AI Drafter 
TaxTMI 
TaxTMI 
2004 (3) TMI 58
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....ober 30, 1996, declaring his income in the sum of Rs. 9,60,970 and claiming deduction of Rs. 84,36,746 under section 80HHC in respect of export of beta-earn tapes with rights attached thereto. The assessee claimed to have entered into an agreement dated March 29, 1995, with Satellite Television Asian Region Ltd. (popularly known as "Star 'IV") to grant the sole and exclusive rights of satellite broadcasting and pay 'IV through Star 'IV satellite for Asian region only in respect of the films mentioned therein. The assessee by virtue of the said agreement transferred beta-earn tapes of 14 films mentioned in the said agreement, to be exploited in the manner mentioned therein for a period of five years. The assessee before the Assessing Officer contended that without prejudice to his right to claim deduction under section 80RRC, his alternate claim for deduction under section 80-O may also be considered. The assessee in support of his alternate claim contended that the amount received by him in convertible foreign exchange, representing the amount of royalty for allowing exhibition of films, was nothing but the income derived by the assessee as consideration for allowing use of c....
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....engaged in the business of export of goods or merchandise nor did he export the same by way of sale or otherwise during the year under appeal. The reasons recorded by the Tribunal in support of its findings can be summarised as under: (i) There was no sale as envisaged in section 80HHC considering the definition of "export turnover" referred to in clause (b) of sub-section (4B) of the said section. (ii) There are no goods/merchandise as envisaged in section 80HHC (iii) Rules 9A and 9B of the Income-tax Rules have no application as the fiction created thereunder has a limited purpose and the object of finding out the cost of the film. (iv) Section 80HHF has been brought on the statute book by the Legislature clearly indicates that "cinematographic films" were not covered for the purposes of section 80HHC. Being aggrieved by the above order of the Tribunal, the assessee has invoked the appellate jurisdiction of this court under section 260A of the Act raising the substantial question of law set out in the memo of appeal contending that the Tribunal has misdirected itself in interpreting the provisions of section 80HHC One of the main ingredients of section 80HHC is that t....
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....ent. And whereas the party of the second part have approached the party of the first part shown their interest for acquiring Star TV satellite broadcasting and transmission rights and rights for pay TV through Star TV satellite broadcasting of and relating to the 'said films' for and in the Asian region only; And whereas at the request of the party of the second part, the party of the first part have agreed to grant to the party of the second part the sole and exclusive rights of satellite broadcasting and pay TV only through Star TV satellite for Asian region only in respect of the said films. For the purpose of broadcasting through Star TV satellite, the right includes sub-titling, exhibition, exploitation and mechanical synchronisation in relation to such exclusive satellite broadcasting and pay TV rights only through the said Star TV satellite in Asian region only as expressed and described hereinbelow, hereinafter collectively referred to as the' said films rights' for the period as fully described herein on the terms and conditions hereinafter appearing." Clauses 3 and 11 relied upon by the Tribunal for recording its findings are also reproduced hereinbelow: "Clau....
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....ce Act, 1983, has omitted the aforesaid provisions with effect from April 1, 1983. Simultaneously, a new section 80HHC came to be inserted with effect from the same date for providing a deduction with reference to the export turnover. The said section 80HHC remained operative for the assessment years 1983-84 to 1985-86. The Finance Act, 1985, has again substituted section 80HHC with a new section 80HHC with effect from April 1, 1986. Section 80HHC has been further amended by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986, with effect from April 1, 1987, and remained operative for the assessment years 1987-88 and subsequent years. By the Direct Tax Laws (Amendment) Act, 1989, sub-sections (1) and (1A) further came to be amended and those amendments were made operative for and from the assessment year 1989-90, the details of which are not necessary for the purposes of this appeal. By the Finance Act, 1990, section 80HHC again came to be amended for and from the assessment year 1991-92 which further came to be substantially amended by the Finance (No.2) Act, 1991, which further came to be amended by the Finance Act, 1992, with effect from April 1, 1992. The....
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....lue of such goods or merchandise, declared in the shipping bill or bill of export as referred to in sub-section (1) of section 50 of the Customs Act, 1962 (52 of 1962), shall, for the purposes of this section, be deemed to be the sale proceeds thereof. (3) For the purposes of sub-section (1),- (a) where the export out of India is of goods or merchandise manufactured or processed by the assessee, the profits derived from such export shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee; (b) where the export out of India is of trading goods, the profits derived from such export shall be the export turnover in respect of such trading goods as reduced by the direct costs and. indirect costs attributable to such export;... Explanation.-For the purposes of this sub-section,-... (3A) For the purposes of sub-section (1A), profits derived by a supporting manufacturer from the sale of goods or merchandise shall be,- (a) in a case where the business carried on by the supporting manufacturer consists exclusively of sale of goods ....
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....lso excluded any sum referred to in clauses (iiia), (iiib) and (iiic) of section 28; (baa) 'profits of the business' means the profits of the business as computed under the head 'Profits and gains of business or profession' as reduced by- (1) ninety per cent of any sum referred to in clauses (iiia), (iiib) and (iiic) of section 28 or of any receipts by way of brokerage, commission, interest, rent charges or any other receipt of a similar nature included in such profits; and (2) the profits of any branch, office, warehouse or any other establishment of the assessee situate outside India;" Section 80-O: Section 80-O came to be enacted basically for encouraging Indian companies to export their know-how and skill abroad. Mere supply of particulars or bio-data of various Indians willing to work abroad and their selection or recruitment accordingly in India is a situation falling far too short of the requisites necessary for attracting the benefits of this section. In order to qualify for a deduction under section 80-O, the royalty, etc., received by an Indian company from a foreign enterprise must, inter alia, be in consideration for the supply of information for use outs....
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....ing in force for regulating payments and dealings in foreign exchange; (ii) 'foreign enterprise' means a person who is a non-resident. (iii) services rendered or agreed to be rendered outside India shall include services rendered from India but shall not include services rendered in India." Section 80HHF : Section 80HHF came to be inserted by the Finance Act, 1999, with effect from April 1, 2000, with a view to provide deduction to Indian companies from profits and gains convertible in foreign exchange from export or transfer by any means out of India of any film software, television software, music software, television news software, including telecast rights. Section 80HHF reads as under: "80HHF. Deduction in respect of profits and gains from export or transfer of film software, etc.-(1) Where an assessee, being an Indian company, is engaged in the business of export or transfer by any means out of India, of any film software, television software, music software, television news software, including telecast rights (hereafter in this section referred to as the software or software rights), there shall, in accordance with and subject to the provisions of this section....
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....Deduction in respect of expenditure on production of feature films.-(1) In computing the profits and gains of the business of production of feature films carried on by a person (the person carrying on such business hereafter in this rule referred to as film producer), the deduction in respect of the cost of production of a feature film certified for release by the Board of film censors in a previous year shall be allowed in accordance with the provisions of sub-rule (2) to sub-rule (4)... 98. Deduction in respect of expenditure on acquisition of distribution rights of feature films.-(1) In computing the profits and gains of the business of distribution of feature films carried on by a person (the person carrying on such business hereafter in this rule referred to as film distributor), the deduction in respect of the cost of acquisition of a feature film shall be allowed in accordance with sub-rule (2) to sub-rule (4)....". With the aforesaid statutory provisions, let us proceed to recapitulate the rival contentions. Rival contentions: The brief facts relevant for the purpose of deciding this appeal, though simple, consumed considerable judicial time in view of the de....
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....t, 1930. That section 80HHC gives certain incentives for the export of goods out of India. The main purpose is to augment the foreign exchange reserves of the country. The incentive provision of tax laws, must be construed liberally, it being an incentive provision. That the Bombay Sales Tax Act provides that any property, tangible or intangible, general or special, which can be transferred for a price, is "goods". In this view of the matter, exhibition rights in respect of films, which are transferable rights, could also constitute goods. As such, export of exhibition rights can very well be covered by the phrase" goods" for the purpose of export under section 80HHC. That under the Customs Act and also under the Indian Trade Classification (which follows the HSN system for classification) "cinematographic items and tapes" have been termed as "goods". Chapter 37 specifically provides for the heading "cinematographic and photographic goods". That transfer of exhibition rights of a film constitute sale of goods and export of goods for the purposes of section 80HHC In any case, it constitutes export of goods, as such entitled to relief under section 80HHC. That the cond....
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....e the above rules have been applied for computing the income, then only, the provision of section 80HHC comes into play. That the word "sale proceeds" must be given a broad meaning particularly considering the nature of the goods in question. It must be understood as export proceeds. In the case of films which are known for their short life, i.e., more than 90 per cent. of the films, die a natural death within a year, when one talks about transferring interest in exhibition rights for ten years, for all practical purposes, it is a sale. Because of this non-durable nature of films and rights therein, rule 9A while providing the method of computing the profits in respect of films provides as follows: "9A. (7) For the purposes of this rule,-... (i) the sale of the rights of exhibition of a feature film includes the lease of such rights or their transfer on a minimum guarantee basis." Such extended meaning is given to the word "sale" because of the peculiar nature of the film and the rights regarding the film. Considering the nature of the goods in question, i.e., films and exhibition rights, it can be safely concluded that though it is called a "licence or lease" : it is noth....
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....eds" received or brought in to India by way of export in convertible foreign exchange. However, in the definition of "export turnover" the emphasis is on foreign exchange and bringing it into India. The emphasis is on receipt of export proceeds. In other words, the general meaning of "business turnover" necessarily includes not only sale proceeds but everything received in the course of business. The emphasis is not on the sale but the emphasis is on the bringing of export proceeds in foreign exchange, which can be illustrated by citing the definition of "export out of India" where the words used are "sale or otherwise": "'export out of India' shall not include any transaction byway of sale or otherwise, in a shop, emporium, or any other establishment situate in India, not involving clearance at any customs station as defined in the Customs Act, 1962 (52 of 1962)." That as long as the proceeds are collected on exports and brought into India they are entitled to relief under the provisions of section 80HHC irrespective of the fact as to whether they constitute sale proceeds or otherwise. As such, receipt in foreign exchange for claiming deduction under section 80HHC need not n....
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....on of the copyright is not compulsory. The Ministry of Law, Justice and Company Affairs, has expressed its opinion that the copyright is covered by section 80-O, as such, the assessee was entitled to deduction under section 80-O and the same has been wrongly denied by the authorities under the Act. The receipt of consideration by the assessee was as a result of sale and even if the term "any similar payment" is wide enough to include sale proceeds which are received by the assessee under the agreement in question dated March 29, 1995, as such, the assessee was entitled to claim deduction under section 80-O of the Act. Per contra: The rival views canvassed on behalf of the Revenue to repel the contentions of the assessee can be summarised as under: That the assessee in this case is not engaged in the export of goods and merchandise. The films recorded on the beta-earn tapes do not qualify either as goods or merchandise. The beta-earn shell (cassette) is only a medium of transfer for the sake of convenience. In the facts and circumstances of the case there is no sale of the film in beta-earn format. The assessee has only given the right to use for a period of five years. ....
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.... only. That section 80HHF is introduced to cover cases of persons like the assessee; as such section 80HHC did not and does not get attracted to the facts of the present case. That the judgments cited on behalf of the assessee deal with the provisions of the Sales Tax Act and the Customs Act; as such, the said judgments cannot be pressed into service to interpret the provisions of the Income-tax Act. No deduction under section 80HHC can be allowed unless it is established that there was a sale that too of goods or merchandise and there was export and proceeds received out of such transaction were in the nature of sale proceeds and were received in convertible foreign exchange as contemplated under said section. That rules 9Aand 9B have no application to the facts of the case. The said rules operate in a different sphere and the said provisions cannot be read while construing the provisions of section 80HHC Section 80HHC is a complete code by itself. In the facts of the present case, none of the important elements of section 80HHC was in existence and, therefore, the assessee was not entitled to any benefit under this section. So far as section 80-O is concerned, none....
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....stoms station as defined in the Customs Act, 1962. And it has been clarified in the Explanation to section 80HHC(2) that where any goods or merchandise are transferred by a taxpayer, to a branch, office, warehouse or any other establishment of the taxpayer situated outside India, and such transfer effected by the assessee shall be deemed to be export out of India. The value of such goods or merchandise declared by the assessee in the shipping bill or bill of export shall be deemed to be the sale proceeds of the goods for the purpose of allowing the deduction. (2) To get deduction under section 80HHC, one has to export eligible "goods" or "merchandise". (3) The sale proceeds of the eligible goods or merchandise exported out of India must be received in, or brought into, India by the assessee in convertible foreign exchange during the previous year or within a period of six months from the end of the relevant previous year. (For instance, for the assessment year 2003-2004, the repatriation of the sale proceeds into India must be completed on or before September 30, 2003). At this juncture, it would be relevant to note that the object of section 80HHC is to grant an incentive....
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....or merchandise for the purposes of levy of customs duty, obviously, they can be treated as goods for claiming exemption from payment of income-tax. Learned counsel supporting the assessee contend that it is well settled that two wings of the Government cannot take two different views of the same transaction. According to them, two wings i.e., Customs and Income-tax are part of the same Ministry. In order to claim support to their submission, learned counsel for the assessee relied upon the judgment of the Delhi High Court in the case of CIT v. Shriram Pistons and Rings Ltd. [1990] 181 ITR 230, where-in the High Court ruled that when remuneration is approved by the Company Law Board of the Department of Company Affairs as required by the Companies Act, the Income-tax Department cannot take a contrary view that it is excessive or unreasonable for the purpose of section 40(c), unless some fraud or misrepresentation is detected. Learned counsel supporting the assessee also pressed into service the Circular No.6, dated July 6, 1968, issued by the Board; wherein it has been stated that in the context of section 40A(2) (b) that, when payments are approved by one wing of the Governme....
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....ictionary meaning of the terms used therein. Though the dictionaries are not to be taken as authoritative exponents of the meaning of the statutory language, it is permissible to seek instruction from these books to understand the ordinary sense of the words in an enactment. At this juncture we are reminded of what Samuel Johnson, a great English poet, critic, essayist and dictionary maker, has stated: "Dictionaries are like watches, the worst is better than none, and the best cannot be expected to go quite true. Every honest lexicographer agrees knowing that no matter how keenly he strives to make his book 'go true' he would inevitably lose the battle with what might be called linguistic indeterminacy. Since indeterminacy will be the prima facie of his professional life, he will often be tempted to deny and resent, like the grammarians of the 17th and 18th centuries, the radical instability of languages." It is thus clear that the court can always take aid of the dictionaries. Now let us turn to the dictionary meaning of the words "goods" and "merchandise". The Legal Thesaurus, regular edition, by William C. Burton defines the words "goods" and "merchandise" as under: ....
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....------------ Black's Law Dictionary, fifth edition, defines the words "goods" and "merchandise" as under: ------------------------------------------------------------------------------------ Goods Merchandise ------------------------------------------------------------------------------------ A term of variable content and meaning. All goods which merchants usually buy It may include every species of personal and sell, whether at wholesale or property or it may be given a very retail; wares and commodities such restricted meaning. as are ordinarily the objects of &n....
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....dise, supply of raw materials, finished goods, all things specially manufactured which are movable at the time of identifying for trade and sale other than money. The word "merchandise" means all goods which merchants buy and sell, whether wholesalers or retailers, wares commodities such as are ordinarily the subject of trade and commerce. The apex court in the case of Associated Cement Companies Ltd. [2001] 124 STC 59 while answering the question as to whether technical advice or information technology, drawings, designs, manuals and technical material are goods observed as under: "It is true that what the appellants had wanted was technical advice or information technology. Payment was to be made for this intangible asset. But the moment the information or advice is put on a media, whether paper or diskettes or any other thing, then what is supplied becomes chattel. It is in respect of the drawings, designs, etc., which are received that payment is made to the foreign collaborators. It is these papers or diskettes, etc., containing the technological advice, which are paid for and used. The foreign collaborators part with them in lieu of money. It is, therefore, sold by them....
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....he case may be. There is no scope for splitting the engineering drawing or the encyclopaedia into intellectual input on the one hand and the paper on which it is scribed on the other. For example, paintings are also to be taxed. Valuable paintings are worth millions. A painting or a portrait may be specially commissioned or an article may be tailor made. This aspect is irrelevant since what is taxed is the final product as defined and it will be an absurdity to contend that the value for the purposes of duty ought to be the cost of the canvas and the oil paint even though the composite product, i.e., the painting is worth millions... The above view, in our view, appears to be logical and also in consonance with the Customs Act. Similarly, in Advent Systems Ltd. v. UNISYS Corporation (925 F 2d 670 (3d Cir 1991)), it was contended before the court in United States that software referred to in the agreement between the parties was a 'product' and not a 'goods' but intellectual property outside the ambit of Uniform Commercial Code. In the said Code, goods were defined as 'all things (including specially manufactured goods) which are movable at the time of the identification for sale....
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....asting rights for Asian region for a period of five years, can conveniently be described as article or thing falling within the sweep of the word "goods" or "merchandise". We, therefore, hold that the beta-cam tape, which has incorporeal rights, is a "goods" or "merchandise" for the purposes of section 80HHC of the Act. Point No.2: Having held that beta-cam tapes are goods and merchandise for the purposes of section 80HHC, now we proceed to consider the second point as to the nature of the transaction. Did it involve export of goods out of India? Can the transaction in question be said to be a transaction of export out of India by way of sale or otherwise involving clearance at the customs station. The submission advanced on behalf of the assessee is that the broadcasting signals or rights embodied in a tape, if regarded as goods, then there can be no doubt that they were exported out of India because they physically left the shores of India and were to be telecast or broadcast out of India. According to the assessee, one of the tests that is applied to find out whether there has been export out of India is to see whether the transaction is subjected to customs clearance. Acc....
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.... the Act. With the above foundation, one has to consider the gravity of submissions advanced by the Revenue that in spite of the above findings in favour of the assessee, section 80HHC is not applicable to the facts of the present case as no sale of goods or merchandise is involved in the transaction in question. The question which needs consideration is : whether or not the transaction involved is sale of goods as contemplated under section 80HHC of the Act ? Section 80HHC at various places refers to phraseology "sale proceeds" which, according to the Revenue, is indicative of the fact that sale is a condition precedent to claim deduction under section 80HHC As against this, the assessee has contended that the telecasting rights are transferred on lease for a period of five years. Considering the short life of the films, the transaction in question is nothing but a transaction of sale of telecasting rights of the films mentioned in the agreement... On the backdrop of the rival contentions, the question which needs dissection is as to whether the grant of right of exhibition of a feature film on lease amounts to sale of rights. Sub-section (1) of section 80HHC only contemplat....
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....e" used in Explanation (a) to section 6 of that Act should be construed. It was observed on page 528, para. 11, as follows: "...It was contended on behalf of the petitioner that Explanation (a) of section 6...contemplates a vacancy when a tenant (omitting other words not necessary) 'ceases to be in occupation upon termination of his tenancy, eviction, or assignment or transfer in any other manner of his interest in the premises or otherwise'. The argument proceeds further to the effect that...admittedly there was no termination, eviction, assignment or transfer and that the words 'or otherwise' must be construed as ejusdem generis with the words immediately preceding them; and that, therefore, on the facts as admitted even in the affidavit filed on behalf of the Government, there was in law no vacancy. In the first place, as already indicated, we cannot go behind the declaration made by the Government that there was a vacancy. In the second place, the rule of ejusdem generis, sought to be pressed in aid of the petitioner, can possibly have no application. The Legislature has been cautious and thorough-going enough to bar all avenues of escape by using the words 'or otherwise'. T....
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....e tenant's interest. But the Legislature, when it used the words "or otherwise", apparently intended to cover other cases which may not come within the meaning of the preceding clauses, for example a case where the tenant's occupation has ceased as a result of trespass by a third party. The Legislature, in our opinion, intended to cover all possible cases of vacancy occurring due to any reasons whatsoever'." The words "or otherwise" appearing in Explanation (aa) to sub-section (4A) of section 80HHC appear to have been used by the Legislature to bar all avenues of escape. Those words are not words of limitation but extension so as to cover all possible ways of escaping from the rigor of section 80HHc. The apparent intention is to cover cases which may not come within the meaning of the preceding word "sale", for example a case where the goods are transferred by assignment or on consignment basis. The word "otherwise" as interpreted by the Supreme Court in the case of George Da Costa [1967] 63 ITR 497 can be understood to mean some kind of legal obligation or some transaction enforceable at law or in equity which may not be in the form of sale but may generate foreign exchange and....
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....f distribution of feature films. The profits of the business of a person engaged in the business of export is also required to be computed. One has to ask a question unto himself how the profits of business of an assessee engaged in the business of production or distribution of feature films is to be computed. Obviously, one has to refer to the provisions of rules 9A and 9B of the Income-tax Rules. If that be so, in our opinion, the said rules will have to be taken into account by way of external aid to find out whether sale of the rights of exhibition of a feature film shall include the lease of such rights or whether the words "or otherwise" are sufficient to cover such transactions which are akin to sale. Having taken the survey of various provisions, one fails to understand as to why the word "otherwise" should not cover within its sweep such types of transactions and, if such types of transactions are taken into account, then they would be nothing but sale for the purposes of section 80HHC We, thus, hold that the transaction in question involved export of goods out of India falling within the sweep of the concept of "sale" involving clearance at the customs station as conte....
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....eceived in the transaction in question, on the facts and circumstances of the case can be termed as sale proceeds falling within the sweep of section 80HHC of the Act. In the case of Bajaj Tempo Ltd. [1992] 196 ITR 188, the apex court followed the judgment of the Gujarat High Court in the case of CIT v. Suessin Textile Bearing Ltd. [1982] 135 ITR 443, wherein while deciding the claim of the assessee under the 1%1 Act, it struck a dissenting note and observed that practical common sense approach keeping in view the commercial expediency should be adopted to find out the legislative intent. Explanation (b) to sub-section (4A), of section 80HHC describes the words "export turnover" to mean sale proceeds received in or brought into India. In other words, "export turnover" came to be equated with "sale proceeds" keeping in mind the traditional concept of export of goods. The words "sale proceeds" is used to explain the concept of "export turnover". Therefore, to say that "export turnover" means sale proceeds received in or brought into India by the assessee in a convertible foreign exchange in accordance with clause (a) of sub-section (2) of section 80HHC is nothing but to equate ....
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....; 100 100 (b) Domestic sale Nil 50 100 200 ------------------------------------------------------------------------------------------- (c) Turnover [(ia) + (ib)] 100 150 200 300 (ii) Business profits before incentives (assumed figure) 10 15 &nb....
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....nbsp; 25x50 30x50 40x50 section 80HHC if ------------------------------------------------------------------- 100 150 200 300 only 50% of the export proceeds, i.e., Rs. 50 lakhs are brought into India [(iv) x 50% (ia)/(ic)] 10 8.33 7.50 6.67 -------------------------------------------------....
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....ble only under one of such provisions. The said sub-section (5) of section 80HHF reads thus: "(5) Where a deduction under this section is claimed and allowed in respect of profits of the business referred to in sub-section (1) for an assessment year, no deduction shall be allowed in relation to such profits under any other provision of this Act for the same or any other assessment year." Mr. Shivram submits that the insertion of above sub-section (5) is one of the indications to say that the assessee who is entitled to claim deduction under section 80HHF may also be found entitled to claim deduction in respect of the very same income under some other provision falling in Chapter VI-A of which section 80HHC is part. He, therefore, submits that merely because section 80HHF came to be inserted with effect from April 1, 2000, that by itself does not mean that section 80HHC cannot be made applicable to the transaction involved in the case in hand. In his submission, the assessee would be entitled to claim deduction only under one of the provisions of the Act after insertion of section 80HHF in general and sub-section (5) thereof in particular. Till such time section 80HHF was not ....