2005 (11) TMI 377 - AT - Income Tax

Deductions under sections 80HHC and 80-IB - Sale consideration of technical know-how drawings, designs, technology to the non-resident of manufacture of segmented tyres and DEPB licence eligible for deduction under section 80HHC? - Implication of the provisions of section 80-IB(13) read with section 80-IA(9) - HELD THAT - In the present case, it is seen that the assessee received the consideration for providing design, development and manufacturing assistance and for defining tooling design and production process. This was done by transferring various design documents and connected papers therewith. The conjoint and harmonious reading of various definitions as well the ratio laid down by Hon ble Supreme Court leads us in no doubt that the amount received by assessee for sale of design, development and manufacturing technology of laminated tyres amounts to sale of goods or merchandise and hence eligible for deduction under section 80HHC. It is not correct to hold that the amount received falls within the term in consideration for the use of any patent, invention, design or registered trade mark used in section 80-O of the Act. The amount received is not for use of but for sale of the drawing, design and technology as such. After the transfer of design and technology, the same is the property of purchaser and no longer remains with the assessee. Thus, the amount received is not for merely allowing use of such drawing, design or technology but for sale of such product, which falls within the definition of goods or merchandise within the meaning of section 80HHC of the Act. We accordingly hold that since the amount is received inconvertible foreign exchange as specified under section 80HHC, the assessee is entitled to deduction under section 80HHC of the Act. In view of our above answer, it is not necessary to deal whether the amount received is eligible for deduction under section 80-O also or not. Whether the assessee is entitled deduction u/s 80HHC as well as 80-IB and the implication of sub-section 9 of section 80-IA or sub-section 13 of section 80-IB - In view of the decision of this Tribunal in the case of Mittal Clothing Co. 2005 (6) TMI 480 - ITAT BANGALORE and in view of the CBDT Circular No. 772, we hold that the assessee can claim deduction u/s 80HHC as well as section 80-IB. However, it is made clear that the total deduction in both the sections will not exceed the profit included in the gross total income, as sections 80AB governs both section 80HHC and section 80-IB. Sale of DEPB licence will be excluded as per clause ( baa ) of Explanation to section 80HHC - It is the contention of assessee that such amount do not fall under clause ( iiia ) of section 28 of the Act but falls under clause 28( iv ) of the Act. Since clause ( baa ) refers merely to clause ( iiia ) of section 28 and since clause ( iv ) of section 28 is not referred to in clause ( baa ), the same is not to be excluded while computing profits of business for the purpose of section 80HHC. We are in agreement with the submission of learned counsel for assessee. Profit on sale of DEPB licence is not equivalent to profit on sale of licence granted under the Imports (Control) Order, 1955 made and under the Imports and Exports (Control) Act, 1947 referred in section under clause ( iiia ) of section 28. Similar view has been held by ITAT, New Delhi Bench in the case of P G Enterprises 2004 (11) TMI 287 - ITAT DELHI-B . We accordingly hold that while computing profits of business for the purpose of section 80HHC, profit on sale of DEPB licence will not be excluded under clause ( baa ) of Explanation to section 80HHC. In the cross-objection, it was contended that the amount realized on sale of DEPB credits is not eligible for deduction u/s 80HHC. Since it has been held that the amount realized on sale of DEPB credit is assessable as business income u/s 28( iv ) of the Act, the word profit of business will also include profit on sale of such DEPB credit. In the result, the appeal is partly allowed and the cross-objection is dismissed.

Summary

Issues Involved:
1. Whether the technical know-how drawings, designs, and technology for the manufacture of segmented tyres transferred to M/s. Segmax, USA were goods or merchandise within the meaning of section 80HHC?
2. Whether the provisions of section 80HHC and section 80-IB can be claimed on the same income and the implication of section 80-IB(13) read with section 80-IA(9)?
3. Whether the provisions of Explanation (baa) to section 80HHC apply to the sale consideration of DEPB licence?
4. If the design, technical know-how, drawings, etc. sold by the assessee to Segmax, USA do not fall within the meaning of goods or merchandise for the purpose of deduction under section 80HHC, can the assessee be entitled to the alternate claim of deduction under section 80-O?

Detailed Analysis:

1. Technical Know-How as Goods or Merchandise:
The appellant argued that the design, development, and manufacturing technology transferred to Segmax, USA, were goods, citing the decision of the Supreme Court in *Associated Cement Co. Ltd. v. Commissioner of Customs* and the Bombay High Court in *Abdulgafar A. Nadiadwala v. Asstt. CIT*. The Tribunal agreed, noting that the amount received for the sale of design, development, and manufacturing technology of laminated tyres amounts to the sale of goods or merchandise. The Tribunal emphasized that the conjoint and harmonious reading of various definitions and the ratio laid down by the Supreme Court leads to the conclusion that the amount received by the assessee for such transfer is eligible for deduction under section 80HHC. The Tribunal concluded that the amount received is not for merely allowing the use of such drawing, design, or technology but for the sale of such product, which falls within the definition of "goods or merchandise" within the meaning of section 80HHC.

2. Deduction Under Both Section 80HHC and Section 80-IB:
The Tribunal referred to the decision in *Mittal Clothing Co.*, where it was held that deductions under section 80HHC and 80-IB should be computed independently. The Tribunal clarified that section 80-IA(9) only regulates the deductions allowable under Chapter VI-A and ensures that the sum total of the deductions does not exceed the profits and gains of the undertaking. The Tribunal concluded that the assessee could claim deductions under both sections 80HHC and 80-IB, provided the total deduction does not exceed the profit included in the gross total income, as governed by section 80AB.

3. Application of Explanation (baa) to DEPB Licence:
The Tribunal agreed with the appellant's contention that the sale consideration of DEPB licence does not fall under clause (iiia) of section 28 but falls under clause (iv). Since clause (baa) of Explanation to section 80HHC refers to clause (iiia) and not clause (iv), the profit on the sale of DEPB licence should not be excluded while computing profits of business for the purpose of section 80HHC. The Tribunal supported this view by referring to the decision of the ITAT, Delhi Bench in *P & G Enterprises (P.) Ltd. v. Dy. CIT*.

4. Alternate Claim Under Section 80-O:
Given the Tribunal's conclusion that the amount received for the sale of design, development, and manufacturing technology qualifies as goods or merchandise under section 80HHC, it was unnecessary to address whether the amount would be eligible for deduction under section 80-O. The Tribunal emphasized that the amount received is not for the use of any patent, invention, design, or registered trademark but for the sale of such items, thus qualifying for deduction under section 80HHC.

Conclusion:
The Tribunal allowed the appeal in part, holding that the amount received for the sale of design, development, and manufacturing technology qualifies for deduction under section 80HHC and that the assessee can claim deductions under both sections 80HHC and 80-IB, provided the total does not exceed the profits included in the gross total income. The Tribunal also held that the profit on the sale of DEPB licence should not be excluded under clause (baa) of Explanation to section 80HHC. The cross-objection by the revenue was dismissed.