9911796707
TMI Blog1992 (1) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... nal was right in holding that, notwithstanding the approvals granted by the Board to the seven agreements for the purpose of section 80-O, for the purpose of assessment for the assessment year 1983-84, the income arising from these contracts has to be brought under section 80HHB of the Income-tax Act, 1961 ? 3. Whether, on the facts of the case, the Tribunal is right in holding that the income from the entire activities under the seven agreements cannot be bifurcated and is wholly covered under section 80HHB of the Income-tax Act, 1961 ? 4. Whether, on the facts and in the circumstances of the case, the Tribunal is right in holding that the assessee-company is not an 'industrial company' as defined in the Finance Act, 1982 ? " The first two income-tax references were made to the High Court at the instance of the assessee which was dissatisfied with the decision of the income-tax Appellate Tribunal on these questions ; there were two references because the above questions arose out of two cross-appeals before the Tribunal one by the assessee and the other by the Department. This appeal by the assessee, Civil Appeal No. 3458 of 1990, is disposed of by the present judgment. The th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ered 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 such income so received in, or brought into India, in computing the total income of the assessee. During the currency of this provision, the Finance Act, 1982, introduced a new section 80HHB with effect from April 1, 1983. This provision reads thus : " 80HHB. Deduction in respect of profits and gains from projects outside India.-(1) Where the gross total income of an assessee being an Indian company or a person (other than a company) who is resident in India includes any profits and gains derived from the business of (a) the execution of a foreign project undertaken ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... be utilised by the assessee during period of five years next following for the purposes of his business other than for distribution by way of dividends or profits ; (iii) an amount equal to twenty-five per cent. of the profits and gains referred to in sub-section (1) is brought by the assessee in convertible foreign exchange into India, in accordance with the provisions of the Foreign Exchange Regulation Act, 1973 (46 of 1973), and any rules made thereunder, within a period of six months from the end of the previous year referred to in clause (ii) or, where the Chief Commissioner or Commissioner is satisfied (for reasons to be recorded in writing) that the assessee is, for reasons beyond his control, unable to do so within the said period of six months, within such further period as the Chief Commissioner or Commissioner may allow in this behalf; Provided that where the amount credited by the assessee to the Foreign Projects Reserve Account in pursuance of clause (it) or the amount brought into India by the assessee in pursuance of clause (iii) or each of the said amount is less, than twenty five per cent. of the profits and gains referred to in sub-section (1), the deduction und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the total value of 534 million dollars. For these contracts, the assessee obtained the approval of the Central Board of Direct Taxes (" Board " or " C. B. D. T. ") in terms of section 80-O. A broad outline of these projects can be gathered from the following table : Sl. No. Name of Project Date of agreement Name of the other contracting party Date of approval by Board Period of approval as per Board's letter 1 2 3 4 5 6 1. Abu Sukhair 6.9.75 State Organisation of Industrial Design and Construction, Ministry of Industry and Minerals, Baghdad (Iraq) 11.8.76 For assessment Project year 1976-77 to 1978-79 2. Wadi Ghan 8.8.77 Socialist People's Libyan Arab Jamahiriya, Secretariat of Dams and Water Resources, Tripoli, (Libya) 31.8.78 For assessment Dam year 1978-79 and onwards 3. Amara Project 15.3.78 State Contracting Co. for Water and Sewer- age Projects, Ministry of Municipalities, Republic of Iraq 22.2.79 Assessment year 1979-80 to 1982-83 4. Nassiriya Project 14.12.78 Ministry of Housing& Construction, Government of Iraq 7.2.80 Assessment year 1980-81 and onwards 5. Sulaimaniyah Project 10.10.79 Ministry of Housing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1983-84 ; (2) all the contracts undertaken by the assessee were in the nature of "foreign projects" within the meaning of section 80HHB ; and (3) even where the contracts had the approval of the Central Board of Direct Taxes, the non-obstante provisions of section 80HHB(5) ruled out the grant of relief under section 80-O for any of the projects. He, however, felt that as the assessee had been under a bona fide belief all through that it was entitled to relief under section 80-O, it had not had a proper opportunity of putting forth its claim for relief under section 80HHB. He, therefore, set aside the assessment to enable both sides to marshall their evidence and to enable the Inspecting Assistant Commissioner to reappraise the assessee's claim for exemption under that section. The order of the Commissioner of Income-tax (Appeals) was dated March 26, 1985. The Income-tax Appellate Tribunal agreed with the Commissioner of Income-tax (Appeals). Its conclusion, set out succinctly in paragraph 48 of its order, was thus : "To conclude this point, we would hold that the income and consideration received by the assessee in the execution of all the seven contracts in general and the Karkh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sessee, in the present case, fell under section 80HHB and not under section 80-O. In the result, questions Nos. 1 to 3 were answered against the assessee and in favour of the Revenue. The assessee, has, therefore, preferred these appeals. As pointed out earlier, the assessee's claim for deduction relates to seven contracts and depends on the terms and conditions of each one of them. However, the Karkh Water Supply scheme contract has been taken as the model or specimen for purposes of discussion both because the terms and conditions of all the contracts are more or less similar and also because the deduction claimed in respect of this contract constitutes an overwhelmingly high percentage of the assessee's total claim. We shall also, therefore, proceed to discuss the issues raised in the light of the terms and conditions of this contract and the approval given therefor. Before doing so, we would like to point out that, for the assessment year 1983-84 with which we are concerned, a discussion of the relative spheres of section 80HHB and section 80-O would be called for and the assessee may get full or partial relief under either or neither of the sections for the said assessment ye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ackage of the assessee was ID 152,956,253 (75% of which was payable in the said foreign exchange.) On March 3, 1981, the assessee applied to the Central Board of Direct Taxes for according approval to the contract " for the supply of civil construction know-how to the Government of Iraq " under section 80-O of the Act. A pro forma prescribed by the Revenue was filled up and enclosed to the application. Paragraphs 5 to 11 of this pro forma run as follows : 5. Please state whether the income is received in consideration for- (a) the use outside India of (i) any patent, invention model, design, secret formula or process, or similar property right : No (ii) information concerning industrial, commercial or scientific knowledge, experience, or skill made available: Yes (b) technical services rendered or agreed to be rendered outside India (Please also state the arrangements available with the applicant for rendering such technical services and the mode of tendering such services) Technical services will be rendered by us to Baghdad Water Supply Administration, Government of Iraq, in accordance with the said agreement dated 17.12.80. The technical know-how and services will be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icians who have already acquired the requisite scientific knowledge, experience and skill for giving such technical know-how and it is they who will be imparting the same to the client by executing the works at the site in Iraq. (b) the manner of imparting it The engineers and technicians will be working for about five years at the site of construction to impart the technical know-how and services on behalf of our company. 9. Has the applicant made any agreement or arrangements with any other person in India or abroad, for obtaining the technical know-how, etc., to be provided tinder this agreement or for rendering technical services ? If so, please give the following information Not applicable. (i) the name and address of such other person ; Not applicable. (ii) details of the agreement or arrangement together with a certified copy of the written agreement, if any Not applicable. (iii) the nature and extent of applicant's relationship and association with such other person. Not applicable. 10. Please state the nature of the Income in respect of which deduction is claimed viz., Income out of imparting civil construction know-how and services for the constr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpleted." There was further correspondence, discussion and hearing including a detailed letter of the assessee dated December 24, 1981 and clarificatory letters dated February 15, 1982, March 17, 1982 and October 9, 1982, some of the contents of which may have to be referred to later. Eventually, the Central Board of Direct Taxes accorded its approval to the agreements, as already mentioned on October 28, 1983. The letter of approval has to be extracted here. It runs : " I am directed to refer to your application dated March 3, 1981, received with your letter No. 601/IT/80-O dated March 3, 1981, and to convey the approval of the Central Board of Direct Taxes to the agreement entered into between you and M/s. Amanat Al-Asima Baghdad Water Supply Administration, Government of Iraq, Baghdad, on December 17, 1980, for the purpose of section 80-O of the Income-tax Act, 1961, for the assessment year 1982-83. For the subsequent period, your attention is invited to the provisions of section 80HHB which are operative with effect from April 1, 1983. 2. The income allowable as a deduction for the assessment year 1981-82 and onwards would be the income computed after accounting for expenses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bove subject, I am directed to say that, for the words and figures assessment year 1982-83. For the subsequent period, your attention is invited to the provisions of section 80HHB which are operative with effect from April 1, 1983, appearing at the end of paragraph I of the Board's letter F. No. 473/46/81-FTD dated October 28, 1983, the following words and figures may please be substituted : 'assessment year 1982-83 and onwards' ". It appears that though the above intimation to the assessee was cryptic, the Central Board of Direct Taxes had decided to extend the period of operativeness of its approval under section 80-O only after consulting the Attorney-General of India (A. G.). The Central Board of Direct Taxes had circulated the opinion of the Attorney-General in this case along with the statement of case put up to him for opinion to all the officers of the Department. On August 14, 1985, the Commissioner of Income-tax (Central-1), New Delhi, wrote a letter to the concerned member of the Central Board of Direct Taxes which makes interesting reading. We do not wish to extract, or comment on, the contents of this letter here. Suffice it to say that the writer of the letter was o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of this type would be hardly relevant for deciding questions regarding the construction of a section in the statute. But, apparently, the Department, before the Tribunal, relied upon the letter of September 14, 1985, as superseding the effect of the approval granted on July 31, 1985. The Tribunal, in its appellate order, referred to these letters. It observed : " It is true that, in respect of the Karkh and Diwaniyah projects, the confusion which has arisen in this case could have been avoided. In the first approval letter, the Board confined the approval to the assessment year 1982-83 and referred to section 80HHB for the subsequent years. On a representation by the assessee, the matter was considered for almost two years and meanwhile the assessment was also made and the first appellate authority also decided the matter. It was only in July 1985, that the Board rectified their earlier order removing the reference to section 80HHB for the assessment year 1983-84 onwards. The second order was likely to give an impression that the rectification has been made in view of the representation made by the assessee about the scope and application of section 80HHB. This impression was not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome-tax Appellate Tribunal and the High Court (see [1990] 185 ITR 230). It is possible that, with sections 80HHB and 80-O, as they stand today, it might not make very much difference to the assessee whether the relief is granted under the one section or the other, as they both permit a deduction from the gross total income, of fifty per cent. of the profits in the one case and of the qualifying receipts in the other. However, till April 1, 1987, the relief under section 80HHB was 25% of the profits whereas the deduction under section 80-O was 100% of the qualifying receipts up to the assessment year 1984-85. Thereafter, the latter was reduced to 50% but the former was raised to 50% only with effect from April 1, 1987. This has made it very material to decide whether the assessee is entitled to the deduction under section 80-O and the question that really arises for our consideration is whether the relief under that section is available to the assessee. We shall first discuss this question on the language of section 80-O without taking into account the insertion of section 80HHB or the complication introduced into the case by the approvals of the Central Board of Direct Taxes referr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gains derived from a business and the assessee here is seeking such a deduction-but section 80-O provides for a deduction only in respect of an assessee's receipts from a foreign Government or enterprise by way of " royalty, commission, fees or any similar payment". Not only this ; the section also requires that the assessee must have derived the receipts falling under the above categories in one of two ways (i) 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 (ii) in consideration of technical services rendered or agreed to be rendered outside India to such Government or enterprise by the assessee. According to learned counsel, the receipts of the present assessee do not fulfil these requirements. In support of the contention that the claim of the assessee, on the facts, is only for a deduction from the profits and gains of a business carried on by it and that such a claim is not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bservations of this court in Cloth Traders P. Ltd. v. Addl. CIT [1979] 118 ITR 243. There, the question which this court had to consider was whether the deduction provided for in section 80M of the Act was of the gross amount of the inter-corporate dividend received by an assessee or the net amount thereof arrived at after deducting the expenses incurred in the earning of such income. The court held that the deduction was available for the gross amount of the dividend. This question does not concern us but, in the course of the discussion, the court made the following observations on which Sri Ahuja seeks to rely (pp. 258, 259) : " Section 80M, sub-section (1), opens with the words 'where the gross total income of an assessee . . . includes any income by way of dividends from a domestic company' and proceeds to say that in such a case there shall be allowed in computing the total income of the assessee a deduction 'from such income by way of dividends' of an amount equal to the whole of such income or 60 per cent. of such income, as the case may be, depending on the nature of the domestic company from which the income by way of dividends is received'. Now, the words 'such income b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... court in Distributors (Baroda) P. Ltd. v. Union of India [1985] 155 ITR 120 (SC) but he points out and we agree he is right in this that the latter decision does not affect the weight of the above observations. We entirely agree with Sri Ahuja that the deduction under section 80-O is in respect of the categories of income specifically referred to therein and this is an aspect to which we shall advert later. But, we are unable to agree with him that there is an antithesis between the categories of income so specified and the expression "profits and gains". It is no doubt true that, wherever the statute refers to the "profits and gains" of a business, it has in mind the income chargeable under the Act under that head-head "D" specified in section 14 of the Act-but the other categories of income referred to in the various sections are not correlated to the headwise classification of section 14. It is well-known that items of interest, dividends and other items of remuneration are not always referable to any particular head. They may be assessable as "business" income or income from other sources. In particular, the receipts by way of royalty, fees, commissions and similar payments ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the recipient chargeable under the head 'Capital gains') for (i) the transfer of all or any rights (including the granting of licence) in respect of a patent, invention, model, design, secret formula or process or trade mark or similar property ; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or trade mark or similar property ; (iii) the use of any patent, invention, model, design, secret formula or process or trade mark or similar property ; (iv) the imparting of any information concerning technical, industrial, commercial or scientific knowledge, experience or skill ; (v) the transfer of all or any rights (including the granting of a licence) in respect of any copyright, literary, artistic or scientific work including films or video tapes for use in connection with television or tapes for use in connection with radio broadcasting, but not including consideration for the sale, distribution or exhibition of cinematographic films ; or (vi) the rendering of any services in connection with the activities referred to in sub-clauses (i) to (v). S. 9(1)(vii) income by way of fees for tech ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allowing another to avail of the assessee's asset, knowledge or services can likewise assume multifarious forms. The word "similar" connotes that the payment made to the assessee need not be in the nature of royalty, commission or fees only; it could be any payment of like nature, i.e., made in consideration for the use or supply of such an asset, knowledge or services in the same manner as royalty, fees or consideration could be. We are, therefore, of the view that any type of payment received by an assessee would qualify for deduction under the section so long only as it is a payment made in consideration of one of the two types of transactions referred to in the section. Sri Ahuja then draws attention to the finding of the Tribunal in paragraph 41 of its order : "Admittedly, in the present case, there is no claim under the first part of the section and the claim was that the assessee-company was receiving payments in consideration of technical services rendered outside India." He submits that this is a finding of fact based on an admission which has not been specifically challenged by the assessee in its application for reference to the High Court and that it is not open to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Tribunal. The word "admittedly" used by the Tribunal in the passage relied on by Sri Ahuja does not appear to refer to any admission over and above that contained in regard to column 5(a)(i) of the application for approval. The question is whether the claim has been substantiated under either of these headings. Sri Ahuja vehemently argues it has not been. He submits that the assessee has neither made any information available to the foreign client nor has it rendered any technical services to the said client. He contends that the contract in favour of the two members of the consortium was in the nature of a turnkey project. This meant that the client was not interested in the details of the information possessed or the services rendered by the contractor ; all it wanted was that the water supply project, as per the detailed specifications, designs and drawings furnished by the BWSA should be executed by the consortium, complete in all respects, and handed over to it. Sri Ahuja points out by analysing the provisions of the consortium agreement that the assessee was not concerned with any part of the contract other than the "civil works". He says that all the "reservoir works" whic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Even these activities involve technical knowledge and expertise. It cannot, therefore, be doubted that the assessee, under the contract, had to make use, outside India, of its industrial, commercial and scientific knowledge, experience and skill. Sri Ahuja makes the point that, even if this be so, the assessee made available no information regarding such expertise to the foreign Government. There is equally no doubt that, in executing the contract, the assessee has rendered technical services. Any engineering contract involves technical services ; more so, a contract of the nature and magnitude involved in the present case. Here again, Sri Ahuja says, no technical services were rendered by the assessee to the foreign Government the assessee only made use of the technical knowledge, experience and skill of its own employees to perform a task undertaken by it. We think that the approach of Sri Ahuja on this issue is narrow and unrealistic. It would be far from accurate to say that no information of a technical nature was imparted or made available to the foreign Government. It cannot be forgotten that the contract was executed jointly with an enterprise that was nothing but an, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uilding works from the point of abstraction at the river Tigris intake to the connections of the proposed primary feeder systems to the existing distribution networks in the various supply areas. The surveys, planning, designing and actual construction as well as installations were part of the whole contract and the assessee company had to perform all these functions and after completion of the work, had to commission it and had to operate the works for a period of three months after the issue of certificate of completion. The various surveys and design reports are contemplated as a part of the contract. The contract also contemplated training the employer's personnel for the operation and maintenance of the whole of the work and had also to conduct studies on water treatment process to optimise operations." Similar objective observations regarding technical competence, expertise and experience are also found in paragraph 44 of the order which is extracted a little later. In the context of these factors and findings, it is difficult to say that no information of the type contemplated in column 5(a)(ii) of the application form had been made available by the assessee to the foreign ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r as the foreign Government is concerned, it looks only to the assessee for the rendering of the technical services under the contract. The High Court has pointed out that a person who manufactures television set ordered by another cannot be said to render technical services to the latter. In our view, that analogy is not apposite in the context of a contract of the nature, magnitude and specialisation with which we are concerned here. Where a person employs an architect or an engineer to construct a house or some other complicated type of structure such as a theatre, scientific laboratory or the like for him, it will not be incorrect to say that the engineer is, in putting up the structure, rendering him technical services even though the actual construction and even the design thereof may be done by the staff and labour employed by the engineer or architect. Where a person consults a lawyer and seeks opinion from him on some, issue, the advice provided by the lawyer would be a piece of technical service provided by him even though he may have got the opinion drafted by a junior of his or procured from another expert in the particular branch of the law. Sri Ahuja tried to negative ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s attributable to its several ingredients and apportion a part of the consideration as being payment for information made available to, or technical services rendered to, the foreign Government. The Tribunal observed : "43. Schedule 11 to the contract refers to the consideration of the work. Though the lump sum price is indicated for different works, the overall consideration is for the work as a whole and it is made clear even before the tenders were given that the contract could not be bifurcated and it could not be given in parts. Separate payments are not contemplated for the surveys done, designs made and the other studies carried out as they are made an integral part of the work. The assessee-company had to give proposals for execution of the works and had to submit preliminary work programme showing the starting and completion dates for each complex and major installation including construction of the preliminary works, submission of functional plants and general designs and periods for manufacture, delivery, erection, etc., of all works required, including plant and civil works pipelines and services. The price schedules were deemed to cover all expenses, costs risks and a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. The cases referred to by the Tribunal and Sri Ahuja as to the indivisibility of a contract arose in an entirely different context. For purposes of income-tax, a principle of apportionment has always been applied in different contexts. Consolidated receipts and expenses have always been considered apportionable in the contexts : (a) of the capital and revenue constituents comprised in them ; (b) portions of expenditure attributable to business and non-business purposes; (c) of places of accrual or arisal ; and (d) of agricultural and non-agricultural elements in such receipts or payments. This is a point that does not need much elaboration and it is sufficient to refer to decided cases cited under the passages on this topic at pp. 47, 137, 264, 621 and 677 of Kanga and Palkhivala's The Law and Practice of Income Tax (Volume 1, eighth edition). We are, therefore, of the opinion that, if, as we have held, the contracts in the present case oblige the assesse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntract and once such approval is granted (on whatever date it be), the approval should enure for the entire period of contract and cannot be restricted to any particular assessment year or years. In support of this contention, the decision in CIT v. Indian Institute o Public Opinion Co. P. Ltd. [1982] 134 ITR 23 (Delhi) is relied upon. It is urged that, once the approval is granted to a contract, section 80-O becomes operative in respect of all sums received under the contract of the nature specified therein. If the applicability of section 80H11B is thus restricted, it is submitted, the terms of that section, including sub-section (5) thereof, cannot stand in the way of the relief available to the assessee under section 80-O. Secondly, he contends that the definition of "foreign project" in section 80HHB (2)(b) is a restrictive one; it covers only the construction of the nature specified in sub-clause (i) or the assembly and installation of the nature specified in sub-clause (ii), there being no other prescribed work in terms of sub-clause (iii) and it is only the consideration received for the carrying out of these two activities that is excluded from the purview of relief under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness of execution of a foreign project" or work forming part of it or the "profits derived from the business, take in all aspects of a business involving the activities referred to in sub-section (2)(b) of section 80HHB together with all activities, commitments and obligations ancillary and incidental thereto and the profits flowing therefrom. The definition cannot be restricted to the mere physical activity of putting up a superstructure, machinery or plant but should be understood to take within its fold all utilisation of technical knowledge or rendering of technical services necessary to bring about the construction, assembly and installation. However, we need not theoretically eliminate all possibility of a contract involving independent elements calling for consideration both under section 80HHB and section 80-O. It is perhaps possible to envisage cases where, while undertaking a foreign project, separate contracts are entered into for two different sets of activities involved, viz., (i) construction of works and assembly or installation of plant and machinery, and (ii) the transfer of rights and know-how, the impartation of technical knowledge or information and the renderin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... entered into by the other person with the foreign Government or enterprise for the execution of the foreign project. (b), whether all the services were rendered by the applicant (i) before the signing of such contract ; or (ii) after the signing of the contract." He sought to contend, on the strength of these columns, that a part only of the payment derived from a contract submitted for approval under section 80-O may be referable to section 80HHB leaving a balance, at least, eligible for relief under section 80-O. This is not the purport of this paragraph. On the other hand, it seems to be clearly intended to ensure while granting approval under section 80-O in pursuance of the application that section 80HHB(5) is given effect to and no part of the payment derived from the execution of such a project is allowed to qualify under section 80-O. Sri Ahuja sought to make a further point that even if the assessee's case falls under section 80-O the assessee would be entitled to relief not on the entire profits derived by the assessee but only to that portion of the receipts as can be ascribed the character enumerated in section 80-O. He suggested that it might actually be more benef ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onwards. In fact, we think that, irrespective of the Board's clarification of 1985, the correct position is that, once a contract stands approved under section 80-O in relation to the first assessment year in relation to which the approval is sought, the approval enures for the entire duration of the contract. This is the principle enunciated in CIT v. Indian Institute of Public Opinion Co. P. Ltd. [1982] 134 ITR 23 (Delhi), the correctness of which cannot be doubted and is, indeed, accepted by both counsel before us. Section 80-O does not envisage an application for approval of the contract for every assessment year or the limitation of the approval granted by the Board to any particular assessment year. The Board approves of a contract, for having regard to the nature of the receipts flowing therefrom and once this approval is granted, the assessee is entitled to seek deduction under section 80-O in respect of all the receipts under the contract the consideration for which is traceable to the three ingredients discussed earlier irrespective of the assessment year in which the receipts fall for assessment. The Board's approval of the contract -in 1983 as well as in 1985-has no dou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 80HHB. We find ourselves unable to accede to the proposition of Sri Nariman that the scope of section 80HHB should be excluded from application to contracts approved prior to April 1, 1983. Indeed, a difficulty of this type could arise even in respect of a contract entered into after April 1, 1983. Since section 80-O continues to be in the statute book even after April 1, 1983, an application may be made and a contract approved under that section. In doing this the Board may not have, and certainly need not have, considered the provisions of section 80HHB. But, despite such approval, the receipts under the contract cannot qualify for relief under section 80-O if the assessing officer comes to the conclusion that the case falls under section 80HHB. The legislature has clearly envisaged the possibility of the same receipts qualifying for deduction under section 80HHB as well as under any other provision of the Act and has specifically provided that, in such a case, the terms of section 80HHB would prevail over the provisions of such other provision. Sri Ahuja invited our attention to the fact that sub-section (5) was not part of section 80HHB at the stage of the Finance Bill bu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to be imparted or rendered under the contract (vide column 6 of the application), eligible for relief under section 80-O. In order, however, not to give an impression that exemption was sought for the entire profits, the assessee purported to exclude from the claim of exemption the net cost of certain machinery, equipment and other items allegedly supplied to the foreign Government under the contract on a no-profit basis. Sri Ahuja says that the calculations of the assesses are incorrect in several respects. These errors apart, the consideration for services plus profits under the entire contract was estimated at 69.893 million ID at the time of filing the application for approval as per a break-up chart placed on record. Of this, the figure of profits was estimated at 25.49 million IDS or Rs. 68 crores only. As against this, the assessment order shows that the relief claimed under section 80-O for the assessment year 1983-84 alone was to the tune of Rs. 77.84 crores in respect of the Kirkh contract. He also pointed out that the aggregate net profits shown by the assessee from this contract for the assessment years 1982-83 to 1989-90 were Rs. 165 crores, almost 50% of the total r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... guidelines provide for revocation of the approval in case some such situation is found to exist. But, so long as the approval lasts, the Assessing Officer is bound and cannot challenge the correctness of the approval or take up the position that the contract itself falls outside the purview of the section. Apart from this general position, Sri Nariman points out that the approval of the Board had been accorded in this case after full and detailed discussions, correspondence and hearings stretching from March 3, 1981 the date on which the application was made to October 28, 1983 when approval was given. These show that each and every aspect of the contract was examined. The assessee was questioned as to how it was claiming that no profit was involved in the sale of materials. Details regarding technical personnel engaged by the assessee and the extent of fees attributable to their recruitment in India were called for. A query was raised as to how the contract can be said to involve the rendering of services to a foreign enterprise within the meaning of section 80-O. The objection that the services under the contract were rendered to self and not to a third party was also raised. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s vested in the apex authority under the Income-tax Act, it is clear that the scope of the Board's powers is more extensive and should bear upon the terms of the agreement vis-a-vis the claim for relief under the section in relation to which relief is sought. It is also interesting to see that this power of approval has since been de-centralised and vested in the Director-General and Chief Commissioner which are authorities at a lower rung than the Board but at a higher rung than the assessing officer. While, at one time, the Income-tax Officer was described as the king-pin of the tax administration and was the sole repository of all functions pertaining to assessment, the recent tendency has been to vest powers of assessment even in Officers above the rank of the Income-tax Officer either because of the amount involved or for other reasons. Here again, there is good reason, over and above the general need to have a surveillance over foreign contracts, as to why the power to grant approval is vested in a higher authority in the income-tax hierarchy itself. The first is that the Board is considered better equipped, both on considerations of time as well as the technical knowledge ne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ission, fee or similar payment is undertaken. The receipts are analysed under the three headings, as earlier referred to by us, and set out in paras 5(a)(i), 5(a)(ii) and 5(b) of the pro forma. Even the situation where the contract is a composite one has been dealt with by the guidelines and this may be referred to here in a little greater detail. In the circular No. 187 of December 23, 1975, the Board decided that it would decline approval in cases where the consolidated consideration could not be legitimately attributed to know-how, services, etc., envisaged in the section but that in cases where such apportionment was considered permissible, it would grant approval to the agreement and have the quantification of the exemption to be decided by the Assessing Officer. It said : " (ix) In the case of a composite agreement specifying a consolidated amount as consideration for purposes which include matters outside the scope of section 80-O (e.g., use of trade marks, supply of equipment, etc.,) the amount of the consideration relating to the provision of technical know-how or technical services, etc., qualifying for purposes of section 80-O will have to be determined by the Income-ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut for itself, we think quite legitimately and properly, a very detailed and dominant rule as to the availability of exemptions under section 80-O. The guidelines are of general nature, fully sanctioned by the provisions of section 119(1) of the Act and, being instructions enuring to the benefit of the assessee, cannot be gone back upon by the Departmental Officers subordinate to the Board particularly in a case where no steps have been taken or even suggested as necessary to be taken to cancel or revoke the approval already accorded. This is, indeed, a proposition well-settled by a series of judicial decisions starting from Navnit Lal C Jhaveri's case [1965] 56 ITR 198 SC. On facts also, the Board has followed only its own guidelines. Elaborate reference to the correspondence, discussions and hearing is unnecessary. The Board has reached its decision to approve the contract and the basis of claim for exemption after full consideration and analysis. We may, in this context, also point out that, while the Board, in the present case, simply approved some of the contracts on the basis of the application filed, it has, in the case of some other contracts, modified that basis also. For ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... visions of these sections" nor the various "conditions" outlined in the letter of approval add anything to or detract anything from the scope of the approval. As already mentioned, Sri Nariman also contended that, even after the insertion of section 80HHB, the assessee would be entitled to claim the deduction under section 80-O in view of the Board's amendment to the letter of approval that the approval would be operative for the assessment year 1982-83 onwards, rescinding the qualification in the earlier letter that the provisions of section 80HHB would apply for the assessment year 1983-84 onwards. It is true that the earlier restriction was lifted by the Board after considering the contentions raised by the assessee in its letter of December 2, 1983 : (a) that the two sections operate in different fields for exemption; (b) that the approval once granted under section 80-O, the exemption to which the assessee became eligible should enure for the duration of the entire contract ; and (c) that section 80HHB should be restricted to agreements entered into before April 1, 1983. But we are unable to give effect to the Board's decision on July 31, 1985 in the, same way as we have ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ay by the new statutory provision. The argument that the assessee could not have anticipated the insertion of section 80HHB and is put to hardship if that section is applied is no doubt correct. But one cannot decline to give effect to the applicability of the statutory provision on the ground of hardship or on the ground that it restricts the relief which, but for the insertion of the section, would have been available to the assessee, particularly when the section itself envisages the possibility of the assessee being also eligible for relief under another section and makes a special provision for that eventuality. Sri Nariman submitted that we should not favour the above interpretation as it would lead to an anomalous result. He says that the whole idea of section 80HHB was to enlarge the benefits to contractors working abroad and earning foreign exchange but that, by reason of our decision, the assessee would now get relief only to the extent of 25% in respect of a contract for which it got 100% benefit in earlier years. On the other hand, the department would no doubt say that our conclusion that the assessee was entitled, in earlier assessment years, to 100% relief on this t ..... X X X X Extracts X X X X X X X X Extracts X X X X
|
