{"id":165581,"date":"1988-12-13T00:00:00","date_gmt":"1988-12-12T18:30:00","guid":{"rendered":"https:\/\/www.legalindia.com\/judgments\/petron-engineering-construction-vs-center-board-of-direct-taxes-on-13-december-1988"},"modified":"2015-09-10T14:14:41","modified_gmt":"2015-09-10T08:44:41","slug":"petron-engineering-construction-vs-center-board-of-direct-taxes-on-13-december-1988","status":"publish","type":"post","link":"https:\/\/www.legalindia.com\/judgments\/petron-engineering-construction-vs-center-board-of-direct-taxes-on-13-december-1988","title":{"rendered":"Petron Engineering Construction … vs Center Board Of Direct Taxes & … on 13 December, 1988"},"content":{"rendered":"
Supreme Court of India<\/div>\n
Petron Engineering Construction … vs Center Board Of Direct Taxes & … on 13 December, 1988<\/div>\n
Equivalent citations: 1989 AIR 501, \t\t 1988 SCR Supl. (3)1058<\/div>\n
Author: M Dutt<\/div>\n
Bench: Dutt, M.M. (J)<\/div>\n
           PETITIONER:\nPETRON ENGINEERING CONSTRUCTION PVT.LTD. & ANOTHER\n\n\tVs.\n\nRESPONDENT:\nCENTER BOARD OF DIRECT TAXES & OTHERS\n\nDATE OF JUDGMENT13\/12\/1988\n\nBENCH:\nDUTT, M.M. (J)\nBENCH:\nDUTT, M.M. (J)\nNATRAJAN, S. (J)\n\nCITATION:\n 1989 AIR  501\t\t  1988 SCR  Supl. (3)1058\n 1989 SCC  Supl.  (2)\t7 JT 1988 (4)\t666\n 1988 SCALE  (2)1556\n\n\nACT:\n    Income-tax Act. 1961: Section 80-O--Deduction in respect\nof rolyalties---Permissible only when it is from  government\nof foreign state or foreign enterprise.\n%\n    Words and Phrases: Foreign enterprise--Foreign Company -\n-Meaning to.\n    Interpretation    of   statutes:\tInterpretation\t  of\nexpressions  to\t be  consistent with the  thing\t or  objects\nincluded  within it: Court to look at the setting  in  which\nthe  words are used; in the case of an\texemption  provision\nliberal\t interpretation\t to be made  without  impairing\t the\nlegislative requirement and the spirit of the provision.\n\n\n\nHEADNOTE:\n    Messrs   Toyo   Engineering\t  Corporation,\t a   company\nregistered in Japan, undertook to render technical  services\nin  respect of Iraqi Storage Terminal Project  Installations\nand engaged Toyo Engineering India Ltd., an Indian  Company,\nfor work connected with the project. Toyo Engineering  India\nLtd.,  in  turn,  entered  into\t two  agreements  with\t the\nappellant-company   to\tperform\t certain  construction\t and\nrelated services of the project work.\n    The\t appellant  sought approval of the  said  agreements\nfrom  the  respondent--the Central Board of  Direct  Taxes--\nunder  section\t80-0  of  the Income  Tax  Act,\t 1961  which\nprovided  for  deduction  from total income  in\t respect  of\nroyalties  etc.\t received from the Government of  a  foreign\nState  or  a foreign enterprise. The respondent\t refused  to\napprove the said agreements on the ground that there was  no\nprivity\t of\tcontract between the appellant-company\tand\nthe  foreign  enterprise  and\tthe  contract  price  was\nreceived   by\tthe   appellant\t  from\t Toyo\t Engineering\nIndia  LTD.  which was an Indian Company and  could  not  be\nregarded a foreign enterprise within the meaning of  section\n80-0.\n    The\t appellant filed a Writ petition before\t the  Bombay\nHigh  Court  challenging the order  refusing  approval.\t The\nlearned\t Single Judge dismissed the petition on\t the  ground\n\t\t\t\t\t\t  PG NO 1058\n\t\t\t\t\t\t  PG NO 1059\ninter  alia  that  the\tpayment\t was  not  received  by\t the\nappellant-company from the Government of a foreign State  or\na  foreign  enterprise. On appeal, the Division\t Bench\theld\nthat (i) in order to attract the provision of section  80-0,\nthe payment must be received by the Indian company from\t the\nGovernment of a foreign State or a foreign enterprise,\t(ii)\nthe  expression\t 'foreign enterprise' must have\t the  colour\nfrom  the words \"Government of a foreign State\" and must  be\nread  to  mean\tan enterprise of a  foreign  national  or  a\nforeign\t ownership which would not include a branch of\tunit\nof an Indian Company  in a foreign country.\n    In\tthis Court, it was contended by the  appellant\tthat\n(i)  the concept  of ownership for the purpose\tof  deciding\nwhether an enterprise was a foreign enterprise or not should\nnot  be\t introduced in section 80-0 and\t if  any  enterprise\nsatisfied  the\ttest of location it should be held to  be  a\nforeign enterprise within the meaning of section 80-0;\t(ii)\nin  any\t event,\t it was possible to  define  the  expression\n\"foreign enterprise\" as an enterprise located outside India,\nand    when   two   interpretations   were   possible\t the\ninterpretation\twhich was favourable to the assessee  should\nbe  adopted; (iii) as the provision of section 80-0  was  an\nexemption  provision, it should be construed liberally\tand,\nupon such liberal  construction, it should be held that Toyo\nIndia  was a foreign enterprise; (iv) the  appellant-company\nhaving fulfilled the objectives of sectio 80-0, it should be\nheld  that the requirement of the section was satisfied\t and\nconsequently the appellant-company was entitled to deduction\nto Income lax: and (v) section 80-0 should be construed\t as\npermitting canalisation.\n    On the other hand, the revenue contended that the  plain\nmeaning of the words \"foreign enterprise\" was an  enterprise\nhaving\ta  foreign  nationality, and if\t an  Indian  company\nopened\tan enterprise in a foreign country but did  not\t get\nthe enterprise registered under the law of that country,  it\nwould  remain an Indian enterprise and not become a  foreign\nenterprise.\n    Dismissing the appeal, it was\n    HELD:  (I)\tIt appears from the  legislative  background\nthat  in 1971 the expression \"foreign company\" occurring  in\nsection 80-0 was changed into \"Government of a foreign State\nor  a  foreign enterprise . There can be no doubt  that\t the\nexpression  \"foreign  enterprise''  is\ta  wider  term\tthan\n\"foreign company\" and will include within it also a  foreign\ncompany. [l066F-G]\n\t\t\t\t\t       PG NO 1060\n    (2) The interpretation of a term should be such as to be\nconsistent  with  the things or objects\t that  are  included\nwithin\tit.  In other words, the meaning of  the  expression\ncannot\tbe different for different objects included  in\t the\nexpression. L1067B]\n    (3)\t If  an\t Indian company having\ta  branch,  unit  or\nestablishment  in  a foreign country cannot  be\t regarded  a\nforeign\t company, then, for the same reason, a branch,\tunit\nor establishment of an Indian company situated in a  foreign\ncountry or doing business in such foreign country cannot  be\nincluded  within  the  meaning of  the\texpression  \"foreign\nenterprise\". [1067C]\n(4)  The test of location is one of the tests  for  deciding\nwhether an enterprise is a foreign enterprise or not  within\nthe meaning of section 80-O. But that is not the only  test.\nOwnership  is  also  a creterion for  deciding\twhether\t all\nenterprise is a foreign enterprise or not. But, again\tthat\nis not the sole test. [1067D]\n    (5) A \"foreign enterprise\" is an enterprise situated  in\na foreign\tcountry having been created or registered in\naccordance  with the law of such country. I his\t view  finds\nsupport from the setting in which the\texpression has\tbeen\nplaced\tand  the circumstances in which the law came  to  be\npassed. [1067G; 1068B]\n    R.L. Arora v. State of Uttar Pradesh,<\/a> [1964] 6 SCR\t784,\nreferred to.\n    (6) The expression\t\"foreign enterprise. admits of\tonly\none interpretation. To interpret it as an enterprise located\noutside India  not be full and complete and will render\t the\nmeaning\t of  the  expression\tinconsistent  with   the\nobjects\t  included   within  it,  having   regard   to\t the\nchange effected by the legislature. [1068E-F]\n    Commissioner  of Income-tax Lucknow v. Madho<\/a>  pd.  jatia\n[1976] 105 ITR 179; Commissioner of Income-tax v.  Vegetable\nproducts Ltd.. [l973l 88 IlK 192 and Commissioner of Income-\ntax, Punjab v.\tKulu Valley Transport Co. P.Ltd<\/a> ., [1970] 77\nITR 518, distinguished.\n    (7)\t It  is true that an exemption provision  should  be\nliberally  construed,\tbut  this does not  mean  that\tsuch\nliberal\t construction should be made doing violence  to\t the\nplain\tmeaning\t  of  such  exemption\tprovision.   Liberal\nconstruction will he made whenever it is possible to be made\nwithout impairing the legislative requirement and the spirit\nof the provision. [1068H; 1069A]\n\t\t\t\t\t\t PG NO 1061\n    (8) Not only the objectives of a provision of a  statute\nhave  to  be  fulfilled,  but also  the\t condition  for\t the\napplicability of the provision have also to be fulfilled. In\nthe  instant  case, the appellant failed to fulfil  the\t two\nmaterial conditions in so far as the income was received  by\nit not from a foreign enterprise but from an Indian company,\nand  the agreements entered into by it were with  an  Indian\ncompany and not with a foreign enterprise. [1071B-D]\n    Gannon Dunkerley and Co. Ltd. v. Central Board of Direct\nTaxes,\t[1986] 159 ITR 162 and Indian Hume Pipe Co. Ltd.  v.\nCentral Board of Direct Taxes, [1987] l65 ITR 537,  referred\nto.\n    (9) The High Court was not right in holding that section\n80-O did not require that the agreement should be made\twith\nthe  Government of a foreign State of a foreign\t enterprise.\nSection 80-O refers to there-parties, namely,Government of a\nforeign\t State, foreign enterprise and the assessee.  It  is\nclear  from the section that the agreement must\t be  between\nthe assessee on the one hand and the Government of a foreign\nState or a foreign enterprise on the other. [1071E-G,]\n    (10)  Whether canalisation should he permitted or  not.\nis  absolutely\ta  matter for the  legislature.\t It  is\t not\nincumbent  on  the legislature to provide  for\tcanalisation\nalthough  it has been conceded by the respondent's  counsel  that\ncanalisation  is desirable. In view of the plain language of  the\nsection ,it is not possible to construe the section as\tproviding\ncanalisation.  That  is\t not the intention  of\tthe  Legislature.\n[1073B-C]\n    Seaford  Court Estates Ltd. v. Asher, [1949] 2 K.B.\t 481\nreferred to.\n\n\n\nJUDGMENT:\n<\/pre>\n
    CIVIL  APPELLATE JURISDICTION Civil Appeal No – 3531  of
\n1988.\n<\/p>\n
    From  the  Judgment and Order dated\t 11.8.19887  of\t the
\nBombay High Court in Appeal No 752\/86 in W.P No 538\/1982.
\n    V.\tRajgopal,  K.M\tSharma\tand  Randhir  Jain  for\t the
\nAppellants.\n<\/p>\n
    Dr.\t  V.   Gauri   Shankar.\t Ms.   A.   Subhashini\t and
\nM.K.Shashidharan for the Respondents.\n<\/p>\n
    The Judgment of the Court was delivered by
\n\t\t\t\t\t\t PG NO 1062
\n    DUTT,  J.  This  appeal by\tspecial\t leave\tis  directed
\nagainst\t the  judgment of the Division Bench of\t the  Bombay
\nHigh Court dismissing the appeal preferred by the appellants
\nagainst\t the  judgment of a Single Judge of the\t High  Court
\ndismissing the writ petition of the petitioners whereby they
\nchallenged the order dated January 5 1982 of the  respondent
\nNo.  1\tthe  Central Board of  Direct  Taxes  rejecting\t the
\napplication  of the appellant-company under section 80-O  of
\nthe  Income  Tax Act, 1961, hereinafter referred to  as\t the
\nAct’.\n<\/p>\n
    By\ttwo agreements one dated April 5 1980 and the  other
\ndated  August  14,1980 entered into between  the  appellant-
\ncompany\t and  Toyo Engineering India Ltd. (for\tshort  ‘Toyo
\nIndia’).  the appellant-company agreed to  render  technical
\nservices  in  respect  of  Iraqi  Storage  Terminal  Project
\nInstallations  in consideration of payment to it by  way  of
\nfees  payable  under  the  said\t agreements.  In  the\tsaid
\nagreement  dated April 5,1980 it is stated inter  alia\tthat
\nToyo India has been engaged by Toyo Engineering\t Corporation
\n(for  short ‘TEC’), a Company organised and  existing  under
\nthe  laws  of Japan having its registered office  at  Tokyo,
\nJapan\tfor  the  Project  of  Storage\tTerminal  of   State
\nOrganisation   for  Oil\t Project.  a   public\tOrganisation
\norganised and existing under the law of Iraq. Toyo India has
\nin its turn engage the appellant-company to perform  certain
\nconstruction  an6 related services by the  appellant-company
\nof the project work as set out in the said agreement.
\n    The\t appellant-Company by its letter dated\tOctober\t 23,
\n1980  requested the respondent No. 1, the Central  Board  of
\nDirect Taxes, for the approval of the said agreements  under
\nsection 80-O of the Act.  The respondent No. 1 after  giving
\nthe  appellants\t a hearing, by its order  dated\t January  5,
\n1982, refused to approve the said agreements for purposes of
\nsection\t 80-O  of  the Act inasmuch as in the  view  of\t the
\nrespondent  No.\t 1, the essential conditions  laid  down  in
\nsection\t 80-O were not satisfied.  The respondent No.  1  in
\nits said order pointed out inter alia that according to\t the
\nsaid  agreements,  the contract price was  received  by\t the
\nappellant-company  from Toyo India, an Indian  Company.\t  In
\nother  words,  income by way of royalty,  commission,  fees,
\netc. had not been received by the appellant-company from the
\nGovernment  of a foreign State or a foreign enterprise,\t and
\nthat the agreements had been entered into by the  appellant-
\ncompany with Toyo India, and Indian company, and not with  a
\nforeign\t State\tor a foreign enterprise.   Further,  it\t was
\nstated by the respondent No. 1 that as there was no  private
\nof  contract between the appellant-company and\tthe  foreign
\nenterprise,  it could not be said that the income  had\tbeen
\n\t\t\t\t\t\t PG NO 1063
\nreceived  by the appellant-Company in consideration  of\t the
\nuse outside india of patents inventions etc. made  available
\nor provided or agreed to be made available or provided to  a
\nGovernment of a foreign State or to a foreign enterprise  or
\nin consideration of technical services rendered or agreed to
\nbe  rendered outside India to such Government or  enterprise
\nby the appellant-company.\n<\/p>\n
    Being  aggrieved by the said order dated January 5\t1982
\nof  the\t respondent No. 1 refusing to approve the  said\t two
\nagreements  the appellants filed a writ petition before\t the
\nBombay\tHigh  Court challenging the said  order.  A  learned
\nSingle Judge of the Bombay High Court by his judgment  dated
\nJune  23,  1986 dismissed the writ petition  on\t the  ground
\ninter  alia  that  the\tpayment\t was  not  received  by\t the
\nappellant-company from the Government of a foreign State  or
\na  foreign enterprise and, as such, it was not\tentitled  to
\nany relief under section 80-O of the Act.\n<\/p>\n
    On appeal by the appellants against the judgment of\t the
\nlearned\t Single Judge the Division Bench of the High  Court  held
\nthat  in  order\t to attract the provision  of  section\t80-O  the
\npayment must be received by an Indian company from the Government
\nof a foreign State or a foreign enterprise. and that the words\t‘
\nforeign\t enterprise”  must  have  the\tcolour\tfrom  the   words
\nGovernment  of\ta  foreign State” and must be read  to\t mean  an
\nenterprise of a foreign national or a foreign ownership.  Further
\nthe words “foreign enterprise” could not he held to apply to  an
\nestablishment  or  undertaking\tor branch or unit  of  an  Indian
\ncompany\t in a foreign country.\tSuch establishment,  undertaking,
\nbranch\tor  unit might well be an enterprise, but not  a  foreign
\nenterprise within the meaning of the said words.  In that of  the
\nmatter,\t the Division Bench of the High Court as stated\t already,
\nupheld the judgment of the learned Single Judge and dismissed the
\nappeal preferred by the appellants.  Hence this appeal by special
\nleave.\n<\/p>\n
    At this stage we may refer to section 80-O of the Act as
\nit  stood  during the assessment year 1980-81 which  is\t the
\nrelevant  period for this appeal.  Section 80-O provides  as
\nfollows:\n<\/p>\n
    “80-O,  Deduction  in respect of royalties,\t etc.  from
\ncertain foreign enterprises.-Where the gross total income of
\nan assessee, being an Indian company, includes any income by
\nway  of\t royalty, commission, fees or  any  similar  payment
\nreceived  by the assessee from the Government of  a  foreign
\nState or a foreign enterprises in consideration for the use
\n\t\t\t\t\t\t PG NO 1064
\noutside\t India of any patent invention model  design  secret
\nformula or process. or similar property right or information
\nconcerning  industrial\tcommercial or  scientific  knowledge
\nexperience or skill made available or provided or agreed  to
\nbe  made  available  or\t provided  to  such  Government\t  or
\nenterprise by the assessee or in consideration of  technical
\nservices rendered or agreed to be rendered out-side India to
\nsuch  Government  or  enterprise by the\t assessee  under  an
\nagreement  approved  by the Board in this  behalf  and\tsuch
\nincome is received in convertible foreign exchange in  India
\nor  having  been received in  convertible  foreign  exchange
\noutside\t India\tor having been\tconverted  into\t convertible
\nforeign\t exchange outside India is brought into India by  or
\non behalf of the assessee in accordance with any law for the
\ntime being in force for regulating payments and dealings  in
\nforeign\t exchange there shall be allowed in accordance\twith
\nand subject to the provisions of this section a deduction of
\nthe whole of the income so received in or brought into India
\nin computing the total income of the assessee:\n<\/p>\n
    Provided  that the application for the approval  of\t the
\nagreement  referred  to in this sub-section is made  to\t the
\nBoard  before the 1st day of October of the assessment\tyear
\nin relation to which the approval is first sought:\n<\/p>\n
    Provided further that approval of the Board shall not be
\nnecessary  in the case of any such agreement which has\tbeen
\napproved  for  the  purposes of\t the  deduction\t under\tthis
\nsection\t by  the Central Government before the\tIst  day  of
\nApril  1972 and every application for such approval  of\t any
\nsuch   agreement   pending  with  the\tCentral\t  Government
\nimmediately  before that day shall stand transferred to\t the
\nBoard for disposal.”\n<\/p>\n
    The following principal conditions must he fulfilled  so
\nas to attract the provision of section 80-O:\n<\/p>\n
    1. The assessee must be an Indian company.\n<\/p>\n
    2.\tThe  income by way of royalty commission  fees\tetc.
\nmust  be received by the assessee from the Government  of  a
\nforeign State or a foreign enterprise.\n<\/p>\n
\t\t\t\t\t\t PG NO 1065\n<\/p>\n
    3. The consideration shall be for the use outside  India
\nof any patent invention model design etc. made available  or
\nprovided to such Government or enterprise by the assessee or
\ntechnical services rendered or agreed to be rendered outside
\nIndia to such Government or enterprise by the assessee.\n<\/p>\n
    4. The agreement must be approved by the Board.\n<\/p>\n
    5.\tThe  income  received by the assessee  shall  be  in
\nconvertible foreign exchange.\n<\/p>\n
    6.\tThe  deduction shall be in respect of the  whole  of
\nsuch income received in or brought into India.
\n    One\t of  the principal points that is involved  in\tthis
\nappeal\trelates\t to  the interpretation\t of  the  expression
\n“foreign  enterprise”.\tThe  respondent\t No.  1\t refused  to
\napprove\t the agreements entered into by the appellants\twith
\nToyo India principally on the ground that Toyo India is\t not
\na foreign enterprise. According to the respondent No. 1 Toyo
\nIndia is an Indian Company and cannot be regarded a  foreign
\nenterprise  within the meaning of section 80-O. The  learned
\nSingle\tJudge and the Division Bench of the High Court\thave
\nalso  taken  the  same\tview and upheld\t the  order  of\t the
\nrespondent No. 1 refusing to approve the agreements.
\n    It\tis not disputed that Toyo India has been engaged  by
\nTEC.  The  latter Company is admittedly\t a  foreign  Company
\norganised  and\testablished  by the laws of  Japan  for\t the
\nProject\t of Storage Terminal of State Organisation  for\t Oil
\nProject.  By  the  said agreements Toyo\t India\tengaged\t the
\nappellant-company   to\tperform\t certain  construction\t and
\nrelated\t services  for the project work as set\tout  in\t the
\nagreements.\n<\/p>\n
    It is urged by Mr. Rajagopalan learned Counsel appearing
\non behalf of the appellants that the High Court is wrong  in
\nits  view  that\t Toyo India is\tnot  a\tforeign\t enterprise.
\nCounsel\t submits  that the test of the\texpression  “foreign
\nenterprise”  is\t the location of the enterprise\t which\twill
\nclinch the issue. It is submitted that as the  establishment
\nof  Toyo India with which we are concerned is a branch\tunit
\nor  on undertaking in Iraq it should be regarded  a  foreign
\nenterprise  within the meaning of section 80-O of  the\tAct.
\nAccording  to the learned Counsel the concept  of  ownership
\nfor  the  purpose  of deciding whether an  enterprise  is  a
\nforeign\t enterprise  or\t not should  not  be  introduced  in
\nsection\t 80-O  and if any enterprise satisfied the  test  of
\nlocation or in other words if an enterprise is situate in  a
\n\t\t\t\t\t\t PG NO 1066
\nforeign country it should be held to be a foreign enterprise
\nwithin the meaning of section 80-O.\n<\/p>\n
    On\tthe  other hand Dr. Gauri  Shankar  learned  Counsel
\nappearing  on  behalf of the respondents  submits  that\t the
\nplain  meaning\tof  the words  “foreign\t enterprise”  is  an
\nenterprise  having a foreign nationality. According  to\t the
\nlearned\t Counsel a “foreign enterprise” means an  enterprise
\ncreated or established in a foreign country under the law of
\nthat country. If an Indian company opens an enterprise in  a
\nforeign\t country but does not get the enterprise  registered
\nunder  the  law of that country it will in the view  of\t the
\nlearned\t Counsel  remain  an Indian  enterprise\t and  not  a
\nforeign enterprise.\n<\/p>\n
    Before  considering\t the  contentions  of  the   learned
\nCounsel\t for both parties relating to the interpretation  of
\nthe expression foreign enterprise” occurring in section 80-O
\nwe  may refer to the legislative background.  Under  section
\n85-C of the act which was introduced by the Finance Act 1966
\nand  which came into force w1th effect from April  1,  1961.
\nIndian companies could obtain concession of the extent of 25
\nper cent of its income if the foreign exchange was  received
\nfrom  a\t company which was neither an Indian company  nor  a
\ndomestic  company. Section 80-O was inserted in the  Act  by
\nthe Finance Act 2 of 1967 and it came into force with effect
\nfrom  April  1, 1968. Section 80-O as it stood on  that\t day
\nprovided that the payer should be a  foreign company and the
\nrelief\twas enlarged to 60 per cent.  Finance Act 2 of\t1971
\nmade  an amendment in section 80-O changing the prayer\tfrom
\n“foreign  company”  to “Government of a foreign State  or  a
\nforeign\t enterprise”  and enlarging the relief\tto  100\t per
\ncent.\tEven  up  to this day no change\t has  been  made  in
\nrespect of the payer.\n<\/p>\n
    It thus. appears from the legislative background or\t the
\nlegislative changes that from ‘foreign company” it has been
\nchanged\t into  “Government of a foreign State or  a  foreign
\nenterprise”.  It  is apparent that the\t expression  foreign
\nenterprise”  has  been substituted  for\t “foreign  company”
\nwhile  the words “Government of a foreign  State”have\tbeen
\ninserted. There can be no doubt that the expression “foreign
\nenterprise’ is a wider term than “foreign company” “Foreign
\nenterprise”  will include within it also a  foreign  company
\nNow  a foreign company is a company incorporated  under\t the
\ncalled\ta  foreign company. Thus in the case  of  a  foreign
\nenterprise  which is a foreign company such company must  be
\nincorporated  in  accordance  with the law  of\tthe  foreign
\n\t\t\t\t\t\t PG NO 1067
\ncountry in question. Keeping this in view the question\tthat
\narises\tis  whether  a branch unit or  establishment  of  an
\nIndian\tcompany doing business in a foreign country  can  be
\nsaid to be a foreign enterprise. In our view it is difficult
\nto  regard  such  branch unit or  establishment\t a  ‘foreign
\nenterprise”  within the meaning of section 80-O of the\tAct.
\nThe  interpretation  of\t a  term should be  such  as  to  be
\nconsistent  with  the things or objects\t that  are  included
\nwithin\tit.  In other words the meaning\t of  the  expression
\ncannot\tbe different for different objects included  in\t the
\nexpression.  If\t an Indian company having a branch  unit  or
\nestablishment  in  a foreign country cannot  be\t regarded  a
\nforeign\t company then for the same reason a branch  unit  or
\nestablishment  of  an Indian company situate  in  a  foreign
\ncountry or doing business in such foreign country cannot  be
\nincluded  within  the  meaning of  the\texpression  “foreign
\nenterprise”.\n<\/p>\n
    The test of location as contended by the learned Counsel
\nappearing on behalf of the appellants is no doubt one of the
\ntests  for  deciding  whether an  enterprise  is  a  foreign
\nenterprise or not within the meaning of section 80-O of\t the
\nAct  but  that\tis  not the only  test.\t In  order  that  an
\nenterprise  can\t be  called a  foreign\tenterprise  for\t the
\npurpose of section 80-O there can be no doubt that it has to
\nbe located in a foreign country. The High Court has  decided
\nthe  issue on the ground of foreign ownership.\tUndoubtedly.
\nownership  is  also  a criterion  for  deciding\t whether  an
\nenterprise is a foreign enterprise or not. But again that is
\nnot  the  sole criterion or test and as\t has  been  observed
\nbefore location of an enterprise is also a test for deciding
\nwhether an enterprise is a foreign enterprise or not.
\n    Now\t we may consider the contention of Dr.Gauri  Shankar
\nthat a “foreign enterprise” means an enterprise created\t and
\nregistered under the foreign law. The question of   creation
\nof an enterprise under the foreign law necessarily comes  in
\nas  the expression foreign enterprise”includes within it  a
\nforeign\t company. Thus considering the above aspects and  to
\ngive the expression “foreign enterprise” as used in section
\n80-O a consistent and reasonable meaning we are of the\tview
\nthat  a\t “foreign  enterprises an enterprise  situate  in  a
\nforeign\t country  having  been\tcreated\t or  registered\t  in
\naccordance  with  the law of such country. It  will  now  be
\nprofitable for us to refer to a decision of this Court in R.
\nL. Arora v . State of Uttar Pradesh, [1964]6 SCR 784,  where
\nit has been held that a literal interpretation is not always
\nthe only interpretation of a provision in a statute and\t the
\nCourt  has  to look  at the setting in which the  words\t are
\nused  and  the\tcircumstances in which the law\tcame  to  be
\npassed to decide whether there is something implicit  behind
\n\t\t\t\t\t\t PG NO 1068
\nthe words actually used which control the literal meaning of
\nthe  words  used.  The expression  “foreign  enterprise”  in
\nsection 80-O has been placed after the words “the Government
\nof  a  foreign\tState”. The view which we  take\t as  to\t the
\ninterpretation of the expression “foreign enterprise”  finds
\nsupport\t from the setting in which the expression  has\tbeen
\nplaced\tand  the circumstances in which the law came  to  be
\npassed.\n<\/p>\n
    It\tis however urged by Mr. Rajagopalan learned  Counsel
\nfor the appellants that it may be that a foreign  enterprise
\ncan  be defined in the manner we have done at the same\ttime
\nthe definition of the expression on the basis of the test of
\nlocation cannot altogether be ruled out. In any event it  is
\npossible to define the expression “foreign C enterprise”  as
\nan  enterprise located outside India. Counsel  submits\tthat
\nwhen  two  interpretations  are\t possible  to  be  made\t the
\ninterpretation which is favourable to the assessee should be
\nadopted.  In support of that contention learned Counsel\t has
\nplaced\treliance  upon\ta few decisions\t of  this  Court  in
\nCommissioner  of Income Tax;. Lucknow v. D Madho Pd.  Jalia,<\/a>
\n[1976] 105 ITR 179; Commissioner of income Tax v.  Vegetable
\nProducts Ltd., [1973] 88 ITR 192 and Commissioner of Income  Tax,
\nPunjab v. Kulu Valley Transport Co. P. Ltd.,<\/a> [1970] 77 ITR 518.
\n    The above principle of law is well established and there
\nis no  doubt that. But the question is whether two views are
\npossible to he taken on the interpretation of the expression
\n‘foreign enterprise. In our opinion the expression  “foreign
\nenterprise”   admits   of  only\t one   interpretation.\t The
\ninterpretation which the learned Counsel for the  appellants
\nwants to put on the expression will not be full and complete
\nand  will render the meaning of the expression\tinconsistent
\nwith  the  objects included within it having regard  to\t the
\nchange effected by the Legislature from ‘foreign company’ to
\nthe  present  expression “foreign enterprise”  as  has\tbeen
\nalready\t noticed.  We  are therefore-unable  to\t accept\t the
\ninterpretation\tof the expression as submitted on behalf  of
\nthe appellants.\n<\/p>\n
    We\tare  also  unable to accept the\t contention  of\t the
\nappellants  that  as  the provision of section\t80-O  is  an
\nexemption  provision, it should be construed  liberally\t and
\nupon such liberal construction. it should be held that\tToyo
\nIndia is a foreign enterprise. It is true that an  exemption
\nprovision  should be liberally construed but this  does\t not
\nmean  that  such liberal construction should be\t made  doing
\nviolence  to the plain meaning of such exemption  provision.
\nLiberal construction will be made whenever it is possible to
\n\t\t\t\t\t\t PG NO 1069
\nbe  made without impairing the legislative  requirement\t and
\nthe  spirit  of the provision. In our  opinion\tto  construe
\n“foreign enterprise” in section 80-O as including within  it
\nan Indian company or a branch or unit of such company simply
\nbecause it is located in a foreign country would be  against
\nthe plain meaning of the term and the legislative intent.
\n    We\tmay now Consider another argument of the  appellants
\nbased on the objective of the provision of section 80-O.  It
\nis submitted by the learned Counsel for the appellants\tthat
\nthe  objectives\t of  section 80-O are  to  encourage  Indian
\ncompanies  to  export their technical know-how\tand  thereby
\naugment\t the  foreign  exchange resources  of  the  country.
\nCounsel submits that the main objective of the section is to
\naugment\t the foreign exchange resources of the\tcountry\t and
\nthat the appellant-Company having earned foreign exchange it
\nshould\tbe  held  that the requirement\tof  the\t section  is
\nsatisfied and accordingly the appellant- Company is entitled
\nto  deduction  of Income Tax. On the other  hand  Dr.  Gauri
\nShankar\t points out that the main objective of section\t80-O
\nis not the earning of foreign exchange. According to him the
\nprincipal  purpose for which the deduction is allowed to  an
\nassessee  is  that contained in the speech  of\tthe  Finance
\nMinister  on  the  floor  of  Parliament  at  the  time\t  of
\nintroduction  of  section 85-C into the Act. A copy  of\t the
\nspeech has been handed over to us and has also been supplied
\nto  the learned Counsel for the appellants. In\this  speech.
\nthe  Hon’ble Finance Minister stated inter alia\t that  ‘some
\nfiscal encouragement needs to be given to our industries  to
\nencourage them to provide technical know-now” and  technical
\nservices  to  newly developing countries.  In  view  of\t the
\nspeech\tit is urged by Dr. Gauri Shankar that the  principal
\nobjective  of section 80-O is to supply\t technical  know-how
\nand  render technical services by Indian companies to  newly
\ndeveloping countries.  Counsel submits that it will he wrong
\nto  say that the principal objective of section 80-O  is  to
\naugment the foreign exchange resources of the country.
\n    Although   there  is  no  indication  in  section\t80-O
\nregarding  the\tsupply of technical  know-how  or  rendering
\ntechnical services to newly developing countries yet it\t may
\nbe  reasonable to infer from the said speech of the  Finance
\nMinister that at the time section 85-C was introduced in the
\nAct  one of the objectives was to supply technical  know-how
\nand render technical services to newly developing countries.
\nForeign\t exchanges can be earned by various other modes\t but
\nthat  will  not\t in  all cases entitle\tthe  assessee  to  a
\ndeduction  of Income Tax. Section 80-O. as it  stood  during
\nthe relevant period with which we are  concerned grants cent
\n\t\t\t\t\t\t PG NO 1070
\npercent\t deduction of tax. In the context of such  deduction
\nof  tax\t it  will not be unreasonable to  presume  that\t the
\nprincipal  objective of section 80-O is to supply  technical
\nknow-how   or  render  technical  services   to\t  developing
\ncountries.  In\tthe  circumstances  the\t contention  of\t the
\nappellants  that as the appellant-Company has fulfilled\t the
\nprincipal  object  of  section\t80-O  by  earning    foreign
\nexchange  the  respondent  No. I should\t have  approved\t the
\nagreements  for\t the  purpose  of  section  80-O  cannot  he
\naccepted.\n<\/p>\n
    It is however submitted on behalf of the appellants that
\napart  from  the  question  as\tto  what  is  the  principal
\nobjective  of  section the appellant-Company  has  fulfilled
\nboth  the objectives namely it has supplied technical  know-
\nhow  to a foreign enterprise through an Indian\tcompany\t and
\nthat  it  has also earned foreign exchange. it is  urged  on
\nbehalf of the appellants that although the appellant-Company
\nmay  not  have directly supplied technical  know-how  to  or
\ndirectly  received  fees commission etc.  from\tthe  foreign
\nenterprise  in\tconvertible foreign exchange in\t effect\t the
\nappellant-Company having satisfied the objectives of section
\n80-O indirectly it is entitled to a deduction of Income Tax.
\nIn support of this contention much reliance has been  placed
\ntwo  Single Bench decisions of the Bombay High\tCourt  which
\nwill  be referred to presently. In Gannon Dunkerley and\t Co.
\nLtd.  v. Central Board of Direct Taxes, [1986] 159 ITR\t162,
\nthe  facts are more or less similar to those in the  present
\ncase and it has been held that the main\t conditions  imposed
\nby  section 80-O has been complied with by  the\t petitioner-
\nCompany\t and the Central Board of Direct Taxes\tshould\thave
\napproved the agreement. The same view has been taken in\t the
\nother  Single  Bench decision of the Bombay  High  Court  in
\nIndian Hume Pipe Co. Ltd. v . Central Board of Direct Taxes,
\n[1987]\t165  ITR  537. Both the above  decisions  have\tbeen
\nconsidered  by the Division Bench in the  impugned  judgment
\nand  the  Division  Bench  could not  agree  with  the\tview
\nexpressed in those decisions.\n<\/p>\n
    Mr.\t Rajagopalan has pressed us to hold on the basis  on
\nthe  said  Single Bench decisions of the Bombay\t High  Court
\nthat  the objectives of the section having  been  fulfilled,
\nthe  agreements\t should have been approved  by\tthe  Central
\nBoard  of Direct Taxes.\t Attractive though the argument\t is,
\nwe  regret,  we are unable to accept the same.\tIt  is\ttrue
\nthat  viewed in the light of the submissions made on  behalf
\nof the appellants, the objectives of the section are to some
\nextent\tfulfilled, but we cannot, at the same  time,  ignore
\nthe   plain   language\tof  the\t  section.    Section\t80-O
\nunequivocally  provides that the income by way\tof  royalty,
\ncommission, fees etc. shall be received by the assessee from
\n\t\t\t\t\t\t PG NO 1071
\nthe  Government of a foreign State or a\t foreign  enterprise
\nand  indeed that is one of the principal conditions for\t the
\napplication of the section. The assessee has to fulfil\tthat
\ncondition before he can claim any deduction of Income Tax or
\napproval  of an agreement. The fulfilment of the  objectives
\nof a provision of a statute without fulfiling the  condition
\nlaid down in plain and clear language will not enable one to
\nhave the benefit of the section. In our opinion not only the
\nobjectives of a provision of a statute have to be  fulfilled
\nbut  also  the\tconditions  for\t the  applicability  of\t the
\nprovision  have\t also  to be fulfilled.\t The  fulfilment  of
\nconditions of a provision of an Act in most cases will\talso
\nbe  fulfilment of the objectives of the provision.  But\t the
\nconverse  may not be true. In other words the fulfilment  of
\nthe objectives may not satisfy the conditions required to be
\nfulfilled  by  the  provision.\tIn  the\t instant  case\t the
\nappellant-Company  received  its income by  way\t of  royalty
\ncommission  fees  or  any  similar  payment  not  from\t the
\nGovernment  of a foreign State or a foreign  enterprise\t but
\nfrom an Indian company. The appellant-Company has  therefore
\nfailed to fulfil the principal condition of section 80-O of
\nthe Act. In the circumstances it is difficult to accept\t the
\ncontention  of the appellants that as they  have  indirectly
\nfulfilled  the objectives of the section the Central  Board
\nof  Direct  Taxes  was not justified in\t not  approving\t the
\nagreements.\n<\/p>\n
    In\tthe impugned judgment the High Court has  held\tthat
\nsection\t 80-O does not require that the agreement should  be
\nmade  with  the Government of a foreign State or  a  foreign
\nenterprise.  We are unable to accept this view of  the\tHigh
\nCourt.\t Section  80-O\trefers\tto  three  parties   namely.
\nGovernment  of a foreign State. foreign enterprise  and\t the
\nassessee.  It is clear from section 80-O that the  agreement
\nmust  be  between  the\tassessee on the\t one  hand  and\t the
\nGovernment of a foreign State or a foreign enterprise on the
\nother. When section 80-O speaks of the supply of know-how by
\nthe assessee to a Government of a foreign State or a foreign
\nenterprise  and\t the  receipt of income by  way\t of  royalty
\ncommission etc. from the Government of a foreign State or  a
\nforeign\t enterprise  it is unreasonable to  think  that\t the
\nagreement  under  which\t the  technical\t know-how  shall  be
\nsupplied and the income shall be received by the assessee in
\nconvertible foreign exchange may not be with the  Government
\nof  a  foreign State or a foreign enterprise but  with\tsome
\nother  party. It is manifestly clear from the  provision  of
\nsection 80-O that the agreement shall be entered into by and
\nbetween\t the assessee and the Government of a foreign  State
\nor a foreign enterprise.\n<\/p>\n
    In\tthe instant case no such agreement has been  entered
\ninto  by  the  appellant-Company with the  Government  of  a
\n\t\t\t\t\t\t PG NO 1072
\nforeign State or a foreign enterprise. In that respect\talso
\nthe  appellant-Company does not fulfil another condition  of
\nsection\t 80-O  which is also very material.  The  agreements
\nwhich have not been approved by the Central Board of  Direct
\nTaxes have been as already noticed entered into between\t the
\nappellant-Company  and\tToyo India which is  not  a  foreign
\nenterprise  but\t an  Indian Company. In view  of  the  facts
\nstated above the Central Board of Direct Taxes was justified
\nin not approving the agreements in question.
\n    Lastly  it\tis argued on behalf of the  appellants\tthat
\nsection 80-O should be construed as permitting\tcanalisation
\nand  if so construed the appellant-Company will be  entitled
\nto  the benefit of the section. On the other hand it is\t the
\ncontention of Dr. Gauri Shankar that in view of the specific
\nmandate\t of  section 80-O that the income  of  the  assessee
\nshall  be directly received from the foreign enterprise\t the
\nquestion  of canalisation does not arise. In other words  it
\nis  submitted  that  canalisation is  not  contemplate.1  by
\nsection\t 80-O.\tIn  reply to the  contention  of  Dr.  Gauri
\nShankar\t Mr. Rajagopalan submits that it is a lacuna on\t the
\npart of the Legislature in not providing for canalisation in
\nfulfilment  of the objectives referred to above. In  support
\nof  his contention. much reliance has been placed by him  on
\nthe  observation of Lord Denning in the decision in  Seaford
\nCourt Estates Ltd. v . Asher [1949] 2 K.B. 481. In that case
\nLord Denning observed as follows:\n<\/p>\n
    “A\tjudge  believing  himself  to  he  fettered  by\t the
\nsupposed rule that he must look to the language and  nothing
\nelse  laments that the draftsmen have not provided for\tthis
\nor  that or have been guilty of some or other ambiguity.  It
\nwould\tcertainly  save\t the  judges  trouble  if  Acts\t  of
\nParliament  were drafted with divine prescience and  perfect
\nclarity. In the absence of it when a defect appears a  judge
\ncannot\tsimply\tfold his hands and blame the  draftsman.  He
\nmust  set  to work on the constructive task of\tfinding\t the
\nintention  of Parliament and he must do this not  only\tfrom
\nlanguage of the statute but also from a consideration of the
\nsocial conditions which gave rise to it and of the  mischief
\nwhich  it was passed to remedy. and then he must  supplement
\nthe  written  word  so as to give “force and  life”  to\t the
\nintention of the legislature.”\n<\/p>\n
    The\t above observation of Lord Denning does not  in\t our
\nopinion help the appellants. The entire observation is based
\non a defect appearing in the provision of a statute. In\t our
\n\t\t\t\t\t\t PG NO 1073
\nview there is no defect in the provision of section 80-O. It
\nmay   be   that\t the  Legislature  has\tnot   provided\t for
\ncanalisation  but  that cannot be said to he a lacuna  or  a
\ndefect\tin  the provision. Whether  canalisation  should  be
\npermitted or not is absolutely a matter for the Legislature.
\nIt  is\tnot  incumbent on the  Legislature  to\tprovide\t for
\ncanalisation  although it has been frankly conceded  by\t Dr.
\nGauri\tShankar\t that  canalisation  is\t desirable   and   a
\nreasonable  one. In the circumstances in view of  the  plain
\nlanguage of the section we do not think that we can construe
\nthe section as providing canalisation that is to say  income
\nby  way\t of  royalty commission etc. need  not\tbe  received
\ndirectly from the Government of a foreign State or a foreign
\nenterprise  but through another Indian company. This is\t not
\nthe intention of the Legislature.\n<\/p>\n
    For the reasons aforesaid the appeal is dismissed. There
\nwill however be no order as to costs.\n<\/p>\n
R.S.S.\t\t\t\t\t       Appeal dismissed.\n\n\n\n<\/pre>\n","protected":false},"excerpt":{"rendered":"
Supreme Court of India Petron Engineering Construction … vs Center Board Of Direct Taxes & … on 13 December, 1988 Equivalent citations: 1989 AIR 501, 1988 SCR Supl. (3)1058 Author: M Dutt Bench: Dutt, M.M. (J) PETITIONER: PETRON ENGINEERING CONSTRUCTION PVT.LTD. & ANOTHER Vs. RESPONDENT: CENTER BOARD OF DIRECT TAXES & OTHERS DATE OF JUDGMENT13\/12\/1988 […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"","_lmt_disable":"","_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[30],"tags":[],"class_list":["post-165581","post","type-post","status-publish","format-standard","hentry","category-supreme-court-of-india"],"yoast_head":"\nPetron Engineering Construction ... vs Center Board Of Direct Taxes & ... on 13 December, 1988 - Free Judgements of Supreme Court & High Court | Legal India<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.legalindia.com\/judgments\/petron-engineering-construction-vs-center-board-of-direct-taxes-on-13-december-1988\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"Petron Engineering Construction ... vs Center Board Of Direct Taxes & ... on 13 December, 1988 - 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