Tribunal denies Section 80HHC deduction for lack of customs clearance in foreign exchange sales

The Tribunal upheld the CIT(A)'s decision to deny the deduction under Section 80HHC of the IT Act to the assessee, who claimed the deduction based on counter sales to foreign tourists in convertible foreign exchange. The Tribunal emphasized the necessity of customs clearance for such transactions to qualify as exports, stating that mere declarations by foreign tourists were insufficient. As the assessee failed to provide evidence of customs clearance, the deduction was denied, and the appeal was dismissed.

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Issues Involved:
- Claim of the assessee under Section 80HHC of the IT Act, 1961, for counter sales made to foreign tourists in convertible foreign exchange.

Detailed Analysis:

1. Facts of the Case:
The assessee, engaged in the business of trading in jewellery, included counter sales made to foreign tourists in convertible foreign exchange as part of its export turnover and claimed a deduction under Section 80HHC of the IT Act, 1961. The total turnover reported was Rs. 58,69,16,222, with an export turnover of Rs. 3,30,92,088. The export turnover included Rs. 8,57,196 from direct sales to foreign parties and Rs. 3,22,34,892 from counter sales to foreign tourists. The claim for deduction under Section 80HHC was Rs. 6,28,724, relying on the Supreme Court judgment in CIT vs. Silver & Arts Palace.

2. Assessment Proceedings:
During assessment, the AO requested documentary evidence for customs clearance of the counter sales. The assessee failed to produce such evidence, leading the AO to conclude that counter sales to foreign tourists did not qualify as exports out of India. Consequently, the deduction under Section 80HHC was reduced to Rs. 14,685.

3. Appeal to CIT(A):
The assessee argued before the CIT(A) that all relevant details of counter sales were provided, including customer information, item details, and encashment certificates. The assessee contended that the declaration by foreign tourists implied the transaction amounted to export out of India. However, the CIT(A) referenced the Allahabad High Court judgment in Ram Babu & Sons vs. Union of India, which emphasized the necessity of customs clearance for transactions to qualify as exports. Without evidence of customs clearance, the CIT(A) denied the deduction under Section 80HHC.

4. Tribunal Proceedings:
The assessee's counsel argued that providing details and declarations from foreign tourists sufficed for claiming the deduction. The counsel also presented specimen copies of bills and encashment certificates. The Departmental Representative countered that the legislative intent behind the amendment to Section 80HHC was to prevent claims without actual export, as highlighted in the Allahabad High Court judgment.

5. Legislative Intent and Judicial Interpretation:
The Tribunal noted that the legislative intent behind the amendment to Section 80HHC was to ensure that counter sales to foreign tourists did not qualify as exports unless customs clearance was involved. This was to prevent potential misuse where goods might not be exported despite claims for deductions. The Allahabad High Court upheld the constitutional validity of this amendment, emphasizing the necessity of customs clearance for transactions to be considered exports.

6. Requirement of Customs Clearance:
The Tribunal reiterated that for counter sales to foreign tourists to qualify as exports, evidence of customs clearance was essential. Mere declarations by foreign tourists were insufficient. The assessee could request tourists to provide customs clearance evidence or assist in obtaining it. Without such evidence, the claim under Section 80HHC could not be accepted.

7. Specific Case Analysis:
In the present case, the assessee provided details of counter sales but failed to prove customs clearance. The Tribunal reviewed the declaration on the bill and the encashment certificate, finding no undertaking by tourists to carry goods out of India or obtain customs clearance. Thus, the contention that declarations were sufficient was rejected. The Tribunal emphasized that customs clearance was a prerequisite for claiming the deduction.

8. Reference to Supreme Court Judgment:
The Tribunal considered the Supreme Court judgment in CIT vs. Silver & Arts Palace, noting that the case involved customs clearance, which was not disputed. Since the assessee in the present case failed to prove customs clearance, the judgment did not support the assessee's claim.

Conclusion:
The Tribunal upheld the CIT(A)'s order, denying the deduction under Section 80HHC due to the lack of evidence for customs clearance. The appeal filed by the assessee was dismissed.

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