....................

M a certificate from the Export House or Trading House containing such particulars as may be prescribed and verified in the manner prescribed that in respect of the export turnover mentioned in the certificate, the Export House or Trading House has not claimed the deduction under this section : ............

Such disclaimer certificate was insisted upon only when the supporting manufacturers claim the benefit. When export houses are directly claiming, such certificates from the supporting manufactures or processors were not necessary. During the relevant assessment year 1983-84, these was no specific provision for enabling the supporting manufacturers to claim this benefit. The scheme of the Act is clear that the benefits can be availed only by one party and simultaneously cannot be claimed by export houses and processors or supporting manufacturers.

The Tribunal after going through the agreement was of the opinion that the real exporters are the assessees, the processors, and export is done through the export houses and the benefits under s. 80HHC can be claimed by the assessee even though such benefits were received by the export houses. The Tribunal relied on the decision of the Delhi High Court in Ferro Alloys Corporation Ltd. Vs. R.C. Mishra and Others, . The above judgment was subsequently reversed by the Supreme Court when an appeal was filed from the above decision in Mineral and Metal Trading Corporation Vs. R.C. Mishra and others, . In that case, Ferro Alloys, a manufacturer-exporter of ferro-manganese and chrome concentrates, entered into a number of agreements with foreign buyers for sale of the above two commodities. But the export was routed through the M.M.T.C. under a barter system. It was agreed and understood that Ferro Alloys should intimate the foreign buyer to enter into a direct contract with M.M.T.C. as it is the seller, The forms and documents like G.R.I. Form and shipping bills were prepared in the name of M.M.T.C. Letters of credit were also opened in the name of M.M.T.C. The Supreme Court held that the entire export was done through the M.M.T.C., there was no half-way house, either it was the barter system or it was not. Therefore, M.M.T.C. was the manufacturer or the exporter for the purpose of s. 280 ZC. It was held that it cannot be explained away as even though in "external appearances" M.M.T.C. is the exporter.

Learned senior standing counsel appearing for the Revenue submitted that in view of the above decision of the Supreme Court now the questions are to be answered in favour of the Revenue as it is fully covered by the above decisions.

Learned senior advocate appearing for the assessees tried to distinguish the above decision as in M.M.T.C.''s case G.R.I. Forms were also prepared in the name of M.M.T.C. and bills were also prepared in the name of M.M.T.C. It is also argued that even though originally the contract with the foreign buyers was with Ferro Alloys Ltd. subsequently separate contracts were entered with M.M.T.C. and the foreign buyers and M.M.T.C. and the supporting manufacturers. But in the case in hand, even though shipping bills were issued in favour of the assessees, the processors, and all documents were prepared in the name of the assessees, it was expressly mentioned that it was done ''on account of the export houses''. Therefore, it is contended by the Revenue that actually the bills were prepared by the assessees only on account of the export houses, but the assessees relied on the dicta of Supreme Court in D. Radhakrishnan Vs. Union of India (UOI) and Others, . There the Supreme Court considered the question whether the sale by the assessee is penultimate sale in the course of export and covered by the terms of s. 5(3) of the Central ST Act. The Supreme Court in the above case after relying the decision in Bhopal Sugar Industries Ltd. v. STO (1977) 40 STC 42 held that while interpreting the terms of the agreement, the Court has to look into the substance rather than the form of it and found that the real exporter in the above case is not State Trading Corporation (STC) but the C.T. Ltd. itself even though the documents were prepared on account of the State Trading Corporation. But the facts of the case were different. It was found by the Supreme Court in the above case that under the terms of the contract between the appellant and STC, STC was merely an agent and there was no sale of tea by the appellant to the STC and sale of tea was directly by the appellant, therefore, sale done by the appellant was penultimate sale. Therefore clear finding on the basis of the agreement was that there was no sale by the appellant to the STC and transfer of property was never done in favour of the STC. The tea export licence for the tea was that of the appellants. The invoice of the appellants showed the Iranian buyer against the column "sold to". It was also held by the Supreme Court that the typing of the words "A/c. the State Trading Corporation of India" below the name and address of the appellants against the column "shipper" will not constitute an endorsement and the purchase of tea by the appellants at the auctions in fulfilment of the export obligation to the Iranian buyer was the penultimate sale in the course of export and covered by the terms of s. 5(3).

In K. Gopinathan Nair and etc. Vs. State of Kerala, , the Supreme Court considered the similar question. In that case there was transfer of property to the Cashew Corporation of India (CCI) Ltd. There was also provision to the contract with CCI and the processor that title to the goods will pass only after the goods crossed the customs frontiers. Since there was a direct, distinct and independent contract between CCI and foreign buyers and this was in connection with the transaction under which CCI sold imported goods to the appellant and there was no privity of contract between the appellant and foreign sellers, it was held that the processor, the local user was not the importer but CCI was the importer. It was held that the mere statement that the goods were sold after it crossed the customs frontiers of India etc. will not be enough as that was not proved by the appellant and the canahsing agency was the importer. Similar question was considered by a Constitutional Bench of the Supreme Court in Serajuddin and Others Vs. The State of Orissa, . In the aforesaid case the Supreme Court was concerned with the interpretation of the term "in the course of export" as found in s. 5(1) of the Central ST Act, 1956. In that case the appellant was an assessee who was registered dealer under the Central ST Act, 1956, carrying on business of mining and exporting mineral ores to foreign countries. He had entered into four contracts for sale of chrome concentrates. Two of them were direct with foreign buyers. The other two were with the STC ever since export of mineral ore was canalised through it. The STC in turn entered into contracts with foreign buyers. The High Court held for sales under the first two contracts directly with foreign buyers there is exemption from sales-tax being in the course of export. But it held sales under the contract with STC is not exempt from sales-tax under Art. 286 (1)(b) of the Constitution r/w s. 5(1) of the Central ST Act, 1956. The majority of the Constitution Bench speaking through Ray, CJ, upheld the decision of the High Court against the assessee. In this connection we also refer to the decision of a Constitution Bench of the Supreme Court in Ben Gorm Nilgiri Plantations Company, Coonoor and Others Vs. Sales Tax Officer, Special Circle, Ernakulam and Others, -

In the cases before us the assessees had not entered into any agreement with the foreign buyers. There was no privity of contract between foreign buyers and the assessees. They could not sell any goods in their own name to the foreign buyers. Since, as per the agreement between the export houses and the assessees, the goods were to be boarded on the ship by them, the documents were prepared "on account of the export houses" as the export houses alone have contract to export goods to the foreign buyers. Contracts were not endorsed in favour of the assessees. If the foreign buyers fail to pay the price, the assessees had no cause of action against the foreign buyers as the assessees are not parties to the agreement with the foreign buyers. Even as per the agreement with the export houses, the assessees were only processors and export houses are the exporters. As found by the Tribunal, the foreign buyers made letters of credit in the name of export houses and, thereafter, of course that letter of credit was endorsed in the name of the assessees by the export houses. The contracts with the export houses and foreign buyers were independent and exclusive. The assessees have no hand in it, The contract with the assessees and the export houses are also separate contracts and that contracts cannot bind the foreign buyers as there was no privity of contract with the assessees, the processors and the foreign buyers. Merely because G.R.I. Form prescribed by the Reserve Bank of India under the Rules framed under the Foreign Exchange Regulation Act for accounting for the receipt of foreign exchange was signed by the assessees they will not become the exporters. As per the contract between the assessees and the export houses the FOB price in foreign exchange has to be received by the assessees and under s. 18(8) of the Foreign Exchange Regulation Act such persons also should sign such declaration. The drawback was received by the assessees only because the assessees have paid the customs duty and it is the person who paid the customs duty is entitled to get the drawback. There was also specific provision in the agreement with the export houses that the benefits under the Customs and Central Excise Act will be derived by the assessees. The benefits under export-import policy regarding REP licence will be obtained by the export houses.

Under s. 80HHC as it stand during the relevant period only the exporter was entitled to claim the benefit and export houses are the real exporters who has got privity of contract with the foreign buyers. As per the contract with the foreign buyers, foreign exchange was receivable by the export houses. Only because of the contract between the export house and the assessees, the foreign exchange was later credited in assessees'' bank as instructed by the export houses. Only on behalf of the export houses the assessees shipped the goods on account of the exporter and merely because of a statement in the contract that the title of the goods will pass only after the goods crossed to the customs frontiers will not make the assessees as exporters. Here the export houses have admittedly got the benefit under s. 80HHC and there is no dispute that no certificate was issued by the export houses in favour of the assessees. As per the scheme of the statute, there will be only one exporter in respect of the export and that exporter had already got the benefits.

Considering the entire facts and circumstances of the case, we are of the view that the ratio of the decision of the Supreme Court in M.M.T.C.''s case referred earlier applies in this case and assessees are not entitled to the benefit of s. 80HHC of the Act as the real exporters are the export houses. Therefore, we answer the questions referred to this Court in the negative, that is, against the assessees and in favour of the Revenue.