1985 (10) TMI 7 - HC - Income Tax

Court rules in favor of petitioner in income tax dispute, deems agreement compliant with law.

The court allowed the petition, ruling in favor of the petitioner. The agreement between the petitioner and the Rangoon City Development Committee was ... S.80-O., Technical Fee Received Through Government Agency Issues Involved:1. Privity of Contract between Petitioner and Foreign Party2. Receipt of Income in Convertible Foreign Exchange3. Compliance with Section 80-0 of the Income-tax Act, 1961Issue-wise Detailed Analysis:1. Privity of Contract between Petitioner and Foreign Party:The Central Board of Direct Taxes (CBDT) rejected the petitioner's application for approval under section 80-0 of the Income-tax Act, 1961, on the ground that there was no direct agreement between the petitioner and the Rangoon City Development Committee. However, the court clarified that section 80-0 does not require the agreement to be directly between the assessee and the foreign party. The section mandates that the fees should be received in consideration of technical services rendered under an agreement approved by the Board. In this case, the petitioner rendered technical services to the Rangoon party under an agreement dated February 5, 1976, between WAPCOS and the Rangoon City Development Committee. The agreement specified the personnel of the petitioner by name who were to provide these services, thereby fulfilling the requirement of section 80-0. The court emphasized that the petitioner's participation was recognized and approved before the contract was awarded to WAPCOS, as confirmed by the Rangoon City Development Committee's letter dated March 31, 1980.2. Receipt of Income in Convertible Foreign Exchange:The Department contended that the petitioner received payments from WAPCOS, an Indian company, and not directly from a foreign enterprise, thus disqualifying the payments under section 80-0. The court refuted this argument, stating that WAPCOS acted merely as an agent for the petitioner in receiving the payments. The agreement between WAPCOS and the petitioner stipulated that WAPCOS would retain 20% for promotional expenses and overheads, and the remaining 80% would be handed over to the petitioner. The payments were received in foreign exchange and brought into India on behalf of the petitioner. The court noted that after obtaining the Reserve Bank of India's permission, the petitioner started receiving payments directly in foreign currency from December 1978 onwards. Therefore, the income derived by the petitioner under the contract was indeed received in convertible foreign exchange and brought into India in compliance with the law.3. Compliance with Section 80-0 of the Income-tax Act, 1961:Section 80-0 provides for a deduction of the whole income brought into India if it meets specific criteria: (i) the income should be by way of fees, (ii) received from a foreign enterprise, (iii) for technical services rendered outside India, (iv) under an agreement approved by the Board, and (v) received in convertible foreign exchange. The court found that the petitioner met all these requirements. The fees were for technical services rendered to the Rangoon City Development Committee, a foreign enterprise, and were paid in US dollars, which were brought into India. The agreement dated February 5, 1976, qualified for approval under section 80-0 as it fulfilled all the stipulated conditions. The court referenced a similar case, Gannon Dunkerley & Co. Ltd. v. Central Board of Direct Taxes, where the High Court held that the agreement complied with section 80-0 despite being with an Indian company, emphasizing the objective of encouraging the export of Indian technical know-how and foreign exchange augmentation.Judgment:The petition was allowed, and the rule was made absolute in terms of prayers (a) and (b). The court directed the respondents to pay the costs of the petition to the petitioner. The agreement dated February 5, 1976, was held to qualify for approval under section 80-0 of the Income-tax Act, 1961, and the Board's refusal to approve it on the grounds stated was deemed unwarranted.