Ita/204/2001 Of The Commisioner Of Incometax, Kottayam v. The Midland Rubber Co. Ltd. Alappuzha

IN THE HIGH COURT OF KERALA AT ERNAKULAM PRESENT : THE HONOURABLE MR. JUSTICE C.N.RAMACHANDRAN NAIR & THE HONOURABLE MR. JUSTICE B.P.RAY TUESDAY, THE 24TH MAY 2011 / 3RD JYAISHTA 1933 ITA.No. 204 of 2001() --------------------- AGAINST THE ORDER DATED 19/06/2001 IN COCH. IN ITA.222/1996 of I.T.A.TRIBUNAL,COCHIN BENCH .................... APPELLANT / APPELLANT -------------------- THE COMMISSIONER OF INCOME TAX,KOTTAYAM. BY ADV. SRI.P.K.R.MENON,SR.COUNSEL, GOI(TAXES) RESPONDENT(S): / RESPONDENT --------------- THE MIDLAND RUBBER & PRODUCE COMPANY LIMITED, ALLEPPEY. BY ADV. SRI.A.K.JAYASANKAR NAMBIAR THIS INCOME TAX APPEAL HAVING BEEN FINALLY HEARD ON 24/05/2011, THE COURT ON THE SAME DAY DELIVERED THE FOLLOWING: ITA NO.204/2001 APPENDIX APPELLANT'S EXHIBITS ANNEXURE-A :COPY OF ORDER OF THE ASSESSING OFFICER DATED 15/03/1995.ANNEXURE-B :COPY OF ORDER OF THE COMMISSIONER OF INCOME TAX(APPEALS) DATED 18/12/1995. ANNEXURE-C :COPY OF ORDER OF THE APPELLANTE TRIBUNAL DATED03/07/2001. //TRUE COPY// jg PA TO JUDGE. C.R. C.N.RAMACHANDRAN NAIR & BHABANI PRASAD RAY, JJ. ---------------------------------- I.T.A. No.204 of 2001 --------------------------------- Dated, this the 24[th] day of May, 2011 J U D G M E N T Ramachandran Nair, J. The short question arising in the appeal filed by the Department is whether the Tribunal was justified in holdingthat the assessee was engaged in export of processed goodsentitling it for deduction of export profit under Section 80HHC(3)(a) of the Income Tax Act (hereinafter referred to as the Actfor short). 2. We have heard learned Standing Counsel appearing for the appellant and learned counsel appearing for therespondent assessee. 3.The facts leading to the controversy are thefollowing:- The assessee is a plantation company, which is also engagedin trading of goods. The assessee purchases cardamom from ITA No.204/2001 farmers, clean up the same by washing, sort and grade it, andexports the best quality cardamom. However, the net result ofthe trading activity for the previous year relevant for theassessment year was a loss, that disentitles the assessee toclaim exemption on export profit in respect of trading ofgoods covered by clause (b) of Section 80HHC(3) of the Act.Even though the assessee is entitled to deduction of profitderived from export of goods i.e. cardamom, the assessee putforward a case before the Assessing Officer that before exportof the cardamom purchased by the assessee, it processed thesame by cleaning and grading, and exported only the bestquality cardamom, and therefore, it is entitled to exemptionon profit of export of processed goods provided under clause(a) of Section 80HHC(3) of the Act. The Assessing Officernoticed that the assessee is engaged only in trading of goodsin as much as the purchased cardamom was graded toseparate the inferior quality, and the assessee had in factexported cardamom in the same form in which it waspurchased. So much so, the Assessing Officer found that ITA No.204/2001 -3- cleaning and grading done by the assessee did not involve any'processing' within the meaning of sub clause (a) of Section80HHC(3) of the Act because there is no change, physical orotherwise, whatsoever of the goods processed, and so muchso, the assessee is not entitled to deduction under sub clause(a) of Section 80HHC(3) of the Act. In an appeal filed by theassessee, the CIT (Appeals) accepted the contention of theassessee that cleaning, drying and grading of cardamom doneby the assessee come within the meaning of “processing” thatentitles the assessee for exemption on export of “processedgoods” under sub clause (a) above referred, and the claim wasallowed. This was confirmed by the Tribunal, against whichthis appeal is filed by the Revenue. 4.The relevant statutory provisions with reference towhich we have to decide the case are extracted hereunder foreasy reference. 4.The relevant statutory provisions with reference towhich we have to decide the case are extracted hereunder foreasy reference. The relevant statutory provisions with reference to “80 HHC. Deduction in respect of profits retainedfor export business.- (1)Where an assessee, being an Indian companyor a person (other than a company) resident inIndia, is engaged in the business of export out of ITA No.204/2001 India of any goods or merchandise to which thissection applies, there shall, in accordance with andsubject to the provisions of this section, be allowed,in computing the total income of the assessee, adeduction of the profits derived by the assesseefrom the export of such goods or merchandise: ----- ----- (3)For the purposes of sub-section(1),- (a)where the export out of India is of goodsor merchandise manufactured or processed by theassessee, the profits derived from such export shallbe the amount which bears to the profits of thebusiness, the same proportion as the exportturnover in respect of such goods bears to the totalturnover of the business carried on by the assessee;(b)where the export out of India is of tradinggoods, the profits derived from such export shall bethe export turnover in respect of such tradinggoods as reduced by the direct costs and indirectcosts attributable to such export; ----- ----- Explanation .- For the purposes of this sub-section,- ----- ----- (f)“trading goods” means goods which are notmanufactured or processed by the assessee.” What is clear from the above provision is that the assessee is entitled to exemption on profit derived from export of goodseither in the course of trading of goods or goods ITA No.204/2001 manufactured or processed by the assessee. The formulaprovided in the above provision in the Act is to work out theproportionate profit attributable to export and to allow thesame. This is to cover persons like the assessee, who areengaged in local sale as well as in export sale of manufacturedor processed goods or trading goods. 5.In this case, the position conceded by theDepartment is that as the assessee is a merchant exporter it isentitled to deduction under clause (b) above stated, if theexport of trading goods resulted in profit. However, theassessee suffered a loss in the trading of goods, and so muchso, it is not entitled to any deduction under clause (b) abovestated. It is to overcome this difficulty, the assesseecanvassed for the position that the cardamom exported by itis “processed goods” entitling it for deduction under clause (a)above stated. Therefore the only question to be considered iswhether the cardamom purchased by the assessee andexported is “processed goods” falling within the meaning ofclause (a) above stated entitling the assessee for deduction as ITA No.204/2001 held by the first appellate authority and confirmed by theTribunal. 6.Learned Standing Counsel for the Revenue relied onthe decision of the Honourable Supreme Court of India in thecase of Delhi Cold Storage P. Ltd. v. Commissioner of IncomeTax, reported in Vol. 191 (1991) ITR 656, wherein theHonourable Court explained “Processing” in the followinglines:- "In common parlance, "processing" is understood asan action which brings forth some change oralteration of the goods or material which issubjected to the act of processing. The dictionarymeaning of the term is not very different from thismeaning in one sense, while various othermeanings of wider amplitude are also available. Theview taken by the Allahabad and Calcutta HighCourts did not find favour with the three judgeBench of this Court and, in clear terms, thejudgment indicates that processing involvesbringing into existence a different substance fromwhat the material was at the commencement of theprocess." Learned counsel for the assessee, on the other hand, relied on "In common parlance, "processing" is understood asan action which brings forth some change oralteration of the goods or material which issubjected to the act of processing. The dictionarymeaning of the term is not very different from thismeaning in one sense, while various othermeanings of wider amplitude are also available. Theview taken by the Allahabad and Calcutta HighCourts did not find favour with the three judgeBench of this Court and, in clear terms, thejudgment indicates that processing involvesbringing into existence a different substance fromwhat the material was at the commencement of theprocess." Learned counsel for the assessee, on the other hand, relied on the court decisions followed by the Tribunal and the findingsof the Tribunal on the facts in regard to the “processing” done ITA No.204/2001 by the assessee. What is clear from the conclusion drawn bythe Honourable Supreme Court in the above decision and fromthe meaning of the word “processing” found in dictionaries isthat processing should involve some change or alteration inthe goods. Certainly processing is quite distinct frommanufacturing and the same does not amount tomanufacturing. However, it should result in some form ofchange in the goods processed. In other words, after theprocessing the original goods should not retain itscharacteristics including the physical form. We do not thinkthere is any need for us to consider exhaustively which are theactivities that amount to “processing”. We have to onlyconsider whether the activities carried on by the assessee onthe cardamom purchased before the export or sale amount to“processing of goods” or the goods exported is “processedgoods”. While considering the claim of the assessee we haveto keep in mind the scope of clause (b) read with clause (f) ofthe explanation to the said Section above stated, and if theassessee falls within those clauses then certainly the assessee ITA No.204/2001 cannot be said to be an exporter of processed goods. In otherwords, what is first to be considered is whether the assessee isengaged in export of goods in the form in which it ispurchased (trading goods) and if so then the assessee cannotbe said to be engaged in export of processed goods. 7.We have gone through the details of the activitiescarried on by the assessee in the purchase and export ofcardamom. Matured cardamom plucked from plants is greenin colour containing extraneous matters and particles. Theonly processing done by the planters is drying the cardamomwithout smoking. Invariably drying is done by sending hot airthrough pipes in the chamber cardomom. On drying, the bestquality cardamom will acquire dark green colour while the notso good quality will have light yellow colour. What is clearfrom the orders of the first appellate authority and theTribunal is that the assessee purchased uncleaned driedcardamom and all what the assessee has done is washing,drying and grading the cardamom between the best quality forexport and the inferior quality not fit for export. No colour or ITA No.204/2001 addition of any material is permissible to the cardamom andthe cardamom which is obtained from the plant in the form ofa capsule is exported in same form. The assessee has no casethat the assessee either changed the physical form or madeany change whatsoever to the cardamom purchased beforeexport, and what was done by the assessee is that it justwashed the cardamom to remove extraneous matters andparticles, if any, on the surface of the cardamom, andexported the same. In our view, since the commodity purchased was ITA No.204/2001 addition of any material is permissible to the cardamom andthe cardamom which is obtained from the plant in the form ofa capsule is exported in same form. The assessee has no casethat the assessee either changed the physical form or madeany change whatsoever to the cardamom purchased beforeexport, and what was done by the assessee is that it justwashed the cardamom to remove extraneous matters andparticles, if any, on the surface of the cardamom, andexported the same. In our view, since the commodity purchased was exported in the same form, the transaction falls under tradingof goods falling under clause (f) read with clause (b) abovereferred, and therefore, we cannot say that the very same itemfalls under clause (a) above referred which provides for exportof manufactured or processed goods. In other words, thepurchased commodity is exported in the same form and priorto such export the assessee washed and cleaned the productwhich does not involve any change physically or otherwisewhatsoever to the commodity. In our view, the first appellate ITA No.204/2001 authority as well as the Tribunal did not consider the issue inthe correct perspective because if they have considered as towhether the assessee was engaged in trading of goods i.e.purchase and export of the commodity in the same form, therewas no escape from the conclusion that the assessee'sactivities squarely fall under trading of goods within themeaning of clause (f) above referred. In our view, the findingof the lower authorities that the cleaning and grading ofcardamom before export involve processing within themeaning of clause (a) above referred cannot be sustained. Thisis because the commodity purchased has not undergone anychange in the course of washing, drying or grading done bythe assessee and the goods even after processing retained allthe characteristics and physical form to call it processedgoods. In our view, what is required to be considered is notwhether the assessee has done any processing of purchasedgoods before export, but the processing of the goods resultedany change to the original form of the goods to treat it as aprocessed goods, export of which alone will entitle the ITA No.204/2001 -11- assessee for deduction of profit under clause (a) abovereferred. Since the washing, drying and grading of driedcardamom purchased by the assessee before export do notmake the cardamom exported as processed cardamom withinthe meaning of clause (a) above stated, the assessee is notentitled to deduction. Consequently, we allow the Income TaxAppeal by reversing the orders of the first appellate authorityand the Tribunal, and by restoring the assessment order. (C.N.RAMACHANDRAN NAIR, JUDGE) (BHABANI PRASAD RAY, JUDGE) jg