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TMI Blog1978 (5) TMI 35X X X X Extracts X X X X X X X X Extracts X X X X ..... h were, however, routed through the Corporation, an undertaking of the Central Government, to bring it within the system of private barter introduced by the Government with a view to promote exports. Under these private barters against export of certain goods, the Indian exporting firms were given a certificate of foreign exchange earned by the exports and the exporter is allowed to sell the foreign exchange to approved licence-holders for import of essential materials at a premium. In this way, the exporter was enabled to export goods at higher (sic) competitive prices to the foreign buyers mostly at a loss which is partially compensated by sale of foreign exchange at a premium in the open market. The sales under the barter system have of necessity to be arranged through the Corporation which was appointed to supervise and watch the implementation of the Scheme in terms of Government policy. The general terms and conditions under which barter deals are carried out, inter alia, visualise that the export sales contract are to be concluded between the foreign buyers and the Corporation on a principal to principal basis in accordance with the Corporation's standard terms and condition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ual practice, however, the bilateral contracts between the Corporation and the foreign buyers on the one hand and the Corporation and the Indian exporter on the other are generally never completed, and the letter of credit opened by the foreign buyer is invariably endorsed in favour of the real exporter and the interest of the Corporation is confined to its commission for its supervisory and overseeing functions which is intended to ensure that foreign trade is properly regulated and is kept free from underhand dealings. In the case of the two petitioners, none of the contracts with the Corporation were actually executed and while the shipping documents in most of the cases mentioned the name of the Corporation on account of the exporter concerned, some of the shipping documents were in the name of the actual exporter, but on account of the Corporation. It may be mentioned that when these exports were made, the only importance of routing of the transactions through the Corporation was to give the benefit of the barter system to the exporters as a possible incentive to further exports and which out of the two would be the ostensible and which out of them the real exporter was of lit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mber of amendments were made to the Income-tax Act. This included the addition of section 280ZC which entitled an exporter who earns foreign exchange by the export and receives sale proceeds in India in accordance with law to a tax credit certificate for an amount not exceeding 15% on the amount of such proceeds. This is how the new section, which was added by Act No. 15 of 1965, with effect from April 1, 1965, reads : " 280ZC. (1) Subject to the provisions of this section, a person who exports any goods or merchandise out of India after the 28th day of February, 1965, and receives the sale proceeds thereof in India in accordance with the Foreign Exchange Regulation Act, 1947 (7 of 1947), and the rules made thereunder, shall be granted a tax credit certificate for an amount calculated at a rate not exceeding fifteen per cent. on the amount of such sale proceeds. Explanation. 1.---For the removal of doubts it is hereby declared that the expression ' sale proceeds' in this sub-section 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 (52 of 1962). Explanation 2.-- For th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he claims made by the petitioner as well as the Corporation were rejected by the Assistant Director, Tax Credit, though for different reasons. Claims of the petitioners were rejected on the ground that the petitioners were not the exporters of the goods and as such they were not entitled to the grant of tax credit certificates. According to the Assistant Director, the exporter was one whose name was shown as such in the G.R.I. declaration filed with the Reserve Bank of India and as the name of the Corporation was shown as the exporters in all these declarations, the petitioners could not be considered as the exporters of the goods. The claim of the Corporation was rejected by the Assistant Director on the grounds that the notices annexed in Form A were not accompanied by a copy of relevent invoices duly certified and that the applications in Form D were not accompanied that the applications in by the copies of the intimation in Form B issued by the various dealers. The petitioners as well as the Corporation appealed to the Tax credit, and by the impugned orders the Director confirmed the order of the Assistant Director in relation to the petitioners and reversed the order of the As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Corporation by virtue of the assignment of the letters of credit opened by the foreign buyers in the name of the Corporation and that there was privity of contract between the foreign buyers and the Corporation, even though the contracts had not been executed. It was, therefore, held that having regard to the contents of G.R.I. Form, the entries in the shipping bills, the essential requirements of the barter system and the routing of the export through the Corporation, the petitioners could not be said to be the exporters for the purpose of the Income-tax Act. The appellate authority accordingly rejected the claim of the petitioners. The claim of the Corporation to the certificates was upheld. The appeals of the petitioners were, therefore, rejected and those of the Corporation were accepted. The petitioners assail these orders and pray that the same be quashed and a direction be issued to the appropriate authorities under the Act to grant the requisite tax credit certificate to the petitioners on the basis of the sale proceeds of the aforesaid exports on the ground that the petitioners were the real exporters of the goods and had received the sale proceeds thereof in India ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of the benefits on such export would also present no legal difficulty. This is so because in each of these events, there can be no doubt as to who was the real exporter of the goods. Where, however, the export of any commodity is canalised by law or by administrative instructions, thereby disabling an exporter of a commodity from carrying on the export trade in such a canalised item, on its own, without the intervention of a Government agency or authority in some form irrespective of what precise form it may take, the determination of the question as to who was the real exporter is not easy of determination. In such cases, Government regulations may merely insist on the prior consent of the Government or its undertaking for such export. Such a pattern would perhaps be innocuous and may not present any difficulty. In another case, Government may insist that all such export transactions would be carried out by the industry or the trade through at governmental agency and even in the name of the governmental agency giving out for all outward appearance as if the commodity either belonged to the Government or had otherwise been produced by Government and had been exported by Governmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to time, the contemporaneous exchange of letters, the conduct of the parties and their true intention ? 2. Which of the two parties would be entitled to the benefit of the tax credit certificates under section 280ZC of the Income-tax Act ? Question, No. 1: The jural relationship beween the parties : For a proper determination of the precise legal relationship between the petitioners on the one hand and the Corporation on the other, it would be necessary to examine the provisions of the scheme of barter, as indeed the system of canalisation, and to construe the various instruments executed between the exporters and their foreign buyers, and between the exporters and the Corporation and to gather the true effect and the real intent from the various communications exchanged between the parties from time to time, the manner of shipment of the goods, the situs of the title in the goods before export, the terms of the letters of credit, bills of lading and the remittances. It would also be necessary to determine if the parties were acting on a principal to principal basis or could be said to be acting as agents for the other. A. The Barter Scheme A copy of the general terms an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... present case at either of the two ends although the letter of credits were opened by the foreign buyers in favour of the Corporation and the shipments were made in some cases in the name of the Corporation on account of the exporter while in the others in the name of the exporter on account of the Corporation. No consideration, however, passed between the Corporation and the exporter on account of any sale of the commodity to the Corporation. The letters of credit being transferable are endorsed immediately on receipt in favour of the exporter by the Corporation and the sale proceeds are directly realised by the exporters through their bankers and the commission of the Corporation agreed to is paid by the exporter to the Corporation. The declaration under section 12 of the Foreign Exchange (Regulation) Act in Form GR-1 contains the name of the Corporation as the exporter. But the form lists the name of the exporters' banker as the banker concerned. C. Legal effect The petitioners being admittedly manufacturing exporters were the real source of the commodity to be exported. The title in the goods admittedly vested initially in the petitioners. Before the transactions were route ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Foreign Exchange Regulation Act in Form G-I clearly mentions the name of the Corporation as the exporter for the purpose of the Foreign Exchange Regulation Act even though the name of the bank listed in the form is admittedly the banker of the exporters concerned. The sale proceeds of the export transaction less the commission that is payable to the Corporation represents the extent to which the foreign exchange is earned by the exporters while the only income the Corporation makes out of the transaction is confined to its commission of 2%. There is nothing on record which may indicate an express contract between the exporter and the Corporation before shipment or which may otherwise expressly transfer title in the goods in favour of the Corporation. What then is the nature of the relationship between the Corporation and the exporters that can be spelt out of the various documents, the conduct of the parties in relation to the transactions and the intention of the parties as may be gathered therefrom ? Was the Corporation only acting as a Government agency to route the exports by the exporters ? Was the Corporation merely an agent of the exporters or had the Corporation titl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alf of the Corporation in support of the contention that notwithstanding various unfavourable features of the arrangement on account of which the arrangement fell short of a concluded contract of sale with the resultant vesting and divesting of title in the property before export, title to the goods clearly passed in favour of the Corporation or would in any event be deemed to have passed because the shipping documents in respect of the various shipments, being documents of title, were sufficient, without anything more, to effect transfer of title to the goods. Now, this is true that, except in one or two instances in the case of one of the petitioners (C.W. No. 1265/76), the shipping documents, which admittedly, are documents of title, mention the Corporation as the exporter of the goods and would ordinarily entitle the Corporation to deal with the goods as absolute owners and entitle the Corporation to transfer title in the goods by virtue of delivery of documents. It is, however, not possible to construe the relationship between the parties merely by a reference to the shipping documents and where from the contemporaneous conduct and arrangement, it is clear that the parties, di ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e was intended to be given to the real exporter and not merely to the ostensible exporter. Where the export had to be diverted through a Government agency either because of the system of canalisation or because of the incentive provided by the scheme of barter, the exporter would not cease to be the person who exports merely because of the intervention of the Government agency irrespective of the precise legal form that the intervention takes. If the effect of routing is that for all external appearances, the Government agency has to be shown as the exporter although the goods are made available by the real exporter, the arrangements are entered into between him and the foreign buyer, the risk involved continues throughout to be his as also the financial investments and the sale proceeds come into his hands and it is he who makes the income to which the tax credit would ultimately relate, he would nevertheless be the real exporter and, therefore, the exporter within the meaning of section 280ZC. The form of the arrangement between the exporter and the Corporation would not change the substance even if the legal effect may be the vesting of title in the Corporation and the correspon ..... X X X X Extracts X X X X X X X X Extracts X X X X
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