1988 (12) TMI 1 - SC - Income Tax

Central Board of Direct Taxes, rejecting the application of the appellant-company under section 80-0 - held that branch of an Indian Company can not be said to be a foreign enterprise , for the purpose of s.80-O - assessee s appeal is dismissed

Issues Involved:
1. Interpretation of the expression "foreign enterprise" under Section 80-0 of the Income-tax Act, 1961.
2. Conditions for the applicability of Section 80-0.
3. Whether the income received by the appellant-company qualifies for deduction under Section 80-0.
4. Whether the agreements entered into by the appellant-company with Toyo India should be approved under Section 80-0.
5. Consideration of the legislative intent and objectives behind Section 80-0.
6. The argument of canalisation under Section 80-0.

Issue-wise Detailed Analysis:

1. Interpretation of the Expression "Foreign Enterprise":
The primary issue revolves around the interpretation of the term "foreign enterprise" as mentioned in Section 80-0 of the Income-tax Act, 1961. The Central Board of Direct Taxes (CBDT) and the High Court concluded that Toyo India, being an Indian company, does not qualify as a "foreign enterprise." The court emphasized that a "foreign enterprise" must be an enterprise situated in a foreign country and created or registered under the laws of that foreign country. The court rejected the appellant's argument that the location of the enterprise alone should determine its status as a foreign enterprise.

2. Conditions for the Applicability of Section 80-0:
Section 80-0 provides for a deduction in respect of royalties, commissions, fees, or similar payments received by an Indian company from the Government of a foreign State or a foreign enterprise. The court outlined the principal conditions for the applicability of Section 80-0:
1. The assessee must be an Indian company.
2. The income must be received from the Government of a foreign State or a foreign enterprise.
3. The consideration must be for the use outside India of patents, inventions, models, designs, etc., or for technical services rendered outside India.
4. The agreement must be approved by the Board.
5. The income must be received in convertible foreign exchange.
6. The deduction applies to the whole of such income received in or brought into India.

3. Whether the Income Received by the Appellant-Company Qualifies for Deduction:
The court held that the appellant-company did not fulfill the principal condition of receiving income directly from the Government of a foreign State or a foreign enterprise, as the payments were received from Toyo India, an Indian company. Therefore, the income did not qualify for deduction under Section 80-0.

4. Approval of Agreements Under Section 80-0:
The agreements between the appellant-company and Toyo India were not approved by the CBDT because Toyo India is not a foreign enterprise. The court upheld this decision, stating that the agreements did not meet the criteria set forth in Section 80-0, which requires the agreement to be between the assessee and the Government of a foreign State or a foreign enterprise.

5. Legislative Intent and Objectives Behind Section 80-0:
The court considered the legislative background and objectives of Section 80-0, noting that the section aims to encourage Indian companies to provide technical know-how and services to foreign entities, thereby augmenting foreign exchange resources. However, the court emphasized that fulfilling the objectives alone is insufficient without meeting the specific conditions laid down in the section.

6. Argument of Canalisation:
The appellants argued that the provision should be construed to permit canalisation, allowing income received through an Indian company to qualify for deduction. The court rejected this argument, stating that the plain language of the section does not support canalisation. The court emphasized that any such provision would need to be explicitly provided by the Legislature and cannot be inferred by judicial interpretation.

Conclusion:
The appeal was dismissed, with the court affirming that the appellant-company did not meet the necessary conditions under Section 80-0 of the Income-tax Act, 1961. The agreements with Toyo India were not approved for the purposes of Section 80-0, as Toyo India is not a foreign enterprise, and the income was not received directly from a foreign entity. The court upheld the decisions of the CBDT and the High Court, emphasizing the importance of adhering to the specific conditions and legislative intent of the provision.

← Previous Next →