"High Court Allows Deduction under Section 80-O (of Income Tax Act, 1961) for Services Rendered from India to Foreign Enterprises in Landmark Judgment, Revenue's Appeal Dismissed by ITAT".

These appeals concern the question of whether the income received by the appellants, who provided services to foreign enterprises, qualifies for deduction under Section 80-O (of Income Tax Act, 1961), 1961. The appellants, engaged in the business of providing services to foreign buyers of Indian marine products, claimed a deduction under Section 80-O (of Income Tax Act, 1961) for the service charges received in foreign exchange.

The Assessing Officer denied the claim, stating that the services rendered were "services rendered in India" and not "services rendered from India," as required by Explanation (iii) to Section 80-O (of Income Tax Act, 1961). The Assessing Officer concluded that the appellants acted as agents for the foreign enterprises in procuring marine products from India.

The Appellate Authorities and the Income Tax Appellate Tribunal (ITAT) differed in their rulings. The ITAT, following its earlier decision in the case of Ramnath & Co., allowed the claim for deduction under Section 80-O (of Income Tax Act, 1961). However, the High Court, in a common judgment, held that the appellants were procuring agents and their services did not qualify as "services rendered from India" under Section 80-O (of Income Tax Act, 1961).

The appellant in the lead case, Ramnath & Co., had agreements with foreign enterprises that involved locating reliable sources of marine products, providing analysis and advice, and negotiating prices. The Assessing Officer determined that these services were incidental to the primary function of acting as an agent and were rendered in India. The Assessing Officer also noted that the foreign enterprises' representatives visited India and the appellant provided services during their visits.

The Assessing Officer distinguished the case from Circular No. 700 dated 23.03.1995, issued by the Central Board of Direct Taxes, which the appellant relied on. The Assessing Officer argued that the services rendered in India, such as inspections, supervision, and negotiation, could not be considered "services rendered from India."

Based on these findings, the High Court held that the appellants were procuring agents and their services did not meet the criteria for deduction under Section 80-O (of Income Tax Act, 1961). The court allowed the appeals of the revenue and set aside the orders of the ITAT.

In conclusion, the appeals raised the question of whether the services provided by the appellants qualified for deduction under Section 80-O (of Income Tax Act, 1961). The High Court held that the appellants were procuring agents and their services did not meet the requirements for the deduction.

The Assessing Officer (AO) disallowed the claim for deduction under Section 80-O (of Income Tax Act, 1961) based on the finding that the services rendered by the assessee were in India and not from India. The AO also noted that the circular relied upon by the assessee, Circular No. 700 dated 23/3/95, was not applicable to the case as it dealt with a different situation where services rendered outside India were used by foreign enterprises in India.

The Appellate Authority disagreed with the AO and allowed the appeal. The Authority held that the services rendered by the assessee were from India as they involved supplying information, negotiating, and finalizing prices for foreign enterprises. The Authority relied on the decision of the Delhi High Court in E.P.W. Da Costa and the ITAT Delhi decision in the case of Capt. K. C. Saigal to support its position.

The revenue appealed to the ITAT, which concurred with the Appellate Authority's findings. The ITAT noted that the services rendered by the assessee were specialized and technical, and the information provided by the assessee was utilized by the foreign parties to import marine products from India. The ITAT emphasized the distinction between "services rendered from India" and "services rendered in India" and held that the specialized and technical services qualified the assessee for deduction under Section 80-O (of Income Tax Act, 1961).

In conclusion, the ITAT dismissed the appeal of the revenue, affirming that the services rendered by the assessee were from India and qualified for deduction under Section 80-O (of Income Tax Act, 1961).

The High Court disagreed with the ITAT and disallowed the claim for deduction under Section 80-O (of Income Tax Act, 1961). The High Court held that the appellant was merely a marine product procuring agent for foreign enterprises and did not provide services that qualified as "services rendered from India" under Section 80-O (of Income Tax Act, 1961). The High Court distinguished the present case from previous decisions, including Thomas Kurian, E.P.W. Da Costa, Mittal Corporation, Oberoi Hotels, Inchcape India, Li & Fung, and Chakiath Agencies.

The High Court analyzed the provisions of Section 80-O (of Income Tax Act, 1961) and the meaning of the expressions "from India" and "in India" with reference to dictionary meanings. The High Court noted that the legislative intent behind Section 80-O (of Income Tax Act, 1961) was to encourage Indian companies to showcase Indian intellect internationally and earn foreign exchange. The High Court emphasized that the services rendered must be used outside India to qualify for the deduction.

The High Court examined various precedents and observed that the type of services rendered by an Indian entity and the true import of the expression "use outside India" had not been conclusively determined. The High Court referred to the decision in Continental Construction, where this Court held that the assessee must provide specialized knowledge, experience, and skill to qualify for the deduction under Section 80-O (of Income Tax Act, 1961). The High Court also considered the requirements set forth in the Khursheed Anwar case, emphasizing that the burden is on the assessee to prove that the commission is for services falling within the scope of Section 80-O (of Income Tax Act, 1961).

Based on its analysis of the law and facts, the High Court held that some of the functions performed by the appellant did not qualify for deduction under Section 80-O (of Income Tax Act, 1961), and the appellant had not provided sufficient material to establish that its services qualified for the deduction.

In conclusion, the High Court disallowed the claim for deduction under Section 80-O (of Income Tax Act, 1961), finding that the appellant's services were not "services rendered from India" within the meaning of the provision.

The appellant argues that the High Court erred in its interpretation of Section 80-O (of Income Tax Act, 1961). The appellant contends that the High Court focused too much on the literal meaning of the words "from India" and "in India" without considering the purpose and object of the provision. The appellant relies on the principle of purposive interpretation and emphasizes that Section 80-O (of Income Tax Act, 1961) is meant to incentivize the earning of foreign exchange.

The appellant refers to the decision in J.B. Boda & Co. Pvt. Ltd v. CBDT, where even a reinsurance broker who provided commercial information from India to a foreign reinsurance company was held entitled to the benefit of Section 80-O (of Income Tax Act, 1961). The appellant argues that this decision negates the revenue's contention that Section 80-O (of Income Tax Act, 1961) only applies to intellectual activities or the use of intellectual property rights.

The appellant also relies on the decision in E.P.W. Da Costa, where the Delhi High Court held that services rendered by the Indian assessee to BBC in London, involving the communication of market survey information, were covered by Section 80-O (of Income Tax Act, 1961).

The appellant highlights the findings of the Appellate Authority and ITAT, which establish that the appellant provided information from India to its foreign customers regarding seafood markets and their quality, and the customers made import decisions based on this information. The appellant argues that these findings fulfill the requirements of Section 80-O (of Income Tax Act, 1961), including the remittance of commission in convertible foreign exchange to India.

The appellant criticizes the High Court's approach of requiring services to be rendered abroad to qualify for the deduction, asserting that it is contrary to the plain language of Explanation (iii) to Section 80-O (of Income Tax Act, 1961) and Circular No. 700. The appellant points out that the foreign enterprises related to the appellant do not have operations in India, making it irrelevant whether the services are subsequently utilized in India.

In conclusion, the appellant argues that the activities in question fall within the scope of Section 80-O (of Income Tax Act, 1961) and that the High Court's interpretation is narrow and unrealistic. The appellant seeks the reversal of the High Court's decision and the allowance of the deduction under Section 80-O (of Income Tax Act, 1961).

The senior counsel representing the revenue counters the arguments made on behalf of the appellant. The counsel emphasizes the purpose of Section 80-O (of Income Tax Act, 1961), which is to encourage the development of technical know-how and services in India and to augment foreign exchange earnings. The counsel asserts that the provision is meant to apply to income derived from intellectual activities and endeavors, not simple trading activities.

The counsel refers to the interpretation of taxing statutes and exemption clauses, relying on the decision in Commissioner of Customs (Import), Mumbai v. Dilip Kumar & Co. and Ors., which states that taxing statutes should be strictly interpreted, with any ambiguity resolved in favor of the revenue. The counsel argues that the same principle should apply to Section 80-O (of Income Tax Act, 1961), and the decision in Baby Marine Exports cited by the appellant is not applicable to the present case.

Regarding the facts of the case, the counsel argues that the activities performed by the appellant, as per the agreements, do not qualify as technical or professional services covered by Section 80-O (of Income Tax Act, 1961). The counsel highlights that the agreements only involve locating suppliers, finalizing pricing, and checking the quality of goods for export, which are considered buying or procuring agent activities, not intellectual activities. The counsel refers to Article 3 of one of the agreements to demonstrate that the appellant's liability for its services is contingent on the quality of the goods, indicating a lack of specialized knowledge provided to the foreign entity. The counsel argues that the appellant's activities fall within the scope of Section 80-O (of Income Tax Act, 1961)'s Explanation (iii), which excludes services rendered in India.

The counsel relies on the decision in B.L. Passi v. Commissioner of Income-Tax and the Kerala High Court's decision in Thomas Kurian to support the contention that the appellant's activities are not covered by Section 80-O (of Income Tax Act, 1961). The counsel distinguishes the appellant's cited cases, arguing that they do not address the specific issues of the type of service covered by Section 80-O (of Income Tax Act, 1961) and the meaning of "use outside India" in Explanation (iii).

In response to the appellant's reliance on the J.B. Boda & Co. case, the counsel argues that the issue in that case was limited to the method of foreign exchange receipt and does not support the appellant's position. The counsel also mentions the circulars issued by CBDT, highlighting Circular No. 187 and Circular No. 253, which provide guidance on composite agreements and the apportionment of payments between qualifying and non-qualifying services. The counsel contends that the appellant has not provided a breakdown of services and receipts to demonstrate eligibility for the Section 80-O (of Income Tax Act, 1961) deduction.

The counsel concludes by stating that the findings of fact by the ITAT were challenged in the High Court, and the interpretation of Section 80-O (of Income Tax Act, 1961) and its Explanation (iii) is a matter of statutory language, making the appellant's argument regarding the challenge to the findings irrelevant.

In the rejoinder submissions, the appellant refutes the arguments made by the respondent. They argue that the principles of interpretation discussed in the Dilip Kumar & Co. case are not applicable to Section 80-O (of Income Tax Act, 1961), which is an incentive provision, unlike an exemption notification. The appellant also contends that the decisions relied upon by the revenue, such as B.L. Passi and Thomas Kurian, are not applicable to the present case due to factual and legal differences. They argue that the findings of the ITAT support their position, and the respondent's attempt to suggest that only a part of the amount received by the appellant qualifies for deduction is baseless.

The appellant maintains that the circulars dated 23.12.1975 and 30.04.1979, which the respondent relies on, are irrelevant as they pertain to the approval of agreements with foreign customers, a requirement that has been eliminated. They argue that these circulars do not address the issues in the present case.

Finally, the appellant reiterates their position regarding the nature of their activities and the findings of the ITAT, stating that the respondent's assertion that the appellant's primary activity was that of a procuring agent is untenable. They emphasize that the ITAT's finding supports the inclusion of the entire amount received by the appellant under Section 80-O (of Income Tax Act, 1961). The appellant concludes by stating that the respondent's references to other cases and circulars are meritless and do not undermine their position.

The Court acknowledges the rival submissions and proceeds to examine the relevant provisions of Section 80-O (of Income Tax Act, 1961), 1961. It notes that the provision aims to encourage the export of Indian technical know-how and foreign exchange reserves. The Court also provides a brief history of the development of Section 80-O (of Income Tax Act, 1961) and highlights the changes made to its scope and requirements over time.

The Court notes that the appellant has challenged the relevance and applicability of the circulars relied upon by the respondent, specifically Circular No. 187 dated 23.12.1975 and Circular No. 253 dated 30.04.1979. The Court states that it will consider these circulars in more detail later in the proceedings.

Overall, the Court has considered the arguments presented and will proceed to analyze the relevant provisions and history of Section 80-O (of Income Tax Act, 1961) in further detail.

The circulars in question are Circular No. 187, dated 23rd December 1975, and Circular No. 253, dated 30th April 1979.

Circular No. 187 provides guidelines for the approval of agreements under Section 80-O (of Income Tax Act, 1961). The circular states that Section 80-O (of Income Tax Act, 1961) aims to encourage the export of Indian technical know-how and increase foreign exchange resources. It mentions that one of the conditions for claiming the tax concession under Section 80-O (of Income Tax Act, 1961) is that the agreement should be approved by the Central Board of Direct Taxes (CBDT). The circular provides guidelines for granting such approval, including the requirement that the agreement should have been genuinely entered into after the announcement of the tax concession. It also clarifies that consideration for the use of trade-marks falls within the scope of Section 80-O (of Income Tax Act, 1961). The circular further states that in cases of composite agreements including non-qualifying services, the CBDT may not approve the agreement for the purposes of Section 80-O (of Income Tax Act, 1961) if it is not possible to determine the consideration relating to qualifying services.

Circular No. 253, dated 30th April 1979, provides further clarifications on the guidelines for approval under Section 80-O (of Income Tax Act, 1961). It modifies certain aspects of the guidelines provided in Circular No. 187. It clarifies that approvals will not be denied on the ground that the agreement was entered into before the announcement of the tax concession. It also states that payments made for the use of trade-marks are considered as royalty and fall within the scope of Section 80-O (of Income Tax Act, 1961). The circular further clarifies that if technical or professional services are rendered from India and received by a foreign government or enterprise outside India, the deduction under Section 80-O (of Income Tax Act, 1961) will be available to the person rendering the services, even if the foreign recipient utilizes the services in India.

The circulars highlight the objective of Section 80-O (of Income Tax Act, 1961) to encourage the export of Indian technical know-how and the provision of technical or professional services to foreign entities. They provide guidelines and clarifications on the approval process and the scope of qualifying services.

These circulars play a significant role in interpreting and applying Section 80-O (of Income Tax Act, 1961). The principles of interpretation and application of Section 80-O (of Income Tax Act, 1961) are a subject of debate. The appellant argues for a purposive and liberal interpretation of the provision to achieve its objective of earning foreign exchange. On the other hand, the revenue argues for a strict interpretation, relying on the principle that taxing statutes should be interpreted strictly, and any ambiguity should favor the revenue. The court will examine these principles and consider relevant precedents in its analysis.

The case of Baby Marine Exports revolves around the interpretation of Section 80HHC (of Income Tax Act, 1961), specifically regarding the inclusion of export house premium in the computation of deduction. The appellant, Baby Marine Exports, was engaged in selling marine products both domestically and through export houses. The export house premium received by the appellant was claimed as part of the total turnover for deduction under Section 80HHC (of Income Tax Act, 1961). The Assessing Officer (AO) rejected the claim, considering the premium as commission or service charge. The Appellate Authority also denied the claim, treating the premium as reimbursement of expenses or commission falling under the definition of "supporting manufacturer."

However, the Income Tax Appellate Tribunal (ITAT) allowed the appeal, stating that the export house premium was an integral part of the sale price and not commission or brokerage. The ITAT's decision was upheld by the High Court. On further appeal by the revenue, the Supreme Court interpreted Section 80HHC (of Income Tax Act, 1961) and upheld the deduction claim of Baby Marine Exports.

The Supreme Court observed that Section 80HHC (of Income Tax Act, 1961) was intended to provide incentives to earners of foreign exchange and should receive a liberal interpretation. It referred to previous decisions that emphasized the need to interpret tax exemption provisions in favor of the taxpayer when there is ambiguity. The Court held that the export house premium received by Baby Marine Exports was an integral part of the sale price and not commission or brokerage. The Court concluded that the appellant, being a supporting manufacturer, was entitled to a deduction of the profit derived from the sale of goods to the export house under Section 80HHC (of Income Tax Act, 1961).

In the case of Dilip Kumar & Co., the core question referred to the Constitution Bench was regarding the interpretative rule to be applied while interpreting a tax exemption provision/notification with ambiguity. The Court examined various past decisions and highlighted the principle that the eligibility for exemption should be strictly construed, but once the ambiguity is resolved and the subject falls within the exemption, a wider and liberal construction should be applied. The Court clarified that while exemptions should be strictly interpreted initially, they should be construed liberally once their applicability is established.

The case of Baby Marine Exports illustrates the application of a liberal interpretation of Section 80HHC (of Income Tax Act, 1961) to allow the deduction of the export house premium. The case of Dilip Kumar & Co. establishes the principle that exemptions should be strictly construed initially but should be given a wider and liberal construction once their applicability is determined.

The case discusses the interpretation and application of Section 80-O (of Income Tax Act, 1961) in various decisions. It emphasizes that exemption provisions, including incentive provisions like Section 80-O (of Income Tax Act, 1961), should be strictly interpreted, and the burden of proving applicability lies with the assessee. If there is any ambiguity, it should be interpreted in favor of the revenue and not the assessee. The Constitution Bench decision in Dilip Kumar & Co. clarifies that exemption notifications must be interpreted strictly, and any ambiguity should be resolved in favor of the revenue.

The case also highlights the distinction between the eligibility criteria and other requirements of an incentive provision. While eligibility must be strictly complied with, other conditions may be subject to substantial compliance. The decision in Hari Chand Shri Gopal reaffirms the principles of interpreting exemption clauses strictly and applying a liberal interpretation once eligibility is established.

The appellant argues that Section 80-O (of Income Tax Act, 1961) should be interpreted and applied liberally as an incentive provision. However, the court rejects this argument, stating that incentive provisions should still be strictly construed and that the burden of proving eligibility lies with the assessee. The court notes that deductions, exemptions, and rebates are different forms of tax incentives, and they all fall under the category of "profit-linked incentives."

The court also addresses the criticism of relying on text and dictionary meanings in the interpretation of statutes. It explains that the plain language of a statutory provision should be understood in its natural, ordinary, or grammatical meaning unless it leads to absurdity or the statute's object suggests otherwise. The court acknowledges the use of dictionaries to determine the general sense of a word in common parlance and emphasizes that dictionary meanings should not be discarded without overriding reasons.

Finally, the case highlights that the High Court's approach in considering semantics, dictionary meanings, and the object of the provision in interpreting Section 80-O (of Income Tax Act, 1961) was appropriate. It concludes that the decisions discussed in the case provide guidance on the interpretation and application of Section 80-O (of Income Tax Act, 1961) in different factual situations and circumstances.

The case discusses two decisions, J.B. Boda & Co. and E.P.W. Da Costa, which the appellant relies on for its contentions. In J.B. Boda & Co., the appellant, a reinsurance broker, arranged for reinsurance with various companies and received a share of the premium as brokerage. The issue in that case was not about the eligibility of the services for deduction under Section 80-O (of Income Tax Act, 1961) but rather the method of receiving the amount. The circular issued by the CBDT confirmed the eligibility of brokerage as a deductible amount under Section 80-O (of Income Tax Act, 1961). The Supreme Court upheld the eligibility of the brokerage for deduction, considering the nature of the transaction and the remittance made through the Reserve Bank of India.

In E.P.W. Da Costa, the petitioner conducted a public opinion survey for the British Broadcasting Corporation (BBC) to assess radio listening habits in India. The CBDT refused approval of the agreement for deduction under Section 80-O (of Income Tax Act, 1961), arguing that the service was rendered in India and did not fall within the scope of Section 80-O (of Income Tax Act, 1961). However, the Delhi High Court held that the petitioner's activity involved the analysis and presentation of scientific knowledge, which was useful to the BBC. The court considered statistics as a branch of science and concluded that the compiled statistical tables constituted scientific knowledge.

The court notes that neither J.B. Boda & Co. nor E.P.W. Da Costa support the appellant's case. In J.B. Boda & Co., the eligibility of brokerage as a deductible amount under Section 80-O (of Income Tax Act, 1961) was not in question, and the case focused on the method of receiving the amount. In E.P.W. Da Costa, the court specifically found that the activity involved the analysis and presentation of scientific knowledge, which fell within the purview of Section 80-O (of Income Tax Act, 1961). The court rejects the appellant's contention that the activities of a reinsurance broker or data compilation are not technical or scientific in nature.

Overall, the court concludes that the appellant's reliance on these decisions is misplaced, as they do not address the eligibility of the appellant's services for deduction under Section 80-O (of Income Tax Act, 1961).

The case discusses the decisions of B.L. Passi and Thomas Kurian, which the revenue relies on to counter the appellant's contentions. In the case of B.L. Passi, the appellant provided services to a Japanese enterprise by supplying blueprints and information about the Indian automobile industry. The appellant claimed deduction under Section 80-O (of Income Tax Act, 1961) for the remuneration received for these services. However, the court found that there was no material on record to prove the development of products or the utilization of the information supplied by the appellant. The court also noted that the appellant did not produce the blueprints or provide evidence of how the service charges were computed. Consequently, the court held that the services provided by the appellant did not qualify as technical services under Section 80-O (of Income Tax Act, 1961).

Similarly, in the case of Thomas Kurian, the appellant's services were related to inspecting and certifying goods for export. While the appellant received payment in convertible foreign exchange, the court found that the services were rendered entirely in India. The appellant's communication with foreign buyers was not considered as services rendered outside India. Therefore, only one of the two conditions for eligibility under Section 80-O (of Income Tax Act, 1961) was satisfied.

Both cases highlight the importance of meeting the requirements of Section 80-O (of Income Tax Act, 1961), such as providing specific material to demonstrate the nature and utilization of services rendered outside India and receiving payment in convertible foreign exchange. Failure to meet these requirements results in the disallowance of deduction under Section 80-O (of Income Tax Act, 1961).

The case discusses the decisions of Continental Construction Ltd. and Khursheed Anwar, which are relevant to the present case. In the case of Continental Construction Ltd., the assessee, a civil construction company, executed various projects overseas and in India. The company obtained the approval of the CBDT under Section 80-O (of Income Tax Act, 1961) for certain contracts. However, several issues related to the applicability of the approval, the nature of activities, and the eligibility for deduction under Section 80-O (of Income Tax Act, 1961) were raised. The court held that the eligibility for deduction cannot be determined solely based on the labels given to receipts, such as royalty, fees, or commission. It emphasized that the consideration for deductions must be attributable to the information and services contemplated by Section 80-O (of Income Tax Act, 1961). The court also acknowledged that contracts of this nature are often complex, and it may not always be possible to dissect the consideration into various elements. However, consolidated receipts and expenses are apportionable. The court further stated that it is the duty of the revenue and the right of the assessee to apportion the consideration paid for information and services and grant the deduction accordingly. The functions of the Assessing Officer in relation to deductions under Section 80-O (of Income Tax Act, 1961) were also outlined.

In the case of Khursheed Anwar, the claim for deduction under Section 80-O (of Income Tax Act, 1961) was declined due to a lack of necessary material to substantiate the claim. The High Court emphasized that the benefit of Section 80-O (of Income Tax Act, 1961) cannot be claimed merely by asking for it; it must be supported by the required records and materials.

From these decisions, it is clear that to bring a foreign exchange receipt within the ambit of Section 80-O (of Income Tax Act, 1961), it must be attributable to the information and services specified in the provision. In contracts involving multiple activities, only the portion of the foreign exchange receipt attributable to the activities under Section 80-O (of Income Tax Act, 1961) qualifies for deduction. The Assessing Officer must conduct an inquiry and establish the necessary co-relation between the foreign exchange receipt and the eligible information or services. The assessee must provide concrete material to support this co-relation.

The case involves two appellants, M/s Laxmi Agencies and M/s Laxmi Agencies - the appeal arising out of SLP (Civil) No. 23699 of 2016. Both appellants are engaged in rendering services to foreign buyers of Indian marine products. They claimed deductions under Section 80-O (of Income Tax Act, 1961) for the assessment years 1997-98 and 1998-99.

In the assessment orders, the Assessing Officers disallowed the deductions on the grounds that the services were rendered in India and did not qualify for deduction under Section 80-O (of Income Tax Act, 1961). The Appellate Authority examined the terms of the agreements with the foreign enterprises and allowed deductions to some extent. The ITAT, following its earlier decision in the case of Ramnath & Co., allowed the appeals and allowed the deductions in full.

The Supreme Court, in its analysis, refers to various decisions and clarifications related to Section 80-O (of Income Tax Act, 1961). It emphasizes that for a foreign exchange receipt to qualify for deduction under Section 80-O (of Income Tax Act, 1961), the service must be rendered from India to a foreign enterprise, and the nature of the service must fall within the scope of Section 80-O (of Income Tax Act, 1961). The court notes that Circular No. 700 dated 23.03.1995 clarifies that even if the ultimate use of the service occurs in India, as long as the service is rendered from India, it may still qualify for deduction under Section 80-O (of Income Tax Act, 1961). However, the court states that the circular does not do away with the basic requirements of Section 80-O (of Income Tax Act, 1961).

The court finds that the appellants failed to provide concrete material to show the necessary co-relation between the foreign exchange receipts and the eligible information/services under Section 80-O (of Income Tax Act, 1961). It concludes that the appellants are only acting as procuring agents and do not go beyond that role. Therefore, the court dismisses the appeals, upholding the disallowance of deductions under Section 80-O (of Income Tax Act, 1961) for the appellants.

Overall, the court affirms the requirement that the service must be rendered from India to a foreign enterprise, and the consideration for the service must be attributable to the information and services contemplated by Section 80-O (of Income Tax Act, 1961) to qualify for deduction.

1. Leave granted.

2. The short point calling for determination in these appeals against the common judgment dated 09.06.2016 passed by the High Court of Kerala at Ernakulam in a batch of appeals is as to whether the income received by the appellants in foreign exchange, for the services provided by them to foreign enterprises, qualifies for deduction under Section 80-O (of Income Tax Act, 1961), 19611, as applicable during the respective assessmentbyears from 1993-94 to 1997-98.

1 Hereinafter also referred to as ‘the Act of 1961’ or ‘the Act’

3. Put in a nutshell, the question involved in these appeals has arisen in the backdrop of facts that the appellants herein, who had been engaged in providing services to certain foreign buyers of frozen seafood and/or marine products and had received service charges from such foreign buyers/enterprises in foreign exchange, claimed deduction under Section 80-O (of Income Tax Act, 1961), as applicable for the relevant assessment year/s.

In both these cases, the respective Assessing Officer/s2

denied such claim for deduction essentially with the finding that the services rendered by respective assessees were the ‘services rendered in India’ and not the ‘services rendered from India’ and, therefore, the service charges received by the assessees from the foreign enterprises did not qualify for deduction in view of clause (iii) of the Explanation to Section 80-O (of Income Tax Act, 1961).

After different orders from the respective Appellate Authorities, the Income Tax Appellate Tribunal, Cochin Bench accepted the claim for such

deduction under Section 80-O (of Income Tax Act, 1961) with the finding in case of the

assessee Ramnath & Co.for the assessment year 1993-94 that as per the

agreements with the referred foreign enterprises, the assessee had passed on the necessary information which were utilised by the foreign enterprises concerned to make a decision either to purchase or not to purchase; and hence, it were a service rendered from India. The same decision was followed by ITAT in the case of this assessee for other assessment years under consideration as also in the case of other assessee M/s Laxmi Agencies5. The revenue preferred appeals before the High Court against the orders so passed by ITAT in favour of the present appellants as also a few other assessees. These appeals have been considered together by the High Court of Kerala; and similar questions regarding eligibility for deduction under Section 80-O (of Income Tax Act, 1961) in relation to the similarly circumstanced assessees have been decided by the impugned common judgment dated 09.06.2016. The High Court has essentially held that the assessees were merely marine product procuring agents for the foreign enterprises, without any claim for expertise capable of being used abroad rather than in India and hence, the services rendered by them do not qualify as the ‘services rendered from India’, for the purpose of Section 80-O (of Income Tax Act, 1961). Therefore, the High Court has allowed the appeals of revenue while setting aside the respective orders of ITAT. Aggrieved, the assessees have preferred these appeals.

4. The basic factual and background aspects relating to the two

assessees in appeal before us are more or less similar in nature but, having regard to the position that ITAT had decided all other appeals based on its order dated 19.11.2001 for the assessment year 1993-94 in relation to the assessee-appellant Ramnath & Co. and the High Court has also rendered common judgment essentially with reference to the facts relating to this assessee (with other assessees having adopted the same contentions), it appears appropriate to elucidate the same facts and background aspects for dealing with the questions raised in these appeals.

RELEVANT FACTUAL AND BACKGROUND ASPECTS:

5. The appellant Ramnath & Co. is a firm engaged in the business of

providing services to foreign buyers of Indian marine products. The

appellant filed its return of income for the assessment year 1993-1994 on 29.10.1993 declaring total taxable income at Rs. 6,21,710/- while claiming 50% deduction (amounting to Rs. 22,39,825/-) under Section 80-O (of Income Tax Act, 1961) in relation to the amount of Rs. 44,79,649/- received by it as service charges from foreign enterprises.

5.1. While asserting its claim for such deduction under Section 80-O (of Income Tax Act, 1961) of

the Act, the appellant submitted that it had rendered myriad services to the foreign enterprises like:

(i) locating reliable source of quality and assured supply of frozen seafood for the purpose of import and communicating its expert opinion and advice in that regard;

(ii) keeping a close liaison with agencies concerned for bacteriological analysis and communicating the result of inspection together with expert comments and advice;

(iii) making available full and detailed analysis of seafood supply situation and prices;

(iv) advising and informing about the latest trends in manufacturing and

markets; and

(v) negotiating and finalising the prices for Indian exporters of

frozen marines products and communicating such other related information

to the foreign enterprises. The appellant claimed that pursuant to the terms and conditions of the agreements with the foreign enterprises, it had received the said service charges; and its services had directly and

indirectly assisted the foreign enterprises to organise, develop, regulate and improve their business.

5.2. In regard to such claim for deduction under Section 80-O (of Income Tax Act, 1961), the AO, by his letter dated 29.01.1996, raised the following queries and sought clarifications from the appellant:-

“1.The location of services rendered by the assessee may be

mentioned if there are any services rendered outside India.

2. Whether the technical/professional services rendered by

the assessee were utilized by the foreign enterprises

anywhere in India or outside India independently of the

assessee.

3. Whether the technical/professional services rendered by

the assessee were utilized by the foreign enterprises, in

India, independently and without the assessee.

4. To clarify whether the technical/professional services

rendered by the assessee are capable or being made use of

by the foreign enterprises independently and without the

assessee.”

5.3. In response, the appellant justified its claim for deduction under

Section 80-O (of Income Tax Act, 1961) by way of its letter dated 19.02.1996 while asserting as under:

“1. The technical/professional services rendered by us are

“from India”.

2. Foreign buyers to whom we have rendered these services

are located in Japan, U.S.A., U.K. and France. None of

these foreign enterprises have utilized our services in any

part of India. But the entire benefit of our services were

utilized by them in effectively distributing and marketing the

Indian sea-foods in their respective countries.

3. We would like to emphasize that the foreign enterprises

have no place of business in India nor do they market any

goods or services in India.

4. Without services the import of marine products from India

by the foreign enterprises will not be possible.”

5.4. In his assessment order dated 28.03.1996, the Assessing Officer

proceeded to analyse the agreements of the appellant with the two foreign enterprises and reproduced the relevant terms thereof in extenso. This part of the order of the AO, containing material terms of agreements, being relevant for the present purpose, is reproduced as under: -

“In the context of the above claim of the assessee, it is

necessary to go through the agreements entered into by the

assessee with the foreign enterprises to find out the nature of

the relationship of the assessee with the foreign enterprises.

I have gone through the agreements entered into by the

assessee with HOKO Fishingco Ltd. is captioned agreement

regarding marine products and that with GELAZURE S.A. is

captioned agency agreement regarding marine products.

Articles 1 to 4 of the agreement with HOKO fishing Co. Ltd.

reads as under:-

Article 1:HOKO desires to avail of the benefit of the

commercial and technical knowledge experience

and skill of “RC-CN foods/Marine products of good

quality and on favourable terms and is willing to

remunerate “RC-CN” for use of such commercial

and technical knowledge, expert and skill and other

related services.

Article 2:“RC-CN agrees to render to “HOKO” the following

services on a continuing basis.

a) Locating reliable sources of quality and

assured supply of frozen seafood/marine products

for the purpose of import by HOK and communicate

its expert opinion and advice to HOKO.”

b) In addition to the above services rendered by

“RC-CN, it will also keep a close liaison with

agencies such as EIA/LLOYDS/SGS especially for

organoleptic/bacteriological analysis and

communicate the results of inspection along with its

expert comment and advise.

c) Making available full and detailed analysis of

the sea food supply situation and prices.

d) To advise HOKO and keep them informed of

the latest trends/processes application in

manufacturing and of all valuable commercial and

economic information about the markets.

Government Policies, exchange fluctuations,

banking laws which will directly or indirectly assist

HOKO to organize, develop control or regulate their

import business from India.

e) To negotiate and finalize prices for Indian

Exporters of frozen marine products and to

communicate such and other related information to

HOKO.

Article 5 RC-CN” shall also do everything that is required to

ensure highest standards of quality hygiene and

freshness of products including supervision at

various stages.

Article 4: HOKO pays to RC-CN 0.7% of the invoice amount

on the C & F basis and US$ 2,000.00 per month as

commission. When the quality of goods is found to

be unsatisfactory to HOKO after inspection in

Japan, HOKO shall have no responsibility to pay

the agent fee.”

Similarly, articles 1 to 4 of the Agreement with GELAZUR S.A

read as under:-

Article 1:‘GELAZUR appoints RAMNATH” as agent to

operate in priority their purchases in frozen

seafood’s products in India.

Article 2 : RAMNATH’ does the following business as Agent

on behalf of GELAZUR.”

1) To negotiate with the local packers for the purchase of the

frozen seafood products which ‘GELAZUR’ requires:

2) To give “GELAZUR’ all the accurate information in respect

of the standard, quantity, price, quality, time of shipment, etc.

promptly, whenever the purchase of the products is made.

3) To carry out technical guidance for processing and for

quality control and inspection of the products and to advise

“GELAZURE” of the results.

4) To inform GELAZURE’ regularly about the market situation,

i.e. fishing situation, prices paid by other markets, prices paid

by French competitors, business opportunities, monthly

supplies of seafood-data.

Article 3: After reception of the goods, GELAZURE’ will pay

RAMNATH” commissions calculated on the following basis:

5.5. Having examined the contents of two agreements, the Assessing

Officer did not feel convinced with the claim that the appellant had been rendering services from India so as to qualify for deduction under

Explanation (iii) to Section 80-O (of Income Tax Act, 1961). The Assessing Officer was

firmly of the view that the appellant had worked only as an agent of the

foreign enterprises in the matter of procurement of marine products from

India; and all the services envisaged in the agreements were incidental to the carrying out of main function as agent. The Assessing Officer recorded his observations and findings as follows: -

“....A close study of the articles extracted above, would

establish that the assessee is merely an agent of the foreign

enterprises in India in the matter of procurement of marine

products from India. All the services which are required to be

carried out by the assessee in terms of the agreements are

incidental to the carrying out of the primary function of acting

as an agent. The assessee’s role is to act on behalf of the

foreign principals within the limits allowed by them. In terms

of the agreements, the assessee negotiates with local

packers with regard to quality, quantity and price. On behalf

of the principals, the assessee carries out technical guidance

for processing and for quality control and also inspection of

the products and also keeps close liaison with various

agencies. These are definitely services rendered in India and

cannot be construed as services rendered from India merely

relying on the facts that the foreign principals are advised of

the results and that they are stationed outside India. It is true

that as per agreement, the assessee was to supply certain

information of a general nature regarding markets,

government policies, exchange fluctuations, banking laws,

prices paid by competitors, monthly supplies of seafood data

etc. However, the agreements do not envisage any payment

of separate in commission or service charge for such

information. The commission is payable to the assessee as

a percentage of the C & F value of the imports by the foreign

enterprises through the assessee. However, the payment of

commission is conditional on the foreign enterprises

finding the quality of goods satisfactory. This would

reinforce my earlier observation that the assessee is

only an agent of the foreign enterprises in the matter of

procurement of marine products from India and all the

services envisaged in the agreement are incidental to the

carrying out of the main function as agent. It is also not as if

the foreign enterprises completely stayed away from India.

Though it might be a fact that none of the foreign enterprises

had any office or branch anywhere in India, available

information indicates that the representatives of the foreign

enterprises used to visit India in connection with the

procurement of marine products from various packers in India

and it fell upon the assessee to take these persons to the

processing facilities of various suppliers with a view to ensure

quality and hygiene standards. This is evident from the fact

that a sum of Rs.23,122/- has been incurred by the assessee

during the visit of buyers, representatives to various seafood

packers in Calcutta, Bombay vizag, Madras Nandapam,

Cochin, Calicut etc. Expenses for souvenirs, compliments

and samples of the value of Rs.29,411.99 have also been

incurred presumably in connection with the visit of the

representatives of the foreign buyers. By any stretch of

imagination, it cannot be claimed that the services rendered

on the occasions of the visit of the representatives of foreign

enterprises were not rendered in India. The foreign travels

undertaken by the Managing Partner for meeting various

buyers can been seen as only an extension of the assessee’s

role as an agent of the foreign enterprises in India. An agent

of a foreign enterprise in India necessarily acts on behalf of

the foreign enterprise in India, and therefore, the services,

namely carrying out inspections to ensure quality of the

products and packaging, supervision of processing,

negotiating prices in respect of marine products

exported with the assistance of the assessee, could not

have been rendered outside India as the parties to be

contacted, products to be inspected, processing to the

supervised etc. were situated in India only. In my view

services that are incapable of being rendered outside India

will not come under the category of services that can be

rendered from India. Therefore, there is no merit in the

contention of the assessee that these services were rendered

from India but not within India....”

(emphasis in bold supplied)

5.6. The appellant also relied upon Circular No. 700 dated 23.03.1995

issued by the Central Board of Direct Taxes in support of its contentions.

The Assessing Officer distinguished the matter dealt with by the said

Circular from that involved in the present case in the following passage: -

“..The assessee also strongly relies on circular No.700

dated 23/3/95 issued by the C.B.D.T. In my view, the reliance

on the above circular by the assessee to buttress its case is

misplaced. Para 3 & 4 of the above circular which are quits

relevant, reads as under : -

“3. A question has been raised as to whether the

benefit of Section 80-O (of Income Tax Act, 1961) would be available if the

technical and professional services, though

rendered outside India, are used by the foreign

government or enterprise in India.

“4. 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 (of Income Tax Act, 1961) would

be available to the person rendering the services

even if the foreign recipient of the services utilizes

the benefit of such services in India.”

As is clear from the above, the C.B.D.T. was dealing with a

question whether deduction under Section 80-O (of Income Tax Act, 1961) could be

denied on the ground that the foreign enterprise uses the

services rendered outside India, in India. It has been clarified

that merely because the foreign enterprises utilized the

benefit of services rendered outside India, the deduction

under Section 80-O (of Income Tax Act, 1961) cannot be denied. In the case before the

C.B.D.T, there was not dispute as to where the technical

services were rendered, In the case before me, there is

absolutely no scope for doubt that the services as an agent

were rendered by the assessee in India only. In 132 ITR 637,

the Bombay High Court held that an assessee acting as a

mere employment recruiting bureau was not entitled for

deduction under Section 80-O (of Income Tax Act, 1961) and the services rendered in

locating prospective candidates and collecting their bio-datas

and conveying names of candidates to foreign employers did

not represent services rendered outside India. Similarly, in

145 ITR 673 in the case of Searls (India) Ltd, the same High

Court ruled that testing of samples in India and giving results

and certificate to foreign company did represent technical

services rendered outside India. In view of the forgoing

discussion, I would hold that the assessee is not entitled for

deduction u/s 80-O (of Income Tax Act, 1961) as the services made available to the

foreign enterprises were rendered in India.”

5.7. In the aforesaid view of the matter, the AO disallowed the claim for deduction under Section 80-O (of Income Tax Act, 1961).

5.8. In the appeal taken by the appellant, the Appellate Authority did not agree with the opinion of the Assessing Officer, particularly with reference to the decision of Delhi High Court in the case E.P.W. Da Costa and Ors. v. Union of India: (1980) 121 ITR 751 (Delhi) and a decision of ITAT Delhi, D Bench in the case of Capt. K. C. Saigal v. Income Tax Officer: (1995) 54 ITD 488 (Delhi) and hence, allowed the appeal while observing, inter alia, as under: -

“14..In the present case, there is no dispute that the

appellant is supplying information with regard to the markets,

government policies, exchange fluctuations, banking laws,

data with regard to monthly supply of sea-food etc. to the

foreign enterprises. Secondly, even if the appellant is a

mere agent of the foreign enterprises, he is bringing the

foreign enterprises in contact with the manufacturers or

processors of shrimps, lobsters etc. and negotiating with

the local packers and is locating sources of frozen sea-

foods for the foreign enterprises. Though the various items

of activity are rendered in India, they are done on behalf of

the foreign enterprises and the market and other

information had been supplied from India to the foreign

enterprises.

15. In section 80-O (of Income Tax Act, 1961), Explanation (iii) reads as under : -

“Services rendered or agreed to be rendered

outside India shall include services rendered from

India but shall not include services rendered in

India”.

The word “from” means “out of” or “springing out of”. Thus,

‘from India’ necessarily means that some of the activities will

spring out of or will be in India because the services are

rendered from India. In this connection, I am of the view that

the decision of the Delhi High Court in E.P.W. De Costa &

Another vs. Union of India (121 ITR 751) is really applicable

to the facts of the case. The services rendered with regard to

assessing the radio-listening habits of the people were

rendered in India i.e. The data had been collected in India.

However, it was held that a mere mass of information without

analysis and without being understandable would not be of

use to the B.B.C. The information is not, therefore, mere

data but scientific knowledge. In the present case, the

appellant has located reliable source of quality and assured

supply of frozen sea-food products to the various foreign

enterprises at Japan, France and other countries and

supplied information with regard to sea-food processing,

manufacturing details and also government policies,

exchange fluctuations etc. to the foreign enterprises. The

appellant has negotiated and finalised prices for the Indian

exporters of frozen sea-food products and communicated the

same to the foreign enterprises. Thus, the appellant has

rendered the services from India to these foreign enterprises.

That the appellant’s information and experience have been

effectively utilised by the foreign enterprises can be seen

from the fact that the export effected by the appellant-

concern have risen from 20 crores in the AY 1991-92 to 100

crores by AY 1996-97. For the year under consideration, the

exports are approximately 60 crores on which the appellant

has earned a commission of Rs. 44.79 lakhs.

16. The major issue to be decided in this case is whether the

services rendered by the appellant can be said to be ‘from

India’. On the facts and circumstances of the case, I am of

the opinion that the services have been rendered from India

and hence, the appellant is eligible for deduction u/s 80-O (of Income Tax Act, 1961),

especially in view of the decision of the Delhi High Court in

E.P.W. De Costa & Another vs. Union of India (121 ITR 751)

and the I.T.A.T. Delhi ’D’ Bench decision in the case of Capt.

K. C. Saigal vs. I.T.O. (54 ITD 488).”

(emphasis in bold supplied)

5.9. Aggrieved by the decision aforesaid, the revenue preferred appeal

before the ITAT, being ITA No. 84/Coch/1997, that was considered and

decided by ITAT by its order dated 19.11.2001. The ITAT took note of the

history of introduction of Chapter VI-A and Section 80-O (of Income Tax Act, 1961) to the Act of 1961 by the Finance (No. 2) Act, 1967 as also the fact that Section 80-O (of Income Tax Act, 1961) had undergone several amendments over the course of time. The ITAT

concurred with the findings of the Appellate Authority that the services

rendered by the appellant, which helped the foreign parties to import marine products from India, had been specialised and technical services and thereby, the appellant was entitled to claim deduction under Section 80-O (of Income Tax Act, 1961). The ITAT observed and held, inter alia, as follows: -

“9. The case of the Revenue is that the assessee has

rendered services only in India and not from India. The

services that entitle the assessee for the benefit under

Section 80-O (of Income Tax Act, 1961) should be of such nature that it can only be

rendered outside India and not services that are capable of

being rendered in India. According to the revenue, the

assessee was rendering only a generalised service such as

market studies, study of processing, etc. so as to satisfy the

quality of the materials exported, like any other general

agent. Therefore, the assessee is not entitled to claim the

benefit under Section 80-O (of Income Tax Act, 1961). Considering the facts and

circumstances of the case, we are unable to agree with the

above proposition. In CBDT v. Oberoi Hotels (India) (P) Ltd.

[1998] 231 ITR 148’ the Supreme Court has held that the

agreement for managing modern hotel, including promotion

of business, recruiting and training staff are all such services

that entitle the assessee for the benefit of Section 80-O (of Income Tax Act, 1961).

In circular No.700 issued on 23-3-1995 the Board

clarifies the position. It clarifies 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 (of Income Tax Act, 1961) 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”.

Now the question is whether the assessee rendered any

service and communicated the same to the foreign party.

Article 2 (4) of the agency agreement regarding marine

products entered into between Gelazur S.A. and Ramnath &

Co. (assessee) states that the assessee is to inform

“GELAZUR” regularly about the market situation, i.e. fishing

situation, prices paid by other markets, prices paid by French

Competitors, business opportunities, monthly supplies of

seafood data. This indicates that the assessee has to

communicate the data it collected, and on the basis of

this, the foreign party acts either to purchase or not to

purchase. It is also true that Article 4 of the said agreement

states that “if, any claim arises out of or in relation to the

purchase of products for which ‘GELAZUR’, has no

responsibility, ‘RAMNATH’ will do their best to settle the claim

through negotiation with manufacturers”. This indicates that

the party is also doing supply of services. But, this part

of the service is only consequential to the first. The

agreement entered into between Hoko Fishing Co. Ltd.,

Tokyo, Japan and the assessee also stipulates that the

assessee has to keep “Hoko” informed of the latest

trends/processes applications in manufacturing and of

all valuable commercial and economic information about

the market, Government Policies, exchange fluctuations,

banking laws which will directly or indirectly assist “Hoko” to

organise, develop, control or regulate their import business

from India. In addition to this, the assessee has to render

services to ensure highest standards of quality, hygiene

and freshness of products including supervision at

various stages. The second mentioned services may be

considered as services rendered in India. But, definitely

the other services rendered and informed to the other

party like latest trends/processes applications in

manufacturing, commercial and economic, information

about the markets, Government Policies, exchange

fluctuations, banking laws etc. which help the foreign

party to import marine products from India is a

specialised and technical service. That, in our view,

qualifies the assessee to claim deduction under Section 80 (of Income Tax Act, 1961)-

O.”

(emphasis in bold supplied)

5.10. The ITAT also referred to the subtle distinction in the two phrases:

‘the services rendered from India’ and ‘the services rendered in India’; and while referring to a decision of Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. v. S.B. Potnis, Chief Commissioner: (1993) 203 ITR 947 (Bom) as also other decisions, observed that if the assessee had not passed on the requisite information, the export would not have materialised.

According to ITAT, if the assessee had done the services like packing,

shipping etc., in that case, the assessee would have been merely an

exporter and could not have claimed the benefit under Section 80-O (of Income Tax Act, 1961) but,

the services rendered by the assessee were of specialised nature, which

had been utilised by the foreign party. Accordingly, the ITAT dismissed the appeal of revenue while observing as under:-

“10. It is true that the difference between ‘the services

rendered from India’ and ‘the services rendered in India’ used

in the Explanation below the proviso to the section is wafer-

thin. But still the difference exists when looked from the point

of view the Indian Exporter. The services rendered in India

are services to make the goods eligible for export. On the

other hand, the services rendered from India can be treated

as services rendered, as desired by the foreign party, which

need specialisation. If the foreign party is interested in

details or information or specific details and such details

are supplied by the Indian party and such details are

utilised either to purchase or not to purchase from India,

such services can be treated as “services rendered from

India”. If the foreign party seeks any service and it is

rendered, it is a service rendered from India, whereas the

services rendered in India are not necessarily by virtue of the

other party’s request or demand. In Godrej & Boyce Mfg. Co.

Ltd. vs. S.B. Potnis, Chief Commissioner [1993] 203 ITR 947’

the Hon’ble Bombay High Court held that a provision made

for the giving of all marketing, industrial manufacturing,

commercial and scientific knowledge, experience and skill for

the efficient working and management of the foreign

company could be treated as services rendered that make

the assessee eligible for the benefit under Section 80-O (of Income Tax Act, 1961).

11. In Mittal Corporation’s case (supra), the Delhi bench-D of

the Tribunal held that the object and spirit of Section 80-O (of Income Tax Act, 1961)

was to mainly encourage Indian technical know-how and skill

abroad and since the information was given outside India

party and it was used outside India and payment was

received in convertible foreign exchange, the condition

required for allowing deduction under Section 80-O (of Income Tax Act, 1961) could

said to have been fulfilled. In the case of E.P.W. Da Costa

(supra) the Delhi High Court has held that if the information

passed on by the assessee is of practical nature and was a

result of making or manufacturing some concrete thing and

such information has been utilised by the foreign party, such

information is sufficient to claim the benefit under Section 80 (of Income Tax Act, 1961)-

O.

12. Before parting with, let us think in a negative way. If the

assessee had not passed on the information like

marketing, processing, quality control, etc. to the other

party, the export would not have materialised. Short of

this information, if the assessee had done services like

packing, shipping, etc. and ensured quality and quantity,

the assessee is merely an exporter and cannot claim the

benefit contemplated under Section 80-O (of Income Tax Act, 1961). If we look from

this angle also, we are of the opinion that the assessee is

entitled to succeed.”

(emphasis in bold supplied)

6. The facts discernible from the material on record make out that on

the similar pattern, the ITAT also allowed the claim of this appellant in relation to the assessment years 1994-95, 1995-96 and 1996-97, while

following its earlier orders. As noticed, the appeals against the orders

passed for these assessment years were clubbed together and disposed of

by the High Court by way of the common judgment dated 09.06.2016,

which is in challenge in these appeals.

The impugned judgment by the High Court

7. In its impugned common judgment dated 09.06.2016, the High

Court of Kerala has disagreed with ITAT and has disallowed the claim for

deduction by the appellant essentially with the finding that the appellant was merely a marine product procuring agent for the foreign enterprises, without any claim for expertise capable of being used abroad rather than in India and hence, the alleged services do not qualify as the ‘services rendered from India’, for the purpose of Section 80-O (of Income Tax Act, 1961).

8. In view of the submissions made and the subject-matter of these

appeals, we may examine the observations and reasoning in the impugned

judgment that have led the High Court to disagree with ITAT and to reject the claim of the appellant for deduction under Section 80-O (of Income Tax Act, 1961) in requisite specifics.10

8.1. The main plank of submissions on behalf of revenue, with reference

to the agreements between the assessee on one hand and the two foreign

companies respectively on the other, had been that the assessee was

simply an agent of the foreign enterprises for procuring marine products

from India; that all its services were incidental to its main functioning as a fish-procuring agent; and that the assessee rendered its services "in India",contra-distinguished with the expression "from India". It was also contended on behalf of the revenue that mere communication between the assessee based in India and the principal based abroad does not bring their transactions within the purview of Section 80-O (of Income Tax Act, 1961). The submissions on behalf of the revenue were supported with a Division Bench decision of that High Court in Commissioner of Income Tax v. Thomas Kurian (Dead) through LR Smt. Primari C. Thomas, since reported as (2012) 72 DTR (Ker). On the other hand, it was contended on behalf of the assessee that on reading the principal provision of Section 80-O (of Income Tax Act, 1961) with clause (iii) of the Explanation, it was clear that once the service is provided by an

Indian company (or other person who is resident in India) and the same is 'used' by a foreign entity outside India, it made no difference if the advice is rendered from Indian soil. In relation to the query of the Court as to whether all the services mentioned in the agreement would come within the purview of Section 80-O (of Income Tax Act, 1961), the response on behalf of the assessee had been that ‘if the recipient of services is situated outside, all the services rendered by the assessee in terms of the agreement come within the sweep of the provision’. It was, therefore, contended on behalf of the assessee that the assessee's establishing ‘which of its services qualifies for the deduction is of no consequence, rather unnecessary’. The decision in Thomas Kurian (supra) was distinguished on behalf of the assessee with reference to the facts that the assessee therein was engaged only in verification of quality and fitness of marine products but provided no commercial or technical information from India to the foreign buyers whereas the assessee in the present case had been supplying commercial and technical information and, using the information supplied by the assessee, the foreign companies had taken decision outside India as regards how they could purchase the merchandise. The submissions on behalf of the assessee were supported with reliance on the said Circular No. 700 dated 23.03.1995 and the decisions in M/s Continental Construction Ltd. v. Commissioner of Income Tax, Central-I:

8.2. Having thus taken note of the rival submissions, the High Court

proceeded to analyse Section 80-O (of Income Tax Act, 1961) with its Explanation (iii). After reproducing the relevant text of the provisions, the High Court entered into the lexical semantics of the prepositions ‘from’ and ‘in’ with reference to their dictionary meanings. Then, reverting to Section 80-O (of Income Tax Act, 1961), the High Court observed that therein, the constants were the Indian agent, the foreign principal, and the Indian agent rendering services from India but the variables were as to ‘how’ and ‘where’ the services were used. Thereafter the High Court looked at the intent and purpose behind Section 80 (of Income Tax Act, 1961)–O of the Act and observed as under: –

“29. Every nation meets any measure more than half way if it

results in the nation's augmenting the foreign reserves. India

is no exception. It encourages and provides incentives to

those who earn foreign exchange. Over and above the

incentive is the facility of deduction from the taxable income

in foreign exchange--that is what Section 80-O (of Income Tax Act, 1961) is. The

legislative intent behind the provision is not far to seek. The

Government encourages entrepreneurial initiative and

innovation by the Indian companies at the international level.

In a measure, the nation encourages any Indian showcasing

the Indian intellect internationally. That accepted, if Indian

technology, know-how, etc., is used in India itself even by a

foreign company, it is an intellectual enterprise not only from

India but also in India. We reckon that use means the end

use of the information or know-how, but not its mere

processing.”

8.3. Proceeding further, the High Court examined the position obtainable

in regard to the interpretation and application of Section 80-O (of Income Tax Act, 1961) from the precedents cited at Bar. The High Court pointed out that in

Thomas Kurian (supra), a case dealt with by the same High Court, the

main service rendered by the assessee was admittedly of examining the

quality and type of fish processed by the exporters in India and certifying the fitness of the product for shipment; and such a service was rendered entirely in India. It was further pointed out that in E.P.W. Da Costa (supra),the assessee had been a consultant engaged in conducting specialised economic and public opinion research on an all-India basis to assess the attitudes of political, social and economic subjects and in the given nature of work, the High Court of Delhi held that BBC, based in London, can be said to have used the information received from the assessee to formulate or modify its broadcasting programmes to India; and though the information was provided by the assessee from India, it was used in another country in

its entirety. As regards the decision in Mittal Corporation (supra), the High Court observed that the assessee therein received commission as a buying agent of certain foreign enterprises and it was held that it was not necessary that the assessee must provide technical services even where it received consideration for only providing commercial information. The High Court, however, observed that from the said decision, it could not be gathered as to how the commercial information provided by the assessee was used by the foreign enterprises outside India which was ‘a crucial aspect for determining the application of the provision’. As regards the decision in Oberoi Hotels (supra), the High Court again observed that the factual background was not explicit, but since the agreement involved the assessee's training the Nigerian personnel, it was held that the assessee undoubtedly under the contract must make use of its commercial and scientific expertise as well as experience and skill, outside India. As regards

the case of Inchcape India (supra), it was pointed out that the assessee

had to work in textile testing, inspection of soft lines, electrical and

electronic products according to the existing standards of European and

American markets, etc. It was also pointed out that the issue arose much

before the insertion of Explanation (iii) to Section 80-O (of Income Tax Act, 1961). In

reference to the decision in Li & Fung (supra), the High Court pointed out that therein, assessee claimed to have rendered technical services out of India as a buying agent and the High Court of Delhi held that the services rendered by the assessee required knowledge, expertise and experience;

and, therefore, the fee it received from foreign enterprises for supply of commercial information sent from India for use outside India was eligible for deduction under Section 80-O (of Income Tax Act, 1961). The Court observed that the said decision gave judicial imprimatur to the Board's clarification to the effect that if an assessee renders technical or professional services from India to a foreign Government or enterprise outside India, it can claim deduction even if the foreign recipient utilises the 'benefit of such services in India'. In this line of consideration, the High Court lastly referred to the decision in the case of Chakiath Agencies (supra) and pointed out that therein, the assessee, a shipping agent, was to ensure that the ship owner picks up the cargo and transports it within time and at the agreed rates; and the information regarding the availability of cargo to ship owners and its destinations at frequent intervals enabled the ship owners to program the ships' travel touching the Indian coasts. In the given facts, it was held that the assessee had rendered commercial service to the foreign shipping owner for his use outside India and received a commission in convertible foreign exchange, entitling it to the benefit of Section 80-O (of Income Tax Act, 1961). After such discussion in relation to the aforesaid decisions, the High Court observed that two crucial aspects of Section 80-O (of Income Tax Act, 1961) had not fallen for consideration therein: as to what type of services rendered by an Indian entity falls within the sweep of the provision and as to what is the true import of the expression ‘use outside India’. The High Court said thus:

“46 With due regard to the above pronouncements, we,

however, feel it necessary to point out that in none of them,

two crucial aspects of Section 80-O (of Income Tax Act, 1961) have not fallen

for consideration : (i) What type of services rendered by an

Indian entity falls within the sweep of the provision; (ii) what is

the true import of the expression ‘use outside India’?”

8.4. Having said so in relation to the aforementioned decisions, the High Court took note of the decision of this Court in the case of Continental Construction (supra), wherein the assessee was a civil construction company that had entered into various contracts for the construction, inter alia, of a dam and irrigation projects in Libya and water supply projects in Iraq after obtaining the approval of CBDT in terms of the then applicable requirements of Section 80-O (of Income Tax Act, 1961). The High Court noticed that in that case, on the assessee's claim for the benefit under Section 80-O (of Income Tax Act, 1961), this Court has held that the assessee was undoubtedly rendering services to the foreign Government and those were technical services indeed, for they required specialised knowledge, experience and skill. The revenue’s contention that those services were not covered by Section 80-O (of Income Tax Act, 1961)

because there was no privity of contract between the employees of the

assessee and the foreign Government was rejected by this Court while

observing that the assessee was a company and any technical services

rendered by it could only be through the medium of its employees. As

regards the claim for a deduction based on labelling of the receipts, this Court held that that eligibility of an item to tax or tax deduction could hardly be made to depend on the label given to it by the parties in that, an assessee was not entitled to claim deduction under Section 80-O (of Income Tax Act, 1961) merely because certain receipts were described in the contract as royalty, fee or commission and at the same time, absence of a specific label cannot destroy the right of an assessee to claim deduction if, in fact, the consideration for the receipts can be attributed to the sources stated in the section. The High Court also noted the dictum of Continental Construction that it is the duty of the revenue and the right of the assessee to see that the consideration paid under the contract legitimately attributable to such information and services is apportioned, and the assessee is given the benefit of deduction available under the section to the extent of such consideration.

8.5. The High Court further took note of a decision of Madras High Court

in the case of Commissioner of Income Tax v. Khursheed Anwar: (2009)

311 ITR 468 (Mad) wherein the assessee had an exclusive agency for

promoting and concluding sales contract in India for machinery and

equipment for an enterprise based in Italy. On the strength of agreement, the assessee worked with the foreign enterprise but the Court observed that the benefit under Section 80-O (of Income Tax Act, 1961) was not available to the assessee for mere asking; the records and materials must support the claim and the benefit of the said Section cannot be claimed as a matter of right, it being a question of fact, which could be considered by the AO on the basis of the records. In that case, the Appellate Authority had recorded a specific finding that the assessee has simply effected the sale of machinery and spares manufactured by the foreign enterprise; and, therefore, the assessee received only the sales commission, which was not for any activities relating to technical or professional services and hence, the assessee was not entitled to claim deduction under Section 80-O (of Income Tax Act, 1961).

8.6. The High Court summed up the requirements, as emanating from

the ratio of the decisions in Continental Construction and Khursheed

Anwar (supra) as follows: -

“53. Both from Continental Construction and Khursheed

Anwar we gather that not every receipt from a foreign

enterprise in convertible foreign exchange does not (sic)

automatically get qualified for deduction under Section 80-O (of Income Tax Act, 1961)--

the nomenclature notwithstanding. The burden, in fact, is on

the assessee to prove before the Revenue through cogent

material that the commission is for the services it rendered

falling within the scope of the section. Neither of the facts-

the existence of the contract and the receipt of convertible

foreign exchange--leads to a presumption that the

commission is deductible as provided in Section 80-O (of Income Tax Act, 1961) of the

Act.”

8.7. Having, thus, traversed through the provision of law applicable; the meaning of the expressions occurring in text thereof; and the position obtainable from the precedents, the High Court proceeded to examine the facts and, with reference to the aforesaid agreements of the appellant with French and Japanese companies respectively, held that some of the functions said to have been discharged by the assessee cannot qualify for deduction under Section 80-O (of Income Tax Act, 1961); and in none of the appeals, the assessees had placed any material as regards the services they had rendered to qualify under that provision.

8.8. While referring to Explanation (iii) to Section 80-O (of Income Tax Act, 1961), the High Court held that mere transferring information abroad would not

establish that the service is rendered from India and not in India; that all receipts cannot qualify for concession; that the range of services referred to in Section 80-O (of Income Tax Act, 1961) have the thread of connectivity in all the intellectual endeavours mentioned therein. The High Court summed up its discussion in the following passages:-

“56. To sum up, we wish to conclude that the Tribunal has

erred on two counts in holding that the assessees are entitled

to the benefit of deduction under Section. 80-O of the Act :

First, mere transmission of the information to a foreign

enterprise, evidently, abroad does not go to show that it

is a service rendered from India, but not in India. With an

element of certainty, we can as well say that once there is a

contract, an Indian agent always interacts with and sends

information--even technical know-how--to a foreign enterprise

abroad. If that alone qualifies for deduction without reference

to ‘the services rendered in India’, the very expression in

explanation (iii) becomes otiose. Trite it is to observe that

statutory surplusage is not a settled canon of construction;

rather it is to be avoided.

57. The purpose of the provision is to provide an

incentive to the indigenous know-how of whatever

nature that reaches the shores of foreign nations and gets

applied there. The resultant fruits may percolate to India, too,

as is the case in E.P.W. Da Costa and Continental

Construction, even in which the Apex Court has held that not

all receipts can claim the concession. If we refer back to

the analogy employed by the learned senior counsel for the

assessees, an advocate in India may render services to a

foreign client stationed abroad concerning a case pending in

India. It is a service rendered not only from India, but also in

India. On the other hand, if that piece of professional advice

is used abroad, even involving clients of Indian origin or laws

of this nation as it happens in international arbitrations, the

remuneration is qualified for the benefit.

58. Once we look at the range of services referred to in

Section 80-O (of Income Tax Act, 1961), we can discern the thread of connectivity

in all the intellectual endeavours mentioned therein : 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 or provided or agreed to be made available or

provided to such Government or enterprise by the assessee.

It can also be in consideration of technical or professional

services rendered or agreed to be rendered outside India to

such Government or enterprise by the assessee. They

cannot be said to be entirely discrete and disparate. The

services have an air of intellectuality; as such, all and

sundry services rendered to a foreign enterprise cannot

be taken into account, lest it should amount to doing

violence to the explanation (iii).”

(emphasis in bold supplied)

8.9. While concluding on the matter, the High Court referred to the

dictionary meaning of the expression “render” and observed that “rendering” includes both “providing” and “performing”; and that in the context of Section 80-O (of Income Tax Act, 1961), the services may be rendered in India but have to be performed on the foreign soil. The High Court also observed that, if the assessees had at all rendered certain services which qualify for deduction,they had failed to place any material in that regard; and the agreements in question only point out that the assessees were marine product procuring agents for the foreign enterprises without any claim for expertise capable of being used abroad rather than in India. Accordingly, the High Court answered the question of law in favour of revenue and set aside the orders passed by ITAT.

RIVAL SUBMISSIONS

Lead arguments on behalf of the appellant

9. On the debate relating to the question of applicability of Section 80-O (of Income Tax Act, 1961) to the foreign exchange earned by the appellant in lieu of the services rendered by it to the foreign enterprises, the learned senior counsel for the appellant has made wide-ranging emphatic submissions on the process of interpretation, the scheme and object of Section 80-O (of Income Tax Act, 1961) and has also referred to the decisions which, in his contention, cover the present case on the substance and principles.

9.1. The learned senior counsel for the appellant has strenuously argued

that the High Court has approached the entire case from an altogether

wrong angle and with rather linguistic and pedantic approach to

interpretation while ignoring the basic object and purpose of Section 80-O (of Income Tax Act, 1961), which is meant to give incentive for earning foreign exchange.

With reference to the decision in Abhiram Singh v. C.D. Commachen

(Dead) by LRs. and Ors.: 2017(2) SCC 629, the learned counsel has

submitted that this Court has cautioned against making a ‘fortress out of the dictionary’ but the High Court has proceeded with excessive reliance on dictionary and has merely looked at the text without its context and object and with such approach, has unjustifiably upturned the well-considered decision of ITAT. Learned counsel has also referred to the decision of this Court in the case of Commissioner of Income Tax, Thiruvananthapuram v. Baby Marine Exports, Kollam: (2007) 290 ITR 323 (SC), to submit that an incentive provision has to be construed purposively, broadly and liberally; and for the provision like Section 80-O (of Income Tax Act, 1961), when the basic object is to earn foreign exchange, the incentive is required to be granted if the object is to be achieved. With reference to the decision in Commissioner of Income Tax-IV, Tamil Nadu v. B. Suresh: (2009) 313 ITR 149 (SC), the learned counsel has pointed out that therein, even five years’ licence to exhibit an Indian film abroad was held to be that of export of goods and merchandise, covered by Section 80HHC (of Income Tax Act, 1961); and Section 80-O (of Income Tax Act, 1961), being equally a provision for incentives to earn foreign exchange, ought to receive the same liberal approach. According to the learned counsel, the approach of High Court in the present case had been too narrow and rather unrealistic.

9.2. The learned senior counsel would contend that on a plain reading of

Section 80-O (of Income Tax Act, 1961), it is clear that it applies to the income by way of royalty, commission, fees or any similar payment received by the assessee from a foreign enterprise in consideration for the use outside India, inter alia, of “information concerning industrial, commercial or scientific knowledge, experience or skill” made available to foreign enterprises, provided that the income is received in convertible foreign exchange in India; and

Explanation (iii) to Section 80-O (of Income Tax Act, 1961) makes it clear that this Section would apply even to the services rendered from India, which are to be treated for the purpose of this Section as services rendered outside India. Learned counsel has argued that Section 80-O (of Income Tax Act, 1961) is by no means confined to grant of user of intellectual property rights or intellectual activities, as contended by the revenue and as observed by the High Court. In this regard, the learned counsel has again referred to the words “information concerning industrial,commercial or scientific knowledge, experience or skill” in the latter part of Section 80-O (of Income Tax Act, 1961) and has argued that these words are distinct from the initial part of this Section, dealing with the use of intellectual property rights. The learned counsel has further argued that even ‘commission’, which could relate to ordinary commercial activities, is also covered by Section 80-O (of Income Tax Act, 1961).

9.3. While strongly relying upon the decision of this Court in the case of J. B. Boda & Co. Pvt. Ltd v. Central Board of Direct Taxes, New Delhi:

(1997) 223 ITR 271 (SC), the learned senior counsel has argued that

therein, even a commission received by the reinsurance broker, who only

sent information to the foreign reinsurance company regarding the risk

involved and other related data, was held entitled to the benefit of Section 80-O (of Income Tax Act, 1961) in respect of the entire commission. The learned counsel has argued that the activity of reinsurance broker cannot possibly be described as an intellectual activity or as a technical or professional service;

and in that case of J.B. Boda & Co., the activity only consisted of sending commercial information from India about a proposed reinsurance contract on the basis of which, the reinsurance company took a commercial decision to enter into the contract. The learned counsel has pointed out that in that case, this Court had referred to the Circular issued by CBDT specifically directing that the deduction under Section 80-O (of Income Tax Act, 1961) should be allowed on the commission received by an Indian reinsurance broker even though it was only deducted from the remittance made to the company abroad and there was no actual inward remittance of foreign exchange. According to the learned counsel, this judgment decisively negatives the stand of the revenue that Section 80-O (of Income Tax Act, 1961) applies only to a payment for use of intellectual property rights or for intellectual activities. The learned counsel would argue that the broad, liberal and purposive interpretation of Section 80-O (of Income Tax Act, 1961) in J. B.

Boda & Co. is of crucial importance and the analogy thereof applies to the appellant.

9.4. The learned senior counsel for the appellant has further relied upon the decision of Delhi High Court in E.P.W. Da Costa (supra) with the submissions that therein, the Indian assessee only carried out market survey of radio listeners in India and communicated the information to BBC in London; and BBC utilized that information to frame Hindi language broadcasts to India. However, the payments made towards such services by BBC to the assessee were also taken to be covered by Section 80-O (of Income Tax Act, 1961).

9.5. As regards the services and activities of the appellant, the learned senior counsel has referred to the findings of the Appellate Authority as also of ITAT and has submitted that the said findings are to the effect that the appellant rendered services from India to its foreign customers by making over to them the information regarding seafood available in various Indian markets, their quality, price ranges etc.; and, on the basis of this information, the foreign customers took decisions on whether or not to import seafood from India, what to import and from which market and supplier. Further, the other basic requirement of Section 80-O (of Income Tax Act, 1961), i.e.,

remittance of the amount in convertible foreign exchange to India has also been fulfilled. According to the learned counsel, the clear and unequivocal findings of the Appellate Authority and ITAT are findings of fact and they fully establish that the appellant furnished information from India to its customers abroad regarding its industrial and commercial knowledge and skill, and such information was utilized abroad by the said foreign customers and the appellant’s commission was remitted to India in convertible foreign exchange. The learned counsel would argue that nothing of perversity was shown in regard to such findings of fact so as to call for interference but the High Court has proceeded on a basis which is totally inconsistent with those findings. With reference to the decision of this Court in the case of K. Ravindranathan Nair v. Commissioner of Income Tax, Ernakulam: (2001) 247 ITR 178 (SC), the learned counsel has argued that there was no scope of interference in the findings of fact in this case.

9.6. Assailing the findings of High Court in the impugned judgment, the

learned senior counsel has also argued that the approach of the High Court that unless services were rendered abroad, the amount received would not qualify for the benefit of Section 80-O (of Income Tax Act, 1961) is directly contrary to the plain provision contained in Explanation (iii) to Section 80-O (of Income Tax Act, 1961) and is also contrary to Circular No. 700 dated 23.09.1995 which had clarified that Section 80-O (of Income Tax Act, 1961) covered not only the services rendered outside India but also the services rendered from India to a party outside India; and it does not matter if the service is subsequently utilized by the foreign customer in India. In regard to the case of the appellant, the learned counsel would submit that in fact, the foreign enterprises related with the appellant do not have any operation or place of business in India and in such a situation, there was no question of the appellant rendering service to the customers in India. Thus, according to the learned senior counsel, the activities in question are squarely covered by Section 80-O (of Income Tax Act, 1961).

The respondent-revenue

10. In counter to the submissions so made on behalf of the appellant,

learned senior counsel for the respondent-revenue has also referred to the object and purpose behind the provisions contained in Section 80-O (of Income Tax Act, 1961); the rules of interpretation, which, in his contention, ought to be applied to these provisions; and, while seeking to distinguish the decisions cited on behalf of the appellant, has relied upon other decisions, which, according to him, apply to the present case and which duly support the view taken by the High Court in the impugned judgment.

10.1. The learned senior counsel for the revenue has pointed out that the provisions similar to Section 80-O (of Income Tax Act, 1961) were originally available in the former Section 85-C (of Income Tax Act, 1961), 1961, which was introduced with the purpose to encourage Indian industries to develop technical know-how and services and make it available to foreign companies so as to augment the foreign exchange earning of our country and to establish a reputation of Indian technical know-how in foreign countries. Reverting to the contents of Section 80-O (of Income Tax Act, 1961), as applicable to the case at hand, the learned counsel has submitted that its purpose is indicated in the heading itself that the same is for providing deduction in respect of royalties etc., received from certain foreign enterprises. Dissecting the relevant parts of this provision, the learned counsel would submit that some of the essential requirements for its applicability are that the assessee must receive income

by way of royalty, commission, fees or similar payment from a foreign

enterprise; the consideration must be for technical or professional services,of patents, inventions or similar intellectual property or information concerning industrial, commercial or scientific knowledge; and the services must be rendered outside India. While reiterating and emphatically underscoring the observations in impugned judgment, the learned counsel would submit that the intention of legislature behind introducing Section 80-O (of Income Tax Act, 1961) was to provide deductions for only that income which is received through intellectual activity/intellectual endeavours; and simple trading activity,though may require certain commercial or industrial information, cannot be said to be covered by this provision. With reference to Explanation (iii) to Section 80-O (of Income Tax Act, 1961), the learned counsel would argue that the principal provision specifically states that it covers the services rendered “outside India” and the explanation clarifies that the services rendered or agreed to be rendered outside India shall include services rendered from India but shall not include services rendered in India; and therefore, services rendered by the assessee to a foreign entity must be rendered outside India, in foreign soil, and not in India, though they may be rendered from India.

10.2. As regards the principles of interpretation, the learned senior

counsel for revenue has strongly relied upon the Constitution Bench

decision in Commissioner of Customs (Import), Mumbai v. Dilip Kumar

& Co. and Ors: (2018) 9 SCC 1 to submit that it is now settled beyond

doubt that taxing statutes are subject to the rule of strict interpretation,leaving no room for any intendment; and the benefit of ambiguity in case of an exemption notification or an exemption clause must go in favour of the revenue, as exemptions from taxation have a tendency to increase the burden on the unexempted class of tax payers. The same principles,according to the learned counsel, shall apply to Section 80-O (of Income Tax Act, 1961) and, for the law declared by the Constitution Bench, the decision relied upon by the learned counsel for the appellant in Baby Marine Exports (supra), which even otherwise dealt with Section 80HHC (of Income Tax Act, 1961) and not Section 80-O (of Income Tax Act, 1961), is of no help to the appellant.

10.3. Taking on to the facts, the learned senior counsel would submit that the activities alleged to be rendered by the appellant to foreign entities as per the respective agreements were not of technical or professional services so as to be covered by the main part of the provision; and further,they are excluded by virtue of Explanation (iii) to Section 80-O (of Income Tax Act, 1961), for having been rendered “in India” and not “from India”. The learned counsel would elaborate on the submissions that as per the agreements, the appellant was only to locate reliable and assured suppliers of marine products, to finalise pricing and before exporting, to check the quality of goods to be exported from India to the foreign entity and to communicate the same to the foreign entity. Moreover, the payment was made on the basis of invoice amount;and not on basis of any specialised commercial or technical knowledge given to the foreign entity. The learned counsel has particularly referred to Article 3 of the above-referred agreement with GELAZUR to point out that if the quality or packaging of the goods was found to be unsatisfactory after inspection in France, the foreign company had no liability to pay the agent’s fee. Thus, according to the learned counsel, the activities in respect of which the agreements were entered into by the appellant were only that of a‘buying or procuring agent’ and do not fall within the ambit of Section 80-O (of Income Tax Act, 1961); and the primary activity being of certification, which is done in India, and of sourcing the goods, which is also done in India, Section 80-O (of Income Tax Act, 1961) is not applicable per the force of its Explanation (iii). The learned counsel has yet further submitted, while supporting the observations of High Court, that if one were to assume that the appellant had rendered certain services which qualify for deduction, no material in that regard has been placed on record.

10.4. The learned senior counsel for the revenue has drawn support to his contentions that Section 80-O (of Income Tax Act, 1961) does not apply to the appellant by making reference mainly to two decisions. In the first place, the learned counsel has relied upon the decision of this Court in B.L. Passi v. Commissioner of Income-Tax: 2018 (404) ITR 19 (SC) with the submissions that this decision applies on all fours to the present case. Therein, the assessee stated that as per the agreement, it was to provide blueprints for manufacture of dies for stamping of doors of cars, though no blueprint sent was produced and there was nothing to show that sales were effected because of information given by assessee. This Court held that the assessee was only a managing agent and was not rendering ‘technical services’ within the meaning of Section 80-O (of Income Tax Act, 1961). Hence, there was no basis for grant of deduction. Next, the learned senior counsel has referred to the decision of Kerala High Court in the case of Thomas Kurian (supra), where the assessee was only examining the quality and type of fish processed by the exporters and was certifying fitness for shipment to foreign buyer, who was bound to accept the goods shipped from India. It was held that the referred services were rendered “in India” and hence, the first eligibility condition of Section 80-O (of Income Tax Act, 1961), that the services should be rendered outside India, was not fulfilled and hence, benefit of deduction under Section 80-O (of Income Tax Act, 1961) was held not available even though the second condition of receiving foreign exchange was fulfilled. The learned senior counsel would submit that the principles available in the said decisions directly apply hereto and the appellant is not entitled to claim deduction under Section 80-O (of Income Tax Act, 1961).

10.5. Seeking to distinguish the decisions cited by the other side, the

learned counsel for revenue has submitted that in the case of J.B. Boda & Co. (supra), the issue was only about the method of receipt of foreign

exchange which would qualify for Section 80-O (of Income Tax Act, 1961) deduction, which is not in

dispute in the present appeals; and the relied upon Circular of 1995 was

also limited to the point as to what constitutes receipt of foreign exchange.

According to the learned counsel, the nature of activity was not in issue in that case and hence, there is no such ratio decidendi which could support the case of appellant. The learned counsel has further submitted that the case of E.W.P. Da Costa (supra) was of entirely different activity inasmuch as therein, statistical tables were compiled by the assessee after analysing masses of numerical data, which was collected with audience research studies in India to assess and analyse the radio listening habits of Indians for BBC; and such services were held to be highly technical, pertaining to scientific knowledge and not mere data collection because those services enabled BBC to broadcast not only in India but other parts of the world. As regards the decision in B. Suresh (supra), it has been submitted that in that case, there was admittedly transfer of rights of feature films for exploitation ‘outside India’ and the main issue was only whether there could be said to be a ‘sale’ within the meaning of Section 80HHC (of Income Tax Act, 1961), which is irrelevant to present case.

10.5.1. It has also been submitted on behalf of the respondent that, in the judgments relied upon by the appellant before the High Court, the crucial twin aspects of Section 80-O (of Income Tax Act, 1961), i.e., as to what type of service rendered by the Indian entity comes within the sweep of this provision; and as to what is the true import of the expression “use outside India” as per Explanation (iii) to Section 80-O (of Income Tax Act, 1961), did not fall for consideration and hence, those judgments were of no support to the proposition sought to be advanced by the appellant. It has also been submitted that in the case of Continental Construction (supra), the contracts were for carrying out physical construction of dams and irrigation projects in foreign countries, i.e., ‘not in India’ and besides that, in special circumstances, the benefit of Section 80-O (of Income Tax Act, 1961) was only allowed in part rather than on the entire contract, where the revenue was directed to bifurcate and look at each of the services rendered. According to the submissions on behalf of the respondent, the appellant relied upon this decision in the High Court but gave it up in this Court realising that the same is in favour of revenue; and if at all the ratio is applied, at best, the benefit of Section 80-O (of Income Tax Act, 1961) might have been considered activity-wise, if the appellant had placed any material as to the actualservices rendered, but no such material had been placed on record by the appellant.

10.6. In regard to different services by the same assessee, some of which may not qualify for deduction, apart from relying on the observations in Continental Construction (supra), reference has also been made on behalf of revenue to two circulars of CBDT i.e., Circular No. 187 dated 23.12.1975 and Circular No. 253 dated 30.04.1979. It has been pointed out that Circular dated 23.12.1975 provided, inter alia, that in the case of a composite agreement which specified a consolidated amount as consideration for purposes which included matters outside the scope of Section 80-O (of Income Tax Act, 1961), CBDT may not approve such an agreement for the purposes of Section 80-O (of Income Tax Act, 1961) if it was not possible to properly ascertain and determine the amount of consideration relatable to the provision of the know-how or technical services etc., qualifying for Section 80-O (of Income Tax Act, 1961). Thus, the benefit of Section 80-O (of Income Tax Act, 1961) could have been denied to the entire amount of royalty, commission, fees etc., receivable under such an agreement. Thereafter, by Circular dated 30.04.1979, it was decided that in such cases of composite agreement, approval would be granted by CBDT subject to a suitable disallowance for the non-qualifying services, after taking into consideration the totality of agreement, so that the balance of the royalty/fees, etc., which was for the services covered by Section 80-O (of Income Tax Act, 1961), could be exempted. This Circular also clarified that trade enquires will not qualify for deduction under Section 80-O (of Income Tax Act, 1961) as also technical services rendered in India. It has been contended that if at all the appellant had been rendering some such services which could qualify for deduction, it had not given any such break-up of services and corresponding receipts and therefore, benefit of Section 80-O (of Income Tax Act, 1961) is not available to the appellant.

10.6.1. As regards the circular relied upon by the counsel for the appellant,i.e., Circular No. 700 dated 23.03.1995, it has been contended on behalf of revenue that the same is of no assistance to the appellant because, as per paragraphs 3 and 4 thereof, the services have to be rendered outside India,and it only clarifies that the foreign recipient of the services may utilise the benefit of such services in India whereas in the present case, the appellant merely rendered services in India and only as an agent.

10.7. The learned senior counsel for revenue has also submitted that the

findings of fact arrived at by the ITAT were clearly challenged before the High Court in ITA No. 131 of 2002 and, in any case, it being a matter of interpretation of statutory language of Section 80-O (of Income Tax Act, 1961) and its Explanation (iii), the contention on behalf of the appellant about want of challenge to the findings is without substance.

Rejoinder submissions on behalf of the appellant

11. The submissions made on behalf of the respondent have been duly

refuted on behalf of the appellant by way of rejoinder submissions.

11.1. As regards the principles of interpretation in the case of Dilip

Kumar & Co. (supra), it has been contended on behalf of the appellant that reference to the said decision is wholly inapposite because that deals with interpretation of an exemption notification and not an incentive provision like Section 80-O (of Income Tax Act, 1961), which has been interpreted in J.B. Boda & Co. (supra) or Section 80HHC (of Income Tax Act, 1961), which has been interpreted in B. Suresh and Baby Marine Exports (supra).

11.2. As regards the decisions relied upon by revenue on application of

Section 80-O (of Income Tax Act, 1961), it has been submitted that reference to the case of B.L. Passi (supra) is completely misplaced because therein, the assessee had not placed any material whatsoever to show that it had rendered any service to the foreign customer; and therefore, the issue regarding the nature of service did not even arise. As regards the decision of Kerala High Court in Thomas Kurian (supra), it has been submitted that the nature of services rendered therein were very different from those of the appellant because the said assessee was only an inspector and certifier; and even otherwise, the said decision is not of any force because the decision of this Court in J.B. Boda & Co. (supra) was not considered therein and the decision of Delhi High Court in E.P.W. Da Costa (supra), which was accepted by revenue and was allowed to become final, was also not considered. It has also been submitted that there is no cogent or specific reply by the respondents to the submissions based on the decisions of this Court in the case of J.B. Boda & Co. (supra); and it has been reiterated that even the activity of reinsurance broker was taken to be covered for the benefit of Section 80-O (of Income Tax Act, 1961) though such activity cannot possibly be described as an intellectual activity or as a technical or professional service. It has been contended that a liberal and purposive approach adopted by this Court in J.B.Boda & Co. for interpreting the incentive provision of Section 80-O (of Income Tax Act, 1961) is of utmost importance to the present case. It has further been contended in rejoinder submissions that there is no material distinction between the cases of J.B. Boda & Co. and E.P.W. Da Costa on one hand and that of the appellant on the other; and superficial comments made on behalf of the respondents in regard to these decisions remain meritless.

11.2.1. Similarly, as regards the Circulars dated 23.12.1975 and

30.04.1979, it has been contended that reference to these circulars is

wholly misplaced because they dealt with the matter of approval by CBDT

of an agreement with foreign customers but such need for approval of

CBDT had been dispensed with by amendment of Section 80-O (of Income Tax Act, 1961) long ago

and these circulars have nothing to do with the issues involved in the

present case.

11.3. With reiteration of the submissions relating to the nature of activity of the appellant and the findings of ITAT, it has been argued that the contention of the respondents that the primary activity of the appellant had merely been of procuring agent remains untenable. It has also been contended that as per the finding of fact of ITAT, it is but clear that whole of the services rendered by the appellant and the entire amount received by it in foreign exchange was covered by Section 80-O (of Income Tax Act, 1961); and that the attempt on the part of the respondent to suggest as if only a part of the amount received by the appellant may be eligible for benefit of Section 80-O (of Income Tax Act, 1961) remains baseless. In the rejoinder submissions, it has also been indicated that reference to the decision of this Court in Continental Construction (supra) by the respondents is irrelevant, as the same has not been relied upon by the appellant.

12. We have given thoughtful consideration to the rival submissions and

have examined the records with reference to the law applicable.

SECTION 80-O OF THE INCOME TAX ACT, 1961

13. Having regard to the subject-matter and the questions involved,

appropriate it would be to take note of the relevant provisions contained in Section 80-O (of Income Tax Act, 1961) and clause (iii) of the Explanation thereto at the outset. This Section 80-O (of Income Tax Act, 1961) has undergone several amendments from time to time but, for the present purpose, suffice would be to extract the relevant and pivotal provisions therein, as existing at the relevant time and as applicable to the present appeal, as under: -

“80-O. Deduction in respect of royalties, etc. from certain

foreign enterprises.— 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, fees or any similar payment

received by the assessee from the Government of a foreign

State or a 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 or provided or agreed to

be made available or provided to such Government or

enterprise by the assessee, or in consideration of technical or

professional services rendered or agreed to be rendered

outside India to such Government or enterprise by the

assessee, 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 an amount equal to fifty per cent of the income

so received in, or brought into, India, in computing the total

income of the assessee:

Explanation.—For the purposes of this section,—

(iii) “services rendered or agreed to be rendered outside

India” shall include services rendered from India but shall not

include services rendered in India;

14. Worthwhile it would also be to take a little excursion into the relevant parts of history related with Section 80-O (of Income Tax Act, 1961) while putting a glance over some of the features of developments relating to the provision/s in the Income Tax, 1961 concerning such deduction in respect of particular class of income, received by way of royalty, commissions etc., by an assessee in consideration of imparting specified intellectual property, or extending specified information, or rendering specified services to foreign State or foreign enterprise.

14.1. In the early stages of advent of the Act of 1961, Chapters VI-A, VII and VIII respectively dealt with the deductions to be made in computing the total income, exempted portion/s of income, and rebates and reliefs but,several of the provisions in these Chapters as also some of the provisions of Chapter XII were recast and were put together in the newly framed Chapter VI-A by the Finance (No.2) Act, 1967 with effect from 01.04.1968 with the result that all such incentives or reliefs were directly provided by way of deductions from the total income itself. In its framework, while Part A of this Chapter VI-A contains general provisions including definitions, Part B thereof provides for deductions in respect of certain payments and Part C provides for deductions in respect of certain incomes in computation of total income. Part CA and Part D making provisions for special class of income or persons were introduced later.

14.2. The aspect germane to the present case is that forerunner to the

provision relating to deduction of tax on royalties etc., received from certain foreign companies, was Section 85-C (of Income Tax Act, 1961) in the Act of 1961, that was inserted by Act No.13 of 1966 w.e.f. 01.04.1966 and was placed in Chapter VII. The said Section 85-C (of Income Tax Act, 1961) and several other provisions of Chapter VII were omitted by Section 33 (of Income Tax Act, 1961), read with Third Schedule, item 14, of the Finance (No.2) Act,1967. The reason for omission of the said Section 85-C (of Income Tax Act, 1961) was that similar provision, with revised requirements, came to be introduced by way of Section 80-O (of Income Tax Act, 1961) in the new Chapter VI-A12

14.3. Section 80-O (of Income Tax Act, 1961) as introduced in Chapter VI-A got several

modifications/alterations in regard to the entities eligible to claim such deductions as also the extent (that is percentage) of admissible deduction,but the core of object remained that of encouraging the export of Indian technical know-how and augmentation of the foreign exchange reserves of the country. While the relief was originally admitted in Section 80-O (of Income Tax Act, 1961) for 12 For the purpose of reference, we are reproducing the said repealed Section 85-C (of Income Tax Act, 1961) as under:-

“85C. Deduction of tax on royalties, etc., received from certain foreign

companies – Where the total income of an assessee, being an Indian

company, includes any income by way of royalty, commission, fees or any

similar payment received by it from a company which is neither an Indian

company nor a company which has made the prescribed arrangements for the

declaration and payment of dividends within India (hereafter, in this section,referred to as the foreign company) in consideration for the use 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 or provided or agreed to be made available or provided to the foreign company by the assessee, or in consideration of technical services rendered or agreed to be rendered to the foreign company by the assessee, under an agreement approved by the Central Government in this behalf before the 1st day of October of the relevant assessment year, the assessee shall be entitled to a deduction from the income-tax with which it is chargeable on its total income for the assessment year of so much of the amount of income-tax calculated at the average rate of income-tax on the income so included as exceeds the amount of twenty-five per cent. thereof.”

13 For the purpose of reference, we may also reproduce Section 80-O (of Income Tax Act, 1961) in its original form, as inserted by the Finance (No.2) Act, 1967 as under:

“80O. Deduction in respect of royalties, etc., received from certain

foreign companies. – Where the gross total income of an assessee being an Indian company includes any income by way of royalty, commission, fees or any similar payment received by it from a foreign company in consideration for the use 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 or provided or agreed to be made available or provided to the foreign company by the assessee, or in consideration of technical services rendered or agreed to be rendered to the foreign company by the assessee, under an agreement approved by the Central Government in this behalf before the 1st day of October of the relevant assessment year, there shall be allowed a deduction from such income of an amount equal to sixty per cent. thereof, in computing the total income of the assessee.” dealing with a foreign company only, but later on, dealing with a foreign Government or foreign enterprise was included and thereby, the scope of coverage and activities was substantially expanded. However, as noticed from the erstwhile Section 85-C (of Income Tax Act, 1961) and the originally inserted Section 80-O (of Income Tax Act, 1961),any such agreement with the foreign entity required the approval of Central Government and this requirement was later on altered to that of the approval of CBDT. Various other features and aspects related with the development and operation of Section 80-O (of Income Tax Act, 1961), as then existing, were dealt with by the two circulars referred to on behalf of the revenue that is, Circular No. 187 dated 23.12.1975 and Circular No. 253 dated 30.04.1979. In fact,these circulars came up for their fuller exposition by this Court in the case of Continental Construction (supra), as we shall notice hereafter a little later.

At this juncture, we may usefully reproduce the relevant text of these two notifications which throw light on the provisions as then existing and as applied. The relevant parts of the said circulars read as under:-

“Circular No. 187, dated 23rd December, 1975.

Subject : Section 80-O (of Income Tax Act, 1961)-

Guidelines for approval of agreements.

“With the twin objectives of encouraging the export of

Indian technical know-how and augmentation of the foreign

exchange resources of the country, section 80-O (of Income Tax Act, 1961) of the

Income-tax Act, 1961, provides for concessional tax

treatment in respect of income by way of royalty, commission,

fees or any similar payment received from a foreign

Government or a foreign enterprise, subject to the

satisfaction of certain conditions laid down in the said section.

2. One of the conditions for availability of the tax

concession under section 80-O (of Income Tax Act, 1961) is that the agreement should

be approved by the Central Board of Direct Taxes in this

behalf. The application for the approval of the agreement is

required to be made to the Central Board of Direct Taxes

before the 1st day of October of the assessment year in

relation to which the approval is first sought. The form of

application for this purpose has been standardised and a

specimen is given in the Appendix.

3. The object of the provision when it was first introduced

as section 85C (of Income Tax Act, 1961) in the Income-tax Act, 1961, was stated in

Board’s Circular No.4P (LXXVI-61) of 1966, to be to

encourage Indian companies to export their technical know-

how and skill abroad and augment the foreign exchange

resources of the country. This was reiterated in Board’s

Circular No.72 explaining the changes introduced by the

Finance (No.2) Act, 1971. Keeping in view the purpose

behind this tax incentive and the requirements of the

statutory provisions, the Board have evolved the following

guidelines for the grant of such approval:-.

(ix) In the case of a composite agreement specifying a

consolidated amount as consideration for purposes

which include matters outside the scope of Section 80-O (of Income Tax Act, 1961)

(e.g., use of trade-marks, supply of equipment, etc.) the

amount of the consideration relating to the provision of

technical know-how or technical services, etc., qualifying

for purposes of section 80-O (of Income Tax Act, 1961) will have to be determined

by the Income-tax Officer separately at the time of

assessment after due appreciation of the relevant facts.

Where, however, in the opinion of the Board, it will not be

possible to properly ascertain and determine the amount

of the consideration relatable to the provision of the

know-how or the technical services, etc., qualifying for

section 80-O (of Income Tax Act, 1961), the Board may not approve such an

agreement for the purposes of section 80-O (of Income Tax Act, 1961).”

Circular No.253, dated 30th April, 1979.

Section 80-O (of Income Tax Act, 1961) – Guidelines for

approval of agreements – Further clarifications. – Attention is

invited to the Board’s Circular No. 187 (F. No. 473/15/73-

FTD), dated 23rd December, 1975, on the above subject

laying down the guidelines for the grant of approval under

section 80-O (of Income Tax Act, 1961). The Board has had occasion to re-examine the

aforesaid guidelines and it has been decided to modify the

guidelines to the extent indicated below : -

(i) Para.3(iii) of the Circular dated 23-12-1975 provided

that the agreement should have been genuinely

entered into on and after the date when the tax

concession was announced by the introduction of

the relevant Bill in the Lok Sabha. It has now been

decided that approvals under section 80-O (of Income Tax Act, 1961) would not

be denied on this ground. In other words, para 3(iii)

of the Circular dated 23-12-1975 may be treated as

deleted.

(ii) In para (ix) of the said circular, it was mentioned that

consideration for use of trade-mark would be outside

the scope of section 80-O (of Income Tax Act, 1961). It has now been decided

that payments made for the use of trade-marks, are

of the nature of royalty, and, therefore, fall within the

scope of section 80-O (of Income Tax Act, 1961).

(iii) It was also stated in para 3(ix) of circular dated 23-

12-75 that in the case of a composite agreement

which specified a consolidated amount as

consideration for purposes which included matters

outside the scope of section 80-O (of Income Tax Act, 1961), the Board may

not approve such an agreement for the purposes of

section 80-O (of Income Tax Act, 1961) if it was not possible to

properly ascertain and determine the amount of the

consideration relatable to the provision of the know-

how or technical services, etc., qualifying for section

80-O. Thus, the benefit of section 80-O (of Income Tax Act, 1961) could be

denied to the entire amount of royalty, commission,

fees, etc., receivable under such an agreement. It

has since been decided that in such cases

approval would be granted by the Board subject

to a suitable disallowance for the non-qualifying

services, after taking into consideration the

totality of the agreement, so the balance of

royalty/fees, etc., which is for the services

covered by section 80-O (of Income Tax Act, 1961), can be exempted.”

(emphasis in bold supplied)

14.4 There had been several other modifications of Section 80-O (of Income Tax Act, 1961) from

time to time. The relevant aspects noticeable for the present purpose are that the extent of deduction under Section 80-O (of Income Tax Act, 1961) was also altered from time to time and it even came to be allowed 100 per cent. but, by the Finance Act, 1984, it was reduced to 50 per cent. of the referred income. Then, the requirement of approval by CBDT was substituted by Finance Act, 1988 to the approval by Chief Commissioner or Director General. However, by Finance (No. 2) Act of 1991, even that requirement was deleted. In fact, the Finance (No. 2) Act of 1991 brought about a sea of changes in Section 80-O (of Income Tax Act, 1961) whereby, first and second provisos were omitted and the above-mentioned clause (iii) of Explanation was inserted. The words “or a person (other than a company) who is resident in India” were also inserted by this very Finance (No. 2) Act of 1991 expanding the reach of Section 80-O (of Income Tax Act, 1961) even to non-corporate tax payers.

Moreover, the earlier expressions “technical services” were also altered to “technical or professional services”. There is no gainsaying the fact that Finance (No. 2) Act of 1991 led to a considerable recasting of Section 80-O (of Income Tax Act, 1961) with substantial expansion of its ambit and area of coverage. These amendments were made applicable from the assessment year 1992-93 onwards and obviously, this had been the reason that the assessees like the appellant,who had earlier been taking the benefit of deduction under Section 80HHC (of Income Tax Act, 1961) with reference to their earning of foreign exchange, attempted to shift, for the purpose of deduction, to this provision of Section 80-O (of Income Tax Act, 1961). The effect of the amendments to Section 80-O (of Income Tax Act, 1961) by Finance (No. 2) Act of 1991 was also explained by the revenue in its Circular No. 621 dated 19.12.1991, the relevant part whereof could be extracted as under:-

“Circular No. 621, dated 19th December, 1991:-

‘Extending the scope of deduction in respect of income from

royalties, commission, technical fee, etc. ---37. Under the

existing provisions of section 80 (of Income Tax Act, 1961)-0 of the Income-tax Act, an

Indian company, deriving income by way of royalties,

commission, fees etc., from a foreign Government or a

foreign enterprise in consideration of the provision of

technical know-how or technical services under an approved

agreement, is entitled to a deduction, in computing its taxable

income, of an amount equal to 50 per cent. of such income

provided such income is received in, or brought into, India in

convertible foreign exchange.

37.1 With a view to bringing this provision on a parity with

other tax concessions for the export sector and also as a

measure of rationalisation, the benefit under section 80 (of Income Tax Act, 1961)-0 has

been extended to a non-corporate tax payers resident in

India. The concession will now also be available in relation to

professional services as well as for services rendered to

foreign enterprise from India. Further, the requirement of

prior approval of the tax authorities in this regard has been

done away with.

37.2 This amendment will take effect from 1st April, 1992

and will, accordingly, apply in relation to the assessment year

1992-93 and subsequent years.

14.5 There had been several further clarifications concerning Section 80-O (of Income Tax Act, 1961), as refurbished by the Finance (No. 2) Act of 1991; and one such

clarification by the revenue had been by way of Circular No. 700 dated

23.03.1995, which has been strongly relied upon by the learned senior

counsel for the appellant. The relevant contents of this circular could also be extracted as follows:-

“Circular No. 700, dated 23rd March, 1995

‘Deduction under section 80-O (of Income Tax Act, 1961) –

Clarification regarding.- Section 80-O (of Income Tax Act, 1961), provides for a deduction of 50% from the income of

an Indian resident by way of royalty, commission, fees or any

similar payment from a foreign Government or enterprise:

(a) in consideration for the use outside India of any

patent, invention, model, design, secret formula or

process, etc.; or

(b) in consideration of technical or professional services

rendered or agreed to be rendered outside India to

such foreign Government or enterprise.

In either case, the requirement is that the income should be

in convertible foreign exchange.

2. It has been clarified in the Explanation (iii) to section 80-O (of Income Tax Act, 1961)

that services rendered or agreed to be rendered outside India

[ i.e., item (b) above] shall include services rendered from

India but shall not include services rendered in India.

3. A question has been raised as to whether the benefit of

section 80-O (of Income Tax Act, 1961) would be available if the technical and

professional services, though rendered outside India, are

used by the foreign Government or enterprise in India.

4. 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 (of Income Tax Act, 1961) 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.

5. The contents of this circular may be given wide publicity

and brought to the notice of all the subordinate authorities

under your charge for information and necessary action.”

14.6 In summation of what has been noticed hereinabove, it turns out

that with the objectives of giving impetus to the functioning of Indian

industries to provide intellectual property or information concerning

industrial, commercial or scientific knowledge to the foreign countries so as to augment the foreign exchange earnings of our country and at the same time, earning a goodwill of the Indian technical know-how in the foreign countries, the provisions like Section 85-C (of Income Tax Act, 1961) earlier and Section 80-O (of Income Tax Act, 1961) later were inserted to the Act of 1961. Noteworthy it is that from time to time, the ambit and sphere of Section 80-O (of Income Tax Act, 1961) were expanded and even the dealings with foreign Government or foreign enterprise were included in place of “foreign company” as initially provided. The requirement of approval by the Central Government of any such arrangement was also modified and was ultimately done away with. Significantly, while initially the benefit of Section 80-O (of Income Tax Act, 1961) was envisaged only for an Indian company but later on, it was also extended to a person other than a company, who is resident of India. The extent of deduction had also varied from time to time.

14.7. Broadly speaking, a few major and important factors related with

Section 80-O (of Income Tax Act, 1961), with reference to its background and its development, make it clear that the tax incentive for imparting technical know-how and akin specialities from our country to the foreign countries ultimately took the shape in the manner that earning of foreign exchange,by way of imparting intellectual property, or furnishing the information concerning industrial, commercial, scientific knowledge, or rendering of technical or professional services to the foreign Government or foreign enterprise, was made eligible for deduction in computation of total income,to the tune of 50 per cent. of the income so received. The finer details like those occurring in Explanation (iii) of Section 80-O (of Income Tax Act, 1961) were also taken care of by providing that the services envisaged by Section 80-O (of Income Tax Act, 1961) ought to be rendered outside India but they may be rendered ‘from India’, while making it clear that the services which are rendered ‘in India’ would not qualify for such a deduction.

The relevant principles for interpretation

15. Having thus taken note of annals and historical perspectives of

development of Section 80-O (of Income Tax Act, 1961) and the relevant parts of the

circulars issued by the department from time to time in tune with such

developments, we may now examine the principles for interpretation and

application of this provision. In this regard, as noticed, it has been argued on behalf of the appellant, with reference to the decisions in Baby Marine Exports and B. Suresh (supra), that an incentive provision like Section 80-O (of Income Tax Act, 1961) has to be construed purposively, broadly and liberally so as to achieve its avowed object to earn foreign exchange. Per contra, it has been contended on behalf of revenue, with reference to the Constitution Bench decision in Dilip Kumar & Co. (supra), that the taxing statutes are subject to the rule of strict interpretation, and the benefit of ambiguity in case of an exemption notification or an exemption clause must go in favour of the revenue; and the same principles would apply in relation to Section 80-O (of Income Tax Act, 1961).

15.1. So far the decision in the case of B. Suresh (supra) is concerned, it does not appear necessary to dilate on the same because the question

involved therein was entirely different that is, as to whether the foreign exchange earned by transferring the right of exploitation of films outside India by way of lease was admissible for deduction under Section 80HHC (of Income Tax Act, 1961), where the department attempted to contend that movies/films were not goods. However, having regard to the submissions made, we may look at the ratio from the other cited decisions in requisite details.

Baby Marine Exports

16. The question that came up for determination before this Court in the

case of Baby Marine Exports (supra) was as to whether the export house

premium received by assessee was includible in ‘profits of business’ while computing deduction under Section 80HHC (of Income Tax Act, 1961)?

16.1. The assessee in the case of Baby Marine Exports was engaged in

the business of selling marine products both in domestic market and was

also exporting it to direct buyers as also through export houses. Contracts with export houses were entered into where assessee received entire FOB value of exports plus export house premium of 2.25% of FOB value. While claiming deduction under Section 80HHC (of Income Tax Act, 1961), this export house premium was also shown as part of total turnover, as being part of sale consideration and not commission or service charge; and deduction was claimed accordingly. The AO rejected such claim for deduction with reference to clause 12 of the agreement and with the observation that such premium was clearly a commission or service charge. The Appellate Authority held that what the assessee received was only reimbursement of certain expenses or payments towards commission or brokerage, falling within the ambit of clause 1 of Explanation (baa) to Section 80HHC (of Income Tax Act, 1961).

However, the ITAT allowed the appeal of the assessee by accepting the

stand that the export house premium was includible in ‘profits of business’ while computing deduction under Section 80HHC (of Income Tax Act, 1961) and that export house premium was nothing but an integral part of sale price realised by assessee and could not have been taken as either commission or brokerage. The appeal by revenue was dismissed by the High Court while following its earlier decision on the same point.

16.2. In further appeal by revenue, this Court observed, inter alia, with reference to other decisions in Sea Pearl Industries v. CIT Cochin:

2001(127) ELT649(SC) and IPCA Laboratory Ltd. v. Dy. Commissioner

of Income Tax, Mumbai: (2004) 266 ITR521(SC) that Section 80HHC (of Income Tax Act, 1961) was

incorporated with the object of granting incentive to earners of foreign

exchange and this section must receive liberal interpretation. This Court also observed with reference to the decision in Bajaj Tempo Ltd. v.Commissioner of Income Tax, Bombay: (1992) 196 ITR188(SC) that we

‘must always keep the object of the Act in view while interpreting the

Section. The legislative intention must be the foundation of the court's

interpretation’. 16.3. However, noticeable it is that in Baby Marine

Exports, ultimately this Court upheld the claim of assessee for deduction under Section 80HHC (of Income Tax Act, 1961) not by way of any liberal or extended meaning to the provision, but only on its plain construction with reference to the definition of the term “supporting manufacturer” in that provision and its direct application to the facts of the case as would distinctly appear from the following passages (at pp. 334-335 of ITR):-

“According to section 80HHC(1) (of Income Tax Act, 1961), the export house in

computing its total income is entitled to deduction to the

extent of the profit derived by the assessee from the export of

the goods or merchandise. Whereas, according to section

80HHC(1A), the supporting manufacturer shall be entitled to

a deduction of profit derived by the assessee from the sale of

goods or merchandise. The term "supporting manufacturer"

has been defined in this section and it reads as under:

“ ‘supporting manufacturer’ means a person being an

Indian company or a person (other than a company)

resident in India, manufacturing (including processing),

goods or merchandise and selling such goods or

merchandise to an Export House or a Trading House for

the purposes of export”: According to the said definition,

the respondent clearly comes within the purview of

supporting manufacturer. On plain construction of

section 80HHC(1A) (of Income Tax Act, 1961) the assessee being supporting

as manufacturer shall be entitled to a deduction of

the profit derived by the assessee from the sale of

goods or merchandise.

The respondent - a supporting manufacturer sold the

goods or merchandise to the export house and received the

entire FOB value of the goods plus the export house

premium of 2.25 per cent. of the FOB value. The relevant

clause 12 of the agreement has already been extracted in the

earlier part of the judgment and according to the said clause,

the export house is under obligation to pay to the supporting

manufacturer an incentive of 2.25 per cent. on the F.O.B.

value according to the terms of the agreement. The

respondent, a supporting manufacturer, admittedly sold the

goods to the export house in respect of which the export

house has issued a certificate under proviso to sub-section

(1). According to the section, the respondent - assessee, in

computing the total income be allowed a deduction to the

extent of profits referred to in sub-section (1B) derived by the

assessee from the sale of goods to the export house.

The Appellate Tribunal has arrived at the definite

conclusion that the Export House premium is nothing but an

integral part of sale price realized by the assessee - a

supporting manufacturer from the Export House. The Tribunal

further held that the Export House premium cannot possibly

be considered to be either commission or brokerage, as a

person cannot earn commission or brokerage for himself.

The High Court has upheld the findings of the Tribunal. In

our considered view, the order of the Appellate Tribunal is

based on proper construction of section 80HHC(1A) (of Income Tax Act, 1961) of the

Income-tax Act that the Export House premium is an integral

part of the sale price realized by the assessee from the

export house.

The submission of the appellant that the premium earned

by the respondent assessee is totally unrelated to export is

fallacious and devoid of any merit. This submission of the

appellant is also contrary to the specific terms of the

agreement between the appellant and the respondent.

On a plain construction of section 80HHC(1A) (of Income Tax Act, 1961), the

respondent is clearly entitled to claim deduction of the

premium amount received from the export house in

computing the total income. The export house premium

can be included in the business profit because it is an integral

part of business operation of the respondent which consists

of sale of goods by the respondent to the export house.”

(emphasis in bold supplied)

Dilip Kumar & Co.

17. The core question referred for authoritative pronouncement to the

Constitution Bench in the case of Dilip Kumar & Co. (supra) was as to

what interpretative rule should be applied while interpreting a tax exemption provision/notification when there is an ambiguity as to its applicability with reference to the entitlement of the assessee or the rate of tax? The reference to the Constitution Bench was necessitated essentially for the reason that in a few decisions, one of them by a 3-Judge Bench of this Court in the case of Sun Export Corpn. v. Collector of Customs: (1997) 6 SCC 564, the proposition came to be stated that any ambiguity in a tax provision/notification must be interpreted in favour of the assessee who is claiming benefit thereunder.

17.1. In Dilip Kumar & Co., the Constitution Bench of this Court

examined several of the past decisions including that by another

Constitution Bench in CCE v. Hari Chand Shri Gopal: (2011) 1 SCC 236

as also that by a Division Bench of this Court in the case of UOI v. Wood Papers Ltd.: (1990) 4 SCC 256 wherein, the principles were stated in clear terms that the question as to whether a subject falls in the notification or in the exemption clause has to be strictly construed; and once the ambiguity or doubt is resolved by interpreting the applicability of exemption clause strictly, the Court may construe the exemption clause liberally. This Court found that in Wood Papers Ltd. (supra), some of the observations in an earlier decision in the case of CCE v. Parle Exports (P) Ltd.: (1989) 1 SCC 345 were also explained with all clarity. This Court noted the enunciations in Wood Paper Ltd. with total approval as could be noticed in the following:-

“46. In the judgment of the two learned Judges in Union of

India v. Wood Papers Ltd.: (1990) 4 SCC 256 (hereinafter

referred to as “Wood Papers Ltd. case”, for brevity), a

distinction between stage of finding out the eligibility to seek

exemption and stage of applying the nature of exemption was

made. Relying on the decision in CCE v. Parle Exports (P)

Ltd. : (1989) 1 SCC 345, it was held: (Wood Papers Ltd.

case, SCC p. 262, para 6)

“6. Do not extend or widen the ambit at the stage of

applicability. But once that hurdle is crossed, construe it

liberally.”

The reasoning for arriving at such conclusion is found in para

4 of Wood Papers Ltd. case, which reads: (SCC p. 260)

“4. Literally exemption is freedom from liability, tax or

duty. Fiscally, it may assume varying shapes, specially,

in a growing economy. For instance tax holiday to new

units, concessional rate of tax to goods or persons for

limited period or with the specific objective, etc. That is

why its construction, unlike charging provision, has to be

tested on different touchstone. In fact, an exemption

provision is like an exception and on normal principle of

construction or interpretation of statutes it is construed

strictly either because of legislative intention or on

economic justification of inequitable burden or

progressive approach of fiscal provisions intended to

augment State revenue. But once exception or

exemption becomes applicable no rule or principle

requires it to be construed strictly. Truly speaking liberal

and strict construction of an exemption provision are to

be invoked at different stages of interpreting it. When

the question is whether a subject falls in the notification

or in the exemption clause then it being in nature of

exception is to be construed strictly and against the

subject, but once ambiguity or doubt about applicability

is lifted and the subject falls in the notification then full

play should be given to it and it calls for a wider and

liberal construction.”

(emphasis supplied)

58. In the above passage, no doubt this Court observed that:

(Parle Exports case, SCC p. 357, para 17)

“17. when two views of a notification are possible, it

should be construed in favour of the subject as

notification is part of a fiscal enactment.”

This observation may appear to support the view that

ambiguity in a notification for exemption must be interpreted

to benefit the subject/assessee. A careful reading of the

entire para, as extracted hereinabove would, however,

suggest that an exception to the general rule of tax has to be

construed strictly against those who invoke for their benefit.

This was explained in a subsequent decision in Wood

Papers Ltd. case. In para 6, it was observed as follows: (SCC

p. 262)

“6. In CCE v. Parle Exports (P) Ltd., this Court while

accepting that exemption clause should be construed

liberally applied rigorous test for determining if

expensive items like Gold Spot base or Limca base or

Thums Up base were covered in the expression food

products and food preparations used in Item No. 68 of

First Schedule of Central Excises and Salt Act and held

‘that it should not be in consonance with spirit and the

reason of law to give exemption for non-alcoholic

beverage basis under the notification in question’.

Rationale or ratio is same. Do not extend or widen the

ambit at stage of applicability. But once that hurdle is

crossed construe it liberally. Since the respondent did

not fall in the first clause of the notification there was no

question of giving the clause a liberal construction and

hold that production of goods by respondent mentioned

in the notification were entitled to benefit.”

59. The above decision, which is also a decision of a two-

Judge Bench of this Court, for the first time took a view that

liberal and strict construction of exemption provisions are to

be invoked at different stages of interpreting it. The question

whether a subject falls in the notification or in the

exemption clause, has to be strictly construed. When

once the ambiguity or doubt is resolved by interpreting

the applicability of exemption clause strictly, the Court

may construe the notification by giving full play

bestowing wider and liberal construction. The ratio of

Parle Exports case deduced as follows: (Wood Papers Ltd.

case, SCC p. 262, para 6)

“6. Do not extend or widen the ambit at stage of

applicability. But once that hurdle is crossed, construe it

liberally.”

60. We do not find any strong and compelling reasons to

differ, taking a contra view, from this. We respectfully record

our concurrence to this view which has been

subsequently, elaborated by the Constitution Bench in

Hari Chand case.”

(emphasis in bold supplied)

17.2. The Constitution Bench decision in Hari Chand Shri Gopal (supra)

was also taken note of, inter alia, in the following:-

“50. We will now consider another Constitution Bench

decision in CCE v. Hari Chand Shri Gopal (hereinafter

referred as “Hari Chand case”, for brevity). We need not refer

to the facts of the case which gave rise to the questions for

consideration before the Constitutional Bench. K.S.

Radhakrishnan, J., who wrote the unanimous opinion for the

Constitution Bench, framed the question viz. whether

manufacturer of a specified final product falling under the

Schedule to the Central Excise Tariff Act, 1985 is eligible to

get the benefit of exemption of remission of excise duty on

specified intermediate goods as per the Central Government

Notification dated 11-8-1994, if captively consumed for the

manufacture of final product on the ground that the records

kept by it at the recipient end would indicate its “intended

use” and “substantial compliance” with procedure set out in

Chapter 10 of the Central Excise Rules, 1994, for

consideration? The Constitution Bench answering the said

question concluded that a manufacturer qualified to seek

exemption was required to comply with the preconditions for

claiming exemption and therefore is not exempt or absolved

from following the statutory requirements as contained in the

Rules. The Constitution Bench then considered and

reiterated the settled principles qua the test of construction of

exemption clause, the mandatory requirements to be

complied with and the distinction between the eligibility

criteria with reference to the conditions which need to be

strictly complied with and the conditions which need to be

substantially complied with. The Constitution Bench followed

the ratio in Hansraj Gordhandas case, to reiterate the law on

the aspect of interpretation of exemption clause in para 29 as

follows: (Hari Chand case, SCC p. 247)

“29. The law is well settled that a person who claims

exemption or concession has to establish that he is

entitled to that exemption or concession. A provision

providing for an exemption, concession or

exception, as the case may be, has to be construed

strictly with certain exceptions depending upon the

settings on which the provision has been placed in

the statute and the object and purpose to be

achieved. If exemption is available on complying

with certain conditions, the conditions have to be

complied with. The mandatory requirements of

those conditions must be obeyed or fulfilled exactly,

though at times, some latitude can be shown, if

there is failure to comply with some requirements

which are directory in nature, the non-compliance of

which would not affect the essence or substance of the

notification granting exemption.

(emphasis in bold supplied)

17.3. In view of above and with reference to several other decisions, in

Dilip Kumar & Co., the Constitution Bench summed up the principles as

follows:-

“66. To sum up, we answer the reference holding as under:

66.1. Exemption notification should be interpreted

strictly; the burden of proving applicability would be on the

assessee to show that his case comes within the parameters

of the exemption clause or exemption notification.

66.2. When there is ambiguity in exemption notification

which is subject to strict interpretation, the benefit of

such ambiguity cannot be claimed by the subject/assessee and it must be interpreted in favour of the Revenue.

66.3. The ratio in Sun Export case is not correct and all

the decisions which took similar view as in Sun Export

case stand overruled.”

(emphasis in bold supplied)

17.4. Obviously, the generalised, rather sweeping, proposition stated in

the case of Sun Export Corporation (supra) as also in other cases that in the matters of taxation, when two views are possible, the one favourable to assessee has to be preferred, stands specifically disapproved by the Constitution Bench in Dilip Kumar & Co. (supra). It has been laid down by the Constitution Bench in no uncertain terms that exemption notification has to be interpreted strictly; the burden of proving its applicability is on the assessee; and in case of any ambiguity, the benefit thereof cannot be claimed by the subject/assessee, rather it would be interpreted in favour of

the revenue.

18. It has been repeatedly emphasised on behalf of the appellant that

Section 80-O (of Income Tax Act, 1961) is essentially an incentive provision and, therefore,needs to be interpreted and applied liberally. In this regard, we may observe that deductions, exemptions, rebates et cetera are the different species of incentives extended by the Act of 196115. In other words, incentive is a 15 As tersely put by this Court in Liberty India v. CIT: (2009) 9 SCC 328, the Act of 1961 broadly provides for two types of tax incentives, namely, investment-linked incentives and profit-linked incentives. Chapter VI-A which provides for incentives in the form of tax deductions essentially generic term and ‘deduction’ is one of its species; ‘exemption’ is another.

Furthermore, Section 80-O (of Income Tax Act, 1961) is only one of the provisions in the Act of 1961 dealing with incentive; and even as regards the incentive for earning or saving foreign exchange, there are other provisions in the Act, including Section 80HHC (of Income Tax Act, 1961), whereunder the appellant was indeed taking benefit before the assessment year 1993–94.

19. Without expanding unnecessarily on variegated provisions dealing

with different incentives, suffice would be to notice that the proposition that incentive provisions must receive “liberal interpretation” or to say, leaning in favour of grant of relief to the assessee is not an approach countenanced by this Court. The law declared by the Constitution Bench in relation to exemption notification, proprio vigore, would apply to the interpretation and application of any akin proposition in the taxing statutes for exemption,deduction, rebate et al., which all are essentially the form of tax incentives given by the Government to incite or encourage or support any particular activity.

20. The principles laid down by the Constitution Bench, when applied to

incentive provisions like those for deduction, would also be that the burden lies on the assessee to prove its applicability to his case; and if there be any ambiguity in the deduction clause, the same is subject to strict interpretation with the result that the benefit of such ambiguity cannot be claimed by the belong to the category of “profit-linked incentives” (at p. 339). 16 Of course, there may be other objectives also like supporting any particular class of persons e.g., those contained in Section 80TTB (of Income Tax Act, 1961) (for deduction in respect of interest on deposits in case of senior citizen) or Section 80U (of Income Tax Act, 1961) (for deduction in case of differently abled person). assessee, rather it would be interpreted in favour of the revenue. In view of the Constitution Bench decision in Dilip Kumar & Co. (supra), the generalised observations in Baby Marine Exports (supra) with reference to a few other decisions, that a tax incentive provision must receive liberal interpretation, cannot be considered to be a sound statement of law; rather the applicable principles would be those enunciated in Wood Papers Ltd. (supra), which have been precisely approved by the Constitution Bench.

Thus, at and until the stage of finding out eligibility to claim deduction, the ambit and scope of the provision for the purpose of its applicability cannot be expanded or widened and remains subject to strict interpretation but,once eligibility is decided in favour of the person claiming such deduction, it could be construed liberally in regard to other requirements, which may be formal or directory in nature.

21. As noticed, Section 80-O (of Income Tax Act, 1961) has a unique purpose and

hence, peculiarities of its own. Applying the aforesaid principles to an

enquiry for the purpose of a claim of deduction under Section 80-O (of Income Tax Act, 1961) as applicable to the present case, evident it is that for the purpose of eligibility, the service or activity has to precisely conform to what has been envisaged by the provision read with its explanation; and the other requirements of receiving convertible foreign exchange etc., are also to be fulfilled. It is only after that stage is crossed and a particular activity falls within the ambit of Section 80-O (of Income Tax Act, 1961), this provision will apply with full force and may be given liberal application. The basic question, therefore, would remain as to whether the suggested activity of appellant had been of

rendering such service from India to its principals in foreign country which answers to the description provided by the provision. As regards this enquiry, nothing of any liberal approach is envisaged. The activity must strictly conform to the requirements of Section 80-O (of Income Tax Act, 1961).

22. At this juncture, we are impelled to deal with a segment of

submissions on behalf of the appellant with reference to the decision in the case of Abhiram Singh (supra). It has been argued that this Court has cautioned against making ‘a fortress out of the dictionary’ but the High Court has relied heavily on text and dictionary rather than the object of the provision. In our view, this part of criticism on behalf of the appellant on the approach of the High Court is entirely inapt and rather unnecessary. The referred observations in the majority view in Abhiram Singh’s case occurred in relation to the interpretation of Section 123(3) of the Representation of People Act, 1951, which is aimed at curbing the unwarranted tendencies of communalism during election campaign and operates in entirely different fields of social welfare and ethos of democracy.

22.1. It remains trite that any process of construction of a written text primarily begins with comprehension of the plain language used. In such process of comprehension of a statutory provision, the meaning of any word or phrase used therein has to be understood in its natural, ordinary or grammatical meaning unless that leads to some absurdity or unless the object of the statute suggests to the contrary.17 In the context of taxing statute, the requirement of looking plainly at the language is more pronounced with no room for intendment or presumption.18 In this process,if natural, ordinary or grammatical meaning of any word or phrase is available unquestionably and fits in the scheme and object of the statute,the same could be, rather need to be, applied. The other guiding rules of interpretation would be the internal aides like definition or interpretation clauses in the statute itself. Yet further, if internal aides do not complete the comprehension, recourse to external aides like those of judicial decisions expounding the meaning of the words used in construing the statutes in pari materi, or effect of usage and practice etc., is not unknown; and in this very sequence, it is an accepted principle that when a word is not defined in the enactment itself, it is permissible to refer to the dictionaries to find out the general sense in which the word is understood in common parlance. In fact, for the purpose of gathering ordinary meaning of any expression, recourse to its dictionary meaning is rather interlaced in the literal rule of interpretation. This aspect was amply highlighted and expounded by the Constitution Bench of this Court in the case of Commissioner of Wealth-Tax, Andhra Pradesh v. Officer-in-Charge (Court of Wards), Paigah: (1976) 105 ITR 133 as follows (at p.137 of ITR) :

“8 . It is true that in Raja Benoy Kumar Sahas Roy's case:

[1957] 32 ITR 466(SC) this court pointed out that meanings

of words used in Acts of Parliament are not necessarily to be

gathered from dictionaries which are not authorities on what

Parliament must have meant. Nevertheless, it was also

indicated there that where there is nothing better to rely upon,

dictionaries may be used as an aid to resolve an ambiguity.

The ordinary dictionary meaning cannot be discarded

simply because it is given in a dictionary. To do that

would be to destroy the literal rule of interpretation. This

is a basic rule relying upon the ordinary dictionary meaning

which, in the absence of some overriding or special reasons

to justify a departure, must prevail. .......”

(emphasis in bold supplied)

22.2. In the setup of the present case, for a proper comprehension of the contents and text of the relevant provision of Section 80-O (of Income Tax Act, 1961) and Explanation (iii), which are carrying even the minute distinction of the expressions “from India” and “in India”, recourse to lexical semantics has been inevitable.

However, in all fairness, the High Court has not only discussed semantics and dictionary meanings but, has equally looked at the object and purpose of Section 80-O (of Income Tax Act, 1961). Hence, without further expanding on this issue,suffice it to say for the present purpose that the submissions against the approach of High Court with reference to the decision in Abhiram Singh (supra) does not advance the cause of the appellant.

Interpretation and application of Section 80-O (of Income Tax Act, 1961) in the

referred decisions

23. Having thus taken note of the provision applicable as also the

principles for its interpretation, we may now take note of the relevant

decisions wherein the claim for deduction under Section 80-O (of Income Tax Act, 1961) has been dealt with by the Courts in the given fact situations and in the particular set of circumstances.

J.B. Boda & Co.

24. The decision of this Court in J.B. Boda & Co. (supra) has been

rather the mainstay of the contentions urged on behalf of the appellant.

24.1. In the case of J.B. Boda & Co., the appellant was engaged in

brokerage business as reinsurance broker. The appellant had been

arranging for reinsurance of a portion of risk with various reinsurance

companies either directly or through foreign brokers against which, it was receiving a percentage of premium received by the foreign companies as its share of brokerage. With respect to reinsurance business, appellant contacted M/s Sedgwick Offshore Resources Ltd. (London brokers) and furnished all details about the risk involved etc., and confirmation about the assignment was informed to the appellant. Following this, the Indian ceding company handed over the premium to be paid by it to the foreign reinsurance company to the appellant for onward transmission. Appellant approached the RBI showing the amount payable after deducting its brokerage amount; and this amount of brokerage was claimed to be a receipt of convertible foreign exchange without a corresponding foreign remittance with reference to the provision contained in Section 9 of the Foreign Exchange Regulation Act. However, the respondent revenue took the stand that the agreements of the appellant could not be approved for

the purpose of Section 80-O (of Income Tax Act, 1961), for the income having been

generated in India and not received in foreign currency. This was

unsuccessfully challenged by the assessee before the High Court and

hence, the matter was in appeal before this Court.

24.2. It is at once clear that in J. B. Boda & Co., the question, as to

whether the foreign exchange received by the assessee in lieu of services to the foreign company was eligible for deduction under Section 80-O (of Income Tax Act, 1961) or not, did not even arise. This was because of the fact that the activity of assessee was, in fact, accepted by CBDT to be eligible for deduction under Section 80-O (of Income Tax Act, 1961) in its Circular No. 731 dated 20.12.1995 and the only issue sought to be raised against the assessee by the revenue related to the method of receiving the amount by the assessee. In the said

Circular, it was provided by the revenue that ‘receipt of brokerage by a

reinsurance agent in India from the gross premia before remittance to is

foreign principals will also be entitled to the deduction under Section 80-O (of Income Tax Act, 1961)’. This Court noted the contents of the said Circular dated 20.04.1995; and two paragraphs therein with the emphasis supplied by this Court could be usefully reproduced as under (at p. 280 of ITR):-

“CIRCULAR NO. 731 DATED 20-12-1995

2. Reinsurance brokers, operating in India on behalf of

principals aboard are required to collect the reinsurance

premia from ceding insurance companies in India and remit

the same to their principals. In such cases, brokerage can be

paid either by allowing the brokers to deduct their brokerage

out of the gross premia collected from Indian insurance

companies and remit the net premia overseas or they could

simply remit the gross premia and get back their brokerage in

the form of remittance through banking channels.

4. The matter has been examined. The condition for

deduction under section 80-O (of Income Tax Act, 1961) is that the receipt should be in

convertible foreign exchange. When the commission is

remitted aboard, it should be in a currency that is regarded as

convertible foreign exchange according to FERA. The Board

are of the view that in such cases the receipt of brokerage by

a reinsurance agent in India from the gross premia before

remittance to his foreign principals will also be entitled to the

deduction under section 80-O (of Income Tax Act, 1961).”

(emphasis in italics in original)

24.2.1. This Court found the said Circular binding on revenue and also

found meaningless the insistence of revenue on a formal remittance to

foreign reinsurer and receiving commission from them. This Court observed that such “two way traffic” was unnecessary because in the end result, the income was generated in India in foreign exchange in a lawful and permissible manner. Hence, this Court concluded on the matter while disapproving the stand of the revenue as follows (at p. 281 of ITR):-

“The facts brought out in this case are clear as to how the

remittance to the foreign reinsurance company is made

through the Reserve Bank of India in conformity with the

agreement between the appellant and the foreign reinsurers,

and that the remittance statement filed along with annexure

“A” which evidences that the amount due to the foreign

reinsurers as also the brokerage due to the appellant and the

balance due to the foreign reinsurers is remitted (and

expressed so) in dollars. It is common ground that the entire

transaction effected through the medium of the Reserve Bank

of India is expressed in foreign exchange and in effect the

retention of the fee due to the appellant is in dollars for the

services rendered. This, according to us, is receipt of income

in convertible foreign exchange. It seems to us that a "two

way traffic" is unnecessary. To insist on a formal remittance to

the foreign reinsurers first and thereafter to receive the

commission from the foreign reinsurer, will be an empty

formality and a meaningless ritual, on the facts of this case.

On a perusal of the nature of the transaction and in particular

the statement of remittance filed in the Reserve Bank of India

regarding the transaction, we are unable to uphold the view

of the respondent that the income under the agreement is

generated in India or that the amount is one not received in

convertible foreign exchange. We are of the view that the

income is received in India in convertible foreign exchange, in

a lawful and permissible manner through the premier

institution concerned with the subject-matter--the Reserve

Bank of India. In this view, we hold that the proceedings of

the Central Board of Direct Taxes dated March 11, 1986,

declining to approve the agreements of the appellant with

Sedgwick Offshore Resources Ltd., London, for the purposes

of section 80-O (of Income Tax Act, 1961), are improper and

illegal. We declare so. We direct the respondent to process

the agreements in the light of the principles laid down by us

here in above. The appeal is allowed. There shall be no order

as to costs.”

24.3. Though it has been painstakingly contended on behalf of the

appellant that the decision in J.B. Boda & Co. should be decisive of the

matter because even the brokerage of a reinsurance broker was held

eligible for deduction under Section 80-O (of Income Tax Act, 1961) but, we are afraid, the said decision has no relevance whatsoever to the question at hand. The eligibility of the concerned services of reinsurance broker for the purpose of Section 80-O (of Income Tax Act, 1961) was not even a question involved therein. Needless to observe that the business of insurance carries its own peculiarities where the factor of risk involved is of unique significance; and any information and assessment of risk involved is itself a specialised task related with the business of insurance. In the fact sheet of the case in J.B. Boda & Co., in the every opening paragraph of judgment, it has been distinctively recorded that in respect of the insurance risk covered by Indian or foreign insurance companies, the appellant had been arranging for the reinsurance of a portion of risk with various reinsurance companies either directly or through foreign brokers. As regards, the services of the appellant with a broker in London, the Court noted, inter alia, that the appellant ‘furnished all the details about the risk involved, the premium payable, the period of coverage and the portion of the risk which is sought to be reinsured’.

Without entering into further details of the activities of the said assessee, suffice it to say for the present purpose that the submissions on behalf of the appellant, as if the task of a broker of reinsurance is not technical in nature, could only be rejected as being not in conformity with the peculiarities of insurance business. In any case, as observed hereinbefore,this aspect does not require further elaboration because of entirely different question involved and decided by this Court in J.B. Boda & Co.

E.P.W. Da Costa

25. Apart from the case of J.B. Boda & Co., much sustenance is sought

on behalf of the appellant with reference to the decision in E.P.W. Da Costa(supra), which was a decision rendered by the Delhi High Court and was, admittedly, not appealed against.

25.1. Facts of the case of E.P.W. Da Costa (supra) had been that the

British Broadcasting Corporation (‘BBC’) was interested in knowing how its broadcasts were received by listeners in India and hence, engaged the services of petitioner for conducting a public opinion survey so that after gathering information from petitioner, it would make modifications in its programmes. An agreement was entered by the petitioner with BBC for conducting specialised economic and public opinion research on all-India basis to assess the attitudes of a wide range of political, social and economic subjects etc. Approval of this agreement for the purpose of Section 80-O (of Income Tax Act, 1961) was refused by CBDT, essentially on the ground that the service (of audience research study in Hindi speaking areas to assess the radio listening habits) was rendered in India and information supplied to the foreign party was not the type contemplated by Section 80-O (of Income Tax Act, 1961).

25.2. In the said decision, of course, the question of nature of services for the purpose of Section 80-O (of Income Tax Act, 1961) was involved but, the High Court precisely found the activity of the assessee to be that of imparting scientific knowledge after proper analysis of the voluminous data collected. While rejecting the contention on behalf of the revenue, the Court observed as under (at p. 755 of ITR):-

“Mr. Kirpal further contends that the information

communicated by the petitioner to the BBC is only data and

not scientific or commercial knowledge. Perhaps data may be

distinguished from knowledge inasmuch as data may be

mere masses of information which is not properly analysed

and made intelligible, while knowledge is analysed and

presented for understanding. The information supplied by the

petitioner to the BBC must fall in the second category or else

the BBC would not have entered into an agreement with the

petitioner for the supply of the information. A mere mass of

information without analysis and without being

understandable would not be of use to the BBC. The

information is not, therefore, mere data but scientific

knowledge.”

(emphasis in bold supplied)

25.3. Reference to this decision in the case of E.P.W. Da Costa also

suffers from the same shortcomings as we have commented in relation to

the decision in J.B. Boda & Co. The appellant would suggest that the

assessee in the case of E.P.W. Da Costa was merely compiling data and

forwarding it to BBC. The Court has precisely pointed out that it was not merely the collection of data but it was analysis thereof that was the root of agreement between the principal and the assessee. Again, statistics and statistical analysis is a matter of specific branch of science. In an elaborate discussion as regards the science of statistics with reference to the activity of the assessee, the Court, inter alia, observed as under (at pp. 754-755 of ITR):-

“The petitioner issues questionnaire to the listeners and

the information gathered from the answers to the

questionnaire is compiled in the form of various statistical

tables. According to Webster's New International

Dictionary, Vol. III, statistics is a science dealing with the

collection, analysis, interpretation and presentation of

masses of numerical data and that it is a branch of

mathematics. It would appear, therefore, that the statistical

tables compiled by the petitioner after analysing masses of

numerical data are commercial or scientific knowledge which

is made available to the BBC. For, the word " science " is

also a very general word. Since statistics is a science

according to Webster's, even in a more particular sense, the

statistical information may be said to be scientific knowledge

within the meaning of s. 80-O.....If commercial or

scientific knowledge is confined to mean the abstract

exposition of commercial or scientific theories then only a

book on commercial or scientific subject may be regarded as

scientific knowledge. But knowledge may be general or

particular. Such knowledge as was compiled, classified and

made useful for the use of the BBC may also be said to be

commercial or scientific knowledge. BBC is a commercial

corporation. Its function may be to disseminate information,

but in the discharge of this function it requires commercial or

scientific knowledge as to the way its broadcasts are

received in different countries. Such a highly organized

concern as BBC would not be content with the general

information as to the receipt of its broadcast in India. The

information would have to be specific, particular and

analysed according to the languages in which the broadcasts

are made and according to the classes of the public who

listen to such broadcasts. In view of the trend to give a wider

meaning to the words " science and scientific knowledge ", it

would not be possible to restrict the connotation of these

words too narrowly. In our view they would include the

statistical tables compiled by the petitioner for the use of

the BBC inasmuch as statistics itself has been

recognised as a science.”

(emphasis in bold supplied)

25.4 The decision in E.P.W. Da Costa, again, does not make out any

case in favour of the appellant.

B. L. Passi

26. In counter to the contentions on behalf of appellant, the decision by Coordinate Bench of this Court in the case of B.L. Passi (supra) has been strongly relied upon by the revenue but is sought to be distinguished on behalf of the appellant with the submissions that therein, no material at all was produced by the assessee. We may examine this case also with the necessary specifics.

26.1. The relevant facts of the case in B.L. Passi had been that a

Japanese enterprise, Sumitomo Corporation, Japan, was interested in

supplying dies for manufacturing of body parts to Indian automobile

manufacturers and an agreement was entered with the appellant (who

claimed having vast experience in the Indian automobile industry)

where under, the appellant was to provide services which involved passing

of industrial and commercial knowledge, information about market

conditions and Indian manufacturers of automobiles and also technical

assistance as required, so as to assist the principal in establishing its business in the Indian automobile industry. The appellant claimed deduction under Section 80-O (of Income Tax Act, 1961) with reference to remuneration received on account of such services rendered to the foreign enterprise. The AO disallowed the claim of the appellant for deduction with the finding that the services in question do not qualify for deduction. However, the Appellate Authority ruled in favour of the appellant but ITAT reversed the order of the Appellate Authority and the decision of ITAT was upheld by the High Court.

26.2. In further appeal, this Court briefly took note of the background of insertion of Section 80-O (of Income Tax Act, 1961) in the Act of 1961 in place of the former Section 85-C (of Income Tax Act, 1961) with the object of giving fiscal encouragement to Indian industries to provide technical know-how and technical services to newly developing countries and foreign companies to augment the foreign exchange of our country and to establish the reputation of Indian technical know-how for foreign countries. Examining the facts of the case relating to the assessment year 1997-98, this Court found that though the appellant had exchanged several letters with its principal, but the information was in the form of some blueprints and there was nothing on record to show as to how the blueprints were obtained and dispatched; and such blueprints were not produced by the assessee on record. This Court also found that the said assessee was to receive service charges at the rate of five per cent. of the

contributable amount from sale of the principal’s products to its customers in India but again, there was nothing on record to prove that any product was developed on the basis of the blueprints supplied by the assessee or that the principal was able to sell any product developed by it by using the information supplied by the assessee. Thus, this Court found that there was no material on record to prove that the sales in question were of any product developed with the assistance of the information by the assessee and equally, there was no material on record to show as to how the service charges payable to the assessee were computed. This Court, inter alia,observed and found as under (at pp 26-28 of ITR) :-

“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 blueprints 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 blueprint was obtained and dispatched

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

appellant has not furnished the copy of the blueprint 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 Income Tax Act, 1961) of the

Income-tax Act mandate the production of document in

respect of which relief has been sought. We, therefore, have

to examine whether the services rendered in the form of

blueprints and information provided by the appellant fall

within the ambit of section 80-O (of Income Tax Act, 1961) or any

of the conditions stipulated therein in order to entitle the

assessee to claim deduction.

The blueprints 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 blueprints is available

on record. The said blueprints 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

blueprints, its unavailability creates a doubt and burden of

proof is on the appellant to prove that on the basis of those

blueprints, the Corporation was able to start up their business

in India and he was paid the amount as service charge.

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

appellant for the services rendered, in terms of the letter

dated January 25, 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 blueprints

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 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 the appellant’s information and

also on as to how the service charges payable to

appellant were computed.

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 Income Tax Act, 1961).

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 Income Tax Act, 1961).”

(emphasis in bold supplied)

26.3. The case of B.L. Passi (supra) had not been a matter where

nothing at all was on record. Indeed the letters exchanged by the assessee with the principal were on record, but the core of information that was allegedly supplied by the assessee to the foreign company, was not furnished, nor it was shown as to how that information was utilized by the foreign company and further, it was also not shown as to how the service charges payable to the assessee were computed when it was to get the payment on the basis of sale to be made by the foreign company.

These crucial facts and factors directly co-relate with the requirements of Section 80-O (of Income Tax Act, 1961); and upon the assessee failing to meet with such requirements, the claim for deduction under Section 80-O (of Income Tax Act, 1961) failed.

Thomas Kurian

27. Thomas Kurian (supra) had been another case where, for want of

any specific material to connect the activity/service of the assessee with Section 80-O (of Income Tax Act, 1961), the assessee was held to be merely an inspector or a certifier for the purpose of export as follows:-

“6. On a reading of the above provisions what we notice is

that assessees service is certainly professional services

which are covered by the provisions of the Act. However, two

conditions have to be satisfied for eligibility for deduction

under Section 80-O (of Income Tax Act, 1961), the first is that the service should be

rendered outside India and the second one is that payment

for such services should be received in convertible foreign

exchange in India. In this case only one condition is satisfied,

ie, receipt of consideration in convertible foreign exchange

and so far as rendering of service is concerned, the entire

service is rendered by the assessee in India and no services

is rendered outside India. Exporter ships the goods only with

assessee’s certificate of fitnesses so that foreign buyer

cannot reject the goods. Assessee’s communication with

foreign buyers in our view does not amount to rendering of

service outside India.”

Continental Construction Ltd.

28. As noticed, in the present case, in the very first place, the Assessing Officer, while dealing with the assessment in question, raised the queries and sought clarifications from the appellant with reference to the enunciations in the decision of this Court in the case of Continental Construction (supra). Then, the High Court has also noticed in its impugned judgment that this was one of the decisions relied upon by the learned counsel for the assessee. A comment has been made in the reply submissions on behalf of the revenue before us that the appellant has given up reliance on this decision for the reasons that the ratio essentially operates against the appellant. The response on behalf of the appellant has been that reference to this decision by revenue was entirely unnecessary for the same not being relied upon. Needless to observe that it being a decision of this Court, the ratio and the principle emanating therefrom cannot be ignored, whether relied upon by the appellant or not. Moreover,the said decision has been rendered by a 3-Judge Bench of this Court and has the force of a binding precedent. Having regard to the submissions made and the questions raised, reference to the decision of this Court in the

case of Continental Construction (supra) is indispensable.

28.1 Briefly put, the relevant factual aspects of the matter in

Continental Construction had been that the assessee was a civil

construction company that had executed a large number of projects

overseas and in India. The assessee entered into eight contracts for the

construction, inter alia, of a dam and irrigation project in Libya, a fibre-board factory at Abu Sukhair in Iraq and the huge Karkh Water Supply Project in Baghdad. For these contracts, the assessee obtained the approval of CBDT in terms of Section 80-O (of Income Tax Act, 1961). In its claim for deduction, various issues related with different assessment years were raised, which included the applicability of the CBDT’s approval and the nature of activities of the assessee, as also the question as to whether the assessee was entitled to claim deduction only under Section 80HHB (of Income Tax Act, 1961) and not under Section 80-O (of Income Tax Act, 1961)? A wide range of issues raised in the matter were dealt with by this Court, all of which are not necessary to be dilated upon.

28.2. The relevant aspect of the matter is that regarding the eligibility for deduction under Section 80-O (of Income Tax Act, 1961), in Continental Construction, this Court said that eligibility of an item to tax or tax deduction could hardly be made dependent on the label given to it by the parties. Thus, the assessee was not entitled to claim deduction under Section 80-O (of Income Tax Act, 1961) regarding certain receipts merely because they were described as royalty, fees or commission; and at the same time, absence of any specific label to the item was not destructive of the right of the assessee to claim deduction. This Court pointed out that the contracts of the type envisaged by Section 80-O (of Income Tax Act, 1961)

are usually very complex and cover a multitude of obligations and

response; and it is not always possible for the parties to dissect the

consideration and apportion it to various ingredients or elements. This

Court, however, pointed out that consolidated receipts and responses were always apportionable. In the context, as regards the activities of the said assessee and entitlement under Section 80-O (of Income Tax Act, 1961), this Court observed that the contracts in question obliged the assessee to make available information and render services to the foreign Government of the nature outlined under Section 80-O (of Income Tax Act, 1961) and therefore, it was the duty of the revenue and right of the assessee to see that the consideration legitimately attributable to such information and services is apportioned and the assessee is given the benefit of deduction under Section 80-O (of Income Tax Act, 1961) to the extent of such consideration. This aspect of the matter, extensively dealt with by this Court, could be usefully extracted as under (at p. 119 of ITR): -

“In our view, neither of the propositions contended for by

Sri Ahuja can be accepted as correct. So far as the first

proposition is concerned, it is sufficient for us to point out that

it is a well-settled principle that eligibility of an item to tax or

tax deduction can hardly be made to depend on the label

given to it by the parties. As assessee cannot claim deduction

under section 80-O (of Income Tax Act, 1961) in respect of certain receipts merely on

the basis that they are described as royalty, fee or

commission in the contract between the parties. By the same

token, the absence of a specific label cannot be destructive

of the right of an assessee to claim a deduction, if, in fact, the

consideration for the receipts can be attributed to the sources

indicated in the section. The second proposition is equally

untenable. Contracts of the type envisaged by section 80-O (of Income Tax Act, 1961)

are usually very complex ones and cover a multitude of

obligations and responsibilities. It is not always possible or

worthwhile for the parties to dissect the consideration and

apportion it to the various ingredients or elements comprised

in the contract. The cases referred to by the Tribunal and Sri

Ahuja as to the indivisibility of a contract arose in an entirely

different context. For purposes of income-tax, a principle of

apportionment has always been applied in different contexts.

Consolidated receipts and expenses have always been

considered apportionable in the contexts: (a) of the capital

and revenue constituents comprised in them; (b) portions of

expenditure attributable to business and non-business

purposes; (c) of places of accrual or arisal; and (d) of

agricultural and non-agricultural elements in such receipts or

payments. This is a point that does not need much

elaboration and it is sufficient to refer to decided cases cited

under the passages on this topic at pp. 47, 137, 264, 621 and

677 of Kanga and Palkhivala’s The Law and Practice of

Income Tax (Volumne I, eighth edition). We are, therefore, of

the opinion that, if, as we have held, the contracts in the

present case oblige the assessee to make available

information and render services to the foreign Government of

the nature outlined in section 80-O (of Income Tax Act, 1961), it is the duty of the

Revenue and the right of the assessee to see that the

consideration paid under the contract legitimately

attributable to such information and services is

apportioned and the assessee given the benefit of the

deduction available under the section to the extent of

such consideration.”

(emphasis in bold supplied)

28.3. It is also significant to notice that in Continental Construction,

this Court took note of the aforesaid circulars of CBDT dated 23.12.1975

and 30.04.1979 and delineated the functions of the Assessing Officer with reference to the claim for deductions under Section 80-O (of Income Tax Act, 1961) even when

approval had been granted by the Board in the following passage (at p. 133 of ITR) :-

“We should, however, make it clear that our conclusion

does not mean the deprivation of all functions of the

Assessing Officer while making the assessment on the

applicant. The Officer has to satisfy himself (i) that the

amounts in respect of which the relief is claimed are amounts

arrived at in accordance with the formula, principle or basis

explained in the assessee's application and approved by the

Board; (ii) that the deduction claimed in the relevant

assessment year relates to the items, and is referable to the

basis, on which the application for exemption was asked for

and granted by the Board; (iii) that the receipts (before the

1975 amendment) were duly certified by an accountant or

that, thereafter, the amounts have been received in or

brought into India in convertible foreign exchange within the

specified period. The second of these functions is,

particularly, important as the approval for exemption granted

in principle has to be translated into concrete figures for the

purposes of each assessment. Neither the introduction of the

words "in accordance with and subject to the provisions of

these sections" nor the various "conditions" outlined in the

letter of approval add anything to or detract anything from the

scope of the approval.”

28.4. A few aspects at once emerge from the said decision in Continental

Construction that even under the provisions of Section 80-O (of Income Tax Act, 1961) as then existing, whereunder prior approval of CBDT was required to claim deduction, this Court underscored that deduction would be available only in relation to the consideration attributable to the information and services envisaged by Section 80-O (of Income Tax Act, 1961) and deduction would be granted to the extent of such consideration; and all these aspects were to be examined by the Assessing Officer while making the assessment.

Khursheed Anwar

29. In the impugned judgment, the decision of High Court of Madras in

the case of Khursheed Anwar (supra) has also been taken note of.

Therein too, the claim for deduction under Section 80-O (of Income Tax Act, 1961) was

declined for want of necessary material while observing that the benefit of Section 80-O (of Income Tax Act, 1961) cannot be claimed by merely asking for the same; it has to be substantiated with the requisite record. In the said case, on the query of the Assessing Officer, the assessee had submitted its reply but could not furnish the material so as to bring the case within the four corners of Section 80-O (of Income Tax Act, 1961). The High Court, inter alia, observed as under (at p. 474 of ITR):

“Having regard to the above discussions, in our view, as

the assessee has not established his claim for deduction by

producing the relevant records, the Tribunal has erred in

reversing the finding of the Commissioner of Income-tax

(Appeals) rendered on the basis that the assessee was not

entitled to the benefit in view of the fact that the commission

received by the assessee was not for any of the activities

mentioned in paragraph 4.1 of the order of the Commissioner

of Income-tax (Appeals). There is absolutely no reason

adduced by the Tribunal to reverse the said finding. We must

also mention here that during the course of arguments, as we

found that there were no supporting materials for the claim,

we directed the assessee's counsel to produce the materials,

if any, available for our perusal. The learned counsel for the

assessee, though had produced the explanation of the

assessee dated March 28, 1998, he was unable to produce

any materials to sustain any of the contentions made in the

said letter. In the absence of any materials to show that what

was passed on to the foreign enterprise was the information

concerning with commercial or technical or scientific aid,

merely because an agreement is entered into between the

assessee and the foreign enterprise, we are not inclined to

accept the claim of deduction under section 80-O (of Income Tax Act, 1961).

Accordingly, the second substantial question of law is

answered in favour of the revenue and against the assessee.

The tax case appeal is allowed in part. No costs.”

30. From the decisions aforesaid, it could be immediately culled out that for bringing any particular foreign exchange receipt within the ambit of Section 80-O (of Income Tax Act, 1961) for deduction, it must be a consideration attributable to information and service contemplated by Section 80-O (of Income Tax Act, 1961); and in case of a contract involving multiple or manifold activities and obligations, every consideration received therein in foreign exchange will not ipso facto fall within the ambit of Section 80-O (of Income Tax Act, 1961). It has to be attributable to the information or service contemplated by the provision and only that part of foreign exchange receipt, which is so attributable to the activity contemplated by Section 80-O (of Income Tax Act, 1961), would qualify for claiming deduction. Such enquiry is required to be made by the Assessing Officer; and for the purpose of this imperative enquiry, requisite material ought to be placed by the assessee to co-relate the foreign exchange receipt with information/service referable to Section 80-O (of Income Tax Act, 1961). Evidently, such an enquiry by the Assessing Officer could be made only if concrete material is placed on record to show the requisite co-relation.

Whether the appellant is entitled claim deduction under S. 80-O

31. Coming to the facts of the present case, the agreements of the

appellant with the foreign entities primarily show that the appellant was to locate the source of supply of the referred merchandise and inform the principals; to keep liaison with the agencies carrying out

organoleptic/bacteriological analysis and communicate the result of

inspection; to make available to the foreign principals the analysis of

seafood supply situation and prices; and to keep the foreign principals

informed of the latest trends in the market and also to negotiate and finalise the prices. As per the agreements, in lieu of such services, the appellant was to receive the agreed commission on the invoice amounts.

32. In contrast to what has been observed in the cases of J.B. Boda &

Co. (advising on the risk factor related to the proposed insurance/reinsurance) and E.P.W. Da Costa (dealing with statistical

analysis of data collected), what turns out as regards the activities/services of the appellant is that the appellant was essentially to ensure supply of enough quantity of good quality merchandise in proper packing and at competitive prices to the satisfaction of the principals. This has essentially been the job of a procuring agent. Though the expressions “expert information and advice”, “analysis”, “technical guidance” etc., have been used in the agreements but, these expressions cannot be read out of context and dehors the purpose of the agreement. All the clauses of the agreements read together make it absolutely clear that the appellant was merely a procuring agent and it was his responsibility to ensure that proper goods are supplied in proper packing to the satisfaction of the principal. All other services or activities mentioned in the agreements were only incidental to its main functioning as agent. Significantly, the payment to the appellant, whatever label it might have carried, was only on the basis of the amount of invoice pertaining to the goods. There had not been any provision for any specific payment referable to the so-called analysis or technical guidance or advice. Viewed from any angle, the services of the appellant were nothing but of an agent, who was procuring the merchandise for its principals; and such services by the appellant, as agent, were rendered in India. Even if certain information was sent by the assessee to the principals, the information did not fall in the category of such professional services or information which could justify its claim for deduction under Section 80-O (of Income Tax Act, 1961). In other words, in the holistic view of the terms of the agreements, we have not an iota of doubt that the appellant was only a procuring agent, as rightly described by the High Court.

33. If at all any doubt yet remains about the nature of services of the

appellant, the same is effectively quelled by the default clauses in the

agreements in question. We may recapitulate the default clauses in the

referred agreements, which read as under:-

The agreement with HOKO

“Article 4: HOKO pays to RC-CN 0.7% of the invoice amount

on the C & F basis and US$ 2,000.00 per month as

commission. When the quality of goods is found to be

unsatisfactory to HOKO after inspection in in Japan, HOKO

shall have no responsibility to pay the agent fee.”

The agreement with GELAZUR

“When the quality and the packaging of the goods are found

to be unsatisfactory to ‘GELAZUR” after inspection in

FRANCE, GELAZURE, shall have no responsibility regarding

the payment of the Agent’s fee.”

33.1. In both the agreements, the default clauses make it more than clear that if the quality of goods was found to be unsatisfactory to the principals after inspection in their respective countries, they shall have no responsibility to pay the agent’s fees. If at all it had been a matter of the appellant furnishing some technical or material information which served the foreign enterprises in making the decision for procurement, in the ordinary circumstances, after completion of such service and its utilization by the foreign enterprises, the appellant was likely to receive the professional service charges for furnishing such information but, contrary and converse to it, the agreements provide for no payment to the appellant in case of principal being dissatisfied with goods. These default clauses effectively demolish the case of the appellant and fortify the submissions of the revenue that the appellant was merely a procuring agent and nothing more.

34. The matter can be viewed from yet another angle, as indicated by

the High Court in the last paragraph of its judgment. If at all it be assumed that out of various tasks mentioned in the agreements, some of them involved such services which answered to the requirements of Section 80-O (of Income Tax Act, 1961), it was definitely required of the appellant to establish as to what had been such information of special nature or of expertise that was given by it and how the same was utilised, if at all, by the foreign enterprises; and how much of the foreign exchange receipt was attributable to such special service. Obviously, the appellant did not supply such particulars. As noticed, the High Court posed a pointed query to the learned counsel appearing for the appellant as to whether all the services mentioned in the

agreement would come within the purview of Section 80-O (of Income Tax Act, 1961). The cryptic

response to this query on behalf to the appellant had been that ‘if the

recipient of services is situated outside, all the services rendered by the assessee in terms of the agreement come within the sweep of the

provision’. It was specifically contended on behalf of the appellant that establishing ‘which of its services qualifies for the deduction is of no consequence, rather unnecessary’. In our view, this response was not in conformity with the requirements of Section 80-O (of Income Tax Act, 1961), as explained

and applied by this Court in Continental Construction and in B. L. Passi

(supra) as also as applied by Madras High Court in Khursheed Anwar

(supra). Rather, this stand, in our view, puts the final curtain on the

appellant’s case because most of the services in the agreements in

question were those of an agent ensuring supply; and if any part of the

services co-related with Section 80-O (of Income Tax Act, 1961), the particulars were of utmost

significance and were fundamentally necessary which the appellant had

never supplied. Merely for having a contract with a foreign enterprise and mere earning foreign exchange does not ipso facto lead to the application of Section 80-O (of Income Tax Act, 1961).

35. The effect of Circular No.700 dated 23.03.1995 is only to the extent that once the service is rendered ‘from India’, even if its ultimate use by the foreign enterprise occurs in India, the matter may not go out of Section 80-O (of Income Tax Act, 1961). This clarification is in tune with the nature of this provision meant for extending incentive but it does not do away with the basic requirements that to qualify for deduction under Section 80-O (of Income Tax Act, 1961), the service must be rendered from India to foreign enterprise and the nature of service ought to be as delineated in Section 80-O (of Income Tax Act, 1961). Ultimate use of the service could be in India, as illustrated by the case of E.P.W. Da Costa (supra) and by the cases of Li & Fung and Chakiath Agencies (supra) that were cited before the High Court. However, the claim of the appellant fails at the threshold for the reasons foregoing. Circular No.700 dated 23.03.1995 is neither of any application to this case nor of any assistance to the appellant. The appellant is not entitled to claim deduction under Section 80-O (of Income Tax Act, 1961).

36. For what we have discussed hereinabove, it is also apparent that

the Appellate Authority as also the ITAT had viewed the present case from an altogether wrong angle. As noticed, the Appellate Authority even did not comprehend the observations in E.P.W. Da Costa (supra) and assumed that every information is scientific knowledge. On facts, the Appellate Authority observed that even if acting as agent of the foreign enterprises,the appellant was locating the sources of frozen seafoods, bringing the foreign enterprises in contact with the manufacturers or processors of seafood, and negotiating with the local packers; and these activities, though carried out in India, had been on behalf of the foreign enterprises. The ITAT, though took note of different services contemplated by the agreements in question and even observed that the clauses like those requiring the appellant to settle the claim with manufacturers might be the services

rendered in India but then, proceeded to assume, without any cogent

material on record, that other services were rendered from India and on that basis, the foreign party took its decision. Even in this regard, the questions relevant and germane to the enquiry were not even gone into inasmuch as,it was not examined as to what and which part of the consideration was attributable to the services envisaged by Section 80-O (of Income Tax Act, 1961), which were rendered from India. Therefore, the findings of the Appellate Authority and ITAT, being based on irrelevant considerations while ignoring the relevant aspects, were neither of binding nature nor could have been decisive of the matter. Hence, neither anything turns upon the submissions made on behalf of the appellant with reference to the decision in K. Ravindranathan Nair (supra) nor this aspect requires any further discussion.

37. In our view, the High Court has rightly analysed the entire matter

with reference to the relevant questions and has rightly proceeded on the law applicable to the case. The impugned judgment calls for no

interference. The appellant M/s Laxmi Agencies - the appeal arising out of SLP (Civil) No.23699 of 2016.

38. This appeal involves similar claim of the other assessee firm M/s

Laxmi Agencies, said to be engaged in similar business of rendering

services to foreign buyers of Indian marine products. For the assessment

year 1997-98, this assessee firm, while declaring total income of Rs.

31,81,180/-, claimed deduction under Section 80-O (of Income Tax Act, 1961) to the tune of

Rs.21,84,302/-, being 50% of the net income of Rs. 43,68,604/- towards the service charges received from such foreign buyers.

38.1. In the assessment order dated 31.01.2000, the AO noted the

explanation of this appellant regarding the services rendered in the

following:

“.As per the detailed letter dated 22.11.1999 filed by the

assessee the services rendered by it to the foreign

enterprises are by way of :

1. To impact commercial and technical knowledge,

experience and skill in the field of Frozen Food/Marine

products to enable them to formulate their policies and take

decision for import thereof from India;

2. To locate reliable sources of quality and assured supply of

Frozen Seafood/Marine products and communicate the

assessee’s expert opinion and advise to them to enable them

to take decisions for import from India;

3. To keep close liaison with agencies such as EIA/Llyods/

SGS especially for organoleptic/bacteriological analysis and

communicate the results of inspection along with assessee’s

expert comments and advice. This also enables the foreign

enterprises to take decisions for import from various sources

from several countries available to them.

4. Making available full and detailed analysis of the seafood

situation and prices for the above purpose.

5. To advise and keep informed the foreign buyers of the

latest trends/process applications in manufacturing and all

valuable commercial and economic information which will

directly and indirectly assist them to organize, develop,

control on regulate their import business from India.

6. To assist foreign buyers in negotiating and finalizing prices

for Indian marine products and advise them of all rules and

regulations and other related information for such import.”

In the case of this appellant, again, the AO was of the view that the

services were rendered in India and the service charges received from the foreign enterprises in respect of such services did not qualify for deduction under Section 80-O (of Income Tax Act, 1961).

38.2. In the case of this appellant, the Appellate Authority examined the terms of agreements with the foreign enterprises in detail and noted the contents thereof in the following paragraphs:-

“2.The appellant had entered into agreement with various

foreign enterprises for render the following services. Article 2

of the agreement entered into with Neptune Fisheries Ind.

USA reads as under:-

(a) Locating reliable source of quality and assured

supply of frozen sea-foods/marine products for the purpose

of import by “NEPTUNE” and communicate its expert opinion

and advice to the NEPTUNE;

(b) In addition to the above services rendered by ‘Laxmi’

it will also keep a close liason with agencies such as

ELA/LLOYDS/SGS especially for organolotic/acteriological

analysis and communicate the result of the inspection along

with its expert comments and advice.

(c) Making available full and detailed analysis of the sea

food supply situation and prices;

(d) To advise NEPTUNE and keep them informed of the

latest trends/processes applications in manufacturing and of

all valuable commercial and economic information about the

markets, Government Policies, exchange fluctuations,

banking laws which will directly or indirectly assist

“NEPTUNE” to organize, develop control or regulate their

import business from India.

e) To negotiate and finalise the prices for India

Exporters of frozen marine products and to communicate

such and other related information to “NEPTUNE”.

Article 4 of the agreement states:

“LAXMI” shall also do everything that is required to ensure

highest standards of quality hygiene and freshness of

products including supervision at various stages.”

3. The agreement made with other principles (sic- principals)

are also on similar lines.”

38.3. In this case, of course, the Appellate Authority took note of various activities of the appellant with and for the buyer concerned and, while disallowing 20% of the service charges received from foreign enterprises towards the services rendered in India, allowed deduction under Section 80-O (of Income Tax Act, 1961) to the extent of the net income arising out of 80% of such charges received from foreign enterprises.

38.4. The order so passed by the Appellate Authority was challenged both

by the appellant and by the revenue before ITAT in ITA No. 580/Coch/2004

and ITA No. 618/Coch/2004 respectively. The ITAT referred to its earlier

decision in the case of the other assessee Ramnath & Co. (as referred to

here in above) and following the same, allowed the appeal of the appellant

and dismissed that of the revenue and thereby, allowed the claim of

appellant for deduction in toto.

38.5. Although, from the fact sheet of this case, it does not appear if the agreements of this appellant also carried the default clauses as we have noticed in the lead case but, on all other major features, the agreements had been of the same nature and again, this appellant has also failed to bring any material on record to show if it had received any specific consideration referable to the activities envisaged by Section 80-O (of Income Tax Act, 1961). In the given set of facts and circumstances, this appellant also turns out to be only a procuring agent and not beyond. Hence, this appeal also deserves to be dismissed.

Conclusion

39. For what has been discussed and held hereinabove, these appeals

fail and are, therefore, dismissed. No costs.

(A.M.KHANWILKAR)

(DINESH MAHESHWARI)

New Delhi,

Dated: 5th June, 2020.