Bombay High Court
Abdulgafar A. Nadiadwala vs Assistant Commissioner Of Income Tax ... on 29 March, 2004
Equivalent citations: (2004)188CTR(BOM)232, [2004]267ITR488(BOM)
Author: V.C. Daga
Bench: V.C. Daga, J.P. Devadhar
JUDGMENT V.C. Daga, J.
1. This appeal at the instance of the assessee gives rise to a highly debated but interesting intricate, legal question as to whether or not the appellant-assessee (hereinafter referred to as the "assessee") was entitled to claim deduction under Section 80HHC, or in the alternative, under Section 80-O of the IT Act, 1961 (hereinafter referred to as "the Act" for short), in the assessment of the asst yr 1996-97 The History of adjudication
2. The history of adjudication proceedings of the case can be stated quite shortly before touching the question of law involved in the present appeal
3. The assessee in this case is an individual by status and is a leading producer of Hindi films The assessee has filed his return of income for the asst yr 1996-97 on 30th Oct, 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-cam tapes with rights attached thereto
4. The assessee claimed to have entered into an agreement dt 29th March, 1995, with Satellite Television Asian Region Ltd (popularly known as "Star TV") to grant the sole and exclusive rights of satellite broadcasting and pay TV through Star TV satellite for Asian region only in respect of films mentioned therein The assessee by virtue of the said agreement transferred beta-cam tapes of 14 films mentioned in the said agreement, to be exploited in the manner mentioned therein for a period of five years
5. The assessee before the AO contended that without prejudice to his right to claim deduction under Section 80HHC, 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 copyrights outside India as such covered within the words "the similar property rights" used in Section 80-O of the Act
6. The AO, vide his order dt 1st May, 1998, rejected the claim of the assessee under Section 80HHC holding that there was no export or any sale of goods or merchandise outside India by the assessee According to the AO, the assessee exported primarily "user of rights" to telecast film and not the goods or merchandise as required under the said section In his view, the beta-cam tapes were only an ancillary to the export He, thus, refused to treat beta-cam tapes as "goods" or "merchandise" for the purposes of Section 80HHC and refused to allow deduction claimed by the assessee under Section 80HHC of the Act Assessee's alternate plea for the claim of deduction under Section 80-O was also rejected on the ground that the assessee did not render any service outside India and that the receipts of the assessee had no nexus with the so-called services rendered abroad
7. Aggrieved by the aforesaid order of the AO dt 1st May, 1998, the assessee unsuccessfully preferred an appeal before the Commissioner of Income-tax (Appeals), Central-V, Mumbai ("the CIT(A) for short) The assessee reiterated his claim with legal submissions as were made before the AO, however, the same did not find favour with the CIT(A) The CIT(A), thus, was pleased to reject the appeal vide his order dt 12th Jan , 1999 and affirmed the order of the AO
8. Aggrieved by the above order, the assessee invoked appellate jurisdiction of the Income-tax Appellate Tribunal, Mumbai ("the Tribunal", for short), and raised the dispute in appeal relating to the deduction under Section 80HHC with alternative claim for deduction under Section 80-O of the Act
9. The Tribunal, after hearing the rival contentions, vide its order dt 15th Nov , 1999, did not accept any of the contentions raised by the assessee with respect to his right to claim deductions either under Section 80HHC or Section 80-O of the Act The Tribunal affirmed the views of the AO as well as that of the CIT(A) with respect to these two deductions as claimed by the assessee According to the Tribunal, the assessee was neither 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 IT Rules have no application as the fiction created thereunder has a limited purpose and object of finding out the cost of the film
(iv) Sec 80HHF has been brought on statute book by the legislature clearly indicates that 'cinematographic films' were not covered for the purposes of Section 80HHC
10. Being aggrieved by the above order of the Tribunal, the assessee has invoked 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 the profits which are derived from the export have to be by 'sale or otherwise' The transaction in question being in the nature of sale was squarely within the sweep of Section 80HHC According to the assessee, the Tribunal has taken a very narrow view of the matter and did not consider in its true scope and failed to correctly interpret the term 'sale or otherwise' occurring in Section 80HHC of the Act The Factual panorama
11. Before going to recapitulate the submissions advanced by the rival parties, it is necessary to understand the nature of transaction involved in the appeal At the same time, it is also necessary to understand what do you mean by "beta-cam film" and "beta-cam tape" The detailed note furnished by the assessee in support of his claim to the AO reveals that to show a 35 mm format film on television, the same is required to be made compatible for transmission and telecast This is required to be done by adopting a process whereunder 35 mrn format film passes through high tech tele-cine machine The CCD camera, which is interlinked with the machine, adjusts the picture's frame and sound with the result synchronised picture and sound is recorded on to the Beta-cam Tape The Beta-cam Tape is video format of 3/4" of magnetic tape of highly professional quality and used for transmission and telecast With the use of computerised colour correction and decoders, beta-cam tapes present a better picture with improved sound quality In short, beta-cam tapes make the film available at 35 mm cinematography, compatible for transmission and telecast
12. Having understood the concept of beta-cam film and beta-cam tape, it is now necessary to look into the nature of transaction between the assessee and the Star TV The relevant clauses of the agreement dt 29th March, 1995, lifted from the order of the Tribunal, are reproduced hereinbelow for immediate reference The preamble of the agreement reads as under
"Whereas the party of the first part have acquired the rights of the several films covered under this agreement from A.G. Films (P) Ltd. Bombay, for the rights of exploitation agreed to be entrusted under this agreement and the party of the first part are fully empowered to grant the said rights i.e. Star TV satellite rights and pay TV rights through Star TV satellite for Asian region only and enter into this agreement.
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 :
"Clause 3: It is clearly agreed and understood that all television rights including Doordarshan 1, Doordarshan 2 and all other channels of Doordarshan and/or Government of India, whether terrestrial and/or satellite including LPT which are presently in operation and/or which may come into operation in future in India as also all television rights for all countries/nation in Asian regions shall continue to remain with the producers/party of the first part or their agents/distributors and this being the essence of the agreement. Thus the rights being acquired by the party of the second part under this agreement are expressly excluding all other rights such as TV rights, dubbing rights, airborne rights and high seas rights, video rights and cable TV rights. The party of the first part have not granted cable TV rights and Doordarshan pay TV rights for India and to any party and have agreed not to grant such cable TV rights and Doordarshan pay TV rights for India to any party during the subsistence of this agreement.
Clause 11: The party of the first part confirm that the negative/source material of the "said films" is of reasonable good condition to provide beta-cam tapes. The beta-cam tapes shall be exact copy of the films of the same title. In case the negative required rejuvenation, cleaning, repair etc., it would be at the cost of the party of the first part."
Having understood the nature of the product and the transaction in question, we proceed to notice the relevant statutory provisions.
The structure of the statutory provisions
13. It is not in doubt that a country's economic growth is measured by the foreign exchange reserves held by it, because that gives it the purchasing power in the international market With a view to encourage larger exports of certain goods and technical know-how and consequent augmentation of foreign exchange earnings, the IT Act was amended from time to time and Sections 80HHC and 80-O came to be enacted Section 80HHC
14. With a view to encouraging larger exports of certain goods, the Finance Act, 1982, had inserted Section 89A in the IT Act w e f 1st June, 1982, for providing tax relief to Indian companies and non-corporate taxpayers resident in India whose export turnover for a year exceeds the export turnover for the immediately preceding year by more than 10 per cent thereof
15. The Finance Act, 1983, has omitted the aforesaid provisions w e f 1st April, 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 asst yrs 1983-84 to 1985-86
16. The Finance Act, 1985, has again substituted Section 80HHC with that of new Section 80HHC w e f 1st April, 1986 Section 80HHC has been further amended by the Taxation Laws (Amendment and Miscellaneous Provisions) Act, 1986, w e f 1st April, 1987, and remained operative for the asst yrs 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 asst yr 1989-90, the details of which are not necessary for the purposes of this appeal
17. By the Finance Act, 1990, Section 80HHC again came to be amended for and from the asst yr 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, w e f 1st April, 1992 The Departmental circulars to explain the amendments made from time to time and laying down broad features thereof were issued by the Central Board of Direct Taxes ("CBDT" for short) The relevant part of Section 80HHC relevant for the purposes of this appeal is reproduced hereinbelow "Deduction in respect of profits retained for export business 80HHC (1) Where an assessee, being an Indian company or a person (other than a company) resident in India, is engaged in the business of export out of India of any goods or merchandise to which this section applies, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of the profits derived by the assessee from the export of such goods or merchandise Provided ............. ...............
......... .........(1A) (2)(a) This section applies to all goods or merchandise, other than those specified in Clause (b), if the sale proceeds of such goods or merchandise exported out of India are received in, or brought into, India by the assessee (other than the supporting manufacturer) in convertible foreign exchange, within a period of six months from the end of the previous year or, where the Chief CIT or CIT is satisfied (for reasons to be recorded in writing) that the assessee is, for reasons beyond his control, unable to do so within the said period of six months, within such further period as the Chief CIT or CIT may allow in this behalf
(b) This section does not apply to the following goods or merchandise, namely
(i) ............ .............
(ii) minerals and ores (other than processed minerals and ores specified in the twelfth schedule) Explanation 1 The sale proceeds referred to in Clause (a) shall be deemed to have been received in India where such sale proceeds are credited to a separate account maintained for the purpose by the assessee with any bank outside India with the approval of the Reserve Bank of India Explanation 2 For the removal of doubts, it is hereby declared that where any goods or merchandise are transferred by an assessee to a branch, office, warehouse or any other establishment of the assessee situate outside India and such goods or merchandise are sold from such branch, office, warehouse or establishment, then, such transfer shall be deemed to be export out of India of such goods and merchandise and the value 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,
(c) ............. ..............
Explanation --For the purposes of this Sub-section,--
(a) to (f) .............. ...............
(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 or merchandise to one or more export houses or trading house, the profits of the business;
(b) in a case where the business carried on by the supporting manufacturer does not consist exclusively of sale of goods or merchandise to one or more export houses or trading houses, the amount which bears to the profits of the business the same proportion as the turnover in respect of sale to the respective export house or trading house bears to the total turnover of the business carried on by the assessee.
(4)..... ......... ..............
(4A) The deduction under Sub-section (1A) shall not be admissible unless the supporting manufacturer furnishes in the prescribed form along with his return of income,--
(a) the report of an accountant, as defined in the Explanation below Sub-section (2) of Section 288, certifying that the deduction has been correctly claimed on the basis of the profits of the supporting manufacturer in respect of his sale of goods or merchandise to the export house or trading house; and
(b) ........... ............
Provided .............. ................
Explanation:--For the purposes of this section,--
(a) "convertible foreign exchange" means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purpose of the Foreign Exchange Regulation Act, 1973 (46 of 1973), and any rules made thereunder;
(aa) "export out of India" shall not include any transaction by way 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);
(b) "export turnover" means the sale proceeds, received in, or brought into, India by the assessee in convertible foreign exchange in accordance with Clause (a) of Sub-section (2) of any goods or merchandise to which this section applies and which are exported out of India, but does not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962 (52 of 1962);
(ba) "total turnover" shall not include freight or insurance attributable to the transport of the goods or merchandise beyond the customs station as defined in the Customs Act, 1962 (52 of 1962):
Provided that in relation to any assessment year commencing on or after the 1st day of April, 1991, the expression "total turnover" shall have effect as if it also 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 of profession" as reduced by--
(1) ninety per cent of any sum referred to in Clause (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
18. 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 aha, be in consideration for the supply of information for use outside India and the information must concern industrial, commercial or scientific knowledge, experience or skill The provision of Section 80-O applicable to the facts of the present case is reproduced hereinbelow "Deduction in respect of royalties, etc, from certain foreign enterprises 80-O Where the gross total income of an assessee, being an Indian company or a person (other than company) who is resident in India includes any income by way of royalty, commission, fees or any similar payment received by the assessee from the Government of a foreign State or a foreign enterprise in consideration for the use outside India of any patent, invention, model, design, secret formula or process, or similar property right, or information concerning industrial, commercial or scientific knowledge, experience or skill made available or provided or agreed to be made available or provided to such Government or enterprise by the assessee, or in consideration of technical or professional services rendered or agreed to be rendered outside India to such Government or enterprise by the assessee, 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 for 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 fifty per cent of the income so received in or brought into, India, in computing the total income of the assessee Provided that such income is received in India within a period of six months from the end of the previous year, or where the Chief CIT or CIT is satisfied (for reasons to be recorded in writing) that the assessee is, for reasons beyond his control, unable to do so within the said period of six months, with such further period as the Chief CIT or CIT may allow in this behalf Explanation --For the purposes of this section,--
(i) "convertible foreign exchange" means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the law for the time being 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
19. Section 80HHF came to be inserted by the Finance Act (No 2) w e f 1st April, 2000, with a view to provide deduction to the Indian companies from profits and gams 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 gams 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, be allowed, in computing the total income of the assessee, a deduction to the extent of the profits derived by the assessee from such business (2) The deduction specified in Sub-section (1) shall be allowed only if the consideration in respect of the software or software rights referred to in that sub-section is received in, or brought into, India by the assessee in convertible foreign exchange, 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 (3) For the purposes of Sub-section (1), profits derived from the business referred to in that sub-section shall be the amount which bears to the profits of the business, the same proportion as the export turnover bears to the total turnover of the business carried on by the assessee (4) The deduction under Sub-section (1) shall not be admissible unless the assessee furnishes in the prescribed form, along with the return of income, the report of an accountant, as defined in the Explanation below Sub-section (2) of Section 288, certifying that the deduction has been correctly claimed in accordance with the provisions of this section (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 any 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 (6) Notwithstanding anything contained in this section, no deduction shall be allowed in respect of the software or software rights referred to in Sub-section (1), if such business is prohibited by any law for the time being in force "
In the Explanation to the proposed new section, the expressions "competent authority", "convertible foreign exchange", "film software", "music software", "telecast rights", "television news software", "television software", "export turnover", "profits of the business" and "total turnover" have been defined Income-tax Rules
20. At this juncture, it is also necessary to refer to the relevant part of Rules 9A and 9B of the IT Rules providing for deduction in respect of profits and gams arising from the business of production of feature films carried on by a person The present Rules 9A and 9B of the IT Rules read as under
"Deduction in respect of expenditure on production of feature films 9A (1) In computing the profits and gams 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) Deduction in respect of expenditure on acquisition of distribution rights of feature films 9B (1) In computing the profits and gams 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)
21. With the aforesaid statutory provisions, let us proceed to recapitulate the rival contentions Rival contentions
22. The brief facts relevant for the purpose of deciding this appeal, though simple, consumed considerable judicial time in view of the detailed, well researched and persuasive arguments that were heard both oral and on paper Several contentions were advanced by the learned counsel of both sides, primarily, with respect to the scope of Sections 80HHC and 80-O in the light of Section 80HHF in relation to the peculiar nature of films and film industry However, we propose to confine ourselves to the facts of the case in hand without laying down any broad legal propositions, though we permitted desirous members of Bar to address us, considering the importance of the issues involved
23. We have heard Shri K Shivram with K Gopal, Shri V H Patil, Shri A P Sathe, Shri S N Inamdar and Shri H Rai, learned advocates, who canvassed the viewpoint of the assessee Shri R V Desai, learned senior counsel with Mr P S Jetly, advocate, was heard on behalf of Revenue Submissions on Section 80HHC
24. The assessee's submissions on the applicability, scope and sweep of Section 80HHC are summarised as under
(A) That the assessee is in the business of production and export of films He had exported the beta-cam tapes containing films pursuant to the agreement dt 29th March, 1995, during the asst yr 1996-97 The export of beta-cam tapes was subject to customs clearance as such beta-cam tapes containing the films are "goods or merchandise"
(B) That the words "goods" and "merchandise" appearing in Section 80HHC should be assigned the same meaning as is understood in the film industry since the said words have not been defined in the Act (C) That the word "goods", if taken in its ordinary dictionary meaning, would mean any article which can ordinarily come to market for being bought and sold The term "merchandise" would mean the goods which are normally bought and sold The term "goods" is much wider than the term "merchandise" The word "goods" means any movable property other than actionable claims and money It includes all the movable properties whether for trade or not The definition of the word "merchandise" as defined in the Law Lexicon, is a term covering all articles of commerce, the objects of commerce, the subjects of commerce and traffic, any article which is the object of commerce, or which may be bought or sold in trade, all kinds of personal property which can be bought and sold in the market, as such beta-cam tapes can be treated as goods or chattel under the Sale of Goods Act, 1930 (D) 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 incentive provision (E) 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 (F) 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' (G) 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 (H) That the condition precedent to claim deduction under Section 80HHC is export of goods or merchandise out of India The term "export out of India" has been defined in Expln (aa) to Section 80HHC(4) to mean transaction of export out of India by way of sale or otherwise involving customs clearance at any customs station as defined under the Customs Act, 1962 The beta-cam tape was subjected to customs clearance when it was exported out of India as per the agreement of lease dt 29th March, 1995, as such, it was nothing but virtually a transaction of sale entered into by a person resident of India, engaged in the business of export of goods and merchandise and the export proceeds akin to sale proceeds were received by the assessee in convertible foreign exchange within a period of six months from the end of the previous year, therefore, the transaction in question fulfilled all the conditions required by Section 80HHC of the Act The assessee, therefore, was entitled to claim deduction under Section 80HHC of the Act (I) That the Tribunal misdirected itself in stating that there is no 'sale' In fact, the Tribunal did not look to the provisions of Section 80HHC in the right perspective Sub-section (3) as well as (4B)(baa) of Section 80HHC specifically refers to 'profits and gams of business or profession' and the same has to be computed in accordance with the provisions of Section 28 of the Act For the purposes of computing profits and gains of business and profession under Section 28, recourse to Rules 9A and 9B has to be taken into account and, according to Sub-rule (6) of Rule 9B 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 "
(J) That Rules 9A and 9B have been specifically incorporated in the IT Rules for providing deduction in respect of profits and gams arising from the "business of production of feature film carried on by a person, (the person carrying on such business hereafter in this rule referred to as film producer) " and Rule 9B specifically provides deduction in respect of expenditure on "acquisition of distribution rights of feature films " Hence the above rules ought to have been taken into consideration while computing the income arising from the above business of film production and acquisition of distribution rights of the film Once the above rules have been applied for computing the income, then only, the provision of Section 80HHC comes into play (K) 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 case of films which are known for their short life i e , more than 90 per cent of the films, die of 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 nondurable nature of films and rights therein, in Rule 9A while providing the method of computing the profits in respect of films provides as follows "9A 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 nothing but the sale of exhibition rights Considering the peculiar nature of films and film industry, they are differently treated as against other industries and special Rules 9A and 9B are provided to compute profits of film industry These provisions basically emphasise the short life of films (L) That recourse to rule has to be taken for the purpose of computing the profits of business and profession as referred in Section 28 for the purpose of Section 80HHC and the rules are not repugnant to the main provisions They are enabling provisions to find out profits and sale proceeds, etc Besides, both the Act and the Rules have to be read in tandem and in conjunction with each other Section 295 and Section 296 of the Act discuss in detail the power to make rules and need to place each and every rule and notification before the Parliament It can thus be deciphered that the legislatures have applied their mind while giving rule-making power to the various authorities under the Act (M) That the Tribunal has applied a wrong test and assigned wrong meaning to the words "export out of India" referred to in Section 80HHC "Export out of India" also contemplates transactions other than sale because of the use of the word "otherwise" The word "otherwise" has a definite meaning It has been judicially interpreted to cover the cases which give rise to some kind of legal obligation In this case may be analogous to transaction of sale (N) That Clause (aa) of Sub-section (4A) of Section 80HHC, while excluding the transaction which do not amount to "export out of India", refers to "sale or otherwise" in a shop, emporium or any other establishment situate in India Thus, "export out of India" does not contemplate sale only A limited sale is also an export (0) That Sub-section (2) of Section 80HHC nowhere lays down the condition that the proceeds should be out of sale of goods or articles mentioned in Clause (b) It only lays down the condition that the sale proceeds should be brought into India within six months There is nothing either in Sub-section (1) or Sub-section (2) that export out of India must be by way of sale As long as there is export of goods by sale or otherwise, Section (1) would be applicable and one would be entitled to deduction under the said provision (P) That it is no doubt true that the word "export turnover" has been defined to mean 'sale proceeds' received or brought in India by way of export in converted foreign exchange However, in the definition of export turnover the emphasis is on foreign exchange and bring 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 Emphasis is not on the sale but the emphasis is on 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'. [See Section 80HHC(4C), Expln. (aa)]:
""export out of India" shall not include any transaction by way of sale or otherwise, in a shop, emporium, or any other establishment situate in India, not involving clearance at any custom station as defined in the Customs Act, 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 necessarily be out of sale only.
(Q) That Section 80HHF, which was introduced w.e.f. 1st April, 2000, and provided that a person engaged in the business of export or transfer by any means out of India of any film, software, television news software, including telecasting rights shall be eligible to claim deduction. According to him, the scope of the deduction has been enlarged and what was not covered under Section 80HHC has also been considered for the purpose of exempting the profit.
(R) That the legislature in its wisdom has provided in Sub-section (5) of Section 80HHF that the deduction under this section shall not be available in respect of such profits which are subject-matter of deduction under any other section of this Act, as such, the applicability of Section 80HHC to the transaction in question cannot be ruled out.
Tribunal on Section 80-O:
25. The main reasons for rejecting alternative claim of deduction under Section 80-O by the Tribunal can be summarised as under:
(i) The amount received by the assessee on sale of user rights is neither 'royalty' nor 'commission'. Therefore, the deduction under Section 80-O was not allowable.
(ii) The telecasting right for Asian region were given to the Star TV. All the films were in Hindi and Gujarati, Therefore, the viewership may be mainly in India. Therefore, the rights granted in the agreement dt. 29th March, 1995, are not used outside India, as such deduction under Section 80-6 was not admissible.
(lii) The assessee has sold user of rights; it is neither a 'patent' nor an 'invention'. Therefore, deduction under Section 80-O was rightly disallowed.
Submissions on Section 80-O:
26. The recap of the assessee's submissions on alternative claim for deduction under Section 80-O can be sketched as under:
(A) That the assessee has granted telecast rights for entire Asian region. TV signals are generated outside India and the same are telecasted to entire Asian region, as such the assessee renders services from India to its principals situated outside India, therefore, eligible to claim deduction under Section 80-O of the Act (B) That the provision of Section 80-O being incentive provision should be construed liberally so as to advance the object of the legislation (C) That the copyright subsists in cinematograph films as defined under Section 13 of the Copyright Act, 1957 The registration 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 (D) 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 dt 29th March, 1995, as such, the assessee was entitled to claim deduction under Section 80-O of the Act Per Contra
27. The rival views canvassed on behalf of the Revenue to repeal the contentions of the assessee can be summarised as under
(A) That the assessee in this case is not engaged in the export of goods and merchandise The films recorded on the beta-cam tapes do not qualify either as goods or merchandise The beta-cam 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-cam format The assessee has only given right to use for a period of five years Thus, the title, always remains with the assessee, as such the transaction is beyond the scope of Section 80HHC (B) That the assessee takes a positive print of the feature film in a 35 mm format and with the help of telecme machines records and transfers the film on beta-cam tape Such films transferred on beta-cam tapes were given on lease with a right to telecast to Star TV under agreement dt 29th March, 1995, for a period of five years only, as such, practically, there is no element of sale so as to attract provision of Section 80HHC (C) That in the facts of the case there is neither sale nor the sale proceeds have been received by the assessee As per Section 80HHC, there must be a sale and the sale proceeds must be realised out of the export of goods or merchandise Explanation to Sub-section (2A), a Sub-section (3A) and the Explanations thereto, which clearly indicate that there must be a sale so as to generate sale proceeds and such sale proceeds must be received in foreign convertible exchange within a period of six months from the end of the previous year or further extended period as the Chief CIT or CIT may allow in that behalf In the instant case, none of these elements are to be found, as such, the assessee was not entitled to claim deduction under Section 80HHC of the Act (D) Section 80HHC is a section which is in the nature of deductions as such the said section has to be strictly construed and interpreted There is no place for intendment or equity (E) Fiscal statutes have to be interpreted on the basis of language therein and not de hors the same No words are to be added and only language used ought to be considered so as to ascertain the proper meaning and intent of legislation The Court has to ascribe to the natural and ordinary meaning of the words used by the legislature and the Court ought not in any circumstance substitute its own impression and ideas in place of legislative intent as is available on plain reading of statutory provision If the plain reading of the provision of Section 80HHC is applied to the facts of the present case, the assessee is not entitled to claim any deduction under either of the sections (F) The word "otherwise' used in Expln (aa) to sub Section (4A) in the context of this section has to be given limited and restricted meaning to mean sale only (G) That Section 80HHF is introduced to cover cases of persons like assessee, as such Section 80HHC did not and does not get attracted to the facts of the present case (H) That the judgments cited on behalf of the assessee deal with the provisions of Sales-tax Act and Customs Act, as such, the said judgments cannot be pressed into service to interpret the provisions of the IT Act (I) 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 (J) That Rules 9A and 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 (K) So far as Section 80-O is concerned, none of the elements thereof being present in the transaction involved in the present case, as such, provision is not available for the assessee to claim deduction Points for determination
28. The substantial points for determination, in narrow compass, on rival contentions as between the parties canvassing rival views, on the facts and circumstances of the case, are as under
1 Whether the product involved can be said to be "goods" and/or "merchandise"?
2 If yes, can it be said that it was exported out of India by way of sale or otherwise involving clearance at the customs station?
3. If yes, whether the consideration received can be described as sale proceeds constituting part of export turnover?
Determination of points:
Point No. 1:
29. Having heard the rival views, let us proceed to consider the application of Section 80HHC to the transaction in question bearing in mind that the product involved viz., telecasting rights of a feature film as recorded on and represented by beta-cam tape which is a peculiar product of its own kind.
30. Section 80HHC grants a deduction in respect of profits derived by certain specified assessee from the export of specified goods and merchandise out of India, if certain conditions are satisfied. An Indian company or a resident noncorporate taxpayer can claim deductions under Section 80HHC. For the purpose of computation of deduction under Section 80HHC, taxpayers are divided into direct exporters and supporting manufacturers.
31. Direct exporter is further divided in three categories viz., firstly, who exports goods manufactured or processed by him, secondly, who exports goods not manufactured by him but manufactured by others (i.e., trading goods) and, thirdly, who exports "manufactured goods" as well as "trading goods".
32. Supporting manufacturer is one who does not directly export goods but supplies goods/merchandise to an export house/trading house for the purpose of export.
33. In order to get deductions under Section 80HHC, one has to satisfy the following conditions:
(1) If goods are taken from India to outside India, it amounts to 'export'; in this context the following two provisions of Section 80HHG are that the export out of India shall not include any transaction by way of sale or otherwise, in a shop, emporium or any other establishment situated in India, not involving clearance at any customs station as defined in Customs Act, 1962. And it has been clarified in 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" and, (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 relevant previous year. (For instance, for the asst. yr. 2003-2004, the repatriation of the sale proceeds into India must be completed on or before 30th Sept., 2003).
34. At this juncture, it would be relevant to note that the object of Section 80HHC is to grant incentive to earners of foreign exchange. The said provision is a self-contained code. The CBDT has issued circulars from time to time for implementation of the scheme of Section 80HHC. The person claiming benefit of deductions provided under Section 80HHC has to comply with the provisions of the said sections.
35. The assessee in this case claims to have complied with the provisions of Section 80HHC, as such, entitled to claim deduction under the said section. He claims to have exported beta-cam tapes containing the films as certified under the Cinematograph Act, 1952, to be exploited as per the terms and conditions of the agreement dt. 29th March, 1995. The contentions canvassed on behalf of the assessee is that the beta-cam tapes containing films represent incorporeal rights with respect to films. The same are goods or merchandise. According to the Revenue, the beta-cam tape is neither goods nor merchandise. Beta-cam tape by itself has no value. The beta-cam tape is only a medium for convenience of transfer of feature film. It is only vehicle of transmission which is incidental to the main transaction. According to the Revenue, even if it is treated as goods or merchandise for the purposes of the Customs Act, that concept cannot be imported under the IT Act. The film recorded on beta-cam tape does not qualify either as goods or merchandise. In rejoinder, the assessee has submitted that the goods and merchandise mean any chattel that can be bought and sold in the market. It is not in doubt that right to telecast through the medium of beta-cam tapes can be bought and sold in the market. In fact, according to the assessee, in this case itself it has been the subject of trade and commerce. The reliance is placed on the apex Court judgment in the case of Union of India v. Delhi Cloth and General Mills Ltd. on behalf of the assessee in support of his contention. The assessee further submits that the shipping bill (p. 9 of paper book-I) clearly described the pre-recorded beta-cam tape as goods. Exchange Control Declaration Form No. AJ (p. 10 of paper book-I) also described it as goods. The Customs Department which is the another wing of the Ministry of Finance has treated the beta-cam tape as goods for imposition of duty. Section 12 r/w Section 2(22)(e) of the Customs Act, 1962, imposes duty on goods imported into and exported out of India. If they are goods 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.
36. 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 judgment of the Delhi High Court in the case of CIT v. Shriram Pistons and Rings Ltd. , wherein the High Court ruled that when remuneration is approved by the Company Law Board of Department of Company Affairs as required by the Companies Act, the IT Department cannot take a contrary view that it is excessive or unreasonable for the purpose of Section 49(c), unless some fraud or misrepresentation is detected
37. Learned counsel supporting assessee also pressed into service the Circular No 6, dt 6th July, 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 Government, there is no question of such payment being treated as unreasonable by another wing of the Government In support of their contention they also relied upon Circular No 24, dt 23rd July, 1969, issued by the Board [(1969) 73 ITR (St) 23] wherein it has been accepted that production of motion picture films amounts to manufacture of goods
38. It is further submitted that the IT Act contains another set of sections viz , Sections 10A and 10B which also deal with export incentives and exempt income from export of articles and things and computer software These sections define 'computer software' to mean any computer programme recorded on any disc, tape, perforated media or another information storage device Thus, according to the assessee, there is overwhelming authority for the view that even intangible rights, etc , once recorded on a tape or disc, can be considered as goods and merchandise Learned counsel, to support assessee's case, also placed reliance on the apex Court judgment in the case of Associated Cement Companies Ltd v. Commr of Customs 2001 (128) ELT 21, wherein the issue before the Supreme Court was whether drawings and designs could be considered as goods While answering this question, the apex Court ruled that technical device or information technology may be an intangible asset but the moment the information of device is put on media, whether on paper or cassettes or diskettes or any other thing, then it becomes chattel
39. The Division Bench judgment of this Court in the case of Ambience Space Sellers Ltd v. Asia Industrial Technology (P) Ltd 1998 PTC 19 is also pressed into service, wherein this Court has held that broadcasting of signals through satellite for the purpose of transmission on television are movable properties within the meaning of the Sale of Goods Act
40. With the aforesaid strongly canvassed aval views, one has to find answer to the question raised under the provisions of the IT Act The provisions of the said Act do not define the word "goods" or "merchandise" In the absence of any statutory guidelines under the Act, the dictionaries can be consulted to find out the meaning of the particular word or phrase It is well settled that in the absence of there being anything contrary to the context, the language of a statute should be interpreted according to the plain dictionary 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 Samvel 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 lexicographic 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 prime 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.
41. 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:
"Goods" "Merchandise"
appurtenances, articles of commerce, assets, belongings, qchattels, commodities, consumer durables, durables, effects, items, materials, paraphernalia, personal estate, possessions, produce, products, property, resources, staples, stock, stock-in-trade, supplies, things for sale, vendibles Associated concepts: bulk sale, chattels, foreign goods, goods and chattels, goods sold and delivered, personality, sale of goods, special goods, tangible goods.
articles, articles of commerce, assets, belongings, capital goods, cargo, chattel, commodities, consumer durables, consumer goods, contents, effects, freight, goods, goods for sale, items for sale, line, line of goods, manufactured goods, material assets, materials, merx, movables, possessions, produce, property, provisions, res vehales, salable commodities, shop goods, specialty, staples, stock, stock-in-trade, store, supplies, tangible assets, vendibles, wares.
Black's Law Dictionary, Fifth Edition defines the wors 'goods' and "merchandise" as under:
"Goods" "Merchandise"
A term of variable content and meaning. It may include every species of personal property or it may be given a very restricted meaning. Items of merchandise, supplies, raw materials, or finished goods. Sometimes the meaning of "goods" is extended to include all tangible items, as in the phrase "goods and services."
All goods which merchants usually buy and sell, whether at wholesale or retail; wares and commodities such as are ordinarily the objects of trade and commerce. But the term is generally not understood as including real estate, and is rarely applied to provisions such as are purchased day by day for immediate consumption (e.g., food).
All things (including specially manufactured goods) which are movable at the time of identification to the contract for sale other than the money in which the price is to be paid, investment securities and things in action. Also includes the unborn of animals and growing crops and other identified things attached to realty as fixtures. U.C.C. 8 2-105(1). All things treated as movable for the purposes of a contract of storage of transportation. U.C.C. $ 7-102(l)(f).
In the Shorter Oxford English Dictionary, the term "goods" means movable property.
42. Having seen the dictionary meaning, let us now turn to different legislations to find out how the word "goods" has been understood. According to Sub-section 2(7) of the Sale of Goods Act, "goods" means every Kind of movable property other than actionable claims and money; and includes stock and shares, forming part of the land which are agreed to be severed before sale or under the contract of sale. Under Section 2(1)(g) of the Trade and Merchandise Marks Act, 1958 (46 of 1958), the word "goods" means and includes every kind of movable property. In Section 76 of the Indian Contract Act, "goods" means anything which is the subject of trade or manufacture. It would, thus, be clear that the word "goods" has been understood to mean all items of merchandise, 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 the merchants buy and sell, whether wholesaler or retailers, commodities such as ordinary subject of trade and commerce.
43. The apex Court in the case of Associated Cement Companies Ltd. (supra) while answering the question as to whether technical device 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, that 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 as chattel for use by the Indian importer. The drawings, designs, manuals, etc., so received are goods on which customs duty could be levied."
The apex Court while considering the programme loaded on a disc or floppy observed as under:
"Similar would be the position in the case of a programme of any kind loaded on a disc or a floppy. For example, in the case of music, the value of a popular music cassette is several times more than the value of the blank cassette. However, if a pre-recorded music cassette or a popular film or a musical score is imported into India, duty will necessarily have to be charged on the value of the final product. In this behalf we may note that in State Bank of India v. Collector of Customs, Bombay 2000 (115) ELT 597 (SC) : 2004 (1) Scale 72) the bank had, under an agreement with the foreign company, imported a computer software and manuals, the total value of which was US $ 4,084,475. The bank filed an application for refund of customs duty on the ground that the basic cost of software was US $ 401,047, while the rest of the amount of US $ 3,683,428 was payable only as a licence fee for its right to use the software for the bank countrywide. The claim for the refund of the customs duty paid on the aforesaid amount of US $ 3,683,428 was not accepted by this Court as in its opinion, on a correct interpretation of Section 14 read with the rules, duty was payable on the transaction value determined therein and as per Rule 9, in determining the transaction value, there has to be added to the price actually paid or payable for the imported goods, royalties and the licence fee for which the buyer is required to pay, directly or indirectly as a condition of sale of goods to the extent that such royalties and fees are not included in the price actually paid or payable. This clearly goes to show that when technical material is supplied whether in the form of drawings or manuals, the same are goods liable to customs duty on the transaction value in respect thereof.
It is misconception to contend that what is being taxed is intellectual input. What is being taxed under the Customs Act r/w Customs Tariff Act and the Customs Valuation Rules is not the input alone but goods whose value has been enhanced by the said inputs. The final product at the time of import is either the magazine or the encyclopaedia or the engineering drawing as the 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 Corpn. 925 F 2d 670 (3d Cin 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 "
Holding that computer software was a "goods" the Court held as follows "Computer programs are the product of an intellectual process, but once implanted in a medium are widely distributed to computer owners An analogy can be drawn to a compact disc recording of an orchestral rendition The music is produced by the artistry of musicians and in itself is not a "goods", but when transferred to a laser-readable disc becomes a readily merchantable commodity Similarly, when a professor delivers a lecture, it is not a goods, but, when transcribed as a book, it becomes a "goods"
That a computer program may be copyrightable as intellectual property does not alter the fact that once in the form of a floppy disc or other medium, the program is tangible, movable and available in the market place The fact that some programs may be tailored for specific purposes need not alter their status as "goods" because the code definition, includes specially manufactured goods"
44. The term 'movable property' has been construed by the apex Court in the case of CST v. Madhya Pradesh Electricity Board The Supreme Court has held that the term 'movable property' cannot be construed in a narrow sense Merely because electric energy is not tangible and cannot be moved or touched, for instance, like a book or piece of wood, does not mean that it ceases to be movable property The electric energy has all the attributes of movable property inasmuch as it can be transmitted, transferred, delivered, stored and possessed in the same way as other movable property
45. The Division Bench of this Court in the case of Ambience Space Sellers Ltd (supra) while considering the case under the Copyright Act, 1957, held that the signals transmitted can also be transmitted, stored, delivered and possessed Many of the programmes are being stored and they can be possessed It has all the attributes of the movable property and, therefore, the Division Bench of this Court was pleased to hold that signals are movable property within the meaning of Sale of Goods Act
46. Having given our anxious consideration to all the factors referred to hereinabove, the transaction in question, whereby the assessee had purchased the rights of various decoders and had recorded on beta-cam tape and entered into an agreement with the Star TV for transfer of telecasting 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:
47. 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 telecasted or broadcasted 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. According to the assessee in the present case the movement of goods from India to another country was subjected to customs clearance at the customs station. The customs authorities had granted customs clearance. Learned counsel for the Revenue could not dispute this factual position. At least there is no material to the contrary. When the articles or goods were physically exported, it must have been the subject of customs clearance No material or things or goods can cross customs borders, unless they go through the gamut of customs clearance. There is no dispute, rather any dispute, so far as this aspect of the matter is concerned, though other serious issues were raised by the Revenue in support of their contentions.
48. It is, thus, not in dispute that the export of beta-cam tape was subjected to customs clearance. The condition precedent for claiming deduction under Section 80HHC is that the transaction must result in export out of India of any goods or merchandise. The phrase 'export out of India' has been defined in Clause (aa) in Explanation to Sub-section (4A). The apex Court has considered this clause in the case of CIT v. Silver Art Palace , wherein the apex Court has observed that for the purposes of special deduction under that section there will be no export out of India; if two cumulative conditions are fulfilled, viz., (a) the transaction is one by way of sale or otherwise in a shop, etc. situated in India, and (b) it does not involve clearance in any customs station as defined in the Customs Act Since, in that case, the transaction of counter sales involved customs clearance it was held that there was export out of India. In the case of Ram Babu & Sons v. Union of India , the Allahabad High Court had already taken this view and further observed that it is the transaction which should involve clearance at customs station, if it is to be an export out of India. If the goods are required to be cleared from the customs station either by the purchaser or the seller it would be an export out of India. It is, thus, clear that if, ultimately, that articles or goods are taken from India to outside India through customs clearance, the goods can be said to have been exported out of India In this view of the matter, we hold that the goods were exported out of India as contemplated under Section 80HHC of the Act.
49. 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 80HHG 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, 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,
50. 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 80HHG only contemplates export out of India of any goods or merchandise by the Indian company or a person resident in India engaged in that business. Sub-section (1) by itself does not contemplate any transaction of sale. However, while defining the words "export out of India" it is said that it shall not include any transaction by way of sale or otherwise in a shop, emporium or any other establishment situated in India not involving clearance at any customs station as defined under the Customs Act, 1962. The concept is defined by using two negatives. Two negatives make the sentence positive. The positive meaning of the term, which is judicially recognised by the apex Court in the case of Silver Art Palace (supra) is that any sale of an article on counter shop, emporium or other establishment situated in India and if, ultimately, that article has been taken out of India subjecting it to customs clearance, it would amount to export out of India.
51. Now another question is what do you mean by way of 'sale or otherwise'. The word "sale" is not defined in the Act: therefore, it must be given its ordinary grammatical meaning. According to the Oxford Dictionary, "sale" means an act of selling or making over to another for a price. It has also been defined as an exchange of a thing for a price. The ordinary concept of "sale" of a movable property is that something is handed over for a price as the result of negotiation and agreement. In a "sale" there is an agreement between the parties whereby one person known as the seller hands over a thing or property to the other person known as the buyer for a consideration usually in terms of money which has been agreed between the parties. That is the ordinary English concept of "sale".
52. Now, let us find out the meaning of the word "otherwise" appearing in the scheme of Section 80HHC of the Act. In order to find out the meaning of the word "otherwise" one has to bear in mind that the said word is used in the company of the word "sale". The word "otherwise" means in a different manner, in another way or in other ways. The word "otherwise" has been interpreted by the Supreme Court while construing the provisions of Sections 5 and 6 of the Bombay Land Requisition Act, 1948, in Smt Lilavati v. State of Bombay The Supreme Court considered the contention raised on behalf of the petitioner, how the word "otherwise" used in Expln (a) to Section 6 of that Act should be construed It was observed on p 528, para 11, as follows "It was contended on behalf of the petitioner that Expln (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 or assignment or transfer in any other manner 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 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 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" Those words are not words of limitation but of extension, so as to cover all possible ways in which a vacancy may occur Generally speaking, a tenant Section occupation of his premises ceased when his tenancy is terminated by act of parties or by operation of law or by eviction by the landlord, or by assignment or transfer of the 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 intended to cover all possible cases of vacancy occurring due to any reasons whatsoever Hence, far from using those words ejusdem generis with the preceding clauses of the Explanation, the legislature used those words in all inclusive sense" [Vinayakrao v. State ]
53. The word "otherwise" has also been interpreted by the Supreme Court in the case of Ganesh Prasad Dixit v. CST to hold that the word "otherwise" includes anything other than the sale In the case of George Da Costa v. CED , the Supreme Court ruled that the word "otherwise" should be construed ejusdem genens, and it must be interpreted to mean some kind of legal obligation or some transaction enforceable at law or in enquiry which, though not in the form of a contract, may confer a benefit on the donor The tolls may be let by public auction, or otherwise than by public auction Where the procedure of a public auction is not accepted, any other procedure is open There is no indication that this procedure must be of the same nature as that of a public auction [Baid Nath Prasad v. State of UP ]
54. In the case of S. Prakash Rao v. Commr. of Commercial Taxes , wherein the Supreme Court relying upon the earlier case law held as under:
"The legislature has been cautious and thorough going enough to bar all avenues of escape by using the words 'or otherwise'. These words are not words of limitation but of extension so as to cover all possible ways in which a vacancy may occur. Generally speaking, a tenancy is terminated by acts of parties or by operation of law or by eviction by the landlord or by assignment or transfer of the 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."
55. The words "or otherwise" appearing in Expln. (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 (supra) 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 may pass through the gamut of customs clearance as contemplated under Section 80HHC of the Act.
56. At this stage, it will not be out of place to mention that the Constitution of India (Forty-sixth Amendment) Act, 1982, has brought into ambit of sale amongst transactions which were not otherwise considered to be a sale. Thus, any transaction which is akin to sale is also deemed to be a sale as per the said constitutional amendment. The Statement of Object and Reasons of the Constitution (Forty-sixth Amendment) Act, 1982, amongst others states as under:
"1. ..... ..... .......
2. ...... ...... .......
3. ....... ....... .......
4. ....... ........ ......
5. ......... ........ ........
6. Device by way of lease of films has also been resulting in avoidance of sales-tax. The main right in regard to a film relates to its exploitation and after exploitation for a certain period of time, in most cases, the film ceases to have any value. It is, therefore, seen that instead of resorting to the outright sale of a film, only a lease or transfer of the right to exploitation is made 7 There were reports from State Governments to whom revenues from sales-tax have been assigned, as to the large scale avoidance of Central sales-tax leviable on inter-State sales of goods through the device of consignment of goods from one State to another and as to the leakage of local sales-tax in works contracts, hire-purchase transactions, lease of films, etc Though Parliament could levy a tax on these transactions, as tax on sales has all along been treated as an item of revenue to be assigned to the States, in regard to these transactions which resemble sales also, it is considered that the same policy should be adopted "
It is, thus, clear that the right to exploit the film given by way of lease, has now been regard as sale by the Constitution (Forty-sixth Amendment) Act, 1982, for the purposes of sales-tax laws After 46th Amendment to the Constitution, the same concept with respect to the lease transactions of feature films is introduced in the income-tax legislation via Rules 9A and 9B of the IT Rules, framed under the Act Rules 9A(7) and 9B(6) both lay down that sale of the rights of exhibition of a feature film includes the lease of such rights or their transfer on a minimum guarantee basis Rule 9A prescribes mode of computing the profits and gams of the business of production of a feature film, whereas Rule 9B provides mode of computing the profits and gams of the business of 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 IT 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" is sufficient to cover such transactions which are akin to sale
57. 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 the 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 contemplated under Section 80HHC of the Act Point No 3
58. Having held that the beta-cam tapes are goods or merchandise and transaction in question involve export of goods out of India falling within the sweep of the words "sale or otherwise", now the question, which needs adjudication is whether or not the consideration received in the transaction in question was sale-proceeds In order to answer this question, one has to find out in what sense the word 'sale proceeds' came to be used in the statute adopting well known settled principles of interpretation of the statute
59. The apex Court in the case of CIT v. Strawboard Mfg Co Ltd ruled that the law providing for concession for tax purposes should be liberally construed The question before the apex Court was whether strawboard could be said to fall within the expression "paper and pulp" mentioned in the schedule relevant to the respective assessment years The apex Court held that since the words "paper and pulp" were mentioned in the schedule, the intention was to refer to the paper and pulp industry and since the strawboard industry could be described as forming part of the paper and pulp industry, it was entitled to the benefit
60. In the case of Bajaj Tempo Ltd v. CIT the apex Court adopted the same principles of interpretation and ruled that the initial exercise should be to find out as to whether the transaction is within the sweep of the statute Once conclusion is reached that the transaction is within the sweep of the statute, then the provision should be applied reasonably and liberally keeping in view the purpose of the statute Keeping in mind the same principles, we, initially, undertook exercise to find out whether or not the items of export in the case in hand were "goods or merchandise" and as to whether or not the transaction in question involved export of goods out of India Having reached to the conclusion that the items of export were goods and merchandise and the transaction in question amounted to export of goods out of India, in our opinion, liberal and reasonable interpretation keeping in mind the spirit of the Act is warranted The purpose of the provision of Section 80HHC is to boost export, as such, let us proceed to consider whether the word 'sale proceeds' can be equated with the term 'export proceeds' and the consideration received in 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
61. In the case of Bajaj Tempo Ltd (supra), the apex Court followed (sic) the judgment of the Gujarat High Court in the case of CTT v. Suessm Textile Bearing Ltd , wherein while deciding the claim of the assessee under 1961 Act, struck a dissenting note and observed that practical commonsense approach keeping in view the commercial expediency should be adopted to find out legislative intent
62. Explanation (b) to Sub-section (4A), describes the word "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 word "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 convertible foreign exchange in accordance with Clause (a) of Sub-section (2) of Section 80HHC is nothing but to equate the said word 'sale proceeds' with that of 'export proceeds'
63. It will be further clear from the GBDT Circular No 572, dt 3rd Aug , 1990, [see (1997) 181 ITR (St) 81) issued by the respondent, which is relevant and affords guidelines in understanding the purport of Section 80HHC of the Act In the case of JB Boda & Co (P) Ltd v. CBDT , the apex Court has made use of one of such circulars to understand the purport of Section 80-O of the Act The circular dt 3rd Aug , 1990, which was issued by the CBDT to explain the substance of the provisions relating to direct taxes in the Finance Act, 1990 and one of such provisions explained therein is Section 80HHC of the Act Thus, to explain the scheme and various shades of Section 80HHC r/w Section 28, as amended by the Finance Act, came to be illustrated by the following examples (Rs. in lakhs) Case I Exclusively export business Case II 2/3rd export 1/3 domestic sales Case III 1/2 export 1/2 domestic sales Case IV 1/3 export 2/3 domestic sales
(i) Turnover
(a) FOB exports 100 100 100 100
(b) Domestic sale Nil 50 100 200
(c) Turnover |(ia) + (ib)j 100 150 200 300
(ii) Business profits before incentives (assured figure) 10 15 20 30
(iii) CCS, DBK, I/L 10 10 10 10
(iv) Total profits of the business [(ii) + (iii)] 20 25 30 40
(v) Deduction under s. 80HHC if entire export proceeds, i.e., Rs. 100 lakhs are brought into India within the stipulated period.
25x100/150 30x100/200 40x100/300 1(iv) x (ia)/(ic)) 20 16.67 15.00 13.33
(vi) Deduction under s. 80HHC if only 50% of the export proceeds, i.e., Rs.
50 lakhs are brought into India 20x50/ 100 25x50/ 150 30x50/200 40x50/ 300 [(iv)x50% (ia)/(ic)] 10 8.33 7.50 6.67 Reading of the above illustration in general and Clauses (v) and (vi) thereof in particular make it clear that while describing the deduction under Section 80HHC the words used are 50 per cent of the export proceeds brought into India It is, therefore, clear that even the CBDT has understood the words 'export proceeds' to be synonymous to 'sale proceeds' If that be so, the amount received by way of consideration in the transaction in question can conveniently be termed as 'export proceeds' equal to that of 'sale proceeds' Once we hold that the transaction involved in this case is akin to 'sale' falling within the sweep of words "sale or otherwise" then the consideration i e, export proceeds received can be termed as 'sale proceeds'
64. Now, one more question raised by Mr Desai needs to be considered is whether the introduction of Section 80HHF has made any difference to the claim of the assessee Mr Desai urged that the facts of the present case squarely fall under the scope of this newly introduced section, however, this provision was absent in the statute book in the relevant assessment year, as such, the assessee was not entitled to any relief as claimed
65. According to Mr Desai, the transaction involved in the present appeal would have been covered under Section 80HHF had this provision been on the statute book on the date when the transaction in question had taken place But the situation is that this provision (Section 80HHF) came into effect w e f 1st April, 2000, as such, it was not available to the transaction in question This provision is brought into effect only to cover the transactions which were not covered by Section 80HHC, as such, Mr Desai submits that deduction under Section 80HHC is not available to the assessee in this case
66. Mr Shivram, learned counsel for the assessee, in reply, submitted that since the insertion of Section 80hHF has not resulted in deletion of Section 80HHC, two sections can be read harmoniously and given effect together He further submits that possibility of any transaction falling in both sections cannot be ruled out In such eventuality, even if any transaction is found to be covered under both sections, then Sub-section (5) of Section 80HHF takes care to meet this situation and makes the benefit available 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 any 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"
67. Mr Shivram submits that 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 w e f 1st April, 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 on the statute book, the assessee could very well claim deduction under Section 80HHC In support of his submission, he pressed into service the apex Court judgment in the case of Continental Construction Ltd v. CIT
68. Having heard the rival parties on the interpretation of Section 80HHF vis-a-vis Section 80HHC, it is not in dispute that the deduction of income of the nature involved in the present appeal would also qualify under Section 80HHF being a specific and special provision However, reading of Sub-section (5) of Section 80HHF would make it clear that the legislature has clearly envisaged possibility of same receipt qualifying for deduction under any other section of Chapter VI-A including that of Section 80HHF and has specifically provided that where a deduction under Section 80HHF is claimed and allowed in respect of profits of the business referred to in Sub-section (1) for any 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 Since provision of Section 80HHF was not available in the relevant assessment year with which we are concerned and in view of our above finding that the transaction in question is covered under Section 80HHC, we hold that so long as Section 80HHF was not on the statute book, the assessee in this case was entitled to claim deduction without any hindrance under Section 80HHC with respect to the transaction involved in the present appeal is concerned and after enactment of Section 80HHF, of course Sub-section (5) thereof will take care to prevent double benefit being claimed by the assessee
69. In the above view of the matter and following the well recognised principles of interpretation reiterated from time to time and adopting purposive interpretation keeping in mind the practical commonsense approach and commercial expediency we have reached to the conclusion that the transaction involved in this appeal, on the facts and circumstances of the case, is well within the sweep of Section 80HHC of the Act and all the authorities below were not justified in denying the deduction to the claim of the assessee under Section 80HHC in the sum of Rs 84,23,746 in respect of export of beta-cam tapes as per agreement dt 29th March, 1995 We, thus, hold that the assessee is entitled to such deduction under Section 80HHC of the Act and allow the appeal on this count Accordingly, we answer the question in favour of the assessee and against the Revenue on this count Section 80-O
70. Having held that the assessee is entitled to the claim of deduction under Section 80HHC, really speaking, it is not necessary to consider this alternate claim for deduction under Section 80-O of the Act
71. In the result, appeal of the assessee is allowed in terms of prayer Clause (b) with no order as to costs