K.R.M. Marine Exports Ltd. Vs. Assistant Commissioner of Income Tax - Court Judgment

K. Raviraja Pandian, J.

Tax Case Nos. 17, 18, 20 and 21 of 2003 :

1. These appeals are filed by the assesses in respect of the asst. yrs. 1995-96 and 1996-97 against the orders dt. 11th Oct., 2002 and 13th Nov., 2002 passed by the senior Vice President and AM respectively and were admitted on the following common substantial questions of law :

1. Whether the Tribunal is justified in holding that the amount received from the export house is brokerage or commission or charges or any other receipt qualified for disallowance under Explanation tinder Sub-section (4A) of Section 80HHC ?

2. Whether the tribunal is justified in holding that 90 per cent of the receipts from the export; house are deductible from the business profits determined under Explanation to Clause (baa) under Sub-section (4A) of Section 80HHC for the purpose of quantifying relief under Section 80HHC ?

2. The assesses is a company engaged in manufacture and export of marine products. Besides own exports,, the assessee exported the marine products through export house also, during the relevant assessment years. In consideration of such export, the assessee received service charges from the export house at 3.5 per cent FOB value of the invoice price of the product exported and claimed deduction in respect of the sum so received under Section 80HHC. The AO applied the provision of Clause (baa) to Explanation to Section 80HHC and reduced 90 per cent of the service charges from the profit of the business while computing exemption under Section 80HHC. As against that order, the matters were carried on appeal to the CIT(A), who dismissed the appeal. The said orders were carried on further appeal to the Tribunal. The two members of the Tribunal differed in their opinion, in the sense, the senior Vice President has accepted the order of the AO, as confirmed by the CIT(A) as correct, whereas the JM has taken a different view. In view of the difference in opinion, the matter was referred to the Third Member, who, in-turn, concurred with the senior Vice President of the Tribunal.

3. Mr. Ramachandran, learned senior counsel appearing for the assessee, submits that the majority order of the Tribunal is illegal, as it ignored the fact that the amount received from the export house had a direct nexus to the. export and is only an, additional consideration in respect of the export. He further contended that no services were rendered by the appellant to the export house apart from the export of the goods through the export house. Hence, the conclusion arrived at that the amount received by the assessee from the export house is service charges is not legally correct. He further contended that the fact that the export house derives certain benefits out of the export is totally irrelevant in determining the nature of payment made to the assessee by the export house. Even assuming without conceding that the export house has made payment taking into account the incentive it received in as much as the payment was made in consideration of the export of the goods, it formed part of the export price. The transaction for export by the assessee through the export house in respect of which the consideration is received represents the amount received in convertible foreign exchange as well as the additional consideration paid by the export house in Indian currency. He further contended that the assessee, being a supporting manufacturer, it is not necessary that the entire consideration should be received in convertible foreign exchange.

4. On the other hand, the counsel appearing for the Department submits that as per the provisions of the Act, the profit of export would only represent the invoice price. He further contended that from the facts of the case the entire transactions have been concluded by the assessees themselves except routing through the export house. Hence, the sum of 3.5 per cent of the FOB value received by the assessee from the export house is ineligible to the benefit under Section 80HHC. In the absence of any nexus or connection to the export, the receipt of 3.5 per cent of the FOB value from the export house cannot be regarded as profit with reference to the provision under Section 80HHC.

5. We heard the arguments of the learned Counsel on either side and perused the material on record,

6. The assessee, a limited company, exported marine products through an export house viz., Adani Exports Ltd. (for short 'AEL') apart from its direct exports. For exporting through AEL, the assessee entered into an agreement, As per Clause 7 of the agreement, the assessee is entitled to service charges at 3.5 per cent of the FOB value of the goods that are exported through the export house AEL. As per the agreement dt. 22nd July, 1994, the assessee agreed to export marine products to the extent of Rs. 15 crores (FOB value) for AEL. The AEL agreed that the proceeds of the goods exported by the assessee would be received directly by the assessee and issued a disclaimer certificate in favour of the assessee. It was agreed that the assessee would bear all expenses till goods are placed on the board of the ship. It was also agreed that 25 per cent of the 3.5 per cent of the FOB value of the exports would be paid on signing the contract and the balance 75 per cent on receipt of the full set of documents of export. The assessee raised shipping bill and invoice to the export house AEL with reference to the goods. The assessee on such export realised the invoice value by foreign exchange through its bank. Thereupon the assessee raised invoice on AEL and received 3.5 per cent of the FOB value of the goods exported. This was received in Indian currency.

7. In the abovesaid factual background, let us consider relevant portions of the statutory provision viz., Section 80HHC, which reads thus :

80HHC, Deduction in respect of profits retained for export business--(1) 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, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of the profits derived by the assessee from the export of such goods or merchandise:

Provided that if the assessee, being a holder of an Export House Certificate or a Trading House Certificate (hereafter in this section referred to as an export house or a trading house, as the case may be,) issues a certificate referred to in Clause (b) of Sub-section (4A), that in respect of the amount of the export turnover specified therein, the deduction under this sub-section is to be allowed to a supporting manufacturer, then the amount of deduction in the case of the assessee shall be reduced by such amount which bears to the total profits derived by the assessee from the export of trading goods, the same proportion as the amount of export turnover specified in the said certificate bears to the total export turnover of the assessee in respect of such trading goods.

(1A) Where the assessee, being a supporting manufacturer, has during the previous year, sold goods or merchandise to any export house or trading house in respect of which the export house or trading house has issued a certificate under the proviso to Sub-section (1), there shall, in accordance with and subject to the provisions of this section, be allowed in computing the total income of the assessee, a deduction of the profits derived by the assessee from the sale of goods or merchandise to the export house or trading house in respect of which the certificate has been issued by the export house or trading house.

(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 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, where the Chief GIT or CIT is satisfied (for reasons to be recorded in writing) that the assessee is, for reasons beyond his control, unable to do so within the said period of six months, within such further period as the Chief CIT or CIT may allow in this behalf.

(b) ...

Explanation 1: The sale proceeds referred to in Clause (a) shall be deemed to have been received in India where such sale proceeds are credited to a separate account maintained for the purpose by the assessee with any bank outside India with the approval of the Reserve Bank of India.

Explanation 2: For the removal of doubts, it is hereby declared that where any goods or merchandise are transferred by an assessee to branch office, warehouse or any other establishment of the assessee situate outside India and such goods or merchandise are sold from such branch, office, warehouse or establishment, then, such transfer shall be deemed to be export out of India of such goods and merchandise and the value of such goods or merchandise declared in the shipping bill or bill of export as referred to in Sub-section (1) of Section 50 of the Customs Act, 1962 (52 of 1962), shall, for the purposes of this section, be deemed to be the sale proceeds thereof.

(3) For the purposes of Sub-section (1),--

(a) where the export out of India is of goods or merchandise manufactured or processed by the assessee, the profits derived from such export shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee;

(b) where the export out of India is of trading goods, the profits derived from such export shall be the export turnover in respect of such trading goods as reduced by the direct costs and indirect costs attributable to such export;

(c) where the export out of India is of goods or merchandise manufactured or processed by the assessee and of trading goods, the profits derived from such export shall,--

(i) in respect of the goods or merchandise manufactured or processed by the assessee, be the amount which bears to the adjusted profits of the business, the same proportion as the adjusted export turnover in respect of such goods bears to the adjusted total turnover of the business carried on by the assessee; and

(ii) in respect of trading goods, be the export turnover in respect of such trading goods as reduced by the direct and indirect costs attributable to export of such trading goods:

Provided that the profits computed under Clause (a) or Clause (b) or Clause (c) of this sub-section shall be further increased by the amount which bears to ninety per cent of any sum referred to in Clause (iiia) (not being profit on sale of a licence acquired from any other person), and Clauses. (iiib) and (iiic) of Section 28, the same proportion as the export turnover bears to the total turnover of business carried on by the assessee.

Explanation: For the purposes of this sub-section,--

(a) 'adjusted export turnover' means the export turnover as reduced by the export turnover in respect of trading goods;

(b) 'adjusted profits of the business' means the profits of the business as reduced by the profits derived from the business of export out of India of trading goods as computed in the manner provided in Clause (b) of Sub-section (3);

(c) 'adjusted total turnover' means the total turnover of the business as reduced by the export turnover in respect of trading goods;

(d) ...

(e) ...

(f) ...

(3A) For the purposes of Sub-section (1A), profits derived by a supporting manufacturer from the sale of goods or merchandise shall be,--

(a) in a case where the business carried on by the supporting manufacturer consists exclusively of sale of goods or merchandise to one or more export houses or trading houses, the profits of the business;

(b) in a case where the business carried on by the supporting manufacturer does not consist exclusively of sale of goods or merchandise to one or more export houses or trading houses, the amount which bears to the profits of the business the same proportion as the turnover in respect of sale to the respective export house or trading house bears to the total turnover of the business carried on by the assessee.

(4) The deduction under Sub-section (1) shall not be admissible unless the assessee furnishes in the prescribed form, along with the return of income, the report of an accountant, as defined in the Explanation below Sub-section (2) of Section 288, certifying that the deduction has been correctly claimed in accordance with the provisions of this section.

(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) the report of an accountant, as defined in the Explanation below Sub-section (2) of Section 288, certifying that the deduction has been correctly claimed on the basis of the profits of the supporting manufacturer in respect of his sale of goods or merchandise to the export house or trading house; and

(b) 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 had not claimed the deduction under this section:

Provided that the certificate specified in Clause (b) shall be duly certified by the auditor auditing the accounts of the export house or trading house under the provisions of this Act or under any other law. (4B) For the purposes of computing the total, income under Sub-section (1) or Sub-section (1A), any income not charged to tax under this Act shall be excluded (amended by Finance Act, 1999, with retrospective effect from 1st April, 1992).

Explanation: For the purposes of this section,--

(a) 'convertible foreign exchange' means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Regulation Act, 1973 (46 of 1973), and any rules made thereunder:

(aa)... (b) 'export turnover' means 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);

(ba) 'total turnover' shall 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) :

Provided that in relation to any assessment year commencing on or after the 1st . day of April, 1991, the expression 'total turnover' shall have effect as if it also excluded any sum referred to in Clauses(iiia), (iiib) and (iiic) of Section 28. (baa) 'profits of the business' means the profits of the business as computed under the head 'profits and gains of business or profession' as reduced by--

(1) ninety per cent, of any sum referred to in Clauses (iiia), (iiib) and (iiic) of Section 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature included in such profits, and

(2) ...

(c) ...

(d) 'Supporting manufacturer' means a person being an Indian company or a person (other than a company) resident in India, manufacturing (including processing) goods or merchandise and selling such goods or merchandise to an export house or a trading house for the purposes of export.

8. As per the above provision, if the assessee is engaged in the business of export out of India of any goods or merchandise to which Section 80HHC applies, in computing the total income of the assessee, there shall be allowed deduction of the profit derived by the assessee from export of the goods or merchandise. As per Sub-section (3) thereof, the profit derived from the export of the goods or merchandise out of India shall be the profits of business as computed under the head 'Profits and gains of business or profession'.

9. In a case where the exclusive business of the assessee is export out of India of goods or merchandise manufactured or processed by the assessee, the profits derived from such export shall be the amount as provided under the provisions of Clause (a) of Sub-section (3). In a case where the export out of India is of trading goods, the profits derived from such export shall be in accordance with Clause (b) of Sub-section (3). Where the export out of India is of goods or merchandise, manufactured or processed by the assessee and of trading goods, the profits derived from such export shall in respect of goods or merchandise manufactured or processed by the assessee be the amount which bears to the adjusted profits of the business, the same proportion as the adjusted export turnover in respect of such goods bears to the adjusted total turnover of the business carried on by the assessee under Sub-clause (c).

10. Proviso to Sub-clause (3) provides that the profits computed under the abovesaid Clauses (a), (b) and (c) shall be further increased by the amount which bears to ninety per cent of any sum referred to in Clause (iiia) (not being profits on sale of a licence acquired from any other person) and Clauses (iiib) and (iiic) of Section 28 the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee,

11. Clauses (iiia), (iiib) and (iiic) are referable to profits on sale of a licence granted under the Imports (Control) Order, 1955, made under the Imports and Exports (Control) Act, 1947 (18 of 1947), cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India and Clause (iiic) any duty of customs or excise repaid or repayable as drawback to any person against exports under the Customs and Central Excise Act, 1971.

12. As per Sub-section (1A), where supporting manufacturer during the previous year has sold goods or merchandise to any export house or trading house in respect of which the export house or trading house has issued a certificate under the proviso to Sub-section (1), there shall, subject to the provisions of Section 80HHC be allowed in computing the total income of the assessee a deduction of the profit derived by the assessee from the sale of goods or merchandise to the export house or trading house, in respect of which certificate has been issued by the export house or trading house.

13. As per Sub-section (3A), for the purpose of Sub-section (1A), profits derived by a supporting manufacturer from the sale of goods or merchandise shall be in a case where the business carried on by the supporting manufacturer consists exclusively of sale of goods or merchandise to one or more export houses or trading houses the profit of the business and in a case where the business carried on by the supporting manufacturer does not consist exclusively of sale of goods or merchandise to one or more export houses or trading houses, the amount which bears to the profits of the business, the same proportion as the turnover in respect of sale to the respective export house or trading house bears to the total turnover of the business carried on by the assessee as the profits derived.

14. The term 'export turnover' has been defined in Clause (b) to the Explanation to Sub-section (4C) of Section 80HHC, which means the sale proceeds which received in or brought into India by the assessee in convertible foreign exchange in accordance with Clause (a) of Sub-section (2), 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.

15. Clause (baa) of the Explanation to Section 80HHC was inserted to clarify the formula as the existing formula distorted the figure of export profits when receipts like interest, commission, etc., are included in the business profits and, therefore, in order to clarify the meaning of the business profits for the purpose of Section 80HHC, the same was inserted to remove the doubt in calculating export profits, A conjoint reading of Clauses (b) and (ba) of the Explanation clearly indicates that the Expln. (baa) has been introduced to bring the components of export turnover and sale turnover on par with each other. Both the numerator and denominator show that they refer to sale proceeds. The numerator and the denominator are required to have a common element which is the sale proceeds. Any receipt which does not form part of sale proceeds cannot come within the ambit of the above ratio. By the proviso in Clause (ba) it could be seen that the expression 'total turnover' shall have effect so as to exclude Section 28(iiia), (iiib) and (iiic), which refer to inter alia, profits on sale of a licence granted under the Imports (Control) Order, cash assistance, duty drawback, etc.

16. As per the agreement entered into by the assessee with the export house, the assessee should be paid over and above the FOB value of the goods exported at 3.5 per cent service charges. The said amount was paid to the assessee in Indian currency. On the export house issuing a disclaimer certificate, the assessee received the foreign exchange credited to its account after conversion into Indian rupee. The export house, in this process received various benefits by way of incentive from the Government of India. The export house gave certain amount as service charges so as to keep the assessee to have all the export routed through the export house. The service charges or export premium thus received is not part of the sale price of the exported goods. The sale price is the invoice price which had been received in foreign exchange from the buyer. The sum received from the export house in India in Indian currency as service charges or incentive or by whatever name it is called, would not become part of the sales turnover of the assessee. The convertible foreign exchange received by the assessee as sale proceeds or the sale proceeds transferred to the supporting manufacturer by the export house alone form part of the sales turnover. Nothing in excess of that amount can be regarded as a subject-matter of Section 80HHC.

17. Having regard to the provisions referred to above, we are of the view that the service charges or the incentive received at 3.5 per cent of the invoice value by the assessee cannot be considered as export turnover as it has not been received in convertible foreign exchange as required in the section. Hence, that part of sum is not eligible for the benefit granted under Section 80HHC and reduction by 90 per cent as provided under Clause (baa) is correct.

18. Learned Counsel for the assessee referred to the judgment of the Kerala High Court in the case of Baby Marine (Eastern) Exports v. Asstt. CIT : [2003]262ITR88(Ker) to support his contention. The facts are more or less similar, except to the effect that in that case, the export house has taken care of procuring buyer and settling the price. Question Nos. (e) and (f) in that case are similar to the questions raised in the present case. In that case, by applying the principle of 'noscitur a sociis' to the words employed in the Expln. (baa) i.e., brokerage, interest, rent, charges to the nomenclature 'premium' and taking note of the overheads incurred by the export house, and the fact of payment of incentive received by the export house for the export carried on by it, the Court has come to the conclusion that the sum received by the supporting manufacturer as 'premium' would be regarded as the general profit earned by export. However, the profit referred to in Section 80HHC is not the general profit, but is the export profit, which has to be calculated and worked out with reference to the other provisions and definitions contained in the section itself, which sort of exercise has not been done in that case. With great respect, we are not able to concur with the reasoning of the learned Judges in the abovesaid case to treat the service charges or premium as export profit, rather we prefer to concur with the contrary view taken by the very same High Court in a subsequent case in the case of CIT v. United Marine Exports : [2005]278ITR155(Ker) .

Tax Case No. 37 of 2003:

19. This appeal is preferred by Southern Sea Foods Ltd., another assessee against the order dt. 31st Oct., 2002 made in ITA No. 825 of 2002 in respect of the asst. yr. 1994-95, wherein in addition to the two questions of law referred in Tax Case Nos. 17, 18, 20 and 21 of 2003, one more question of law has been raised, which reads thus:

Whether the Tribunal is right in law in holding that the freezing and processing charges and labour charges received from the exporters in respect of processing of goods for export by such exporters, is not eligible for relief under Section 80HHC

20. It is the case of the assessee that the assessee, apart from exporting the goods for themselves and through export house, is also processing marine products for other exporters. The income derived in a sum of Rs. 35,21,735 out of the processing of the goods, which were ultimately exported by other exporters for whom freezing and processing has been made by the assessee have been claimed as business profit. The AO rejected the claim on the ground that the sum received did not have any direct nexus with the export activity. On appeal, before the CIT(A), it was argued by the assessee that the freezing and processing charges received involves utilisation of the entire resources of the assessee like machinery, power and the other manufacturing and administrative set up. The only difference between the regular manufacturing and processing for others is that the assessee did not own the goods in respect of which processing has been carried out. However, the CIT(A) rejected the claim by saying that on a careful reading of the above explanation offered by the assessee itself shows that the freezing and processing charges does not have any nexus with the export activity. On appeal before the Tribunal also, the assessee has taken a point that the finding of the CIT(A) that the freezing and processing charges do not have any nexus with the export profit is incorrect. The frozen and processed goods were exported and the charges relating to the same are directly linked to the export receipts. However, the Tribunal also without assigning any reason held that freezing and processing charges stand as a distinct and separate payment purely for service rendered and not to be treated as forming part of the sale proceeds of the goods sold to the TEL export house. We are not able to approve the way in which this point was dealt with by the authorities. The export profits are required to be computed in the ratio of export turnover to total turnover as contemplated in the formula, i.e., export profit = business profit x export turnover/total turnover. If we consider the business of the assessee, which is manufacturing and processing and export of marine products, the income derived for freezing and processing of marine products--but for that operation the export cannot be made--is an income earned by using the entire undertaking of the company i.e., machinery and power and other manufacturing and administrative set up. The sum so received could be regarded as business profit. The said factual findings have not been disputed by any of the authorities. In these circumstances, we are of the view that the freezing and processing charges would definitely form part of one of the components of business profits, as the activity of freezing and processing would have a direct and immediate nexus to the activity of export. Useful reference can be had to the judgments of this Court in CIT v. N.S.C. Shoes : [2002]258ITR749(Mad) , though concerned about the assessment year prior to insertion of Clause (baa) and of the Bombay High Court in the case of CIT v. Bangalore Clothing Company : [2003]260ITR371(Bom) .

21. In view of the aforesaid reasoning, the common questions of law raised for consideration of this Court in all these tax cases are answered in affirmative against the assessee. However, in respect of freezing and processing charges raised, Tax Case No. 37 of 2003 is partly allowed in favour of the assessee. The tax cases are disposed of accordingly.