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TMI Blog1998 (3) TMI 6X X X X Extracts X X X X X X X X Extracts X X X X ..... rial, 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, or in consideration of technical services rendered or agreed to be rendered outside India to such Government or enterprise by the assessee; under an agreement approved by the Board in this behalf, and such income is received in convertible foreign exchange in India, or having been received in convertible foreign exchange outside India or having been converted into convertible foreign exchange outside India, is brought into India, by or on behalf of the assessee in accordance with any law for the time being in force for regulating payments and dealings in foreign exchange, there shall be allowed, in accordance with and subject to the provisions of this section, a deduction of the whole of the income so received in, or brought into, India in computing the total income of the assessee : Provided that the application for the approval of the agreement referred to in this sub-section is made to the Board before the 1st day of October of the assessment year in relation to which the approval is first sought : ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r book) : "2. The Board have carefully reconsidered the matter in pursuance of the directions contained in the judgments of the Delhi High Court in the Civil Writ Petitions Nos. 429 of 1974 and 1301 of 1975, on the basis of the written and oral arguments advanced by you. It is regretted that the Board does not consider it necessary to revise the decisions already communicated to you in the Board's orders referred to above owing to the following reasons :--- (1) The services being rendered by you to the foreign party in both cases are in the nature of managerial services. As observed by the Delhi High Court in Civil Writ No. 901 of 1975 (J. K. Bombay Ltd. v. CBDT [1979] 118 ITR 312) the running of a business or the management of a business does not amount to the rendering of technical services. (2) What is being given under the agreements can also not be viewed as information concerning industrial, commercial or scientific knowledge or skill. It is not as if some information is being supplied by you which is made use of by the foreign parties. Under the two agreements, you are yourself functioning in the foreign countries. (3) Though your name is being utilised by the two foreig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rough such training programme including hotel schedule, if any, and other training techniques, as it shall deem necessary. The respondent shall select suitable personnel for adequate and proper training in hotel management and operation, always giving preference however to Nepalese nationals. (4) The respondent would use its best efforts to advertise and promote the business of the hotel through its existing facilities. Soaltee Hotel, the foreign enterprise, subject to later amortisation and reimbursement as provided in the agreement, shall pay or reimburse the respondent in full for all costs and expenses of the said training and for all the costs of advertising, promotion, literature, travel and business entertainment including celebrations and ceremonies incurred prior to or concurrently with the beginning of full operation of the hotel by the respondent. (5) The respondent in consultation with the foreign enterprise will make available for the hotel, its staff of consultants and specialists who were qualified to provide advice in the various departments and aspects of hotel operations. The services of the members of the respondent's staff and of any outside consultants engage ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ross operating profits in terms of the agreement to the foreign enterprise. The agreement contained details as to how allocation was to be made for meeting different expenses and for payment of taxes, etc. Gross operating profits and gross operating losses were defined. A limit was put on expenses to be incurred for advertisement, etc., which could not be more than three per cent. of the total sales. (11) For worldwide promotion of the hotel, the foreign enterprise desired that the respondent shall, in any manner it regards fit and proper, make necessary arrangements with any company or companies, agency or agencies in any one or more countries for specialised hotel services and worldwide reservation facilities. (12) At the time of taking over the operation of the Hotel Soaltee the respondent is to purchase the existing stock of food and beverages, etc., and the foreign enterprise shall be paid the cost thereof. The amount paid by the respondent to the foreign enterprise shall be payable to the respondent out of the revenue of the hotel before the expiry of one year. (13) There is a provision for repairs, maintenance, alterations, structural repairs and changes in the hotel. (1 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assessee in consideration for the use outside India, of information concerning industrial, commercial and scientific knowledge, experience or skill made available or provided or agreed to be made available or provided to a foreign enterprise by the assessee. The respondent can certainly support the agreement as falling under section 80-O on any ground on which it had approached the High Court in its writ jurisdiction. We, therefore, have to examine if the agreement in question falls within the purview of section 80-O on any of the conditions stipulated therein entitling the respondent to claim deduction. Mr. Shukla referred to the guidelines issued by the Central Board of Direct Taxes to examine if the agreement provides for technical services or managerial services or both. He also referred to Circular No. 187, dated December 23, 1975, of the Central Board of Direct Taxes. The circular. The circular also sets out the form of the application for approval of the agreement under section 80-O of the Act. We may reproduce the relevant part of the circular as under : "Circular No. 187, dated December 23, 1975. Subject : Section 80-O of the Income-tax Act, 1961---Guidelines for appro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cases will not qualify for this purpose. (v) The technical services rendered or agreed to be rendered to the foreign party should relate to productive fields such as (a) mining, or (b) generation or distribution of electricity or any other form of power, or (c) constructional, industrial or manufacturing operations, or (d) engineering services. Services such as those relating to management, organisation, sales, finance and accounts, will not qualify for this purpose. Technical services which are rendered or to be rendered in India will also not qualify for this purpose. (vi) Agreements for recruitment or mere supply of technical personnel from India for service outside India will not be eligible for approval. (vii) Agreements which provide for participation in business or management operations abroad simpliciter in return for a specified percentage of commission or profit will not be eligible for approval. . . It may be pointed out that these guidelines are merely illustrative and should not be taken as exhaustive. These may be modified or supplemented in due course in the light of the different types of cases which come up for approval. Even where the agreement is bona fide a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reement. After all, it was the Central Board of Direct Taxes which was the best judge to see if the agreement fulfilled the requirements of law as it was the Central Board of Direct Taxes which was the concerned authority to grant or not to grant approval and had the advantage of various agreements which came for its approval by other assessees. Mr. Shukla said that the two earlier judgments of the Delhi High Court in J. K. (Bombay) Ltd. v. CBDT [1979] 118 ITR 312 and Ghai Lamba Catering Consultants P. Ltd. v. CBDT [1980] 124 ITR 301 were not correctly distinguished by the High Court. In the present case, he said that if the principles laid down in those two judgments were applied, the agreement certainly would not come within the scope of grant of approval. Mr. Shukla said that the respondent took complete charge of running the hotel of the foreign enterprise as the terms of agreement showed and as a matter fact, the respondent took over the hotel of the foreign enterprise itself for 20 years. He referred to the decision of the Karnataka High Court in HMT Ltd. v. CBDT [1991] 188 ITR 457. Finally, Mr. Shukla said that one did not have to render services by becoming master. He said ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... [1992] 195 ITR 81, by the Supreme Court. The judgment of this court in Continental Construction Ltd.'s case [1992] 195 ITR 81, widened the scope of the term used in section 80-O. Mr. Dave referred to the New Encyclopaedia Britannica where the term "technical assistance" had been considered. It states that technical assistance may involve sending experts into the field to teach skills and to help solve problems in their areas of specialisation, such as irrigation, agriculture, fisheries, education, public health or forestry. In New Webster's Dictionary of the English Language the word "technical" means what is characteristic of particular art, science, profession, or trade and the word "technology" means the branch of knowledge that deals with the industrial arts and sciences; utilisation of such knowledge; the knowledge and means used to produce the material necessities of a society. It is submitted that the term "technical" should receive broad interpretation to include professional services as well. The term "professional" was added in section 80-O with effect from April 1, 1992, by amending the section. This court in Continental Construction Ltd.'s case [1992] 195 ITR 81, had s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... this court observed as under : "Though the Central sales tax is levied and collected by the Government of India, article 269 of the Constitution provides for making over the tax collected to the States in accordance with certain principles. Where, of course, the sale is an export sale within the meaning of section 5(1) of the Central Sales Tax Act (export sale) the State may not get any revenue but the larger national interest is served thereby. It is for these reasons that tax on the purchase of raw material is waived in these two situations. Thus, there is a very sound and consistent policy underlying the provision." In CIT v. Straw Board Manufacturing Co. Ltd. [1989] 177 ITR 431 (SC), the assessee had claimed concessional rates of income-tax, development rebate at higher rate and deduction under section 80E of the Income-tax Act, 1961, on the ground that the manufacture of straw board was a priority industry. The question before this court was whether straw board could be said to fall within the expression "paper and pulp" mentioned in the Schedule. The income-tax authority held that the assessee could not be described as a priority industry and the manufacture of straw board ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s court observed as under : "We have considered the matter carefully and to our mind, it seems clear that the Appellate Tribunal and the High Court are right in the view adopted by them. As was observed by the Gujarat High Court in CIT v. Ahmedabad Maskati Cloth Dealers Co-operative Warehouses Society Ltd. [1986] 162 ITR 142, while considering the analogous provision of section 80P(2)(e) of the Income-tax Act, 1961, the provision for exemption was intended to encourage co-operative societies to construct warehouses which were likely to be useful in the development of rural economy and exemption was granted from income-tax in respect of income derived from the letting of such warehouses for the storage of fertilisers and other related commodities concerned with co-operative marketing. Having regard to the object with which the provision has been enacted, it is apparent that a liberal construction should be given to the language of the provision and that, therefore, in the circumstances of the present case, it must be regarded that what the assessee did was to let out its godowns for the purpose of storing the ammonium sulphate handed over to it by the State Government." As to what ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of the Act. These were in the nature of concessions and could always be prospectively withdrawn. However, on what lines the rights of the parties should be adjusted in consonance with justice in view of these circulars is not a subject-matter to be adjudicated by us and, as rightly contended by counsel for the Revenue, the circulars cannot detract from the Act.' The expression 'executive in character' is, presumably, used to distinguish them from judicial pronouncements. The circulars referred to in that case were also of the Central Board of Direct Taxes and were, presumably also, statutory in character. However, this contention need not detain us, as it is unnecessary to examine whether or not such circulars are recognised as legitimate aids to statutory construction. In the present case, the circular of 1965 broadly accords with the view taken by us on the true scope and interpretation of section 40(b) in so far as the quantification of the interest for purposes of section 40(b) is concerned." In Collector of Central Excise v. Usha Martin Industries [1997] 7 SCC 47, this court was considering the binding effect of a circular issued by the Central Board of Excise and Customs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction for visitors, foreign currency earners, employers of labours, outlets for the products of other industries and as an important source of amenities for local residents. We do not think it is necessary for us to go into all these aspects of hotel management as we are concerned with the origin of the law in its application to the agreement in question. Lastly, Mr. Dave said that the use of the name of the respondent was not an ordinary matter and it could not be said as held by the appellant in its impugned order that the fee received for the use of the trade name of the respondent though covered by the provisions of section 80-O, yet the amount relatable to this aspect of the total services rendered would be so small that it was not easy to quantify the same for the purpose of section 80-O. We may now consider the judgments referred to during the course of arguments in somewhat greater detail. In J. K. (Bombay) Ltd. v. CBDT [1979] 118 ITR 312 (Delhi), a Division Bench of the Delhi High Court was considering the question whether the services of managing agents rendered by an Indian company to a foreign company were not "technical services" within the meaning of section 80-O o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m), a Division Bench of the Bombay High Court (where one of us was a member) held that the order denying approval under section 80-O was not justified. In that case the petitioner entered into two agreements with the foreign company for establishing a plant in Indonesia for the manufacture of various products of the petitioner as manufactured by it. One agreement was titled "technical assistance agreement". The second agreement titled "management service agreement" provided for the petitioner to take over the responsibility for the working and management of the foreign company for a period of twenty-five years. For this purpose, the petitioner was required to loan to the foreign company the services of its "fully qualified and experienced managers, engineers, technicians, production specialists and such other personnel as may be necessary, not only for the setting up of the company's said plant but also for the overall working and management of the company." The agreement also contained wide-ranging provisions for the giving of all marketing, industrial, manufacturing, commercial and scientific knowledge, experience and skill for the efficient working and management of the foreign ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quired for rendering the managerial services. The court, therefore, held that the respondent took a somewhat rigid view of the matter in refusing to grant approval to the second agreement. It, therefore, quashed the order of the respondent refusing to grant approval to the second agreement. The application of the petitioner for grant of approval was sent back to the respondent for reconsideration in accordance with the law. In HMT Ltd. v. CBDT [1991] 188 ITR 457 (Kar), the petitioner had entered into an agreement with the Nigerian Government and sought approval of the agreement under section 80-O of the Act. The agreement consisted of various types of passing of technical information, know-how, designs, trade mark, logo and also training of Nigerian personnel in India among other matters. On the question of training of Nigerian personnel in India and the technical fee paid therefor, the respondent stated that the training of Nigerian personnel in India would mean a service rendered in India and, therefore, the fee receivable in that respect would not be entitled to the benefit of 80-O of the Act. The High Court upheld the view of the respondent and this is how the court dealt with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that this topic was originally dealt with in section 85C. Section 80-O was substituted in its place with effect from April 1, 1968, and that the section had since undergone amendments from time to time. It is not necessary for us to analyse this judgment in any detail as here we are not concerned only with the interpretation of section 80-O. What the judgment lays down for our purposes is : (1) The job of the assessee involved survey, soil investigation, design, detailed drawings and construction of all civil works and pipelines (other than trunk pipelines). Even these activities involve technical knowledge and expertise. It cannot, therefore, be doubted that the assessee under the contract, had to make use, outside India, of its industrial, commercial and scientific knowledge, experience and skill. (1A) There is equally no doubt that, in executing the contract, the assessee has rendered technical services. Any engineering contract involves technical services; more so, a contract of the nature and magnitude involved in the present case. (2) Where a person employs an architect or an engineer to construct a house or some other complicated type of structure such as a theatre, scie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t always possible or worthwhile for the parties to dissect the consideration and apportion it to the various ingredients or elements comprised in the contract. There is no gainsaying that running a well equipped modern hotel is no ordinary affair. One needs a great deal of expertise, skill and technical knowledge for the purpose. If we examine the agreement, it provides for rendering of technical services and also professional services for operating of Hotel Soaltee, a foreign enterprise. The Central Board of Direct Taxes fell into an error in considering particularly the clause in the agreement which provided for operation of the Hotel Soaltee by the respondent. The agreement has to be seen as a whole and so examined it is quite apparent that it provided for rendering of not only technical services for operating the hotel of the foreign enterprise but also providing for professional and other services in connection with operating of the hotel. Section 80-O was enacted with the twin objects of encouraging the export of Indian technical know-how and augmentation of foreign exchange resources of the country. We have seen above that after the amendment of section 80-O by the Finance ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the foreign enterprise, we are of the view that the Central Board of Direct Taxes was not right in not granting approval of the agreement to the respondent under section 80-O of the Act. We have also seen the scope of the circulars issued by the Central Board of Direct Taxes and how these are to be acted upon in various decisions of this court. In the matter of the nature as in the present case and the legislative intention to give relief we have to draw an interpretation to the term "technical services" which includes "professional services" as well. The 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 in that process to receive income to augment the foreign exchange resources of the country. The assessee can also make available to the foreign enterprise technical and professional services expertise of which it possesses for earning foreign exchange for the country. When exercising power of judicial review, courts have to see that the a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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