TMI Blog1981 (5) TMI 13X X X X Extracts X X X X X X X X Extracts X X X X ..... give the relevant clauses of the said agreement only. The relevant clauses are as under : " And Whereas, the Hotel Company wants to construct and add approximately 190 (one hundred and ninety) more rooms in the Soaltee and also to obtain contracts for airlines catering (all the aforesaid activities of the Hotel Company, namely, Soaltee Hotel and the additions therein as described hereinafter, the restaurant at Tribhuvan Airport, Kathmandu, and the various airlines catering contracts are described, hereinafter collectively as 'the Hotel') ; And Whereas, Oberoi has a name and worldwide reputation in the hotel field and is experienced in and has the technical skill for providing professional, architectural, engineering and decorating service, and is qualified to assist in planning, designing, constructing, furnishing and equipping of hotels; And Whereas, Oberoi is engaged in the development, leasing and operation of hotels (said hotels being hereinafter referred to as 'the Oberoi group') in the interest of facilitating international travel and trade; And Whereas, in view of the name and tradition, experience and skill of Oberoi in the hotel world for profitable operation o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter provided, shall pay or reimburse Oberoi in full for all costs and expenses of the said training as herein provided, and for the cost of all advertising, promotion literature, travel and business entertainment, including celebrations and ceremonies, incurred prior to or concurrently with the beginning of full operation of the Hotel by Oberoi. All costs, if any, incurred by Oberoi shall be paid by the Hotel Company within thirty (30) days thereafter. III. Duration of the term The terms of this agreement shall expire at midnight fifteen years from the date Oberoi starts operating the Hotel. This agreement is subject to an extension for a further period of (5) five years at the option of Oberoi on the same terms and conditions as contained herein. V. Operation of the Hotel Oberoi covenants to use the Hotel solely for the operation of a first class hotel on international standards and all activities in connection therewith which are customary or usual for such operation. It is understood that Oberoi shall have, within the terms and provisions hereof, absolute discretion in the operation of the Hotel but the same shall always be and be deemed to be owned by the Hotel Comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... year, final instalment shall be payable to the Hotel Company based on the Hotel's gross operating profit for the entire financial year as certified by joint auditors of the Hotel Company and Oberoi after deducting therefrom the amount of the preliminary instalment/instalments paid. Oberoi shall similarly draw its share of 15% (fifteen per cent.) of the gross operating profit for the financial year after deducting the preliminary instalment. In the event that the preliminary instalment in any financial year shall exceed the amount due for the entire financial year both the parties shall refund the amount of such excess to the Hotel within 90 (ninety) days after the close of the financial year. (b) The first financial year shall be the period between the commencement date of the operation of the Hotel by Oberoi and the following July 15. It the commencement of the term falls in the fourth quarter in any financial year, then the first instalment shall be calculated and paid for the period from the commencement of the term to the end of the first six months in the next subsequent financial year. (c) After the completion of the proposed new wing and with the commencement of its op ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ilities A. Oberoi shall not without the concurrence of the Hotel Company spend more than 3% of the total sales of the Hotel on the normal advertisement expenses of the Hotel. This expenditure shall be a prior charge to the gross operating revenue in arriving at gross operating profit. B. For worldwide promotion of the Hotel, the Hotel Company desires and Oberoi accepts that Oberoi shall in any manner it regards fit and proper make necessary arrangements with any company or companies, agency or agencies in any one or more countries for specialised hotel services and worldwide reservation facilities. Oberoi is authorised to pay to such company or companies, agency or agencies as described above a total amount of 3% (three per cent.) of the total sales of the hotel per annum as mentioned in Section A of Art. VIII hereof and such promotion expenses shall be a prior charge to gross operating profits. The Hotel Company shall undertake to obtain necessary sanction from appropriate authority or authorities in connection with the remittance of the amounts mentioned hereinabove in convertible foreign currency. X. Capital Oberoi will at the time of taking over the operation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... receipt of such further notice, either party hereto shall have requested arbitration as provided for in art. XVIII of this Agreement, in which event, this Agreement shall remain in force and effect pending the decision in such arbitration proceedings ....... XVII. Arbitration Any and all disputes and controversies arising out of or in any manner relating to the performance of this agreement which cannot be settled by mutual agreement Of the parties hereto shall be submitted to arbitration of the International Chamber of Commerce. The decision of the arbitrator/arbitrators shall be binding and judgment upon the award rendered by them may be entered in any competent court in Nepal. The obligation of the parties in respect of this agreement shall continue during the arbitration proceedings and no payment due to be made to either party other than those under dispute, shall be withheld on account of such proceedings.. XXI. Successors and assigns All the terms and provisions of this agreement shall be binding upon and shall enure to the benefit of the parties hereto and their respective successors and assigns. Either party to this agreement shall have a right to assign this a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d reasonable attorney's fees incurred in defending such claims, which may be asserted against Oberoi by reason of any action by either of them in accordance with this agreement. Nor shall Oberoi be liable to the Hotel Company for any action taken or omitted to be taken by either of them except for losses caused by their own wilful misconduct or gross negligence. B. It is agreed that Oberoi shall have full authority to file, institute, conduct and contest legal proceedings of any nature for and on behalf of the Hotel and to engage lawyers for conducting the aforesaid cases. For the due performance of their obligations under this agreement Oberoi shall be competent to execute any deeds or documents and to make or receive payments in connection thereof. The Hotel Company shall authorise Oberoi through a power of attorney to act on behalf of the Hotel Company and the Hotel on all matters concerning the operation of Hotel excluding transactions at Government level. XXVIII. Title of the immovable property The Hotel Company shall not pass the title of the immovable property of the Hotel or in any way alienate the same during the subsistence of this agreement or the renewal thereo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he rendering of technical services. (2) What is being given under the agreements can also not be viewed formation concerning industrial, commercial or scientific knowledge or skill. It is not as if some information is being supplied by you which is made use of by the foreign parties. Under the two agreements, you are yourself functioning in the foreign countries. (3) Though your name is being utilised by the two foreign hotels, and the fee received for the use of your trade name would be covered by the provisions of section 80-0 yet the amount relatable to this aspect of the total services rendered under the two agreements would be so small that it is not easy to quantify the same for purpose of section 80-0 of the Incometax Act, 1961. " Dissatisfied with the aforesaid order of respondent No. 1, the petitioner-company has filed the present petition under art. 226 of the Constitution of India. The question for decision in this petition is whether the agreements in question satisfy the requirements of s. 80-O of the I.T. Act, 1961. Section 80-0 is as follows: " 80-0. Where the gross total income of an assessee being an Indian company includes any income by way of royalty, com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of s. 80-0 were as follows (p. 316): (1) The provisions of deduction applies only to royalty, commission, fees or any similar payment. These payments are received by a company either for supplying information or for rendering technical services. This postulates that the Indian company does not become a part of the foreign enterprise. If the two merge together then the identity of the Indian company would be lost and what would be paid would be not royalty, commission, or fees but rather a share in the profits. (2) The identity of the Indian company being distinct from that of foreign enterprise, the Indian company must not run the foreign company. If it does so it is difficult to separate the management function exercised by the Indian company from the day to day working of the foreign company. (3) This necessity of the Indian company having a separate identity explains why the meaning of " technical services " to be rendered by an Indian company under section 80-0 would have to be different from the meaning of technical services rendered by an individual. An individual would not become a part of the company under which he is serving. He would remain an employee. He cannot ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as in sense carrying on the day-to-day management of the hotel at Nepal, it was also rendering important technical services such as engineering services, laundry services, architectural services, interior decoration services, maintenance of cold storage, maintenance of generating sets or boiler rooms. Besides these services, there was the service of training the staff for the foreign company. The said staff was recruited in Nepal and trained by the petitioner-company and such services were particularly technical in nature. The question really boils down to determining whether the services which are being rendered by the petitioner to the company in Nepal are distinguishable from the services which were being rendered in the case of J. K. (Bombay) [1979] 118 ITR 312 (Delhi). Can it be said that the services being rendered by the petitioner are similar to or almost the same as the services which were being rendered by the managing agents in the case of J. K. (Bombay). It seems that the passage appearing in the case of 1. K. (Bombay) are somewhat widely stated because it was quite new type of case which did not visualise all the possible situations. We are, therefore, to find out what ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... have had this training. This is not the case in a managing agency. Anybody can be a managing agent. He does not have to have any technical knowledge for the purpose. Everybody, however, cannot operate and manage a hotel, there are so many branches of hotel management which require experts only. For instance, decoration of rooms, making of menu, making arrangements for guests at large functions, cooking of the special quality food which is expected to be supplied at such hotels ; making provisions for the accommodation of customers; getting customers from abroad to visit, making commercial arrangements with others, and so on. All these and many other services are requirements for ensuring that the necessary number of experts fill the hotel and also serve to give a good name to the hotel as regards its comforts and the food and other services supplied in such a hotel. But, this is not at all akin to the services that a managing agency renders to the managed company. Those services are of a purely commercial nature which cannot to described as technical. In fact, in most examples of managing agency in India before the system was abolished, the managing agent was the managing agent onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... resent case is distinguishable from the two cases, namely, the case of J. K. (Bombay) [1979] 118 ITR 312 (Delhi) and Ghai Lamba Catering Services [1980] 124 ITR 301 (Delhi) referred to above, inasmuch as the petitioner-company is not managing the foreign companies but is only engaged in managing particular undertakings of the said foreign companies. The petitioner-company has no say in the management of the affairs of the two foreign companies and the petitioner-company does not control the utilisation of the profits or investments or other assets of the foreign companies. The petitioner-company does not participate in the net profits of the foreign company which was the case in both the cases referred to above. It has not been disputed in the counter-affidavit that the petitioner-company has not made any capital assets or acquired any interest in the capital assets or interest in the shareholding of the foreign company. All that the petitioner-company is entitled to is a percentage of gross operating profits which is different from sharing of commercial profits. The agreement with the Nepal Company is for a fixed period of 15 years, which can be extended at the most for a further ..... X X X X Extracts X X X X X X X X Extracts X X X X
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