2006 (5) TMI 302 - AT - Income Tax

Summary

Issues Involved:
1. Eligibility for deduction under section 80-O of the Income-tax Act.
2. Nature of services rendered by the assessee.
3. Interpretation of section 80-O and relevant case law.
4. Proportionate deduction for services rendered in India and abroad.
5. Examination of agreements and contracts with foreign buyers.

Issue-wise Detailed Analysis:

1. Eligibility for deduction under section 80-O of the Income-tax Act:
The primary issue was whether the assessee was eligible for deduction under section 80-O of the Income-tax Act for the assessment year 1997-98. The assessee claimed a deduction of Rs. 3,20,81,836 under section 80-O, but the deduction was restricted to Rs. 1,40,50,080 based on positive income shown. The Assessing Officer denied the deduction, arguing that the services rendered were managerial rather than technical, relying on the decision in J.K. (Bombay) Ltd. v. CBDT [1979] 118 ITR 3121.

2. Nature of services rendered by the assessee:
The CIT (Appeals) found that the assessee rendered various services to its foreign customers, including preparation of drawings and designs, merchandising assistance, evaluation of factories, negotiation with vendors, protecting buyer's interests, logistics, quality inspection, lab tests, and compliance with international norms. The CIT (Appeals) concluded that these services were professional/technical in nature, not merely managerial.

3. Interpretation of section 80-O and relevant case law:
The CIT (Appeals) held that the Assessing Officer's view was too narrow and cited Supreme Court decisions in Continental Construction Co. Ltd. and Oberoi Hotels Ltd. to support a broader interpretation of technical services. The CIT (Appeals) also noted that the decision in J.K. (Bombay) Ltd. was not applicable under the current provisions of section 80-O and had been diluted by subsequent decisions.

4. Proportionate deduction for services rendered in India and abroad:
The revenue argued that the assessee rendered services in India and, per Explanation (iii) to section 80-O, deduction was not permissible for such services. They contended that if some services were rendered outside India, the deduction should be proportionate. The Tribunal agreed that services rendered from India to foreign buyers could qualify for deduction, but services rendered in India should not. The Tribunal decided that 30% of fees received should be attributed to services rendered in India and 70% to services qualifying for deduction under section 80-O.

5. Examination of agreements and contracts with foreign buyers:
The revenue contended that the assessee did not provide agreements with all foreign parties and that the nature of services rendered needed thorough examination. The Tribunal noted that the assessee had furnished all requested information and that the CIT (Appeals) had thoroughly examined the details. The Tribunal decided against remanding the case, instead making a reasonable estimate based on available material.

Conclusion:
The Tribunal concluded that the assessee was entitled to a deduction under section 80-O, but only for 70% of the fees received, attributing the remaining 30% to services rendered in India. The Assessing Officer was directed to recompute the deduction accordingly. The appeal was allowed for statistical purposes.