M/S.swayam Consultancy (P) Ltd., Pashamylaram, Medak v. $ The Income Tax Officer, Ward 3(2), Hyderabad

* THE HON’BLE SRI JUSTICE V.V.S.RAOANDTHE HON’BLE SRI JUSTICE RAMESH RANGANATHAN INCOME TAX TRIBUNAL APPEAL No.62 of 2011 % 26.4.2011 M/s.Swayam Consultancy (P) Ltd., Pashamylaram, Medak VERSUS ... Appellant $ The Income Tax Officer, Ward 3(2), Hyderabad ... Respondent < GIST: > HEAD NOTE: ! Counsel for Appellant: Sri M.V.J.K. Kumar^Counsel for Respondent: Sri A.Rajasekhar Reddy, Standing Counsel ? Cases referred1. AIR 1992 SC 13712. (2003) 259 ITR 684 (SC)3. (1996) 222 ITR 606 (All)4. (2001) 248 ITR 69 (Raj) THE HON’BLE SRI JUSTICE V.V.S.RAOAND THE HON’BLE SRI JUSTICE RAMESH RANGANATHAN INCOME TAX TRIBUNAL APPEAL No.62 of 2011 April 26, 2011 Between: M/s.Swayam Consultancy (P) Ltd., Pashamylaram, Medak AND … Appellant The Income Tax Officer, Ward 3(2), Hyderabad … Respondent THE HON’BLE SRI JUSTICE V.V.S.RAOANDTHE HON’BLE SRI JUSTICE RAMESH RANGANATHAN INCOME TAX TRIBUNAL APPEAL No.62 of 2011 JUDGMENT: (Per Hon’ble Sri Justice V.V.S.Rao) This appeal under Section 260A of the Income Tax Act, 1961 (the Act) isagainst the order dated 31.1.2011 of the Income Tax Appellate Tribunal,Hyderabad Bench ‘A’, in ITA No.1242/H/2010. By the said order, the appeal ofthe assessee against the order dated 03.2.2010 of the Commissioner of IncomeTax (Appeals)-IV, Hyderabad was dismissed holding that the appellant is notentitled to claim deduction under Section 10B of the Act. The appellant is engaged in the manufacturing and assembling of wireand cable drawing/manufacturing machines. It is an assessee within thejurisdiction of the respondent. The assessee filed income tax returns for theyear 2007-08 declaring loss of Rs.45,469/-. Though the surplus, as per theprofit and loss account, is Rs.1,29,79,828/-, the assessee claimed deduction ofRs.1,28,97,161/- under Section 10B of the Act. They contended that they are a100% export oriented unit (EOU) as approved under the scheme of theGovernment of India, and they are entitled for deduction under Section 10B ofthe Act. The assessing officer noticed that the goods were cleared from thefactory on 04.11.2006 and, as per the invoice-cum-challan, the place of deliveryis at Attola Village in Silvasa (Daman & Nagar Haveli Union Territory). Duringthe scrutiny of the return, the assessee pleaded that the machinery wasdelivered to M/s.Chandra Proteco Ltd., (the Agent for short) under Section143(3) of the Act on the express instructions of the foreign buyer, M/s.ProtecoDe Marino Ozino and C Sass, Italy (the Proteco for short) and, therefore, it isdeemed to be an export for the purpose of Section 10B of the Act. Theassessing officer disallowed deduction holding that the assessee did not fulfilthe conditions laid down for deduction under Section 10B of the Act; the goodswere delivered in India; and they were not exported out of India. Beingaggrieved, the appellant preferred an appeal to CIT (A). While holding that theassessee did not furnish any evidence that the goods had moved out of Indiaso as to fall within the definition of “export”, the appeal was dismissed. Thisview found favour with the learned Tribunal as well. Learned Tribunal considering the Explanation to Section 80HHC of theAct held that delivery of the machinery to the Proteco’s agent in India does notamount to export out of India. The relevant observations are as follows.In our opinion, in view of the above provisions of the IT Act, deemedexport is not recognized by the provisions of the IT Act. Evenotherwise, as seen from the facts of the case, it is an admitted fact thatM/s.Chandra Proteco Ltd., is not the buyer of the goods. The saidconcern is only the ‘Consignee’, at whose place the delivery of thegoods sold by the assessee to M/s.Proteco De Marino Ozino and CSass (Italy), was to be given at their request of said buyer. Therefore, Learned Tribunal considering the Explanation to Section 80HHC of theAct held that delivery of the machinery to the Proteco’s agent in India does notamount to export out of India. The relevant observations are as follows.In our opinion, in view of the above provisions of the IT Act, deemedexport is not recognized by the provisions of the IT Act. Evenotherwise, as seen from the facts of the case, it is an admitted fact thatM/s.Chandra Proteco Ltd., is not the buyer of the goods. The saidconcern is only the ‘Consignee’, at whose place the delivery of thegoods sold by the assessee to M/s.Proteco De Marino Ozino and CSass (Italy), was to be given at their request of said buyer. Therefore, it is not the case that the assessee had sold the goods to other EOUagainst relevant declaration in Form CT 3, so as to consider thetransaction as an export. In view of this fact, we do not find any meritin the contention that there was a case of sale from one EOU toanother. Therefore, for the mere fact that there was movement ofgoods from one bonded warehouse to another cannot be taken tomean that there was an ‘Export’. In order to claim deduction u/s.10B, itmust be proved by the assessee that such sale transaction mustinvolve clearance at any Customs station as defined in the CustomsAct. Otherwise, there was possibility that goods after the purchasemay not be exported at all and yet the benefit may be claimed. Since inthe present case, the transaction involves no clearance at the Customsstation, it cannot be treated as export out of India. The Counsel for the appellant, placing reliance on Central Coal Fields vState of Orissa[[1]],CIT v Silver and Arts Palace[[2]],Ram Babu and sons v Union of India[[3]]and CIT v Silver and Arts Palace[[4]], would contend thatSection 10B of the Act is intended to extend the benefit of exemption toIndustries and, therefore, it should be construed liberally. He would submit thatthe machinery intended for export is delivered to the agent of Proteco and, eventhough it is delivered in India at Silvasa, it should be deemed to be delivery to aforeign buyer, and a delivery on export. He points out that payment was madein convertible foreign exchange as evidenced by Foreign Inward RemittanceCertificate (FIRC) issued by the State Bank of Hyderabad and, therefore, thelearned Tribunal erred in rejecting the contention of the appellant. According tothe Counsel, the FIRC is conclusive proof of export and, therefore, theassessee is entitled for claiming deduction under Section 10B of the Act. Exports and imports are regulated by the Customs Act, 1962 which,among others, repealed the Sea Customs Act, 1878. Section 2(18) of theCustoms Act defines “export” to mean “taking out of India to a place outsideIndia”. As defined in Section 2(16) of the Customs Act “entry” in relation togoods, inter alia, means an entry made in a bill of entry, shipping bill or bill ofexport. Sections 50 and 51 of the Customs Act stipulate the procedure for entryof goods for exportation as well as clearance of goods for exportation. Forready reference they are quoted below. Section 50. Entry of goods for exportation.- (1) The exporter of anygoods shall make entry thereof by presenting to the proper officer inthe case of goods to be exported in a vessel or aircraft, a shipping bill,and in the case of goods to be exported by land, a bill of export in theprescribed form. (2) The exporter of any goods, while presenting a shipping bill or bill ofexport, shall at the foot thereof make and subscribe to a declaration asto the truth of its contents. Section 50. Entry of goods for exportation.- (1) The exporter of anygoods shall make entry thereof by presenting to the proper officer inthe case of goods to be exported in a vessel or aircraft, a shipping bill,and in the case of goods to be exported by land, a bill of export in theprescribed form. (2) The exporter of any goods, while presenting a shipping bill or bill ofexport, shall at the foot thereof make and subscribe to a declaration asto the truth of its contents. Section 51. Clearance of goods for exportation.- Where the properofficer is satisfied that any goods entered for export are not prohibitedgoods and the exporter has paid the duty, if any, assessed thereon andany charges payable under this Act in respect of the same, the properofficer may make an order permitting clearance and loading of thegoods for exportation.officer is satisfied that any goods entered for export are not prohibitedgoods and the exporter has paid the duty, if any, assessed thereon andany charges payable under this Act in respect of the same, the properofficer may make an order permitting clearance and loading of thegoods for exportation. The exporter of any goods has to present a shipping bill making entry inrelation to the goods to be exported in a vessel and the shipping bill should contain a declaration as to the truth of the contents thereof. After the officer issatisfied that the goods entered in the shipping bill are not prohibited goods,and the exporter has paid the duty of customs and charges leviable under theCustoms Act, he may make an order for clearance and loading the goods forexportation. Therefore the document evidencing clearance and loading thegoods for exportation is conclusive proof of export outside India. It is also thefact that, for the purpose of Central Excise Act and the Customs Act, certaintransactions involving sale of goods in India are treated as “deemed exports”under different schemes evolved by the Central Government to facilitate growthof income from export and import duties. But for the purpose of Income-tax Actas we shall presently see, the law neither contemplates nor recognizes such“deemed exports”. The term “export” is not defined in the Income-tax Act though the term“export turnover” is explained/defined by four provisions, namely, theExplanations to Sections 10A, 10AA, 10B and 80HHC of the Act. Be it noted,Section 10A of the Act enables an undertaking in a free trade zone to claimdeduction of profits and gains from the export of articles or things or computersoftware for a period of 10 consecutive years. Similarly, under Section 10AA ofthe Act, a newly established unit in a Special Economic Zone can claimdeduction of 100% profits and gains derived from the export for a period of 10years and, under Section 10B of the Act, an assessee can claim deduction ofprofits and gains as are derived by 100% EOUs from the export of articles orthings for a period of 10 years. Section 80HHC of the Act is to the effect that anassessee, being an Indian company engaged in the business of ‘export out ofIndia’, may be allowed deduction of the profits to the extent specified in Section80HHC(1B) of the Act. The Explanation to all these provisions has a definitebearing in understanding Section 10B(3) of the Act on which the petitioner’sCounsel placed considerable emphasis. For ready reference, we quote thesame hereunder. Section 10B(3). This section applies to the undertaking, if the saleproceeds of articles or things or computer software exported out ofIndia are received in, or brought into, India by the assessee inconvertible foreign exchange, within a period of six months from theend of the previous year or, within such further period as the competentauthority may allow in this behalf. Section 10B(3). This section applies to the undertaking, if the saleproceeds of articles or things or computer software exported out ofIndia are received in, or brought into, India by the assessee inconvertible foreign exchange, within a period of six months from theend of the previous year or, within such further period as the competentauthority may allow in this behalf. The language of Section 10B (3) of the Act is plain. It does not admit anyother meaning than what is conveyed by the language used therein. Thebenefit under Section 10B (1) of the Act is available to 100% EOUs only if thesale proceeds of articles or things exported out of India are received inconvertible foreign exchange. Two conditions should be satisfied before thebenefit under Section 10B(1) of the Act is claimed. There should be export ofarticles or things or computer software out of India, and the sale proceedstherefor shall be received in convertible foreign exchange. One would notexclude the other nor only one condition would satisfy the eligibilityconditionalities. The intention of the Parliament, in granting benefit to the unitsin free trade zones, special economic zones and EOUs, is to allow the benefitof deduction only when the articles or things or computer software are actuallyand factually exported out of India for foreign currency. This is made very clear (emphasis supplied Sections 10A, 10AA, 10B and 80HHC of the Act allow an assessee toclaim deduction of profits from export of articles. These provisions, in effect,deal with different categories of eligible undertakings and establishmentsengaged in the export of articles and things in various locations. TheExplanation to these provisions defines/explains the “export turnover”. Thefreight and telecommunication charges incurred in connection with the “deliveryof articles or things outside India” during the course of export cannot bereckoned as “export turnover”. This clearly indicates that when the profits fromexports are allowed as deduction, the Parliament intended the actual export outof India of the articles or things. The intention was never to consider thedelivery of goods to a foreign buyer in India as amounting to export. The decisions relied by the petitioner’s Counsel do not in any mannerassist the point argued by him. Indeed they support the view expressed by ussupra. Explanation (aa) of Section 80HHC of the Act is clarificatory in natureand explains a transaction which cannot be treated as “export out of India”. Asale in a shop, emporium, or other establishment in India which does notrequire any clearance in any Customs station is not considered as “export outof India”. The view of the Allahabad High Court in Ram Babu and Sons to thesaid effect followed by the Rajasthan High Court received imprimatur from theSupreme Court in Silver and Arts Palace. Suffice to excerpt the following The decisions relied by the petitioner’s Counsel do not in any mannerassist the point argued by him. Indeed they support the view expressed by ussupra. Explanation (aa) of Section 80HHC of the Act is clarificatory in natureand explains a transaction which cannot be treated as “export out of India”. Asale in a shop, emporium, or other establishment in India which does notrequire any clearance in any Customs station is not considered as “export outof India”. The view of the Allahabad High Court in Ram Babu and Sons to thesaid effect followed by the Rajasthan High Court received imprimatur from theSupreme Court in Silver and Arts Palace. Suffice to excerpt the following observations from the decision of the Supreme Court which reads as under.The Allahabad High Court specifically considered the effect ofintroduction of Explanation (aa) to Section 80HHC of the Act and hadtaken view in Ram Babu and sons v Union of India, (1996) 222 ITR 606(All), that this Explanation means that, for the purpose of this section,there will be no export out of India if two conditions are cumulativelyfulfilled viz., (a) it is a transaction by way of sale or otherwise in a shop,emporium or establishment situate in India, and (b) that it does notinvolve clearance in any customs station as defined in the CustomsAct. This view of the Allahabad High Court had been consistentlyfollowed by several other High Courts, including the Rajasthan HighCourt itself in ITO v Vaibhav Textiles, (2002) 258 ITR 346 (Raj).The Allahabad High Court specifically considered the effect ofintroduction of Explanation (aa) to Section 80HHC of the Act and hadtaken view in Ram Babu and sons v Union of India, (1996) 222 ITR 606(All), that this Explanation means that, for the purpose of this section,there will be no export out of India if two conditions are cumulativelyfulfilled viz., (a) it is a transaction by way of sale or otherwise in a shop,emporium or establishment situate in India, and (b) that it does notinvolve clearance in any customs station as defined in the CustomsAct. This view of the Allahabad High Court had been consistentlyfollowed by several other High Courts, including the Rajasthan HighCourt itself in ITO v Vaibhav Textiles, (2002) 258 ITR 346 (Raj). It is the admitted position herein that initially Proteco agreed to takedelivery of wire/cable drawing machines at Hyderabad Ex-factory,subsequently Proteco sent a communication advising the appellant to deliverthe machinery to their Agent at Silvasa which is also a 100% EOU, thepayment was received in convertible foreign exchange as evidenced by FIRC,and the goods were delivered to the Agent under a proforma invoice in thename of the foreign buyer. This transaction of manufacturing machines in Indiaby EOU and delivering them in India to another 100% EOU, which is alleged tobe the agent of a foreign buyer, does not amount to “export out of India" eitherunder the Customs Act or under the Income-tax Act. The assessing officer, theappellate authority and the learned Tribunal appreciated the principle of lawand applied it correctly. The appeal is misconceived. The appeal, for the above reasons, is dismissed, without any order as tocosts. _______________ (V.V.S.RAO, J) April , 2011 ______________________________(RAMESH RANGANATHAN, J) NOTE:L.R. Copy be marked.(By order)YS [1]AIR 1992 SC 1371[2](2003) 259 ITR 684 (SC)[3](1996) 222 ITR 606 (All)[4](2001) 248 ITR 69 (Raj)