B. L. PASSI versus COMMISSIONER OF INCOME TAX, DELHI on 24 April 2018

496

[2018] 3 S.C.R. 496

SUPREME COURT REPORTS

[2018] 3 S.C.R.

A

B. L. PASSI

v.

COMMISSIONER OF INCOME TAX, DELHI

(Civil Appeal No. 3892 of 2007)

BAPRIL 24, 2018

[R. K. AGRAWAL AND ABHAY MANOHAR SAPRE, JJ.]

Income Tax Act, 1961: s.80-O – Deduction under, claimed byassessee on the ground that it supplied to a foreign company theindustrial and commercial knowledge about the Indian AutomobileCIndustry, information about market conditions and also technicalassistance as required by such foreign company and such foreigncompany used such services and accordingly supplied dies toIndian automobile manufacturer for manufacturing body parts –Maintainability of claim for deduction – Held: The provisions ofDs.80-O mandate the production of document in respect of whichrelief has been sought – Assessee claimed that the major informationsent to the foreign company was in the form of blue prints formanufacture of dies for stamping of doors, however, said blue printswere not produced before the lower authorities – Also there wasnothing on record to prove that any product was developed by theEforeign company by using the information supplied by assessee –Thus, there was no material to prove the sales effected by foreigncompany to its customers in India in respect of any productdeveloped with the assistance of assessee’s information and alsoon as to how the service charges payable to assessee were computedF– The letters exchanged between the parties cannot be basis forgetting deduction under s.80-O – High Court rightly denied theclaim for deduction under s.80-O.

Words and phrases: Technical assistance – Meaning of.

Dismissing the appeal, the CourtG

HELD: 1.1 Provisions similar to Section 80-O of the Actwere originally in the former Section 85-C of the Income TaxAct, 1961 which was substituted by Finance (No. 2) Act, 1971.Section 80-O was inserted in place of Section 85C which wasdeleted by the Finance (No. 2) Act, 1967. While moving the bill H

relevant to the Finance Act No. 2 of 1967, the then FinanceMinister highlighted the fact that fiscal encouragement needs tobe given to Indian industries to encourage them to providetechnical know-how and technical services to newly developingcountries. It is also seen that the object was to encourage Indiancompanies to develop technical know-how and to make it availableto foreign companies so as to augment the foreign exchangeearnings of this country and establish a reputation of Indiantechnical know-how for foreign countries. The objective was tosecure that the deduction under the section shall be allowed withreference to the income which is received in convertible foreignexchange in India or having been received in convertible foreignexchange outside India, is brought to India by and on behalf oftaxpayers in accordance with the Foreign Exchange Regulations.[Para 12] [503-H; 504-A-C]

1.2. In the instant case, it is evident from record that themajor information sent by the Appellant to the foreign companywas in the form of blue prints for the manufacture of dies forstamping of doors. Several letters were exchanged between theparties but there was nothing on record as to how this blue printwas obtained and dispatched to the said company. Also, theAppellant has not furnished the copy of the blue print which wassent to the foreign company before the Assessing Officer norwas it submitted before the Appellate authority and the Tribunal.The provisions of Section 80-O of the IT Act mandate theproduction of document in respect of which relief has been sought.The blue prints made available by the Appellant to the foreigncompany can be considered as technical assistance provided bythe Appellant to the foreign company in the circumstances if thedescription of the blue prints is available on record. The saidblue prints were not even produced before the lower authorities.In such scenario, when the claim of the Appellant is solely relyingupon the technical assistance rendered to the foreign companyin the form of blue prints, its unavailability creates a doubt andburden of proof is on the Appellant to prove that on the basis ofthose blue prints, the foreign company was able to start up theirbusiness in India and he was paid the amount as service charge.Further, with regard to the remuneration to be paid to the Appellant AB

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Afor the services rendered, in terms of the letter dated 25.01.1995,it has been specifically referred that the remuneration would bepayable for the commercial and industrial information suppliedonly if the business plans prepared by the Appellant resultspositively i.e it will pay service charges on sales of its productsso developed but there was nothing on record to prove that anyBproduct was so developed by the foreign company on the basis ofthe blue prints supplied by the Appellant as also that the foreigncompany was able to sell any product developed by it by usingthe information supplied by the Appellant. Meaning thereby, thereis no material on record to prove the sales effected by the foreignCcompany to its customers in India in respect of any productdeveloped with the assistance of Appellant’s information and alsoon as to how the service charges payable to Appellant werecomputed. [Paras 13, 16, 17] [504-D-E; 505-E-G; 506-A-B]

2. In the present facts and circumstances of the case, theDservices of managing agent, i.e., the Appellant, rendered to aforeign company, are not technical services within the meaningof Section 80-O of the IT Act. The Appellant failed to prove thathe rendered technical services to the foreign company and alsothe relevant documents to prove the basis for alleged paymentby the foreign company to him. The letters exchanged betweenEthe parties cannot be claimed for getting deduction under Section80-O of the IT Act. It is settled law that the expressions used ina taxing statute would ordinarily be understood in the sense inwhich it is harmonious with the object of the Statute to effectuatethe legislative animation. The Appellant was a managing agentFand the High Court was right in holding the principal agentrelationship between the parties and there is no basis for grantof deduction to the Appellant under Section 80-O of the IT Act.[Paras 18, 19] [506-D; 506-E]

J. K. (Bombay) Ltd. v. Central Board of Direct TaxesGand Another (1979) 118 ITR 312 (Del.) – referred to.

Case Law Reference

(1979) 118 ITR 312 (Del.) referred toPara 15CIVIL APPELLATE JURISDICTION: Civil Appeal No. 3892of 2007.H

From the Judgment and Order dated 13.12.2006 of the High Courtof Delhi at New Delhi in Income Tax Appeal No. 1198 of 2006.

Lakshmikumaran, Ms. Nina Gupta, Sanjay Gupta, Mudit Sharma,Ms. Ranu Purohit, Saurav Sood, Shashank Sharma, Ms. Subhash Peer,Ms. Bina Gupta, Advs. for the Appellant.

K. Radhakrishnan, Sr. Adv., Ms. Niranjana Singh, Ms. SadhanaSandhu (for Mrs. Anil Katiyar), Advs. for the Respondent.

The Judgment of the Court was delivered by

R. K. AGRAWAL, J. 1. The above appeal has been filed againstthe judgment and order dated 13.12.2006 passed by the High Court ofDelhi in I.T. Appeal No. 1198 of 2006 whereby the Division Bench ofthe High Court dismissed the appeal filed by the appellant herein againstthe order dated 10.10.2005 passed by the Income Tax Appellate Tribunal,Delhi Bench (in short ‘the Tribunal’) in ITA No. 1603/D/2002.

2. Brief facts:

(a) The Appellant herein filed return disclosing income of Rs.57,40,360/- for the Assessment Year (AY) 1997-98 while claimingdeduction of Rs. 58,87,045/- under Section 80-O of the Income Tax Act,1961 (in short ‘the IT Act’) on a gross foreign exchange receipt of Rs.1,17,74,090/- received from Sumitomo Corporation, Japan. SumitomoCorporation was interested in supplying dies for manufacturing of bodyparts to Indian automobile manufacturers and entered into a contractwith the Appellant under which the services of the Appellant hereinwere engaged by using his specialized commercial and industrialknowledge about the Indian automobile industry. Sumitomo Corporationalso agreed to pay remuneration at the rate of 5% of the contractualamount between Sumitomo Corporation and its Indian customers on salesof its products so developed. The Appellant claimed to have supplied toSumitomo Corporation the industrial and commercial knowledge,information about market conditions and Indian manufacturers ofautomobiles and also technical assistance as required by the Corporation.

(b) The case of the Appellant was selected for scrutiny by theIncome Tax Department, Delhi and in response to notice under Section143(2) of the IT Act, the Appellant along with others attended theassessment proceedings from time to time justifying the claim underSection 80-O of the IT Act. The Assessing Officer, vide order dated A

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A27.03.2000 under Section 143(3) of the IT Act assessed the total incomeat Rs. 1,18,43,060/- and determined the sum payable by the assessee tothe tune of Rs. 43,25,960/-. Being aggrieved by the order dated27.03.2000, the Appellant preferred an appeal being No. 272/01-02 beforethe Commissioner of Income Tax (Appeals)-XXVI, New Delhi. TheAppellate Authority, vide order dated 20.02.2002, partly allowed the appealBand held that the Appellant is entitled to deduction under Section 80-O ofthe IT Act. Being aggrieved by the order dated 20.02.2002, the Revenuewent in appeal before the Tribunal. The Tribunal, vide order dated10.10.2005, allowed the appeal filed by the Revenue. The Appellantapproached the High Court by filing I.T. Appeal No. 1198 of 2006Cchallenging the order of the Tribunal dated 10.10.2005 which wasdismissed on 13.12.2006 by a Division Bench of the High Court.(c) Aggrieved by the judgment and order dated 13.12.2006, theAppellant has filed this appeal by way of special leave before this Court.

3. Heard Mr. Lakshmikumaran, learned counsel for the AppellantDand Mr. K. Radhakrishnan, learned senior counsel for the Respondentand perused the records.

Point(s) for consideration:-

4. The sole point for consideration before this Court is whetherEthe Appellant is entitled to deduction under Section 80-O of the IT Actunder the facts and circumstances of the present case?

Rival contentions:-

5. Learned counsel for the Appellant contended that the Appellanthas fulfilled all the conditions as envisaged under Section 80-O of the ITFAct inasmuch as he was providing specialized, industrial and commercialknowledge relating to the Indian automobile industry and also detailedinformation about the industry in India. Learned counsel furthercontended that the Appellant is enjoying a very good professionalreputation amongst manufacturers and traders and having a vastexperience of the Indian automobile industry. The services so renderedGby the Appellant were in fact rendered and the payment was receivedfor having rendered those services. Learned counsel finally contendedthat the High Court committed an error in considering it a principal-agent relationship and the order passed by the High Court is liable to beset aside.

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6. Learned senior counsel for the Respondent submitted that inorder to claim deduction under Section 80-O of the IT Act, the informationmust be concerning industrial, commercial or scientific knowledge,experience or skill, which is made available to the non-resident partyand it is difficult to hold from the material on record that the Appellantwas having any information concerning industrial, commercial or scientificknowledge, experience or skill or he ever had in possession of any blueprints. Learned senior counsel further submitted that the manner orcircumstances under which the proposed multipurpose vehicles of Telcounder SAFARI project were finalized are not clear and no documentshave been produced on record for the same. Learned senior counselfinally submitted that the decision rendered by the High Court was rightand no interference is sought for by this Court.

7. In rejoinder, learned counsel for the appellant contended thatthe agreement between the parties satisfies the ingredients of Section80-O of the IT Act entitling the Appellant to get the benefit of deductionas the services rendered by the appellant were in the nature of industrialand commercial knowledge to a foreign enterprise.

Discussion:-

8. The Appellant has claimed to have vast experience of the Indianautomobile industry and has acquired substantial expertise and experienceand is in a position to supply specialized commercial and industrialinformation about the automobile industry to any foreign enterprise lookingfor developing its market in India. The Appellant struck a deal with theSumitomo Corporation, Japan with regard to the information about themarket conditions existing in the Indian automobile industry, specificinformation regarding manufacturers of automobiles in India, about themarket position, credibility and the product acceptance of each of thosemanufacturers, to provide pre-information regarding the proposal tolaunch any new product by any of the manufacturers in India, to providesuggestions for development of automobile parts/dies for manufactureof automobile body parts conforming to the specific needs of themanufacturers of automobiles in India, to provide services and supportas may be reasonably required in connection with the development andmanufacture of the products in Japan for sale in India and to advise theSumitomo Corporation of legal laws and regulations applicable in Indiarelating to the importation and/or sale of its products in India etc.

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A9. The services so rendered by the Appellant were required to beused by Sumitomo Corporation for establishing its business in the Indianautomobile industry and he received a sum of Rs. 1,17,73,940/- on accountof technical and industrial knowledge and professional services renderedby him in relation to the SAFARI project of TELCO. It is his claim thatthe Sumitomo Corporation bagged the order from TELCO in respect ofBSAFARI project as a result of use of specialized, commercial andindustrial knowledge and professional services rendered by him.

10. The Appellant filed the income tax return declaring an incomeof Rs. 57,40,360/- which was selected for scrutiny by the Income TaxDepartment. While computing the income, a deduction of Rs. 58,87,045/C- was claimed under Section 80-O of the Act on the gross receipts ofRs. 1,17,74,090/- received from Sumitomo Corporation of Japan inconvertible foreign exchange in the name of M/s Pasco Internationalwherein the Appellant was the sole proprietor. It was further explainedthat he had received the above amount in convertible foreign exchangeDas consideration for providing specialized industrial and commercialknowledge relating to the Indian automobile industry including thereinthe detailed information about the industry, analyzing the governmentpolicies relating to Indian automobile industry and also to identifyopportunities for supply of products of M/s Sumitomo corporation tovarious customers in India and hence he is entitled to claim deductionEunder Section 80-O of the IT Act which had been claimed in the returnof income filed. However, the Assessing Officer, by order dated27.03.2000, disallowed the claim of deduction of Rs. 58,87,045/- underSection 80-O of the Act while holding that the Appellant’s services donot qualify for deduction under the relevant Section.F

11. In the above backdrop, it is essential to quote Section 80-O(unamended) of the IT Act which reads as under:- “80-O.Deduction in respect of royalities etc. from certainforeign enterprises.—1) Where the gross total income of anassessee, being an Indian company or a person (other than acompany) who is resident in India, includes any income by way ofroyalty, commission, fee or any similar payment received byassessee from the Government of a foreign state or foreignenterprise in consideration for the use outside India of any patent,invention, model, design, secret formula or process or similar G

property right, or information concerning industrial, commercialor scientific knowledge, experience or skill made available ofprovided or agreed to be made available of provided to suchGovernment or enterprise by the assessee, or inconsideration oftechnical or professional services rendered or agreed to berendered outside India to such Government or enterprise by theassessee, and such income received in convertible foreignexchange outside India, or having been converted into convertibleforeign exchange outside India, is brought into India, by or onbehalf of the assessee in accordance with any law for the timebeing in force for regulating payments and dealings in foreignexchange, there shall be allowed, in accordance with and subjectto provisions of this section, a deduction of an amount equal tofifty percent of income so received in , or brought into, India, incomputing the total income of the assessee:

Provided that such income is received in India within a period ofsix months from the end of the previous year, or where the ChiefCommissioner or Commissioner is satisfied (for reasons to berecorded in writing) that the assessee is, for reasons beyond hiscontrol, unable to do so within the said period of six months, withinsuch further period as a Chief Commissioner may allow in thisbehalf:

Explanation for the purposes of this section:-

(i) “Convertible foreign exchange” means foreign exchange whichis for the time being treated by the Reserve Bank of India asconvertible foreign exchange for the purpose of the law for thetime being in force for regulating payments and dealing in foreignexchange.

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

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

12. Provisions similar to Section 80-O of the Act were originallyin the former Section 85-C of the Income Tax Act, 1961 which wassubstituted by Finance (No. 2) Act, 1971. Section 80-O was inserted inplace of Section 85C which was deleted by the Finance (No. 2) Act, AB

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A1967. While moving the bill relevant to the Finance Act No. 2 of 1967,the then Finance Minister highlighted the fact that fiscal encouragementneeds to be given to Indian industries to encourage them to providetechnical know-how and technical services to newly developing countries.It is also seen that the object was to encourage Indian companies todevelop technical know-how and to make it available to foreign companiesBso as to augment the foreign exchange earnings of this country andestablish a reputation of Indian technical know-how for foreign countries.The objective was to secure that the deduction under the section shallbe allowed with reference to the income which is received in convertibleforeign exchange in India or having been received in convertible foreignCexchange outside India, is brought to India by and on behalf of taxpayersin accordance with the Foreign Exchange Regulations.

13. Now coming to the facts of the case at hand, it is evident fromrecord that the major information sent by the Appellant to the SumitomoCorporation was in the form of blue prints for the manufacture of diesDfor stamping of doors. Several letters were exchanged between theparties but there is nothing on record as to how this blue print was obtainedand dispatched to the aforesaid company. It is also evident on recordthat the Appellant has not furnished the copy of the blue print which wassent to the Sumitomo Corporation neither before the Assessing Officernor before the Appellate authority nor before the Tribunal. The provisionsEof Section 80-O of the IT Act mandate the production of document inrespect of which relief has been sought. We, therefore, have to examinewhether the services rendered in the form of blue prints and informationprovided by the Appellant fall within the ambit of Section 80-O of the ITAct or any of the conditions stipulated therein in order to entitle theFassessee to claim deduction.

14. In New Encyclopaedia Britannica, where the term “technicalassistance” had been considered, it has been stated that technicalassistance may involve sending experts into the field to teach skills andto help solve problems in their areas of specialisation, such as irrigation,Gagriculture, fisheries, education, public health, or forestry. In NewWebster’s Dictionary of the English Language the word “technical”means what is characteristic of a particular art, science, profession, ortrade and the word “technology” means the branch of knowledge thatdeals with the industrial arts and sciences; utilisation of such knowledge;the knowledge and means used to produce the material necessities of aHsociety.

15. In J.K. (Bombay) Ltd. vs. Central Board of Direct Taxesand Another (1979) 118 ITR 312 (Del.), the interpretation of technicalassistance has been described as under:-

“We have shown above that adopting the wider meaning of theword “technical” would defeat the object of Section 80-O byenabling the remuneration for management or running of a foreigncompany to be eligible for deduction under Section 80-O. On theother hand, the narrower meaning of the word “technical” seemsto be more in keeping with the object of the section. It has to beremembered that the word “technology” which has affinity withthe word “technical” is concerned with the control of materialenvironment by man. This is done by two means. Firstly, by theuse of tools, and, secondly, by the application of reason to theproperties of matter and secondly, by the application of reason tothe properties of matter and energy. It would appear, therefore,that it would be reasonable to think that technical services shouldinclude the use of tools and machinery in addition to the use ofreason. Managerial services which do not include any use oftools and machinery may not be regarded as technical services.”

16. The blue prints made available by the Appellant to theCorporation can be considered as technical assistance provided by theAppellant to the Corporation in the circumstances if the description ofthe blue prints is available on record. The said blue prints were not evenproduced before the lower authorities. In such scenario, when the claimof the Appellant is solely relying upon the technical assistance renderedto the Corporation in the form of blue prints, its unavailability creates adoubt and burden of proof is on the Appellant to prove that on the basisof those blue prints, the Corporation was able to start up their business inIndia and he was paid the amount as service charge.

17. Further, with regard to the remuneration to be paid to theAppellant for the services rendered, in terms of the letter dated25.01.1995, it has been specifically referred that the remuneration wouldbe payable for the commercial and industrial information supplied only ifthe business plans prepared by the Appellant results positively. SumitomoCorporation will pay to PASCO International service charges equivalentto 5% (per cent) of the contractual amount between Sumitomo and itscustomers in India on sales of its products so developed. From a perusalof the above, it is clear that the Appellant was entitled to service charges A

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Aat the rate of 5% (per cent) of the contractual amount between SumitomoCorporation and its customers in India on sales of its products sodeveloped but there is nothing on record to prove that any product wasso developed by the Sumitomo Corporation on the basis of the blue printssupplied by the Appellant as also that the Sumitomo Corporation wasable to sell any product developed by it by using the information suppliedBby the Appellant. Meaning thereby, there is no material on record toprove the sales effected by Sumitomo Corporation to its customers inIndia in respect of any product developed with the assistance ofAppellant’s information and also on as to how the service charges payableto Appellant were computed.

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18. In view of the foregoing discussion, we are of the consideredopinion that in the present facts and circumstances of the case, theservices of managing agent, i.e., the Appellant, rendered to a foreigncompany, are not technical services within the meaning of Section 80-Oof the IT Act. The Appellant failed to prove that he rendered technicalDservices to the Sumitomo Corporation and also the relevant documentsto prove the basis for alleged payment by the Corporation to him. Theletters exchanged between the parties cannot be claimed for gettingdeduction under Section 80-O of the IT Act.

19. Before parting with the appeal, it is pertinent to mention hereEthat it is settled law that the expressions used in a taxing statute wouldordinarily be understood in the sense in which it is harmonious with theobject of the Statute to effectuate the legislative animation. The Appellantwas a managing agent and the High Court was right in holding the principalagent relationship between the parties and there is no basis for grant ofdeduction to the Appellant under Section 80-O of the IT Act.F

20. In view of the above, the appeal is dismissed with no order asto costs.

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Devika Gujral

Appeal dismissed.

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