Income Tax Appellate Tribunal - Mumbai
Mrs. Sheila Anil Paul vs The Acit on 23 April, 2003
Equivalent citations: [2004]90ITD605(MUM), [2004]269ITR133(MUM), (2004)85TTJ(MUM)424
ORDER
Mukul Shrawat, Judicial Member
1. This appeal filed by the assessee is arising out of the order of CIT (A) XX. Mumbai dated 30/7/2002 and the only issue is in respect of claim of deduction Under Section 80-O of Rs. 15,13,593/-. This issue was agitated in the grounds of appeal reads as follows:
"1. In the facts and circumstances of the case and in law Learned CIT (Appeals) erred in confirming the view taken by A.O. that appellant is not entitled to claim deduction Under Section 80-O of I.T. Act 1961.
2. Reasons given by CIT (Appeals) for confirming the view taken by A.O. that appellant is not entitled to claim deduction Under Section 80-O of the Income Tax Act, 1961 are wrong, insufficient and contrary to facts and evidence on record.
3. In the facts and circumstances of the case and in law Learned CIT (Appeals) ought to have held that, appellant is entitled for the deduction Under Section 80-O of Rs. 15,13,593/-."
2. As per the assessment order passed Under Section 143(3) dated 28/3/2002 for the A.Y. 1999-2000 the A.O. has mentioned that the assessee carried on the business of creating Design in Man-made as well as Synthetic Fabrics with the help of various Designers. Such designs as made by the assessee were being sold to foreign customers as well as local customers and assessee used to receive designing charges during the year. The A.O. has also observed that for this purpose she has maintained two separate Income & Expenditure Account, P&L Account, one for the feeds received from the local suppliers and one for the fees received from foreign enterprises. Deduction Under Section 80-O was claimed in respect of the fees received from foreign enterprises. As per A.O. deduction Under Section 80-O is admissible in respect of any income received by the assessee from foreign government or enterprises for the use outside India of any patent, invention, design or registered trade mark. According to A.O. the word "design" along with patent, invention, registered trade mark etc. indicates that this word should be of similar nature i.e. an identifiable or registered design. According to him mere design of garments to not fall under this category. According to him a design for the purpose of deduction Under Section 80-O should be totally distinguishable and identifiable design. With these observations he has held that the claim of the assessee did not qualify for the deduction Under Section 80-C of IT Act.
3. In first appeal ld.CIT(A) has discussed the facts of the case of mentioned in above para by A.O. according to him the word "design contemplated in Section 80-O has to be read as provided and in context mentioned in the said section and just by using the word design for services provided did not get the same meaning as provided in the section. Ld. CIT (A) has mentioned that the appellant used to prepare various sketches of cloth outfits by using different fabrics in different forms and used the word "design" which according to him do not fall under the terms used in Section 80-O. He has further mentioned that the sketches were being approved by foreign clients for the purpose of manufacturing of garments in India on the basis of the approved sketches called as designs and the appellant got design charges @5% on FOB value purchased by those foreign clients through various Indian parties based in India. In view of ld.CIT(A) the word design used in this section contemplates something the engineering design similar to patent, invention, etc. and could not be similar to sketches of garments. Before him the appellant has relied upon a decision of ITAT Delhi in the case of Mittal Corporation, 77 ITD 270 ld.CIT (A) has distinguished this case from the case of the appellant with this observation that the issue was in respect of technical services and not related to designs, therefore, he has mentioned that the said citation was not applicable. Further according to him provisions of this section have been amended by the Finance act, 1997 and accordingly the deduction now available only with respect of income received for patent, invention, design or registered trade mark and not for "professional services" which were earlier available in the old section, therefore also he has held that the case law cited was not applicable. With these observations it was held that the appellant was not entitled for deduction Under Section 80-O. Being aggrieved, now the assessee is further in appeal.
4. On behalf of the appellant ld.A.R Shri Prakash P. Pandit appeared and we have heard him at length. After narrating the facts of the case and the reasons on the basis of which the revenue authorities have denied the claim, as stated in above paras ld.A.R has opened his arguments that the word "design" is not defined in I.T.Act for the purpose of claim of deduction Under Section 80-O. Generally if any word is not defined in a particular Act then to understand the said word the dictionary meaning has to be adopted. The term "design" is used in Fashion Designing Service and the meaning assigned "visible form to the conceptions of the mind mentally conceived at the planning stage to give shape on cloth, paper in the form of drawing or sketches so that such drawings/sketches act as a guide to the work of fashion designing". Ld. A.R has also produced Design Act, 1911 wherein "design" means only the features of shape, configuration, pattern, applied to any article by any industrial process or manual means. Ld. A.R has further advanced his arguments that the terms used in Section 80-O i.e. patent, invention, design or registered trade mark should be understood as defined in the respective Acts, because most of these terms are otherwise governed by different statutes. For the purpose of trade mark there is Trade and Merchandise Marks Act, 1958, likewise for the purpose of patent there is Patent Act as well.
After elaborating on the word "design" ld. A.R has drawn our attention on the facts of the case in respect of the designs of cloths made by the appellant, sketches provided from page 9 to 46 of paper book. He has also drawn our attention on letters received from foreign parties, placed on paper book from page 6 to 8. On page 4 of paper book detail of receipt of foreign payment is also enclosed. Ld.A.R has referred the correspondence of the foreign parties who have confirmed that the designs prepared by the appellant are exclusive for those companies. Through those letters remittance of design charges were also acknowledged.
Finally ld.A.R has cited the following decision wherein according to him this issue of allowability of deduction Under Section 80-O has been dealt with and decided in favour of the assessee.
1. Ramnath & Co., 83 ITD 698
2. Oberoi Hotels India Pvt. Ltd., 231 ITR 148
3. Overseas Merchandise Inspection Co.(India) (P) Ltd., 80 ITD 176
4. Mittal Corporation, 72 ITD 270
5. Kankap (India) 67 ITD 237.
5. On behalf of the Revenue ld.D.R. Shri R.S. Arneja has strongly relied upon the orders of A.O. and CIT(A). He has argued that the revenue authorities have disallowed the claim of the appellant because of two reasons, firstly, the term "design" as used in Section 80-O do not include the "sketches" made by the appellant. The second reason for disallowance was that the sketches so provided were utilized and used in India by the manufacturers of garments situated in India. He has thus argued that since the language of the section clearly states that the patent, design etc. to be used outside India then only qualifies for the claim of deduction, therefore, the assessee is not entitled for this claim. Ld. D.R has also relied upon the definition of "design" as per the. The Designs Act, 1911 and emphasized that the design should be applied to any article for industrial process or mechanical purpose. This definition has excluded the design made for the purpose of construction. The definition has also excluded such design which are in substance a mere mechanical device. As far as the case law relied upon by the appellant of Mittal Corporation(supra), ld.D.R has mentioned that while deciding the appeal ld.CIT(A) has distinguished the facts of the case, therefore, under these circumstances the claim of the assessee was rightly denied.
6. We have heard at length both the parties and carefully considered their arguments. We have also thoroughly perused the orders of the authorities below in the light of the evidences and other material placed before us as well as the case laws cited above. The object of introduction of Section 80-O was to provide tax incentive for encouraging Indian Companies an Indian residents to export their know-how and skill abroad. The deduction admissible under this section is available in all cases where the know-how, patent etc. are provided out side India to a foreign Government or to a foreign enterprise the benefit under this section is available to the receipts in convertible foreign exchange in India or convertible foreign exchange out side India brought into India in lieu of providing invention, patent, trade mark, design etc. Thus Section 80-O states that where the gross total income of an assessee, being an Indian company or a person who is resident in India includes any income received from the Government of a foreign State or foreign enterprises in consideration for the use out side India of any patent, invention, design or registered trade mark and such income is received in convertible foreign exchange in India or having been converted into convertible foreign exchange outside India, is brought into India by such assessee and shall be allowed a deduction as prescribed. In short the salient requirements to be fulfilled to qualify for deduction are, (i) the assessee must be a resident in India (ii) the income earned by way of providing patent, invention, design or registered trade mark (iii) the income is in consideration for use out side India made available to a foreign State or foreign enterprise (iv) the income received is convertible and brought into India (v) and as per explanation (vi) services rendered or agreed to be rendered out side India shall include services rendered from India but shall not include services rendered in India.
After undertaking the object of the insertion of this deduction clause it is also true that an exemption provision should be liberally construed. The liberal construction should be such as understandable on plain reading of the said exemption provision. Liberal construction has to be adopted without impairing the legislative requirement and spirit of the provision. Thus the fulfilment of the objectives of a statute is a must and without fulfilling the conditions laid down in plain and clear language cannot enable an assessee to have the benefit of the section. Thus we have to examine the fact of this case to ascertain whether the conditions laid down in this section have been fulfilled or not to avail the benefit.
There is no dispute about this fact that the assessee during the year carried on the business of creating "design" to be used on fabrics. It is also not disputed that the designs were supplied to the foreign customers. The A.O also noted that the appellant has prepared a separate account of the fees received from the foreign enterprises. As per the details made available from Foreign Inward Remittance Certificate the appellant received Rs. 32,85,000/- from various overseas clients and claimed deduction Under Section 80-O of Rs. 15,13,593/-. It is also not disputed that the amount was received in convertible foreign exchange which was brought into India. So the assessee has fulfilled the basic requirement laid down in this section. The pertinent question raised before us two fold, firstly whether the service of providing sketch comes within the term used in this section "design" and secondly, the design so provided were for the purpose of outside India or within India.
To answer the first question raised before us we have to examine the word "design" used in the language of this section i.e. 80-O. According to general principles of statutory interpretation is that a statute is to be understood in its conventional way of interpretation keeping in mind the intention of its maker i.e. Legislature. A statute is to be construed according to the intent of them that make it and it is the duty of judicature is to act upon the true intention of legislature, the mens or sentential legis. Keeping in mind this general principle we have reproduced the object of introduction of this section in the beginning itself. The first primary rule of construction is that the intention of the legislature must be found in the words used by the legislature itself. The intention of the legislature thus assimilates two aspects, one aspect is the concept of "meaning" i.e. what the specific word mean and, another aspect the concept of "purpose" conveyed in the statute. Thus to decide the first objection of the Revenue we would like to know the meaning of the word "design".
As per Mary Brooks Pickem "design" means Plan, Pattern, or Preliminary sketch for something to be done or made; as design for a dress. As per Oxford 'design' means a plan or drawing produced to show the look and function or working of something before it is built or made. As per Webster's (Archaic)- to mark out, designate, to make drawing or plans, be a designer. The meaning of this word as used in various dictionaries has also been adopted in various Acts. The Design Act, 1911 has given a meaning that "design" means the features of shape, configuration, pattern applied to any article by any industrial process or means whether manual, mechanical or chemical, separate or combined which in the finished article appeal to and are judged solely by the eye; but does not include any mode or principle of construction or anything which is in substance a mere mechanical device, and does not include any trade mark." To levy tax on fashion designing service meaning of "design" in the context of special designing the term design can be taken to mean giving visible form to the conceptions of the mind. One can say that what is mentally conceived at the 'planning' stage is given shape on cloths, paper in the form of drawing or sketches so that such drawings/sketches act as a guide to the work of fashion designing." Since the term design has not been defined in the I.T.Act, therefore, for correct interpretation it is essential to seek the help of the technical meaning as well as the meaning of this term wherever used in other statutes/acts. It is necessary to adopt the meaning of the word used in general parlance to avoid anomalies, absurdities and basically to impart justice. Considering the manner in which the appellant has provided sketches, annexed in the paper book we are of the opinion that the sketches used for the manufacture of garments qualifies for the claim of deduction Under Section 80-O for the term used "design". In view of the above discussions a conclusion can be drawn that the services provided by the appellant comes within the purview of the definition of "design" as mentioned in Section 80-O. On this count we do not agree with the view adopted by the revenue authorities and hereby hold that the appellant has rendered service of providing design to foreign enterprises for which she is entitled for the claim of deduction.
The second reason for disallowance of this claim was that whether the services rendered were within India or used out side India. The facts as referred above states that the appellant has provided designs to foreign enterprises and on approval the same were used by the Indian manufacturers for stitching garments. The garments stitched on the basis of the sketches and designs of the appellant were exported and the ultimate destination was not within India but out side India. This fact has not been denied by the revenue authorities, rather the A.O has verified and found that the assessee received the foreign remitted @5% of the POB of the garments exported. The A.O has also mentioned that the remittance was certified as per the prescribed form "Foreign Inward Remittance Certificate". Thus on the basis of these facts one thing is evident that the ultimate destination of the services provided by the assessee was not within the country albeit helped the Indian manufacturers to stitch garments meant only for the purpose of export. The design prepared by the appellant was thus specifically meant for the purpose of use out side India. Thus on the basis of these facts a conclusion can be drawn that the services rendered by the appellant were from India and as used out side India in consideration thereof received foreign remittance. CBDT Circular No. 700 issued on 23/3/95 also clarified this position that," as long as technical and professional service are rendered from India and are received by a foreign Government or enterprises outside India, deduction Under Section 80-O would be available to the person rendering the service even if the foreign recipient of the services utilizes the benefit of such services in India." This CBDT Circular No. 700 dated 23/3/95 reported in 213 ITR 78(St) has further elaborated as follows:
"A question has been raised as to whether the benefit of Section 80-O would be available if the technical and professional services, though rendered outside India, are used by the foreign Government or enterprises in India.
The matter has been considered by the Board. It is clarified that as long as the technical and professional services are rendered from India and are received by a foreign Government or enterprise outside India, deduction under Section 80-O would be available to the person rendering the services even if the foreign recipient of the services utilizes the benefit of such services in India."
Since the word "use" is a very general word, therefore, it is necessary for the Courts to give a practical meaning so that the purpose and object of the statute could be achieved. Keeping in view this aspect Hon'ble Delhi High Court in the case of E.P.W Da Costa and Another, 121 ITR 751 has taken a view that, it is necessary that the use to which the information is to be put must be practical and utilized by a foreign enterprise though applied for the benefit of India audience. In this instant case the petitioner rendered the services in making an "audience research study" in the Hindi speaking areas of the Union of India to assess the radio listening habits of Indians and supply such information to the British Broadcasting Corporation(BBC). This was held to be covered by the provisions of Section 80-O. The British Broadcasting Corporation was said to have 'used' the information when it formulated or modified its broadcasting programmes to India according to the guidance given to the British Broadcasting Corporation by the said information." This decision of Hon'ble Delhi High Court supports the claim of the appellant because almost parallely services in the form of design were essentially consisted of conveying commercial specific information based on the skill of the designer which enabled the foreign buyer to take a decision used ultimately to import the garments stitched in India. Therefore, we hereby hold that in the instant case the services were rendered from India which were utilized outside India by the foreign enterprises, hence qualifies for deduction Under Section 80-O. To strengthen this view a decision of ITAT Cochin Bench in the case of Ramnath & Co. cited supra is also relied upon.
In an another decision of ITAT Delhi Bench in the case of Mittal Corporation(supra) has also taken a view that on the basis of the facts in that case the assessee was not an exporter and did not sell goods abroad but only sold the information. On the basis of the information the foreign buyer imported the goods from India and paid the commission to that assessee. The important thing which was considered was that identically in that appeal also the assessee only provided the information to the foreign buyers. The foreign buyers place the orders directly on the supplier and the suppliers shipped the goods directly abroad. The foreign buyers made the payments of the goods supplied directly to the supplier and the assessee in that appeal only received the commission in convertible foreign exchange. This decision is also hereby cite in support of our view expressed above.
Before we conclude, the only objection of the revenue yet to be considered by us is whether under present circumstances the services were to be treated as rendered within India or outside India? Considering the facts involved in the instant case and the provisions of law, there was enough material available on record to hold that the services were being rendered by the assessee from India which were being used by foreign entrepreneurs. The assessee had rendered its specialized job of supply of design to the foreign entrepreneurs and it was the decision of the foreign parties how to utilize the said designs supplied by the appellant. On her part the appellant had completed her job by supplying the design and the decision was totally rested with the foreign parties to give the orders of stitching either in India or to any other country. As far as the appellant is concerned she has rendered services from India which were factually used in foreign countries by the respective foreign parties. Regarding the genuineness of the services rendered and the fact that the assessee received income in convertible foreign exchange has not been doubted by the revenue, hence we discard this argument of ld.D.R.
7. Considering the facts involved in the appeal before us, the objects of the provisions of Section 80-O and the material available on record, we are of the view that the assessee who is resident in India has genuinely provided the information in the form of "design" out side India to foreign enterprises and in consideration earned foreign exchange which was brought to India, therefore, eligible for deduction Under Section 80-O. The ground raised by the assessee is allowed.
ITA No. 5398/Mum/027. In the result, the appeal of the assessee is allowed.