1. These are cross appeals filed by both the parties against the order passed by the Commissioner (Appeals) on 6-2-2003. The appeals relate to assessment year 1999-2000. ITA No. 2771 /Mum./'2003 -.Assessee's appeal 2. The assessee has taken 11 grounds of appeal, out of which the assessee has pressed only Ground Nos. 1, 8, 9 and 10. Other grounds of appeal have not been pressed and hence they are dismissed as not pressed. We shall now take up each of the grounds pressed at the time of hearing, for disposal.
On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) has erred in confirming exclusion of a sum of Rs. 10,20,31,150 from the export turnover of the year for the purpose of computing admissible deduction under Section 80HHC. The Commissioner (Appeals) failed to appreciate that the person who are entitled for deduction under Section 80HHC are those who are engaged in the business of export out of India of any goods or merchandise. Such deduction is available as per the provisions of Section 80HHC(1) to an Indian company resident in India, "engaged in the business of export out of India of any goods or merchandise".
The key word in Section 80HHC(1) is the word "engaged" which was brought into Act by the Finance Act, 1985 with effect from 1-4-1986.
4. The assessee-company is a manufacturer, trader and exporter of garments, fabrics, etc. The assessee filed its return of income on 30-12-1999 declaring total income of Rs. 4,69,460. It also filed copies of Trading, Profit and Loss Account, Balance sheet and Tax Audit Report under Section 44AB before the assessing officer. The assessee claimed deduction under Section 80HHC amounting to Rs. 2,39,45,187. The assessee had shown export sales at Rs. 61,07,61,940 in its Profit & Loss Account for the year under appeal. The assessing officer perused the details and noticed that export sales amounting to Rs. 10,20,31,150 out of total export sales of Rs. 61,07,61,940 were not made by the assessee itself but by three sister concerns of the assessee, namely, M/s. April Exports, M/s. Haria Garments Pvt. Ltd. and M/s. Haria Textiles. Pvt. Ltd. ("sister concerns" in short). The assessing officer also noted that all the sister concerns had the same address as that of the assessee. According to the assessing officer, all sister concerns were allotted quota rights by the Apparel Export Promotion Council (AEPC) under the Ministry of Textiles. The sister concerns, according to the assessment order, had made exports on their own against the non-transferable export quota allotted to them after completing all the export formalities like Shipping bills, invoice, etc. The assessing officer further noted that all the sister concerns had made their individual applications under their own signatures for availing duty drawback under the Customs and Central Excise Duties Drawback Rules, 1995. The assessment order (pp. 2-4) contains the details of invoice-wise sales made and the duty drawback received by each of the sister concerns in detail.
5. It is further stated in the assessment order that the garments exported by the sister concerns were manufactured and supplied by the assessee. It is further stated that it was an internal arrangement between the assessee and the sister concerns by which rupee equivalent of the export proceeds were transferred by the aforesaid three concerns to the assessee through book entry. It is also stated in the assessment order that, apart from the export proceeds, duty drawback received by the said three concerns were also transferred by the assessee-company by book entries. To the extent the amounts were not received, the aforesaid three parties were shown as debtors in the books of the assessee. According to the assessing officer, the assessee had included, consequent upon the aforesaid arrangements, rupee equivalent of the export proceeds received by the sister concerns in its export turnover while calculating deduction under Section 80HHC of the Income Tax Act. The aforesaid findings recorded in the assessment order are not in dispute. The assessing officer confronted the assessee with the aforesaid position. In reply, the assessee submitted that the exports amounting to Rs. 10,20,31,150 made by the sister concerns should be treated as export sales of the assessee through its agents. The assessee also referred to the scheme of deduction under Section 80HHC in its reply filed before the assessing officer. In other words, the assessee sought to emphasize before the assessing officer that the local transfers made by the assessee to the sister concerns who, in turn, had made the exports should be treated as its export sales through agents.
6. The assessing officer considered the submissions of the assessee. He however rejected the plea of the assessee for treating the local sales made to the sister concerns and consequential exports made by the sister concerns as its exports sales through agents and consequently excluded sum of Rs. 10,20,31,150 being local transfers to the sister concerns from the export turnover of the assessee for the purpose of computation of deduction under Section 80HHC. Aggrieved by the aforesaid order, the assessee carried the matter in appeal before the Commissioner (Appeals). The learned Commissioner (Appeals) has also decided the issue against the assessee for the detailed reasons given in his appellate order.
7. Aggrieved by the order of the learned Commissioner (Appeals), the assessee is now in appeal before this Tribunal. In support of his appeal, the assessee has filed voluminous paper book in three volumes containing 121 pages, written submissions and copies of several judgments and decisions of this Tribunal. His arguments, in brief, run as under: (i) The assessee-company was engaged in the business of manufacturing and exporting readymade garments to the countries like the USA, the UK, Canada, etc. In order to carry out the export of garments to the aforesaid countries, the exporters were required to possess quota rights. Export quotas were allotted by the respective foreign countries to the Ministry of Textiles in the Government of India which, in turn, distributed them to various exporters in the country. The assessee had already exhausted its own quota of export allotted by the Ministry of Textiles and hence it was not in a position to make further export of garments on its own. The sister concerns, according to the assessee had export quotas allotted to them by the Ministry of Textiles and therefore the assessee considered it appropriate to export its garments through the sister concerns against the export quotas allotted to them. It was claimed by the assessee that the assessee had manufactured the goods and handed them over to the aforesaid three sister concerns for export to the overseas customers. According to the assessee, sales order were booked by it and that it had made all administrative, financial and selling efforts to organize the exports through the aforesaid three concerns.
(ii) It was contended by the assessee that it had utilized and exported the garments against the export quotas allotted to the aforesaid sister concerns, as the quotas allotted to them were not only non-transferable but also for the reason that the quotas so allotted to them were required to be utilized within the stipulated period of their validity failing which their quotas would have lapsed. According to the assessee, it had merely utilized the export quotas allotted to the sister concerns and thus exported the goods through them. It was contended that the aforesaid sister concerns had merely acted as agents of the assessee in carrying out the exports on behalf of the assessee through the quotas allotted to them.
(iii) It was submitted that all the documents like invoice, shipping bill, bill of lading and other export documents were prepared in the names of the aforesaid three parties because those documents required the endorsement of Apparel Export Promotion Council. It was further contended that the assessee had entered into agreements with the aforesaid sister concerns wherein the terms and conditions were specified. According to the agreement, all the payments against exports were to be received by the sister concerns directly from the customers and so also the duty drawback from the Government of India. Likewise all the aforesaid sister concerns were required to incur expenses like bank charges, bank interest, clearing, forwarding etc. for making the exports. The claim of the assessee however was that the sister concerns had carried out all the export related activities including receipt of money and disbursement of expenses for and on behalf of the assessee and in their capacity as the agents of the assessee. It was emphasized that it was the assessee-company, which had received the export order in its own name. In other words, the export orders were neither procured nor received by the sister concerns on their own.
(iv) It was contended that the assessee-company had exhausted its quota rights allotted to it by the Apparel Export Promotion Council when it received the order for export of textile garments to M/s.
Global Apparels Inc., USA and thus had no quota rights at its disposal for executing the export order so received from the foreign buyer. It was submitted that: it had therefore become necessary for the assessee-company to acquire additional quota rights for executing the export orders. It was pointed out that the quota rights already allotted to other parties by Apparel Export Promotion Council were not at all transferable and therefore the assessee had only two alternatives, namely, either to acquire additional quota rights from Apparel Export Promotion Council, or in alternative, execute the export orders received from Global Apparel Inc. through any other person having quota rights allotted by the Apparel Export Promotion Council. It was contended by the assessee that it was not possible for the assessee to obtain additional quota rights from the Apparel Export Promotion Council and hence it decided to utilize the quota rights allotted to its sister concerns and execute the export orders against the quota rights allotted to them.
(v) Inviting our attention to the various terms and conditions in the agreement, the learned Authorized Representative for the assessees ubmitted that the goods which were exported were not onlymanufactured/procured by the assessee but also that they weredelivered to the forwarding agents for shipment to the importers. Hefurther submitted that the assessee had made all the financial arrangements with its bankers for successful execution of the export order. According to him, it was the assessee who was responsible for successful execution of the export order right from the stage of procurement of goods till their ultimate delivery to the foreign buyers and hence it was only the assessee-company which could be treated to have exported the goods and not the aforesaid three concerns.
(vi) As regards the payments received by the aforesaid three sister concerns from the foreign buyers against exports, the learned Authorize Representative for the assessee submitted that the terms and conditions of the agreements entered into by the assessee with the aforesaid sister concerns required them to perform various activities including receipt of export proceeds and duty drawback in consideration of payment of commission. He emphasized that the payment of commission to the aforesaid three parties further established that the assessee's relationship with the aforesaid three parties was that of principal and agent.
(vii) As regards the export benefits taken by the aforesaid three sister concerns and later on passed over to the assessee, it was submitted that it was the assessee alone who could claim the benefit under Section 80HHC in terms of Clause 14 of the Agreement. He submitted that none of the aforesaid three sister concerns had claimed any benefit under Section 80HHC in their individual income-tax cases in respect of the impugned exports.
8. The learned Counsel for the assessee has strongly relied on Clauses 11,12,13, 14 and 15 of the Agreement, which read as under: 11. That the additional quota rights that may be obtained by the Agents on account of export of goods to the said Global Group shall be the property of the Agents and shall always remain their property and the Exporters shall not claim any right or interest in the same.
12. That any incentive that may be received on account of export of goods from India other than the quota rights shall belong to the Exporters alone and such incentives when received by the Agents for and on behalf of the Exporters they shall handover the same to the Exporters.
13. That the Exporters hereby authorizes the Agents to represent themselves before any Government or local authorities for the performance of terms and conditions of this agreement and agree to ratify all acts of the Agents carried out in performance of this agreement.
14. That the Exporters to the said Global Group are the exports by the exporters who alone shall claim deductions and return under the Income Tax Act and the Agent shall not claim any deduction under Section 80HHC of the Act in relation to goods exported to the said Global Group under this Agreement.
15. That the Agents shall not be responsible for non-payment or delay in payment of the said Global Group and it shall be the responsibility of the Exporters alone to take adequate steps for recovery of the dues for export of goods.
9. On the basis of the aforesaid clauses, the learned Authorized Representative for the assessee contended that the sister concerns of the assessee were its agents and that it was the substance of the agreement that the benefits arising on exports would be passed on by the sister concerns to the assessee and further that the sister concerns would not claim any deduction under Section 80HHC of the Act in respect of the exports made by them.
10. On the legal side, the learned Authorized Representative for the assessee submitted that the claim of the assessee was covered by the provisions of Section 80HHC. He submitted that the assessee was engaged in the business of export and that the export proceeds were received inconvertible foreign exchange in lieu of the exports made by the aforesaid three sister concerns. According to the assessee, the aforesaid proposition was quite simple and clear and hence the departmental authorities should have allowed the claim of the assessee.
The assessee further contended that it was no longer necessary, after the amendments made in Section80HHC, that the assessee itself should have made the exports directly to the foreign parties.
11. As regards the charge of the assessing officer that the assessee had not exported the goods, the learned Authorized Representative for the assessee submitted that Sub-section (1) of Section 80HHC, prior to its amendments, required the assessee to export the goods but the amended provisions of Section 80HHC(1) as in force in the assessment year under appeal extended the benefit where the assessee was engaged in the business of export of eligible goods and merchandise and therefore the mere fact that the assessee had exported some of its goods through its sister concerns acting as its agents would not defeat the claim of the assessee in terms of Sub-section 80HHC(1).
12. As regards the other charge of the assessing officer that the assessee had not received the sale proceeds of the exports in convertible foreign exchange, the learned Authorized Representative for the assessee submitted that the provisions of Sub-section (2)(a) and also Clause (b) of the Explanation to Section 80HHC required that the sale proceeds of eligible goods or merchandise exported out of India should be received in, or brought into, India by the assessee (other than the supporting manufacturer) in convertible foreign exchange within the stipulated period. According to him, the assessee might not have received the sale proceeds of the exports made through the sister concerns acting as agents in convertible foreign exchange in India but it had certainly brought the said proceeds in convertible foreign exchange into India within the stipulated time and therefore the case of the assessee was not hit by the aforesaid provisions.
13. In support of his submissions, the learned Authorized Representative for the assessee has referred to a very large number of decisions. One of the decisions so referred to by him is Burlingtons Exports v. Asstt. CIT (2005) 96 ITD 151 (Mum.). He submitted that the aforesaid decision was squarely applicable to the case of the assessee and hence, following the aforesaid order of a coordinate Bench of this Tribunal, the issue should be decided in favour of the assessee.
14. In reply, the learned departmental Representative has relied upon the orders passed by the assessing officer and also by the learned Commissioner (Appeals). He has also filed written submissions. His main arguments in brief, are as under: (i) The reliance placed by the assessee on the decision in Burlington Exports 'case (supra) is completely misplaced as the facts in that case were materially different from those in the case of the assessee before us.
(ii) The export proceeds were not received by the assessee but by the aforesaid three sister concerns of the assessee. The export proceeds so received by the aforesaid three sister concerns of the assessee could not be construed to mean that the export proceeds were received by the assessee itself. In this connection, he has invited our attention to the judgment of the Hon'ble Supreme Court in Sea Pearl Industries v. CIT (2001) 247 ITR 5781 in which the Hon'ble Supreme Court has held that the phrase "sale proceeds...receivable by the assessee" in Section 80HHC, Sub-section (2), cannot be construed to mean sale proceeds ultimately received and that the mere fact that the export house has chosen to transfer the foreign exchange to a third party under some independent arrangement would not make the third party the exporter regardless of the internal arrangement between the export house and the assessee. The Hon'ble court has further held that the export house would clearly be an exporter as far as the Income Tax Authorities are concerned. On the basis of the aforesaid authority, the learned departmental Representative contended that the export-proceeds received in convertible foreign exchange by the aforesaid three sister concerns could not be treated as export proceeds received by the assessee in convertible foreign exchange.
(iii) Benefit of Section 80HHC is available only to a person who actually exports the eligible goods and merchandise out of India and not to anybody else. According to the learned departmental Representative, the assessee has not made the exports in the present case and hence the exports made by others could not be treated as export turnover of the assessee.
(iv) Referring to the judgment in Sea Pearl Industries 'case (supra), the learned departmental Representative submitted that the burden was on the assessee to show that it had actually exported the goods and that it had received the export proceeds in convertible foreign exchange. The aforesaid requirements, according to the learned departmental Representative, were not satisfied by the assessee in the present case. The learned departmental Representative invited our attention to the observations in Sea Pearl Industries for the proposition that the question of title of property in the goods exported was not relevant to Section 80HHC and that the Section did not require the exporter to be the owner of the goods. He contended that the question of ownership of goods was totally irrelevant consideration in deciding upon the claim of the assessee.
(v) Inviting our attention to the various clauses in the Garments Exports Entitlement Policy (1997-99), the learned departmental Representative submitted that the quotas based on Past Performance Entitlement (PPE) were transferable. According to him, the claim made in the agreement with the agents that the agents were in possession of quotas on the basis of Past Performance Entitlement was therefore incorrect. According to him, the quotas available with the aforesaid three concerns fell in the category of First Come First Served (FCFS) and that this fact was accepted by the assessee in his written submission before the assessing officer. He submitted that the allotments made in favour of the sister concerns were based on First Come First Served and hence were not transferable and therefore it was not possible for any other person including the assessee to utilize those quotas as such a course of action would be illegal and opposed to public policy. He emphasized that any agreement, which was illegal or opposed to public policy, was void and therefore incapable of being enforced or acted upon.
(vi) Inviting our attention to the agreements with the sister concerns, the learned departmental Representative submitted that the agreements contained a clause to the effect that the aforesaid three parties were already in possession of quota rights at the time of entering into agreements and that they had allowed the assessee to utilize the said quota rights for its own exports. Referring to page 10 of the Garments Export Entitlement Policy, the learned departmental Representative submitted that the quota allotment under the First Come First Served system for items other than those identified as slow moving items were subject to production of Letter of Credit or Foreign Inward Remittance Certificate or Encashment certificates showing receipt of advance payments from the overseas buyers and thus the aforesaid three parties could have obtained the quota only after the letters of credit were opened. He contended that the statement in the agreements that they were already in possession of quota rights was therefore patently false and misleading. On the strength of the aforesaid the learned departmental Representative submitted that the real exporters were the sister concerns and not the assessee.
15. We have heard both the parties and considered their submissions including all the authorities and decisions referred to by them. To recapitulate the facts, all the aforesaid three concerns are the sister concerns of the assessee. They had quota rights allotted to them by the Government for export of garments. The quota rights so allotted to them were nontransferable. It was the policy of the Government, i.e., Garment Export Entitlement Policy (1997-99) issued by the Apparel Export Promotion Council that quota rights so allotted to them would not be transferred but would be used by them in their own right for making the exports. All export documents were executed by the aforesaid three concerns. The aforesaid three concerns had also received export proceeds in convertible foreign exchange. The aforesaid three concerns had also received duty drawback from the Government in their own right.
There is no indication in any of the aforesaid export documents that the sister concerns had executed the exports as agent of the assessee.
The agreements entered into by the assessee with the sister concerns are bipartite agreements. They do not contain any clause to show that the said sister concerns would represent or act on behalf of the assessee to third parties or that they had the power to make the assessee answerable to third parties or render him liable to be sued by the third parties. There is no evidence on record to show that the sister concerns had exported the goods for and behalf of the assessee or had claimed and received the duty drawback from the Government on behalf of the assessee. In this view of the matter, it is held that all the aforesaid sister concerns had exported the goods pursuant to the quota rights granted to them in their own right.
16. Let us now consider the submission of the assessee that the aforesaid three sister concerns were agents of the assessee and therefore the exports made by them should be treated as exports made by the assessee. Section 182 of the Indian Contract Act, 1972 defines 'agent' and 'principal' thus : "An 'agent' is a person employed to do any act for another or to represent another in dealings with third persons. The person for whom such act is done, or who is so represented is called a 'principal'." Agency in law connotes the relation which exists where one person has an authority or capacity to create legal relations between a person occupying the position of principal and third parties : Halsbury's Laws of England, Fourth Edition, Reissue, Volume I(2), para 1. The essential feature of an agent is his power of making the principal answerable to third persons, viz., enabling the principal to sue third parties directly, and render him liable to be sued directly by the third party. Varsha Engg. (P) Ltd. v. Vijay Trader . The test of agency is whether the person is entering into transaction on behalf of the principal or not; i.e., to create, modify or terminate contractual obligations between his principal, whom he represents, and some third parties. Representative character and derivative authority may briefly be said to be the distinguishing features of an agent. The function of an agent is to enter into contractual relations on behalf of his principal with third parties.
Tested on the aforesaid principles, there is no document placed before us to show that the aforesaid sister concerns had represented to the concerned authorities and persons that they were acting on behalf of the assessee or as the agents of the assessee. There is no document placed before us to show that the aforesaid sister concerns had the legal capacity to make the assessee-company in its capacity as principal answerable to third persons, viz., enabling the principal to sue third parties directly or render him liable to be sued directly by the third parties. On the other hand, the documents and the materials placed on record clearly indicate that all the aforesaid sister concerns had entered into the transactions with the concerned authorities in their own right and on their own strength. In this connection, we are reminded of the observations made by Lord Herschell in Kennedy v. Dc Trafford 1897 A.C. 180 that "No word is more commonly and constantly abused than 'agent'". The use of the word 'agent' in itself really means very little. The legal incidence of agency must be established to show that the person purporting to act as agent had the capacity to bind the principal in relation to third parties and the third parties in relation to the principal. In the present case, the sister concerns did not have such a capacity in them to bind the principal in relation to third parties or the third parties in relation to the principal. Therefore the plea of the assessee that the aforesaid sister concerns were acting as its agents in carrying out the impugned exports must fail.
17. The Government had allotted quota rights to the aforesaid sister concerns with specific stipulation that they would not be transferable.
Such a stipulation was clearly in terms of a public policy incorporated in the Garment Export Entitlement Policy (1997-99) notified by the Apparel Export Promotion Council under the Minis try of Textiles, Government of India. It was a public policy that the quota rights granted to a party must be used by that party alone in its own rights and that he should not transfer them to any other party. In this connection, provisions of Section 24 of the Indian Contract Act are quite apposite. Section 24 makes any agreement void if the considerations and objects of the agreements are unlawful even in part.
The quota rights were allotted to the aforesaid three concerns for making their own exports and therefore it was not open to them to allow the use of their quota rights by the assessee or others as such action would be opposed to the public policy. Likewise, it was not open to the assessee either, after exhausting its own quota rights, to use others' quota for making its exports as such a course would clearly be in violation of the public policy that the exports should be made only by quota holders and by none else. Use of quota rights by any person other than the holder of the quota rights was thus clearly prohibited under the Garment Export Entitlement Policy notified by the Government. Any agreement to allow use of non-transferable quota rights by a person other than the quota holder would be against the public policy.
Agreements opposed to public policy are declared by law to be null and void and hence they are not capable of being given effect. What could not have been done directly could not have been done indirectly also.
If the assessee had exhausted its quota rights and therefore not capable of making further exports it could not be allowed to make further exports by defeating the public policy which authorized only the holders of quota rights to make the exports. Business interests must yield to public policy. We are therefore unable to accept the submissions of the assessee that the exports made by the said sister concerns should be treated as its exports through agents. On the facts of the case, we hold that the exports made by the sister concerns were made by them in their own, right pursuant to the quota rights granted by the Government to them and, hence the exports made by them cannot be treated as exports made by the assessee through the agents.
18. Let us now turn to the provisions of Section 80HHC. Sub-section (1) of Section 80HHC requires, inter alia, that the assessee must be engaged in the business of "export out of India" of eligible goods or merchandise. Clause (aa) of the Explanation in Section 80HHC defines "export out of India" as not including "any transaction by way of sale or otherwise, in a shop, emporium or any other establishment situate in India, not involving clearance at any customs station as defined in the Customs Act, 1962 (52 of 1962)". In the present case, the goods have been transferred by the assessee to the said sister concerns situated in India, not involving clearance at any customs station as defined in the Customs Act and hence the goods so transferred to the sister concerns cannot be treated as export out of India. Thus the requirements of Section 80HHC(1) are not fulfilled in this case.
Sub-section (2) of Section 80HHC provides that the said Section would apply "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 received in, or brought into, India by the assessee (other than the supporting manufacturer) in convertible foreign exchange within a period of six months from the end of the previous year or". It is patently clear from the aforesaid that the sale proceeds of such goods or merchandise exported out of India must be received in, or brought into, India by the assessee and by none else (other than the supporting manufacturer) in convertible foreign exchange within the stipulated period. The assessee in the present case has admittedly neither received in nor brought into India the sale proceeds of goods exported out of India by the aforesaid three parties in convertible foreign exchange in its bank account. The sale proceeds of the goods exported by the aforesaid sister concerns were received in or brought into India by them and not by the assessee in convertible foreign exchange. The assessee has received sale proceeds of the goods transferred to the said sister concerns in the Indian currency. Thus the assessee did not fulfil the requirements of Section 80HHC(2).
Likewise, Clause (b) of the Explanation in Section 80HHC defines "export turnover" as "the sale proceeds received in, or brought into, India by the assessee in convertible foreign exchange in accordance with Clause (a) of Sub-section (2) of any goods or merchandise to which this Section applies and which are exported out of India, but does not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962 (52 of 1962)". As stated earlier, the assessee, in the present case, has neither received in nor brought into India the sale proceeds in convertible foreign exchange. In fact the assessee was not entitled to receive the sale proceeds of the goods exported by the aforesaid three concerns in convertible foreign exchange and hence the said sale proceeds could not form part of the assessee's export turnover. The claim of the assessee that its transfer of goods to the sister concerns and their consequential exports by them should be treated as the export made by the assessee through its sister concerns therefore deserves outright rejection.
19. The learned departmental Representative has relied upon the judgment in Sea Pearl Industries' case (supra) rendered in the context of the provisions of Section 80HHC as they existed in assessment year 1983-84. Section 80HHC(1) as it existed then provided, inter alia, that the benefit under that Section would be available "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 of merchandise to which this Section applies...". Likewise, Sub-section (2)(a) of Section 80HHC as it existed then provided that Section 80HHC would apply "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." As against the aforesaid provisions of Sub-section (1) of earlier Section 80HHC, provisions of Sub-section (1) of Section 80HHC as they existed in the assessment year under appeal provided, inter alia, that the benefit under that Section would be available "Where an assessee, being an Indian company or a person (other than a company) Resident in India, is engaged in the business of export out of India of any goods or merchandise to which this Section applies". It is quite evident that the requirement of "export out of India" in Section 80HHC(1) existed not only in assessment year 1983-84 considered by the Hon'ble Supreme Court in Sea Pearl Industries 'case (supra) but also in the assessment year under appeal. Likewise, Sub-section (2)(a) of Section 80HHC as it existed in assessment year 1983-94 considered by the Hon'ble Supreme Court in Sea Pearl Industries 'case (supra) provided that Section 80HHC would apply "to all goods on 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 word "receivable" in the said provision has now been substituted by the words "received in, or brought into, India". Barring this limited change, the provisions of earlier Sub-section 2(a) have been bodily lifted and incorporated in Sub-section (2)(a) of Section 80HHC in force in the assessment year under appeal. Thus the basic thrust of Section 80HHC with regard to the requirement of export out of India and the further requirement that the sale proceeds of such goods or merchandise exported out of India must be received in, or brought into, India by the assessee remain substantially the same. Therefore, the propositions laid down by the Hon'ble Supreme Court in Sea Pearl Industries' case (supra) will apply with equal force to the case of the assessee before us. In Sea Pearl Industries' case (supra), the Hon'ble Supreme Court has laid down the following propositions: 9. 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 ST 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 v. CTO 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.
12. 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 IT authorities were concerned, the export house would clearly be the exporter.
20. The principles laid down in the said judgment squarely apply to the case of the present assessee. Sale proceeds can be treated as part of the export turnover only when the assessee (i) is engaged in the business of export out of India of the eligible goods or merchandise; and (ii) the sale proceeds are "received in, or brought into, India" by the assessee in convertible foreign exchange. A conjoint reading of all the relevant provisions in Section 80HHC show beyond doubt that the assessee, in order to have the benefit of export turnover, must not only export the eligible goods out of India in its own right but also receive in or being into India the sale proceeds thereof in the convertible foreign exchange. In the case before us, the assessee has neither exported the impugned goods out of India in its own right nor received in or brought into India the sale proceeds thereof in convertible foreign exchange. In fact the sale proceeds C in respect of the exports made by the sister concerns were neither due to nor were they otherwise receivable by the assessee from the foreign buyers. The question of such sale proceeds being received in India or brought into India by the assessee would therefore not even arise. Exports made by the sister concerns of the assessee in their own right cannot be considered as export turnover of the assessee. Likewise, the sale proceeds of the aforesaid exports received or brought into India by the sister concerns of the assessee in convertible foreign exchange cannot be treated as received in or brought into India by the assessee. The learned Commissioner (Appeals) has rightly not treated such exports as part of the assessee's export turnover.
21. The submission of the assessee that it was the manufacturer of goods exported by the sister concerns or that it continued to be the owner of the goods exported till they reached the foreign buyers are irrelevant considerations for deciding the issue under Section 80HHC, as held in Sea Pearl Industries' case (supra). The fact that commission was paid to the sister concerns for their efforts and services would neither make them the agents of the assessee nor disprove the fact that they were exporters.
22. As stated earlier, the assessee has strongly relied upon Clauses 11 to 15of the Agreement with sister concerns. Perusal of the aforesaid clauses does not show that the sister concerns were authorized to represent or act on behalf of the assessee before the Government or local authorities. In fact Clause 13 says in clear terms that the sister concerns would represent before the Government and local bodies in their capacity as exporters. This again shows that the sister concerns were not acting as agents of the assessee and that they had no capacity either to bind the assessee for their dealings with the third parties or bind the third parties for their dealings with the principal. The mere fact that both the parties, namely, the sister concerns and the assessee had agreed that the benefit under Section 80HHC would accrue to the assessee does not mean that the Assessing Officer was obliged to extend the benefit of Section 80HHC to the assessee. Terms and conditions of agreement between the assessee and its sister concerns cannot override the provisions of Section 80HHC.Deduction under Section 80HHC is available only to an assessee who satisfies the conditions stipulated in Section 80HHC and to none else.
As already stated earlier in this order, the assessee has not fulfilled the conditions of Section 80HHC and therefore the assessee has been correctly denied the benefit of Section 80HHC by the departmental authorities.
23. Learned Authorized Representative for the assessee has strongly relied upon the decision of a coordinate Bench of this Tribunal in Burlingtons Exports' case (supra) and submitted that the facts of the case before us were identical with those in Burlington's Exports and therefore the decision in the said case should be followed by us. He submitted that the Tribunal in the aforesaid case has clearly held that an assessee was entitled to claim deduction under Section 80HHC in respect of the exports made by utilizing export quota of a third party.
The learned departmental Representative, on the other hand, has seriously objected to the aforesaid submission made on behalf of the assessee and submitted that the factual matrix in the aforesaid case is altogether different from the case before us and therefore the said decision should not be followed. We have considered the rival submissions in this behalf. In Burlingtons Exports, the assessee-firm was engaged in export business and utilized quota allotted to a third party in order to meet extra orders from foreign buyers after exhausting its own quota of export. To this extent, the issue is similar. However, the factual matrix of that case is materially different from the one in the case of the present assessee. In Burlingtons Exports' case (supra), the Tribunal has recorded a finding that export was directly made by the assessee and thereafter all documentation was done through bank by the assessee and the sale proceeds were paid directly in convertible foreign exchange into the bank account of the assessee. In the case before us, the admitted position is that the goods were transferred by the assessee to its sister concerns upon which the sister concerns made the exports. Export documents and the documents for claiming duty drawback, were prepared by the aforesaid sister concerns and not by the assessee. Sale proceeds of the goods exported were paid directly in convertible foreign exchange into the bank account of the aforesaid three sister concerns and not into the bank account of the assessee. In our view, the aforesaid facts are material to the decision. Since the facts in the case before us are materially different from those in Burlington Export, the decision in the said case cannot be applied to the case before us. In Padmasundara Rao v. State bank of Tamil Nadu , the Hon'ble Supreme Court has held : "Courts should not place reliance on decisions without discussing as to how the factual situation fits in with the fact situation of the decision on which reliance is placed. There is always peril in treating the words of a speech or judgment as though they are words in a legislative enactment, and it is to be remembered that judicial utterances are made in the setting of the facts of a particular case, said Lord Morrin in Herrington v. British Railways Board (1972) 2 WLR 537 (HL).
Circumstantial flexibility, one additional or different fact may make a world of difference between conclusions in two cases." Besides, the issue before us is squarely covered by the decision of the Hon'ble Supreme Court in Sea Pearl Industries' case (supra) and therefore we see no valid reason as to how we can take a view inconsistent with the law laid down by the Hon'ble Supreme Court.
24. The assessee has referred to a large number of decisions, which are hardly relevant to deciding the matter under dispute on the facts and circumstances of the case. We have however considered them while taking the view in the matter.
25. After taking into account all the facts and circumstances of the case and the propositions of law laid down in Sea Pearl Industries case (supra), we have no hesitation to hold that notwithstanding the internal arrange merits between the assessee and the sister concerns, the assessee cannot be treated as exporter in respect of the goods exported by the said sister concerns and therefore the exports made by the sister concerns cannot be treated as export turnover of the assessee. In this view of the matter, the order of the learned Commissioner (Appeals) in this behalf is confirmed. Ground No. 1 is dismissed.
The learned Commissioner (Appeals) erred in confirming the exclusion of the amount of Rs. 3,46,37,449 from the export turnover of the assessee for the year under consideration, on the ground that the said amount was not received by assessee-company within six months from the end of the previous year. The Commissioner (Appeals) failed to appreciate Bombay High Court judgment in the case of Uttam Corporation, 95 Taxman 552 (Bom.) wherein Bombay High Court held that the petitioner was justified in contending that it received the sale proceeds after some time over which it had no control.
27. Briefly stated, the facts of the case are that the assessing officer has excluded a sum of Rs. 3,46,37,889 from the export turnover for the year under consideration on the ground that the said amount was not received by the assessee within six months from the end of the previous year. The assessing officer, after referring to the provisions of Section 80HHC(2)(a)read with Explanation thereto, observed that the competent authority, namely, the Reserve bank of India had not given any permission to the assessee. to receive the impugned export proceeds after the expiry of the stipulated period. Since the impugned export proceeds were not received within the stipulated time and the requisite approval of the Reserve Bank of India was also not obtained in terms of the Explanation to Section (2)(a) of Section 80HHC, the assessing officer excluded the impugned export proceeds from the export turnover.
On appeal, the learned Commissioner (Appeals) confirmed the order of the assessing officer in this behalf. He held that mere filing of application by the assessee with the Reserve Bank of India was not sufficient and did not amount to extension of time by the Reserve bank of India for bringing the export proceeds into India after the expiry of the stipulated period.
28. Aggrieved by the aforesaid order, the assessee is now in appeal before this Tribunal. In support of appeal, the learned Authorized Representative for the assessee relied upon the decision of the Hon'ble Bombay High Court in Uttam Corpn. v. CIT (1997) 95 Taxman 552 and submitted that the assessee had no control over receipt of export proceeds from foreign buyers and therefore should be allowed the benefit of export proceeds ultimately received by the assessee after the expiry of the stipulated period.
29. In reply, the learned departmental Representative submitted that the reliance placed by the assessee on the decision in Uttam Corpn.'s case (supra) was completely misplaced. He submitted that the order passed by the Commissioner refusing extension of time was set aside by the Hon'ble High court in that case as the petitioner-assessee had difficulties in procuring the sale proceeds in respect of exports made within prescribed period. He contended that the said decision could not be interpreted to mean that the export proceeds not procured by the assessee within time should be treated as export turnover as statutorily defined in Clause (b) of the Explanation in Section 80HHC.30. We have heard the parties. It is not in dispute that the assessee has received the export proceeds after the expiry of the stipulated period. The assessee contends that it had submitted an application to the Reserve bank of India seeking extension of time but the Reserve bank of India did not extend the time. In this fact-situation, it is quite clear that the competent authority namely, the Reserve bank of India has not extended the time-limit for receipt of sale proceeds after the stipulated period. In this view of the matter, the Commissioner (Appeals) was justified in confirming the order of the assessing officer refusing to include the impugned export proceeds as part of the export turnover. His order is in conformity with the provisions of Clause (b) of the Explanation to Section 80HHC. The reliance placed by the learned Authorized Representative for the assessee on the judgment in Uttam Corpn.'s case (supra) is not of any assistance to him. In that case the Hon'ble High Court has simply set aside the order of the CIT refusing extension of time keeping in view the petitioner's difficulty in procuring sales proceeds in respect of exports made within prescribed time. The said judgment cannot, in our view, be read to lay down the proposition that export proceeds received after the expiry of the stipulated period and without the approval of the competent authority should be treated as part of export turnover.
Ground No. 8 taken by the assessee therefore fails.
The learned Commissioner (Appeals) erred in confirming the assessing officer's action by increasing the direct cost of the export by not allowing the deduction at 10 per cent of the export incentives, being the estimated expenditure incurred in earning such incentives despite Hon'ble Bombay Tribunal Special Bench judgment in the case of Surendra Engineering Corporation v. ACIT, ITA No. 885/Mum./9 assessment year 1995-96, dated 12-12-2002.
32. At the time of hearing, both the parties submitted that the issue was covered by the decision of a Special Bench of this Tribunal in Surendra Engg. Corporation v. Asstt. CIT (2003) 86 ITD 121/130 Taxman 45 (Mum.)(Mag.) as interpreted by a coordinate Bench of this Tribunal in Asstt. CIT v. Rang International (2004) 91 ITD 499 (Ahd.) and therefore the matter should be restored to the file of the assessing officer for deciding the matter afresh in the light of the aforesaid decisions. We accept their submission and order accordingly. The assessing officer is directed to carefully go through both the decisions and decide the matter accordingly after giving a reasonable opportunity of hearing to the assessee. Ground No. 9 is treated as allowed for statistical purposes.
The learned Commissioner (Appeals) erred in confirming the disallowance of the sum of Rs. 8,86,281 being the quota premium paid to three sister concerns.
34. Briefly stated, the facts of the case are that a sum of Rs. 8,86,281 was paid to the three sister concerns whose quota had been utilized by the assessee and through whom the assessee had claimed to have made the exports. The assessing officer observed that the impugned expenditure was incurred to acquire the right to use the quota granted to the aforesaid sister concerns in violation of the Garment Export Entitlement Policy notified by the Government. The assessing officer further noted that use by the assessee of such quota rights allotted to the sister concerns was prohibited by the notification issued by the Government and hence the impugned expenses were hit by the Explanation to Section 37(1) of the Income Tax Act. On appeal, the assessee contended before the learned Commissioner (Appeals) that the impugned expenditure was incurred towards quota premium of Rs. 8,86,281 learned Commissioner (Appeals) took note of the submissions made by the assessee and held as under: 36. The assessing officer is directed to verify the computation of income furnished by the assessee along with its return for the assessment year under consideration. If on verification it is found that the assessee had indeed not claimed the deduction of the sum of Rs. 8,86,281 as claimed by it then, the said addition will stand deleted. Conversely, if the assessee's contention turns out to be incorrect then the disallowance would stand confirmed since, as mentioned by the assessing officer, the quotas of the three sister concerns utilized by the assessee, were not transferable and hence, such utilization as a result of an internal arrangement would be illegal. Consequently, such illegal expenditure would not be allowable as a deduction in accordance with the provisions of the Explanation below Section 37(1) of the Income Tax Act. The assessing officer is directed to take action accordingly.
35. We have heard the parties. The order of the learned Commissioner (Appeals) is correct on facts and in law. If the expenses have been incurred to acquire the nontransferable quota rights, which is prohibited by the Notification issued by the Government, the expenditure so incurred shall be squarely hit by the Explanation to Section 37(1). In this view, of the matter, the learned Commissioner (Appeals) has correctly restored the matter to the file of the assessing officer for verification and for doing the needful in this behalf. Let the assessing officer do his job in terms of the instructions given by the learned Commissioner (Appeals). Ground No. 10 is dismissed.
1. On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) has erred in deleting the disallowance of interest of Rs. 13,93,639 which was made on account of interest-free advances given to the sister concern, ignoring inter alia the ratio of the decision in the case of Phalton Sugar Mills Ltd. v. CWT, 208 ITR 989 and CIT v. V.M. Salgaonkar & Bros.
Pvt. Ltd., 2. On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) has erred in allowing the relief by holding that 'no linkwas established between the interest bearing funds which were borrowed and the funds which were lent out free of interest', to tally ignoring the basic fact that the assessee has not produced any evidence to show that there is no nexus.
37. Briefly stated, the facts of the case are that the assessee had borrowed large amounts from banks and other financial institutions on interest. The assessee, on the other hand, was found to have given interest-free loans and advances to its sister concerns. The assessing officer examined the details furnished by the assessee and disallowed the interest payments calculated @15 per cent of the amounts advanced interest-free to the sister concerns. On appeal, the assessee contended before the learned Commissioner (Appeals) that the assessing officer had failed to appreciate that the assessee had at its disposal interest-free funds by way of capital and reserves aggregating to Rs. 26.70 crores as compared to the interest-free advances given to the sister concerns amounting to Rs. 92,90,925 for the year under appeal.
The assessee submitted before the learned Commissioner (Appeals) that the interest-free funds advanced to the sister concerns were not out of the interest bearing borrowed loans and advances as held by the assessing officer. The learned Commissioner (Appeals) considered the submissions of the assessee. In para 41 of his order the learned Commissioner (Appeals) directed the assessing officer to ascertain the correctness of the assessee's submission from the profit and loss account and the Balance sheet of the assessee for the year under consideration as to whether the assessee had interest-free funds available with it for giving interest-free advances to the sister concerns. In para 42 of his order, the learned Commissioner (Appeals) however held that no direct link had been established between the interest bearing funds which were borrowed and the funds which were lent out free of interest and therefore he directed the Assessing Officer to allow the impugned amount as expenditure.
38. Aggrieved by the aforesaid order, the department is in appeal before this Tribunal. In support of the appeal, the learned departmental Representative contended that the directions given by the Commissioner (Appeals) were contradictory in as much as he first directed the assessing officer in para 41 of his order to verify the correctness of the assessee's claim and subsequently in para 42 of his order directed the assessing officer to allow the expenditure. He submitted that the order of the Commissioner (Appeals) was not in conformity with the decision of the Hon'ble Bombay High Court in Phaltan Sugar Works Ltd. v. CWT and CIT Salgaoncar & Bros. (P) Ltd. and therefore his order should be vacated and that of the assessing officer restored.
39. In reply, the learned Authorized Representative for the assessee supported the order of the learned Commissioner (Appeals) and submitted that the issue was covered in favour of the assessee by the decisions of this Tribunal in department's appeal for assessment years 1991-92, 1992-93, 1993-94 and 1996-97.
40. We have heard the parties. The order of the Commissioner (Appeals) in its present form cannot stand. In para 42 of his order he has directed the assessing officer to verify the correctness of the claim of the assessee as to whether the assessee had interest-free funds available for giving interest-free loans to the sister concern. Having thus directed the assessing officer to carry out verification, the learned Commissioner (Appeals) subsequently directed the assessing officer in para 42 to allow the impugned expenditure. Both these directions are contradictory. Therefore, the order of the Commissioner (Appeals) cannot stand. Besides, the Hon'ble Supreme Court in S.A.Builders Ltd. v. CIT(2007)288 ITR 1 has held that the test for allowing interest on money borrowed from bank and lent to sister concern without charging interest was whether the interest bearing funds borrowed and interest-free advances given to the sister concerns were for the purposes of business and that the interest payment should be allowed if made as a measure of commercial expediency. Since it is the assessee-company, which is claiming deduction under Section 36(1)(iii), the burden is obviously on the assessee to show that it satisfies the aforesaid test. The Commissioner (Appeals) is directed to decide the issue afresh in the light of the aforesaid decision of the Supreme Court after giving a reasonable opportunity of hearing to both the parties. Appeal filed by the department is treated as allowed for statistical purposes.
41. In view of the foregoing, the appeal filed by the assessee is partly allowed while the appeal filed by the department is treated as allowed for statistical purposes.