TaxTMI 
TaxTMI 
1998 (3) TMI 6
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....he Government of a foreign State or a foreign enterprise in consideration for the use outside India of any patent, invention, model, design, secret formula or process, or similar property right, or information concerning industrial, commercial or scientific knowledge, experience or skill made available or provided or agreed to be made available or provided to such Government or enterprise by the assessee, or in consideration of technical services rendered or agreed to be rendered outside India to such Government or enterprise by the assessee; under an agreement approved by the Board in this behalf, and such income is received in convertible foreign exchange in India, or having been received in convertible foreign exchange outside India or having been converted into convertible foreign exchange outside India, is brought into India, by or on behalf of the assessee in accordance with any law for the time being in force for regulating payments and dealings in foreign exchange, there shall be allowed, in accordance with and subject to the provisions of this section, a deduction of the whole of the income so received in, or brought into, India in computing the total income of the assesse....
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....did not find any ground under the section to approve the agreement and by order dated February 26, 1980, communicated its decision to the respondent. We reproduce the relevant portion of this order of the Central Board of Direct Taxes as under (pages 63-64 of the paper book) : "2. The Board have carefully reconsidered the matter in pursuance of the directions contained in the judgments of the Delhi High Court in the Civil Writ Petitions Nos. 429 of 1974 and 1301 of 1975, on the basis of the written and oral arguments advanced by you. It is regretted that the Board does not consider it necessary to revise the decisions already communicated to you in the Board's orders referred to above owing to the following reasons :--- (1) The services being rendered by you to the foreign party in both cases are in the nature of managerial services. As observed by the Delhi High Court in Civil Writ No. 901 of 1975 (J. K. Bombay Ltd. v. CBDT [1979] 118 ITR 312) the running of a business or the management of a business does not amount to the rendering of technical services. (2) What is being given under the agreements can also not be viewed as information concerning in....
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....se shall be known and designated as the Hotel Soaltee Oberoi. (2) The agreement will remain in force for fifteen years. It could be extended for a further period of five years at the option of the respondent on the same terms and conditions. (3) The respondent would recruit and train the requisite staff of the hotel through such training programme including hotel schedule, if any, and other training techniques, as it shall deem necessary. The respondent shall select suitable personnel for adequate and proper training in hotel management and operation, always giving preference however to Nepalese nationals. (4) The respondent would use its best efforts to advertise and promote the business of the hotel through its existing facilities. Soaltee Hotel, the foreign enterprise, subject to later amortisation and reimbursement as provided in the agreement, shall pay or reimburse the respondent in full for all costs and expenses of the said training and for all the costs of advertising, promotion, literature, travel and business entertainment including celebrations and ceremonies incurred prior to or concurrently with the beginning of full operation of the hotel b....
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....the uniform system of accounts for hotels though not inconsistent with the provisions of law applicable in Nepal. (10) Provision was to be made as to how the amount received during the operation of the hotel shall be deposited in the bank account and how that account had to be operated. The respondent was to submit a monthly budget of the estimated income and expenditure in detail and the gross operating profits in terms of the agreement to the foreign enterprise. The agreement contained details as to how allocation was to be made for meeting different expenses and for payment of taxes, etc. Gross operating profits and gross operating losses were defined. A limit was put on expenses to be incurred for advertisement, etc., which could not be more than three per cent. of the total sales. (11) For worldwide promotion of the hotel, the foreign enterprise desired that the respondent shall, in any manner it regards fit and proper, make necessary arrangements with any company or companies, agency or agencies in any one or more countries for specialised hotel services and worldwide reservation facilities. (12) At the time of taking over the operation of the Hotel....
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.... of technical services rendered or agreed to be rendered outside India by the respondent that it could claim deduction of the income received in India or abroad in computing the total income of the respondent which is received by way of royalty, commission, fee or any other similar payment. We do not think, however, that we can debar the respondent from bringing its case in the first part of section 80-O which provides for similar payment received by the assessee in consideration for the use outside India, of information concerning industrial, commercial and scientific knowledge, experience or skill made available or provided or agreed to be made available or provided to a foreign enterprise by the assessee. The respondent can certainly support the agreement as falling under section 80-O on any ground on which it had approached the High Court in its writ jurisdiction. We, therefore, have to examine if the agreement in question falls within the purview of section 80-O on any of the conditions stipulated therein entitling the respondent to claim deduction. Mr. Shukla referred to the guidelines issued by the Central Board of Direct Taxes to examine if the agreement provides for techni....
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....made available or provided, should be information not merely of a statistical type collected or collated from commercial or scientific journals or other commonly available sources of information, but it should be information concerning the industrial, commercial or scientific knowledge, experience or skill possessed or developed by the Indian party and which is made available or provided to the foreign party under the agreement. Information regarding trade enquiries or reports regarding the credit or trade-worthiness in individual cases will not qualify for this purpose. (v) The technical services rendered or agreed to be rendered to the foreign party should relate to productive fields such as (a) mining, or (b) generation or distribution of electricity or any other form of power, or (c) constructional, industrial or manufacturing operations, or (d) engineering services. Services such as those relating to management, organisation, sales, finance and accounts, will not qualify for this purpose. Technical services which are rendered or to be rendered in India will also not qualify for this purpose. (vi) Agreements for recruitment or mere supply of technical personne....
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.... of foreign enterprise would not fall within the provisions of section 80-O. It was submitted that it could not be said that the Central Board of Direct Taxes did not consider the terms of the agreement with reference to section 80-O and the guidelines issued by it and arrived at a decision which was unreasonable under the circumstances. He said that considering the scope of judicial review of administrative decisions, which might even be quasi-judicial, this court should set aside the impugned judgment of the High Court as that court wrongly interfered in the exercise of its power of judicial review of the decision taken by the Central Board of Direct Taxes not granting approval to the agreement. After all, it was the Central Board of Direct Taxes which was the best judge to see if the agreement fulfilled the requirements of law as it was the Central Board of Direct Taxes which was the concerned authority to grant or not to grant approval and had the advantage of various agreements which came for its approval by other assessees. Mr. Shukla said that the two earlier judgments of the Delhi High Court in J. K. (Bombay) Ltd. v. CBDT [1979] 118 ITR 312 and Ghai Lamba Catering Consultan....
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....case [1979] 118 ITR 312 and Ghai Lamba's case [1980] 124 ITR 301, and said that these judgments considered a very narrow concept of "technical services" or "managerial services". He said there was a qualitative difference in the agreements in those two cases and the subject-matter of the agreement in the present case. The statement in J. K. (Bombay) Ltd.'s case [1979] 118 ITR 312 (Delhi) that management as a process is practised throughout in every organisation from top management through middle management to operational management and, on the other hand, technical services occupy a much narrower field than the field occupied by management was explained in the case of Continental Construction Ltd.'s case [1992] 195 ITR 81, by the Supreme Court. The judgment of this court in Continental Construction Ltd.'s case [1992] 195 ITR 81, widened the scope of the term used in section 80-O. 13. Mr. Dave referred to the New Encyclopaedia Britannica where the term "technical assistance" had been considered. It states that technical assistance may involve sending experts into the field to teach skills and to help solve problems in their areas of specialisation, such as irrigat....
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....n keeping in view the object of introduction of section 80-O in the statute. In this context, he referred to certain decisions of this court. In CIT v. Gwalior Rayon Silk Manufacturing Co. Ltd. [1992] 196 ITR 149, this court said that the words in the taxing statute should be given a liberal interpretation. Nothing is to be read in, nothing is to be implied; one can only look fairly at the language used and nothing more and nothing less. It went on to add that it was settled law that the expressions used in a taxing statute would ordinarily be understood in the sense in which it was harmonious with the object of the statute to effectuate the legislative animation. 14. In Hotel Balaji v. State of A. P. [1993] 88 STC 98; [1993] Supp 4 SCC 536, this court observed as under : "Though the Central sales tax is levied and collected by the Government of India, article 269 of the Constitution provides for making over the tax collected to the States in accordance with certain principles. Where, of course, the sale is an export sale within the meaning of section 5(1) of the Central Sales Tax Act (export sale) the State may not get any revenue but the larger national interest is se....
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.... a technician. This court did not accept this contention and said that there was nothing to warrant a restricted construction as canvassed by the Revenue. The court said that it was significant that section 80RRA of the Act used the expression "remuneration" and not salary to be entitled to deduction and that there was no warrant to restrict the meaning of the expression "remuneration" to a salary received by an employee abroad. 18. In CIT v. South Arcot District Co-operative Marketing Society Ltd. [1989] 176 ITR 117, this court was considering if a certain amount described as a commission received by the assessee from the Madras Government under an agreement for stock and distribution of ammonium sulphate was exempted under section 14(3)(iv) of the Indian Income-tax Act, 1922. This court observed as under : "We have considered the matter carefully and to our mind, it seems clear that the Appellate Tribunal and the High Court are right in the view adopted by them. As was observed by the Gujarat High Court in CIT v. Ahmedabad Maskati Cloth Dealers Co-operative Warehouses Society Ltd. [1986] 162 ITR 142, while considering the analogous provision of section 80P(2)(e) of th....
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....rculars do not bind them. But the benefits of such circulars to the assessees have been held to be permissible even though the circulars might have departed from the strict tenor of the statutory provision and mitigated the rigour of the law. But that is not the same thing as saying that such circulars would either have a binding effect in the interpretation of the provision itself or that the Tribunal and the High Court are supposed to interpret the law in the light of the circular. There is, however, support of certain judicial observations for the view that such circulars constitute external aids to construction. In State Bank of Travancore v. CIT [1986] 158 ITR 102, however, this court referring to certain circulars of the Board said : '. . . The earlier circulars being executive in character cannot alter the provisions of the Act. These were in the nature of concessions and could always be prospectively withdrawn. However, on what lines the rights of the parties should be adjusted in consonance with justice in view of these circulars is not a subject-matter to be adjudicated by us and, as rightly contended by counsel for the Revenue, the circulars cannot ....
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.... free from doubt. It was far from clear. In such a case, where two opinions are possible, the assessee should be given the benefit of doubt and that opinion which is in its favour should be given effect to. In the light of the above, it is unnecessary to adjudicate the other points involved in the appeal on the merits." 22. Mr. Dave then referred to a treatise on the business of hotels by S. Medlik to contend that to run a hotel, skills and techniques are required like hotel reception, housekeeping, food and drink service and especially food preparation and accounting and marketing, personnel management, maintenance and other specialist functions of a hotel. He also dwelt on the importance of hotels in modern day life and the role which hotels play in many countries in providing facilities for the transaction of business, for meetings and conferences, for recreation and entertainment and is attraction for visitors, foreign currency earners, employers of labours, outlets for the products of other industries and as an important source of amenities for local residents. We do not think it is necessary for us to go into all these aspects of hotel management as we are concerned with t....
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....the main function of the petitioner was to manage and run the restaurant of G. L. Restaurants Ltd., an English company, in return for a certain percentage of the profits. The court held that the agreement did not in terms state as to what type of technical services were to be rendered by the petitioner to the foreign company. The court referred to its earlier decision in J. K. (Bombay) Ltd. v. CBDT [1979] 118 ITR 312 (Delhi), where it had said that if the Indian company was in fact running the foreign company it was difficult to separate the management function exercised by the Indian company from the day-to-day working of the foreign company and that section 80-O postulated that the Indian company did not become a part of the foreign enterprise. Applying those tests, the court upheld the refusal to grant approval to the agreement by the respondent under section 80-O of the Act. 27. In Godrej and Boyce Mfg. Co. Ltd. v. S. B. Potnis, Chief CIT [1993] 203 ITR 947 (Bom), a Division Bench of the Bombay High Court (where one of us was a member) held that the order denying approval under section 80-O was not justified. In that case the petitioner entered into two agreements with the f....
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.... J. K. (Bombay) Ltd.'s case [1979] 118 ITR 312 (Delhi). The court also noted another decision of this court in Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188, where this court highlighted that a provision in a taxing statute granting incentives for promotion of growth and development should be construed liberally and that since a provision for promoting economic growth has to be interpreted liberally, the restriction on it too has to be construed strictly so as to advance the objective of the provision and not to frustrate it. Keeping in view this principle and on the terms of the agreement the High Court was of the view that when the respondent did not grant approval it was not having the benefit of the decision of the Supreme Court in Continental's case [1992] 195 ITR 81. The court said that it was not possible to postulate, as a general proposition of law, that all managerial services must necessarily be non-technical services and that it depended on the nature of the expertise required for rendering the managerial services. The court, therefore, held that the respondent took a somewhat rigid view of the matter in refusing to grant approval to the second agreement. It, there....
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....learned counsel for the petitioner is right, that does not come within the expression 'technical service', and as such service is not rendered by the assessee outside India, by imparting training to the personnel of the Nigerian Government, it cannot be said that the same would fall within the deduction granted under section 80-O of the Act. Therefore, the view of the Board on this aspect of the matter appears to be correct." 29. In Continental Construction Ltd. v. CIT [1992] 195 ITR 81 (SC) one of the questions before this court was if the Appellate Tribunal was right in holding that the income arising from the activities of the petitioner in pursuance of seven agreements for construction of various projects with foreign Government/enterprise were governed by the provisions of section 80HHB and not section 80-O of the Act. The petitioner had claimed deduction under section 80-O which provides for a deduction, in computing the total income, in respect of royalties, etc., from certain foreign enterprises. The court noted that this topic was originally dealt with in section 85C. Section 80-O was substituted in its place with effect from April 1, 1968, and that the section ....
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....l services". Secondly, the question whether " professional services" would be "technical services" or not has no impact on the point we are trying to make, viz., that, in order to say that a person is rendering such services to another, it is not necessary that the services should be rendered by the former personally and not through the medium of others. (5) It is a well-settled principle that exigibility of an item to tax or tax deduction can hardly be made to depend on the label given to it by the parties. An assessee cannot claim deduction under section 80-O in respect of certain receipts merely on the basis that they are described as royalty, fee or commission in the contract between the parties. By the same token, the absence of a specific label cannot be destructive of the right of an assessee to claim a deduction, if, in fact, the consideration for the receipts can be attributed to the sources indicated in the section. Contracts of the type envisaged by section 80-O are usually very complex ones and cover a multitude of obligations and responsibilities. It is not always possible or worthwhile for the parties to dissect the consideration and apportion it to the vario....
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....y running or managing a foreign company would be in the nature of profits while section 80-O deliberately restricted itself to income by way of royalty, commission or fees and included other types of remunerations. We do not think that this is a correct statement as the royalty, commission or fees can be in terms of percentage of profits earned by the foreign enterprise on account of services rendered by the Indian company. It is the substance of the case which matters and not the name. The view taken by the Bombay High Court in Godrej and Boyce Mfg. Co. Ltd.'s case [1993] 203 ITR 947 commends to us, as it is more in consonance with the provision of section 80-O and the object which it seeks to achieve. The Karnataka High Court in the case of HMT Ltd.'s case [1991] 188 ITR 457 has rather taken a narrow view of the provision of section 80-O. Applying the principles of law as laid down by this court in Continental Construction Ltd.'s case [1992] 195 ITR 81 and the term "technical services" which included "professional services" and the nature of services agreed to be rendered by the respondent to the foreign enterprise, we are of the view that the Central Board of Direct ....