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2011 (12) TMI 40 - HC - Income TaxDeduction u/s 80-O - whether contractor of sub-contractor eligible for deduction u/s 80-O - rendering of service outside India - it was contended that the assessee was not entitled for deduction under Section 80-O of the Act, it being a mere contractor and the deduction under the said provision is available only with gross total income of an assessee being an Indian company which includes any income by way of royalty fees or commission, similar payments received by the assessee from the company of the foreign state or a foreign enterprise in consideration for the use outside India of any patent, innovation, model, design etc. - Held that - under the contracts in question, the assessee had made available technical information to the foreign Government for use outside India and had also rendered technical services to the foreign Government outside India. - Even, theoretically the sub-contractor is entitled for the benefit under Section 80-O of the Act and to that extent the impugned order of the Tribunal in denying such right of the assessee, is stand set aside. - Decided in favor of assessee. Absence of positive income - Held that - In view of the principles enunciated in the above cited decisions of the Apex Court in the case of COMMISSIOENR OF INCOME TAX V/ SHIRKE CONSTRUCTION EQUIPMENT LTD., 2007 -TMI - 6560 - SUPREME Court , we are of the view that the computation of income has to be made in accordance with the provisions of the Income Tax Act and the income includes not only the profits , but also the losses and therefore, we direct the assessing officer to compute the income in accordance with the provisions of the Income Tax Act. - Decided in favor of assessee by way of remand.
Issues Involved:
1. Entitlement to deduction under Section 80-O of the Income Tax Act, 1961. 2. Classification of the appellant as a contractor and the nature of payments received. 3. Rendering of services outside India for the purposes of claiming deduction under Section 80-O. Issue-wise Detailed Analysis: 1. Entitlement to Deduction under Section 80-O: The appellant claimed deductions under Section 80-O for the assessment years 1993-94 and 1994-95. The Assessing Officer, Commissioner of Income Tax (Appeals), and the Income Tax Appellate Tribunal (ITAT) all rejected the claim. The core contention was whether the services rendered by the appellant qualified for deductions under Section 80-O, which allows deductions for income received in convertible foreign exchange for services rendered outside India. 2. Classification as Contractor and Nature of Payments: The Revenue argued that the appellant acted merely as a contractor and not as a provider of technical services. The appellant had engaged a sub-contractor, M/s. Chemtex Engineering India Ltd., to prepare drawings and designs, which were then sent to the foreign company. The Revenue contended that the appellant acted as an agent and not as an independent service provider, thus disqualifying it from claiming deductions under Section 80-O. The appellant countered that the services rendered from India to the foreign company should qualify for the deduction, even if the technical know-how was sourced from a sub-contractor. 3. Rendering of Services Outside India: The Tribunal and lower authorities held that the appellant did not render services outside India, as the work was executed in India. However, the appellant argued that the services rendered from India to a foreign company for use outside India should qualify for the deduction under Section 80-O. The legal provision and relevant explanations were scrutinized, emphasizing that services rendered from India for use outside India are eligible for deductions, provided they earn foreign exchange. Legal Analysis and Judgments: Section 80-O Interpretation: Section 80-O allows deductions for income received in convertible foreign exchange for services rendered outside India. Explanation (iii) to Section 80-O clarifies that services rendered from India for use outside India are included, but services rendered within India are excluded. This interpretation was supported by the Supreme Court's judgment in *Central Board of Direct Taxes vs. Oberoi Hotels India Pvt. Ltd.*, emphasizing the purpose of Section 80-O to augment foreign exchange resources. Supreme Court and High Court Rulings: The Supreme Court in *Petron Engineering Construction P. Ltd. vs. Central Board of Direct Taxes* and *Continental Construction Ltd. vs. Commissioner of Income Tax* ruled that services rendered through employees or sub-contractors still qualify for deductions under Section 80-O. The Madras High Court in *Commissioner of Income Tax vs. Chakiat Agencies Pvt. Ltd.* reiterated that services rendered from India for use outside India qualify for deductions, even if the foreign recipient utilizes the services in India. Circular No. 700: Circular No. 700 issued by the Central Board of Direct Taxes clarified that deductions under Section 80-O are available even if the services rendered from India are utilized by the foreign recipient in India. Final Judgment: The High Court concluded that the authorities below failed to consider the issue properly and did not account for the second proviso and explanation (iii) to Section 80-O. The Court directed the Assessing Officer to reconsider the entire case, granting the benefit under Section 80-O to the appellant, subject to the provisions of Section 80-AB, which requires the computation of income to include both profits and losses. The matter was remanded to the Assessing Officer for fresh orders in accordance with the law.
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