ORDER
R.K. Gupta, Judicial Member
1. This is an appeal by the assessee against the order of the Commissioner (Appeals) for assessment year 1999-2000.
1. The ld. Commissioner (Appeals) erred in disallowing the claim of deduction of Rs. 1,67,38,513 under Section 80HHC on the ground that the claim was made under Section 80HHC instead of Section 80HHE and the audit report in Form No. 10CCAC was filed instead of Form No. 10CCAF.
2. The ld. Commissioner (Appeals) failed to appreciate the fact that the appellant as under a bona fide belief based on the decision of the Bombay ITAT in the case of Tangerine Export (49 ITD 386) that the claim of deduction would be allowed under Section 80HHC and hence the audit report of Form No. 10CCAC was filed.
3. The ld. Commissioner (Appeals) failed to appreciate that the assessing officer never treated the Return of Income as defective one and failed to give the opportunity to the assessee to file the audit report in the Form No. 10CCAF in the place of Form No. 10CCAC and thereby disregarded the CBDT’s Circular No. 1/2001, dated 17-1-2001 where the CBDT has clarified that procedural defect can be corrected.
4. The ld. Commissioner (Appeals) erred in exceeding his jurisdiction in disallowing the entire claim of deduction of Rs. 1,67,38,513 without taking into account the facts that the assessing officer himself had allowed the deduction to the extent of Rs. 47,16,987 which remained to be deducted while computing the total income.
5. The ld. Commissioner (Appeals) further erred in not appreciating that the assessing officer had erroneously computed the deduction at Rs. 47,16,987 as against Rs. 62,54,283 under Section 80HHC due to not apportioning direct cost proportionately on the basis of export turnover to total turnover.
6. The ld. Commissioner (Appeals) erred in not treating the payment of export dues received in shape of shares allotted by the foreign customer in settlement of export dues as foreign exchange brought into India without appreciating that the payments received in the shape of shares are in lieu of foreign exchange realization. The appellant submits that the Commissioner (Appeals) ought to have allowed such claim in view of CBDT’s Circular No. 711, dated 24-7-1995 given for the purpose of Section 80HHB.
7. The ld. Commissioner (Appeals) failed to appreciate that the foreign customer settled the export dues by allotment of shares. Since it was a starter in its activities and in development stage and could not pay the entire dues by remitting the foreign exchange and in order to avoid duplication and foreign exchange loss in transmission both ways, it was thought prudent that the foreign customer could directly issue shares against export dues instead of remitting the foreign exchange and getting it back to issue shares.
8. The ld. Commissioner (Appeals) failed to appreciate the RBI videits letter dated 28-3-2002 and 30-4-2002 has granted the permission for extension of time to repatriate the export proceeds represented by shares of foreign customer.
9. The ld. Assessing Officer erred in charging the interest under Section 234B without considering the fact that the appellant was not liable to pay advance tax under Section 208 in view of the advance tax liability not exceeding the specified limit of Rs. 50,000 and therefore the provisions of Section 234B are not attracted.
2. The briefly stated the facts of the case are that the assessee is an individual who, during the relevant period year, was engaged in preparing a digital library of standardized notes and treatises for Atlantis Publishing Group (APG) of the USA which in July 1998 was taken over by M/s Pinkmonkey. Com Inc. of the USA. This business was carried on by A her on proprietorship basis in the name and style of Meena Exports. As per the agreement reached on 24-10-1997 and confirmed on 2-1-1998 between the assessee and the American party, the assessee was to prepare a digitalized synopses of 150 famous literature books etc., to be supplied by the US party. The synopses were to be sent digitally via e-mail to Pinkmoneky. These were actually sent to USA via digital file transfer procedure/internet. As such no documentation formalities were required from the Customs authorities. The lump sum consideration for the job was fixed at US $ 5,00,000. It was agreed that $ 2,00,000 would be paid in cash and the balance $ 3,00,000 in the form of shares of the US party. The return of income filed by the assessee disclosed total income of Rs. 64,680 and was accompanied with audited accounts, tax audit report and report in Form No. 10CCAC for claiming deduction of Rs. 1,67,38,513 under Section 80HHC. The assessee stated before the assessing officer that the entire turnover of Rs. 2,10,24,524 comprised export of software, mainly to Pinkmonkey. Com. The assessing officer observed from the inward remittance certificates that from the export of software during the relevant previous year only Rs. 78,55,735 was received in India in convertible foreign exchange. For the balance amount of exports of Rs. 1,28,51,014 the assessee had received 301667 fully paid shares of Pinkmonkey. Com Inc., USA. It was contended by the assessee that since these shares were received in India, these should also be construed as export proceeds received in India for purposes of computing admissible deduction under Section 80HHC. The assessee applied to the RBI on 25-3-2002 for confirming this position. The RBI advised the assessee to divest the shares immediately and repatriate the sale proceeds of the shares to India. The Assessing; Officer held that since convertible foreign exchange equivalent to $ 3,00,000 had not been brought in India within the permissible time-limit, the claim of the assessee that receipt of shares amounted to receipt of foreign exchange could not be accepted. The assessing officer took the view that the assessee being exporter of software should have claimed deduction under Section 80HHE which specifically provides for deduction for software exports. In view of this, provisions of Section 80HHC were not applicable to the assessee. The assessing officer stated that under Section 80HHE(4) filing of report in Form No. CCAF is mandatory for exigibility of the deduction under Section 80HHE. Since the assessee had not filed the report in Form 10CCAF she was held by the assessing officer to be not eligible to deduction under Section 80HHE.
3. After holding that the assessee is not eligible for deduction under Section 80HHE also, the assessing officer observed in his order that in the event it is held that the assessee is entitled to deduction under Section 80HHE, the deduction was to be restricted to Rs. 47,16,987. The computation of this deduction under Section 80HHC has been given by the assessing officer by treating the assessee as a Trading Exporter. How-ever, while computing the total taxable income, no deduction is allowed by the assessing officer under Section 80HHC as in his view assessee was entitled for deduction under Section 80HHE.
4. The assessee preferred appeal before the Commissioner (Appeals). The contentions raised before the assessing officer were reiterated before the Commissioner (Appeals) and it was further contended that deduction under Section 80HHC is very much allowable to the assessee. Clause 2(a) of Section 80HHC specifies that the provisions of Section 80HHC apply to all goods and merchandise except mineral oil and minerals and ores. Reliance was placed on the decision of the Bombay Bench of the Tribunal in the case of Tangerine Exports v. Income Tax Officer (1994) 49 ITD 386. It was contended that this decision of the Tribunal is applicable to the instant case. Therefore, the deduction under Section 80HHC is allowable as the requisite conditions are satisfied. It was further submitted that the assessing officer erred in treating the assessee as a trading exporter. It was argued that the assessee is a manufacturing exporter and as such, even if the stand taken by the assessing officer regarding excluding the export proceeds received in the form of shares is conceded the deduction will be of Rs. 62,54,283 and not deduction of Rs. 47,16,987 as computed by the assessing officer. It was further contended that even if it is held that the deduction is allowable only under Section 80HHE and not under Section 80HHC, a mere procedural defect in filing Form No. 10CCA in place of 10 CCAF could not reasonably result in defect in filing Form No. 10CCA in place of 10 CCAF could not reasonably result in denying the deduction altogether, particularly as Form No. 10CCAC contained all the essential information and particulars required under Section 80HHE was also filed along with the return of income.
5. It was further contended that receipt of the fully paid shares of the face value of US $301667 should be construed as receipt of foreign exchange. It is averred that the assessee never desired to obtain shares in return for their export but the exigency of the situation compelled them to accept the shares only as a commercial alternative. It was further submitted that the assessee applied to RBI to permit the assessee in obtaining shares from US party as per the agreement entered into by the assessee and the US party. The attention of the Commissioner (Appeals) was drawn on the correspondence made with the RBI. After considering the submissions and on perusal of the other relevant materials on record, the Commissioner (Appeals) was in agreement with the findings of the assessing officer. The findings of the Commissioner (Appeals) are in para 4.1 to 4.5 at pages 3 and 4 of his order which read as under :
4.11 have carefully considered the matter. The decision of the ITAT in the case of Tangerine Exports (supra) has been perused by me and I find that this decision does not support the case of the appellant. In this decision the Tribunal has held that Section 80HHC is not applicable to the non-physical type of software i.e. that which is exported through satellite data links or consultancy delivered at the location of the foreign client outside India. Such non-physical type of software according to ITAT, could never be termed “goods merchandise”. In the instant case the digitalized synopses A were, as per the details furnished by the appellant and available on the assessment record, sent to the USA through digital file transfer procedure/ internet. Even the agreement with Pinkmonkey Com Inc. provided for transfer of data through e-mail. Thus, as the digitalized datas not contained in any physical medium it cannot qualify as “goods and merchandise” and therefore Section 80HHC will have no application to the appellant’s case.
4.2 Section 80HHC may also not apply as in the instant case there is no export out of India in terms of Explanation (aa) to Section 80HHC as the transaction did not involve: clearance at any customs station of India.
4.3 There is also no merit in the contention that shares brought to India should be construed as convertible foreign exchange brought to India. There is absolutely no warrant, authority or rule for this proposition. The RBI has not declared the shares to be so. The RBI had merely required the applicant to disinvest the shares and remit the proceeds to India. Even that has not been done by the appellant up to now as the shares of Pinkmonkey Com Inc. are almost valueless on the NASDAQ. But even if that had been done, the proceeds would be those of sale of shares and not export proceeds of the digitalized synopses. Here it may also be pointed out that the averment of the appellant that she was compeled to take the shares as a commercial alternative is misleading. In both the agreements dated 24-10-1997 and 2-1-1998 it has specifically been provided that consideration amount of $ 3,00,000 will be paid to her in the form of shares appellant either in the return or before the assessing officer. For claiming the deduction it is a mandatory conditions under Section 80HHE(4) that the audit report in Form No. 10CCA must be filed. No such report has been filed either with the return or thereafter to this day. The fact that there are some similarities between Form No. 10CCAC furnished by the appellant and Form No. 10CCAF cannot mean that the former can be regarded as a substitute to the latter. Form No. 10CCAC does not contain the certification that the deduction under Section 80HHE has been correctly claimed.
4.5 For all the above reasons I am one with the assessing officer that the deduction claimed under Section 80HHC is not exigible in the instant case. The disallowance of the deduction claimed under Section 80HHC is therefore confirmed.
6. Now, the assessee is in appeal here before the Tribunal.
7. The ld. Counsel for the assessee, who appeared before the Tribunal has filed a copy of brief propositions and stated that the assessee is entitled for benefit under Section 80HHC on the entire amount of sales made to Atlantis Publishing Group (AGP) of the USA. It was further stated that agreement of sales were made for three years. The assessee made sales for assessment years 1998-99,1999-2000 and 2001-02. Deduction was claimed for all the years. The deduction for 1998-99 and 2000-01 has been allowed by the department itself, though; the assessments were completed under Section 143(1). There is not much difference whether the assessment was completed under Section 143(1) or under Section 143(3). It was further submitted that after framing the assessment of the year under consideration i.e. 1999-2000, the assessment for the subsequent year was completed and the assessing officer himself has allowed deduction for assessment year 2000-01. Copy of the order passed under Section 143(1) is placed at page 56 of the paper book. Therefore, it was submitted that in view of the consistency alone, the deduction under Section 80HHC is allowable. It was further submitted that there was an agreement of sales of US $ 5,00,000. Out of the sale, US $ 5,00,000 to be completed during the year under consideration and US $ 2,00,000 was to be remitted in convertible foreign exchange and equivalent to US $ 3,00,000 was to be allotted to the assessee in the form of shares of M/s. Atlantis Publishing Group Inc., USA. It was further submitted that the assessee has received Rs. 81,73,510 (equivalent to US $ 2,00,000) in 1999-2000, i.e. the assessment year under consideration and allotted equity shares of Rs. 1,28,51,014 (3,01,667 equity shares of US $ 1 equivalent $ 3,00,000 in Atlantis Publishing Group Inc., USA) on 24-6-1998. It was further submitted that the Atlantis Publishing Group got merged in Pinkmonkey.com Inc and accordingly, the shares of the amalgamated company i.e. Pinkmonkey.com Inc were allotted which was listed on the Nasdaq Stock Exchange, New York and other cities. The attention of the Bench was drawn on the copy of the share certificate placed on record. It was further explained in regard to the activity done by the assessee and explained that the assessing officer has treated the assessee as Trader done by the assessee and explained that the assessing officer has treated the assessee as trader and therefore, as mentioned in his order that if the assessee is allowed deduction then he will be eligible for deduction of Rs. 47,16,987 instead of Rs. 62,54,283 being profit on account of $ 2,00,000 received, treating the assessee as a trader. It was further explained that the assessing officer has rejected the claim of the assessee for the entire deduction by treating that the assessee was entitled for deduction under Section 80HHE and the assessee was supposed to file certificate in Form 10CCAF whereas the assessee has filed its return in Form 10CCAC. Accordingly, it was held that the assessee is not entitled for deduction on the whole amount. Regarding the deduction in regard to US $ 3,00,000 received in the form of shares, the assessing officer rejected the claim of the assessee by observing that no receipt has been received in convertible foreign exchange. Therefore, as per the provisions of law, no deduction can be allowed. Accordingly the entire deduction has been disallowed. The Commissioner (Appeals) confirmed the action of the assessing officer. Further reliance was placed on the decisions in Abdulgafar A. Nadiadwala v. Asstt. CIT , Dun & Bradstreet Espana, SA, In re (2005) 272 ITR 992, Navnit Lal C. Javeri v. K.K. Sen., Appellate Assistant Commissioner and Anchor Pressing (P.) Ltd. v. CIT (1986)161 ITR 1591 (SC). These decisions were relied upon in regard to the fact A that the assessee is a manufacturer and the assessee is entitled for deduction under Section 80HHC. Regarding the deduction under Section 80HHC or 80HHE in respect US $ 3,00,000 equivalent to Rs. 1,28,51,014, it was submitted that the issue is covered by the decision of the Supreme Court in the case of J.B. Boda & Co. (P.) Ltd. the Board Circular Nos. 731, dated 20-12-1995 and 711, dated 24-7-1995. The attention of the Bench was drawn on the copies of the Board Circulars placed on record. On the other hand, the ld. DR has strongly placed reliance on the orders of the authorities below.
8. We have considered the rival submissions and perused the other relevant materials available on record. After considering the rival submissions and various case laws along with the Board Circulars and other materials on which our attention were drawn, we find that the assessee deserves to succeed in its appeal in part. The assessee is engaged in the business of export of synopsis of various literature books, instructional C text in narrative form and software version in digitalized form which is then to be exported through the electronic media and/or physically. For the export of these products, the assessee had received following consideration in convertible foreign exchange :
AY
Export Proc. In US $
Export Proc. In INR
Deduction Under Section 80HHC
claimed & allowed
1998-99
1,04,600
38,31,736
11,39,576 Under Section 143(1)
(pg No. 49 of the PB)
1999-2000
1,94,990 + for shares
81,73,510 equi. To
1,67,38,513 (in appeal)
2001-02
1,72,400
74,49,527
32,05,429 Under Section 143(1)
(pg No. 56 of the PB)
As per the agreement, the assessee was to prepare synopsis of famous literature books, college level instructional texts in narrative form and in the software version for splitting the text into small pieces. All the above products and software were to be digitally sent via FTP directly to customer’s server in USA if required to be physically sent on floppy or disc. The customer was to download, convert into publications in the form of literature books, instructional texts etc. and sell in electronic form like CDs and by way of internet to ultimate users in USA, Canada and Europe. As per the agreement with Atlantis Publishing Group Inc., Texas, USA was to pay US $ 5,00,000 of which US $ 2,00,000 was to be remitted in convertible foreign exchange and equivalent to US $ 3,00,000 was to be allotted to the assessee in the form of shares of the Atlantis Publishing Group Inc., USA. On exporting the software in respect of 150 famous literature books and 14 college level instructional texts in narrative and software form, the Atlantis Publishing Group remitted Rs. 81,73,510 equivalent to US $ 2,00,000 in assessment year 1999-2000 the year under consideration. And allotted equity shares of Rs. 1,28,51,014 equivalent to US $ 3,00,000 on 24-6-1998. The assessing officer denied the deduction under Section 80HHC on the entire receipts by holding that the assessee was entitled for deduction under Section 80HHE and not under Section 80HHC. It was further held by the assessing officer that the assessee is a Trader and the report has not filed in the required form and therefore, he has mentioned in his order that if the deduction is to be allowed that can be allowed Rs. 47,16,987 instead of Rs. 62,54,283 which was computed on account of receipt of US $ 2,00,000. Regarding the remaining amount i.e. Rs. 1,28,51,014, which was equivalent to US $ 3,00,000, it was held by the assessing officer that the assessee is not entitled on this account as no convertible foreign exchange has been received by the assessee as the assessee received only shares. Therefore, the entire deduction claimed by the assessee under Sections 80HHC has been disallowed by the assessing officer and the Commissioner (Appeals) confirmed the action of the assessing officer.
9. As stated above, we have considered all the relevant materials along with the various case laws and found that the assessee deserves to succeed in its appeal in part. The reasons for observing so, is that the assessee has claimed similar deduction for assessment years 1998-99 and 2000-01. The assessments were completed under Section 143(1) and the deduction claimed by the assessee has been allowed. No proceedings under Section 147/148 has been initiated by the department, meaning thereby the claim of the assessee has been accepted by the department. The language of Sections 80HHC and 80HHE are identical and the assessing officer himself in his order mentioned that the assessee was entitled for deduction under Section 80HHE but not under Section 80HHC. The accounts were audited. Report in Form 10CCAC was prepared and there is no dispute in this respect. If the claim of the assessee was allowable then it was the duty of the assessing officer to allow the same. Denial of claim of the assessee on the reason that it claimed under wrong section, in our considered view action of the assessing officer was not justified. The assessing officer should have asked to rectify the mistake by filing correct Form 10CCAF. Similar issue came before the Tribunal in the case of Dy. CIT v. Lab India (P.) Ltd. (2005) 94 TTJ 113″ (Pune). The Tribunal has held that the assessee is eligible for deduction. In its order, the Tribunal has taken into consideration the judgment of the Supreme Court in the case of Anchor Pressing (P.) Ltd. v. CIT wherein it has been held that “if on the basis of material placed on record, the assessee is entitled to claim any deduction but forgets to make his claim in the return or in the course of assessment proceedings, then the assessee is entitled to make such claim by moving application under Section 154 for rectification since non-granting of deduction/ A exemption would amount to mistake apart from record. The ratio of this judgment is based on the principle that the assessing officer is duty bound to grant the exemption/deduction even where assessee failed to claim the same”. The relevant observations of the Apex court are as under :
An obligation is imposed on the Income Tax Officer by Section 84 of the Income Tax Act, 1961, to grant relief thereunder and the relief cannot be effused merely because the assessee had omitted to claim the relief, but the mere existence of such an obligation on the Income Tax Officer is, not sufficient. Precise factual material and clear data must be contained in the record sufficient to enable the Income Tax Officer to consider whether the relief should be granted under Section 84. In the absence of such material, no fault can be found with the Income Tax Officer for not making an order under Section 84 favouring the assessee.
10. In the present case, all the materials for claiming deduction were placed on record. Audit report was filed. Form 10CCAC was filed. The assessing officer himself admits in his order that the assessee is entitled for deduction under Section 80HHE but he has claimed deduction under Section 80HHC, therefore, he has disallowed the claim of the assessee. In our considered view, the assessing officer was not justified in refusing to allow the claim of the assessee because the assessee has placed all the relevant materials before the assessing officer. Therefore, it was the duty of the assessing officer to rectify the mistake by asking the assessee to file the correct certificate. We further noted that the department itself allowed the claim of the assessee for deduction under Section 80HHC in the earlier year as well as in the subsequent year. Therefore, we do not find any reason, why the claim of the assessee was not allowed for the year under consideration. At least the Commissioner (Appeals) should have allowed the claim of the assessee, if by any reason the assessing officer rejected the claim of the assessee, as otherwise the assessee is entitled for the deduction.
11. The ratio of the decision of the Supreme Court in the case of National Thermal Corpn. Ltd. wherein it has been held that “legitimate claim can be raised for the first time before the Tribunal even when no claim is made either in the return or before the assessing officer in assessment proceedings”, is also in support of the case of the assessee.
12. The decision of the Bombay High Court in the case of Ahmedabad Electricity Co. Ltd. v. CIT also in favour of the assessee.
13. The Hon’ble Supreme Court in the case of R. Dalmia v. CIT has held that such provisions cannot affect the rights and liabilities of the assessee unless specific provisions are made to that effect, also supports the case of the assessee. There is no dispute that the assessee was entitled for deduction. The only defect is that the assessee, by mistake, claimed deduction under Section 80HHC. This can be a bona fide mistake because in the earlier year the assessee claimed deduction under Section 80HHC and the same was allowed. Therefore, for the year under consideration, the assessee claimed deduction under Section 80HHC. Therefore, for this reason, the same should have been allowed. The language of the Sections 80HHC and 80HHE are identical. The only difference is that in case of deduction under Section 80HHC, the audit report is to be filed in Form 10CCAC whereas in case of deduction under Section 80HHE, the report has to be filed in Form 10 CCAF otherwise there is no difference in these two provisions of law. Therefore, in view of the facts and circumstances of the case, we hold that the assessee is entitled for deduction.
14. Regarding the issue whether the assessee is a trader or a manufacturer, in the earlier year and in the subsequent year on similar facts, the deduction has allowed to the assessee by treating the same as manufacture. Therefore, the same facts should apply in the year under consideration.
15. Now, the issue in regard to sales shown is sale of goods or not as the departmental authorities have mentioned that the assessee has not made sales of goods. The Hon’ble Supreme Court in the case of Tata Consultancy Services v. State of Andhra Pradesh held that the transfer of right to use intellectual property (software) put in media, would amount to sale of goods under the General Sales Tax Act. The Supreme court has held that the term “goods” cannot be given a narrow meaning. The properties, which are capable of being abstracted, consumed and used and/or transferred, delivery, stored or processed, are to be treated as goods. In the present case, the assessee has prepared software and has transferred through media. Therefore, the same has to be treated as sale of goods.
16. Similar view was taken by the Bombay High Court in the case of Abdul Gaffar A. Nadiadwalla (supra). In this case, the High Court has held that grant of exclusive rights of Satellite Broadcasting and through exhibition rights in respect of film, amounts to export of film software. The film software in the form of Beta-Cam. Tapes which had incorporeal rights of the films software loaded in the same, amounts to the export of goods eligible for deduction under Section 80HHC.
17. Similar view was taken by the Authority for Advanced Ruling in the case of Dun & Bradstreet Espana, S.A., In re (supra).
18. Therefore, in view of the facts and circumstances and in view of the above decisions, we are of the view that the software in respect of 150 famous literature books and 14 college level instructional texts in narrative and software form products cannot be said that they are not export of goods. Therefore, we are of the considered view that the assessing officer and the Commissioner (Appeals) were not justified in refusing the deduction on this account.
19. As we have stated earlier also that in the earlier year and in the A subsequent year the deduction was allowed by the department authority. Therefore, for the year under consideration, the deduction disallowed by the assessing officer and confirmed by the Commissioner (Appeals) was not justified on this ground also. Therefore, in view of the facts and circumstances, we hold that the assessee was entitled for deduction on Rs. 62,54,283 against Rs. 47,16,987 as observed by the assessing officer.
20. Now we take up the issue relating to allowability of deduction under Section 80HHC on a sum equivalent to US$ 3,00,000. The facts relating thereof have been elaborately discussed in preceding paragraphs. How ever, it would be pertinent to refer that para of Section 80HHC, which deal with receipt of foreign exchange on export.
(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, within such further period as the competent authority may allow in this behalf.
Explanation. For the purposes of this clause, the expression “competent authority” means the Reserve bank of India or such other authority as is authorised under any law for the time being in force for regulating payments and dealings in foreign exchange.
(b)
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.
21. Thus, the requirement for allowability of deduction under Section 80HHC is that the sale proceeds of good or merchandise exported outside India are received in India in convertible foreign exchange within six months or within the period as extended by Competent authority. The competent authority as per Explanation (1) is RBI, which can extend the period for bringing the foreign exchange in India. Further, the Explanation provided that where RBI permits sale proceeds to be credited in separate account outside India, still the assessee would be entitled for deduction under Section 80HHC.
22. In the background of this legal position, let us examine the relevant agreement which reads as under :
I Assets to be delivered:
(i) 150 (total) Synopses of famous literature books (Pink Monkey notes) see list attached.
(ii) 14 college-level instructional texts, in narrative form (Pink Monkey guides) see list attached.
(iii) 14 college level instructions in software version (Pink Monkey software) which splits the text into small individual pieces for piecemeal purchase and down loading through the internet.
Such synopses, texts and software are to be in a finished form -although minor charges in the US might be made.
II Delivery
(i) The synopses are to be directly sent digitally to our chief editor (literature) in USA via e-mail as and when the notes gets ready.
(ii) The guides and the software are to be sent digitally via FTP directly to our server in the USA.
III Time Frame .It will be necessary to complete the desired 150 notes/ 14 guides and software within 15 months of signing this letter, viz. within 31-3-1999.
IV Sale Price : The total sale price agreed upon is US$ 5,00,000. US $ 200,000 will be wired as given below. The balance US$ 300,000 will be paid in the form of company stocks on or before 30-6-1998, the value to be adjusted against consideration due to your exports to 31-3-1999. The shares to be issued will be subject to restrictions and/or limitation of your disposal as may be prescribed at the time of issue.
V Others: We also agree to pay US$ 20,000 towards costs of procuring relevant hardware/software for preparation of the synopsis, guides and software.
23. From the above agreement, it is clear that against the export of software, the assessee will be paid US$ 2,00,000 in cash and for the remaining US$ 3,00,000, the assessee will get shares in Atlantis, USA. The equivalent Indian rupee is worked out at Rs. 1,28,51,014 for US$ 3,00,000. Thus, the assessee has not received convertible foreign exchange of US $ 30,000 but received shares in customer company equivalent to that amount. The question of bringing convertible foreign exchange within 6 months or within the extended period does not arise. Similarly, the question of crediting foreign exchange in separate account also does not arise. Therefore, the conditions of sub-section and explanation thereunder to Section 80HHC are not satisfied.
24. The assessee has relied on the Circular No. 731, dated 20-12-1995 and Circular No. 711, dated 24-7-1995, the copies of the same are placed on record at pages 65 and 66 of APB, for the proposition that if foreign exchange is not brought in India the same can be retained outside India with the permission of RBI. There is no dispute with this proposition. The problem is that the assessee has not received foreign exchange for the sale proceeds of its product. What it has received is shares in barter. Even RBI has objected to this sort of transaction vide its letter dated 28-3-2002, which reads as under:
Reserve bank of India, A
Exchange Control department
Central Officer, Mumbai – 400 001
Ref. No. EC.CO.OID/635/19.33.01/2001 -02, dated 28-3-2002.
M/s. Meena Exports,
P.O. Box No. 16919,
Santacruz (West),
Mumbai – 400 054.
Dear Sirs,
Acquisition of shares in foreign company
Please refer to the correspondence resting with your letter dated 24-3-2002 on the captioned subject. We note that you have acquired 300,000 shares (face value of US$ 1.00 per share) for a total amount of US$ 3,00,000 from M/s Pinkmoney Com. Inc, USA, against your export receivables from them. Please note that it was irregular on your part to have acquired the shares without prior approval of the RBI. You are, therefore, C advised to disinvest the shares immediately and repatriate the sale proceeds through normal banking channels and approach us with necessary documentary evidence in support of the repatriation for further action at your end.
Yours faithfully,
(V. Venugopalan)
Manager
25. From this, it is clear that the export, where sale proceeds are received in shares is barter, is not approved by RBI. Therefore, it could not be said that this transaction is within scope of the circulars referred above. The arguments of the learned counsel for assessee was that it will not serve any useful purpose if foreign exchange is brought into India and there-after it is remitted back to USA for investment in shares. We are not convinced with this argument. Receiving shares in the customer company in lieu of export to the customer is not equivalent to receiving foreign exchange and its application in accordance with the directions of RBI.
26. The Circular No. 711, dated 24-7-1995 was issued under the special circumstances of war in Iraq, wherein bonds in lieu of foreign exchange realisation from the project completed in Iraq were given by RBI in the hope that the foreign exchange will eventually be repatriated into India by EXIM bank after the lifting of the UN sanction. The RBI/ECGC bonds so issued by way of settlement of claims of projects in IRAQ will be treated as convertible foreign exchange brought into India for the purposes of Section 80HHB. Thus, bonds were to be issued by RBI, ECGC and they will be treated as convertible foreign exchange brought into India for the purposes of Section 80HHB. Certainly the facts of the present case are different. There is no permission from RBI to acquire shares in lieu of convertible foreign exchange.
27. The learned counsel for assessee had placed reliance on the decision of Hon’ble Supreme Court in the case of JB Boda & Co. (P.) Ltd. (supra). We find that the decision of Hon’ble Supreme Court in the case of JB Boda & Co. (P.) Ltd. {supra) does not support the assessee’s case but supports our contentions. In that case, gross premium was payable in foreign exchange. Remittance was made with the permission of RBI in US$. However, the same was retained as commission expressed in US$. It was held that commission retained is income received in convertible foreign exchange. Formal remittance to foreign company and receipt thereafter not necessary. In that case, the commission retained was held as an application of convertible foreign exchange. In the present case, no convertible foreign exchange is received at all against sale proceeds. What it received was only shares, not approved by RBI. In view of this, we are of the view that the conditions laid down in Section 80HHC are not satisfied and, therefore, the assessee is not entitled for deduction for the sum equivalent to US$ 3,00,000 received in the form of shares in USA.
28. Therefore, in view of the facts and circumstances of the case, we hold that the assessee was not entitled for the deduction under Section 80HHC or 80HHE on the balance amount of Rs. 1,28,51,014. Therefore, we reject the ground of the assessee to this extent.
29. The remaining grounds is in regard to charging of interest under Section 234B, which is consequential in nature and therefore, the assessing officer is directed to give consequential relief to the assessee.
30. In the result, the appeal of the assessee is allowed in part.