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TMI Blog1998 (3) TMI 6X X X X Extracts X X X X X X X X Extracts X X X X ..... on 80-O is as under : "80-O. Where the gross total income of an assessee, being an Indian company, includes any income by way of royalty, commission, fees or any similar payment received by the assessee from the 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, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in the above terms. No order as to costs." After that the respondent represented its case before the Central Board of Direct Taxes but again the Central Board of Direct Taxes 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ement. The parties agreed (formulated from the agreement) : (1) During the term of the agreement the hotel of the foreign enterprise 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 ce ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecting the results of the operation of the hotel in accordance with 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... consideration 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 provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rely 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 personnel from India for service outside India will not be eligible for approv ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ence 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 Consultants P. Ltd. v. CBDT [1980] 124 ITR 301 were not correctly distinguished by the High Court. In the present case, he said that if the principles laid down in those two judgments were applied, the agreement certainly ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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. 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 irrigation, agriculture, fisheries, education, public health or forestry. In New Webster's Dictionary of the English Language the word "technical" means what is characteristic of particular art, science, profession, or trade and the word "technology" mean ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tatute 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. 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 served thereby. It is for these reasons that tax on the purchase of raw material is waived in these two situations. Thus, there is a very sound and consistent policy underlying the provision." In CIT v. Straw Board Manufacturing Co. Ltd. [1989] 177 ITR 431 (SC), the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction and that there was no warrant to restrict the meaning of the expression "remuneration" to a salary received by an employee abroad. 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 the Income-tax Act, 1961, the provision for exemption was intended to encourage co-operative societies to construct warehouses which were likely to be useful in the development of rural economy and exemption was granted from income-tax in respect of income derived from the letting of such warehouses for the s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 detract from the Act.' The expression 'executive in character' is, presumably, used to distinguish them from judicial pronouncements. The circulars referred to in that case were also of the Central Board of Direct Taxes and were, presumably also, statutory in character. However, this contention need not detain us, as it is unnecessary to examine wheth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the origin of the law in its application to the agreement in question. Lastly, Mr. Dave said that the use of the name of the respondent was not an ordinary matter and it could not be said as held by the appellant in its impugned order that the fee received for the use of the trade name of the respondent though covered by the provisions of section 80-O, yet the amount relatable to this aspect of the total ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 foreign company for establishing a plant in Indonesia for the manufacture of various products of the petitioner as manufactured by it. One agreement was titled "technical assistance agreement". The second agreement titled "management service agreement" provided for the petitioner to take over the responsibility for the working and management of the foreign company for a period of twenty-five years. For this purpose, the petitioner was required to loan to the foreign c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ive 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, therefore, quashed the order of the respondent refusing to grant approval to the second agreement. The application of the petitioner for grant of approval was sent back to the respondent for reconsideration in accordance with the law. In HMT Ltd. v. CBDT [1991] 188 ITR 457 (Kar), the petitioner had entered into an agreement with the Nigerian Government and sought approval of the agreement under section 80-O of the Act. The agreement consisted of various types of passing of technical inform ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore 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 had since undergone amendments from time to time. It is not necessary for us to analyse this judgment in any detail as here we are not concerned only with the interpretation of section 80-O. What the judgment lays down for our purposes is : (1) The job of the assessee involved survey, soil investigation, design, detailed drawings and construction of all civil works and pipelines (other than trunk pipelines). Even these activities involve technical knowledge and expertise. It cannot, therefore, be doubted that the assessee un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... -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 various ingredients or elements comprised in the contract. There is no gainsaying that running a well equipped modern hotel is no ordinary affair. One needs a great deal of expertise, skill and technical knowledge for the purpose. If we examine the agreement, it provides for rendering of technical services and also professional services for operating of Hotel Soaltee, a foreign enterprise. The Central Board of Direct Taxes fell into an error in considering particularly the clause in the agreement which provided for operation of the Hotel Soaltee by the respondent. The ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Taxes was not right in not granting approval of the agreement to the respondent under section 80-O of the Act. We have also seen the scope of the circulars issued by the Central Board of Direct Taxes and how these are to be acted upon in various decisions of this court. In the matter of the nature as in the present case and the legislative intention to give relief we have to draw an interpretation to the term "technical services" which includes "professional services" as well. The basic purpose of section 80-O is the spread by an Indian assessee of any patent, invention, model, design, secret for ..... X X X X Extracts X X X X X X X X Extracts X X X X
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