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TMI Blog2011 (12) TMI 40X X X X Extracts X X X X X X X X Extracts X X X X ..... ect of the said assessment years, upholding the decision of the authorities below. 2. The above said appeals were admitted on the following substantial questions of law: 1. Whether the Hon ble Tribunal was right in law and on facts in holding that the appellant was not entitled to the deduction under Section 80-O of the Income Tax Act,1961 for the assessment year in question? 2. Whether the Hon ble Tribunal was right in law and on facts in holding that the appellant was merely a contractor and the payments received by it in pursuance of the services rendered by it were not payments in the nature prescribed in Section 80-O of the Income Tax Act,1961? 3. Whether the Hon ble Tribunal was right in law and on facts in holding that the appellant company had not rendered any service outside India for the purposes of claiming deduction under Section 80-O of the Income Tax Act,1961 especially when Explanation (iii) to Section 80-O clearly provided that services rendered or agreed to be rendered outside India shall include services rendered from India? 3. The assessee claimed deduction under Section 80-O of the Income Tax Act,1961 (in short, the Act ) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ees 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. 5. It is the contention of the learned senior counsel appearing for the appellant that for application of Section 80-O in respect of deduction, services rendered or agreed to be rendered outside India includes the service rendered from India and the service may be in the nature of technical or professional and that it must be rendered to a foreign company or enterprises. According to him, the agreement entered by the appellant/assessee with the foreign company dated 2.1.1992, in its scope of work clearly provides for the engineering services to be rendered to the foreign company. It is his further contention that for the purpose of rendering such service by an Indian Company to a foreign company to be used in a foreign country, it is not necessary that the assessee in India must itself be a technical expert and even if such Indian company being a sub-contractor of some other company in India, obtains the technical know-how under a joint agreement, such assessee will ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny under the agreement dated 02.01.1992 and in that process the assessee only acts as an agent of the foreign company and therefore, whatever benefit he would receive from the foreign company cannot be said to be the benefit received for the information or technical know-how, and it can be at the most a reimbursement from the foreign company by its agent in the name of the assessee in respect of its contract with the Indian Company at Bombay. He would submit that all the three authorities have concurrently found that the appellant/assessee is not entitled for the deduction under Section 80-O of the Act and therefore there is nothing to interfere with the orders. 10. We have heard the learned senior counsel for the appellant/assessee and the Senior Central Government Standing Counsel for the Revenue and given our anxious thoughts to the issue involved in these cases. 11. On facts, it is not in dispute that the assessee/appellant has entered into an agreement with the foreign company M/s.EI DU PONT de Nemours & Company on 02.01.1992. Under the said agreement, the scope of work is as follows: CONTRACTOR shall, except to the extent otherwise expressly stated her ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ill function as the Contract Administrator and approve any procedure change and be kept informed on the over all aspects of all work under the agreement. Detailed technical and cost control surveillance will be carried out by Du Pont project personnel especially responsible for each work assignment. Contractor shall provide Du Pont every four weeks with a report of cost elements to include, but not limited to, the following: -Reproduction,Travel,Miscellaneous,Billed Labor,Manpower,Overtime,International Communications. That apart, there are various general conditions involving the engineering and design services, which form part of the said agreement. 13. For the assessment year 1993-94, the assessee claimed a sum of Rs.1,00,45,950/- as deduction while for the assessment year 1994-95, the claim of deduction was made to the extent of Rs.2,40,58,578/- being 100% of the gross receipts of Rs.4,81,17,155/- from the foreign principal. The assessing officer, after referring to the agreement between the assessee and the foreign company, has referred to certain explanatory note stated to have been filed by the assessee on 27.03.1996, to show that the contract ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... only as an agent for executing such work as specified and directed by the company. The work was executed by Chemtex Engineering Limited, Bombay. The information necessary for drawing and designs was passed on to the Bombay Company through the appellant. The appellant company invoiced Dupont in U.S. dollars equivalent to the bill raised by Bombay Company in Indian rupees. It has to be noted that the appellant has functioned only as an agent without any independent right in India. Ultimately, the appellate authority has come to the conclusion that the assessee has not rendered any service outside India and works were got executed in India, in the following words: The appellant company has not rendered any service outside India. The entire work was got executed in India. which in our view is totally opposed to the provisions of Section 80-O of the Act, especially second proviso and explanation annexed to that and it is this finding which has been confirmed by the Tribunal in its impugned order. 15. Now, we may refer to Section 80-O of the Act, which, as stood during the relevant time is as follows: 80-O, Deduction in respect of royalties, etc., ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction, in the second proviso, explanation (iii) makes it abundantly clear that the services include even if they are rendered or agreed to be rendered outside India, from India, but the only exclusion is that the services shall not be rendered in India. On the facts of the present case, it is very clear that even assuming that the assessee has acted as an agent of the foreign company under the agreement, the services of the assessee in transferring the technical know-how of another company in Bombay were rendered from India to be used in the foreign country for earning foreign exchange and the same were never rendered in India. It is only when such services were rendered outside India there could be foreign exchange which would be earned by the company. On the above said admitted facts, there is absolutely no doubt in our mind that even if the petitioner is to be treated as an agent of the foreign company, when it has rendered service and obtained the amount from the foreign source either by way of reimbursement or by any other mode, which would certainly earn foreign exchange, the assessee ought to have been allowed the deduction under Section 80-O of the Act. 17. In fact, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vs. Oberai Hotels India Pvt. Ltd., [1998 (231) ITR 148] wherein the Supreme Court has held as follows: Basic purpose of Section 80-O is the spread by an Indian assessee of any patent, invention, model, design, secret formula or process, or similar property right, or information concerning industrial, commercial or scientific knowledge, experience or skill of the assessee for use outside India and it that process to receive income to augment the foreign exchange resources of the country. 19. It is interesting to note that when an argument was advanced that the benefit of Section 80-O should be applicable only to the assessee who shall directly receive from the foreign enterprise and not by canalization and that there is some lacuna in the legislation, the Hon ble Apex Court in Petron Engineering Construction P. Ltd., vs. Central Board of Direct Taxes [1989 (175) ITR 523], by relying upon an observation made by Lord Denning, rejected the said contention and held that there is no lacuna under Section 80-O of the Act and the legislature has not provided the canalization. It is useful to extract the following paragraphs of the judgement of the Supreme Court: Lastly, it i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hankar that canalisation is desirable and a reasonable one. In the circumstances, in view of the plain language of the section, we do not think that we can construe the section as providing canalisation, that is to say, income by way of royalty, commission etc. need not be received directly from the Government of a foreign State or a foreign enterprise, but through another Indian company. This is not the intention of the Legislature. 20. This court in Commissioner of Income tax vs. Chakiat Agencies Pvt., Ltd., [2009 (314) ITR 200 (Mad)] by following the Supreme Court judgement in Oberai Hotels cited supra, has held, based on the circulars of the Central Board of Direct Taxes dated 23.3.1995 and subsequent clarification, as follows: 15. The CBDT in Circular No. 700 dt. 23rd March, 1995 clarified Section 80-O by stating that as long as the technical and professional services are rendered from India and are received by foreign Government or enterprise outside India, deduction under Section 80-O of the Act would be available to the person rendering the service, even if the foreign recipient of the service utilises the benefit of such services in India. 21. Even ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat, so far as they are concerned, they render services only to their employer and not to the other contracting party are in no way inconsistent with, or repugnant to, the notion that, so far as the foreign Government is concerned, it looks only to the assessee for the rendering of the technical services under the contract. The High Court has pointed out that a person who manufactures a television set ordered by another cannot be said to render technical services to the latter. In our view, that analogy is not apposite in the context of a contract of the nature, magnitude and specialisation with which we are concerned. Where a person employs an architect or an engineer to construct a house or some other complicated type of structure such as a theatre, scientific laboratory or the like for him, it will not be incorrect to say that the engineer is, in putting up the structure, rendering him technical services even though the actual construction and even the design thereof may be done by staff and labour employed by the engineer or architect. Where a person consults a lawyer and seeks an opinion from him on some issue, the advice provided by the lawyer will be a piece of technical ser ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laim of the assessee for deduction under Section 80-O of the Act by all the authorities, is not sustainable. However, the learned Standing Counsel appearing for the Revenue made an alternative submission that there is no positive income of the assessee and hence, he is not entitled to deduction under Section 80-O the Act. For the assessment year 1993-1994, the Commissioner of Income-tax (Appeals) has given a finding in paragraph 2.3, which reads as follows: "2.3 During the hearing of the case, the assessing officer held the view that Section 80AB is squarely applicable while computing deduction under Section 80-O. He would also take the view that the decision of the ITAT in 4- ITD 51 is not squarely applicable to the facts of the case." Further, the Commissioner of Income-tax (Appeals), in paragraph 2.7 held that there is no need to go into the provisions of Section 80AB of the Act. For the assessment year 1994-1995, there is a specific finding given by the assessing officer that there is no positive income and therefore, the assessee is not eligible for deduction. On an appeal, the the Commissioner of Income Tax (Appeals) also mentioned that the assessee has no pos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that section . Thus Section 80-AB has been given an overriding effect over all other sections in Chapter VI-A. Section 80-HHC does not provide that its provisions are to prevail over Section 80-AB or over any other provision of the Act. Section 80-HHC would thus be governed by Section 80-AB. Decisions of the Bombay High Court and the Kerala High Court to the contrary cannot be said to be the correct law. Section 80-AB makes it clear that the computation of income has to be in accordance with the provisions of the Act. If the income has to be computed in accordance with the provisions of the Act, then not only profits but also losses have to be taken into consideration. In view of the principles enunciated in the above cited decisions of the Apex 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. 24. Accordingly, the impugned orders of the Tribunal as well as the appellate Commissioner and the asse ..... X X X X Extracts X X X X X X X X Extracts X X X X
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