Income Tax Appellate Tribunal - Mumbai
P.N. Writer And Co. Ltd. vs Dy. Cit on 31 October, 2006
ORDER
Rajpal Yadav, Judicial Member
1. The assessee is in appeal before us against the order of learned Commissioner (Appeals)-XLX, Mumbai, 17-11-2004 passed for assessment year 2001-02. The grounds of are not in consonance to rule 8of ITAT Rules, they are argumentative and descriptive in nature. The sale grievance of assessee relates to denial of deduction under Section 80-O of the Act.
2. The learned first appellate authority has noticed the facts in a very lucid and exhaustive manner from para 5 of the order, thus the facts leading to the litigation read as under:
5. The appellant assessee is engaged in the business of relocation of personal and household effects. It is stated by the appellant that it is engaged in the business of specialized relocation solutions in India and in foreign countries involving handling, packing, moving and relocation of personal and household effects of foreign clients like multinational companies, diplomatic missions, Government agencies and private non-resident clients etc. It is explained that the international relocation projects handled by the assessee-company involve complete pre-importation solution including advice to forwarding/destination agents in the foreign country on the type of packing, mode of forwarding, advice/assistance on negotiation of favourable freight rates from the foreign country to India, advice on customs formalities, tariffs and classification, monitoring of the shipment from pick up in the foreign country to arrival at port in India, etc. The international relocation projects also involve complete door-to-door specialized packing, moving relocation from residence in India to residence in a Foreign country, monitoring of the consignment until they reach at the port of entry in the foreign country, receiving consignment at entry port in the foreign country, arranging clearance, reloading, transfer of shipment to shipper's residence unloading, unpacking, placement of items, removal of debris, handyman solutions, etc. It is stated that all these activities involve internationally recognized high standard of expertise, exploitation of know-how and use of its registered trademark outside India as recognized by International Associations of which the company is a member.
6. The assessee's business activities and the sources of receipts can be categorized into five parts:
1. Inbound -I:
The client requires to transport its goods from "F" place outside India to "I" place within India. In such transaction, the client directly contacts the assessee with a request to transport cargo from "F" place outside India to "I" place within India. The assessee, in turn, obtains a quotation from an entity at place "F", which is in the same business as that of the assessee and based on the quotation, the assessee chooses the entity offering the most favourable rate for handling the work relating to packing of goods and movement of the such goods to the port (air/sea) in place "F" and booking the cargo in the shipping line/airline for transport to India. The assessee handles the delivery from the airport/seaport in India to the destination place "I" in India.
The assessee bills the client in respect of the complete transportation job from place "F" outside India to place "I" within India and the assessee pays the foreign entity for the job handled by it in place "F".
During the year under consideration the appellant assessee has handled only three such cases from Hongkong, UAE and Turkey/ Greece. Total receipts are of Rs. 10,26,086. Foreign Exchange expenditure is of Rs. 3,86,134. Net foreign exchange income is Rs. 6,39,950. Deduction under Section 80-O on account of such income is claimed at Rs. 2,55,980.
2. Inbound - II:
The client requires to transport its goods from "F" place outside India to 'I' place within India. The client does not contact the assessee directly, but contacts an entity in place "F" outside India for the movements of its goods to a place "I" inside India. This entity which is in the similar line of business as that of the assessee, in turn, contacts the assessee and based on the negotiated rates, enters into a contract with the assessee regarding the work relating to the handling of the shipment from the airport/seaport in India to the destination place "I" in India. The assessee is paid by the foreign entity (and not by the client whose goods/effects are relocated) for the work of transportation and handling of the goods in India.
During the year there were no receipts on account of such activity in respect of which deduction under Section 80-O has been claimed.
3. Outbound -I :A The client requires to transport its goods from "I" place within India. In such transactions, the client directly contacts the assessee with a request to transport cargo from "I" place within India to "F" place outside India. The assessee in turn, obtains a quotation from an entity at place "F", which is in the same business as that of the assessee and based on the quotation, the assessee chooses the entity offering the most favourable rate for handling the work relating to picking up the goods from the airport/seaport in place "F" outside India and transporting the same to the destination in place "F" outside India. The assessee handles the work relating to packing of the goods from the clients' place in India and movement of the same to the airport/sea port and its booking on the shipping line/airline.
During the year gross foreign exchange earned by the appellant assessee for such services/job is of Rs. 11,85,57,951. Foreign exchange expenditure is of Rs. 1,53,16,505. Net foreign exchange income is of Rs. 10,32,41,445. Deduction under Section 80-O is claimed at Rs. 4,12,96,579.
4. Outbound - II:
The client requires to move its goods from source place "I" in India to destination place "F" outside India. The client does not contact the assessee directly but, contacts an entity in place "F" outside India for the movements of its goods. This entity which is in the similar line of business as that of the assessee, in turn, contacts the assessee and based on the negotiated rate, contracts to the assessee the work relating to the packing and handling of the shipment from the clients place in place "I" in India to the airport/seaport in India. The assessee is paid by the foreign entity (and not the client) for the work of transportation and handling of the goods in India.
During the year foreign exchange receipts from such activity are of Rs. 13,62,64,583. Foreign exchange expenditure is of Rs. 1,61,03,078. Net foreign exchange income of Rs. 12,01,61,505. Deduction of Rs. 4,80,64,601 is claimed under Section 80-O on account of such receipts.
5. Pre-import Consultancy:
When a foreign entity or clients is interested in moving the goods to India, they seek the opinion of the assessee on the weather conditions in India and the nature of packing that should be done on the goods. The assessee is also consulted for the actual shipment and the preferable airport/seaport for the shipment. In respect of this consultancy, the client or the foreign entity in the same business as that of the assessee, pays pre-import consultancy charges to the assessee.
During the year such receipts are of Rs. 5,12,48,496. There is no foreign exchange expenditure. Deduction under Section 80-O is claimed at Rs. 2,04,99,398.
To sum up, the details of the gross foreign exchange receipts, foreign exchange expenditure, net foreign exchange income and deduction claimed are as under:
Activity Receipts Expenditure Net Receipts Deduction Inbound-I 10,26,086 3,86,136 6,39,950 2,55,980 Inbound-II
-
-
-
-
Outbound-I 11,85,57,951 1,53,16,505 10,32,41,446 4,12,96,578 Outbound-II 13,62,64,583 1,61,03,078 12,01,61,505 4,80,64,601 Consultancy 5,12,48,496
-
5,12,48,496 2,04,99,398 Total 30,70,97,116 3,18,05,719 27,52,91,397 11,01,16,557 It can be seen that while claiming deduction under Section 80-O, the appellant assessee has not taken into account the indirect expenses incurred to earn the above stated foreign exchange income. The assessing officer, however, has taken note of this aspect and has held that in case the appellant assessee is found eligible for deduction under Section 80-O, same would be allowed only on the net foreign exchange income i.e. after allocating direct as well as indirect expenditure incurred for the purpose of earning the income.
3. In order to explain its claim for grant of deduction under Section 80-O the assessee had contended that the income derived from specialized packing, moving and relocation solutions and system offered by the company in respect of international relocation projects can be considered as income received in consideration for the use out of India of any registered trademark as also exploitation of its know-how. It was also pointed out that the income so received in convertible foreign exchange from foreign clients is because of the exploitation of assessee technical know-how in such large international relocation projects. For getting this business the trademark possessed by the assessee is very important to create confidence in the minds of the persons using the solutions offered by the assessee. Thus according to the assessee the income received from foreign clients is for use outside India by the assessee of its registered trademark which qualify for deduction under Section 80. The assessee further expounding the meaning of trademarks had wrote a letter to the assessing officer on 22-1-2004 and pointed out that trademarks are devices used by organizations to protect, maintain and expand their activities and their association with the public. They cannot be conceived apart from the business or goods to which or in connection with which they are applied. A trademark promises a customer to seek a particular source of services. A trademark is the right apparent to a business or trade in connection with which it is employed and the right of a particular mark grows out of its use/exploitation. Any trademark assumes significance only after it is intricate association with a superbly consistent, reliable and professional services delivered/rendered over a long period of time. The International Relocations Solutions offered by the company is of a very sensitive nature and a trademark is the only distinguishing feature which induces Clients/ Agents to make a choice to do business with assessee-company amongst other competition. The assessee further contended that it has trademark which is registered in Switzerland under registration No. 450645. According to the assessee it has 55 years of experience and expertise in Relocation Solutions. Its experience and expertise has developed novel useful method of moving, storing and freight forwarding. It has also developed useful computer software for fulfilling the requirement of its business which augmented time automation, integration of operation for improving profitability, control and efficiency of the assessee's business. It was also pointed out that prior to the amendment carried out in Section 80-O assessee-company was eligible to claim deduction under Section 80-O as provider of professional services outside India but also for use/exploitation outside India of its trademark/brand.
4. The learned Assessing Officer has gone through the submissions of the assessee in detail and after taking into cognizance of Section 80-O as it exist prior to the amendment carried out in assessment year 1998-99 as also the amended provision brought on the statute book with effect from assessment year 1998-99. The l)d. Assessing Officer for construing the true import of Section 80-O took into consideration the Circular No. 763, dated 18-2-1998 issued by the CBDT wherein the object and true import of Section 80-O has been explained. After considering the comparative difference between Section 80-O as it stood prior to assessment year 1998-99 and in its present form the learned Assessing Officer has observed that deduction under Section 80-O after amendment carried out with effect from 1998-99 would not be allowable to an assessee who is rendering professional services outside India. According to him the deduction would be available only to an assessee who is exploiting a patent right, trademark and technical know-how abroad. In other words, the exploitation has to be of intellectual property and should not involved the actual export of goods or services. In the opinion of the assessing officer the assessee in the present case is only providing transportation services and import consultancy services, that is also with the limit of India and therefore, there is no F exploitation of trademark or technical know-how outside India. He further observed that as far as the argument of the assessee that the trademark is the distinguishing feature which induce a client or agent to make choice to do business with it is not relevant issue for considering assessee's case for grant of deduction under Section 80-O. According to the assessing officer if a client chooses the assessee for a particular job, it is due to the reputation of the assessee to render quality services and it does not involve the exploitation of any trademark or technical know-how. Making a reference of the assessee's bills learned Assessing Officer pointed out that all the bills are related for rendering of services, including items such as packing expenses, port duties, freight, insurance etc. There is no amount which is billed by the assessee for the use of its trademark or technical know-how. In this way learned Assessing Officer rejected the claim of assessee for grant of deduction under Section 80-O.
5. Dissatisfied with the denial under Section 80-O assessee carried the matter in appeal before learned Commissioner (Appeals) and made a detailed written submission. The learned first appellate authority noticed the submissions of the assessee extensively in para - 8 of pages 16 to 35 of the impugned order. After taking note of the written submissions exhaustively learned first appellate authority has summarized the written submissions as under:
The detailed submissions made above may be summarized as under:
On the merits of the case:
(a) The service mark for services enjoy the same legal rights and enforceability as that of a trademark for goods;
(b) The trademark registered by the assessee-company in Switzerland is a valuable asset of the assessee-company and as proprietor of such trademark the assessee-company is entitled to enforce the rights under the trademark throughout the world including in India in view of the Paris Convention for the protection of Intellectual Property Rights in 1998;
(c) Similarly, the assessee-company is also entitled to exercise those rights in respect of the trademarks of the international trade association in its capacity as a permitted user of those trademarks, which right is vested in the assessee-company by the bye-laws of the trade associations;
(d) There is no inherent antithesis between earnings from technical or professional services and earnings from the use of the trademark, particularly if one keeps in mind that the trademark law in all countries currently envisages the registration of trademarks in respect of services also.
(e) The fee for services includes consideration for the use of trademark and that the nomenclature assigned to a receipt is not conclusive of its substance and content and is not conclusive as to the claim for exemption under Income-tax laws;
(f) The owner of an asset can derive income from the asset in multifarious forms and in the manner as may be decided by him;
(g) The fact that the assessee-company itself directly uses the trademark and earns income does not make any difference and it would still constitute income arising out of the user of the registered trademark. The income from the user of trademark need not necessarily have to be through letting out or licensing the trademark. It must be noted that the wordings 'fees, commission, etc.' have been dropped and the work 'any income' is added in the amendment to Section 80-O. Therefore, after amendment, as long as there is income arising out of the user of the patent, invention, design or registered trademark, such income would be entitled to deduction under the provisions of Section 80-O.
(h) The assessee-company has put to bona fide use, both in law and in fact, its own registered trademark as a proprietor and the trademarks of the international trade associations as a permitted user;
(i) Large international clients, who have given large business and contracts over the years have confirmed that they have given the business only on account of assurance of quality standards as evidenced by the assessee-company of the use of trademarks of trade association have also confirmed that they had give the contracts and business to the assessee-company only on account of the rights vested in the assessee-company to use the trademarks of the internationally reputed trade associations.
(j) The income of the assessee-company earned outside India, is and in substance represents consideration from the use of trademarks;
Therefore, the assessee-company is justified both in law and in fact, to claim exemption of the income earned by it outside India and remitted into India through the use of registered trademarks under Section 80-O of the Income Tax Act.
6. The learned first appellate authority has considered the submissions of the assessee elaborately and for arriving at a conclusion he propounded 10 propositions which exhibit the different angles under which he has examined the controversy. The first proposition reads as under:
(a) Whether an assessee who is resident in India becomes eligible for deduction under Section 80-O of the Income Tax Act only if the trademark owned by the assessee, which is claimed to have been used outside India, should be registered under the relevant Indian laws, that is the Trade Marks Act, 1999 or its predecessor the Trade and Merchandise Act, 1958? In other words whether it is sufficient for an assessee who is resident in India to claim deduction under Section 80-O in respect of any income received by him from a foreign enterprise in consideration for the use outside India of any trademark even if such trademark is not registered in India but registered in any other country ?
7. While dealing with this proposition learned first appellate authority has observed that language of Section 80-O makes it unambiguously clear that deduction is admissible to only an Indian resident company. It will be available at foreign receipts received on export of certain intellectual properties. Thus according to the learned Commissioner (Appeals) the conditions enumerated in Section 80-O make it amply clear that the origin, certification and registration of such intellectual property should be in India only. Thus intellectual property may be any such as patent, design or trademark. The learned first appellate authority further observed that the expression "trademark" is qualified by the expression "registered", hence it is not any trademark which qualifies deduction under Section 80HHE. According to the learned Commissioner (Appeals) it is only that trademark which is registered and exported outside, receipt received on such export will only qualify for deduction under Section 80-O. If trademark is registered outside India then how it can be said that such registered trademark is exported outside for the use by foreign enterprises. If the Legislature had an intention to allow benefit of the deduction under Section 80-O in spite of a trademark registered outside India the Legislature would have specified such a liberalized requirement in the language of Section 80-O.
8. The second proposition propounded by the learned Commissioner (Appeals) is as under:
(b) Whether an assessee who is resident in India can be eligible for deduction under Section 80-O in respect of any income received by him from a foreign enterprise in consideration for the use outside India of any registered trademark owned by certain international organizations or associations of which the assessee is a member ?
Under this proposition the learned first appellate authority observed that association of the assessee and its membership of international movers has no relevancy so far as deduction under Section 80-O is concerned. The affiliation or association of the assessee with the organization of international repute of furniture movers only indicate about its quality and integrity and mutual co-operation amongst the members. The assessee no doubt would widen the reach and access of international market by becoming member of international association but that would not help the assessee to claim deduction under Section 80-O on such extra income earned by affiliating itself with those concerns. Rather, according to the learned Commissioner (Appeals) this argument of the assessee is counter productive. The deduction under Section 80-O is admissible only with reference to that income which has been received by the assessee from a foreign enterprise in consideration of use of registered trademark of the assessee. If assessee had earned any income on account of use of names, logo, association of any affiliation of international association by procuring more business on liquidated terms that would come beyond the beneficial provisions of Section 80-O.
9. The next proposition enunciated by learned Commissioner (Appeals) reads as under:
(c) Whether an assessee who is resident and who owns a trademark registered outside India also becomes eligible for deduction under Section 80-O on account of international conventions even though such assessee does not own a trademark registered in India for the moving services on account of which any income is received from the Government of foreign State or a foreign enterprise in convertible foreign exchange?
In the opinion of learned Commissioner (Appeals) the international convention and ratification of the same by a host country has different purpose and intent. The purpose of such convention is to protect registered trademark from infringement, to safeguard rights and privilege of the owner of the trademark. Whereas Section 80-O of the Income Tax Act is concerned it is a beneficial Section and such convention has no relevance while considering the case of assessee under this Section. This Section allows tax relief to certain Indian Companies who fulfils the conditions laid down under Section 80-O of the Act. According to the learned Commissioner (Appeals) there is no force in the claim of assessee that even if it has no trademark registered in India it should be allowed deduction under Section 80-O on the strength that it has registered trademark in Switzerland.
10. The next proposition made out by the learned Commissioner (Appeals) reads as under:
(d) What is the intent and meaning of the expression "any income received.... In consideration for the use outside India of any registered trademark?
Under this proposition the learned Commissioner (Appeals) has explained the expression "any income received by the assessee...in consideration for the use outside India of any registered trademark" employed in Section 80-O. According to the learned Commissioner (Appeals) expression "any income" and "use of registered trademark" are mutually exclusive and two separate independent condition required to be met by an assessee. The learned first appellate authority is of the opinion that expression "any income" means income of all sorts received by the assessee in foreign exchange from a foreign enterprise who has used the registered trademark of the assessee. He observed that it is not necessary that such use of the registered trademark by the foreign enterprises is permitted use. This expression covers all the income received from the foreign enterprises irrespective of the nature of use, for example, if some foreign enterprises infringed the registered trademark and an assessee received damage or compensation for infringement of the registered trademark that would come in the ambit of expression "any income" ipso facto that would not be eligible for deduction under Section 80-O because other conditions are required to be fulfilled. He emphasized on the point that income should have been received in consideration for the use of registered trademark by a foreign company. The emphasis of the learned Commissioner (Appeals) is that the registered trademark owned by the Indian company must have been used by the foreign company and consequently the foreign company should pay to the Indian company consideration of such use. He observed that owner of the registered trademark may use its trademark for several purposes. It may use to save itself from revocation or prevent revocation of the registered trademark, it may use the registered trademark to justify the maintenance of "mark". It may use for the purpose of defending an application for registration and finally it may use the same for the purpose of earning income, but for enabling one self to avail benefit of Section 80-O, the requirement is very specific. The requirement is that the registered trademark owned by the Indian company is allowed to be used by the foreign enterprises and received foreign income in consideration of such use. According to the learned Commissioner (Appeals) the trademark of the assessee has not been used by any foreign company, hence it is not entitled for the deduction under Section 80-O.
11. The next proposition propounded by learned Commissioner (Appeals) reads as under:
(e) Whether the appellant assessee has received income in convertible foreign exchange from a foreign enterprise in connection with the use of a registered trademark owned by the appellant assessee by the foreign enterprise or the income has been received by the appellant on account of rendering professional services both outside and inside India?
Under this proposition learned first appellate authority has simply observed that the income in convertible foreign exchange received by the assessee was not on account of use of the assessee's registered trademark by any foreign enterprise. According to the learned Commissioner (Appeals) the income was received on account of rendering professional services to the clients both outside and inside India.
12. The next proposition propounded by learned Commissioner (Appeals) reads as under:
(f) How can foreign enterprises 'use' the trademark owned by and registered in the name of the appellant assessee? Whether the income paid by such foreign enterprises to the appellant assessee in the instant case was on account of 'use' of the registered trademark owned by the appellant assessee or on account of specialized services rendered by the appellant assessee?
This proposition is directly related to the proposition earlier propounded and under this point learned first appellate authority again observed that the income received by the assessee is not on account of use of its registered trademark by the foreign enterprises.
13. The next proposition propounded by learned Commissioner (Appeals) is:
(g) Whether it is justified to claim deduction in terms of Section 80-O stating that it is sufficient that the assessee itself uses its trademark in foreign countries to procure business and earn income from a foreign enterprise in convertible foreign exchange or whether it is an essential condition in terms of Section 80-O of the Income Tax Act that the use of the trademark owned and registered by a resident assessee should be by a foreign State or a foreign enterprise and income should be paid to the assessee by foreign enterprise on account of the use of the registered trademark by such foreign enterprise?
While elaborating his reasonings under this proposition learned Commissioner (Appeals) was of the view that pre-requisite of Section 80-O is that the registered trademark owned by the assessee-company should have been used by the foreign enterprises for their business purposes. According to the learned Commissioner (Appeals) that the goodwill and reputation cannot be equated with a registered trademark. The registered trademark may convey quality and integrity of the services but does not necessarily mean goodwill. According to the learned Commissioner (Appeals) the purpose of Section 80-O is not to use the goodwill and reputation to earn foreign income. The purpose is that trademark registered in India in the name of resident Indian companies are exported out of India and used by foreign enterprises outside India and pay for such user. According to learned Commissioner (Appeals) this is not the case of assessee.
14. The next proposition propounded by the learned Commissioner (Appeals) reads as under:
(h) Whether deduction under Section 80-O is also admissible in respect of the income attributable to the services rendered by the assessee in India though the services so rendered in India from part of the package of services which inter alia consists of the services to be rendered in India and also outside India ?
Under this proposition learned first appellate authority has highlighted the activities of the assessee which has been categorized as Outbound-1 and Outbound-2. In the activity categorized under Outbound-2 assessee is required to move goods of its clients from source place-1 in India to destination place "F" outside India. In this activity client does not contact the assessee directly but, contact entity in place of "F" outside India for the movement of its goods, such entity who is in the similar line of business contact with the assessee for providing service within India. The assessee has only rendered services within India that is packing and handling of the shipment from the clients place "I" in India to Airport or Seaport in India. Thus according to the learned Commissioner (Appeals) the activities which have been carried out only within India and the receipts received for such activity will not qualify for the deduction under Section 80-O.
15. The next proposition propounded by the learned Commissioner (Appeals) reads as under:
(i) Whether the assessee is eligible for deduction in respect of any income received from a foreign enterprise in convertible foreign exchange on the basis of a contract awarded in India or on the basis of a business deal which originated in India and part of the services were also rendered in India in the course of execution of such business deal or performance of such contract in addition to the services to be rendered outside India ?
In this proposition the learned Commissioner (Appeals) recorded the following finding:
In my opinion, any income received from a foreign enterprise in convertible foreign exchange on the basis of a contract awarded in India or on the basis of a business deal originating in India so far as the services in performance of such contract or deal were also rendered in India is not eligible to be covered under the provisions of Section 80-O. This issue has been discussed in detail in question No. (h) above, therefore, repetition is avoided.
16. The next proposition propounded by the learned Commissioner (Appeals) reads as under:
(j) Whether any income received from a foreign enterprise in convertible foreign exchange on account of pre-import consultancy rendered by the appellant assessee from India though such information/consultancy is used by the foreign client outside India?
Since the assessee has received a sum of Rs. 5,12,48,490 on account of pre-import consultancy, in view of the amended provision of Section 80-O such receipts do not qualify for deduction under Section 80-O, therefore, learned Commissioner (Appeals) has observed that no deduction would be available on these receipts under Section 80-O.
17. After considering all these issues with all possible angles learned first appellate authority further considered the issue for academic purpose and held that only net income can be considered for claiming deduction under Section 80-O. In this connection learned first appellate authority has appreciated the computation details of working out of Section 80-Otherefore, in case such deduction is allowed to the assessee. The following finding of the learned first appellate authority in this regard is worth to note:
It is a settled law that net income is considered eligible for deduction under Section 80-O in case the requisite conditions are met by an assessee. The appellant had claimed deduction on the basis of the gross receipts. The expenditure incurred in India directly and indirectly were not considered by the appellant assessee while claiming this deduction.
In my considered opinion, only net income of Rs. 19,57,84,022 can be considered eligible for claiming deduction under Section 80-O, if the other conditions are met. Needless to repeat that this finding remains academic in nature in view of the decision that appellant is not eligible to claim deduction under Section 80-O on substantive grounds. Ground of Appeal No. 5 is, therefore, rejected and the view of the assessing officer is uphelearned
18. The learned Counsel for the assessee while impugning the order of learned Commissioner (Appeals)submitted that though learned first appellate authority has considered all the arguments of the assessee elaborately but failed to interpret it and construed the true meaning of Section 80-O. He pointed out that the issue involved in this appeal are whether fees for services can, in law, include consideration for use of trademark, (ii) once it is agreed that fees for services can include fees for use of trademark then next question would be whether nomenclature of the receipt as fee for services would preclude an assessee from claiming deduction under Section 80-O. The learned Counsel for the assessee while apprising us with the activities of the assessee and the nature of receipt contended that appropriateness of the claim of the assessee-company would depend upon the following three question of facts.
(1) Whether, in fact, the assessee-company had used any trademark(whether own or that of others) to earn its remittance from abroad;
(2) Whether, in fact, the fee for services received by the assessee-cornpany includes consideration for the use of trademark;
(3) If the answer to question (2) is yes, then how much of the fee is consideration for the use of the registered trademark;
Therefore, whether the nature of the income derived by the company from in its clients is one of fee for service simplicitor or includes, fully or partially consideration for use of registered trademark is a mixed question of law and fact.
19. The learned Counsel for the assessee while buttressing his arguments apprised us with the meaning of expression 'trademark', evolution of trademark law in India and submitted that there is no inherent antithesis between earning from technical or professional services and earnings from the use of the trademark particularly if one keeps in mind that the trademark law in all countries currently envisages the registration of trademarks in respect of services also. In respect of a trademark in respect of services, the refusal to grant exemption to earnings from such services, be they technical or professional or otherwise, will result in an unjustified denial of the benefit of Section 80-O altogether in such cases and render the inclusion of the registered trademarks in the first class of receipts totally otiose in respect of his category of trademarks. The proper and harmonious way to read the amended Section will therefore, be to say that, generally, receipts in consideration of professional or technical services may not be eligible for the exemption any longer. However, if such services are attributable to the use of a "registered trademark", the receipts flowing out of such user will continue to be eligible for the exemption by virtue of the specific addition, in the amended Section, of the words "registered trademark" qua the first class of receipts earlier referred to. He further submitted, originally trademarks were associated only with goods. With the evolution of law, trademarks are used, registered and protected in respect of services also. Trademarks associated with services, know as "service marks" are capable of registration. Firms carrying on professional services, such as accounting, audit, legal profession, designers etc. have now registered trademarks associated with their professional service. This leads to the question of whether the fee charged by such firms could, in law, include fee for use of trademark. For instance, normally an accountant with a registered trademark charges a fee, which is higher than the income chargeable by an accountant without a registered trademark. Without any doubt, on facts, the registered trademark enables him to charge that higher fee and the higher fee is attributable to the registered trademark.
20. While taking us through Section 80-O of the Act he emphasized that the Section nowhere requires that the registered trademark should have been necessarily registered in India. The learned Commissioner (Appeals) has unnecessarily emphasized on the point that the registered trademark possessed by the assessees hould have been registered in India. He further submitted that learned Commissioner (Appeals)has taken very narrow interpretation of the expression "used" outside India employed in Section 80-O. The self-exploitation of the registered trademark outside India would also denote the user of the trademark for earning foreign exchange. According to the learned Counsel for the assessee it is not the requirement of the law that the trademark should have been used by a third entity and for the use of such trademark any consideration received by the assessee would only qualify the deduction under Section 80-O.
21. The learned D.R on the other hand, relied upon the order of learned Commissioner (Appeals) and pointed out that the Commissioner (Appeals) has dealt with all the arguments of the assessee raised before the Tribunal. He pointed out that the deduction would only admissible when a trademark developed by the assessee is exported outside India and it is used by foreign company out of India, the receipts received by assessee in consideration of such user would only qualify for the deduction. He heavily relied upon the finding of learned Commissioner (Appeals) regarding registration of the registered trademark within India.
22. We have duly considered the rival contentions and gone through the record carefully. The facts as emerges out from the record it is not in dispute that assessee is having a registered trademark. Though the trademark has been registered in Switzerland, the registered trademark has been exploited by the assessee for its business and it has received consideration for use of its trademark outside India. To this extent there was no dispute of facts.
23. Section 80-O has a direct being on the controversy, therefore, it is salutary upon us to take note of this Section.
80-O. Deduction in respect of royalties, etc., from certain foreign enterprises.(1) Where the gross total income of an assessee, being an Indian company or a person (other than a company) who is resident in India, includes any income received by the assessee from the Government of a foreign State or foreign enterprise in consideration for the use outside India of any patent, invention, design or registered trademark and such income is received in convertible foreign exchange in India, or having been received in convertible foreign exchange outside India, or having been converted into convertible foreign exchange outside India, is brought into India, by or on behalf of the assessee in accordance with any law for the time being in force or regulating payments and dealings in foreign exchange, there shall be allowed, in accordance with and subject to the provisions of this Section, a deduction of an amount equal to
(i) forty per cent for an assessment year beginning on the 1-4-2001;
(ii) thirty per cent for an assessment year beginning on the 1-4-2002;
(iii) twenty per cent for an assessment year beginning on the 1-4-2003;
(iv) ten per cent for an assessment year beginning on the 1-4-2004, of the income so received in, or brought into, India, in computing the total income of the assessee and no deduction shall be allowed in respect of the assessment year beginning on the 1-4-2005 and any subsequent assessment year:
Provided that such income is received in India within a period of six months from the end of the previous year, or within such further period as the competent authority may allow in this behalf.
Provided further that no deduction under this Section shall be allowed unless the assessee furnishes a certificate, in the prescribed form, along with the return of income, certifying that the deduction has been correctly claimed in accordance with the provisions of this Section.
24. The learned GIT(A) while construing and expounding the scope of the Section mainly emphasized on two aspects. Firstly the registered trademark possessed by an assessee should be registered in India. Secondly such trademark should have been exported out of India which should have been used by a third entity. The consideration received on such user in foreign exchange would qualify deduction under Section 80-O. The learned first appellate authority has also explained the expression "any income" and "any consideration for use". In our opinion all such discussions are F peripheral to the main controversy and not having much relevancy for the facts of the present case.
25. There is no dispute that Section 80-O is a beneficial legislation and a provision in a taxing statute granting incentives for promoting growth and development should be construed liberally. The restriction or interdiction provided in the provision are to be construed so as to advance the object of the provision and not to frustrate it.
26. It is also not in dispute that the expressions "used" in a taxing statute would ordinarily be understood in the sense in which it is harmonious with the object of the statute to effectuate the legislative intention. The learned first appellate authority while construing the scope of the provision incorporated a condition that registered trademark should be registered in India. In his opinion if the trademark is registered outside India then how an assessee could export the trademark. In our opinion the learned first appellate authority restricted the scope of user of the registered trademark by only to the extent of its export as a commodity. On plain reading of the provision nothing that sort of is discernible. It is necessary to emphasize that Section 80-O does not require that the trademark by the use of which the income is earned should be a trademark registered within India and it should be used by others. We do not see any reason to read limitation into Section 80-O as put up by the learned Commissioner (Appeals) regarding the registration of the registered trademark mandatorily in India. Thus in our opinion the learned first appellate authority has imported a condition which is not available in the Section for denying the deduction to the assessee.
27. Let us see another angle of the controversy. No doubt assessee is engaged in the activity of packing, moving and relocation solution internationally as well as nationally. The condition of registration of the registered trademark in India by the learned Commissioner (Appeals), is associated with user of registered trademark outside India. According to the learned Commissioner (Appeals) it should be a third entity who used that trademark outside India and pay for such user. Only such consideration if received in foreign exchange would qualify for the deduction under Section 80-O. In our opinion there is another face of the user of the trademark. The assessee is owner of the trademark. No doubt it is an asset of assessee. It is in the domain of the assessee as to how optimally exploit its asset. The one way is that assessee can allow any other concern to use its trademark outside India and receive payment of such user. The other way is that assessee may give it to some foreign concern and receive sale commission. The third possibility is self-exploitation of the registered trademark. For example assessee operating in 10 countries and getting business by the use of its registered trademark. Simultaneously it is not viable for the assessee to do business by self in another 15 countries and it allowed its trademark to be used by other concerns in those 15 countries and received the consideration. The receipts are being received by exploitation of the trademark either by self or by other concerns. There can be a situation that assessee likes to operate in those 15 countries where it has allowed to use its trademark by third entities. It can restrain the operation of those entities regarding the user of its trademark. In that case the assessee would get business by the exploitation of its registered trademark by self. How such receipts should be excluded as not eligible for grant of deduction under Section 80-O?
28. Thus on due consideration of all facts and circumstances we are of the view that a registered trademark not necessarily registered in India possessed by an Indian company used outside India even by self and received consideration in lieu of that user in the foreign exchange that would qualify for deduction under Section 80-O.
29. The next question emerges out for adjudication is as to whether all the receipts received by assessee are to be construed as receipt in consideration of use of registered trademark outside India. In our opinion all the receipts cannot be relatable to the user of the registered trademark outside India because apart from getting the business by virtue of the trademark assessee is doing the activity of packing, transportation, clearing at Airport and Seaports, which are directly associated with its business activity. The role of registered trademark is one factor which help the assessee to get a better business. Thus it cannot be said that whatever receipts assessee received in foreign exchange are by virtue of use of registered trademark outside India. The next question is as to how quantify the receipts which should be directly relatable to the use of registered trademark outside India. It is a little difficult question and there cannot be any straight jacket formula for arriving at a particular figure. However, the discretion for quantifying such receipts is to be exercised judiciously and in accordance with the guiding principle for exercising judicial discretion. The Hon'ble Supreme Court in the case of Sudhangshu Mohan Deb v. Niroda Sundari Debidhup has propounded the following guidelines required to be kept in mind while exercising the judicial discretion:
24. Discretion, in general, is the discernment of what is right and proper. It denotes knowledge and prudence, that discernment which enables a person to judge critically of what is correct and proper united with caution; nice discernment, and judgment directed by the circumspection; deliberate judgment; soundness of judgment; a science or understanding to discern between falsity and truth, between wrong and right, between shadow and substance, between equity and colorable glosses and pretence, and not to do according to the will and private affections of persons. When it is said that something is to be done within the discretion of the authorities, that something is to be done according to the rules of reason and justice, not according to private opinion; according to law and not humour. It is to be not arbitrary, vague, and fanciful, but legal and regular. And it must be exercised within the limit, to which an F honest man, competent to the discharge of his office ought to confine himself.
In the present case as to how to quantify the receipts relatable to the use of registered trademark outside India, one way is to approach the controversy in a way that if somebody violated the registered trademark of a concern and that concern approached the court for damages then how the court would quantity the damages. It is to be quantified keeping in view the business loss of the owner of the registered trademark vis-a-vis business gain of the violator. The second way is to analyse the profit of assessee on account of services provided by it in the shape of packing, transportation, clearance at Seaport, Airport etc. The net profit computed for this regular business can be excluded from the inclusive receipts i.e., eligible and ineligible, for deduction under Section 80-O. The resultant receipt could be termed as the receipt qualifying for deduction under Section 80-O. We find that learned first appellate authority has carried out an exercise in this regard while working out the net receipt for deduction under Section in case such deduction is admissible to the assessee. However, the Tribunal in Tata Sons Ltd (IT Appeal No. 629 (Mum.) of 2003) has already taken a view that only direct expenses will have to be considered in computing the net income. Insofar as the order of the Commissioner (Appeals) which holds that even indirect expenses have to be taken into account in computing the net receipts for the purpose of computing deduction under Section 80-O therefore cannot be accepted. The assessee in the course of hearing has filed revised working as per the decision of Tata Sons Ltd.'s case (supra), which is extracted below for understanding the issue better:
Gross receipts 30,70,97,117 Add:
Foreign Exchange Fluctuation Included in other income 1,79,94,480 Total F.C. Receipts 34,94,18,819 Eligible Section 80-O Receipts 30,70,97,117 Non-eligible Section 80-O FC Receipts 4,23,21,702 Foreign Exchange Fluctuations Attributable to Section 80-O receipts 1,58,14,984 Total Foreign Currency receipts Eligible 32,29,12,101 Less:
Direct Expenses In foreign currency 3,18,05,719 In Indian Rupees - Reimbursements 4,70,10,051 Indian Rupees -Expenditure 1,69,16,342 9,57,32,112 Profits eligible to Deductions under Section 80-O 22,71,79,989 In principle, we approve the above working to the extent extracted above and proceed further from then onwards. Here the assessee pleads for allowance of deduction under Section 80-O @ 40 per cent of 22,71,79,989. We do not agree with stand of the assessee that is entitled for relief under Section 80-O in respect of receipts included above.
30. The learned Counsel for the assessee drew our attention to the comparative figures in the case of Blue Dart, wherein net profit of 6.82 percent is accepted for assessment year 1999-2000, 10.06 per cent is accepted for assessment year 2000-01, 8.79 per cent is accepted for 2001-02 and 9.80 per cent is accepted for assessment year 2002-03. In the assessee's own case the non-eligible turnover has been to the extent of 13.06 per cent over the years. Having regard to all these factors it can be concluded that profit from its ineligible business activity should not be considered as eligible for Section 80-O deduction. It should be what is relatable to the exploitation of the registered trademark. It is very difficult to arrive at that figure unless we exclude the part of the profits attributable to its normal business of packing and transportation etc. We can safely conclude that 25 per cent of the above net receipts are attributable to its regular business activity of packing and forwarding and the rest of it is definitely for the usage and exploitation of registered trademark. We, therefore, direct the assessing officer to allow deduction under Section 80-O after reducing from the above figure 25 per cent which is attributable to normal profits of its packaging and forwarding business. The balance will be treated as profits eligible for deduction under Section 80-O of the Act. We are required to do this exercise because we do not accept the plea of the assessee that the entire profits are eligible for exploitation of the registered trademark. The assessing officer will be free to examine the correctness of the revised working extracted above with reference to the books of account of the assessee. The assessee, if so required by the assessing officer, shall produce all the evidence in support of the working made out by it.
31. In the result, the appeal of the assessee is partly allowed.