TMI Blog2004 (8) TMI 324X X X X Extracts X X X X X X X X Extracts X X X X ..... ported at 206 ITR 548 (Bom.)." 4. Briefly stated, the facts of the case, as relevant to the aforesaid ground of appeal, are as follows: The assessee-firm, during the previous year relevant to the assessment year under appeal, i.e., 1992-93, was engaged in the business of packing, moving, clearing and forwarding of household goods in India and outside India. Ground No. 1 is concerned with the nature of the activities of the assessee involving clearing and forwarding business done outside India and not with the activities of the assessee within the country. Hence, we shall deal with the nature of the activities of the assessee that were conducted outside India. During the relevant previous year, the assessee used to raise composite bills charging its customers for movement and transportation of goods including their packing/unpacking, loading/unloading, actual transportation, clearance of various formalities involved en route from the point of their origin in India to the ultimate point of their destination abroad. This is evident from the copies of two bills annexed to the assessment order, by way of illustration, which are not disputed. Thus, the activities performed by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arned CIT(A). He also referred to his written submissions filed before us. His submissions, in brief, were the same as mentioned by the Assessing Officer in his assessment order. He has relied upon the following decisions: (i) CIT v. Manmohan Das [1966] 59 ITR 699 (SC). (ii) G.K. Choksi Co. v. CIT [2001] 252 ITR 863 (Guj.). (iii) CIT v. International Clearing Shipping Agency [2000] 242 ITR 426 (Mad.) which has quoted, with approval, the observations of the Hon'ble Supreme Court in Cochin Shipping Co. v. ESI Corpn. 81 FJR 387 as follows: "The assistance rendered by the clearing and shipping agent to those who import or export, by attending to the documentation and ensuring the clearance of goods, cannot be regarded as profession based on intellectual attainments or personal service rendered on account of possession of specialized skill and knowledge based on higher learning and intellectual skill." (iv) CIT v. Jeevanlal Laloobhai Co. [1994] 206 ITR 548 (Bom.) for the proposition that the activities of a firm of clearing, forwarding and shipping agents does not amount to profession. (v) Eastman Consultants (P.) Ltd. v. CBDT [1981] 132 ITR 637 (Bom.) for the propositio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fessional services' contemplated by section 80-O were comprehensive enough to take within their ambit the services rendered by the assessee-firm to its customers. (iv) The assessee firm had received convertible foreign exchange in consideration of the services rendered by it to its customers. 7. In support of her submissions, Ms. Vissanji relied upon the following decisions: (i) Order dated 5th November, 2003 passed by the Tribunal in Tristar Consultants, ITA No. 2857/Mum./98 for the interpretation of the term 'professional services' and for the proposition that the services rendered by a recruitment agent were professional services within the meaning of section 80-O. (ii) CIT v. R. Jayalakshmi [1999] 240 ITR 773, 776 (Mad.) for the proposition that the terms 'technical services' and 'professional services' were terms of comprehensive meaning. (iii) Blue Dart Express Ltd. v. JCIT [197O] 75 ITD 414. (iv) Continental Construction Ltd. v. CIT [1992] 195 ITR 81 (SC) for the proposition that fees for technical services include consideration for rendering of any managerial, technical or consultancy services and also for the proposition that the services rendered through mediu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the assessee in accordance with any law for the time being in force or regulating payments and dealings in foreign exchange, there shall be allowed, in accordance with and subject to the provisions of this section, deduction of an amount equal to fifty per cent of the income so received in, or brought into India, in computing the total income of the assessee: Provided that such income is received in India within a period of six months from the end of the previous year, or where the Chief Commissioner or Commissioner is satisfied (for reasons to be recorded in writing) that the assessee is, for reasons beyond his control, unable to do so within the said period of six months, within such further period as the Chief Commissioner or Commissioner may allow in this behalf. 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 dealing in foreign exchange; (ii) "foreign enterprise" means a person who is a non-resident; (iii) services rendered or a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... son may have some knowledge of law, does not, in my view, determine whether or not the particular-business carried on by him is a profession. Take a case that I put during the argument, of a forwarding agent. From the nature of his business he has to know something about railway Acts, about the classes of risk that are run in sending goods in a particular way, and under particular forms of contract. That may or may not be sufficient to make his business a profession. Other persons may require rather more knowledge of law, and it must be a question of degree in each case. Take the case before Rowlatt J. of a photographer: Cecil v. Inland Revenue Commissioners, 36 Times L.R. 164. Art is a matter of degree, and to determine whether an artist is a professional man again depends, in my view, on the degree of artistic work that he is doing. All these cases which involve questions of degree seem to me to be eminently questions of fact, which the Legislature has thought fit to entrust to the Commissioners, who have, at any rate, from their varied experience, at least as much knowledge, if not considerably more, of the various modes of carrying on trade than any judge on the bench." His L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ices to developing countries and not the mere augmentation of foreign exchange resources; and (ii) Liberal construction will be made wherever it is possible to be made without impairing the legislative requirement and the spirit of the provision. The Hon'ble Court held: "Although there is no indication in section 80-O regarding the supply of technical know-how or rendering technical services to newly developing countries, yet it may be reasonable to infer from the said speech of the Finance Minister that at the time when section 85C was introduced in the Act, one of the objectives was to supply technical know-how and render technical services to newly developing countries. Foreign exchange can be earned by various other modes, but that will not, in all cases, entitle the assessee to a deduction of income-tax. Section 80-O, as it stood during the relevant period with which we arc concerned, grants cent per cent deduction of tax. In the context of such deduction of tax it will not be unreasonable to presume that the principal objective of section 80-O is to supply technical know-how or render technical services to developing countries. In the circumstances, the contention of the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncluding information concerning industrial, commercial or scientific knowledge, experience or skill. Section 80-O is also applicable in the case of receipt of consideration for technical services rendered outside India but then again, this income which is received must necessarily be by way of royalty, fee or commission or a similar payment." 14. At this stage, it may be useful to have a broad conceptual framework of 'service', 'professional service' and 'technical service' and then to see whether any and every skilled service will qualify to be called 'professional' or 'technical' service for the purposes of section 80-O. The term 'service', as relevant for the purpose in hand, has been defined at page 1372 in Black's Law Dictionary Seventh Edition - as "5. An intangible commodity in the form of human effort, such as labour skill or advice ." According to P. Ramanatha Aiyer's 'The Law Lexicon' - Reprint 2002 - General Editor: Justice Y.V. Chandrachud, one of the several meanings of the term 'service' as given at p. 1748 is as follows:" 1. The action of serving, helping or benefiting; conduct tending to the welfare or advantage of another." From the aforesaid, it is clear that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pation requires a high level of training and proficiency". First element of 'professional service' is that it requires is a purely intellectual skill and not manual skill. Then, we have the dictum in Curries case according to which, importance is also to be attached, while judging whether a profession is exercised or not, to the fact that the particular man is a member of an organized professional body with a recognized standard of ability enforced before he can enter it and a recognized standard of ability enforced while he is practicing it. This aspect assumes greater importance in certain situations. For example, the services rendered by a lawyer to his client by virtue of his enrolment with the Bar Council will no doubt be a professional service. But when the same lawyer is elevated and occupies a high judicial office discharging the judicial functions of the State, can it be said that he is still rendering professional service? The answer lies in the fact that, as a lawyer, he was rendering 'professional service' by virtue of his enrolment with a professional body, i.e., the Bar Council and in the further fact that he was rendering service pursuant to a contract for service wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pation which is substantially the production or sale of commodities or mere supply of services as extinguished from professional service. The distinction between mere service through employment of mainly manual skill, on one hand, and 'professional service' through employment of purely intellectual skill by the members of a learned profession, on the other hand is real and not illusory. (ii) It is equally relevant to bear in mind as to whether the main rendering the service is a member of an organized professional body with a recognized standard of ability enforce before he can enter it and a recognized standard of ability enforced while he is practicing it to arrive at the finding as to whether a profession is exercised or not though this fact by itself may not always settle the issue. Enrolment of a professional with a professional body is different from the membership of a body of traders or trade/business associations. (iii) 'Professional service' unlike business service is not a saleable commodity and hence is not guided so much by profit considerations as by professional ethics which requires a particular standard of service to be maintained towards the client. 16. To c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rd. It is payment in consideration of such expertise that is sought to be covered by section 80-O of deduction. In our view, services which require purely or pre-dominantly manual or non-technical skill with little or no engineering expertise in rendering them will be clearly outside the scope of 'technical service' within the meaning of section 80-O. 18. Now, the next question is as to what is the true import of the phrase "in consideration of technical or professional services rendered or agreed to be rendered outside India to such Government or enterprise by the assessee." At page 1298 in Black's Law Dictionary, the term 'render' has been defined to mean as follows: "render, vb. 1. To transmit or deliver 2. (Of a judge to deliver formally 3. (Of a jury) to agree on and report formally . 4. To pay as due . "Thus, the focus of section 80-O is that it is the professional expertise or technical know-how of the assessee seeking deduction under section 80-O which should be delivered or transmitted outside India to the Government of a foreign State or a foreign enterprise. In taking this view, we have the guidance of the decision in HMT Ltd. v. CBDT [1991] 188 ITR 457 (Kar.) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... person which is being delivered or transmitted outside India. 19. Keeping the aforesaid in view, we shall now proceed to examine the facts as available on record to ascertain as to whether the services provided to the customers of the assessee were mere business service or professional/technical service and whether they were rendered by the assessee outside India so as to fall within the four corners of section 80-O. 20. The fact that the assessee was engaged in the business of packing, moving, clearing and forwarding of household goods in India and outside India is fairly clear from the finding recorded in the assessment order as also from clause 5 of the Deed of Partnership dated 18th January, 1979 which provides: "The partnership shall continue to be that of removing, clearing, forwarding, shipping, packing, storage and other commodities and also such other business of a similar or allied nature as the partners may from time to time agree to carry on in this partnership." The letterheads on which the assessee has issued the Bills and which are annexed to the assessment order also describes the activities of the assessee thus: "Moving, Storage, Relocations, Exhibitions, Shipp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee are firms and companies well known for the quality of their services in field of moving the goods in their respective territories and that is the reason why the assessee engaged them to look after certain activities in their territories. It is their expertise which has led the assessee-firm to engage them for undertaking certain activities abroad. Thus, the short point to be noted is that it is not the assessee which itself as transmitted or delivered the services abroad. It is in fact the destination agents who have rendered or delivered their services and undertaken certain activities abroad for which they were paid by the assessee. Thus, there is a direct nexus between the destination agents who provided certain services abroad and the payment made to them by the assessee in consideration thereof. It would therefore be a contradiction in terms to say that it is the professional or technical expertise or skill of the assessee which has been delivered or transmitted or rendered abroad. The correct statement of fact, in our humble view, is that it is the assessee which has paid to the destination agents for the services rendered by them abroad to the assessee. As far ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on or any payment of similar nature as is required to be made in consideration of rendering the professional or technical services abroad. Payment was not made by the customers just for the sake of having destination services abroad but for the entire job of moving the goods from the point of origin to the point of destination. It is therefore immaterial as to how the assessee shows the receipt in the bills raised by it or in its books. It is well settled that it is the substance of the transaction that is decisive and not the forming which it is recorded or shown. And the substance of the transaction is that the assessee has simply rendered to its customers the services of moving the goods from one part of the globe to another part and was accordingly paid for it. Any activity that was performed either in India or abroad was in pursuance of its business to move the goods for which it was paid by its customers. The customers did not pay the assessee in consideration of mere performance of certain activities abroad. Hence the treatment given by the assessee by trifurcating the charges in the bills or in its account books in immaterial and would not change the character of receipt fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... State or foreign enterprise by the assessee. What the section requires is that it should be the expertise or skill or professional or technical service of the assessee that should be transmitted or delivered outside India to the Government of a foreign State or foreign enterprise. If the professional or technical service of the assessee is not delivered or transmitted or rendered outside India, the benefit of section 80-O will not accrue to the assessee. As mentioned earlier, it is the service of the destination agents based on their own skill and expertise that was delivered or performed abroad for which the payments were made to them by the assessee. This is clearly outside the scope of section 80-O inasmuch as it is the assessee which had made the payments in consideration of the services of the foreign enterprises instead of the services of the assessee being delivered or transmitted abroad and payments being made by the said foreign enterprises to the assessee. Since the destination services of the foreign enterprises, namely the destination agents were delivered or rendered abroad by the said foreign enterprises, namely, the destination agents utilizing their own skill and ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... where exactly the same services which have already been rendered abroad are sought to be further relayed or transmitted through an Indian assessee like the one before us. It is the destination agents who rendered the services abroad and were also paid for it by the assessee. The assessee cannot claim deduction under section 80-O on such relayed service. It is not the case of the assessee before us that it had rendered any other service abroad over and above that services already performed by the destination agents. Mere receipt of foreign exchange by the assessee by raising the bills on the customers charging them for the aforesaid expenditure incurred or agreed to be incurred by the assessee on destination services as increased by a significant mark up cannot, in our view, form the basis for claiming the deduction under section 80-O. (v) It has been held by the Hon'ble Supreme Court in Petron Engg. Construction and the Hon'ble jurisdictional High Court in Eastman Consultants (P.) Ltd.'s case that tax incentive contemplated under section 80-O is basically for encouraging the Indian companies to export their know-how and skill abroad. The case of the assessee is squarely hit by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... activity of clearing and forwarding operations, was a "shop" for the purpose of application of the Employees' State Insurance Act, 1948. The Supreme Court held as under: "The appellant is carrying on stevedoring, clearing and forwarding operations. Clearing the documents, even it be in the customs house, is necessary for the export or import of goods. These services form part of the carrier's job. It cannot be gainsaid that the appellant is rendering service to cater to the needs of exporters and importers and others who want to carry the goods further. Therefore, it is a shop carrying on systematic economic or a commercial activity." 29. The issue in hand is also covered, in our view, by the decision of the Hon'ble jurisdictional High Court in Jeevanlal Lallubhai's case, in which the Hon'ble Court has held as under: "... Following the ratio of the above decision* and the decision of this court in CIT v. Lallubhai Nagards and Sons [1993] 204 ITR 93, we are of the clear opinion that the activities of the assessee as clearing, forwarding and shipping agents did not constitute a profession and, as such, it was not entitled to the benefit of the lower rates of taxes applicable t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g such services to another, it is not necessary that the services should be rendered by the former personally and not through the medium of others. The Hon'ble Court has made the aforesaid observations to repel the differentiation sought to be made between the technical services rendered to the assessee by its employees/technicians and technical services rendered by the assessee to a foreign constituent/The relevant observations made by the Hon'ble Court read as under: "... The assessee is a company and any technical services rendered by it could only be through the medium of its employees, skilled and unskilled, and, even if the contract had not related to a turnkey project, the assessee's employees would have been answerable only to the assessee and none else though, perhaps, in such an event, the other party to the contract may have retained a larger degree of control and supervision in the execution of the contract. Even where the contractor is an individual or firm and not a company, a contract of this magnitude can be executed only through the medium of employees or other personnel engaged by the assessee. The fact that, physically speaking, it is only such employees that r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he relationship between the assessee before us and the parties which actually did the job abroad was based on contract for service. Secondly, it was the service or skill of the assessee in Continental Construction that was delivered or transmitted to the foreign enterprises abroad whereas, in the case before us, it is not the skill or expertise of the assessee or its employees that was delivered abroad. The assessee did nothing to deliver or render its skill or service abroad except to trifurcate the bill and charge its customers for the destination services actually delivered by certain foreign parties by adding a substantial mark-up. Besides, the assessee, in the case before us, was paid by its customers for organizing certain composite services and not for rendering any technical or professional service per se abroad. There is no delivery or transmission of the service of the assessee to any foreign enterprise or the Government of a foreign State. And then what is being done abroad is nothing but the work of a clearing and forwarding agent whereas, in Continental Construction, the work that was done abroad involved engineering skills and expertise. Thus, in the aforesaid case be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the same to the assessee. We have considered the rival submissions. We are neither in a position nor do we have the jurisdiction to comment upon the correctness of the Departmental action in subsequent years. It is however not the case of the assessee that the Departmental authorities had allowed, before passing the assessment order in question, deduction to the assessee under section 80-O in earlier years or to other assessees carrying on identical business, as was the case in Berger Paints Ltd.'s case. Be as it may, the appeal as brought before us has got to be adjudicated on the basis of the facts brought on record and in the light of the relevant law as applicable to the assessment year under appeal. It is for the supervisory officers in the Income-tax Department to examine this aspect and take such action as they may deem fit in accordance with law. A copy of this order may be endorsed to the Chief Commissioner of Income-tax IV, Mumbai to enable him to do the needful. 37. While reaching the aforesaid conclusions, we have duly considered all the submissions including the authorities cited by the respective counsels and representatives for the parties during the course of thei ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bank. The Assessing Officer deducted the total of such receipts as detailed in Annexure 'B' of assessment order at Rs. 9,18,125 from the foreign exchange receipts from services rendered abroad, while computing deduction under section 80-O. 2.6 The appellant contends that the amounts received in Indian rupees are out of bank accounts "funded by remittances from abroad". The appellant has filed letter from RBI and copy of notification of RBI dated 1-1-1974 at pages 68 to 70 of the paper book, according to which such amounts have to be treated as foreign exchange. As such the same appears to be allowable. As regards payments of Rs. 30,585 and 23,350 from Indian companies, it has been explained that the job as well as payment was given by the foreign enterprise' and only the address of their Indian collaborator were mentioned in the bill for easy contact. Necessary documents in support have been filed at pages 71 to 83 of paper book. Assessee's claim is clearly allowable in this respect and the Assessing Officer is directed to allow the same." 42. Ground No. 2 involves two issues: one, whether the payments were received from the Government of a foreign State or a foreign enterpris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceived were foreign enterprises within the meaning of the Explanation (ii) to section 80-O. The assessee would not be entitled to deduction under section 80-O unless it shows to have fulfilled this condition also. It would therefore, not be appropriate to allow a finding to go on record without due examination of all the facts necessary for holding that the assessee had received payments in convertible foreign exchange from a foreign enterprise. We therefore reverse the order of the learned CIT(A) on both the aforesaid issues and restore them to his file for recording the requisite finding and re-deciding the matter in accordance with law. If considered necessary, the learned CIT(A) may call for a remand report on both or any of the aforesaid issues which have been restored to him. 44. Ground No. 2 is treated as allowed in favour of the Department in terms of the aforesaid directions. Ground No. 3: Expenditure on foreign travel and other expenses relating to activities under section 80-O. 45. Ground Nos. 3 and 4 as taken by the Department read as under: "3. On the facts and in the circumstances of the case, the learned CIT(A) has erred in restricting the expenditure on fore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hange earning. On appeal, the learned CIT(A) held as under: ".... Section 80-O being a beneficial legislation to encourage FE earning must be interpreted in a liberal manner so as to encourage exports. Further expenses having direct nexus with the earning of FE should be deducted before computing deduction under section 80-O. The appellant has submitted calculation in respect of expenses incurred in India having nexus with services rendered abroad at pp.110 to 114 of the paper book which has been perused by me. It comes of Rs. 3,61,795 as under: Salaries : 34,047 @ 25% of salaries of related staff Foreign Travel : 1,53,897 @ 25% total Postage, Telephone : 1,66,878 @ 25% of total Courier Charges : 6,972 @ 25% of total ----------- 3,61,795 ----------- If a deduction has to be made on the above account, the same will have to be restricted to the abovesaid amount and the Assessing Officer is directed to restrict the disallowance to this figure." 48. It is also the grievance of the Revenue that the learned CIT(A) has admitted certain new evidences in contravention of r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he assessee to deposit Rs. 15 lakhs in the Court out of which the Court allowed the assessee to withdraw Rs. 7 lakhs without furnishing security and further sum of Rs. 8 lakhs on furnishing bank guarantee. All these withdrawals permitted by the Court were subject to the result of the suit. The assessee was also directed to shift the goods. The assessee thus withdrew the said sum of Rs. 15 lakhs out of the disputed amount in addition to Rs. 14 lakhs which it had already received from the Bank on raising the proforma invoice. The assessee also shifted and delivered the goods at New York on 5-2-1992. Both the parties subsequently agreed that the said sum of Rs. 14 lakhs + Rs. 15 lakhs recovered by the assessee pursuant to the order dated 22-8-1991 passed by the Hon'ble Court would be treated to be the full and final settlement of the claim. Since the parties had subsequently (sic) stage noted that none of the aforesaid amounts, i.e., Rs. 15 lakhs or Rs. 14 lakhs or both, i.e., Rs. 29 lakhs was declared as income for the assessment year under appeal on the ground that the matter was under adjudication before the High Court. The Assessing Officer however brought both the amounts to tax. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat what was purchased was only a vacant piece of land without any structure thereon. The Assessing Officer therefore asked the assessee to furnish the details of structure on the vacant piece of land that was purchased, the date as well as cost of construction of the said structure, and the sources from which the cost of construction was met. Assessee failed to respond to the query raised by the Assessing Officer and hence he disallowed the depreciation claimed by the assessee. On appeal, the learned CIT(A) allowed the depreciation on the ground that the assessee had raised bills on its customers for storage of their goods which showed the existence of structure on the said property. The Revenue is now in appeal against the aforesaid order of the CIT(A). 55. We have considered the rival submissions. In our view, the Revenue is entitled to succeed in view of the materials brought by the Assessing Officer on record. He has given detailed reasoning for disallowing the claim of the assessee for depreciation. It is undisputed that what the assessee had purchased was a vacant piece of land. It gave no evidence to show before the Assessing Officer to establish that the said piece of la ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s Account. The rent, however, did not relate to the previous year under consideration but to the preceding year. Noting that the assessee was following mercantile system of accounting, the Assessing Officer disallowed the rent which, on appeal, was allowed by the learned CIT(A). 63. Having heard the parties, we are of the view that the assessee has brought no material on record to show that the impugned expenditure had arisen or accrued during the previous year under consideration. It is also not in dispute that the rent did not relate to the previous year under consideration. The order of the learned CIT(A) allowing the rent is therefore reversed and that of the Assessing Officer is restored. 64. Ground No. 8 is allowed. Ground No. 9: Addition under section 40A(3) 65. Ground No. 9 reads as under: "9. On the facts and in the circumstances of the case, the learned CIT(A) has erred in deleting the disallowance of Rs. 54,600 made under section 40A(3) for want of any proof justifying the circumstances requiring such payments in cash." 66. Facts of the case as relevant to the aforesaid ground of appeal are that the tax auditors of the assessee reported in their tax audit rep ..... X X X X Extracts X X X X X X X X Extracts X X X X
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