IN THE SUPREME COURT OF INDIA

CIVIL APPELLATE JURISDICTION

CIVIL APPEAL NO.3300 OF 2007

Commr. of Income Tax-IV, Tamil Nadu ...Appellant(s)

Versus

B. Suresh ...Respondent(s)

W I T H

Civil Appeals Nos.3534, 3294, 3291, 3302, 3298, 3299, 3306, 3304, 5334, 4389, 2490, 2670, 2495, 2500, 2484, 2497, 2496, 2491, 2489, 2498, 2499, 2501, 2483, 2482, 2481, 2492, 2671, 2485, 2502, 2475, 2474, 2477, 2476, 2478, 5221 of 2007, 2811, 4454, 4707, 4705, 6643 of 2008, 94, 432, 1154, 1256, 1004, 1155, 1115 and 1303 of 2009

CIVIL APPEALS NOS. 1576 TO 1586  OF 2009 (Arising out of S.L.P.(C) Nos.8314, 8315, 18839, 10854 of 2008, 1361, 2162,

3758 of 2009, 9814, 9809 of 2008, 2771 & 5726 of 2009)

O R D E R

Delay condoned.

Leave granted in Special Leave Petitions.

The question which arises for determination in this batch of Civil Appeal(s)

is whether the foreign exchange earned by transferring the right of exploitation of the

films outside India by way of lease is admissible for deduction under Section 80HHC

of the Income Tax Act 1961.   According to the Department,  movies/films are not

goods.  They are not merchandise.  Hence Section 80HHC is not invokable.  Further,

according to the Department, there is a difference between “sale” and “lease” hence,

the subject transaction will not fall under Section 80HHC.

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Facts in Civil Appeal No.3300/2007:

During  the  relevant  Assessment  Year  1993-94,  the  assessee,  B.  Suresh,

transferred feature film rights for exploitation outside India and earned income in

foreign exchange.  The assessee claimed deduction under Section 80HHC in respect of

the said receipts.  The Assessment Officer (AO) held that the assessee was not entitled

to deduction under section 80HHC, inter alia, on the ground that the export was not

of merchandise or goods as contemplated under Section 80HHC, but was merely an

export of “rights” in the film.  This decision of the AO was over-ruled by CIT(A).

When the matter came before the Tribunal at the instance of the Department, there

was already a judgment of the Bombay High Court in the case of Abdulgafar A.

Nadiadwala Vs. Asst. Commr. of Income Tax & Ors., reported in 267 ITR 488 Bom.

Following the said decision, in the present case, the Tribunal held that the assessee

was  entitled  to  deduction  under Section  80HHC,  hence,  this  Civil  Appeal  by  the

Department.

Contentions:

On  behalf  of  the  Revenue,  Shri  V.  Shekhar,  learned  senior  counsel,

submitted that the assessee in this case  was not engaged in the export of goods and

merchandise;  that  the  films recorded on beta-cam tapes  did  not  qualify either as

'goods'  or  'merchandise'.   In  this  connection,  it  was  urged  that  beta-cam  tape

(cassette) was only a medium of transfer;  that,  there was no “sale” of the film in

beta-cam format and that the assessee had only transferred the right to use for a

period of five years and since  the  title  remained with  the  assessee,  the  impugned

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transaction fell outside Section 80HHC.  According to the learned counsel, since the

films transferred on beta-cam tapes were given on lease with a right to telecast given

to Star TV under the Lease Agreement dated 29th March, 1995 for a period of five

years, there was no element of sale so as to attract Section 80HHC.  It was further

urged  that  movies  are  neither  “goods”  nor  “merchandise”.   In  this  connection,

learned counsel placed reliance on Dictionaries.

Shri Harish N. Salve and Shri S.Ganesh, learned senior counsel appearing

on behalf of the assessee, submitted that on a bare reading of Section 80HHC(1), one

finds that the deduction/concession is given in cases where an assessee derives profits

from the activity of exports and earns foreign exchange.  It is pointed out that the

said  Section  is  concerned  with  the  Business  Profits  under  the  1961  Act.   It  is

submitted that the word “goods” or “merchandise” must be read as understood in

common parlance.  Our attention was also invited to the dictionary meaning of the

word “merchandise”.  On the basis of the said meaning, it was submitted that any

article  of  commerce  and  trade  could  fall  under  the  meaning  of  the  word

“merchandise”.   It  was  submitted  that  one  has  to  read  the  words  “goods”  and

“merchandise” in the broad sense, keeping in mind the object of the Parliament in

enacting Section 80HHC.  According to the learned counsel, the said Section is an

incentive provision.  Its object to promote earnings in foreign exchange arising from

exports,  which includes sale of goods and merchandise.  If one keeps the object in

mind, according to the learned counsel, movies/films which are made would certainly

come within the ambit and meaning of the word “merchandise” as an article of trade

and commerce.  It is also urged that with globalisation and also with advancement in

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technology, the words “goods” and “merchandise” have to be read in widest possible

terms.   

Our attention is also invited to the scheme of Section 80HHC in support of

the above contentions to point out that the word “sale” would also include “lease” as

indicated in Rule 9A(7) which states that for the purposes of Rule 9A, the “sale” of

the  rights of exhibition  of feature films would include the  “lease” of such rights.

Similarly, under Rule 9B(6), it has been, inter alia, provided that “sale” of rights of

exhibition  of  a  feature  film would  include  the  “lease”  of  such  rights.   It  is  also

submitted on behalf of the assessee that Section 80HHF goes far beyond the physical

exports referred to in Section 80HHC(1).  Section 80HHF recognises even software

transfers  “by  any  means”.   Further   under  clause  (5)  of  Section  80HHF,  the

Parliament has clearly indicated that if an assessee has taken the benefit of Section

80HHC, he would not be entitled to claim the same benefit under Section 80HHF,

which provision, according to the learned counsel, shows that benefit of deduction

under Section 80HHC could be claimed for foreign exchange earned by sale of feature

films or rights therein.

Findings:

Two questions arise for determination, namely, whether foreign exchange

earned by transfer of feature film rights for exploitation outside India, in the form of

lease, is entitled to the benefit of Section 80HHC deduction.  The same is denied by

the Department on the ground that there is no “sale”.  The other question is whether

such “rights” are goods/merchandise.

The basic requirement of Section 80HHC is earning in foreign exchange

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and retention of profits for export business.  Profits are embedded in the “income”

earned.   Earning  of  income  depends  on  sale  of  goods  and  services.   Today  the

difference  between  the  two is  getting  blurred with  globalization  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 T.V. for five years (it has a

limited life).  Hence such “rights” would certainly fall in the category of articles of

trade and commerce, hence, merchandise.

On the question as to whether transfer of the said rights by way of lease

would attract Section 80HHC, we find merit in the contention that under Rule 9A

and Rule 9B, the word “lease” is included in the meaning of the word “sale”.

Lastly, we find no infirmity in the judgment of the Bombay High Court in

the case of Abdulgafar A. Nadiadwala.

For  the  above  reasons,  the  Civil  Appeals  filed  by  the  Department  are

dismissed with no order as to cost.

                               ...................J.             (S.H. KAPADIA)

                      ..................J.

                                       (H.L. DATTU) New Delhi, March 03, 2009.

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