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2016 (11) TMI 1010 - KERALA HIGH COURT

2016 (11) TMI 1010 - KERALA HIGH COURT - [2016] 388 ITR 307 - Claim for deduction under section 80-O - Whether the services rendered by the assessees are from India or in India ? - Held that:- Tribunal has erred on two counts in holding that the assessees are entitled to the benefit of deduction under section 80-O of the Act : First, mere transmission of the information to a foreign enterprise, evidently, abroad does not go to show that it is a service rendered from India, but not in India. With .....

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provide an incentive to the indigenous know-how of whatever nature that reaches the shores of foreign nations and gets applied there. The resultant fruits may percolate to India, too, as is the case in E.P.W. Da Costa [1979 (2) TMI 40 - DELHI High Court ] and Continental Construction [1992 (1) TMI 5 - SUPREME Court ], even in which the apex court has held that not all receipts can claim the concession. - If we refer back to the analogy employed by the learned senior counsel for the assesse .....

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e thread of connectivity in all the intellectual endeavours mentioned therein : 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. It can also be in consideration of technical or professional services rendered or agreed to be rendered outside In .....

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Any other interpretation renders the Explanation (iii), in our view, otiose. - In the alternative, if one were to assume-it is unlikely, though-that the assessees had rendered certain services which qualify for a deduction, they have, however, failed to place any material in that regard. The agreement unfailingly points out that the assessees are marine-product procuring agents for the foreign enterprises without any claim for expertise capable of being used abroad rather than in India. - D .....

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on 80-O of the Income-tax Act, 1961 ("the Act"), as the provision was existing during the assessment year 1993-94. 2. Since all the other appeals have been decided based on the order of the Tribunal in the matter of the assessee who is the appellant in I. T. A. No. 132 of 2002, we shall refer to the facts of the said case for discussion and elucidation. Further, given a common question of law under identical fact situation arises, we also deem it appropriate to render a common judgment .....

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assessee filed an appeal. We may, however, add that in I. T. A. No. 437 of 2009, the dispute concerns the assessment year 1995-96. 4. Through annexure-B order, the appellate authority upheld the assessee's claim and allowed the appeal declaring that the assessee is eligible for deduction under section 80-O. Then, it was the turn of the Revenue to assail annexure-B appellate order before the Income-tax Appellate Tribunal ("the Tribunal"). As seen, the Tribunal concurred with the ap .....

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into with two foreign companies : Gelazur, a French company ; Hoko Fishing Co. Ltd., a Japanese company. 6. The principal contention raised by the learned senior counsel is that the assessee is, straight and simple, an agent of the foreign enterprises procuring marine products from India ; all its services are incidental to its main functioning as a fish-procuring agent. He has further contended that the assessee rendered its services "in India", contradistinguished with the expression .....

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l for the Revenue has laid much emphasis on the phraseology employed in annexures-D and E agreements between the assessee on- one hand and the two foreign companies respectively on the other to hammer home his contention that the assessee was engaged as an agent to do a particular business in India on behalf of those foreign companies. To support his submissions, the learned senior counsel has placed reliance on the CIT v. Thomas Kurien I. T. A. No. 254 of 2009, unreported judgment, dated Februa .....

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mit given in the said circular. He contends that, as is evident from clause-10 of the circular, it is retrospective in its operation. 10. Referring to the quantum involved in the appeals, the learned counsel would contend that all the appeals fall within the mischief of the circular and as such, the appeals are not maintainable. The learned senior counsel has further submitted that, on the issue of maintainability, the judgment of the hon'ble Supreme Court in CIT v. Surya Herbal Ltd. [2013] .....

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cipal provision is read with clause (iii) of the Explanation appended to the section, it lends itself to no other interpretation that what has been stated above. Once the service is "used" by a foreign entity outside India, contends the learned senior counsel, the fact that the advice is rendered from the Indian soil hardly makes any difference. Illustratively, the learned senior counsel has drawn an analogy from a lawyer's providing professional advice to an entity or individual, .....

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o consequence, rather unnecessary. In further elaboration, he has submitted that all along neither of the adjudicating authorities has entertained any doubt whether the assessee has actually rendered the services. 14. Referring to the precedential position on the issue, the learned senior counsel has further contended that using the information supplied by the assessee; the foreign companies have taken a decision outside India as regards how they can purchase the merchandise-fish. The learned se .....

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ial and technical information, by implication even Thomas Kurien, according to him, has accepted the proposition : providing commercial or technical information to an entity outside India falls within the sweep of section 80-O. 15. To support his submissions, the learned senior counsel has placed reliance on Circular No. 700, dated March 23, 1995 See [1995] 213 ITR (St.) 78, Continental Construction Ltd. v. CIT [1992] 195 ITR 81 (SC), CIT v. Mittal Corporation [2005] 272 ITR 87 (Delhi), Li and F .....

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21 of 2015, dated December 10, 2015 ? 2. Whether the services rendered by the assessees are from India or in India ? Issue No. 1 17. The Central Board of Direct Taxes, Government of India, has revised its policy of litigation by fixing monetary limits for filing the appeals by the Department before the Income-tax Appellate Tribunal, the High Courts, and the Supreme Court. As seen from paragraph No. 3 of the Circular No. 21 of 2015, the monetary limit of the tax dispute before any High Court sha .....

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there can be cases in which a common principle may be involved affecting many matters that may fall for adjudication in due course. 19. To distinguish the observations of the Supreme Court, the learned senior counsel for the respondents has submitted that the present batch of matters has no cascading effect because the provision stood amended subsequently. Nor can there be a chance of any other large number of matters coming up for consideration involving the common question of law. Nevertheles .....

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ide the issue on the merits. 20. Issue No. II : Statutory Scheme : 21. To weigh the rival contentions, we reckon section 80-O of the Act to be the fulcrum of the legal lever. As such, it is essential to examine the provision, which reads, as it stood during the assessment year 1993-94, thus : "80-O. Deduction in respect of royalties, etc., from certain foreign enterprises.-Where the gross total income of an assessee, being an Indian company or a person (other than a company) who is resident .....

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r enterprise by the assessee, or in consideration of technical or professional services rendered or agreed to be rendered outside India to such Government or enterprise by the assessee, and such income is received in convertible foreign exchange in India, or having been received in 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 .....

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essee to be entitled to the deductions provided in the provision : (1) the assessee must be an Indian or a person residing in India ; (2) the assessee must receive income by way of commission from a foreign enterprise ; (3) the assessee's receiving the commission must be in consideration of technical or professional services being rendered by it ; (4) the rendering of services shall be outside India ; (5) the income, thus, received must be in convertible foreign exchange in India. By any rec .....

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instance, all the assessees in the batch of appeals are business entities based in India ; they have been rendering services to foreign enterprises territorially situated outside India ; the services are rendered based on validly executed agreements ; and the assessees are being paid in convertible foreign exchange. 25. That said, the conclusion is seemingly simple and straight that the assessees are entitled to the benefit of a deduction, but there lies a catch : Whether the services are rende .....

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or instrumentality. The learned author wonders how difficult it is to define the term without using the word itself in its own definition. The preposition "from" is so ubiquitous that it is needed even to define itself. From : 1. Of place or space : having as a starting point of motion, actual or implied ; out of ; starting at ; leaving behind ; opposed to into, to, or unto; as, he sailed from New York to Liverpool ; the student went from home to college ; the town is five miles from t .....

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pertaining to or connected with the interior of ; within ; inside ; as, the stars in the sky ; the prisoner in chains ; a story in a book ; a room in the house ; she clasped the child in her arms. 27. In section 80-O of the Act, the constants are the Indian agent ; the foreign principal, and the Indian agent rendering services from India. The variable is, how and where are the services used ? Indeed, if words are plain and unambiguous, it ill behoves us to put a strained meaning on them in the n .....

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gislative intent behind the provision is not far to seek : The Government encourages entrepreneurial initiative and innovation by the Indian companies at the international level. In a measure, the nation encourages any Indian showcasing the Indian intellect internationally. That accepted, if Indian technology, know-how, etc., is used in India itself even by a foreign company, it is an intellectual enterprise not only from India but also in India, We reckon that use means the end use of the infor .....

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companies buying marine products from India. The assessee was engaged to examine the quality and stability of the products for the foreign buyers ; only on the assessee's certification could the exporter ship the goods from India to the foreign buyer. In other words, the assessee was rendering professional services to ensure the quality of the product exported to the foreign buyers and the services were rendered in India. 31. In that factual context, a learned Division Bench of this court h .....

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l for the assessee has placed reliance on Li and Fung and Inchcape (here too relied on) but the court has concluded that they have no relevance. E.P.W. Da Costa : 33. Concerning interpretation of section 80-O of the Act, E.P.W Da Costa (supra) is one of the earliest judgments cited at the Bar by the learned senior counsel for the respondents. As is evident from the judgment rendered by the High Court of Delhi, the assessee is a consultant "engaged in conducting specialised economic and publ .....

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ourt of Delhi interpreted section 80-O of the Act to hold that BBC can be said to use the information received from the assessee when it formulates or modifies its broadcasting programmes to India. The court has observed that the term "used" is a word of general import. 35. Indisputably, the BBC is in London ; it transmits all its programmes from London propagating its waves across the globe through transponders and transmission stations in various countries, India having no transmissi .....

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ther country in its entirety. Mittal Corporation : 36. In Mittal Corporation (supra), The assessee received a commission as a buying agent of certain foreign enterprises ; it claimed deduction under section 80-O of the Act. The assessee's claim was because it earned the commission in foreign exchange by supplying commercial information for the use outside India by the foreign companies. The Department, however, disallowed the claim contending that the assessee rendered neither any technical .....

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i Hotels : 37. In Oberoi Hotels (supra), the factual background to the case is not explicit. What can be gleaned from the judgment is that the assessee contracted with a foreign company agreeing to manage a foreign company for 25 years. For the said purpose, the assessee had to loan to the foreign company the services of its fully qualified and experienced personnel. The agreement was styled as "management services agreement". 38. The Department refused to extend the benefit under sect .....

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affirmed the findings of the Tribunal. On facts, it has held that the assessee was providing two types of services involving its dyeing and testing divisions. It concurred with the findings of the Tribunal that the assessee had to work in textile testing, inspection of soft lines, electrical and electronics products according to the existing standards of European and American markets, etc. Of all things, the Delhi High Court has noted that the issue arose much before the insertion of Explanation .....

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red knowledge, expertise, and experience ; and, therefore, the fee it received from foreign enterprises for supply of commercial information sent from India for use outside India was eligible for deduction under section 80-O of the Act. 41. Pertinently, Li and Fung has squarely considered the issue whether the benefit of section 80-O of the Act would be available if the technical and professional services, though rendered outside India, are used by the foreign Government or enterprise in India. .....

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e agreed rates. The information regarding the availability of cargo to ship owners and its destinations at frequent intervals enables the ship owners to program the ships' travel touching the Indian coasts. The assessee contacts the ship owners whenever they send the cargo, and in that process they exchange various types of special information with the ship owners or the parties concerned. For such services as rendered by the assessee, it receives a commission from its foreign principals. 43 .....

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appeal on the ground that the assessee's activity comes within the purview of the provision. The correctness of decision was assailed before the High Court of Madras ; a learned Division Bench has surveyed much of the case law on that point. 44. Chakiat Agencies felicitously states the purpose of the provision : To provide, by an Indian assessee, any patent, invention, model, design, secret formula or process, or similar property right, or information concerning industrial, commercial or sci .....

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convertible foreign exchange. Hence, the rendering of the commercial service and receiving a commission in foreign exchange by the assessee would entitle the assessee to the benefit of section 80-O. The Twin Aspects : 45. With due regard to the above pronouncements, we, however, feel it necessary to point out that in none of them, two crucial aspects of section 80-O of the Act have not fallen for consideration : (i) What type of services rendered by an Indian entity falls within the sweep of the .....

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terms of section 80-O of the Act. 47. Concerning the dispute that has arisen based on the assessee's claim for the benefit under section 80-O of the Act, the Supreme Court has held that the assessee was undoubtedly rendering services to the foreign Government by executing the water supply project. These services were no doubt technical services, as they required specialised knowledge experience and skill for their proper execution. The Department's argument seems that the services in th .....

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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 regarding certain receipts merely because 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 destroy the right of an assessee to claim a deduction, if, in fact, the consideration for the receipts can be attributed .....

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ntitlement on the deduction under section 80-O, it is for the assessee to satisfy the Revenue firstly that it has received commission ; second, that the commission was received from a foreign enterprise outside India ; and third, that the commission was regarding the information relating to the commercial transaction provided by the assessee. 50. On facts, Khursheed Anwar reveals that the assessee has an exclusive agency for promoting and concluding sales contract in the territory of India for m .....

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said section cannot be claimed as a matter of right, as it is purely a question of fact, which could be considered by the Assessing Officer on the basis of the records. In fact, the Commissioner of Income-tax (Appeals) has rendered a specific finding that the assessee has simply effected the sale of machinery and spares manufactured by the foreign enterprise ; and, therefore, the assessee received only the sales commission. The appellate authority also found that the sales commission received b .....

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nwar (supra) we gather that not every receipt from a foreign enterprise in convertible foreign exchange does not automatically get qualified for deduction under section 80-O the nomenclature notwithstanding. The burden, in fact, is on the assessee to prove before the Revenue through cogent material that the commission is for the services it rendered falling within the scope of the section. Neither of the facts-the existence of the contract and the receipt of convertible foreign exchange-leads to .....

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LAZUR" all the accurate information in respect of the standard, quality, price, time of shipment, etc. promptly, whenever the purchase of the products is made. (iii) To carry out technical guidance for processing and for quality control and inspection of the products, and to advise "GEELAZUR". (iv) To inform "GEELAZUR" regularly about the market situation, i.e., fishing situation prices paid by other markets, prices made by French competitors, business opportunities, mon .....

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make available full and detailed analysis of the seafood supply situation and prices. (d) To advise "HOKO" and keep them informed of the latest trends/ processes applications in manufacturing and of all valuable commercial and economic information about the markets, Government polices, exchange fluctuations, banking law which will directly or indirectly assist "HOKO" to organise, develop control or regulate their import business from India. (e) To negotiate and finalise price .....

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, we wish to conclude that the Tribunal has erred on two counts in holding that the assessees are entitled to the benefit of deduction under section 80-O of the Act : First, mere transmission of the information to a foreign enterprise, evidently, abroad does not go to show that it is a service rendered from India, but not in India. With an element of certainty, we can as well say that once there is a contract, an Indian agent always interacts with and sends information-even technical know-how-to .....

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s may percolate to India, too, as is the case in E.P.W. Da Costa and Continental Construction, even in which the apex court has held that not all receipts can claim the concession. If we refer back to the analogy employed by the learned senior counsel for the assessees, an advocate in India may render services to a foreign client stationed abroad concerning a case pending in India. It is a service rendered not only from India, but also in India. On the other hand, if that piece of professional a .....

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knowledge, experience or skill made available or provided or agreed to be made available or provided to such Government or enterprise by the assessee. It can also be in consideration of technical or professional services rendered or agreed to be rendered outside India to such Government or enterprise by the assessee. They cannot be said to be entirely discrete and disparate. The services have an air of intellectuality ; as such, all and sundry services rendered to a foreign enterprise cannot be .....

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