Case Brief
Sea Pearl Industries and Ors. v. Commissioner of Income Tax, Cochin– 2001 (1) SCR 184
Deciding Authority
Supreme Court
Name of the Judges
S.P. Bharucha, Doraiswamy Raju, Ruma Pal JJ.
Date of Judgment
9th January 2001
Facts of the Case
The question to be decided in this appeal was whether the appellant was an exporter for the purposes of Section 80HHC of the Income Tax Act, 1961. The appellant processed 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 concerned transaction 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 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 was therefore challenged before the Supreme Court.
Judgment
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 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. 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 Hon’ble Supreme Court observed that 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. 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 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.
The Court remarked that 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.
Decision
For all these reasons, the Hon’ble Supreme Court affirmed the decision of the High Court and dismissed the appeals with costs.
Shubham Shandilya, 4th Year, B.B.A. LL.B., Symbiosis Law School, Pune
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