Income Tax Appellate Tribunal - Mumbai
Sm Energy Teknik And Electronics Ltd. vs Deputy Commissioner Of Income Tax on 18 April, 2006
Equivalent citations: (2007)109TTJ(MUM)34
ORDER
Shailendra K. Yadav, J.M.
1. This appeal has been filed by the assessee against the order of the CIT(A), pertaining to the asst. yr. 1996-97 on the following grounds:
1. Ground No. 1On the facts and in.the circumstances, the learned CIT(A) erred in:
(a) assuming that the definition of the term 'export' is to be determined with reference to Customs Act, 1957.
(b) holding that for claiming deduction under Section 80HHC, the appellant should show that the goods should be exported out of India and goods should be cleared by the Indian customs station.
(c) assuming that the definition of words 'export out of India' under Expln. (aa) of Section 80HHC is applicable to the facts and circumstances of the case.
(d) assuming that the ratio of Bombay High Court decision in the case of Bombay Buimah Trading Conon. Ltd. v. CIT is not applicable to the appellant's case as the issue considered was whether goods were exported out of India for the purpose of deduction under Section 35B of the IT Act, 1961.
Therefore concluding that the export of goods made by the appellant under Clause 154D of Import and Export Policy 1992-93 of Foreign Trade (Regulations & Development) Act, 1992 was not an export eligible for deduction under Section 80HHC of the Act, 1961 at Rs. 1,81,42,968.
2. Ground No. 2Without prejudice to the above ground, on the facts and circumstances of the case, the learned CIT(A) erred in confirming the deduction under Section 80HHC at Rs. 89,225 as determined by the learned AO as against the appellant's claim at Rs. 1,81,502.
2. The only issue in this appeal is regarding the claim of deduction under Section 80HHC of the IT Act, 1961. The assessee had claimed deduction under Section 80HHC of the Act. The AO observed that out of the total export sales of Rs. 4,33,97,326 related to the shipment of plant and machinery purchased for Rs. 1,79,11,286 by the assessee from M/s Textllmaschinen Service GmbH, Germany, directly to M/s G.R. Textiles Mills, Dhaka (Bangladesh), without bringing them into Indian territory. The AO was of the view that the machinery was not exported out of India and, therefore, the deduction in respect of the transfer of machinery from Germany directly to Dhaka was not covered by the provisions of Section 80HHC. Accordingly, the AO restricted the same to Rs. 89,225 in respect of the remaining export sales.
2.1 The matter was carried before the first appellate authority, wherein it was submitted that opinions obtained from Shri V.H. Patil, advocate, Supreme Court, dt. 30th Sept., 1999 were also filed to claim that the assessee was entitled for deduction under Section 80HHC and that the law does not require the goods to be physically exported out of India. It was also claimed that the case of the assessee was covered by Clause 154D of the Export and Import Policy, 1992-97, which permitted merchenting international trade. Various submissions raised before the CIT(A) are summarized as under:
(i) The object of introducing deduction under Section 80HHC was to give incentive to augment the foreign exchange by export of goods outside India. The foremost consideration was to augmentation of the foreign exchange by exporting the goods i.e. earning of the foreign exchange is the most dominant factor.
(ii) The assessee had exported goods under Merchant Trade Export Policy, which was notified by the Commerce Ministry under Foreign Trade (Regulation & Development) Act, 1992 and regulated by RBI. The assessee had also complied with all the regulations applicable for such transaction, such as, FERA and banking formalities. The assessee had also brought in the foreign exchange within the stipulated time.
(iii) Nowhere in the Act or in the circulars issued by the CBDT, it was stipulated that for availing of deduction under Section 80HHC, the goods exported should go physically out of customs boundary of India. However, under Section 35B (export market development and allowances since repeated), the question as to whether the weighted deduction under Section 35B can be allowed on an import of goods from South Africa and export to United Kingdom was decided by the Hon'ble Bombay High Court in the case of Bombay Buimah Trading Corporation Ltd. v. CIT and held that there is no need for physical export of goods out of Indian territory for availing the weighted deduction under Section 35B on such exports.
In this context, sending of goods out of India, the Hon'ble Bombay High Court held as under:
It is not disputed that the assessee satisfied all the requirements of Section 35B, except in regard to the requirement, according to the Revenue, that the export should be made from India. To get the advantage of the deduction under Section 35B, the' expenditure has to be incurred wholly and exclusively on the performance of the services outside India in connection with or incidental to the execution of any contract for the supply outside India of goods which the assessee deals in the course of its business. The assessee deals in tea. In the course of its business, the expenditure was incurred in regard to the performance of the services outside India, i.e., in East Africa and the United Kingdom, in connection with the execution of a contract for the supply of tea in the United-Kingdom. The provision does not require that the export should be from India.
Accordingly, it was submitted that similar facts and circumstances existed in the case of the assessee. The similar view was taken by the Hon'ble Kamataka High Court in the case of Chief CIT v. H.M.T. (International) Ltd. .
(iv) The assessee further submitted that the deduction under Section 80HHC is self-contained code as the section states as under:
80HHC-Deduction in respect of profits retained for export business - (1) Where an assessee, being an India company or a person (other than) a company resident in India, is engaged in the business of export out of India of any goods 01 merchandise to which this section applies, there shall, in accordance 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.
The underlined, italicised in print, words of extracts of Section 80HHC, specifically stated that "to which this section applies, there shall, in accordance and subject to the provisions of this section", it means that no external reference in interpreting this provision is permissible. The above proposition was also confirmed by 'D' Delhi Bench of the Tribunal (Special Bench) in the case of International Research Park Laboratories Ltd. v. Asstt. CIT . Therefore, it was submitted that the reference to Customs Act defining the term "export outside India" need not be made. In Section 80HHC, the reference to Customs Act, 1962 was made at various places. Therefore, wherever there was a need to refer the Customs Act, 1962, etc., the references were made in the provisions of Section 80HHC. Therefore, what was not specifically referred in Section 80HHC cannot be read out to deny the deduction.
(v) The Foreign Trade (Regulation & Development) Act, 1992 (FTRDA, 1992) had replaced the Import & Export (Control) Act, 1947. The significant change brought in was under the Import and Export (Control) Act, 1947, the object was. to "prohibit or control import and exports", whereas under FTRDA 1992, the object was "to provide for the development and regulation of foreign trade by facilitating imports into and augmenting export from India". This object was incorporated under Section 3 of FTRDA, 1992 as under:
3(1) - The Central Government may by publishing in Official Gazette make provision for the development and regulation of foreign trade by facilitating imports and increasing exports. By the FTRDA, 1992, the Central Government may from time-to-time formulate and announce by notification in the Official Gazette the export and import policy and may also in like manner amend the policy.
In exercise of powers vested in Section 5, FTRDA, 1992, Ministry of Commerce, Government of India, had issued a notification on 31st March, 1992-Export and Import policy - for the period 1992-97 (E & IP 1992-97). This also covers all the aspects of imports and exports in the nature of physical movement of goods and in cases where physical movements of goods were not necessary.
In Chapter XIVA - Trade and Indian Joint Venture brought out the objectives of this Chapter in cl,154B which is as under:
154B. Visualizing economic relationship well beyond the realm of physical exports and recognizing the close relationship between international trade and flow of investment, it is imperative to establish a more dynamic policy framework for making India to emerging and active partner in the global trade and services. Some of the important schemes for attaining the above objectives are as under.
Under Clause 154D - Merchanting or country trade, it is provided as under:
154D-An Indian trader may carry on merchanting trade or third country trade by buying in one country and selling in another country. In such transactions it is not necessary to physically import the goods into India and then re-export the same. RBI is the authority to grant general permission to export houses/trading houses/star trading houses/super star trading houses to make advance payments for this purpose.
It was submitted that under E & IP, 92-97, under Chapter XIV in Clause 154D, a specific provision was made enabling the merchant trade to import and export goods which need not physically brought into India and exported thereafter. The above position clarifies that the assessee had imported goods from Germany and directly exported to Dhaka (Bangladesh), in which goods have not been brought into India and, therefore, did not go out of Indian customs boundary was an eligible export for the purpose of deduction under Section 80HHC of the IT Act, 1961.
(vi) The import/export has three main components which are as under:
(a) Goods related aspect;
(b) Import export finance, i.e., foreign exchange;
(c) Payment of customs duty and customs clearance.
The regulation of goods are regulated by FTRDA, 1992 and Rules made thereunder as well as E & IP 1992-97.
(vii) So far as the import export finance is concerned, this aspect is governed by Foreign Exchange Regulation Act (FERA) and RBI guidelines. The functions of FERA are available in Foreign Exchange Dealers Association of India (FEDAI Rules) and RBI's guidelines contained in Exchange Control Manual.
(viii) The payment of customs duty and customs clearance comes into operation only in such cases where the carrier of the goods (aircrafts, ships and surface transport) takes out or bring in the goods and liable to file what is known as customs manifest or bill of entry.
(ix) Taking into all facts as stated in above paras, it was submitted that FTRDA, 1992 and policy framed under E & IP 92-97 govern the goods imported and exported out of India. The import export foreign exchange is governed by FERA and RBI. The payments of customs duty and customs clearance are covered under Customs Act, 1962, etc. In the assessee's case, as the goods imported and exported without brining it into India, the question of filing of customs manifest or bill of entry, etc. does not arise and, therefore, the Customs Act, 1962 has no role to play. The FTRDA, 1992 and E & IP 92-97 and FERA and RBI guidelines only apply. The definitions under FTRDA, 1992 of import and export. Under Section 2(e) import and export means to bring into or taking out of India any goods by land, sea or air. Similarly, under E & IP 92-97, under Clause 7(16) means a person who exports or intend to export and holds an importer exporter code number. Under Rule 7(26), merchant exporter means a person engaged in trading activity and exporting or intending to export the goods. What is significant in the above definitions are that the definition under Section 2 of FTRDA, 1992, no doubt, specifies that bringing into or taking out of India of any goods amounts to import or export. This definition is intended to govern the physical import and export, which was also regulated by Foreign Trade (Regulation and Development) Act 1992. However, this definition will not apply to the merchanting trade exports as under the E & IP 92-97, the definition of importer, exporter, merchant exporter r/w Sections 154B and 154D provides that the goods dealt by merchanting trade (international trade) need not physically be imported into India and then re-exported out of India. Therefore, it was submitted that under the merchanting trade export, in view of the specific provisions contained in FTRDA, 1992 with E & IP 92-97, the goods exported under merchant trade export need not physically go out of Indian territory.
(x) As already submitted that the Customs Act, 1962 is neither an enactment governing all the aspects of import and export trade, but only an operating Act for the purpose of collection of duty. The concept of Customs Act derived from the ancient custom that whenever a merchant entered a Kingdom with his merchandise, he had to make suitable offering of gifts to the king. In the course of time, the modern State formalized this "custom" into customs duty, which the State collects in respect of goods imported into or occasionally, exported out of its frontiers. This concept was enacted into an Act as Customs Act, 1962/Customs Tariff Act, 1975, etc. which enabled the State to collect customs duty and prevent import export of goods listed in so-called negative list. Therefore, it was submitted that the Customs Act, 1962, etc. has no role to pay as the merchanting trade transactions as they are beyond its jurisdiction.
(xi) The export effected by the assessee is governed by Clause 154D of the Import Export Policy notified by Commerce Ministry of Government of India under the Foreign Trade (Regulation & Development) Act, 1962, which is within the four corners of laws of land and recognized as an export by the Commerce Ministry/FERA and RBI, etc. Therefore, the assessee having exported goods out of India and earned the foreign exchange and brought the convertible foreign exchange into India as stipulated under Section 80HHC of the IT Act, 1961, it was requested that taking into account the submissions made on facts and law, the same may kindly be allowed.
2.2 The CIT(A) observed that the assessee purchased machinery from a German company and directly supplied them to M/s G.R. Textiles Mills, Dhaka, Bangladesh, without bringing the same to India and claimed deduction under Section 80HHC on the profits earned from this transaction. The assessee claimed that the supply of such machinery from Germany directly to Bangladesh was a business activity of "export out of India". The term "export" has not been defined under the IT Act. However, it has been defined in the Customs Act, 1962 and the Foreign Trade (Regulation & Development) Act, 1992 (FTRDA, 1992). In Section 2(18) of the Customs Act, the word "export" has been defined as:
(18) 'Export', with its grammatical variations and cognate expressions, means taking out of India to a place outside India.
The relevant Section 2(e) of FTRDA, 1992 reads as under:
2(e) 'import' and 'export' means respectively bringing into, or taking out of India any goods by land, sea or air.
2.3 The CIT(A) observed from the two definitions that an "export" activity requires taking out of India any goods to a place outside India. It follows that only those goods can be exported which have either originated/manufactured in India or have been imported (brought into India) earlier. The assessee did not bring the machinery into India and, consequently, did not export it out of India to Dhaka. The words "export out of India" for the purpose of Section 80HHC have been defined in Expln. (aa) of Section 80HHC. The implication of this Explanation and its effect could be best seen from the following extracts from the order of Delhi Bench of the Tribunal, reported in ITO v. Lall's Gem Exports (1995) 52 ITD 385 (Del). It is, therefore, clear from the provisions of the Customs Act, referred to above, that in the case of foreigners purchasing goods in India on payment of the consideration in foreign exchange and taking the goods along with them to be taken outside India, the customs clearance is not required as defined under the Customs Act, 1962. In such cases only a declaration has to be made which cannot be equated to the customs clearance as is required in the case of exporters.
2.4 The CIT(A) observed that for claiming deduction under Section 80HHC of the Act, any assessee has to show that he had made "export out of India", as defined in the Expln. (aa) of that section. It is a necessary condition that the goods should be cleared at any customs station, as defined in the Customs Act, 1962. The assessee's goods should be cleared at any customs station. Accordingly, the assessee did not export out of India any machinery or plant. The CIT(A) further observed that where a legislature gave a special meaning to a particular word in particular statute, then the meaning has to be given to that word CIT v. J.K. Cotton Spinning & Weaving Mills Co. Ltd. (1986) 57 CTR (All) 215 : (1986) 164 ITR 18 (All).
2.5 With regard to the decision rendered by the Hon'ble Bombay High Court in the case of Bombay Bmmah Trading Co. Ltd. v. CIT , wherein it was held that export market development allowance under Section 35B of the IT Act, 1961, omitted w.e.f. 1st April, 1989. So, the ratio of decision rendered by the Hon'ble Bombay High Court in the case of Bombay Bmmah Trading Co. Ltd. (supra) is not applicable under the provisions of Section 80HHC of the Act. Regarding the application of Clause 154B of E & IP 1992-97, the CIT(A) observed that it simply permits an Indian trader to carry merchanting trade or third country trade by buying from one country and selling in another country. In such transactions, it was not necessary to physically import the goods into India. The said Clause 154D does not lay down that such a transaction is deemed to be "export of goods out of India". The Clause 154D simply permits third country trade transaction. It does not make export of goods out of Germany, equivalent to the export of goods out of India as observed by the CIT(A). To sum up, the assessee's action of buying the machinery from Germany and selling it in Bangladesh did not result in "export", even in terms of the provisions of FTRDA, 1992. Further, reference to the provisions of the FTRDA, 1992 and E & IP-1992-97 was not called for because, as stated by the assessee itself, Section 80HHC is a complete code by itself. The aforesaid transactions of the assessee did not require any clearance of goods at any customs station in India. Therefore, no export was made by the assessee in respect of machinery worth Rs. 4,23,34,960 purchased in Germany. Accordingly, the order of the AO on the point was upheld by the CIT(A). The same has been opposed before us.
3. We find that the assessee claimed deduction under Section 80HHC on goods purchased by assessee company from Germany and sold it directly to the customer in Bangladesh. The deduction has been denied by lower authorities. The main issue is whether this sale constitutes export or not.
3.1 Brief facts of the case as narrated by the learned Authorised Representative of the assessee are that the assessee company has been in the field of export since several years. During assessment year in question i.e. 1996-97, assessee has purchased plant and machinery for Rs. 1,79,11,286 from M/s Textlrmaschinen Service. GmbH, Germany, and sold same directly to M/s G.R. Textile Mills, Dhaka, Bangladesh, hereinafter called buyer, for Rs. 4,23,34,960, without bringing its plant and machinery into Indian territory. According to the learned Authorised Representative of the assessee, the assessee has filed a paper book containing contract for procurement entered into between assessee and buyer, sales bills in the name of assessee, purchase bills showing purchase of machinery from M/s Textlrmaschinen Service, GmbH, Germany, and various other bank documents related to the sale of this machinery to buyer, M/s G.R. Textiles Mills, Dhaka, Bangladesh. The abovesaid transaction according to learned Authorised Representative of the assessee is not under dispute. The assessee claimed deduction under Section 80HHC on profit of Rs. 1,81,42,968 in above transaction.
3.2 The AO held that since the assessee had sold machinery directly from Germany to Bangladesh and not from India, could not be stated that machinery was exported out of India. Hence assessee company was not entitled to benefit under Section 80HHC. The AO therefore did not grant deduction under Section 80HHC as claimed. In appeal, the action of AO was upheld.
3.3 Before us, it was submitted on behalf of assessee that Section 80HHC nowhere stated that export has to necessarily emanate from one's own country. The export could also be in the form of merchanting or third country trade. It was explained that e-commerce had made the modern world much smaller place, not only have geographical boundaries shrunk but the movement of goods across globe has become almost instantaneous. It was possible for a person from Mumbai to sell goods from Australia to Nigeria. That person could rightly claim to be in business of export, since he was exporting goods from Australia to Nigeria, though based in Mumbai.
3.4 The learned Authorised Representative of the assessee then took us to the definition of "export" as appearing in Black's Law Dictionary:
Export, No. 1. A product or service created in one country and transported to another;
Domestic export. A product originally grown or manufactured in the United States, as distinguished from a product originally imported into the United States and then exported;
2. The process of transporting or services to another country:
Export, b. 1. To send or carry abroad. 2. To send, take, or carry (a goods or commodity) out of the country; to transport (merchandise) from one country to another in the course of trade;
3. To carry out or convey goods by sea.
Submitting that the definitions did not even remotely suggest that the goods had to be transported from one's own country, then it was pointed out that if the legislature had intended "exports" to mean only "domestic exports", since the word used was only "export", the widest possible meaning had to be given to that word. The word "export" in Supreme Court on 'words and phrases' by Justice R.P. Sethi, former Judge, Supreme Court of India, to say nowhere was it contemplated that exports had necessarily to emanate from one's own country. In the absence of any provisions under the IT Act restricting the meaning of the word "export" to only domestic exports, as contemplated by the CIT(A) is not justified.
3.5 Our attention was drawn towards the ratio of Hon'ble Supreme Court in the case of CIT v. Bombay Burmah Trading Corpn. Ltd. (supra), wherein the apex Court held as under:
The Tribunal's reading of the section that the export should be ex-India is not supported by the language of the provision or any authority. The High Court has, therefore, rightly concluded that to avail of the benefit of weighted deduction the provisions does not require that the export should be ex-India.
It was further explained that although Section 35B of the Act, under which the above decisions were rendered, was expenditure-based and Section 80HHC of the IT Act, 1961, was turnover-based, the objective was the same, viz., to augment the foreign exchange reserves through exports.
3.6 Our attention was also drawn towards the object of the enactment as appearing in the Fifth Edition, Volume-2, p. 3553 of Chaturvedi and Pithisaria. In neither of the two sections, pointed by the learned Authorised Representative of the assessee, was there any clause stating that the exports should originate from India. The learned Authorised Representative of the assessee pleaded that it appeared from the reasoning of the lower authorities that the AO would have allowed the deduction under Section 80HHC of the Act, if the goods shipped from Germany had touched the shores of India even for a few days before being shipped to Bangladesh. The commercial expediency in a direct shipment to save time and money should not be an impediment to the granting of deduction under Section 80HHC. The assessee had brought in foreign exchange. All the documentation was in order and undisputed. Emphasis has to be placed on substance rather than mere form. In this connection, the learned Authorised Representative of the assessee relied on the decision of Hon'ble Supreme Court in the case of J.B. Boda & Co. (P) Ltd. v. CBDT , wherein it was held that:
A two-way traffic is unnecessary. To insist on a formal remittance first and thereafter to receive the commission from the foreign re-insurer, will be an empty formality and a meaningless ritual, on the facts of this case.
3.7 It was emphasized on behalf of the assessee that the objective of any legislative enactment must not be lost sight of while interpreting the provisions of the Act. In support of his contention, the learned Authorised Representative of the assessee relied on the decision rendered by the Hon'ble Supreme Court in the case of Bajaj Tempo Ltd. v. CIT , observed as under:
Since a provision intended for promoting economic growth has to be interpreted liberally, the restriction on it too has to be construed so as to advance the objective of the section and not to frustrate it. But, that turned out to be the unintended consequence of construing the clause literally, as was done by the High Court, for which it cannot be blamed, as the provision is susceptible of such construction if the purpose behind its enactment, the objective if sought to achieve and the mischief it intended to control are lost sight of.
It was also pleaded that if two views were possible then the view favouring the assessee should be adopted.
3.8 It was also pointed out on behalf of the assessee that Section 80HHC(1) of the Act spoke of "business of export out of India of any goods or merchandise", as distinguished from the expression "from India to a place outside India" as appearing in Sub-section (1) of Section 80HHE which reads as under:
80HHE(1) - (i) export out of India of computer software or its transmission from India to a place outside India by any means.
The learned Authorised Representative of the assessee pointed out that the second limb of Sub-Clause (i) was a highly restricting provision stating explicitly that the transaction should necessarily emanate from the territory of India and should reach a destination outside Indian territory. Since these restricting provisions were absent in Section 80HHC, the interpretation as offered by the CIT(A) was not tenable.
3.9 In response to a query from the Bench, the learned Authorised Representative of the assessee stated that there was a decision of the Mumbai Bench of the Tribunal in the case of Hindustan Level Ltd. v. IAC (1996) 56 TTJ (Bom) 598 : (1996) 58 ITD 555 (Bom) where relying upon Section 2(18) of the Customs Act, 1962, the Tribunal held that to qualify for deduction under Section 80HHC, the exports must be from India. It was submitted that when this decision was given, the Tribunal did not have the benefit of the judgment of the Hon'ble Supreme Court in the case of Bombay Burma Trading Corpn. (supra). Besides, even the judgment of the Hon'ble High Court was not cited. Further, relying upon the case of Coca Cola Export Corporation. v. no was pointed out that just as the Hon'ble Supreme Court held that the IT Act and the FERA operated in different fields, so did the Customs Act. Some words in a statute cannot be automatically imported for the interpretation of the same words in another statute.
3.10 The learned Authorised Representative of the assessee took us through para 4.4 of the order of the CIT(A) where the meaning of the words "export out of India" in Expln. (aa) of Section 80HHC formed the main plank of the order of the CIT(A) to deny the assessee its claim of deduction under Section 80HHC. The learned Authorised Representative of the assessee had proceeded to give his submissions on the phrase "export out of India" appearing on Expln. (aa) to Section 80HHC. The expression "export out of India" in Expln. (aa) reads as follows:
'export out of India' shall not include 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).
It was further stated on behalf of the assessee that the Explanation referred specifically and only to the purchase of goods in a shop, emporium, or any other establishment in India. It was submitted that if the meaning of the section has intended to cover all exports as interpreted by the CIT(A), the legislature would not have used the words "in a shop, emporium or any other establishment situate in India." The fact that these sales outlets were specifically mentioned in the Explanation amply showed that the said Expln. (aa) was confined only to over-the-counter sales in these establishments. It was explained that the purpose of introducing the said Explanation was to plug the loophole of parties claiming export benefits without actually exporting such goods. The reference to Customs Act in Expln. (aa) was to ensure that such goods were actually taken out of the country. In support of this proposition, the learned Authorised Representative of the assessee took us through the decision in the case of Ram Babu and Sons and Anr. v. Union of India and Anr. , where the meaning of Expln. (aa) and the legislative intent was explained as under:
Section 80HHC of the IT Act, 1961, was enacted to give certain benefits to exporters. Explanation (aa) to Section 80HHC inserted by the Finance (No. 2) Act, 1991, w.e.f. 1st April, 1986, was to plug a loophole in the Act since there was possibility that the goods after purchase may not be exported at all and yet the benefit may be claimed. Explanation (aa) to Section 80HHC is constitutionally valid.
The said decision also stated that both the conditions stated in Expln. (aa) viz., the transaction should be by way of sale or otherwise in a shop, emporium or establishment situated in India, and. the sale does not involve clearance in any customs station, had to be cumulatively fulfilled so as to exclude the transaction from the definition of "export out of India". This was endorsed by the Hon'ble apex Court in the case of CIT v. Silver and Arts Palace and was further relied upon in the case of Abdulgafar A. Nadiadwala v. Asstt. CIT .
3.11 Our attention was also drawn towards the decision in the case of CIT v. M.S. Gem Chettiai , wherein the Hon'ble Supreme Court held that whenever a word in a statute is given a specified meaning, the ordinary or dictionary meaning of the word is neither diluted nor lost unless specifically excluded by the definition. Accordingly, it was pleaded that even assuming that the expression "export out of India" appearing at Expln. (aa) were to be given a meaning that the Revenue authorities have attempted to give, it would not takeaway the ordinary meaning of the word "export". As defined in Black's Law Dictionary (supra), "export" simply means transporting goods from one country to another. The learned Authorised Representative of the assessee also pointed that if the expression "export out of India" was to be read as "domestic exports" as defined in Black's Law Dictionary, the legislature should have said so in clear terms. Nowhere in the section was there any indication to exclude merchanting or third country trade from the purview of the expression "export out of India".
3.12 The learned Authorised Representative of the assessee then drew out attention to Board's Circular No. 621, dt.19th Dec, 1991 [(1992) 101 CTR (St.) 1] explaining the purpose of introducing Expln. (aa) (which) reads as under:
32.16. The issue whether sale of goods to foreigners in shops or other establishments situated in India is export, has been a subject-matter of litigation. The view of the Department all along has been that such counter sales within India do not constitute export and, therefore, are not eligible for the tax concession under Section 80HHC. To give finality to this view and to end all judicial controversies, a clarificatory amendment has been made in order to reiterate that 'export out of India' shall not include any transaction by way of sale or otherwise, in a shop, emporium or any other establishment in India, not involving clearance at any customs station.
The learned Authorised Representative of the assessee also drew our attention to Circular No. 624, dt. 23rd Jan., 1992 [(1992) 101 CTR (St.) 61], analyzing that even the Board's circular states the Expln. (baa) refers only to counter-sales in India.
3.13 Finally, the learned Authorised Representative of the assessee invited our attention to the case of Asif Taheibhai v. ITO in ITA No. 101/Mum/2002 where, under similar facts, the Mumbai Bench 'A' of the Tribunal held that the assessee was entitled to deduction under Section 80HHC of the Act where he had purchased in Bangladesh a ship belonging to Shipping Corporation of India and sold the same in Bangladesh itself. The learned Authorised Representative of the assessee pleaded that the assessee's case was on a sound footing as there was an actual transfer of goods from Germany to Bangladesh.
4. On the other hand, the learned Departmental Representative supported the order of the CIT(A). He stated that the legislative intent was clearly to give a boost to the export of Indian products and, consequently, the direct sales to Bangladesh from Germany did not qualify for deduction under Section 80HHC. The learned Departmental Representative further added that the words "export out of India" in Section 80HHC meant that the export should be made from the territory of India. He also stated that the main intention of augmenting foreign exchange reserves would not be fulfilled in a transaction where foreign exchange was spent to import goods. He relied upon the following decisions:
(i) Abdulgafai A. Nadiadwala (supra);
(ii) ITO v. Taj Trade & Transport Co. Ltd. (1992) 41 ITD 60 (Bom);
(iii) Sanjeev Malhotra v. Dy. CIT (2005) 93 TTJ (Del) (TM) 394 : (2004) 91 ITD 76 (Del) (TM);
(iv) Indian Delco Ltd. v. Dy. CIT (1997) 59 ITD 268 (Del);
(v) Hindustan Lever Ltd. (supra);
(vi) Ram Babu & Sons (supra);
(vii) CIT v. Rajendra Kasliwal (2004) 271 ITR 448 (Raj);
(viii) Silver Arts Palace (supra).
The learned Departmental Representative stated that in all the above mentioned cases, it was held that there had to be evidence in the form of customs clearance for claiming deduction under Section 80HHC.
5. In his rejoinder, the learned Authorised Representative of the assessee stated that none of the decisions cited by the learned Departmental Representative applied to the assessee as none referred to a case of direct third country transaction. All of them were in the context of exports made from the shores of India. Some decisions like Taj, Transport Co. Ltd., Ram Babu & Sons, Silver Arts Palace and Rajendra Kasliwal (all supra) directly concerned over-the-counter sales in an emporium. The learned Departmental Representative had, therefore, merely cited those cases without considering whether the decisions cited by him applied to the facts of the assessee's case. He added that it was obvious that the customs clearance would be required when the goods left the shores of India, but not when the goods were shipped directly from a third country to another. The learned Authorised Representative of the assessee reiterated that it made no economic sense to bring the purchased machinery into India just to claim the Section 80HHC benefits, spend large sums on berthing and demurrage, and then ship the machinery to Bangladesh. That would merely be an empty formality and a ritual that the Hon'ble Supreme Court disapproved of, as stated in the case of J.B. Boda (supra). Countering the contention of the learned Departmental Representative in respect of import of goods resulted in an outflow of foreign exchange, the learned Authorised Representative of the assessee stated that this was not prohibited, moreso, when profits in foreign exchange were actually brought into India. What is important is that deduction under Section 80HHC is given only on profits. It was undisputed that in the case under appeal the assessee had shown profits and had actually brought it in foreign exchange.
6. We have gone through the rival contentions and have also gone through various documents including the decisions cited by the learned Authorised Representative of the assessee. We have also gone through the voluminous paper book. On a careful consideration. and also after going through the decisions cited by the learned Departmental Representative, we find that the decisions do not help the case of the Revenue, as none of them refers to merchanting or third country trade. The decisions cited by the learned Departmental Representative in the cases of Taj Trade & Transport Co. Ltd., Ram Babu & Sons and Silver Arts Palace (all supra) all deal with purchases made in an emporium. So, such purchases have to go through customs clearance for obtaining the benefit under Section 80HHC, as explained in Expln. (aa). In the case of Sanjeev Malhotra (supra), there was primarily a strong doubt whether there was a genuine export made by him, whereas in the case of Indian Delco (supra), the goods never went outside the country either through UNICEF or its designated consignees who were all stationed in India. The case of Abdulgafar A. Nadiadwala (supra) questioned whether beta-cam-tapes constituted "goods". It was the contention of the Revenue in that case that the films recorded on the beta-cam tapes do not qualify either as goods or merchandise. The beta-cam shell (cassette) is only a medium of transfer for the sake of convenience. Hence, the Revenue argued that even though customs clearance was obtained the export of these tapes could not entitle the assessee to deduction under Section 80HHC as the tapes did not constitute "goods". The contention of the Revenue was struck down by the Hon'ble Bombay High Court, who held that the proceeds in foreign exchange were received in India and thus entitling the assessee to deduction under Section 80HHC. In the cases of Nadiadwala, Taj Trade, Transport Co., and Indian Delco (all supra), it was held that in the absence of a specific definition contained in the section, the ordinary dictionary meaning should be adopted for the word "export" which is, sending goods outside the country by land, sea or air.
6.1 The purpose of Expln. (aa), upon which heavy reliance was placed by the learned Departmental Representative, was explained by the Hon'ble Allahabad High Court in the case of Ram Babu & Sons (supra) in the following words:
Section 80HHC of the IT Act, 1961, was enacted to give certain benefits to exporters. Explanation (aa) to Section 80HHC inserted by the Finance (No. 2) Act, 1991, w.e.f. 1st April, 1986, was to plug a loophole in the Act since there was possibility that the goods after purchase may not be exported at all and yet the benefit may be claimed.
The law as existed before 1986 contained a loophole which could be used by taxpayers to get export benefits without exporting the goods at all. The Hon'ble Allahabad High Court had clarified this situation and the same was approved by the Hon'ble Supreme Court in the case of Silver and Arts Palace (supra). The above two decisions read with circulars of the CBDT which have been brought to our notice, show that Expln. (aa) applies only to sales made over-the-counter in a shop, emporium or such other establishment. It is obvious that in the present case such is not the position. We find that the assessee ordered the machinery in Germany and instead of bringing the same physically within the territorial limits of India, directed the shipping agents to carry the machinery to Bangladesh directly. It is also worth mentioning that the copy of contract for supply of machinery to G.R. Textile Mills is available in paper book at pp. 28 to 40. Similarly, the various documents connected with this transaction are available in the paper book. Pages 41 to 57 contain copies of sales bills for trading exports along with banking documents. At pp. 60 to 80 contain import documents comprising purchase bills, dispatch particulars and payment particulars. The relevant documents show that the assessee had purchased machinery from M/s Textillmaschinen Services GmbH Ltd., Germany, in their own name. Therefore, the goods were sold to the assessee, an Indian company, by the European company and, therefore, Indian company was the owner of the goods and exercising the right of ownership of the goods. The plant and machinery was directly shipped to Bangladesh. The direct shipment of goods to another country without touching base in India should not be an impediment to the assessee from claiming the benefits of Section 80HHC, if it was otherwise entitled to do so. The ratio of Hon'ble Supreme Court in the case of J.B. Boda & Co. (P) Ltd. (supra) helps the case of the assessee. In the case of J.B. Boda & Co. (P) Ltd. (supra), ONGC had insured all their operations with an Indian insurance company, J.B. Boda & Co., were reinsurance brokers. They contacted a London company who were brokers for placement of reinsurance business who, in turn, informed J.B. Boda & Co. about the reinsurance coverage. J.B. Boda & Co. sought permission of the RBI to remit a certain amount of money, after deducting their own brokerage. They also sought the approval of the CBDT for deduction under Section 80-O of the Act on the ground that the reinsurance brokerage retained by J.B. Boda & Co. in India amounted to receipt of income in convertible foreign exchange. The CBDT refused the approval sought by J.B. Boda & Co. holding that by retaining the fees, J.B. Boda & Co. did not receive any foreign exchange in India. A writ petition filed by the Hon'ble Delhi High Court met with the same fate. In appeal, the Hon'ble Supreme Court allowed the assessee's appeal holding that the entire transaction was conducted through the RBI and was expressed in foreign exchange. A formal remittance to the foreign reinsurer first and, thereafter, receipt of the commission from the foreign reinsurer was unnecessary. To insist on a formal remittance first and thereafter to receive the commission from the foreign reinsurer, will be an empty formality and a meaningless ritual, on the facts of this case.
6.2 We have also perused pp. 103 and 104 of the paper book which contain a compilation of new Import Export Policy & Procedures 1992 to 1997. The Chapter XIV-A of New Import Export Policy & Procedures 1992-97 speaks of Trade and Indian Joint Ventures Abroad. The objective of the new import export policy is to establish a more dynamic policy framework making India an emerging and active partner in the global trade and services. One of the important schemes for attaining this objective was through merchanting or third country trade.
154D. Meichanting or third country trade.-An Indian trader may carry on merchanting trade or third country trade by buying in one country and selling in another country. In such transactions it is not necessary to physically import the goods into India and then re-export the same. RBI is the authority to grant general permission to export houses/trading houses/star trading houses/super star trading houses to make advance payments for this purpose.
Thus, when third country trade is a recognized feature of the new import export policy and procedure of the Government of India, we see no reason to deny deduction under Section 80HHC solely on the ground that the exports were not made ex-India. It is undisputed that the assessee had earned foreign exchange for the country. The focus and emphasis of foreign policy are to increase the foreign reserves of the country.
"Export" literary means sending goods to another country. So, we are of the opinion that the word "export" does not mean only sending goods out of one's own country to another. The wordings of Section 80HHC do not provide for such an interpretation at all, as distinguished from the expression "from India to a place outside India" as appearing in Sub-section (1) of Section 80HHE. It is worth mentioning that Section 80HHC was brought in view to help all export of goods outside India. India was in definite trouble due to shortage of foreign exchange. By sending goods outside India or helping India in getting foreign exchange, which was at a premium at that time has to be taken into consideration. Regarding export out of India, the Hon'ble Supreme Court in the case of Bombay Burmah Trading Corpn. (supra) at p. 301 observed as under:
The Tribunal's reading of the section that the export should be ex-India is not supported by the language of the provision or any authority. The High Court has, therefore, rightly concluded that to avail of the benefit of weighted deduction the provision does not require that the export should be ex-India. It must be observed in fairness to Mr. M.L. Verrna, learned senior counsel appearing for the Revenue, that he does not seriously dispute this proposition. Once this position is accepted, the order under challenge has to be sustained.
We also find that Hon'ble Madras High Court, in the case of CIT v. N.S. Gompex (P) Ltd. , has observed that to avail of the benefit under Section 35B of the IT Act, 1961, the provision does not require that export should be ex-India. The assessee had purchased goods from China and sold them in USA and no export of Indian goods was carried on. It was held that expenditures incurred on foreign travel, advertisements, foreign travel expenses were entitled to weighted deduction.
6.3 We find that Mumbai 'A' Bench of the Tribunal in the case of Asif Taheibhai (supra) in ITA No. 101/Mum/2002 has observed as under:
Though the ship was salvaged at Chitagong, the nearest port, and was there for the next two years pending formalities of the global tender, its acceptance, handing over the ship to the highest bidder, till the agreement kit made with the foreign parties and pending the Chitagong parties completion of formalities of import, as per rule, ship was treated as Indian property. The payment of berthing charges was also made by the Indian part. All these indicate that neither the Indian nor Bangladesh party treated the ship as imported scrap upto 18th Jan., 2001.
Taking to totality of all the facts and circumstances of this case before us and also on the interpretation section, as propounded by the Hon'ble High Court in the above case of Ram Babu Sons & Am. (supra), we are of the view that the Revenue authorities were not justified in not giving the benefit of Section 80HHC of the IT Act, 1961, to the assessee. Therefore, the above appeal is hereby allowed.
The assessee had purchased in Bangladesh a ship belonging to Shipping Corporation of India which had docked in Chitagong Port in a damaged condition and sold the said ship in Bangladesh itself. The facts in that case are very similar to the facts in the instant case. The claim for deduction under Section 80HHC of the Act is still on more sound footing in this case as the assessee had actually transported goods from Germany to Bangladesh, whereas in the case of Asif Taheibhai (supra), the assessee had purchased a ship belonging to Shipping Corporation of India in Bangladesh.
6.4 On going through the paper book, we find that the reliance of the Department on the case of Hindustan Lever Ltd. of Mumbai Bench of the Tribunal, reported in (1996) 56 TTJ (Bom) 598 : (1996) 58 ITD 555 (Bom) does not help the Department. In that case, it was held that the exports must be from India to claim deduction under Section 80HHC. We agree with the learned Authorised Representative of the assessee that Mumbai 'A' Bench of the Tribunal did not have occasion to consider the Bombay High Court decision in the case of Bombay Buimah Trading Corporation (supra), which was later on affirmed by the Hon'ble Supreme Court. In any case, the Hindustan Lever case (supra) dealt with asst. yr. 1983-84. We are of the opinion that the reference by the CIT(A) to the Customs Act to define "export" was misplaced. If he could rely on the Customs Act for the definition of export for interpreting section like Section 80HHC which was brought into existence with a view to export goods so that good foreign exchange was earned then he should have taken into consideration the various provisions of other Government of India rules and regulations like import and export policy, context of RBI manual and other circulars. By not doing so, he restricted his view only to the Customs Act and denied the benefit of section to the assessee. The section as discussed above was specifically brought in to expedite exports and earn foreign exchange. There is tremendous development on the issue after relying on the decision rendered in the case of Hindustan Level Ltd. (supra).
We also note that the following observations appear in the case of Dy, CIT v. Ashwin C. Shah (2002) 76 TTJ (Mumbai) 823 : (2002) 82 ITD 573 (Mumbai):
It had been held that it is necessary to have in view the context in which the observations were made and that it is not proper to pick out a single or few sentences from the judgment, divorced from the context, and apply them to an entirely different context. There can be no dispute with this proposition. But, in none of the authorities has it been held that the "obiter dicta" of the Supreme Court of India is not binding on the Tribunal which is placed on a much lower rung in the hierarchy of Courts or Tribunals in India. The question whether obiter dicta of the Supreme Court are binding on the High Courts may be one for consideration and there may even be divergent views. But, so far as the Tribunal is concerned, we have grave doubts whether it is at all open to it (the Tribunal) to consider certain observations of the highest Court of the country as "obiter dicta" and proceed to disregard the same. In fact, our humble view is that it cannot do so.
In the case of Shree Bharkha Synthetics Ltd. v. Asstt. CIT (2002) 75 TTJ (Jd) 7, to it was held:
it is the settled position of law that the law declared by the Hon'ble Supreme Court is the law of the land and that even obiter dicta of the Hon'ble Supreme Court is also binding on the subordinate Courts/Tribunals/judicial authorities.
Even if it is conceded that Bombay Burmah case (supra) was in the contention of Section 35B and not Section 80HHC, we are of the opinion that the view of the Hon'ble Supreme Court in the case of Bombay Burmah (supra) should prevail. What is important is the ratio laid down, that there is no mention anywhere in the Act that the exports have to be ex-India.
We also rely on the decision of Hon'ble Bombay High Court in the case of H.A. Shah & Co. v. CIT that as a general rule the principle of res judicata is not applicable to decision of IT authorities. However, if there is a total lack of consistency, that would lead to chaos in judicial administration. Therefore, there can be circumstances where there may be a departure from the earlier held position. We have noted from p. 630 of Shah's decision (supra):
The principles of natural justice require that if there is prior determination by the IT Department, ordinarily there should be no variation from that decision unless there are fresh circumstances to warrant a deviation from the previous decision.
So, what this decision of the Madras High Court has emphasized is fresh circumstances being present to justify a departure from the earlier decision. Fresh circumstances are not necessarily be same as fresh facts brought before the Tribunal considering revising the earlier decision, and in our opinion, 'fresh circumstances' is a much wider expression than merely "fresh fact brought before the authority"... In our opinion, even if there are no fresh facts, if material facts have not been taken into consideration on the earlier occasion, it could not be said of the later decision that it is an arbitrary interference with the earlier decision.
The Hon'ble Bombay High Court had mentioned about "fresh circumstances" and "material facts". The situation that the goods that were ordered by Bangladesh had to be routed through India to make it export will only end in creating more complication. In the global economy, where the goods from one part of the world are sent to the another part of the world against the directions of third party is very common.
Ultimately, we are of the opinion that Section 80HHC was specifically created to help export out of India and earn foreign exchange. Unless the section is interpreted in this manner without causing any injustice, then this interpretation resulting in benefit to taxpayer should be adopted.
Under the facts and circumstances of the case and in law, we hold that the assessee is entitled for deduction under Section 80HHC of the IT Act, 1961, on profit of shipment in respect of plant and machinery sold in Bangladesh.
As, a result, the appeal of the assessee is allowed.