On Further Appeals By The Revenue, The Tribunalfollowing The Decision Of The Bombay High Court In Abdulgafara.nadiadwala v. Assistant Commissioner Of Income Tax And Others,[2004] 267 Itr 488 Held In Favour Of The Assessees. Hence Thepresent Appeals

IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 26.2.2007 CORAM THE HON'BLE MR.JUSTICE P.D.DINAKARANANDTHE HON'BLE MRS.JUSTICE CHITRA VENKATARAMAN T.C.(A).Nos.109 and 110 of 2007 Commissioner of Income TaxChennai...Appellantin both TCs.Vs. M/s.Superstar Music23A, North Boag RoadT.Nagar, Chennai-17...Respondentin TC.109/2007M/s.Superstar Exports23A, North Boag RoadT.Nagar, Chennai-17...Respondentin TC.110/2007 M/s.Superstar Exports23A, North Boag RoadT.Nagar, Chennai-17. Appeals under Section 260A of the Income Tax Act, 1961against the common order of the Income Tax AppellateTribunal, Madras 'B' Bench dated 25.11.2005 made in ITANos.126 and 127/Mds/2002 filed against the order of theCommissioner of Income Tax (Appeals) VI Chennai 34 dated09.11.2001 in ITA NO. 175/2000-01/VI, ITA NO. 176/2000-01/vi which appeal had been filed against the Assessmentorder of Deputy Commissioner of Income Tax film circleChennai 600 006 dated 31.03.2000 in PA NO. GIR NO. 10357-3,10356-3 in respect of the Assessment year 1999-2000. These appeals are directed against the common order ofthe Income Tax Appellate Tribunal dated 25.11.2005 made inITA.Nos.126 and 127/Mds/2002 for the assessment year 1999-2000, raising the following common substantial questions of https://hcservices.ecourts.gov.in/hcservices/ law: "1. Whether in the facts and circumstances of the case, theTribunal was right in treating the export of audio softwareas deduction under Section 80HHC for the assessment year1999-2000, when the relief for the same is available underSection 80HHF only from the assessment year 2000-01?; and2. Whether in the facts and circumstances of the case, theexport of music software can be equated with export ofgoods for the purpose of Section 80HHC?" 2.1. Brief facts of the case are: The assessees are companiesengaged in the business of export of music software and theassessees claimed deduction under Section 80HHC of the Income TaxAct (for brevity, "the Act"). The Assessing Officer disallowedthe claims of the deduction under Section 80HHC of the Act on theground that the relief in respect of export of music software isavailable under Section 80HHF of the Act only from the assessmentyear 2000-01 onwards and is not available for the impugnedassessment year. 2.2. On appeals by the assessees, the Commissioner of IncomeTax (Appeals) allowed the appeals and directed the AssessingOfficer to recompute the income allowing deduction under Section80HHC of the Act. 2.3. On further appeals by the Revenue, the Tribunalfollowing the decision of the Bombay High Court in AbdulgafarA.Nadiadwala v. Assistant Commissioner of Income Tax and Others,[2004] 267 ITR 488 held in favour of the assessees. Hence thepresent appeals. 3. Mrs.Pushya Sitaraman, learned Senior Standing Counsel forthe appellant contends that the deduction under Section 80HHC ofthe Act is applicable only for profits derived from export ofgoods and merchandise, and thus cannot apply to the transaction ofthe assessees, who have not exported any goods or merchandise, butonly exported music software. 4. At the outset, what is to be determined is whether theproduct involved in these cases can be said to be "goods” and/or"merchandise", as defined under Section 80HHC of the Act. 5. At this juncture, a reference to Section 80HHC of the Actis essential:"Section.80HHC. Deduction in respect of profits retainedfor export business.--(1) Where an assessee, being anIndian company or a person (other than a company) residentin India, is engaged in the business of export out of Indiaof any goods or merchandise to which this section applies, there shall, in accordance with and subject to theprovisions of this section, be allowed, in computing thetotal income of the assessee, a deduction of the profitsderived by the assessee from the export of such goods ormerchandise: ..... 4. At the outset, what is to be determined is whether theproduct involved in these cases can be said to be "goods” and/or"merchandise", as defined under Section 80HHC of the Act. 5. At this juncture, a reference to Section 80HHC of the Actis essential:"Section.80HHC. Deduction in respect of profits retainedfor export business.--(1) Where an assessee, being anIndian company or a person (other than a company) residentin India, is engaged in the business of export out of Indiaof any goods or merchandise to which this section applies, there shall, in accordance with and subject to theprovisions of this section, be allowed, in computing thetotal income of the assessee, a deduction of the profitsderived by the assessee from the export of such goods ormerchandise: ..... (2)(a) This section applies to all goods or merchandise,other than those specified in clause (b), if the saleproceeds of such goods or merchandise exported out of Indiaare received in, or brought into, India by the assessee(other than the supporting manufacturer) in convertibleforeign exchange, within a period of six months from theend of the previous year or, ~within such further period asthe competent authority may allow in this behalf. Explanation.--For the purposes of this clause, theexpression "competent authority" means the Reserve Bank ofIndia or such other authority as is authorised under anylaw for the time being in force for regulating payments anddealings in foreign exchange. (b) This section does not apply to the following goods ormerchandise, namely:-- (i) mineral oil; and (ii) minerals and ores (other than processedminerals 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 suchsale proceeds are credited to a separate account maintainedfor the purpose by the assessee with any bank outside Indiawith the approval of the Reserve Bank of India. Explanation 2.--For the removal of doubts, it is herebydeclared that where any goods or merchandise aretransferred by an assessee to branch, office, warehouse orany other establishment of the assessee situate outsideIndia and such goods or merchandise are sold from suchbranch, office, warehouse or establishment, then, suchtransfer shall be deemed to be export out of India of suchgoods and merchandise and the value of such goods ormerchandise declared in the shipping bill or bill of exportas referred to in sub-section (1) of section 50 of theCustoms Act, 1962 (52 of 1962), shall, for the purposes ofthis 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 ormerchandise manufactured or processed by the assessee, theprofits derived from such export shall be the amount whichbears to the profits of the business, the same proportionas the export turnover in respect of such goods bears tothe total turnover of the business carried on by theassessee ; (b) where the export out of India is of trading goods,the profits derived from such export shall be the exportturnover in respect of such trading goods as reduced by thedirect costs and indirect costs attributable to such export ; (c) where the export out of India is of goods ormerchandise manufactured or processed by the assessee andof trading goods, the profits derived from such exportshall,-- (i) in respect of the goods or merchandisemanufactured or processed by the assessee, be the amountwhich bears to the adjusted profits of the business, thesame proportion as the adjusted export turnover in respectof such goods bears to the adjusted total turnover of thebusiness carried on by the assessee ; and (ii) in respect of trading goods, be the exportturnover in respect of such trading goods as reduced by thedirect and indirect costs attributable to export of suchtrading goods : ; (c) where the export out of India is of goods ormerchandise manufactured or processed by the assessee andof trading goods, the profits derived from such exportshall,-- (i) in respect of the goods or merchandisemanufactured or processed by the assessee, be the amountwhich bears to the adjusted profits of the business, thesame proportion as the adjusted export turnover in respectof such goods bears to the adjusted total turnover of thebusiness carried on by the assessee ; and (ii) in respect of trading goods, be the exportturnover in respect of such trading goods as reduced by thedirect and indirect costs attributable to export of suchtrading goods : Provided that the profits computed under clause (a) orclause (b) or clause (c) of this sub-section shall befurther increased by the amount which bears to ninety percent of any sum referred to in clause (iiia) (not beingprofits on sale of a licence acquired from any otherperson), and clauses (iiib) and (iiic) of section 28, thesame proportion as the export turnover bears to the totalturnover of the business carried on by the assessee. Provided further that in the case of an assessee havingexport turnover not exceeding rupees ten crores during theprevious year, the profits computed under clause (a) orclause (b) or clause (c) of this sub-section or aftergiving effect to the first proviso, as the case may be,shall be further increased by the amount which bears toninety per cent. of any sum referred to in clause (iiid) or clause (iiie), as the case may be, of section 28, the sameproportion as the export turnover bears to the totalturnover of the business carried on by the assessee : Provided also that in the case of an assessee having exportturnover exceeding rupees ten crores during the previousyear, the profits computed under clause (a) or clause (b)or clause (c) of this sub-section or after giving effect tothe first proviso, as the case may be, shall be furtherincreased by the amount which bears to ninety per cent. ofany sum referred to in clause (iiid) of section 28, thesame proportion as the export turnover bears to the totalturnover of the business carried on by the assessee, if theassessee has necessary and sufficient evidence to provethat, - (a) he had an option to choose either the dutydrawback or the Duty Entitlement Pass Book Scheme, beingthe Duty Remission Scheme; and (b) the rate of drawback credit attributable to thecustoms duty was higher than the rate of credit allowableunder the Duty Entitlement Pass Book Scheme, being DutyRemission Scheme : Provided also that in the case of an assessee having exportturnover exceeding rupees ten crores during the previousyear, the profits computed under clause (a) or clause (b)or clause (c) of this sub-section or after giving effect tothe first proviso, as the case may be, shall be furtherincreased by the amount which bears to ninety per cent. ofany sum referred to in clause (iiie) of section 28, thesame proportion as the export turnover bears to the totalturnover of the business carried on by the assessee, if theassessee has necessary and sufficient evidence to provethat, - (a) he had an option to choose either the dutydrawback or the Duty Free Replenishment Certificate, beingDuty Remission Scheme; and (b) the rate of drawback credit attributable to thecustoms duty was higher than the rate of credit allowanceunder the duty Free Replenishment Certificate, being DutyRemission Scheme. Explanation. - For the purposes of this clause, "rate ofcredit allowable" means the rate of credit allowable underthe Duty Free replenishment Certificate, being the DutyRemission Scheme calculated in the manner as may be notified by the Central Government. Explanation.--For the purposes of this sub-section,-- (a) "adjusted export turnover" means the exportturnover as reduced by the export turnover in respect oftrading goods ; (a) he had an option to choose either the dutydrawback or the Duty Free Replenishment Certificate, beingDuty Remission Scheme; and (b) the rate of drawback credit attributable to thecustoms duty was higher than the rate of credit allowanceunder the duty Free Replenishment Certificate, being DutyRemission Scheme. Explanation. - For the purposes of this clause, "rate ofcredit allowable" means the rate of credit allowable underthe Duty Free replenishment Certificate, being the DutyRemission Scheme calculated in the manner as may be notified by the Central Government. Explanation.--For the purposes of this sub-section,-- (a) "adjusted export turnover" means the exportturnover as reduced by the export turnover in respect oftrading goods ; (b) "adjusted profits of the business" means theprofits of the business as reduced by the profits derivedfrom the business of export out of India of trading goodsas computed in the manner provided in clause (b) of sub-section (3) ; (c) "adjusted total turnover" means the total turnoverof the business as reduced by the export turnover inrespect of trading goods ; (d) "direct costs" means costs directly attributableto the trading goods exported out of India including thepurchase price of such goods ; (e) "indirect costs" means costs, not being directcosts, allocated in the ratio of the export turnover inrespect of trading goods to the total turnover ; (f) "trading goods" means goods which are notmanufactured or processed by the assessee. (3A) For the purposes of sub-section (1A), profits derivedby a supporting manufacturer from the sale of goods ormerchandise shall be,-- (a) in a case where the business carried on by thesupporting manufacturer consists exclusively of sale ofgoods or merchandise to one or more Export Houses orTrading Houses, the profits of the business; (b) in a case where the business carried on by thesupporting manufacturer does not consist exclusively ofsale of goods or merchandise to one or more Export Housesor Trading Houses, the amount which bears to the profits ofthe business the same proportion as the turnover in respectof sale to the respective Export House or Trading Housebears to the total turnover of the business carried on bythe assessee. (4) The deduction under sub-section (1) shall not beadmissible unless the assessee furnishes in the prescribedform along with the return of income, the report of an https://hcservices.ecourts.gov.in/hcservices/ accountant, as defined in the Explanation below sub-section(2) of section 288, certifying that the deduction has beencorrectly claimed in accordance with the provisions ofthis section. (4A) The deduction under sub-section (1A) shall not beadmissible unless the supporting manufacturer furnishes inthe prescribed form along with his return of income,-- (a) the report of an accountant, as defined in theExplanation below sub-section (2) of section 288,certifying that the deduction has been correctly claimed onthe basis of the profits of the supporting manufacturer inrespect of his sale of goods or merchandise to the ExportHouse or Trading House; and (b) a certificate from the Export House or TradingHouse containing such particulars as may be prescribed andverified in the manner prescribed that in respect of theexport turnover mentioned in the certificate, the ExportHouse or Trading House has not claimed the deduction underthis section: Provided that the certificate specified in clause (b) shallbe duly certified by the auditor auditing the accounts ofthe Export House or Trading House under the provisions ofthis Act or under any other law. (4B) For the purposes of computing the total income undersub-section (1) or sub-section (1A), any income not chargedto tax under this Act shall be excluded. Explanation.--For the purposes of this section,-- (b) a certificate from the Export House or TradingHouse containing such particulars as may be prescribed andverified in the manner prescribed that in respect of theexport turnover mentioned in the certificate, the ExportHouse or Trading House has not claimed the deduction underthis section: Provided that the certificate specified in clause (b) shallbe duly certified by the auditor auditing the accounts ofthe Export House or Trading House under the provisions ofthis Act or under any other law. (4B) For the purposes of computing the total income undersub-section (1) or sub-section (1A), any income not chargedto tax under this Act shall be excluded. Explanation.--For the purposes of this section,-- (a) "convertible foreign exchange" means foreignexchange which is for the time being treated by the ReserveBank of India as convertible foreign exchange for thepurposes of the Foreign Exchange Regulation Act, 1973 (46of 1973), and any rules made thereunder; (aa) "export out of India" shall not include anytransaction by way of sale or otherwise, in a shop,emporium or any other establishment situate in India, notinvolving clearance at any customs station as defined inthe Customs Act, 1962 (52 of 1962) ; (b) "export turnover" means the sale proceeds receivedin, or brought into, India by the assessee in convertibleforeign exchange in accordance with clause (a) of sub-section (2) of any goods or merchandise to which this https://hcservices.ecourts.gov.in/hcservices/ section applies and which are exported out of India, butdoes not include freight or insurance attributable to thetransport of the goods or merchandise beyond the customsstation as defined in the Customs Act, 1962 (52 of 1962). (ba) "total turnover" shall not include freight orinsurance attributable to the transport of the goods ormerchandise beyond the customs station as defined in theCustoms Act, 1962 (52 of 1962): Provided that in relation to any assessment year commencingon or after the 1st day of April, 1991, the expression"total turnover" shall have effect as if it also excludedany sum referred to in clauses (iiia), (iiib) and (iiic) ofsection 28 ; (baa) "profits of the business" means the profits ofthe business as computed under the head "Profits and gainsof business or profession" as reduced by-- (1) ninety per cent. of any sum referred to inclauses (iiia), (iiib) and (iiic) of section 28 or of anyreceipts by way of brokerage, commission, interest, rent,charges or any other receipt of a similar nature includedin such profits ; and (2) the profits of any branch, office, warehouseor any other establishment of the assessee situate outsideIndia ; (c) "Export House Certificate" or "Trading HouseCertificate" means a valid Export House Certificate orTrading House Certificate, as the case may be, issued bythe Chief Controller of Imports and Exports, Government ofIndia; (d) "supporting manufacturer" means a person being anIndian company or a person (other than a company) residentin India, manufacturing (including processing) goods ormerchandise and selling such goods or merchandise to anExport House or a Trading House for the purposes ofexport." 6. The provisions of the Act do not define the word “goods”or “merchandise”. Hence, a reference to meaning of "goods" and"merchandise" as can be inferred from the law settled so far wouldbe a guiding factor to decide the case on hand. 7. The Larger Bench of the Apex Court in Tata ConsultancyServices v. State of A.P., (2005) 1 SCC 308, while testing whether https://hcservices.ecourts.gov.in/hcservices/ the property involved in a transaction is "goods" for thepurposes of sales tax held as under: 6. The provisions of the Act do not define the word “goods”or “merchandise”. Hence, a reference to meaning of "goods" and"merchandise" as can be inferred from the law settled so far wouldbe a guiding factor to decide the case on hand. 7. The Larger Bench of the Apex Court in Tata ConsultancyServices v. State of A.P., (2005) 1 SCC 308, while testing whether https://hcservices.ecourts.gov.in/hcservices/ the property involved in a transaction is "goods" for thepurposes of sales tax held as under: "The term "goods" includes all types of movable properties,whether those properties be tangible or intangible. InIndia the test to determine whether a property is "goods"for the purpose of sales tax, is not whether the propertyis tangible or intangible or incorporeal. The test iswhether the item concerned is capable of abstraction,consumption and use and whether it can be transmitted,transferred, delivered, stored, possessed, etc. TheIntellectual property, once it is put on to a medium,whether it be in the form of books or canvas or computerdiscs or cassettes, and marked would become "goods". Asoftware program may consist of various commands whichenable the computer to perform a designated task. Thecopyright in that program may remain with the originator ofthe program. But the moment copies are made and marketed,it becomes goods, which are susceptible to sales tax. Wesee no difference between a sale of a software program on aCD/floppy disc from a sale of music on a cassette/CD or asale of a film on a video cassette/CD. In all such cases,the intellectual property has been incorporated on a mediafor purposes of transfer. Sale is not just of the mediawhich by itself has very little value. The software and themedia cannot be split up. What the buyer purchases andpays for is not the disc or the CD. As in the case ofpaintings or books or music or films the buyer ispurchasing the intellectual property and not the media i.e.the paper or cassette or disc or CD. Thus atransaction/sale of computer software is clearly a sale of“goods” within the meaning of the term as defined in thesaid Act. The term “all materials, articles andcommodities”includesbothtangibleandintangible/incorporeal property which is capable ofabstraction, consumption and use and which can betransmitted, transferred, delivered, stored, possessed,etc. The software programs have all these attributes." 8. The said view of the Larger Bench of the Apex Court wasalso adopted by a Three Judge Bench of the Apex Court in BharatSanchar Nigam Ltd. v. Union of India, (2006) 3 SCC 1. 9. From the law as enunciated from the decisions referredsupra, "goods" may be tangible property or an intangible one. Itwould become goods provided it has the attributes thereof havingregard to (a) its utility; (b) capable of being bought and sold;and (c) capable of being transmitted, transferred, delivered,stored and possessed. If the above attributes are satisfied, the https://hcservices.ecourts.gov.in/hcservices/ 10. In the cases on hand, the Commissioner of Income Tax(Appeals), after careful consideration of the facts of the case,found that the assessee exported music software, i.e., theassessee assigned the rights to parties of foreign countries andthat the rights could not be sold without the sale of the audiodigital track, and therefore, the transaction comes within thepurview of Section 80HHC of the Act, and the said view was alsoalso affirmed by the Tribunal. We are, therefore, satisfied thatthe attributes required for bringing the property involved withinthe meaning of "goods" is satisfied with reference to its utility;capability of being bought and sold; and capability of beingtransmitted, transferred, delivered, stored and possessed. 10. In the cases on hand, the Commissioner of Income Tax(Appeals), after careful consideration of the facts of the case,found that the assessee exported music software, i.e., theassessee assigned the rights to parties of foreign countries andthat the rights could not be sold without the sale of the audiodigital track, and therefore, the transaction comes within thepurview of Section 80HHC of the Act, and the said view was alsoalso affirmed by the Tribunal. We are, therefore, satisfied thatthe attributes required for bringing the property involved withinthe meaning of "goods" is satisfied with reference to its utility;capability of being bought and sold; and capability of beingtransmitted, transferred, delivered, stored and possessed. 11. In view of our above finding that the property involvedis "goods", we find no hesitation to hold that the assessee isentitled to deduction under Section 80HHC of the Act, and ourabove view is fortified with the decision of the Division Bench ofthe Bombay High Court in Abdulgafar A.Nadiadwala v. AssistantCommissioner of Income Tax and Others, [2004] 267 ITR 488. 12.1. Alternatively, it is contended by Mrs.Pushya Sitaraman,learned Senior standing counsel for the Revenue that the deductioncould be claimed by the assessee only under Section 80HHF of theAct, but not under Section 80HHC; and that since Section 80HHF ofthe Act providing deduction in respect of profits and gains fromexport or transfer of any film software, television software,music software, television news software, including telecastrights was inserted by the Finance Act, 1999, with effect from1.4.2000, the assessee is not entitled to deduction even underSection 80HHF of the Act for the assessment year 1999-2000. 12.2. A contention made in the above lines, was carefullyconsidered by the Division Bench of the Bombay High Court inAbdulgafar A.Nadiadwala v. Assistant Commissioner of Income Taxand Others, [2004] 267 ITR 488 and rejected. 12.3. Moreover, in view of the ratio laid down by the ApexCourt in Tata Consultancy Services v. State of A.P. and BharatSanchar Nigam Ltd. v. Union of India, referred supra, we are ofthe considered opinion that merely because Section 80HHF came tobe inserted with effect from 1.4.2000, that, by itself, does notmean the benefit of Section 80HHC could be denied to the https://hcservices.ecourts.gov.in/hcservices/ transactions which are governed under Section 80HHC of the Act.Of course, it goes without saying that in view of the specificprovision under Section 80HHF for deductions in respect of profitsand gains from export or transfer of any film software, televisionsoftware, music software, television news software, includingtelecast rights, the assessee could very well in future claim suchdeductions and the same would be taken care of under Section 80HHF(5) of the Act to prevent double benefits being claimed by theassessee in such events. However, in view of our clear findingthat the transaction in question is covered under section 80HHC,it is inappropriate to hold that merely because Section 80HHF wasnot on the statute book during the assessment year in question,viz., 1999-2000, the assessee is not entitled to claim deductionwithout any hindrance under Section 80HHC in spite of complianceof the ingredients thereunder. In the result, finding no substantial questions of lawarising for our consideration, these appeals are dismissed. Nocosts.Sasi Sd/Asst.Registrar/true copy/ Sub Asst.Registrar To: 1.The Assistant Registrar,Income Tax Appellate TribunalMadras Bench "B", Chennai.Rajaji Bhavan, 3[rd] Floor, Besant Nagar,Chennai 600 090Income Tax Appellate TribunalMadras Bench "B", Chennai.Rajaji Bhavan, 3[rd] Floor, Besant Nagar,Chennai 600 090 2.The Secretary, Central Board of Direct Taxes, New Delhi.of Direct Taxes, New Delhi. 3.The Commissioner of IncomeTax (Appeals)-VI, Chennai.Tax (Appeals)-VI, Chennai. 4.The Commissioner of Income Tax-IV, Chennai. Income Tax-IV, Chennai. In the result, finding no substantial questions of lawarising for our consideration, these appeals are dismissed. Nocosts.Sasi Sd/Asst.Registrar/true copy/ Sub Asst.Registrar To: 1.The Assistant Registrar,Income Tax Appellate TribunalMadras Bench "B", Chennai.Rajaji Bhavan, 3[rd] Floor, Besant Nagar,Chennai 600 090Income Tax Appellate TribunalMadras Bench "B", Chennai.Rajaji Bhavan, 3[rd] Floor, Besant Nagar,Chennai 600 090 2.The Secretary, Central Board of Direct Taxes, New Delhi.of Direct Taxes, New Delhi. 3.The Commissioner of IncomeTax (Appeals)-VI, Chennai.Tax (Appeals)-VI, Chennai. 4.The Commissioner of Income Tax-IV, Chennai. Income Tax-IV, Chennai. 5.The Joint Commissioner of Income Tax, Media Range Chennai-600 034. 6. The Deputy Commissioner of Income TaxFilm Circle,Chennai 600 006 + 2 cc to Mrs. Pushya Sitaraman, Advocate sr no. 115398 and 11540 nsm(co)nm(10.04.07) T.C.(A).Nos.109 and 110 of 2007