B.L. Passi vs Commissioner Of Income Tax (Xi)

B.L. Passi .... Appellant(s)

Versus

Commissioner of Income Tax, Delhi .... Respondent(s)

JUDGMENT

R.K. Agrawal, J.

1) The above appeal has been filed against the judgment

and order dated 13.12.2006 passed by the High Court of Delhi

in I.T. Appeal No. 1198 of 2006 whereby the Division Bench of

the High Court dismissed the appeal filed by the appellant

herein against the order dated 10.10.2005 passed by the

Income Tax Appellate Tribunal, Delhi Bench (in short ‘the

Tribunal’) in ITA No. 1603/D/2002.

Signature Not Verified Digitally signed by ASHA SUNDRIYAL Date: 2018.04.24 17:40:43 IST Reason: 1

2) Brief facts:

(a) The Appellant herein filed return disclosing income of Rs.

57,40,360/- for the Assessment Year (AY) 1997-98 while

claiming deduction of Rs. 58,87,045/- under Section 80-O of

the Income Tax Act, 1961 (in short ‘the IT Act’) on a gross

foreign exchange receipt of Rs. 1,17,74,090/- received from

Sumitomo Corporation, Japan. Sumitomo Corporation was

interested in supplying dies for manufacturing of body parts to

Indian automobile manufacturers and entered into a contract

with the Appellant under which the services of the Appellant

herein were engaged by using his specialized commercial and

industrial knowledge about the Indian automobile industry.

Sumitomo Corporation also agreed to pay remuneration at the

rate of 5% of the contractual amount between Sumitomo

Corporation and its Indian customers on sales of its products

so developed. The Appellant claimed to have supplied to

Sumitomo Corporation the industrial and commercial

knowledge, information about market conditions and Indian

manufacturers of automobiles and also technical assistance as

required by the Corporation.

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(b) The case of the Appellant was selected for scrutiny by the

Income Tax Department, Delhi and in response to notice

under Section 143(2) of the IT Act, the Appellant along with

others attended the assessment proceedings from time to time

justifying the claim under Section 80-O of the IT Act. The

Assessing Officer, vide order dated 27.03.2000 under Section

143(3) of the IT Act assessed the total income at Rs.

1,18,43,060/- and determined the sum payable by the

assessee to the tune of Rs. 43,25,960/-. Being aggrieved by

the order dated 27.03.2000, the Appellant preferred an appeal

being No. 272/01-02 before the Commissioner of Income Tax

(Appeals)-XXVI, New Delhi. The Appellate Authority, vide

order dated 20.02.2002, partly allowed the appeal and held

that the Appellant is entitled to deduction under Section 80-O

of the IT Act. Being aggrieved by the order dated 20.02.2002,

the Revenue went in appeal before the Tribunal. The Tribunal,

vide order dated 10.10.2005, allowed the appeal filed by the

Revenue. The Appellant approached the High Court by filing

I.T. Appeal No. 1198 of 2006 challenging the order of the

3 Tribunal dated 10.10.2005 which was dismissed on

13.12.2006 by a Division Bench of the High Court.

(c) Aggrieved by the judgment and order dated 13.12.2006,

the Appellant has filed this appeal by way of special leave

before this Court.

3) Heard Mr. Lakshmikumaran, learned counsel for the

Appellant and Mr. K. Radhakrishnan, learned senior counsel

for the Respondent and perused the records.

Point(s) for consideration:-

4) The sole point for consideration before this Court is

whether the Appellant is entitled to deduction under Section

80-O of the IT Act under the facts and circumstances of the

present case?

Rival contentions:-

5) Learned counsel for the Appellant contended that the

Appellant has fulfilled all the conditions as envisaged under

Section 80-O of the IT Act inasmuch as he was providing

specialized, industrial and commercial knowledge relating to

the Indian automobile industry and also detailed information

about the industry in India. Learned counsel further

4 contended that the Appellant is enjoying a very good

professional reputation amongst manufacturers and traders

and having a vast experience of the Indian automobile

industry. The services so rendered by the Appellant were in

fact rendered and the payment was received for having

rendered those services. Learned counsel finally contended

that the High Court committed an error in considering it a

principal-agent relationship and the order passed by the High

Court is liable to be set aside.

6) Learned senior counsel for the Respondent submitted

that in order to claim deduction under Section 80-O of the IT

Act, the information must be concerning industrial,

commercial or scientific knowledge, experience or skill, which

is made available to the non-resident party and it is difficult to

hold from the material on record that the Appellant was

having any information concerning industrial, commercial or

scientific knowledge, experience or skill or he ever had in

possession of any blue prints. Learned senior counsel further

submitted that the manner or circumstances under which the

proposed multipurpose vehicles of Telco under SAFARI project

5 were finalized are not clear and no documents have been

produced on record for the same. Learned senior counsel

finally submitted that the decision rendered by the High Court

was right and no interference is sought for by this Court.

7) In rejoinder, learned counsel for the appellant contended

that the agreement between the parties satisfies the

ingredients of Section 80-O of the IT Act entitling the Appellant

to get the benefit of deduction as the services rendered by the

appellant were in the nature of industrial and commercial

knowledge to a foreign enterprise.

Discussion:-

8) The Appellant has claimed to have vast experience of the

Indian automobile industry and has acquired substantial

expertise and experience and is in a position to supply

specialized commercial and industrial information about the

automobile industry to any foreign enterprise looking for

developing its market in India. The Appellant struck a deal

with the Sumitomo Corporation, Japan with regard to the

information about the market conditions existing in the Indian

automobile industry, specific information regarding

6 manufacturers of automobiles in India, about the market

position, credibility and the product acceptance of each of

those manufacturers, to provide pre-information regarding the

proposal to launch any new product by any of the

manufacturers in India, to provide suggestions for

development of automobile parts/dies for manufacture of

automobile body parts conforming to the specific needs of the

manufacturers of automobiles in India, to provide services and

support as may be reasonably required in connection with the

development and manufacture of the products in Japan for

sale in India and to advise the Sumitomo Corporation of legal

laws and regulations applicable in India relating to the

importation and/or sale of its products in India etc.

9) The services so rendered by the Appellant were required

to be used by Sumitomo Corporation for establishing its

business in the Indian automobile industry and he received a

sum of Rs. 1,17,73,940/- on account of technical and

industrial knowledge and professional services rendered by

him in relation to the SAFARI project of TELCO. It is his claim

that the Sumitomo Corporation bagged the order from TELCO

7 in respect of SAFARI project as a result of use of specialized,

commercial and industrial knowledge and professional

services rendered by him.

10) The Appellant filed the income tax return declaring an

income of Rs. 57,40,360/- which was selected for scrutiny by

the Income Tax Department. While computing the income, a

deduction of Rs. 58,87,045/- was claimed under Section 80-O

of the Act on the gross receipts of Rs. 1,17,74,090/- received

from Sumitomo Corporation of Japan in convertible foreign

exchange in the name of M/s Pasco International wherein the

Appellant was the sole proprietor. It was further explained

that he had received the above amount in convertible foreign

exchange as consideration for providing specialized industrial

and commercial knowledge relating to the Indian automobile

industry including therein the detailed information about the

industry, analyzing the government policies relating to Indian

automobile industry and also to identify opportunities for

supply of products of M/s Sumitomo corporation to various

customers in India and hence he is entitled to claim deduction

under Section 80-O of the IT Act which had been claimed in

8 the return of income filed. However, the Assessing Officer, by

order dated 27.03.2000, disallowed the claim of deduction of

Rs. 58,87,045/- under Section 80-O of the Act while holding

that the Appellant’s services do not qualify for deduction

under the relevant Section.

11) In the above backdrop, it is essential to quote Section

80-O (unamended) of the IT Act which reads as under:-

“80-O.Deduction in respect of royalities etc. from certain foreign enterprises.--1) Where the gross total income of an assessee, being an Indian company or a person (other than a company) who is resident in India, includes any income by way of royalty, commission, fee or any similar payment received by assessee from the Government of a foreign state or foreign enterprise in consideration for the use outside India 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 made available of provided or agreed to be made available of provided to such Government or enterprise by the assessee, or inconsideration of technical or professional services rendered or agreed to be rendered outside India to such Government or enterprise by the assessee, and such income 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 provisions of this section, a deduction of an amount equal to fifty percent of income so received in , or brought into, India, in computing the total income of the assessee:

Provided that such income is received in India within a period of six months from the end of the previous year, or where the Chief Commissioner or Commissioner is satisfied (for reasons to be recorded in writing) that the assessee is,

9 for reasons beyond his control, unable to do so within the said period of six months, within such further period as a Chief Commissioner may allow in this behalf: Explanation for the purposes of this section:-

(i) “Convertible foreign exchange” means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purpose of the law for the time being in force for regulating payments and dealing in foreign exchange.

(ii) “foreign enterprise” means a person who is non resident.

(iii) Services rendered or agreed to be rendered outside India shall include services rendered from India but shall not include services rendered in India.”

12) Provisions similar to Section 80-O of the Act were

originally in the former Section 85-C of the Income Tax Act,

1961 which was substituted by Finance (No. 2) Act, 1971.

Section 80-O was inserted in place of Section 85C which was

deleted by the Finance (No. 2) Act, 1967. While moving the

bill relevant to the Finance Act No. 2 of 1967, the then Finance

Minister highlighted the fact that fiscal encouragement needs

to be given to Indian industries to encourage them to provide

technical know-how and technical services to newly developing

countries. It is also seen that the object was to encourage

Indian companies to develop technical know-how and to make

it available to foreign companies so as to augment the foreign

exchange earnings of this country and establish a reputation

10 of Indian technical know-how for foreign countries. The

objective was to secure that the deduction under the section

shall be allowed with reference to the income which is received

in convertible foreign exchange in India or having been

received in convertible foreign exchange outside India, is

brought to India by and on behalf of taxpayers in accordance

with the Foreign Exchange Regulations.

13) Now coming to the facts of the case at hand, it is evident

from record that the major information sent by the Appellant

to the Sumitomo Corporation was in the form of blue prints for

the manufacture of dies for stamping of doors. Several letters

were exchanged between the parties but there is nothing on

record as to how this blue print was obtained and dispatched

to the aforesaid company. It is also evident on record that the

Appellant has not furnished the copy of the blue print which

was sent to the Sumitomo Corporation neither before the

Assessing Officer nor before the Appellate authority nor before

the Tribunal. The provisions of Section 80-O of the IT Act

mandate the production of document in respect of which relief

has been sought. We, therefore, have to examine whether the

11 services rendered in the form of blue prints and information

provided by the Appellant fall within the ambit of Section 80-O

of the IT Act or any of the conditions stipulated therein in

order to entitle the assessee to claim deduction.

14) In New Encyclopaedia Britannica, where the term

“technical assistance” had been considered, it has been stated

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 a 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.

15) In J.K. (Bombay) Ltd. vs. Central Board of Direct

Taxes and Another (1979) 118 ITR 312 (Del.), the

interpretation of technical assistance has been described as

under:-

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“We have shown above that adopting the wider meaning of the word “technical” would defeat the object of Section 80-O by enabling the remuneration for management or running of a foreign company to be eligible for deduction under Section 80-O. On the other hand, the narrower meaning of the word “technical” seems to be more in keeping with the object of the section. It has to be remembered that the word “technology” which has affinity with the word “technical” is concerned with the control of material environment by man. This is done by two means. Firstly, by the use of tools, and, secondly, by the application of reason to the properties of matter and secondly, by the application of reason to the properties of matter and energy. It would appear, therefore, that it would be reasonable to think that technical services should include the use of tools and machinery in addition to the use of reason. Managerial services which do not include any use of tools and machinery may not be regarded as technical services.”

16) The blue prints made available by the Appellant to the

Corporation can be considered as technical assistance

provided by the Appellant to the Corporation in the

circumstances if the description of the blue prints is available

on record. The said blue prints were not even produced before

the lower authorities. In such scenario, when the claim of the

Appellant is solely relying upon the technical assistance

rendered to the Corporation in the form of blue prints, its

unavailability creates a doubt and burden of proof is on the

Appellant to prove that on the basis of those blue prints, the

13 Corporation was able to start up their business in India and

he was paid the amount as service charge.

17) Further, with regard to the remuneration to be paid to

the Appellant for the services rendered, in terms of the letter

dated 25.01.1995, it has been specifically referred that the

remuneration would be payable for the commercial and

industrial information supplied only if the business plans

prepared by the Appellant results positively. Sumitomo

Corporation will pay to PASCO International service charges

equivalent to 5% (per cent) of the contractual amount between

Sumitomo and its customers in India on sales of its products

so developed. From a perusal of the above, it is clear that the

Appellant was entitled to service charges at the rate of 5% (per

cent) of the contractual amount between Sumitomo

Corporation and its customers in India on sales of its products

so developed but there is nothing on record to prove that any

product was so developed by the Sumitomo Corporation on the

basis of the blue prints supplied by the Appellant as also that

the Sumitomo Corporation was able to sell any product

developed by it by using the information supplied by the

14 Appellant. Meaning thereby, there is no material on record to

prove the sales effected by Sumitomo Corporation to its

customers in India in respect of any product developed with

the assistance of Appellant’s information and also on as to

how the service charges payable to Appellant were computed.

18) In view of the foregoing discussion, we are of the

considered opinion that in the present facts and

circumstances of the case, the services of managing agent, i.e.,

the Appellant, rendered to a foreign company, are not

technical services within the meaning of Section 80-O of the IT

Act. The Appellant failed to prove that he rendered technical

services to the Sumitomo Corporation and also the relevant

documents to prove the basis for alleged payment by the

Corporation to him. The letters exchanged between the parties

cannot be claimed for getting deduction under Section 80-O of

the IT Act.

19) Before parting with the appeal, it is pertinent to mention

here that it is settled law that the expressions used in a taxing

statute would ordinarily be understood in the sense in which it

is harmonious with the object of the Statute to effectuate the

15 legislative animation. The Appellant was a managing agent

and the High Court was right in holding the principal agent

relationship between the parties and there is no basis for grant

of deduction to the Appellant under Section 80-O of the IT Act.

20) In view of the above, the appeal is dismissed with no

order as to costs.

...…………………………………J. (R.K. AGRAWAL)

…………….………………………J. (ABHAY MANOHAR SAPRE)

NEW DELHI;

APRIL 24, 2018.

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