Services provided outside India but used in India by the recipient of such services - whether benefit of exemption related to export of service is available to the provider of such services.

Though this case pertains to section 80O of the Income Tax Act, 1961, but the principle evolved from this judgment of honorable High Court (reported in 2008 -TMI - 3600 - HIGH COURT OF DELHI)may put some light on issues under Service Tax for claiming exemption towards export of taxable services which are being used in India by the recipient of such services.

In the present case, the appellant rendered technical services out of India as buying agent and thus claimed to be eligible for deduction of Rs. 3,20,81,836/- under Section 80-O of the Income Tax Act, 1961. AO has rejected the claim of the appellant but CIT(A) has allowed the deduction.

Revenue filed an appeal before the Tribunal.  Tribunal held that 30% of the fees received by the assessee is taken towards services rendered in India and 70% of fees received by the assessee is taken to be qualified for deduction under Section 80-O of the Act and accordingly directed the Assessing Officer to re-compute the deduction.

It has been contended by learned counsel for the Assessee that the assessee company is incorporated in India with the object of providing buying services from India to various principals and the services rendered by the assessee requires knowledge, expertise and experience and were essentially technical services and in any case, even if it was to be held that a portion of the said services were managerial services, the same would be regarded as technical services as defined in Explanation (2) to Section 9(i)(vii) of the Act and therefore, covered under Section 80-O of the Act. Further, the services rendered to the foreign principal no doubt originate in India but terminate outside India only when the foreign client is communicated the contents and factum of rendition of services. It is also submitted that even if the benefit of the services was utilized by the foreign principals to further their business interest in India.

On the other hand, it has been argued by learned counsel for the revenue that the assessee in this case was rendering services to foreign buyers in India and according to Explanation (iii) to Section 80-O of the Act no deductions are permissible in respect of services rendered in India. Earlier CBDT in a circular has clarified that:

"A question has been raised as to whether the benefit of section 80-O would be available if the technical and professional services, though rendered outside India, are used by the Foreign Government or enterprise in India.

The matter has been considered by the Board. It is clarified that as long as the technical and professional services are rendered from India and are received by a Foreign Government or enterprise outside India, deduction under section 80-O would be available to the person rendering the services even if the foreign recipient of the services utilises the benefit of such services in India."

The High Court Court has held that:

Therefore, the assesse is to be given the benefit of the deduction available under the section to the extent of such consideration. The claim made by the assessee cannot be denied under section 80-O of the Act and thus the Tribunal erred in law in restricting the claim of deduction under Section 80-O of the Act to 70%. 

(For full text of judgment visit - 2008 -TMI - 3600 - HIGH COURT OF DELHI)