High Court Of Kerala
Baby Marine (Eastern) Exports vs. Assistant Commissioner Of Income Tax
Sections 80HHC
Asst. Year 1993-94, 1994-95
V.P. Mohan Kumar & K.K. Denesan, JJ.
IT Appeal Nos. 4 & 5 of 1999 and 97 & 98 of 2000
4th April, 2002
Counsel Appeared
Joseph Vellappally & Antony Dominic, for the Assessee : P.K.R. Menon & Gerorge K. George, for the Department
JUDGMENT
V. P. MOHANKUMAR, J. :
These four appeals raise similar questions. Of them two appeals are preferred by the assessee whereas the other two by the Revenue. Conflicting views have been expressed by the Tribunal on identical sets of facts necessitating both the Department and the assessee to invoke the jurisdiction of this Court. While ITA No. 4 of 1999 and ITA No. 5 of 1999 have been preferred by the assessee, ITA No. 97 of 2000 and ITA No. 98 of 2000 have been preferred by the Department. We shall deal with the set of facts separately. ITA Nos. 4 and 5 of 1999
2. These are the appeals preferred by the assessee. They relate to different assessment years but the facts herein are identical. We will summarise the facts after omitting those which are not material, as under : The assessee is the appellant in the above appeals. The assessee is engaged in processing and export of marine products. During the previous year relevant to the asst. yr. 1993-94, the appellant had an export turnover of Rs. 10,24,12,075. With respect to the asst. yr. 1994-95, the subject-matter of appeal in ITA No. 5 of 1999, the export turnover was Rs. 25,65,69,887. The exports made by the assessee to the foreign buyers are routed through export houses.
The nature of transaction was processing and shipment of the cargo by the assessee and endorsement of the bill of lading in favour of the export houses after the goods crossed the customs frontiers of India. In addition to the direct receipt from the importer outside India of the price as per contract described as f.o.b. value, the assessee received an additional amount called premium or incentive, etc., varying from 3 to 5.5 per cent in the course of export itself from the export houses through which the exports were routed. The amount thus received is described as incentive received from the export houses. The other agreements subject-matter of ITA No. 5 of 1999 employs the same phraseology. The assessee submits that the assessee has not rendered any service to earn an incentive or brokerage or service charges or commission, etc., and according to the assessee, it has not done anything other than exporting the goods and endorsing the documents of title to the goods in favour of the export houses. In other words, the assessee alleged that it did not act in any other capacity otherwise than as an exporter selling the goods in the course of export.
The AO while computing export profit for granting deduction under s. 80HHC excluded 90 per cent of the premium received from export houses by applying Expln. (baa) to sub-s. (4A) of s. 80HHC of the IT Act.
Aggrieved by the partial disallowance of exemption claimed with respect to the abovesaid amount the assessee filed appeals before the CIT(A), Thiruvananthapuram, who dismissed the appeals and confirmed the assessment order. The assessee thereupon filed second appeals to the Tribunal who also confirmed the disallowance. In doing so, the Tribunal has relied on its own decision in G. Gangadharan Nair vs. ITO (1995) 54 ITD 15 (Cochin) and that of the High Court in CIT vs. V.T. Joseph (1997) 137 CTR (Ker) 318 : (1997) 225 ITR 731 (Ker). But the assessee points out that G. Gangadharan Nair vs. ITO (supra), the first of the decisions relied on by the Tribunal, was set aside by this Court and remanded back to the Tribunal for reconsideration. It is contended by the assessee that the decision of the Court in CIT vs. V.T. Joseph (supra) is not applicable to the assessee’s case.
Aggrieved, the assessee has preferred the above appeals under s. 260A of the IT Act contending that the following substantial questions of law arise for decision by this Court, namely : “(a) Whether, on the facts and in the circumstances of the case, the Tribunal had jurisdiction to go into any issue other than the deductibility of 90 per cent of the receipts from the export houses ? (b) If the answer to the first question is in the negative then whether, on the facts and in the circumstances of the case, when the issue of the applicability of s. 80AB was not before it, was the Tribunal justified in going into this issue and holding against the assessee ? (c) Assuming that the Tribunal had such jurisdiction having regard to the definition of the term ‘profits from business’ under cl. (baa) of the Explanation was the Tribunal justified in invoking the provisions of s. 80AB which are general principles as distinct from the special provisions contained in s. 80HHC ? (d) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in relying upon the decision in CIT vs. V.T. Joseph (supra), which dealt with different provisions for a different assessment year and even if it was right, should not the Tribunal have followed the later decision of this Court in CIT vs. A.V. Thomas & Co. Ltd. (1997) 142 CTR (Ker) 364 : (1997) 225 ITR 29 (Ker) and allowed the claim ? (e) Whether, on the facts and circumstances of the case, was the Tribunal justified in holding that the premium received from the export houses is brokerage or commission or charges or any other receipt of a similar nature qualified for disallowance under Expln. (baa) of sub-s. (4A) of s.80HHC ? (f) Whether, on the facts and in the circumstances of the case, whether the Tribunal was justified in law in holding that 90 per cent of the receipts from the export houses are deductible from the business profits determined under cl. (baa) of the Explanation to s. 80HHC for the purpose of quantifying relief under that section? (g) Whether, on the facts and in the circumstances of the case, the Tribunal had jurisdiction to go into the issue of the receipts from the export houses being a part of the total turnover when that was not an issue at all before it ?” ITA. Nos. 97 & 98 of 2000 These appeals are preferred by the Department with respect to the asst. yrs. 1993-94 and 1994-95. The facts are as under :
The assessment relates to the years 1993-94 and 1994-95. The assessee is different from the assessee whose appeals are dealt with in ITA Nos. 4 & 5 of 1999. The assessee who had effected its export through export houses was paid a fixed percentage of f.o.b. value described as incentive, service charges, premium, etc., by the export house. In the instant case, the AO noticed that these payments are effected in favour of the assessee by the export house. It pointed out that by virtue of such exports the exporter is entitled to licence or additional licence on account of the export. This was being transferred to the export house under the contract and it will be received by the export house. According to the Department it was in these circumstances, the AO held that the assessee was not entitled to the deduction envisaged under s. 80HHC. He disallowed the assessee’s claim for deduction under s. 80HHC. In doing so he followed the decision of the Tribunal, Cochin Bench, in the case of A.M. Moosa, in ITA No. 498/Cochin of 1995, dt. 14th Sept., 1995. The assessee being aggrieved preferred an appeal before the CIT(A). The CIT(A) confirmed the order of the AO. Aggrieved, the assessee preferred appeal before the Tribunal.
In the instant case, the Tribunal for the reasons given in its order, held that 90 per cent of the export house premium cannot be deducted while computing the deduction under s. 80HHC(4A) read with the Expln. (baa) to s. 80HHC as they are directly related to exports though a local receipt. Aggrieved by the above order of the Tribunal, the Department has filed the appeals urging the following substantial questions of law :
“1. Whether, on the facts and in the circumstances of the case, the Tribunal is right in law in holding that 90 per cent of the export house premium cannot be deducted while computing the deduction under s. 80HHC in accordance with the Expln. (baa) to s. 80HHC as they are directly related to exports though a local receipt ?
2. Whether, on the facts and in the circumstances of the case and in the light of the relevant provisions, the Tribunal is right in law and facts in arriving at the conclusion reached ?”
12. Now, the question raised for consideration is largely on the interpretation to be placed to the expression “premium” or “service charge” found in the agreement. At the outset the following facts may be taken as admitted : (a) The premium in question did not form part of the turnover, and (b) The premium in question was a part of the profits of the business under cl. (baa) to s. 80HHC (4A). There were no appeals nor cross-objections by the Department. Both these findings of the CIT(A) were in favour of the assessee as the inclusion in the profits and the exclusion from the turnover would result in a higher relief under s. 80HHC than otherwise.
13. The argument of the assessee as advanced is that the amount received by the appellant from the export houses and styled as premium does not take the character of “brokerage, commission, interest, rent or charges or any other receipt of a similar nature”. It, according to him, is a part of the export earning and hence export profit which is not different from the f.o.b. value except to the extent, that it is received in Indian rupees. According to him, the view that the relief available under s. 80HHC has to be worked out with reference to the provisions of s. 80AB of the Act according to the assessee is erroneous as s. 80HHC itself defined the expression “profits of the business” under the Explanation to that section and excluded, by its express wording invoking of that section. Hence, the question of applying the provisions of s. 80AB does not arise as the assessee in the instant case is interested only in exports and nothing else. Before proceeding further, we would refer to the relevant clause in the agreement which has given rise to the controversy. The material clause in the agreement the subject-matter of ITA Nos. 4 and 5 of 1999 reads as follows : “The exporter will pay the processors/shippers the entire proceeds of the exports received from the foreign buyers plus 3.40 per cent of f.o.b. value of such exports. The exporter shall ask the bankers nominated by the processors/shippers to credit the entire proceeds of the bills of export to the account of the processors/shippers as soon as the documents are negotiated.”
14. As far as ITA Nos. 97 & 98 of 2000 are concerned the wording occurring in the relevant clause is as under : “The exporters shall pay to the processor, service charges at 7.50 per cent on the f.o.b. value of the exports on presentation of debit notes by the processor after the shipment and negotiation and after all documents have duly been forwarded to the exporter along with monthly statement. The exporters have advanced a sum of Rs. 1,90,000 (rupees one lakh ninety thousand only) towards the service charges. The receipt of the said advance is hereby acknowledged. This advance will be adjusted on pro rata basis from each debit note.”
15. It is not in dispute that this payment represents the excess amount received by the assesseevendor from the export house to whom the sale is effected in the high seas after crossing the customs barrier over and above the f.o.b. value of the merchandise. The claim of the assessee is that he being a supporting manufacturer for the purpose of computing profits of the business of the assessee the amount received by him in excess of the f.o.b. price referred to above cannot be treated as either brokerage, commission, interest, rent charges or any other receipt of a similar nature as described in s. 80HHC(4B), Expln. (baa) of the Act. That provision reads : “‘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 cls. (iiia), (iiib) and (iiic) of s. 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; . . .”
16. Now the argument of Mr. Joseph Vellapally learned senior counsel for the assessee, is that the expression “premium” or “service charges”, as the case may be, used in the document cannot be described as a receipt of an amount similar to brokerage, commission, interest, rent, charges referred to in s. 80HHC, Expln. (baa), extracted above. According to him, it forms part of the price of the commodity sold by the assessee to the export house. Unless it be equated with the expression the one referred to in s. 80HHC, Expln. (baa), referred to supra the AO is not justified in including the same, he contends.
17. Per contra Sri Menon, learned senior standing counsel for the Revenue, persuasively urges that the amount thus received is nothing but a consideration paid in excess of the price and it is not the price nor it would be part of the price as contended by the assessee. Once the deal is struck and the purchaser agrees to pay the amount received as the f.o.b. price to the vendee any payment being made in excess of the price can be only a brokerage or commission or interest of charges which is referred in s. 80HHC(4B), Expln. (baa) of the Act.
18. What does the expression “premium” mean ? We have to remember that it being a fiscal statute there will be attempts made by an assessee using clever phraseology to camouflage the real intention of the parties while striking a deal and secreting assessable income. Such attempts to screen the income is a pitfall that the Court has to keep in mind while attempting to interpret such transactions. But, at the same time, that certainly does not mean that every transaction entered into by a bona fide trader be viewed with a magnifying glass to rope in all deals within the financial legislation. It is not the form that matters but the substance. With this in mind we will examine the rival contentions.
19. Bruton’s Legal Theasaurus defines “premium” as a noun as under : “Amount over par, bonus, bounty, charge, beyond normal, charge to excess, excessive charge, extra, incentive, increased value, overcharge, prize.” Collins Cobuild English Language Dictionary more graphically defines “premium” to mean as under : “A premium is a sum of money that is added to something, for example to someone’s earnings or to the price of goods, in order to encourage people to work hard or to produce the goods.” Likewise, we may advert to other dictionaries as well. As for instance in Black’s Law Dictionary “premium” is defined as : “A reward for an act done. Brown vs. Board of Police Commissioner’s of City of Los Angeles (58 Cal. App. 2d 473, 136 p. 2d 617, 619). See also Bonus. A bounty or bonus ; a consideration given to invite a loan or a bargain, as the consideration paid to the assignor by the assignee of a lease, or to the transferer by the transferee of shares of stock, etc. So stock is said to be ‘at a premium’ when its market price exceeds its nominal or face value. The excess of issue (or market) price over par value. See Par.”
20. But it is not useful to multiply the dictionary meanings and assess the intent of the given transaction. Our endeavour should be to understand the real intent of the parties entering into the transaction. What s. 80HHC(4B) provides is that for the purposes of computing the total income under sub-s. (1) or (1A) of that section every income not charged to tax under the Act shall be excluded. Expln. (baa) to the section defines what is meant by profits of the business. It means profits and gains of business or profession as reduced by ninety per cent of brokerage, commission, interest, rent, charges, or “any other receipt of a similar nature included in such
profits”. Our enquiry is whether the premium or service charges as earned would come within the ambit of any of the clauses as mentioned above.
The premium or the service charge earned is not a brokerage or interest or rent or charges as envisaged in the section. It may be either a commission or any other receipt of a similar nature. The supporting manufacturer is the vendor; hence it does not stand to reason that he earns a commission on his own sales. If it be so it has to fall in the residuary clause. The question then is can we apply the rule of “noscitur a sociis” to interpret the said expression.
We are of the view that in the instant case this rule cannot be invoked. The rule means that the expression should take colour from the words it is associated. As stated, compiling of that word already referred to in the section together with the expression “premium or service charges” would not synchronise. If the money received is neither a brokerage, nor interest nor rent nor charges nor commission then it is not possible to secure the same meaning to the expression “premium” or “service charges”, as the case may be, by invoking the rule of “noscitur a sociis”. The collection being made cannot be held to partake of similar character as the other expression specifically referred to. It is something else. Generally, in trade practice, a seller discovers a buyer who buys the wares in the course of his business. In the instant case, the supporting manufacturer is the seller and the export house is an intermediary. The intermediary using his own skill and labour locates a foreign buyer and after expending his expertise and labour, settles the sale. He thus incurs overhead charges. Normally, his seller should absorb the overheads and give credit to the expenses incurred by that intermediary. But, the intermediary in the instant case as per the term of the agreement, the f.o.b. price fetched at the sale by the intermediary is made over to the seller by him without providing for his overheads he suffered and referred to above. Besides over and above the f.o.b. price realised by him, he pays something more which is described as premium/service charges. What does this payment represent to the buyer in his trade practice ?
From the intermediary’s point of view, this is nothing but the price paid by him for having chosen him as the trader to deal with. May be in a given case higher share of such payment could have been demanded by the seller for settling the transaction. Can we treat the said question in the abstract and treat it as the commission earned ?
Buyer trades in the wares purchased by him as business deal. But where does his profit arise ? This is provided in the following clause in the agreement, namely : “The benefits of income-tax under s. 80HHC will be to the account of the processor/shipper. The export house agrees to give the necessary disclaimers. All other benefits available under the ITC policy for export houses will be to the account of the exporter.” (Similar clause exists in all other transactions. Exporter referred to above is the exporter). Namely, the seller parts to the intermediary the import licence earned by him by virtue of the export of the goods which he sold to the intermediary. To put it differently, the charges in the nature of overheads incurred by the intermediary as also the premium paid by him to his seller is the price of the merchandise traded by him under the above clause. His merchandise is not merely the raw materials but his goodwill in the form of import permit. Is it not the income earned by the seller by his trade of marine products ?
The answer should be in the positive. On the date of settling of the deal between the seller and buyer, the credit of import permit is the concluded right acquired by the seller. The parties settled the value of the existing right. Obviously it does not partake of the character of winning a game of chance. Besides the question considered by A.M. Moosa, Bharath Sea Foods vs. CIT (1996) 135 CTR (Ker) 110 : (1997) 224 ITR 735 (Ker) is not similar. There the sale of the import entitlement did not form part of a single transaction. It is treated as an independent commodity and dealt with as such. Therefore as such this Court felt that the profit derived by trading of import licence cannot be treated as an income derived out of the business.
28. Now therefore what is sold by the seller in this case is not merely the marine products. In addition, the import permit earned by him as well is also sold. And that is why a higher price is fixed for his wares. Hence, the amount described as a premium is in fact part of the price settled by him for sale of his merchandise and it is neither a brokerage, commission, interest, charges or collection of any amount of similar nature.
In the result the questions raised are answered against the Revenue and in favour of the assessee.
[Citation : 262 ITR 88]
