TMI Blog1996 (10) TMI 70X X X X Extracts X X X X X X X X Extracts X X X X ..... Taxes dated March 11, 1986, declining to approve the agreements of the appellant with Sedgwick Offshore Resources Ltd., London, for the purposes of section 80-O of the Income-tax Act, are improper and illegal. We declare so. We direct the respondent to process the agreements in the light of the principles laid down by us hereinabove. The appeal is allowed. - CIVIL APPEAL NO. 933 OF 1989 - - - Dated:- 30-10-1996 - Judge(s) : B. P. JEEVAN REDDY., K. S. PARIPOORNAN JUDGMENT The judgment of the court was delivered by K. S. PARIPOORNAN J. --- The petitioner in Writ Petition No. 3086 of 1987 in the High Court of Delhi, has filed this appeal against the judgment of the High Court dated October 29, 1987. The short matter that arises for consideration in this appeal is the interpretation to be placed on section 80-O of the Income-tax Act, 1961. The appellant is a private company. It is engaged in the brokerage business as reinsurance brokers. It receives a commission at 3 to 6 per cent., relating to maritime and other insurance. The respondent is the Central Board of Direct Taxes, Government of India, New Delhi. In respect of insurance risk covered by Indian or foreign insuranc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ice to the appellant to approach the Reserve Bank of India for necessary permission to remit in U. S. dollars the reinsurance premium abroad. Thereafter, the appellant writes to the Reserve Bank of India enclosing the remittance application in Form " A-2 " as prescribed by the Exchange Control Manual together with the statement and auditor's certificate. These can be seen from annexure " A ". A statement is also attached thereto, which shows that the gross amount of the reinsurance premium to be remitted in U. S. dollars, under the heading " Balance of account " and the amount of brokerage also is mentioned in U. S. dollars, earned by the appellant on the reinsurance premium to be so remitted under the heading " Brokerage ". While in the normal course, the entire premium should be remitted abroad to the foreign parties and then the foreign reinsurers would remit the commission back to the appellant, who supplied the information, under the procedure adopted and approved by the Reserve Bank of India, the appellant remits the amount after deducting the brokerage, which is also expressed in foreign exchange. Thus, the appellant entered into an agreement with Sedgwick Offshore Resources ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ue to you U. S. $ 1,060,891.68 Less : Brokerage due by you U. S. $ 71,004.48 Net balance due to you U. S. $ 989,887.20" (emphasis supplied). By communication dated March 11, 1986, the respondent regretted their inability to approve the agreement submitted by the appellant for the purposes of section 80-O of the Income-tax Act for the reason " that income under the agreement is generated in India and is not received in convertible foreign exchange as required under the provisions of section 80-O." The communications in that regard are evidenced by annexure " C " series dated March 11, 1986. It is further seen that the steps taken by the appellant to review the annexure " C " proceedings were futile vide annexure " D ". It is thereafter the appellant moved the High Court of Delhi in Civil Writ No. 3086 of 1987. A Bench of the High Court of Delhi by order dated October 29, 1987, dismissed the said writ petition, stating thus : " The case of the petitioners is that they had to remit about one million dollars in consideration of certain services which they had conducted on behalf of the foreign company and by way of their fees, they retained the foreign exchange worth six la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction is made to the Chief Commissioner or, as the case may be, the Director-General in the prescribed form and verified in the prescribed manner before the 1st day of October of the assessment year in relation to which the approval is first sought : . . Explanation. -- For the purposes of this section,--- (i) ' convertible foreign exchange ' means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the law for the time being in force for regulating payments and dealings in foreign exchange ; (ii) ' foreign enterprise ' means a person who is a non-resident." (emphasis supplied). It is common ground that remittance to the foreign insurance company on behalf of the Indian insurance company, as also the receipt of the amount of brokerage by the Indian company, should be done only with the concurrence of the Reserve Bank of India. The remittance application along with the relevant details and the statement (annexure " A "), shows the amount due to the foreign company in U. S. dollars as also the brokerage due to the appellant in U. S. dollars and adjustment is made accordingly. The appellant i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion 80-O of the Income-tax Act will apply to cases like the present one where the commission earned is for the supply of such information as is received by a foreign enterprise, which instead of getting the gross commission first and then remitting back to persons like the appellant its brokerage, permits the appellant to retain the amount due and remit only the net amount. It was argued that the financial and the accounting effect is the same and the mere fact that the amount is retained in India with the approval of the foreign reinsurers and the Reserve Bank of India would not take away the basic feature, that the source of income of the appellant was the agreement with the foreign reinsurers and it is in fact received from the foreign reinsurers for services rendered. In other words, it is contended that the transaction contemplated by section 80-O of the Income-tax Act need not necessarily be achieved by the form of external remittance followed by internal remittance and the legal nature and the effect of the transaction will remain the same when the amount is credited straightaway by making adjustments instead of adopting a two-way traffic. The appellant's counsel also brough ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In case of receipt of brokerage by reinsurance agent, operating in India on behalf of principals abroad, from gross premia before remittance to his foreign principals. Circular No. 731, dated 20-12-1995 : 1. Under the provisions of section 80-O of the Income-tax Act, 1961, an Indian company or a non-corporate assessee, who is resident in India, is entitled to a deduction of fifty per cent. of the income received by way of royalty, commission, fees ; etc., from a foreign Government or foreign enterprise for the use outside India of any patent, invention, model, design, secret formula or process, etc., or in consideration of technical or professional services rendered by the resident. The deduction is available if such income is received in India in convertible foreign exchange or having been converted into convertible foreign exchange outside India, is brought in by or on behalf of the Indian company or aforementioned assessee in accordance with the relevant provisions of the Foreign Exchange Regulation Act, 1973, for the time being in force. 2. Reinsurance brokers, operating in India on behalf of principals abroad, are required to collect the reinsurance premia from ceding i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmal remittance to the foreign reinsurers first and thereafter to receive the commission from the foreign reinsurer, will be an empty formality and a meaningless ritual, on the facts of this case. On a perusal of the nature of the transaction and in particular the statement of remittance filed in the Reserve Bank of India regarding the transaction, we are unable to uphold the view of the respondent that the income under the agreement is generated in India or that the amount is one not received in convertible foreign exchange. We are of the view that the income is received in India in convertible foreign exchange, in a lawful and permissible manner through the premier institution concerned with the subject-matter -- the Reserve Bank of India. In this view, we hold that the proceedings of the Central Board of Direct Taxes dated March 11, 1986, declining to approve the agreements of the appellant with Sedgwick Offshore Resources Ltd., London, for the purposes of section 80-O of the Income-tax Act, are improper and illegal. We declare so. We direct the respondent to process the agreements in the light of the principles laid down by us hereinabove. The appeal is allowed. There shall be ..... X X X X Extracts X X X X X X X X Extracts X X X X
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