2016 (11) TMI 1010 - HC - Income Tax

Claim for deduction under section 80-O - Whether the services rendered by the assessees are from India or in India ? - Held that - Tribunal has erred on two counts in holding that the assessees are entitled to the benefit of deduction under section 80-O of the Act First mere transmission of the information to a foreign enterprise evidently abroad does not go to show that it is a service rendered from India but not in India. With an element of certainty we can as well say that once there is a contract an Indian agent always interacts with and sends information-even technical know-how-to a foreign enterprise abroad. If that alone qualifies for deduction without reference to the services rendered in India the very expression in explanation (iii) becomes otiose. Trite it is to observe that statutory surplusage is not a settled canon of construction ; rather it is to be avoided. The purpose of the provision is to provide an incentive to the indigenous know-how of whatever nature that reaches the shores of foreign nations and gets applied there. The resultant fruits may percolate to India too as is the case in E.P.W. Da Costa 1979 (2) TMI 40 - DELHI High Court and Continental Construction 1992 (1) TMI 5 - SUPREME Court even in which the apex court has held that not all receipts can claim the concession. If we refer back to the analogy employed by the learned senior counsel for the assessees an advocate in India may render services to a foreign client stationed abroad concerning a case pending in India. It is a service rendered not only from India but also in India. On the other hand if that piece of professional advice is used abroad even involving clients of Indian origin or laws of this nation as it happens in international arbitrations the remuneration is qualified for the benefit. Once we look at the range of services referred to in section 80-O we can discern the thread of connectivity in all the intellectual endeavours mentioned therein any patent invention model design secret formula or process or similar property right or information concerning industrial commercial or scientific knowledge experience or skill made available or provided or agreed to be made available or provided to such Government or enterprise by the assessee. It can also be in consideration of technical or professional services rendered or agreed to be rendered outside India to such Government or enterprise by the assessee. They cannot be said to be entirely discrete and disparate. The services have an air of intellectuality ; as such all and sundry services rendered to a foreign enterprise cannot be taken into account lest it should amount to doing violence to the Explanation (iii). As seen rendering includes both providing and performing. In the context of section 80-O the services may be rendered from India but have to be performed on foreign soil. Any other interpretation renders the Explanation (iii) in our view otiose. In the alternative if one were to assume-it is unlikely though-that the assessees had rendered certain services which qualify for a deduction they have however failed to place any material in that regard. The agreement unfailingly points out that the assessees are marine-product procuring agents for the foreign enterprises without any claim for expertise capable of being used abroad rather than in India. - Decided in favour of revenue

Summary

Issues Involved:
1. Whether the appeals filed by the Revenue are maintainable in the face of Circular No. 21 of 2015, dated December 10, 2015?
2. Whether the services rendered by the assessees are from India or in India?

Issue-wise Detailed Analysis:

Issue No. 1: Maintainability of Appeals in Light of Circular No. 21 of 2015
The Central Board of Direct Taxes (CBDT) issued Circular No. 21 of 2015, revising its policy on litigation by setting monetary limits for filing appeals. For High Courts, the limit is Rs. 20,00,000. The circular operates retrospectively. In this case, all the appeals involve disputes below this threshold. The Supreme Court's decision in Surya Herbal allows the Department to move the High Court if the matter has a cascading effect. The respondents argued that the provision was amended, and no large number of matters would arise. The court decided to proceed on the merits, noting the cascading effect of the Tribunal's order.

Issue No. 2: Services Rendered from India or in India
Statutory Scheme:
Section 80-O of the Income-tax Act, 1961, provides deductions for income by way of royalty, commission, fees, or similar payments from foreign enterprises for the use outside India of patents, inventions, models, designs, secret formulas, or processes, or information concerning industrial, commercial, or scientific knowledge. The Explanation (iii) to the section includes services rendered from India but excludes services rendered in India.

Semantic Significance:
The court analyzed the terms "from India" and "in India" to determine their implications. Services rendered "from India" must be used outside India to qualify for the deduction.

Precedential Position:
1. Thomas Kurian: The assessee acted as an agent for foreign companies, ensuring the quality of marine products in India. The court held that services rendered entirely in India do not qualify for deduction under section 80-O.
2. E.P.W. Da Costa: The Delhi High Court held that services used by the BBC outside India qualify for the deduction.
3. Mittal Corporation: The Delhi High Court allowed the deduction for commercial information provided to foreign enterprises.
4. Oberoi Hotels: The Supreme Court held that technical services rendered outside India qualify for the deduction.
5. Inchcape India: The Delhi High Court affirmed the deduction for services rendered outside India.
6. Li and Fung: The Delhi High Court held that services rendered from India for use outside India qualify for the deduction.
7. Chakiat Agencies: The Madras High Court allowed the deduction for commercial services rendered to foreign shipping owners.

The Twin Aspects:
1. The type of services rendered by an Indian entity.
2. The true import of the expression "use outside India."

Continental Construction: The Supreme Court held that technical services rendered outside India qualify for the deduction. The court emphasized the need for the assessee to prove that the services rendered fall within the scope of section 80-O.

Khursheed Anwar: The Madras High Court held that the assessee must provide evidence to support the claim for deduction under section 80-O.

Application to the Present Case:
The agreements with Gelazur and Hoko Fishing Co. Ltd. required the assessee to perform various duties, including negotiating purchases, providing information, and carrying out technical guidance. The court held that some functions do not qualify for deduction under section 80-O. The assessees failed to provide material evidence to support their claim.

Conclusion:
The Tribunal erred in holding that the assessees are entitled to the benefit of deduction under section 80-O. Mere transmission of information to a foreign enterprise does not qualify as a service rendered from India. The orders of the Tribunal were set aside, and the questions of law were answered in the Revenue's favor.