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TMI Blog2020 (6) TMI 158X X X X Extracts X X X X X X X X Extracts X X X X ..... providing services to certain foreign buyers of frozen seafood and/or marine products and had received service charges from such foreign buyers/enterprises in foreign exchange, claimed deduction under Section 80-O of the Act of 1961, as applicable for the relevant assessment year/s. In both these cases, the respective Assessing Officer/s denied such claim for deduction essentially with the finding that the services rendered by respective assessees were the 'services rendered in India' and not the 'services rendered from India' and, therefore, the service charges received by the assessees from the foreign enterprises did not qualify for deduction in view of clause (iii) of the Explanation to Section 80-O of the Act of 1961. After different orders from the respective Appellate Authorities, the Income Tax Appellate Tribunal, Cochin Bench accepted the claim for such deduction under Section 80-O of the Act with the finding in case of the assessee Ramnath & Co. for the assessment year 1993-94 that as per the agreements with the referred foreign enterprises, the assessee had passed on the necessary information which were utilised by the foreign enterprises concerned to make a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... taxable income at Rs. 6,21,710/- while claiming 50% deduction (amounting to Rs. 22,39,825/-) under Section 80-O of the Act in relation to the amount of Rs. 44,79,649/- received by it as service charges from foreign enterprises1. 5.1. While asserting its claim for such deduction under Section 80-O of the Act, the appellant submitted that it had rendered myriad services to the foreign enterprises like: (i) locating reliable source of quality and assured supply of frozen seafood for the purpose of import and communicating its expert opinion and advice in that regard; (ii) keeping a close liaison with agencies concerned for bacteriological analysis and communicating the result of inspection together with expert comments and advice; (iii) making available full and detailed analysis of seafood supply situation and prices; (iv) advising and informing about the latest trends in manufacturing and markets; and (v) negotiating and finalising the prices for Indian exporters of frozen marines products and communicating such other related information to the foreign enterprises. The appellant claimed that pursuant to the terms and conditions of the agreements with the foreign enterpr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he nature of the relationship of the assessee with the foreign enterprises. I have gone through the agreements entered into by the assessee with HOKO Fishingco Ltd. is captioned agreement regarding marine products and that with GELAZURE S.A. is captioned agency agreement regarding marine products. Articles 1 to 4 of the agreement with HOKO fishing Co. Ltd. reads as under:- Article 1:HOKO desires to avail of the benefit of the commercial and technical knowledge experience and skill of "RC-CN foods/Marine products of good quality and on favourable terms and is willing to remunerate "RC-CN" for use of such commercial and technical knowledge, expert and skill and other related services. Article 2:"RC-CN agrees to render to "HOKO" the following services on a continuing basis. a) Locating reliable sources of quality and assured supply of frozen seafood/marine products for the purpose of import by HOK and communicate its expert opinion and advice to HOKO." b) In addition to the above services rendered by "RC-CN, it will also keep a close liaison with agencies such as EIA/LLOYDS/SGS especially for organoleptic/bacteriological analysis and communicate the results of inspection alo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... USD O.65/Kg When the quality and the packaging of the goods are found to be unsatisfactory to 'GELAZUR" after inspection in FRANCE, GELAZURE, shall have no responsibility regarding the payment of the Agent's fee. Article 4: If any claim arises out of or in relation to the purchases of products for which 'GELAZUR' has no responsibility, RAMNATH will do their best to settle the claim through negotiation with manufacturers. The settlement of the claim will have to be carried out 60 days after the reception of the goods."2 5.5. Having examined the contents of two agreements, the Assessing Officer did not feel convinced with the claim that the appellant had been rendering services from India so as to qualify for deduction under Explanation (iii) to Section 80-O of the Act. The Assessing Officer was firmly of the view that the appellant had worked only as an agent of the foreign enterprises in the matter of procurement of marine products from India; and all the services envisaged in the agreements were incidental to the carrying out of main function as agent. The Assessing Officer recorded his observations and findings as follows: - "....A close study of the articles e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iers with a view to ensure quality and hygiene standards. This is evident from the fact that a sum of Rs. 23,122/- has been incurred by the assessee during the visit of buyers, representatives to various seafood packers in Calcutta, Bombay vizag, Madras Nandapam, Cochin, Calicut etc. Expenses for souvenirs, compliments and samples of the value of Rs. 29,411.99 have also been incurred presumably in connection with the visit of the representatives of the foreign buyers. By any stretch of imagination, it cannot be claimed that the services rendered on the occasions of the visit of the representatives of foreign enterprises were not rendered in India. The foreign travels undertaken by the Managing Partner for meeting various buyers can been seen as only an extension of the assessee's role as an agent of the foreign enterprises in India. An agent of a foreign enterprise in India necessarily acts on behalf of the foreign enterprise in India, and therefore, the services, namely carrying out inspections to ensure quality of the products and packaging, supervision of processing, negotiating prices in respect of marine products exported with the assistance of the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mere employment recruiting bureau was not entitled for deduction under Section 80-O and the services rendered in locating prospective candidates and collecting their bio-datas and conveying names of candidates to foreign employers did not represent services rendered outside India. Similarly, in 145 ITR 673 in the case of Searls (India) Ltd, the same High Court ruled that testing of samples in India and giving results and certificate to foreign company did represent technical services rendered outside India. In view of the forgoing discussion, I would hold that the assessee is not entitled for deduction u/s 80-O as the services made available to the foreign enterprises were rendered in India." 5.7. In the aforesaid view of the matter, the AO disallowed the claim for deduction under Section 80-O of the Act. 5.8. In the appeal taken by the appellant, the Appellate Authority did not agree with the opinion of the Assessing Officer, particularly with reference to the decision of Delhi High Court in the case E.P.W. Da Costa and Ors. v. Union of India: (1980) 121 ITR 751 (Delhi) and a decision of ITAT Delhi, D Bench in the case of Capt. K. C. Saigal v. Income Tax Officer: (1995) 5 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ervices from India to these foreign enterprises. That the appellant's information and experience have been effectively utilised by the foreign enterprises can be seen from the fact that the export effected by the appellantconcern have risen from 20 crores in the AY 1991-92 to 100 crores by AY 1996-97. For the year under consideration, the exports are approximately 60 crores on which the appellant has earned a commission of Rs. 44.79 lakhs. 16. The major issue to be decided in this case is whether theservices rendered by the appellant can be said to be 'from India'. On the facts and circumstances of the case, I am of the opinion that the services have been rendered from India and hence, the appellant is eligible for deduction u/s 80-O, especially in view of the decision of the Delhi High Court in E.P.W. De Costa & Another vs. Union of India (121 ITR 751) and the I.T.A.T. Delhi 'D' Bench decision in the case of Capt. K. C. Saigal vs. I.T.O. (54 ITD 488)." (emphasis in bold supplied) 5.9. Aggrieved by the decision aforesaid, the revenue preferred appeal before the ITAT, being ITA No. 84/Coch/1997, that was considered and decided by ITAT by its order dated 19.11.2001. The ITAT took ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by French Competitors, business opportunities, monthly supplies of seafood data. This indicates that the assessee has to communicate the data it collected, and on the basis of this, the foreign party acts either to purchase or not to purchase. It is also true that Article 4 of the said agreement states that "if, any claim arises out of or in relation to the purchase of products for which 'GELAZUR', has no responsibility, 'RAMNATH' will do their best to settle the claim through negotiation with manufacturers". This indicates that the party is also doing supply of services. But, this part of the service is only consequential to the first. The agreement entered into between Hoko Fishing Co. Ltd., Tokyo, Japan and the assessee also stipulates that the assessee has to keep "Hoko" informed of the latest trends/processes applications in manufacturing and of all valuable commercial and economic information about the market, Government Policies, exchange fluctuations, banking laws which will directly or indirectly assist "Hoko" to organise, develop, control or regulate their import business from India. In addition to this, the assessee has to render services to ensure highest standards of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India are not necessarily by virtue of the other party's request or demand. In Godrej & Boyce Mfg. Co. Ltd. vs. S.B. Potnis, Chief Commissioner [1993] 203 ITR 947' the Hon'ble Bombay High Court held that a provision made for the giving of all marketing, industrial manufacturing, commercial and scientific knowledge, experience and skill for the efficient working and management of the foreign company could be treated as services rendered that make the assessee eligible for the benefit under Section 80-O. 11. In Mittal Corporation's case (supra), the Delhi bench-D of the Tribunal held that the object and spirit of Section 80-O was to mainly encourage Indian technical know-how and skill abroad and since the information was given outside India party and it was used outside India and payment was received in convertible foreign exchange, the condition required for allowing deduction under Section 80-O could said to have been fulfilled. In the case of E.P.W. Da Costa (supra) the Delhi High Court has held that if the information passed on by the assessee is of practical nature and was a result of making or manufacturing some concrete thing and such information has been utilised by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... red its services "in India", contra-distinguished with the expression "from India". It was also contended on behalf of the revenue that mere communication between the assessee based in India and the principal based abroad does not bring their transactions within the purview of Section 80-O. The submissions on behalf of the revenue were supported with a Division Bench decision of that High Court in Commissioner of Income Tax v. Thomas Kurian (Dead) through LR Smt. Primari C. Thomas, since reported as (2012) 72 DTR (Ker). On the other hand, it was contended on behalf of the assessee that on reading the principal provision of Section 80-O of the Act with clause (iii) of the Explanation, it was clear that once the service is provided by an Indian company (or other person who is resident in India) and the same is 'used' by a foreign entity outside India, it made no difference if the advice is rendered from Indian soil. In relation to the query of the Court as to whether all the services mentioned in the agreement would come within the purview of Section 80-O, the response on behalf of the assessee had been that 'if the recipient of services is situated outside, all the services ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and provides incentives to those who earn foreign exchange. Over and above the incentive is the facility of deduction from the taxable income in foreign exchange--that is what Section 80-O is. The legislative 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 information or know-how, but not its mere processing." 8.3. Proceeding further, the High Court examined the position obtainable in regard to the interpretation and application of Section 80-O of the Act from the precedents cited at Bar. The High Court pointed out that in Thomas Kurian (supra), a case dealt with by the same High Court, the main service rendered by the assessee was admittedly of examining the quality and type of fish processed by the exporters in India and certifying the fitness of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s for supply of commercial information sent from India for use outside India was eligible for deduction under Section 80-O of the Act. The Court observed that the said decision gave judicial imprimatur to the Board's clarification to the effect that if an assessee renders technical or professional services from India to a foreign Government or enterprise outside India, it can claim deduction even if the foreign recipient utilises the 'benefit of such services in India'. In this line of consideration, the High Court lastly referred to the decision in the case of Chakiath Agencies (supra) and pointed out that therein, the assessee, a shipping agent, was to ensure that the ship owner picks up the cargo and transports it within time and at the agreed rates; and the information regarding the availability of cargo to ship owners and its destinations at frequent intervals enabled the ship owners to program the ships' travel touching the Indian coasts. In the given facts, it was held that the assessee had rendered commercial service to the foreign shipping owner for his use outside India and received a commission in convertible foreign exchange, entitling it to the benefit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ht of an assessee to claim deduction if, in fact, the consideration for the receipts can be attributed to the sources stated in the section. The High Court also noted the dictum of Continental Construction that it is the duty of the revenue and the right of the assessee to see that the consideration paid under the contract legitimately attributable to such information and services is apportioned, and the assessee is given the benefit of deduction available under the section to the extent of such consideration. 8.5. The High Court further took note of a decision of Madras High Court in the case of Commissioner of Income Tax v. Khursheed Anwar: (2009) 311 ITR 468 (Mad) wherein the assessee had an exclusive agency for promoting and concluding sales contract in India for machinery and equipment for an enterprise based in Italy. On the strength of agreement, the assessee worked with the foreign enterprise but the Court observed that the benefit under Section 80-O of the Act was not available to the assessee for mere asking; the records and materials must support the claim and the benefit of the said Section cannot be claimed as a matter of right, it being a question of fact, which coul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ish 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 a foreign enterprise abroad. If that alone qualifies for deduction without reference to 'the services rendered in India', the very expression in explanation (iii) becomes otiose. Trite it is to observe that statutory surplusage is not a settled canon of construction; rather it is to be avoided. 57. The purpose of the provision is to 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gn exchange earned by the appellant in lieu of the services rendered by it to the foreign enterprises, the learned senior counsel for the appellant has made wide-ranging emphatic submissions on the process of interpretation, the scheme and object of Section 80-O and has also referred to the decisions which, in his contention, cover the present case on the substance and principles. 9.1. The learned senior counsel for the appellant has strenuously argued that the High Court has approached the entire case from an altogether wrong angle and with rather linguistic and pedantic approach to interpretation while ignoring the basic object and purpose of Section 80-O of the Act, which is meant to give incentive for earning foreign exchange. With reference to the decision in Abhiram Singh v. C.D. Commachen (Dead) by LRs. and Ors.: 2017(2) SCC 629, the learned counsel has submitted that this Court has cautioned against making a 'fortress out of the dictionary' but the High Court has proceeded with excessive reliance on dictionary and has merely looked at the text without its context and object and with such approach, has unjustifiably upturned the well-considered decision of ITAT. Learned cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommercial activities, is also covered by Section 80-O. 9.3. While strongly relying upon the decision of this Court in the case of J. B. Boda & Co. Pvt. Ltd v. Central Board of Direct Taxes, New Delhi: (1997) 223 ITR 271 (SC), the learned senior counsel has argued that therein, even a commission received by the reinsurance broker, who only sent information to the foreign reinsurance company regarding the risk involved and other related data, was held entitled to the benefit of Section 80-O of the Act in respect of the entire commission. The learned counsel has argued that the activity of reinsurance broker cannot possibly be described as an intellectual activity or as a technical or professional service; and in that case of J.B. Boda & Co., the activity only consisted of sending commercial information from India about a proposed reinsurance contract on the basis of which, the reinsurance company took a commercial decision to enter into the contract. The learned counsel has pointed out that in that case, this Court had referred to the Circular issued by CBDT specifically directing that the deduction under Section 80-O should be allowed on the commission received by an Indian reinsur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the High Court has proceeded on a basis which is totally inconsistent with those findings. With reference to the decision of this Court in the case of K. Ravindranathan Nair v. Commissioner of Income Tax, Ernakulam: (2001) 247 ITR 178 (SC), the learned counsel has argued that there was no scope of interference in the findings of fact in this case. 9.6. Assailing the findings of High Court in the impugned judgment, the learned senior counsel has also argued that the approach of the High Court that unless services were rendered abroad, the amount received would not qualify for the benefit of Section 80-O is directly contrary to the plain provision contained in Explanation (iii) to Section 80-O and is also contrary to Circular No. 700 dated 23.09.1995 which had clarified that Section 80-O covered not only the services rendered outside India but also the services rendered from India to a party outside India; and it does not matter if the service is subsequently utilized by the foreign customer in India. In regard to the case of the appellant, the learned counsel would submit that in fact, the foreign enterprises related with the appellant do not have any operation or place of busine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctivity/intellectual endeavours; and simple trading activity, though may require certain commercial or industrial information, cannot be said to be covered by this provision. With reference to Explanation (iii) to Section 80-O, the learned counsel would argue that the principal provision specifically states that it covers the services rendered "outside India" and the explanation clarifies that the services rendered or agreed to be rendered outside India shall include services rendered from India but shall not include services rendered in India; and therefore, services rendered by the assessee to a foreign entity must be rendered outside India, in foreign soil, and not in India, though they may be rendered from India. 10.2. As regards the principles of interpretation, the learned senior counsel for revenue has strongly relied upon the Constitution Bench decision in Commissioner of Customs (Import), Mumbai v. Dilip Kumar & Co. and Ors: (2018) 9 SCC 1 to submit that it is now settled beyond doubt that taxing statutes are subject to the rule of strict interpretation, leaving no room for any intendment; and the benefit of ambiguity in case of an exemption notification or an exemption c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n placed on record. 10.4. The learned senior counsel for the revenue has drawn support to his contentions that Section 80-O of the Act does not apply to the appellant by making reference mainly to two decisions. In the first place, the learned counsel has relied upon the decision of this Court in B.L. Passi v. Commissioner of Income-Tax: 2018 (404) ITR 19 (SC) with the submissions that this decision applies on all fours to the present case. Therein, the assessee stated that as per the agreement, it was to provide blueprints for manufacture of dies for stamping of doors of cars, though no blueprint sent was produced and there was nothing to show that sales were effected because of information given by assessee. This Court held that the assessee was only a managing agent and was not rendering 'technical services' within the meaning of Section 80-O of the Act. Hence, there was no basis for grant of deduction. Next, the learned senior counsel has referred to the decision of Kerala High Court in the case of Thomas Kurian (supra), where the assessee was only examining the quality and type of fish processed by the exporters and was certifying fitness for shipment to foreign buyer, who wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d as to what is the true import of the expression "use outside India" as per Explanation (iii) to Section 80-O, did not fall for consideration and hence, those judgments were of no support to the proposition sought to be advanced by the appellant. It has also been submitted that in the case of Continental Construction (supra), the contracts were for carrying out physical construction of dams and irrigation projects in foreign countries, i.e., 'not in India' and besides that, in special circumstances, the benefit of Section 80O was only allowed in part rather than on the entire contract, where the revenue was directed to bifurcate and look at each of the services rendered. According to the submissions on behalf of the respondent, the appellant relied upon this decision in the High Court but gave it up in this Court realising that the same is in favour of revenue; and if at all the ratio is applied, at best, the benefit of Section 80-O might have been considered activity-wise, if the appellant had placed any material as to the actual services rendered, but no such material had been placed on record by the appellant. 10.6. In regard to different services by the same assessee, some of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Court in ITA No. 131 of 2002 and, in any case, it being a matter of interpretation of statutory language of Section 80-O and its Explanation (iii), the contention on behalf of the appellant about want of challenge to the findings is without substance. Rejoinder submissions on behalf of the appellant 11. The submissions made on behalf of the respondent have been duly refuted on behalf of the appellant by way of rejoinder submissions. 11.1. As regards the principles of interpretation in the case of Dilip Kumar & Co. (supra), it has been contended on behalf of the appellant that reference to the said decision is wholly inapposite because that deals with interpretation of an exemption notification and not an incentive provision like Section 80-O, which has been interpreted in J.B. Boda & Co. (supra) or Section 80HHC, which has been interpreted in B. Suresh and Baby Marine Exports (supra). 11.2. As regards the decisions relied upon by revenue on application of Section 80-O of the Act, it has been submitted that reference to the case of B.L. Passi (supra) is completely misplaced because therein, the assessee had not placed any material whatsoever to show that it had rendered any ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the services rendered by the appellant and the entire amount received by it in foreign exchange was covered by Section 80-O of the Act; and that the attempt on the part of the respondent to suggest as if only a part of the amount received by the appellant may be eligible for benefit of Section 80O remains baseless. In the rejoinder submissions, it has also been indicated that reference to the decision of this Court in Continental Construction (supra) by the respondents is irrelevant, as the same has not been relied upon by the appellant. 12. We have given thoughtful consideration to the rival submissions and have examined the records with reference to the law applicable. SECTION 80-O OF THE INCOME TAX ACT, 1961 13. Having regard to the subject-matter and the questions involved, appropriate it would be to take note of the relevant provisions contained in Section 80-O of the Act of 1961 and clause (iii) of the Explanation thereto at the outset. This Section 80-O has undergone several amendments from time to time but, for the present purpose, suffice would be to extract the relevant and pivotal provisions therein, as existing at the relevant time and as applicable to the present ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s VI-A, VII and VIII respectively dealt with the deductions to be made in computing the total income, exempted portion/s of income, and rebates and reliefs but, several of the provisions in these Chapters as also some of the provisions of Chapter XII were recast and were put together in the newly framed Chapter VI-A by the Finance (No.2) Act, 1967 with effect from 01.04.1968 with the result that all such incentives or reliefs were directly provided by way of deductions from the total income itself. In its framework, while Part A of this Chapter VI-A contains general provisions including definitions, Part B thereof provides for deductions in respect of certain payments and Part C provides for deductions in respect of certain incomes in computation of total income. Part CA and Part D making provisions for special class of income or persons were introduced later. 14.2. The aspect germane to the present case is that forerunner to the provision relating to deduction of tax on royalties etc., received from certain foreign companies, was Section 85-C in the Act of 1961, that was inserted by Act No.13 of 1966 w.e.f. 01.04.1966 and was placed in Chapter VII. The said Section 85-C and sever ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tions laid down in the said section. 2. One of the conditions for availability of the tax concession under section 80-O is that the agreement should be approved by the Central Board of Direct Taxes in this behalf. The application for the approval of the agreement is required to be made to the Central Board of Direct Taxes before the 1st day of October of the assessment year in relation to which the approval is first sought. The form of application for this purpose has been standardised and a specimen is given in the Appendix. 3. The object of the provision when it was first introduced as section 85C in the Income-tax Act, 1961, was stated in Board's Circular No.4P (LXXVI-61) of 1966, to be to encourage Indian companies to export their technical knowhow and skill abroad and augment the foreign exchange resources of the country. This was reiterated in Board's Circular No.72 explaining the changes introduced by the Finance (No.2) Act, 1971. Keeping in view the purpose behind this tax incentive and the requirements of the statutory provisions, the Board have evolved the following guidelines for the grant of such approval:-..... *** *** *** (ix) In the case of a composite agreem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... determine the amount of the consideration relatable to the provision of the knowhow or technical services, etc., qualifying for section 80-O. Thus, the benefit of section 80-O could be denied to the entire amount of royalty, commission, fees, etc., receivable under such an agreement. It has since been decided that in such cases approval would be granted by the Board subject to a suitable disallowance for the non-qualifying services, after taking into consideration the totality of the agreement, so the balance of royalty/fees, etc., which is for the services covered by section 80-O, can be exempted." (emphasis in bold supplied) 14.4 There had been several other modifications of Section 80-O from time to time. The relevant aspects noticeable for the present purpose are that the extent of deduction under Section 80-O was also altered from time to time and it even came to be allowed 100 per cent. but, by the Finance Act, 1984, it was reduced to 50 per cent. of the referred income. Then, the requirement of approval by CBDT was substituted by Finance Act, 1988 to the approval by Chief Commissioner or Director General. However, by Finance (No. 2) Act of 1991, even that requirement ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uirement of prior approval of the tax authorities in this regard has been done away with. 37.2 This amendment will take effect from 1st April, 1992 and will, accordingly, apply in relation to the assessment year 1992--93 and subsequent years. **** **** ****" 14.5 There had been several further clarifications concerning Section 80O, as refurbished by the Finance (No. 2) Act of 1991; and one such clarification by the revenue had been by way of Circular No. 700 dated 23.03.1995, which has been strongly relied upon by the learned senior counsel for the appellant. The relevant contents of this circular could also be extracted as follows:- "Circular No. 700, dated 23rd March, 1995 'Deduction under section 80-O of the Income-tax Act, 1961 - Clarification regarding.- Section 80-O of the Income-tax Act,1961, provides for a deduction of 50% from the income of an Indian resident by way of royalty, commission, fees or any similar payment from a foreign Government or enterprise: (a) in consideration for the use outside India of any patent, invention, model, design, secret formula or process, etc.; or (b) in consideration of technical or professional services rendered or agreed to b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... major and important factors related with Section 80-O of the Act of 1961, with reference to its background and its development, make it clear that the tax incentive for imparting technical know-how and akin specialities from our country to the foreign countries ultimately took the shape in the manner that earning of foreign exchange, by way of imparting intellectual property, or furnishing the information concerning industrial, commercial, scientific knowledge, or rendering of technical or professional services to the foreign Government or foreign enterprise, was made eligible for deduction in computation of total income, to the tune of 50 per cent. of the income so received. The finer details like those occurring in Explanation (iii) of Section 80-O were also taken care of by providing that the services envisaged by Section 80-O ought to be rendered outside India but they may be rendered 'from India', while making it clear that the services which are rendered 'in India' would not qualify for such a deduction. The relevant principles for interpretation 15. Having thus taken note of annals and historical perspectives of development of Section 80-O of the Act and the relevant parts ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for deduction with reference to clause 12 of the agreement and with the observation that such premium was clearly a commission or service charge. The Appellate Authority held that what the assessee received was only reimbursement of certain expenses or payments towards commission or brokerage, falling within the ambit of clause 1 of Explanation (baa) to Section 80HHC. However, the ITAT allowed the appeal of the assessee by accepting the stand that the export house premium was includible in 'profits of business' while computing deduction under Section 80HHC and that export house premium was nothing but an integral part of sale price realised by assessee and could not have been taken as either commission or brokerage. The appeal by revenue was dismissed by the High Court while following its earlier decision on the same point. 16.2. In further appeal by revenue, this Court observed, inter alia, with reference to other decisions in Sea Pearl Industries v. CIT Cochin: 2001 (127) ELT 649(SC) and IPCA Laboratory Ltd. v. Dy. Commissioner of Income Tax, Mumbai: (2004) 266 ITR5 21(SC) that Section 80HHC was incorporated with the object of granting incentive to earners of foreign exchange an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e terms of the agreement. The respondent, a supporting manufacturer, admittedly sold the goods to the export house in respect of which the export house has issued a certificate under proviso to sub-section (1). According to the section, the respondent - assessee, in computing the total income be allowed a deduction to the extent of profits referred to in sub-section (1B) derived by the assessee from the sale of goods to the export house. The Appellate Tribunal has arrived at the definite conclusion that the Export House premium is nothing but an integral part of sale price realized by the assessee - a supporting manufacturer from the Export House. The Tribunal further held that the Export House premium cannot possibly be considered to be either commission or brokerage, as a person cannot earn commission or brokerage for himself. The High Court has upheld the findings of the Tribunal. In our considered view, the order of the Appellate Tribunal is based on proper construction of section 80HHC(1A) of the Income-tax Act that the Export House premium is an integral part of the sale price realized by the assessee from the export house. *** *** *** The submission of the appellant ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... noticed in the following:- "46. In the judgment of the two learned Judges in Union of India v. Wood Papers Ltd.: (1990) 4 SCC 256 (hereinafter referred to as "Wood Papers Ltd. case", for brevity), a distinction between stage of finding out the eligibility to seek exemption and stage of applying the nature of exemption was made. Relying on the decision in CCE v. Parle Exports (P) Ltd. : (1989) 1 SCC 345, it was held: (Wood Papers Ltd. case, SCC p. 262, para 6) "6. ... Do not extend or widen the ambit at the stage of applicability. But once that hurdle is crossed, construe it liberally." The reasoning for arriving at such conclusion is found in para 4 of Wood Papers Ltd. case, which reads: (SCC p. 260) "4. ... Literally exemption is freedom from liability, tax or duty. Fiscally, it may assume varying shapes, specially, in a growing economy. For instance tax holiday to new units, concessional rate of tax to goods or persons for limited period or with the specific objective, etc. That is why its construction, unlike charging provision, has to be tested on different touchstone. In fact, an exemption provision is like an exception and on normal principle of construction or interp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ral construction and hold that production of goods by respondent mentioned in the notification were entitled to benefit." 59. The above decision, which is also a decision of a two-Judge Bench of this Court, for the first time took a view that liberal and strict construction of exemption provisions are to be invoked at different stages of interpreting it. The question whether a subject falls in the notification or in the exemption clause, has to be strictly construed. When once the ambiguity or doubt is resolved by interpreting the applicability of exemption clause strictly, the Court may construe the notification by giving full play bestowing wider and liberal construction. The ratio of Parle Exports case deduced as follows: (Wood Papers Ltd. case, SCC p. 262, para 6) "6. ... Do not extend or widen the ambit at stage of applicability. But once that hurdle is crossed, construe it liberally." 60. We do not find any strong and compelling reasons to differ, taking a contra view, from this. We respectfully record our concurrence to this view which has been subsequently, elaborated by the Constitution Bench in Hari Chand case." (emphasis in bold supplied) 17.2. The Constitution B ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omplied with. The mandatory requirements of those conditions must be obeyed or fulfilled exactly, though at times, some latitude can be shown, if there is failure to comply with some requirements which are directory in nature, the non-compliance of which would not affect the essence or substance of the notification granting exemption. *** *** ***" (emphasis in bold supplied) 17.3. In view of above and with reference to several other decisions, in Dilip Kumar & Co., the Constitution Bench summed up the principles as follows:- "66. To sum up, we answer the reference holding as under: 66.1. Exemption notification should be interpreted strictly; the burden of proving applicability would be on the assessee to show that his case comes within the parameters of the exemption clause or exemption notification. 66.2. When there is ambiguity in exemption notification which is subject to strict interpretation, the benefit of such ambiguity cannot be claimed by the subject/assessee and it must be interpreted in favour of the Revenue. 66.3. The ratio in Sun Export case is not correct and all the decisions which took similar view as in Sun Export case stand overruled." (emphasis in bo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ambiguity in the deduction clause, the same is subject to strict interpretation with the result that the benefit of such ambiguity cannot be claimed by the assessee, rather it would be interpreted in favour of the revenue. In view of the Constitution Bench decision in Dilip Kumar & Co. (supra), the generalised observations in Baby Marine Exports (supra) with reference to a few other decisions, that a tax incentive provision must receive liberal interpretation, cannot be considered to be a sound statement of law; rather the applicable principles would be those enunciated in Wood Papers Ltd. (supra), which have been precisely approved by the Constitution Bench. Thus, at and until the stage of finding out eligibility to claim deduction, the ambit and scope of the provision for the purpose of its applicability cannot be expanded or widened and remains subject to strict interpretation but, once eligibility is decided in favour of the person claiming such deduction, it could be construed liberally in regard to other requirements, which may be formal or directory in nature. 21. As noticed, Section 80-O of the Act has a unique purpose and hence, peculiarities of its own. Applying the afor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esumption.11 In this process, if natural, ordinary or grammatical meaning of any word or phrase is available unquestionably and fits in the scheme and object of the statute, the same could be, rather need to be, applied. The other guiding rules of interpretation would be the internal aides like definition or interpretation clauses in the statute itself. Yet further, if internal aides do not complete the comprehension, recourse to external aides like those of judicial decisions expounding the meaning of the words used in construing the statutes in pari materi, or effect of usage and practice etc., is not unknown; and in this very sequence, it is an accepted principle that when a word is not defined in the enactment itself, it is permissible to refer to the dictionaries to find out the general sense in which the word is understood in common parlance. In fact, for the purpose of gathering ordinary meaning of any expression, recourse to its dictionary meaning is rather interlaced in the literal rule of interpretation. This aspect was amply highlighted and expounded by the Constitution Bench of this Court in the case of Commissioner of Wealth-Tax, Andhra Pradesh v. Officer-in-Char ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... through foreign brokers against which, it was receiving a percentage of premium received by the foreign companies as its share of brokerage. With respect to reinsurance business, appellant contacted M/s Sedgwick Offshore Resources Ltd. (London brokers) and furnished all details about the risk involved etc., and confirmation about the assignment was informed to the appellant. Following this, the Indian ceding company handed over the premium to be paid by it to the foreign reinsurance company to the appellant for onward transmission. Appellant approached the RBI showing the amount payable after deducting its brokerage amount; and this amount of brokerage was claimed to be a receipt of convertible foreign exchange without a corresponding foreign remittance with reference to the provision contained in Section 9 of the Foreign Exchange Regulation Act. However, the respondent revenue took the stand that the agreements of the appellant could not be approved for the purpose of Section 80-O of the Act, for the income having been generated in India and not received in foreign currency. This was unsuccessfully challenged by the assessee before the High Court and hence, the matter was in appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rt observed that such "two way traffic" was unnecessary because in the end result, the income was generated in India in foreign exchange in a lawful and permissible manner. Hence, this Court concluded on the matter while disapproving the stand of the revenue as follows (at p. 281 of ITR):- "The facts brought out in this case are clear as to how the remittance to the foreign reinsurance company is made through the Reserve Bank of India in conformity with the agreement between the appellant and the foreign reinsurers, and that the remittance statement filed along with annexure "A" which evidences that the amount due to the foreign reinsurers as also the brokerage due to the appellant and the balance due to the foreign reinsurers is remitted (and expressed so) in dollars. It is common ground that the entire transaction effected through the medium of the Reserve Bank of India is expressed in foreign exchange and in effect the retention of the fee due to the appellant is in dollars for the services rendered. This, according to us, is receipt of income in convertible foreign exchange. It seems to us that a "two way traffic" is unnecessary. To insist on a formal remittance to the foreig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter alia, that the appellant 'furnished all the details about the risk involved, the premium payable, the period of coverage and the portion of the risk which is sought to be reinsured'. Without entering into further details of the activities of the said assessee, suffice it to say for the present purpose that the submissions on behalf of the appellant, as if the task of a broker of reinsurance is not technical in nature, could only be rejected as being not in conformity with the peculiarities of insurance business. In any case, as observed hereinbefore, this aspect does not require further elaboration because of entirely different question involved and decided by this Court in J.B. Boda & Co. E.P.W. Da Costa 25. Apart from the case of J.B. Boda & Co., much sustenance is sought on behalf of the appellant with reference to the decision in E.P.W. Da Costa (supra), which was a decision rendered by the Delhi High Court and was, admittedly, not appealed against. 25.1. Facts of the case of E.P.W. Da Costa (supra) had been that the British Broadcasting Corporation ('BBC') was interested in knowing how its broadcasts were received by listeners in India and hence, engaged the services of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ysis is a matter of specific branch of science. In an elaborate discussion as regards the science of statistics with reference to the activity of the assessee, the Court, inter alia, observed as under (at pp. 754-755 of ITR):- "The petitioner issues questionnaire to the listeners and the information gathered from the answers to the questionnaire is compiled in the form of various statistical tables. According to Webster's New International Dictionary, Vol. III, statistics is a science dealing with the collection, analysis, interpretation and presentation of masses of numerical data and that it is a branch of mathematics. It would appear, therefore, that the statistical tables compiled by the petitioner after analysing masses of numerical data are commercial or scientific knowledge which is made available to the BBC. For, the word " science " is also a very general word. Since statistics is a science according to Webster's, even in a more particular sense, the statistical information may be said to be scientific knowledge within the meaning of s. 80-O..........If commercial or scientific knowledge is confined to mean the abstract exposition of commercial or scientific theo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant claimed deduction under Section 80-O of the Act with reference to remuneration received on account of such services rendered to the foreign enterprise. The AO disallowed the claim of the appellant for deduction with the finding that the services in question do not qualify for deduction. However, the Appellate Authority ruled in favour of the appellant but ITAT reversed the order of the Appellate Authority and the decision of ITAT was upheld by the High Court. 26.2. In further appeal, this Court briefly took note of the background of insertion of Section 80-O in the Act of 1961 in place of the former Section 85-C with the object of giving fiscal encouragement to Indian industries to provide technical know-how and technical services to newly developing countries and foreign companies to augment the foreign exchange of our country and to establish the reputation of Indian technical know-how for foreign countries. Examining the facts of the case relating to the assessment year 1997-98, this Court found that though the appellant had exchanged several letters with its principal, but the information was in the form of some blueprints and there was nothing on record to show as to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sistance rendered to the Corporation in the form of blueprints, its unavailability creates a doubt and burden of proof is on the appellant to prove that on the basis of those blueprints, the Corporation was able to start up their business in India and he was paid the amount as service charge. Further, with regard to the remuneration to be paid to the appellant for the services rendered, in terms of the letter dated January 25, 1995, it has been specifically referred that the remuneration would be payable for the commercial and industrial information supplied only if the business plans prepared by the appellant results positively. Sumitomo Corporation will pay to PASCO International service charges equivalent to 5 per cent. of the contractual amount between Sumitomo and its customers in India on sales of its products so developed. From a perusal of the above, it is clear that the appellant was entitled to service charges at the rate of 5 per cent. of the contractual amount between Sumitomo Corporation and its customers in India on sales of its products so developed but there is nothing on record to prove that any product was so developed by the Sumitomo Corporation on the basis of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eduction under Section 80-O, the first is that the service should be rendered outside India and the second one is that payment for such services should be received in convertible foreign exchange in India. In this case only one condition is satisfied, ie, receipt of consideration in convertible foreign exchange and so far as rendering of service is concerned, the entire service is rendered by the assessee in India and no services is rendered outside India. Exporter ships the goods only with assessee's certificate of fitnesses so that foreign buyer cannot reject the goods. Assessee's communication with foreign buyers in our view does not amount to rendering of service outside India." Continental Construction Ltd. 28. As noticed, in the present case, in the very first place, the Assessing Officer, while dealing with the assessment in question, raised the queries and sought clarifications from the appellant with reference to the enunciations in the decision of this Court in the case of Continental Construction (supra). Then, the High Court has also noticed in its impugned judgment that this was one of the decisions relied upon by the learned counsel for the assessee. A comment has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eduction. This Court pointed out that the contracts of the type envisaged by Section 80-O are usually very complex and cover a multitude of obligations and response; and it is not always possible for the parties to dissect the consideration and apportion it to various ingredients or elements. This Court, however, pointed out that consolidated receipts and responses were always apportionable. In the context, as regards the activities of the said assessee and entitlement under Section 80-O of the Act, this Court observed that the contracts in question obliged the assessee to make available information and render services to the foreign Government of the nature outlined under Section 80-O and therefore, it was the duty of the revenue and right of the assessee to see that the consideration legitimately attributable to such information and services is apportioned and the assessee is given the benefit of deduction under Section 80-O to the extent of such consideration. This aspect of the matter, extensively dealt with by this Court, could be usefully extracted as under (at p. 119 of ITR): - "In our view, neither of the propositions contended for by Sri Ahuja can be accepted as correct. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch consideration." (emphasis in bold supplied) 28.3 It is also significant to notice that in Continental Construction, this Court took note of the aforesaid circulars of CBDT dated 23.12.1975 and 30.04.1979 and delineated the functions of the Assessing Officer with reference to the claim for deductions under Section 80-O even when approval had been granted by the Board in the following passage (at p. 133 of ITR) :- "We should, however, make it clear that our conclusion does not mean the deprivation of all functions of the Assessing Officer while making the assessment on the applicant. The Officer has to satisfy himself (i) that the amounts in respect of which the relief is claimed are amounts arrived at in accordance with the formula, principle or basis explained in the assessee's application and approved by the Board; (ii) that the deduction claimed in the relevant assessment year relates to the items, and is referable to the basis, on which the application for exemption was asked for and granted by the Board; (iii) that the receipts (before the 1975 amendment) were duly certified by an accountant or that, thereafter, the amounts have been received in or brought in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that there were no supporting materials for the claim, we directed the assessee's counsel to produce the materials, if any, available for our perusal. The learned counsel for the assessee, though had produced the explanation of the assessee dated March 28, 1998, he was unable to produce any materials to sustain any of the contentions made in the said letter. In the absence of any materials to show that what was passed on to the foreign enterprise was the information concerning with commercial or technical or scientific aid, merely because an agreement is entered into between the assessee and the foreign enterprise, we are not inclined to accept the claim of deduction under section 80-O of the Act. Accordingly, the second substantial question of law is answered in favour of the revenue and against the assessee. The tax case appeal is allowed in part. No costs." 30. From the decisions aforesaid, it could be immediately culled out that for bringing any particular foreign exchange receipt within the ambit of Section 80-O for deduction, it must be a consideration attributable to information and service contemplated by Section 80-O; and in case of a contract involving multiple or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t the appellant was merely a procuring agent and it was his responsibility to ensure that proper goods are supplied in proper packing to the satisfaction of the principal. All other services or activities mentioned in the agreements were only incidental to its main functioning as agent. Significantly, the payment to the appellant, whatever label it might have carried, was only on the basis of the amount of invoice pertaining to the goods. There had not been any provision for any specific payment referable to the so-called analysis or technical guidance or advice. Viewed from any angle, the services of the appellant were nothing but of an agent, who was procuring the merchandise for its principals; and such services by the appellant, as agent, were rendered in India. Even if certain information was sent by the assessee to the principals, the information did not fall in the category of such professional services or information which could justify its claim for deduction under Section 80-O of the Act. In other words, in the holistic view of the terms of the agreements, we have not an iota of doubt that the appellant was only a procuring agent, as rightly described by the High Court. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not supply such particulars. As noticed, the High Court posed a pointed query to the learned counsel appearing for the appellant as to whether all the services mentioned in the agreement would come within the purview of Section 80-O. The cryptic response to this query on behalf to the appellant had been that 'if the recipient of services is situated outside, all the services rendered by the assessee in terms of the agreement come within the sweep of the provision'. It was specifically contended on behalf of the appellant that establishing 'which of its services qualifies for the deduction is of no consequence, rather unnecessary'. In our view, this response was not in conformity with the requirements of Section 80-O of the Act, as explained and applied by this Court in Continental Construction and in B. L. Passi (supra) as also as applied by Madras High Court in Khursheed Anwar (supra). Rather, this stand, in our view, puts the final curtain on the appellant's case because most of the services in the agreements in question were those of an agent ensuring supply; and if any part of the services co-related with Section 80-O, the particulars were of utmost significance and were funda ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecision. Even in this regard, the questions relevant and germane to the enquiry were not even gone into inasmuch as, it was not examined as to what and which part of the consideration was attributable to the services envisaged by Section 80-O of the Act, which were rendered from India. Therefore, the findings of the Appellate Authority and ITAT, being based on irrelevant considerations while ignoring the relevant aspects, were neither of binding nature nor could have been decisive of the matter. Hence, neither anything turns upon the submissions made on behalf of the appellant with reference to the decision in K. Ravindranathan Nair (supra) nor this aspect requires any further discussion. 37. In our view, the High Court has rightly analysed the entire matter with reference to the relevant questions and has rightly proceeded on the law applicable to the case. The impugned judgment calls for no interference. The appellant M/s Laxmi Agencies - the appeal arising out of SLP (Civil) No.23699 of 2016. 38. This appeal involves similar claim of the other assessee firm M/s Laxmi Agencies, said to be engaged in similar business of rendering services to foreign buyers of Indian marine prod ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ad entered into agreement with various foreign enterprises for render the following services. Article 2 of the agreement entered into with Neptune Fisheries Ind. USA reads as under:- (a) Locating reliable source of quality and assured supply of frozen sea-foods/marine products for the purpose of import by "NEPTUNE" and communicate its expert opinion and advice to the NEPTUNE; (b) In addition to the above services rendered by 'Laxmi' it will also keep a close liason with agencies such as ELA/LLOYDS/SGS especially for organolotic/acteriological analysis and communicate the result of the inspection along with its expert comments and advice. (c) Making available full and detailed analysis of the sea food supply situation and prices; (d) To advise NEPTUNE and keep them informed of the latest trends/processes applications in manufacturing and of all valuable commercial and economic information about the markets, Government Policies, exchange fluctuations, banking laws which will directly or indirectly assist "NEPTUNE" to organize, develop control or regulate their import business from India. (e) To negotiate and finalise the prices for India Exporters of frozen marine pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the specified class of goods or merchandise. 2. Note: In the papers placed on record, the name of this foreign company has been mentioned both as 'GELAZUR' and 'GELAZURE'. We have retained the particulars in extractions as stated in the respective papers but in our discussion, have referred it as 'GELAZUR'. 3. It may, in the passing, be observed that one of the preliminary points raised before the High Court by the assessees had been on the maintainability of appeals by the revenue in the face of Circular No. 21/2015 dated 10.12.2015 due to low-tax effect and no likelihood of cascading effect because the provision having been amended subsequently. The High Court did not agree with the assessees on this aspect while observing that ITAT has passed all the orders by following its initial order relating to ITA No. 131 of 2002; and the order impugned has a cascading effect. This aspect of the matter does not concern us in these appeals and hence, need no further comment. 4. This extraction is after omitting the other parts of Section 80-O of the Act, including its Provisos and other clauses of Explanation, being not relevant for the question at hand. 5. For the purpose of reference ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessment year, there shall be allowed a deduction from such income of an amount equal to sixty per cent. thereof, in computing the total income of the assessee." 7. In Sun Export Corpn. v. Collector of Customs, (1997) 6 SCC 564 the Court had stated the law as follows (at page 568) : "Even assuming that there are two views possible, it is well settled that one favourable to the assessee in matters of taxation has to be preferred." 8. As tersely put by this Court in Liberty India v. CIT: (2009) 9 SCC 328, the Act of 1961 broadly provides for two types of tax incentives, namely, investment-linked incentives and profit-linked incentives. Chapter VI-A which provides for incentives in the form of tax deductions essentially belong to the category of "profit-linked incentives" (at p. 339). 9. Of course, there may be other objectives also like supporting any particular class of persons e.g., those contained in Section 80TTB of the Act (for deduction in respect of interest on deposits in case of senior citizen) or Section 80U of the Act (for deduction in case of differently abled person). 10. In Principles of Statutory Interpretation by Justice G.P. Singh (14th edn.at p. 91) this ele ..... X X X X Extracts X X X X X X X X Extracts X X X X
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