Section 80HHC: Tribunal Expands 'Export' Definition to Include Merchanting Trade for Deduction Eligibility.

SM Energy Teknik & Electronics Ltd. Versus Deputy Commissioner of Income-tax, Central Circle-XXIV, Mumbai

SM Energy Teknik & Electronics Ltd. Versus Deputy Commissioner of Income-tax, Central Circle-XXIV, Mumbai - [2006] 10 SOT 679 (MUM.) Issues Involved:
1. Definition of "export" under Section 80HHC of the Income-tax Act, 1961.
2. Applicability of Customs Act, 1962, and Foreign Trade (Regulation & Development) Act, 1992 (FTRDA-92) in determining "export."
3. Eligibility for deduction under Section 80HHC for goods not physically brought into India.
4. Interpretation of the term "export out of India" in Explanation (aa) of Section 80HHC.
5. Relevance of case laws and judicial precedents in interpreting Section 80HHC.

Detailed Analysis:

1. Definition of "export" under Section 80HHC of the Income-tax Act, 1961:
The primary issue was whether the sale of goods directly from Germany to Bangladesh by the assessee constituted an "export" under Section 80HHC. The assessee argued that the term "export" should be interpreted broadly to include merchanting or third-country trade, which does not require physical movement of goods from India. The Assessing Officer and CIT(A) disagreed, stating that the goods must be physically exported from India to claim the deduction.

2. Applicability of Customs Act, 1962, and Foreign Trade (Regulation & Development) Act, 1992 (FTRDA-92) in determining "export":
The CIT(A) relied on the definitions provided in the Customs Act, 1962, and FTRDA-92, which define "export" as taking goods out of India. The assessee contended that Section 80HHC is a self-contained code and does not require reference to the Customs Act. The assessee also pointed out that under the Import & Export Policy (1992-97), merchanting trade is recognized, allowing goods to be sold from one country to another without physically entering India.

3. Eligibility for deduction under Section 80HHC for goods not physically brought into India:
The assessee argued that the objective of Section 80HHC is to augment foreign exchange reserves, and the physical movement of goods into and out of India is not a necessary condition for claiming the deduction. The CIT(A) and Assessing Officer held that the deduction could only be claimed if the goods were cleared at an Indian customs station, which did not happen in this case.

4. Interpretation of the term "export out of India" in Explanation (aa) of Section 80HHC:
Explanation (aa) of Section 80HHC specifies that "export out of India" excludes transactions not involving customs clearance. The assessee argued that this explanation applies only to over-the-counter sales in India and not to merchanting trade. The CIT(A) disagreed, stating that the goods must be physically exported out of India to qualify for the deduction.

5. Relevance of case laws and judicial precedents in interpreting Section 80HHC:
The assessee cited several judicial precedents, including the Bombay High Court decision in Bombay Burmah Trading Corpn. Ltd. v. CIT, which held that physical export from India is not required for claiming deductions under certain sections of the Income-tax Act. The CIT(A) dismissed these precedents, stating they were not applicable to Section 80HHC. The assessee also referred to the Supreme Court decision in J.B. Boda & Co. (P.) Ltd. v. CBDT, which emphasized the importance of substance over form in interpreting tax provisions.

Tribunal's Conclusion:
The Tribunal held in favor of the assessee, stating that the primary objective of Section 80HHC is to augment foreign exchange reserves. The Tribunal noted that the term "export" should be interpreted broadly to include merchanting trade. The Tribunal also emphasized that the physical movement of goods into and out of India is not a necessary condition for claiming the deduction under Section 80HHC. The Tribunal relied on the Supreme Court's decision in J.B. Boda & Co. (P.) Ltd. and other judicial precedents to support its conclusion. The Tribunal allowed the assessee's claim for deduction under Section 80HHC on the profits earned from the sale of goods directly from Germany to Bangladesh.