The Income Tax Tribunal has ruled that the assessee who is a resident in India and has genuinely provided the information in the form of 'design' outside India to foreign enterprises and in consideration earned foreign exchange which was brought to India is entitled for deduction under section 80-O of the Income Tax Act.

The two questions raised before the Tribunal were: whether the service of providing sketch comes within the terms used in section 80-O 'design' and if the design so provided was for 'outside India' or 'within India.'

The deduction admissible under Section 80-O is available in all cases where the knowhow, patent, etc. are provided outside India to a foreign government or to a foreign enterprise.

The benefit under this section is available to the receipts in convertible foreign exchange in India or convertible foreign exchange outside India brought into India in lieu of providing invention, patent, trade mark, design, etc.

Section 80-O states that the gross total income of an assessee (being an Indian company or a person who is resident in India) includes any income received from the government of a foreign state or foreign enterprise in consideration for the use outside India of any patent, invention, design or registered trade mark. If this income is received in convertible foreign exchange in India or is converted into convertible foreign exchange outside India and brought into India by the assessee, it shall be allowed a deduction as prescribed.

The assessee during the year carried on the business of creating 'design' to be used on fabrics. The designs were supplied to the foreign customers. The assessing officer also noted that the appellant has prepared a separate account of the fees received from the foreign enterprises.

As per the details made available from foreign Inward Remittance Certificate the appellant received Rs 32.82 lakh (Rs 3.282 million) from various overseas clients and claimed deduction under section 80-O of Rs 15.13 lakh (Rs 1.513 million).

The amount was received in convertible foreign exchange which was brought into India. So the assessee has fulfilled the basis requirement laid down in the section.

The Tribunal observed that the Design Act, 1911 says: "'Design' means the features of shape, configuration, pattern applied to any article by any industrial process or means whether manual, mechanical or chemical, separate or combined which in the finished article appeal to and are judges solely by the eye; but does not include any mode or principle of construction or anything which is in substance a mere mechanical device, and does not include any trade mark."

To levy tax on fashion designing service meaning of 'design' in the context of special designing the term design can be taken to mean giving visible form to the conceptions of the mind. One can say that what is mentally conceived at the 'planning' stage is given shape on cloths, paper in the form of drawing or sketches so that such drawings/sketches act as a guide to the work of fashion designing."

Since the term design has not been defined in the I-T Act, therefore, for correct interpretation it is essential to seek the help of the technical meaning as well as the meaning of this term wherever used in other statutes/acts.

It is necessary to adopt the meaning of the word used in general parlance to avoid anomalies, absurdities and basically to impart justice. Considering the manner in which the appellant has provided sketches, the sketches used for the manufacture of garments qualify for the claim of deduction under section 80-O for the term used 'design.'

The appellant has provided designs to foreign enterprises and on approval the same were used by the India manufacturers for stitching garments.

The garments stitched on the basis of the sketches and designs of the appellant were exported and the ultimate destination was not within India but out side India. This fact has not been denied by the revenue authorities, rather the assessing officer has verified and found that the assessee received the foreign remittance at the rate of 5 per cent of the FOB of the garments exported.

The assessing officer also mentioned that the remittance was certified as per the prescribed form 'Foreign Inward Remittance Certificate.'

The Tribunal held that "on the basis of these facts one thing is evident that the ultimate destination of the services provided by the assessee was not within the country albeit helped the Indian manufacturers to stitch garments meant only for the purpose of export. The design prepared by the appellant was thus specifically meant for the purpose of use out side India. Thus on the basis of these facts a conclusion can be drawn that the services rendered by the appellant were from India and as used out side India in consideration therefore received foreign remittance."

The assessee carried on the business of creating Design in Man-made as well as Synthetic Fabrics with the help of various Designers. Such designs as made by the assessee wee being sold to foreign customers as well as local customers and assessee used to receive designing charges during the year.

The assessing officer also observed that for this purpose she has maintained two separate income & expenditure accounts, P&L accounts -- one for the fees received from the local suppliers and one for the fees received from foreign enterprises. Deduction under section 80-O was claimed in respect of the fees received from foreign enterprises.

As per the assessing officer, deduction under section 80-O is admissible in respect of any income received by the assessee from foreign government of enterprises for the use outside India of any patent, invention, design or registered trade mark. According to assessing officer the word 'design' along with patent, invention, registered trademark, etc indicates that this word should be of similar nature i.e. an identifiable or registered design

According to him mere design of garments do not fall under this category. According to him a design for the purpose of deduction under section 80-O should be totally distinguishable and identifiable design. With these observations he held that the claim of the assessee did not qualify for the deduction under section 80-O of IT Act.

In first appeal CIT(A) observed the word "design" contemplated in section 80-O has to be read as provided and in context mentioned in the said section and just by using the word design for services provided did not get the same meaning as provided in the section.

The CIT(A) mentioned that the appellant used to prepare various sketches of cloth outfits by using different fabrics in different forms and used the word 'design' which according to him does not fall under the terms used in section 80-O.

He further mentioned that the sketches were being approved by foreign clients for the purpose of manufacturing of garments in India on the basis of the approved sketches called as designs and the appellant got design charges @5% on FOB value purchased by those foreign clients through various Indian parties based in India.

In view of the CIT (A), the word 'design' used in this section contemplates something like engineering design similar to patent, invention, etc. and could not be similar to sketches of garments.