Guidelines with respect to disposal of applications u/s 80-O. - Income Tax - 1813/1989

INSTRUCTION NO. 1813/1989 Dated: March 27, 1989 Section 80-O of the Income-tax Act, 1961 provides for deduction of 50 percent of the net income by way of royalty, commission, fees or any similar payment earned by an Indian company in convertible foreign exchange from the Government of a foreign State or a foreign enterprise. This tax concession was hitherto available if the agreement under which such income is derived is approved by the Central Board of Direct Taxes. By an amendment made to this section by the Finance Act, 1988, the powers of the Board to approve the agreement have been delegated to the Chief Commissioners/Directors General of Income-tax w.e.f. 1.4.1989. Every application pending for approval under this section with the Board immediately before 1.4.1989 shall stand transferred to the concerned Chief Commissioner or Director General of Income-tax for disposal. Further, it has now been provided that the application for the approval of the agreement should be made in the prescribed form and verified in the prescribed manner. 2. Vide Notification No. 8135/SO 1108(E) (F.No. 142/9/88-TPL) dated 28.11.1988, a new rule 11E has been inserted in the Income-tax Rules, 1962 w.e.f 1.4.1989, prescribing that the application for approval of agreement under section 80-O shall be made in Form No 10F. 3. Detailed instructions were issued vide Instruction No.797 (F.No. 473/5/72-FTD) dated 23.11.1974, highlighting the points which should be kept in view by the Assessing Officers while dealing with the claim for deduction under section 80-O. Detailed guidelines were also issued vide Circular No.187 (F.No. 473/15/73-FTD) dated 23.12.1975 as modified by Circular No. 253 (F.No. 473/15/78-FTD) dated 30.4.1979. keeping in view the amendments made to this section, it has become necessary to amplify/amend these instructions for the guidance of Chief Commissioners/Directors General of Income-tax and Assessing Officers. For the purposes of granting approval to an agreement under section 80-O, the following points should inter-alia be kept in view by the Chief Commissioners and Directors General:- i. The application for approval should be in the prescribed form No.10F. In this form the applicant is required to furnish all the necessary details required for the purpose of deciding as to whether the case is covered under the provisions of section 80-O. ii. The applicant should be an Indian company. iii. The application for approval under section 80-O should have been filed before the 1st day of October of the assessment year in relation to which an approval is first sought. Under the Act, there is no power to condone the delay in filing the application. iv. It has been found that in some of the agreements presented before the Board, the date of the agreement or the date on which the agreement is signed by the foreign party is found to be either after the services under the agreement started or after the entire services had been completed. The Board have been advised that the expression "under the agreement" in section 80-O would imply that only the services which commence from the date of the execution of the agreement would qualify for the benefit under this section. Therefore, any services rendered prior to the date of execution of the agreement would not qualify for the purposes of section 80-O. However, where the assessee is able to prove that the parties to the agreement had agreed prior to the date of the agreement to render such services from a date prior to the execution of the agreement and the terms of the written agreement do not contradict such statement, the agreement can be considered for purposes of section 80-O from such prior date. It may, however, be noted that a company cannot enter into an oral agreement. The agreement that could be legally entered into by a company should be something reduced in writing. It could be by way of exchange of correspondence or by way of a formal agreement. v. For the purposes of section 80-O, an agreement, will have to be either with a foreign Government or with a foreign enterprise as defined in the Act. With effect from assessment year 1988-89 a foreign enterprise has been defined as a person who is a non-resident. In the case of Indian companies which have established independent branches outside India, such branches, even if they are registered under the laws of that state, would not be considered as 'foreign enterprise' for the purpose of section 80-O. vi. While examining the application under section 80-O, it is necessary to consider whether the income is received in consideration for the following:- (I) the use outside India of: (a) any patent, invention, model, design, secret formula or process or similar property right; or (b) information concerning industrial, commercial or scientific knowledge, experience or skill made available or provided or agreed to be made available or provided; and (II) technical services rendered or agreed to be rendered outside India. Deduction is available only in respect of income by way of royalty, commission, fees or any similar payment. vii. The Board have been advised that payment received in consideration for the use of trade mark rights or copy-right would be covered under the expression "similar property rights". viii. The agreements providing for furnishing of information where the job culminates into certain findings, reports, recommendation or information which would be of use to the foreign party outside India, would be covered by the provisions of section 80-O. It has been held by the Delhi High Court in the case of EPW de Costa and another Vs. Union of India (1980) (1212) ITR (751) that the statistical tables compiled by the petitioner after analysing masses of numerical data would amount to commercial or scientific knowledge made available to the foreign party. In view of this, the stipulation in para 3(iv) of Boards circular No.187 (F.No.473/15/73-FTD) dated 23-12-75 to the effect that the information made available to the foreign party should be processed or developed by the Indian party and should not be of a statistical type collected or collated from scientific journals or other commonly available sources of information is contradictory to the legal provision. Accordingly, the guidelines contained in para 3(iv) of Board's circular referred to above should be treated as withdrawn. It would however be necessary to verify whether the information furnished relates to industrial, commercial or scientific knowledge, experience or skill. Genuineness of transactions should be considered in every case on an overall appreciation of the facts of the case before granting approval to the agreement. Special care should be taken in examining agreements between associated enterprises. ix. In the case of technical services rendered outside India, the usual method is by deputing the technicians of the applicant for rendering such services. It is to be verified whether the persons deputed are the employees of the Indian company and have not become the employees of the foreign company. In case the persons deputed become the employees of the foreign company, it will be difficult to hold that the services were rendered by the assessee. It should also be verified as to who is responsible for the work done by the technicians deputed. If the responsibility is that of assessee company who have to make good any mistake, loss or damage to the foreign party, then, the agreement can be held to be one for rendering technical services. Attention in this connection is invited to the judgment of the Calcutta High Court in the case of Simon Carves India Ltd. (159 ITR 168). x. In the case of composite agreements covering provisions of technical services or furnishing of information besides supply of goods etc. it may be examined whether the profit on supply of goods etc. has been loaded in the portion of income towards services, thereby increasing the admissible portion of income which would be covered by section 80-O. xi. Agreements for mere recruitment of persons from India would not qualify for purposes of section 80-O. In this connection, attention is invited to the judgment of Bombay High Court in Eastman Consultant P. Ltd. (132 ITR 637), wherein it was held that mere supply of bio-data of persons willing to work abroad and their selection recruitment in India is not an 'information' covered under section 80-O. xii. If under the agreement, the assessee is required to manage the day-to-day affairs of the foreign party, that would amount to a participation in the business of the foreign party and hence cannot be considered as rendering of technical services. Therefore, the portion of fees under the agreement relating to such management services which are not covered by the provisions of section 80-O should be excluded from the purview of that section. It is for the Chief Commissioner / Director General to decide the portion which is to be so excluded. Before doing so, however, an opportunity of being heard may be given to the assessee. It may be mentioned in this connection that the Delhi High Court have held that hotel management is covered under section 80-O (Oberoi Hotels India Ltd. Vs. C.B.D.T. (135 ITR 257). This judgment has not been accepted by the Board. Therefore, the cases where management services are in respect of a hotel, involving hoteliering as distinct from management of the company itself, the applications may be kept pending till the decision of the Supreme Court in Oberoi Hotels India Ltd.'s case is received. xiii. It has been found that many of the agreements contained a restriction on the assessee from providing similar know-how to other parties without the consent of the foreign party. In such cases, the restriction would amount to a trade restriction and the consideration under that agreement would include a portion of fees for compensating the assessee for the loss of business due to such restriction. Therefore, a suitable disallowance may be made from the total consideration towards such trade restriction. It may, however, be noted that in some cases there will be a counter-balancing restriction on the foreign party also. In such cases, subject to the satisfaction of the Chief Commissioner / Director General, no disallowance or a lesser disallowance need be made towards such trade restriction. Before passing an order, an opportunity of being heard may be granted to the assessee. xiv. if the agreements provide for rendering of services in India like giving practical training in India, attending to the queries of Indian customers of the foreign party etc., in such cases, suitable disallowance for such services in India may be made. However, before any disallowance is made in this respect, the assessee may be given an opportunity of explaining its position. xv. Some of the agreements relate to supply of machinery / equipment alongwith technical documentation, wherein the assessees claim a portion of the cost of such machinery / equipment towards charges for technical documentation. In such cases, it may be ensured that the agreement itself provides for such apportionment or it has been agreed in writing between the parties that such apportionment be made and such apportionment is found to be reasonable. xvi. In the case of a composite agreement specifying a consolidated amount as consideration for the purposes which include matters outside the scope of section 80-O, other than matters covered under section 80HHB (e.g. supply of equipment etc.), and the amount of the consideration relating to the provisions of technical know-how or technical services etc. qualifying for section 80-O cannot be determined the agreement will be approved by the Chief Commissioner / Director General subject to a suitable disallowance for the non-qualifying services, after taking into account the totality of the agreement. xvii. Section 80-O requires the agreement to be approved for the purpose of that section and application has to be made for approval before the 1st day of October of the relevant Assessment Year for which the approval is first sought. It is not necessary for the assessee to file an application every year for approval of the same agreement. An approval once granted to an agreement would cover the entire period for which the agreement runs or in which the income under the agreement would be received, as the case may be. To ensure that no undue advantage is taken of the approval, the assessment years for which approval is being granted may be mentioned in the order of approval itself. A specimen copy of the order of approval to be issued by the Chief Commissioner / Director General of Income-tax is enclosed. xviii. Each agreement will have to be considered separately for the purposes of this section. Therefore, if an original agreement is extended by a subsequent agreement, such extension agreement would also have to be separately approved for the purposes of section 80-O, for which a separate application within the prescribed time has to be made. However, in case the original agreement provides that it will continue until revoked, such agreement can be approved for all the relevant assessment years. xix. In this connection, attention is invited to the provisions of section 80HHB introduced in the Income-tax Act w.e.f. assessment year 1983-84. It relates to the deduction in respect of profits and gains from projects outside India. For the purposes of this section, 'foreign project' has been defined in clause (b) of sub-section (2) of this section. The income which will be eligible for the deduction under this section has been classified in respect of two activities : i. The execution of a foreign project undertaken by the assessee in pursuance of contract entered into by him, or ii. the execution of any work undertaken by him and forming part of a foreign project undertaken by any other person in pursuance of a contract entered into by such other person, with a foreign Govt. or any statutory or other public authority or agency in a foreign State or a foreign enterprise. Sub-section (5) of this section lays down that no part of the consideration or of the income comprised in the consideration payable to the assessee for the execution of the foreign project referred to in clause (a) of sub-section (1) or of any work referred to in clause (b) of that sub-section would qualify for deduction for any assessment year under other provisions in Chapter VI-A of the Act under the heading "C - Deductions in respect of certain incomes". In the light of the above provisions it has to be seen whether any part of the consideration under the agreement falls within the ambit of section 80HHB. If it so falls, it cannot be considered for the purposes of section 80-O. It is, therefore, necessary that before approving an agreement under section 80-O, applicability of section 80HHB should be examined. The following points may be kept in view while considering the applicability of section 80HHB to the case presented under section 80-O :- I. Where an assessee has undertaken a 'foreign project' himself under an agreement, section 80HHB will apply. Even if part of the foreign project involves the services covered by section 80-O, the entire agreement will have to be considered for the purposes of section 80HHB alone and not under section 80-O, in view of the prohibition in sub-section (5) of section 80HHB and, therefore, cannot be approved. II. In cases where the assessee has not directly undertaken any foreign project but is rendering services or furnishes information which forms part of a 'foreign project' undertaken by any other person within the meaning of section 80HHB(1)(b) then also the entire agreement would be covered by section 80HHB and not by section 80-O. It may, however, be noted that for a case to be covered by sub-section (1)(b) of section 80HHB, there has to be - a. a contract between "other person and a foreign enterprise or foreign Govt. etc." existing before the date of the agreement which is sought to be approved under section 80-O; and b. the contract should relate to a 'foreign project' as defined in sub-section (2)(b) of section 80HHB. III. The word 'work' will include even technical services or consultancy services including supervision. In the cases of agreements for preparation of feasibility reports or market survey reports, generally the contract for construction / installation is entered into at a much later date after the submission of such reports. Such cases, therefore, may not be covered by section 80HHB. While considering the applicability of section 80HHB, it has to be examined whether the two conditions mentioned in (II) above are satisfied. IV. Agreements for services upto a date which is prior to the date of contract for the 'foreign project' would not be covered by the provisions of section 80HHB. 4. A separate Circular No.533 (F.No.516/4/87-FID) dated 27.3.89 has also been issued in this regard. In case of any doubt as to the correct interpretation of section 80-O, a reference may be made to the Foreign Tax Division of the Board before deciding the matter. 5. Assessing Officers while dealing with any claim for deduction under section 80-O should also keep in view the above instructions and also the instructions issued on the subject from time to time. For this purpose the following instructions may be referred to :- a. Instruction No. 797 (F.No.473/5/72-FTD) dated 23.11.1974. b. Instruction No.1008 (F.No.473/46/73-FTD) dated 18.9.1976. c. Instruction No.1242 (F.No.473/16/77-FTD) dated 23.6.1979. The income which will be allowed as a deduction would be the net income computed after accounting for expenses incurred in earning such income. The assessing officers should verify the actual receipt of foreign exchange in India within the prescribed limit before the benefit under section 80-O is allowed to an assessee. With effect from assessment year 1988-89, any income which is utilised outside India even with the permission of RBI, would not be eligible for the purposes of Section 80-O. 6. The application received in the Chief Commissioner / Director General's office should be entered in a Register chronologically giving serial number to each case. The register should have the following columns :- 1. Serial No. 2. Name of the applicant 3. Name of the foreign party with date of agreement. 4. Date of receipt of application. 5. Date of final orders. 6. Total consideration under the agreement in Indian rupees. 7. Decision taken (Approved/Rejected/Filed). 8. Assessment Years involved. 9. Amount finally allowed as deduction in the relevant assessment years (To be collected from the concerned assessing officers periodically). In order to watch the progress of disposal of section 80-O applications, monthly statement as per Proforma No.I enclosed may be maintained by the Chief Commissioner / Director General's office. Report about the disposal of cases should be sent to the Board every quarter by the 10th of the month following the quarter i.e. 10th April, 10th July, 10th October and 10th January in the Proforma No.II enclosed. 7. These instructions may please be brought to the notice of all the officers working in your Region.