Judgment
S.B. Sinha, C.J.
The petitioner is a public limited company. It is engaged in the business of export of engineering and industrial goods. Technical know-how to indigenous manufacturers is provided by the sales engineers of the petitioner as the exports comprised of sophisticated goods. Such technical assistance is also provided in development of various engineering and industrial goods for the purpose of exports.
2. An Iraq Government company known as a State Company for Rubber Industries, Baghdad (SCRI) sought for technical assistance of the petitioner pursuant whereto 16 specialists were deputed for the purpose of sharing experience for running the factory as also for improving and developing technical and managerial skills of its personnel as also to participate in the practical application of the planned technology.
On the ground that providing of such technical assistance would entitle the petitioner to claim deduction under section 80-O of the Income Tax Act, an application was filed for approval of the said agreement dated 10-8-1977, before the prescribed authority on 27-9-1978. By reason of the impugned order dated 24-12-1980, the said prayer was rejected by the Central Government stating :
Subject : Approval under section 80-O of the Income Tax Act, 1961, Agreement dated 10-8-1977, with the State Company for Rubber Industries, Ministry of Industries and Minerals, Government of Iraq, Baghdad, Iraq.
Dear Sirs
With reference to your application dated 27-9-1978, on the subject which was filed under your letter No. RID dated 27-9-1978, I am directed to say that the Board regret their inability to approve your agreement dated 19-8-1977, with the State Company for Rubber Works, Ministry of Industry and Minerals, Government of Iraq, Baghdad, Iraq, for purposes of section 80-O of the Income Tax Act, 1961, owning to the following reasons :
(i) The agreement does not provide for the transfer of any technology by the Indian company to the foreign enterprise as contemplated in section 80-O.
(ii) The services rendered by you to the foreign enterprise related to the mere supply of 16 specialists who would in turn assist the local personnel in the foreign project. These persons were specifically recruited by you for working on the foreign project and they were answerable for their work and conduct to the foreign enterprise and not to you. Consequently the services rendered by these personnel cannot be treated as services rendered by you for purpose of section 80-O.”
3. Section 80-O of the Income Tax Act is as under :
“80-O. Deduction in respect of royalties, etc., from certain foreign enterprisesWhere the gross total income of an assessed, being an Indian company, or a person other than a company who is resident in India includes any income received by the assessed from the Government of a foreign State or foreign enterprise in consideration for the use outside India of any patent, invention, design or registered trademark and such income is received in convertible foreign exchange in India, or having been received in convertible foreign exchange outside India, or having been converted into convertible foreign exchange outside India, is brought into India, by or on behalf of the assessed in accordance with any law for the time being in force for regulating payments and dealings in foreign exchange, there shall be allowed, in accordance with and subject to the provisions of this section, a deduction of an amount equal to:
(i) forty per cent, for an assessment year beginning on the 1-4-2001;
(ii) thirty per cent, for an assessment year beginning on the 1-4-2002;
(iii) twenty per cent, for an assessment year beginning on the 1-4-2003;
(iv) ten per cent, for an assessment year beginning on the 1-4-2004, of the income so received in, or brought into, India, in computing the total income of the assessed and no deduction shall be allowed in respect of the assessment year beginning on the 1-4-2005, and any subsequent assessment year :
Provided that such income is received in India within a period of six months from the end of the previous year, within such further period as the competent authority may also in this behalf;
Provided further that no deduction under this section shall be allowed unless the assessed furnishes a certificate, in the prescribed form, along with the return of income, certifying that the deduction has been correctly claimed in accordance with the provisions of this section.
ExplanationFor the purpose 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.
(iii) “services rendered or agreed to be rendered outside India” shall include services rendered from India but shall not include services rendered in India.
(iv) “competent authority” means the Reserve Bank of India or such other authority as is authorised under any law for the time being in force for regulating payments and dealing in foreign exchange.”
4. The afore-mentioned provision envisages “any income by way of related commission (fees or any similar payment underlying”. It is trite that only because the contract does not specially assign the nomenclature mentioned therein, the same would not be determinative of the claim to exemption/ deduction by the assessed.
The essence of the expression “any similar payment” can be found out upon examining as to whether the receipt is a payment in consideration of one of the two situations envisaged in the section. If the assessed is in possession of a technical know-how, he may be prepared to allow another to make use thereof in consideration of a fee payable therefore. An assessed may also possess of some speciality and he may agree to lend his services to some other person on consideration. The nature of services may be varied.
5. In Oberoi Hotels (India) (P) Ltd. v. v. CBDT & Ors. (1982) 135 ITR 257 (Del), it was observed :
“It cannot be disputed that the running of a modem hotel requires highly specialized management techniques and a combination of scientific management and highly specialized inn-keeping. The Modern system of preparation of good and beverages also involves considerable technical skill and know-how. These elements do not find place in the case of a managing agency.”
The question came up for consideration before the Apex Court in Continental Construction Ltd. v. CIT (1992) 195 ITR 81 (SC) wherein it was held :
“Or, again, where the assessed is in possession of technical know-how, he may be prepared to allow another to make use thereof in consideration of a “fee” to the assessed. He may also stipulate a consideration in the form of a commission based an the sales of the products the other party is able to manufacture with the aid of such invention or know-how. Again, an assessed may have achieved some speciality and he may agree to lend his services to some other person and stipulate to some other person and stipulate a consideration therefore which may be variously described. The nature of the asset, right, information or services which can be brought under this provision may be varied and the consideration stipulated for allowing another to avail of the assessed’s asset, knowledge or services can likewise assume multifarious forms. The word “similar” connotes that the payment made to the assessed need not be in the nature of royalty, commission or fees only; it could be any payment of like nature, i.e., made in consideration for the use or supply of such an asset, knowledge or services in the same manner as royalty, fees or consideration could be. Therefore, any type of payment received by an assessed will qualify for deduction under the section so long only as it is a payment made in consideration of one of the two types of transactions referred to in the section.”
Yet again in CBDT & Ors. v. Oberoi Hotels (India) (P) Ltd. (1998) 231 ITR 148 (SC) it was observed :
“(3) No doubt that ‘professional services’ have been brought within the scope of section 80-O only by an amendment by the Finance (No. 2) Act, 1991, and that too, with effect from 1-4-1992, which is proposing to substitute the words ‘technical or professional services’ in the place of the words ‘technical services’ now used in the section. It seems to us that this amendment may be only of a clarificatory nature. The expression ‘technical services’ have a very broad connotation.
(4) Firstly, whatever may be the position regarding other ‘professional services’, there can hardly be any doubt that services involving specialised knowledge, experience and skill in the field of constructional operations are ‘technical services’. Secondly, the question whether ‘professional services’ would be ‘technical services’ or not has no impact on the point we are trying to make, viz., that, in order to say that a person is rendering 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.
(5) It is a well settled principle that exigibility of an item to tax or tax deduction can hardly be made to depend on the label given to it by the parties. An assessed cannot claim deduction under section 80-O in respect of certain receipts merely on the basis that they are described as royalty, fee or commission in the contract between the parties. By the same token, the absence of a specific label cannot be destructive of the right of an assessed to claim a deduction, if, in fact, the consideration for the receipts can be attributed to the sources indicated in the section. Contracts of the type envisaged by section 80-O are usually very complex ones and cover a multitude of obligations and responsibilities. It is not always possible or worthwhile for the parties to dissect the consideration and apportion it to the various ingredients or elements comprised in the contract.”
The Apex Court therein also followed the earlier decision in Continental Construction Ltd. v. CIT (supra).
For the reasons afore-mentioned, we have no other option but to hold that the petitioner is entitled to exemption in terms of section 80-O of the Act and the same has wrongly been denied to the petitioner. In this view of the matter, we are of the opinion that the impugned order cannot be sustained which is set aside accordingly and the writ petition is allowed. There shall, however, be no order as to costs.
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