In a judgment pronounced on Friday, the Calcutta High Court, answering two substantial questions of law, held that extra realisation made in rupees for export sale proceeds in foreign exchange due to adverse exchange rate of rupee would be part of the export turnover in the year of receipt subject to the foreign exchange coming into the country within the statutorily prescribed time period. The Division Bench was also of the view that export sale proceeds received in accordance with and in terms of the export contract and with approval of RBI could not be ignored for the purpose of relief under Section 80-HHC of the Income Tax Act.
The said provision provides that where an assessee is engaged in the business of export out of India of any goods or merchandise, there shall be allowed, in computing the total income of the assessee, a deduction to the extent of profits, derived by the assessee from such export. This section applies to all goods or merchandise, (other than mineral oil and minerals and ores), if the sale proceeds of such goods or merchandise exported out of India are received in, or brought into, India by the assessee (other than the supporting manufacturer) in convertible foreign exchange, within a period of six months from the end of the previous year.
The Chief Justice-led bench, in the present case, noted that the appellant exported goods to the Indonesian purchaser. Such export was completed by January, 1994. The payment that was to be made by the foreign purchaser was agreed to be in installments. This arrangement had the sanction of the RBI. The payment terms contemplated payment in a staggered manner during a period of time which was much beyond six months from the date of export or from the end of the previous year. The appellant received the rupees equivalent of the invoice amount which was in US dollars, from Allahabad Bank. In other words, Allahabad Bank financed the export undertaken by the appellant. Allahabad Bank was in turn refinanced by the Export-Import Bank. The foreign purchaser paid the first two instalments on the agreed dates. On those dates, US dollar was dearer vis-à- vis Indian rupee which resulted in excess realisation in terms of Indian rupee. This surplus was made over by Allahabad Bank to the appellant. The balance consideration amount for the export was paid by the foreign purchaser at one go after RBI granted permission to Allahabad Bank to receive the balance at one go. As on the date of payment of the entire balance amount by the foreign purchaser to Allahabad Bank, the exchange rate had undergone considerable change and Indian rupee had fallen substantially vis-à-vis US dollar. This again resulted in excess realisation in terms of India rupees. The surplus was made over by Allahabad Bank to the appellant.
"It cannot possibly be disputed that the inflow of foreign exchange in question into India resulted from the export that the appellant made. This excess realization is inextricably linked to the export made by the assessee. Had the export not been made, the foreign exchange would not have come into India and no question of realization or excess realization in terms of Indian rupees would have arisen. Hence, in principle, such excess realization should be treated as part of the export turnover of the assessee", noted the bench
However, going by the definition of "export turnover" in the said Act, the court further reflected that before an amount received by an exporter can be treated as part of the export turnover, it must also be shown that the convertible foreign exchange was received in or brought into India within a period of six months from the end of the previous year or within such extended period as the Chief Commissioner/Commissioner (now RBI) may allow. "In the present case, it is not in dispute that the foreign exchange was received in India beyond the period of six months stipulated in sub-section (2)(a) of Section 80-HHC. However, this was in accordance with the permission granted by the RBI", reads the judgment.
It narrates that prior to completion of the assessment of the appellant for the assessment year 1996- 97, the appellant had made an application before the Commissioner of Income Tax, West Bengal – I, requesting for permission to enable the appellant to claim the amount of excess realisation due to exchange rate fluctuation as export turnover. "In the present case, the Commissioner never dealt with the appellant's application for extension of time period so as to enable the appellant to treat the receipt in question as part of its export turnover", it stressed.
"It was not possible for the appellant to know as on the date of export as to the manner in which exchange rate may fluctuate in future. The subsequent excess realisation in Indian rupees due to adverse exchange rate of rupee cannot be said to be unrelatable to the particular export", said the court.
It opined that Afterall, the object of incorporating Section 80-HHC in the said Act is clearly to grant incentive to the exporters who earn valuable foreign exchange for our country. The exemption contemplated under the said section for the purpose of calculating total income, is obviously to encourage exports resulting in flow of foreign exchange into the country. "Such a piece of legislation, in our opinion, must be interpreted as liberally as possible in favour of the exporter/assessee. It is trite law that if a particular taxing provision is liable to two interpretations, one favouring the assessee and the other favouring the department, the former interpretation ought to be accepted", it iterated.
On a meaningful reading of the relevant provisions of the said Act, the bench went to the extent of saying that income arising from export taking place not necessarily in the previous year relevant to the assessment year but also exports taking place in earlier years could qualify for deduction under Section 80-HHC provided of course the foreign exchange came into India within the time period specified in the statute.
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