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Judgment
N. Kumar, J.—All these seven appeals relate to the very same assessee but for different assessment years. In fact, the assessee has preferred three cross-objections in three appeals. Therefore, all these appeals and cross-objections are taken up for consideration together and disposed of by this common order. The assessee is carrying on the business of providing engineering drawings, designs, fabricating and installing drilling equipment for oil platforms etc. The assessee has filed his return for all the assessment years. The matter was taken up for scrutiny assessment. The assessee had claimed deduction under s. 80-O of the IT Act, 1961 (hereinafter referred to as "the Act") @ 50 per cent of the gross receipts by way of foreign exchange earnings. The assessee also claimed deduction under s. 80-IA of the Act. The assessee also claimed deduction both under ss. 80-IA and 80-O of the Act in respect of few agreements. He also claimed deduction under s. 80HHB of the Act. The assessing authority declined to grant the benefit sought for. Aggrieved by the said order, the assessee preferred an appeal to the CIT(A) who granted partial relief. In the appeal filed by the assessee before the Tribunal the deduction under ss. 80-IA, 80-O and 80HHB as well as deduction both under ss. 80-IA and 80-O was partly allowed. The Tribunal also held insofar as s. 80-O is concerned, the assessee is entitled to benefit only on the net income. Thus, rejected the claim of the assessee for deduction on the gross receipts. Therefore, the assessee is before this Court by way of cross-objection whereas the Revenue has challenged the granting of those deductions under the aforesaid provisions of law.
The substantial questions of law framed for consideration are as under:
(1) Whether the Tribunal was right in proceeding to grant relief in favour of the assessee that it was entitled for deduction under s. 80-IA of the Act without examining the various reasons recorded by the CIT(A) in holding that the assessee was not manufacturing any article or thing nor did it have workers consisting of ten or more as per s. 80-IA(2)(V) of the Act?
(2) Whether the Tribunal was correct in proceeding to hold that the assessee would be entitled to claim 80-O deduction despite the fact that the services rendered or agreed to be rendered was utilised by the foreign company in India?
(3) Whether the Tribunal was correct in proceeding to hold that ss. 80-IA and 80-O deduction operate under two different spears (spheres) and the assessee would be entitled to claim both the deduction on the same income of a project?
(4) Whether the Tribunal was right in not apportioning the financial cost and operating expenses which had to be allocated to the export income before working out the deduction under s. 80HHB of the Act ? and
(5) Whether the Tribunal was justified in the facts of the case in holding that s. 80-O deduction shall not be allowable on gross amount of foreign exchange brought into India and further, it should also not be allowed on net foreign exchange brought into India i.e., foreign exchange received minus foreign exchange expended? In other words, the expenses in Indian currency cannot be taken into consideration?
Re. Substantial question of law No. 1:
The present s. 80-IA was substituted by Finance Act, 2001 w.e.f. 1st April, 2002. In the instant case, we are concerned with the asst. yrs. 1994-95 to 1999-2000. Therefore, the substituted provision has no application to the facts of this case. The section, which was there on the statute book prior to substitution, reads as under:
Where the gross total income of an assessee includes any profits and gains derived from any business of an industrial undertaking or a hotel or operation of a ship (such business being hereinafter referred to as the eligible business), 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 from such profits and gains of an amount equal to the percentage specified in sub-s. (5) and for such number of assessment years as is specified in sub-s. (6).
This section was inserted by Finance Act No. 2 of 1991, which came into effect from 1st April, 1991. Though in the subsequent years several amendments were carried out, those amendments are of no relevance in deciding these appeals. A perusal of the aforesaid provisions makes it clear that the assessee is entitled to the benefit of deduction from the profits and gains if it is included in the total gross income of the assessee in the manner provided in the said section. This section was made applicable to industrial undertakings, which fulfil the conditions which are mentioned in the sub-s. (2). More importantly the assessee should be in the business of manufacturing or production of any article or thing and he must have employed ten or more workers in the said manufacturing process, it is carried on with the aid of power and twenty or more workers in the manufacturing process carried on without the aid of power. The benefit under the section was declined by the CIT(A) to the assessee on the ground that the activities carried of by the assessee is neither manufacturing activity nor involves production and that he has not employed more than ten workers in the said manufacturing process. However, the Tribunal has held that the activities which the assessee is carrying on falls within the word "produces" and that he has employed more then ten workers and working with the aid of power. Therefore, the conditions prescribed in the aforesaid provisions are fulfilled. It is that finding, which is assailed by the Revenue in these appeals.
Learned counsel for the Revenue contends pointing out from the judgment of the CIT(A) where at para 15.2, the activities of the assessee have been listed and on that basis he contends that it is neither manufacturing activity nor production activity and therefore s. 80-IA is not attracted.
Per contra, learned counsel for the assessee submits that the activities carried on by the assessee is in the nature of preparing of designs and drawings and rightly the Tribunal has extended the benefit to the assessee and therefore he submits that there is no merit in the said contention. In fact he submitted that for some years the authorities have concurrently held that the assessee is carrying on manufacturing and production activities. The benefit is denied on the ground that in addition to that, other activities, which are offered by the assessee, did not fall within definition of section and therefore, s. 80-IA is not attracted.
The activities, which are carried on by the assessee as per one of the agreements are as under:
Design and Engineering Service.
Mudmat analysis.
Fabrication Engineering Review.
Providing technical inputs for preparation of manuals by client for operation start up, maintenance procedure, etc.,
Review of approval of installation related engineering.
Review of approval of fabrication related engineering.
Prepare vendor list for procurement.
Incorporation of vendor data in engineering drawings, documents and notify the contractor of omissions/inconsistencies therein.
Detailed design/engineering of the platform facilities.
Preparation of technical specification.
Structural designs of jackets, piles, pipes, top sides, etc.,
Preparation of materials balance.
Preparation/review of equipment specification for electrical work.
Prepare electric system testing procedure.
Prepare instrumentation index design, location and installation drawings and hook up drawings.
Prepare vendor list and technical recommendations based on vendor clarifications provided by MDL.
Review of vendor''s project.
Review of inspection procedures.
Review of vendors documentation.
Issue of inspection release notes.
The CIT(A) after taking note of all these activities has categorically held that most of these activities fall in the category of preparing engineering drawings, designs and other technical know-how as claimed by the assessee. In addition to this, the assessee has offered certain other facilities to a foreign concern, which do not fall under s. 80-IA.
The Supreme Court in the decision of Commissioner of Income Tax-V, New Delhi Vs. Oracle Software India Ltd., has held that s. 80-IA occurs in Chapter VI-A which deals with deductions in respect of certain incomes. Where the gross total income of an assessee includes any profits, derived from any business of an industrial undertaking to which s. 80-IA applies, there shall in accordance with and subject to the provisions of s. 80-IA, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to a specific percentage for such number of assessment years as specified in s. 80-IA. For deciding the present controversy, it would be sufficient to notice that the gross total income of an assessee must include profits derived from any business (eligible) of an industrial undertaking which in terms of s. 80-IA(12)(b) is given the same meaning as is assigned to that expression vide Explanation to s. 33B. As could be seen from the Explanation to s. 33B, an industrial undertaking, inter alia, has been defined to mean any undertaking which is engaged, inter alia, in the manufacture or processing of goods. Therefore, till 2009 the word ''manufacture'' was not defined under the Act. By Finance Act (No. 2) 2009 w.e.f. 1st April, 2009 s. 2(29BA) was inserted which reads as under:
(29BA) : ''manufacture'' with its grammatical variations, means a change in a non-living physical object or article or thing.--
(a) resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or
(b) bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure;
Therefore, the word ''manufacture'' as understood in the context of income tax law is that if an assessee brings into existence a new and distinct object or article it amounts to manufacturing activity and thus the case falls under s. 80-IA. In this connection, it is also useful to refer to the judgment of the apex Court in the case of Scientific Engineering House (P) Ltd. Vs. Commissioner of Income Tax, Andhra Pradesh, explains the meaning of the word plant. If the aforesaid test is applied to the drawings, charts, plans, processing data and other literature comprised in the "documentation service" as specified in cl. 3 of the agreement, it will be difficult to resist the conclusion that these documents as constituting a book would fall within the definition of "plant". It cannot be disputed that these documents regarded collectively will have to be treated as a "book" for the dictionary meaning of that word is nothing but a "a number of sheets of paper, parchment, etc., with writing or printing on them, fastened together along one edge, usually between protective covers, literary or scientific work, anthology, etc., distinguished by length and form from a magazine, tract, etc." (vide Webster''s New World Dictionary). But apart from its physical form, the question is whether these documents satisfy the functional test indicated above. Obviously, the purpose of rendering such documentation service by supplying these documents to the assessee was to enable it to undertake its trading activity of manufacturing theodolites and microscopes and there can be no doubt that these documents had a vital function to perform in the manufacture of these instruments; in fact it is with the aid of these complete and up-to-date sets of documents that the assessee was able to commence its manufacturing activity and these documents really formed the basis of the business of manufacturing the instruments in question. True, by themselves, these documents did not perform any mechanical operations or processes but that cannot militate against their being a plant since they were in a sense the basic tools of the assessee''s trade having a fairly enduring utility, though owing to technological advances, they might or would in course of time become obsolete. We are, therefore, clearly of the view that the capital asset acquired by the assessee, namely, the technical know-how in the shape of drawings, designs, charts, plans processing data and other literature falls within the definition of "plant" and is, therefore, a depreciable asset.
The Division Bench of this Court in the case of Commissioner of Income Tax Vs. Datacons (P.) Ltd., dealing with the meaning of the word "industrial company" and where the activity carried on by the assessee is either manufacturing of goods or engaged in the processing of goods held as under:
All these activities dovetail into one another and the stage from the receiving of the basic data right upto the handing over of the final statements to the customers is one integrated activity.
In the activities carried out by the company there is a physical transformation of blank cards and blank stationery into punched cards and statements bound in the form of a book. Punched cards and statements made in the form of a book is different from blank cards and blank continuous stationery. The punched cards after the entire processing is completed is comparable to the scrap generated in a manufacturing or processing activity.
It will be clear from these activities that the assessee receives vouchers and statement of accounts from the customer and they are converted into the required balance-sheet, stock account, sales analysis, etc. They are got printed as per the requirements of the customer. In all these activities, the assessee has to play an active role by co-ordinating the activities and collecting the information. Such activities, in our opinion, could fairly fall within the concept of processing of goods, if not manufacture of goods.
This view has been found favour by the apex Court in the decision of COMMISSIONER OF INCOME TAX Vs. PEERLESS CONSULTANCY and SERVICES (P) LTD., .
The apex Court in the decision of Commr. of Income Tax-IV, Tamil Nadu Vs. B. Suresh, dealing with ''articles of trade and commerce'' held at para 9 that
Today the difference between the two is getting blurred with globalisation and cross-border transaction. Today with technological advancement one has to change our thinking regarding concepts like goods, merchandise and articles. In the case of B. Suresh, the assessee had bought rights of various decoders and had recorded movies on beta-cam tapes which were transferred as telecasting rights to Star TV for five years (it has a limited life). Hence such ''rights'' would certainty fall in the category of articles of trade and commerce, hence, merchandise.
In the instant case, as it is clear from the copy of the agreement, the activities of the assessee involves various activities as per the requirement of their clients. It is client specific as it involves incorporation of clients data in engineering drawings, documents detailed design engineering of the specimen facilities, preparation of technical know-how, review of installation related engineering, fabrication, equipment specific for legal system, testing procedure and assurance of technical services. As rightly held by the CIT(A) these activities fall in the category of preparing engineering drawings, designs and other technical know how. Therefore, the assessee brings into existence new and distinguished (distinct) product and designs which are client specific as per their requirement and thereafter advise the clients in manufacture, production according to the designs and also advise the client in its installation after the manufactured goods are brought into country for installation. In other words, what is transferred to the client is not the intellectual property, the consideration of which is for supply of drawings and design. Instructions given for preparing the equipment according to the drawings and also its installation when it is installed. Therefore, the said activity of the assessee falls within the meaning of the word ''manufacture'' or ''produce'' used in s. 80-IA. Even if the assessee as ancillary or incidental or in connection with the aforesaid activity renders some service by way of advice or review or procurement of materials, the said service is a part of the manufacturing or a production activity with which it carries on and therefore, the Tribunal was justified in extending the benefit of s. 80-IA to the assessee in the light of the undisputed and admitted facts on record. The Tribunal has also relied on several decisions on the subject. Thus the substantial question of law is answered in favour of the assessee and against the Revenue. The material on record discloses that the assessee has employed nearly about 400 persons as work force to carry out its activities. The word ''worker'' used in the section cannot be construed in the context of the Industrial Disputes Act, 1947. The meaning of the word ''worker'' has to be noted in the context of manufacture or production activity carried on by the assessee, which in turn earns foreign exchange certainly which requires highly qualified persons such as engineers. Even otherwise, the material on record shows the assessee is carrying on its activities with the aid of power and it has engaged more than the requisite number of draftsmen, supervisors and even persons who are technically qualified. Therefore, the Tribunal was justified in extending the benefit of s. 80-IA to the assessee, thus the first substantial question of law is answered in favour of the assessee and against the Revenue.
Re. Substantial question of law No. 2:
Answer to this question revolves round the interpretation of s. 80-O which was in force at the relevant point of time which reads as under:
80-O Deduction in respect of royalties, etc., from certain foreign enterprises.--Where the gross total income of an assessee, being an Indian company [or a person (other than a company) who is resident in India], includes any income 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, 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, within 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.
The Explanation to the section further makes it clear that service rendered or agreed to be rendered outside India shall include service rendered from India, but not service rendered in India. Therefore, it is clear if the services are rendered in India, the assessee is not entitled to the benefit of s. 80-O of the Act, but if the assessee is rendering the service from India and the services are actually rendered outside India, then he is entitled to the benefit of s. 80-O of the Act. In the instant case, the assessee was rendering service from India, which service was being made use of by the foreign enterprise outside the country. Therefore, it is not a case of service being rendered inside India. Even after the foreign enterprise making use of the service rendered by the assessee after manufacturing the equipments though brought it again into the country and erect the same, the material on record discloses that the assessee has not rendered any service in India in connection with the entire project. The reliance by the Tribunal on the Circular of the Board is also apt. The service is rendered from India to a foreign enterprise and therefore, s. 80-O is attracted and the Tribunal rightly extended the said benefit. Thus the second substantial question of law is also answered in favour of the assessee and against the Revenue.
Re. Substantial question of law No. 3:
A similar question arose for consideration before this Court in the case of 969855--> wherein the question was as to whether the assessee is entitled to the benefit of ss. 80HHC and 80-I of the Act. In that case this Court held under:
From the aforesaid statutory provisions and the law declared by the Courts it is clear all the sections which fall under the heading ''C''-- Deductions in respect of certain incomes'' are independent of each other. Therefore, ss. 80HHC and 80-I are independent of each other. A new industrial unit can claim deduction under both sections on the gross total income independently. Sub-s. (9) of s. 80-IA makes it clear that such profits and gains which is allowed deductions under s. 80-IA cannot be again allowed deduction under any other provisions of the chapter under the heading '' ''C''--Deductions in respect of certain incomes,'' The stress on the profits and gains of such eligible business in the case of s. 80HHC, is the profits and gains from export business. Under the provisions of Chapter VI-A of the Act, various deductions from the profits and gains are allowed to the assessee who have to fulfil certain requirements specified under the relevant section. The total deductions under Chapter VI-A of the Act are restricted to the gross total profits in respect of the assessee as a whole. In explanatory note in Circular No. 772 it is stated that the object of s. 80-IA is not to curtail the deductions obtainable under various provisions under the heading--''C Deductions in respect of certain incomes.'' Therefore, s. 80-IA(9) effects the allowability of deductions and not computation and deductions. The deduction to which the assessee is entitled to under this provision is to be computed at the time of allowing deductions and not at the time of computing deductions. Therefore the contention of the Revenue that the profits and gains permitted to be deducted under s. 80-IA should be deducted out of the profits of the business and thereafter the profits and gains from export business is to be calculated, as otherwise it would amount to double benefit, is contrary to the scheme of the aforesaid statutory provisions as well as cl. (baa) to Expln. (ii) to s. 80HHC. When once it is held that sections under the heading '' ''C''--Deductions in respect of certain incomes'' are independent of each other and the assessee is entitled to claim deduction under more than one section, the deduction has to be necessarily in the profits and gains arrived at after making the claims in terms of the aforesaid section. However, the overall claim under both sections has to be restricted to the total profits and gains of such eligible business from gross total income''.
Sec. 80-IA and s. 80-O both fall under the heading ''Deductions in respect of certain incomes'' both are independent of each other. In view of what is held above the assessee is entitled to claim deduction under both the sections. However, the overall claim under both sections has to be restricted to the total profits and gains of eligible accounts (business) from the total profits and gains. In fact this provision [sub. s. (9A)] to s. 80-IA was inserted by Finance Act No. 2, 1998, which came into effect from 1st April, 1998 (1999) that limitation was not there for the earlier assessment years. This question is answered in favour of the assessee and against the Revenue.
Re. Substantial question of law No. 4:
The Tribunal has held that in the facts and circumstances of the case, the additional allocation of general overheads and business costs is not called for. The Tribunal has relied on the principles of the decision of the Tribunal in the case of M.N. Dastur & Co., ITA No. 452/Bang/1997 and others, which it has followed under s. 80-O. The allocation, therefore, has been upheld by the Tribunal on the ground that no allocation of overheads in computing the deduction is necessary and that even to the extent of 20 per cent has to be allowed in the facts of these cases. We are also satisfied that there is no error committed by the Tribunal on this issue of deduction under s. 80HHB. The substantial question of law as framed do not arise for consideration. Accordingly, we decline to answer the said substantial question of law.
Re. Substantial question of law No. 5:
In the cross-objection filed by the assessee it was contended that the assessee is entitled to the benefit of s. 80-O on the gross total income which he has earned as a foreign exchange. The intention behind the aforesaid section is to extend the benefit of the said section in respect of the foreign exchange earned. Even otherwise, it was contended that if the assessee has spent any foreign exchange in earning the income, what has to be deducted is only the foreign exchange expended as expenditure out of the gross total income and benefit has to be extended on such income. In fact in the case of The Assistant Commissioner of Income Tax Vs. Abcon Engineering and Systems Pvt. Ltd, a Division Bench of this Court has held that deduction has to be allowed only on the net income and not on the gross income. Net income after deduction shall be taken to be the amount of income derived or received by the assessee for the purpose of deduction under s. 80-O of the Act and therefore, in that case the matter was remanded to the Tribunal to take into consideration the nature of deduction in the light of s. 80AB and pass orders in accordance with law. Therefore, it was alternatively contended that if the expenditure has to be incurred, it is only that expenditure in foreign exchange is to be deducted and expenditure incurred in Indian currency cannot be taken into consideration as the twin object of the section is export of technical know-how and earning foreign exchange for the country as made it clear by the circular. As it is clear from s. 80-O the benefit under the said provision is to be extended on the taxable income. Taxable income is not gross total income. Any tax is liable to be paid on the amount of expenditure incurred. The expenditure has to be necessarily deducted out of the gross total income in order to arrive at the taxable income. Whether that expenditure was incurred by way of foreign exchange or in Indian currency goes to the background and therefore, when, the benefit is extended from payment of tax on income in computing the said amount, the expenditure incurred either by way of foreign exchange or Indian currency is to be deducted. The Tribunal has considered all three types of claim and has rightly allowed the entitlement of the assessee.
It was also contended the word used is not ''profit'' but ''income'' in s. 80-O unlike s. 80HHC and wherever the Parliament wanted to extend the benefit only to the profit without having used the word income and as the said word is conspicuously absent, the meaning in this section has to be noted in the nature of benefit that is extended i.e., on income and not on profit. In the context in which the benefit is extended to the assessee under s. 80-O, gross total income is arrived at after deducting the expenditure, out of the gross total income and therefore, mere absence of the word profit and use of the word income in the context of s. 80-O would not make any difference. The case laws relied are not relevant to the facts of the case. No interference to the finding of the Tribunal is warranted in the facts of the case.
In this view of the matter, we do not see any error in the order passed by the Tribunal. There is no merit in the cross-objection and therefore, the said substantial question of law is answered in favour of the Revenue and against the assessee. In the result, the order of the Tribunal is upheld and all the seven appeals filed by the Revenue are dismissed and also the three cross-objections filed by the assessee are also dismissed.