ORDER
R.P. Garg, Accountant Member
1 to 3. [These paras are not reproduced here as they involve minor issues.]
4. The next ground is concerning the claim of the assessee under Section 80HHC. The assessee had started the business of export of garments. The assessee claimed deduction under Section 80HHC on its export turnover. As no certificate from the bank about the proof of receipt of money in convertible exchange was filed, the Assessing Officer stated that 80HHC deduction would be allowed under Section 155 on production of the certificate. The assessee filed the required certificate and the assessing officer allowed 80HHC deduction at a sum of Rs. 35,425 being 1 per cent of Rs. 35,42,557 being the f.o.b. value of the goods exported. Besides the’ above claim, the assessee claimed 80HHC deduction on the sale of Rs. 42,77,636 across the counter to foreign tourists made in foreign currency or in the form of foreign credit card/cheques by raising an additional ground. The Commissioner (Appeals) following the Tribunal decision in the case of Natraj Jewellers v. ITO [IT Appeal No. 4635 (Bom.) of 1982 dated 17-1-1986] allowed the assessee’s claim as he found that the facts of that case and the present case were exactly identical and in that case the Tribunal had held in favour of the assessee in both the situations, viz. (i) directly exported out of India and consideration received in foreign exchange, and (ii) goods sold across the counter and payments received in foreign exchange.
5. The learned Departmental Representative, Shri Keshav Prasad, submitted that Natraj Jewellers’ case (supra) decided by the Tribunal was for deduction under Section 35B and the claim was for advertisements, etc. for promotion of exports outside India. Section 80HHC, on the other hand, he submitted, allows deduction on turnover of export outside India received in foreign exchange. This is not a case of actual export, but sales made by a shop in the hotel to the foreign customers. Sales were in India and not of export of goods outside India. Receipt of foreign exchange by itself, he submitted, is of no consequence. There was no necessity for a finding that sales across the counter were also export sales and for allowing 35B deduction what was to be seen was the expenses incurred for promotion of exports.
6. The learned representative of the assessee Sh. S.K. Khandhari, on the other hand, submitted that to be eligible for deduction under Section 80HHC two conditions are required to be fulfilled, viz. (i) that there must be export and (ii) that consideration must be received in foreign exchange. He referred to the Exchange Control Manual – 1987 Edition, Item F-3 dealing with tourists’ purchases permittingthe tourists to take goods out of India on production of documentary evidence to show that the goods were purchased against payment of foreign exchange. He then referred to the Import & Export Policies for 1981-82 and 1982-83 treating sales to foreign tourists as deemed export and entitling an assessee to import replenishment licences for such deemed export. He also brought to our notice the provisions of the Finance Act, 1991 providing that 80HHC deduction would not be eligible on counter sales, but only with effect from 1-4-1986. From this, he contended, that for this year even the Legislature did not think to deny deduction on such sales. As per Article 73(3) of the Policy, the assessee had kept the necessary details of the sales made on the counter to the foreign tourists in foreign exchange as required under this Article. He further submitted that the assessee has been granted a money changer licence for conversion of currencies. He then referred to the decision of the Tribunal in the cases of Marble Emporium v. ITO (IT Appeal Nos. 1396 and 1397 (Delhi) of 1982] and vice-versa in I.T.A. Nos.1807 & 1808 (Delhi) 1982; Natraj Jewellers (supra); Indian Handicrafts Emporium v. ITO I IT Appeal No. 1029 (Delhi) of 1979J and Subhash Emporium v. ITO (IT Appeal Nos. 1496, 1497 and 1365 (Delhi) of 1982]. All these decisions are for the deduction under Section 35B and as per the submissions of the assessee even if a finding that counter sales amount to export sales was not necessary, the observation in the above decisions do help the assessee if seen in the over-all context of the matter. The learned Departmental Representative, in reply, submitted that even if the counter sale is a deemed export for replenishment entitlement, the present case would not be covered by the provisions of Section 80HHC, which requires export out of India and not the deemed export in India.
7. We have heard the parties and considered their rival submissions. The provisions of Section 80HHC, as they stood at the relevant time, are as under:
80HHC. (7) Where the assessee, being an Indian company or a person (other than a company) who is resident in India, exports out of India during the previous year relevant to an assessment year, goods or merchandise to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, the following deductions, namely :-
(a) a deduction of an amount equal to one per cent, of the export turnover of such goods or merchandise during the previous year; and
(b)a deduction of an amount equal to five per cent of the amount by which the export turnover of such goods or merchandise during the previous year exceeds the export turnover of such goods or merchandise during the immediately preceding previous year.
(2)(a) This section applies to all goods or merchandise [other than those specified in Clause (b)1 if the sale proceeds of such goods or merchandise exported out of India are receivable by the assessee in convertible foreign exchange.
(b) The goods or merchandise referred to in Clause (a) are the following, namely:-
(i) agricultural primary commodities, not being produce or plantations;
(ii) mineral oil;
(iii) minerals and ores; and
(iv) such other goods or merchandise as the Central Government may, by notification in the Official Gazette, specify in this behalf.
(3) No deduction under Clause (b) of Sub-section (1) shall be allowed unless the assessee had, during the immediately preceding previous year, exported out of India goods or merchandise to which this section applies.
Explanation : For the purposes of this section,-
(a) ‘convertible foreign exchange’ means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the Foreign Exchange Regulation Act, 1973, and any rules made thereunder;
(b) ‘export turnover’ means the sale proceeds of any goods or merchandise exported out of India, but does not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962.
This section was brought in by the Finance Act, 1983 with effect from 1-4-1983. The object of this section was to grant incentive to encourage export turnover. The deduction is made available on that export turnover, the proceeds whereof are received in foreign exchange. It is not available on other export turnover, the receipts whereof are in Indian currency or a currency which is not a convertible foreign exchange. The object, therefore, appears to be to encourage more inflow of convertible exchange and not the mere export of goods as was there for granting weighted deduction under Section 35B where the deduction is on the expenditure incurred to promote exports irrespective of the fact whether there was any export or not or whether export receipts were received in convertible exchange or in Indian Rupee. Making it available with reference to the realisation in convertible exchange is suggestive of the fact that it was with a view to encourage foreign exchange inflow. We find that this deduction was originally brought under Section 89A by Finance Act, 1982 and in this connection we may refer to the Hon’ble Finance Minister’s speech as under :
I will now come to some proposals regarding foreign exchange earnings. I propose to provide some tax relief to exporters whose export turnover for any year exceeds that of the immediately preceding year by more than 10 per cent. The tax relief, to be calculated at a specified percentage of such excess turnover, would be limited to 10 per cent of the income-tax otherwise payable on export profits. The rate at which the tax relief will be calculated and the goods qualifying for the purposes of this concession will be notified by the Central Government.
The amount of deduction was to be provided by Sub-section (3) thereof and “the need to earn foreign exchange” was one of the factors to be taken into consideration for determining the amount of deduction by Clause (c) of Sub-section (4) thereof. Findingthese provisions as cumbersome, the Finance Minister in his Budget speech for the Financial year 1983-84, with a view to simplifying and liberalising the scheme, introduced the present scheme under Section 80HHC making it obligatory that the sale proceeds must be receivable in convertible foreign exchange. Therefore, the avowed object is to encourage inflow of convertible foreign exchange. If that object is kept in mind, the sale at counter of a shop in foreign exchange has to be considered as export turnover, particularly when the goods were intended for sending or taking outside India by the foreign tourists.
8. The following conditions are to be satisfied to avail this deduction, viz: (i) there must be export of goods or merchandise out of India; (ii) the goods are not such as are excluded by Sub-section (2), and (iii) the consideration of sale is received in convertible foreign exchange. There is no dispute in this case that the assessee had complied with the conditions No. (ii) and (iii) and the dispute is only with regard to the fulfilment of the condition No. (i). This is admittedly not a case where the goods were sold outside India. The goods were sold across the counter in India. They were sold to foreign customers/tourists. The items sold were not consumable, but handicrafts, etc. which a foreigner would like to take abroad. Though there is no evidence to show that they were sent abroad by them or by the assessee on their behalf, such goods sold could not be disposed of within the country under the rules framed under Foreign Exchange Regulations Act. In substance, therefore, such type of sales are to be treated as export sales.
9. The term “export turnover” has been defined to mean the sale proceeds of any goods or merchandise exported out of India, but does not include freight or insurance attributable to the transport of the goods or merchandise from the customs station as defined in the Customs Act, 1962. The term “export” is not defined in that Act. Its dictionary meaning is to carry or send goods out of country, as goods in commerce. As noun, it means as an act of exporting; that which is exported; a commodity which is or may be sent from one country to another in traffic. Therefore, goods sold, which are to be carried or sent outside India would be export sales. It includes both visible as well as invisible exports. Invisible form of export is such items in a national trade balance as money spent by tourists from abroad. Visible export on the contrary are goods sold abroad by traders. Sale on the counter to the foreign tourists in foreign exchange, therefore, would be invisible form of export sale as per the dictionary meaning.
10. In commerce, the export sale is one which occasions export of goods out, of India, where there is (i) a common intention of both the seller and the buyer to export; (ii) an obligation to export, and (iii) actual export. The obligation to export may arise from statute, from contract or from the nature of transaction or in other words it may be implicit or explicit. But the bond between the sale and export must be such as cannot be broken without a breach of obligation. When the goods were sold to foreign tourists, there was a common intention of both the parties, i.e. that the goods shall be carried outside India. There was an obligation also on the part of the foreign tourists to take them out of India inasmuch as such goods could not have been thereafter dealt with or disposed of in India. Some of the goods were admittedly taken out of India and there is no evidence to the contrary to the effect that rest of the goods were not so taken out or sent out of India. Here one should not forget that the assessee’s sales on counter were not of consumable items, but articles of handicrafts etc. which one would buy in India only to take out to their home-country for personal possession or to make a gift thereof to a friend in foreign country. Item F-3 of the Exchange Control Manual allows such articles to be taken out by bona fide foreign tourists without any permission from the Reserve Bank of India on production of documentary evidence to show that the goods were purchased against payment of foreign exchange. In these circumstances, in our opinion, the assessee has complied with all the conditions for the sale made in the course of export, as commercially understood.
11. From the above, it is clear that both as per the dictionary meaning of the term “export” as well as its meaning as commercially understood, the sales at the counter to foreign tourists in foreign exchange would be export sales for the purposes of Section 80HHC. We may state here that the four decisions referred to above have held that the sales at the counter to the foreign tourists would partake the character of export sale. It is true that those observations were made in connection with the deduction under Section 35B and that deduction is available on the expenditure, but the fact remains that that expenditure is also allowed for encouraging export and, therefore, the finding given would be equally applicable to a case under Section 80HHC.
12. We may also extract the following observations in the explanatory notes in respect of the proposed amendment of Section 80HHC by the Finance (No. 2) Act, 1991, viz:
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 Department’s view, 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, it is proposed to clarify 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.
This amendment will take effect retrospectively from the 1st April 1986, the day on which the substituted Section 80HHC took effect. It will accordingly, apply in relation to assessment year 1986-87 and subsequent years.
The said clarification is made applicable with effect from 1-4-1986 i.e. assessment year 1986-87 i.e. the day on which the substituted Section 80HHC took effect. We are in the present case concerned with assessment year 1983-84 when Section 80HHC as it stood before its amendment by the Finance Act, 1985 with effect from 1-4-1986, was applicable. Therefore, we are of the opinion that the benefit of deduction under Section 80HHC has to be given in respect of the sales effected to foreign tourists across the counter in foreign exchange for the period prior to 1-4-1986. The assessment year 1983-84 being a period prior to 1-4-1986, the assessee is entitled to such relief. It may further be stated that such counter sales are treated as deemed export for the purposes of granting REP licences. Though the assessee had not applied for such entitlement, yet we find an example to this effect in the case of Burlingtons of Bombay [IT Appeal No. 5611 (Bom.) of 1987 dated 4-10-1991], wherein import entitlement to the extent of Rs. 9,700 on one occasion and Rs. 6,800 on another occasion was noticed to have been granted to the assessee. These facts would thus establish that even the relevant authority, i.e. the Joint Chief Controller of Export & Import has treated such sales to the tourists in foreign exchange as export sales while issuing the import licence. In this case, the Tribunal has allowed the assessee’s claim for 80HHC deduction.
13. Taking into consideration all the facts and circumstances, we are of the opinion that the assessee was entitled to 80HHC deduction in respect of the counter sales and the Commissioner (Appeals) was justified in allowing the same. 14. [This para in not reproduced here as it involves minor issue.]