DELIVERY OF GOODS TO A FOREIGN BUYER IN INDIA DOES NOT AMOUNT TO EXPORT.

[Mr. M. GOVINDARAJAN]

                        Exports and imports are regulated by the Customs Act, 1962.   Sec. 2(18) of the Customs Act defines ‘export’ as taking out of India to a place outside India.  Sec. 2(16) of the Customs Act defines the term ‘entry’ in relation to goods, inter alia, means an entry made in a bill of entry, shipping bill or bill of export.  The term ‘export’ is not defined in Income Tax Act, 1961.

                        Sec. 50 of the Customs Act provides that the exporter of any goods shall make entry thereof by presenting to the proper officer in the 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 the prescribed form.   The exporter of any goods, while presenting a shipping bill or bill of export, shall at the foot thereof make and subscriber to a declaration as to the truth of its contents.

                        Section 51 of the Customs Act provides that where the proper officer is satisfied that any goods entered for export are not prohibited goods and the exporter has paid the duty, if any, passed thereon and any charges payable under this Act in respect of the same, the proper officer may make an order permitting clearance and loading of the goods for exportation.

                        For the purpose of Central Excise Act and the Customs Act, certain transactions involving sale of goods in India are treated as ‘deemed exports’ under different schemes evolved by the Central Government to facilitate the growth of income from export and import duties.   But for the Income tax purpose the law neither recognizes such ‘deemed exports’.

                        The term ‘export turnover’ is explained by four provisions of the Income Tax Act namely,  the explanations to Sections 10A, 10AA, 10B and 80HHC.

• Sec. 10A enables an undertaking a free trade zone to claim deduction of profits and gains from the export of articles or things or computer software for a period of 10 consecutive years;
• Section 10AA, a newly established unit in a special economic zone can claim deduction of 100% profits and gains derived from the export for a period of 10 years;
• Section 10B allows an assessee to claim deduction of profits and gains derived by 100% EOUs from the export of articles or things for a period of 10 years.
• Section 80HHC allows an Indian company engaged in the business ‘export out of India’ deduction of the profits to the extent specified in Section 80HHC(1B) of the Act.

With the above introduction in regard to ‘export’ we may discuss whether the delivery of goods to a foreign buyer in India amounts to export with reference to decided case law by the AP High Court in ‘Swayam Consultancy P Limited V. Income Tax Officer’ – (2011) 336 ITR 189 (AP).        

                        In this case the appellant is engaged in the manufacturing and assembling of wire and cable drawing/manufacturing machines.  The appellant filed income tax return for the year 2007-08 declaring loss of Rs.45,469/- after deducting a sum of Rs.1,29,79,828/-  under Section 10B of the Act.  The appellant is a 100% EOU as approved under the scheme of the Government of India and entitled deduction under Section 10B of the Act.   The Assessing Officer noticed that the goods were cleared from the factory as per the invoice-cum-challan, the place of delivery is Attola Village in Silvasa.  In the return the assessee indicated that the machinery was delivered to M/s Chandra Proteco Limited under Section 143(3) of the Act on the express instructions of the foreign buyer M/s Proteco De Marino Ozina and C Sass, Italy and contended that it is deemed to be an export for the purpose of Section 10B of the Act.  The Assessing Officer disallowed the claim since the assessee did not fulfill the conditions laid down for deduction under Section 10B of the Act; the goods were delivered in India and they were not exported out of India.  

                        The assessee filed an appeal before the Commissioner of Income Tax (Appeals).  The Commissioner dismissed the appeal holding that the assessee did not furnish any evidence that the goods had moved out of India so as to fall within the definition of ‘export’.

                        The Tribunal, on appeal of the assessee against the order of Commissioner (appeals) held that for the mere fact that there was movement of goods from one bonded warehouse to another it cannot be taken to mean that there was an ‘export’.   It further held that in order to claim deduction under Section 10B, it must be proved by the assessee that such sale transaction must involve clearance at any customs stations as defined in the Customs Act, otherwise there was a possibility that the goods after the purchase may not be exported at all and yet the benefit may be claimed.  Since in the present case, the transaction involves no clearance at the Customs station, it cannot be treated as export out of India.

                        The assessee moved to High Court for appeal.   In the appeal before High Court the assessee put forth the following submissions:

• Sec 10B is intended to extend the benefit of exemption to industries and, therefore, it should be construed liberally;
• The machinery intended for export is delivered to the agent of Proteco and even though it is delivered in India at Silvasa it should be deemed to be delivery to a foreign buyer and a delivery on export;
• The payment was made in convertible foreign exchange as evidence by the Foreign Inward Remittance Certification (FIRC) issued by the State Bank of Hyderabad;
• The FIRC is conclusive proof of export and there the assessee is entitled for claiming deduction under Section 10B of the Act.

The High Court held that the benefit under Section 10B(1) of the Act is available to 100% EOUs only if the sale proceeds of articles or things exported out of India are received in convertible foreign exchange.  Two conditions should be satisfied before the benefit under Section 10B (1) of the Act is claimed-

• There should be export of articles or things or computer software out of India; and
• The sale proceeds therefore shall be received in convertible foreign exchange

One would not exclude the other nor only one condition would satisfy the eligibility conditionalities.   The intention of the Parliament to allow such benefit of deduction only when the articles or things or computer software are actually and factually exported out of India for foreign currency.  This is made very clear by the Explanation 2(iii) to Section 10B.   This explanation defines ‘export turnover’.  According to this explanation ‘export turnover’ means the consideration in respect of export by the undertaking of articles or things or computer software received in, or brought into, India by the assessee in convertible foreign exchange in accordance with sub section (3) but does not include freight, telecommunication charges or insurance attributable to the delivery of the articles or things or computer software outside India or expenses, if any, incurred in foreign exchange in providing the technical services outside India.   The High Court held that the explanation clearly indicates that when the profits from exports are allowed as deduction, Parliament intended the actual export out of India of the articles or things.   The intention was never to consider the delivery of goods to a foreign buyer in India as amounting to export. 

                        The High Court held that it is admitted position in this case that initially Proteco agreed to take delivery of wire/cable drawing machines at Hyderabad ex-factory, subsequently Proteco sent a communication advising the appellant to deliver the machinery to their agent at Silvasa which is also a 100% EOU, the payment was received in convertible foreign exchange as evidenced by the FIRC and the goods were delivered to the agent under a proforma invoice in the name of the foreign buyer.   This transaction of manufacturing machines in India by an EOU and delivering them in India to another 100% EOU, which is alleged to be the agent of a foreign buyer, does not amount to ‘export out of India’ either under the Customs Act or under the Income Tax Act.   The High Court dismissed the appeal of the assessee.