Bombay H.C : We find it difficult to accept the interpretation of the words ” foreign enterprise ” canvassed by Mr. Dwarkadas. Analysing s. 80-O

High Court Of Bombay

Petron Engineering Construction (P) Ltd. & Anr. vs. Central Board Of Direct Taxes & Ors.

Section 80-O

S.P. Bharucha & V.P. Tipnis, JJ.

Appeal No. 752 of 1986 in Writ Petn. No. 538 of 1982

11th August, 1987

Counsel Appeared

Dilip Dwarkadas, S.P. Mehta & D.H. Nanavati, for the Appellants : D.R. Dhanuka, J.P. Devadhar & S.V. Naik, for the Respondents

BHARUCHA, J.:

The judgment and order of Jahagirdar J. (See (1986) 57 CTR (Bom) 268 : (1987) 165 ITR 668)) dismissing the appellants’ writ petition is the subjectmatter of this appeal.

2. The appellants applied to the CBDT for approval under s. 80-0 of the IT Act, 1961, of the agreements dated April 5, 1980, and August 14, 1980, entered into between them and Toyo Engineering India Ltd. (now called ” Toyo India “). After giving the appellants a hearing, the Board rejected the appellants’ application by its letter dated March 27, 1981. The Board held that the agreements could not be approved under s. 80-0 because they were not made with the Government of a foreign State or a foreign enterprise and because the payments thereunder were not payments from the Government of a foreign State or a foreign enterprise.

3. The order of the Board was impugned in the writ petition filed by the appellants. The learned single judge upheld the contention of the appellants that, under the terms of s. 80-0 of the IT Act, 1961, it was not necessary that the agreements should be with the Government of a foreign State or a foreign enterprise. He, however, rejected the writ petition on the ground that the payments under the agreements were not made to the appellants by the Government of a foreign State or a foreign enterprise. They clearly showed that the payments were made, though in a foreign country and in a foreign currency, by Toyo India which was, beyond dispute, an Indian company.

4. It is necessary to set out briefly the terms of what are, in any case, brief agreements. They are stated to be between ” TOYO ENGINEERING INDIA LIMITED “, a company organised and existing under the laws of ” INDIA and having its registered office at … New Delhi “, and the appellants. The agreements recite that Toyo India ” has been engaged by Toyo Engineering Corporation, a company organised and existing under the laws of Japan and having its registered office at … Japan … for the Project of Storage Terminal of State Organisation for Oil Project, a public Organisation organised and existing under the laws of Iraq. ” Article 3 of the agreements deals with the contract price and states that the contract price to be paid by Toyo India to the appellants thereunder was attached therewith.

5. Sec. 80-0 of the IT Act, 1961, so far as it is material, reads thus: ” 80-0. 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 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 services rendered or agreed to be rendered outside India to such Government or enterprise by the assessee, under an agreement approved by the Board in this behalf and such income is received in convertible foreign exchange in India, or having been received in convertible foreign exchange outside India, or having been converted into convertible foreign exchange outside India, is brought into India, by or on behalf of the assessee in accordance with any law for the time being in force for regulating payments and dealings in foreign exchange, there shall be allowed, in accordance with and subject to the provisions of this section, a deduction of 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. “

6. Mr. Dwarkadas, learned counsel for the appellants, pointed out that Toyo India had an establishment or undertaking or branch or unit in Iraq. This is not in dispute.

7. Mr. Dwarkadas submitted that, therefore, this establishment or undertaking or branch or unit had to be regarded as a foreign enterprise for the purposes of s. 80-0 of the IT Act, 1961. Mr. Dwarkadas drew our attention to the judgment of a single judge of this Court in Gannon Dunkerley & Co. Ltd. vs. CBDT (1988) 53 CTR (Bom) 1 : (1986) 159 ITR 162 (Bom), wherein, in substantially similar circumstances, it was held that the agreement ought to be approved under s. 80-0. In regard to ” foreign enterprise “, this is what the learned judge said (p. 164) : ” Still further, EPI, a Government company registered in India, also had its branch office at Kuwait. One also cannot ignore the fact that the enterprise also was in a foreign country, namely, at Kuwait, and that it was in all material respects a foreign enterprise. “

Mr. Dwarkadas also relied upon the judgment of another learned single judge of this Court delivered in Writ Petition No. 1764 of 1981, Indian Hume Pipe Co. Ltd. vs. CBDT (1986) 53 CTR (Bom) 4 : (1987) 165 ITR 537 (Bom), decided on October 14, 1985. The learned judge held that under s. 80-O of the IT Act, 1961, it was not necessary that the agreement should be between the assessee and a foreign party. All that was required was that the assessee should have rendered technical services under an agreement and this agreement should be approved by the Board. It was contended before the learned judge that the payment that has been received by the assessee had been made by an organisation established by the Government of India, pursuant to an agreement between the assessee and that organisation. The learned judge found that the payment had been received in foreign exchange on behalf of the assessee by the organisation and had been brought into India on behalf of the assessee. It was, therefore, held that the agreement ought to have been approved under s. 80-O.

Upon the plain words of s. 80-O of the IT Act, 1961, we find it difficult to accept the interpretation of the words ” foreign enterprise ” canvassed by Mr. Dwarkadas. Analysing s. 80-O of the IT Act, 1961, we find that it requires that the assessee should be an Indian company. It should receive income by way of royalty, commission, fee or similar payment. The payment must be received ” from the Government of a foreign State or a foreign enterprise “. It must be received in consideration of the use outside India of any patent, invention, model, design and the like concerning industrial , commercial or scientific knowledge or in consideration of technical services rendered or agreed to be rendered outside India. Such use or service must be by or to ” such Government or enterprise “. Such use or service must also be ” under an agreement approved by the Board in this behalf “. The income must be received in foreign exchange in India or, being received in convertible foreign exchange outside India, or having been converted into convertible foreign exchange outside India, must be brought into India, by or on behalf of the assessee.

In the context of the contention with which we are presently dealing, the words ” the Government of a foreign State or a foreign enterprise ” must be read together. The words ” foreign enterprise ” must take colour from the words the Government of a foreign State “. The words ” foreign enterprise must, therefore, be read to mean an enterprise of a foreign national or of foreign ownership. They cannot be read to mean an enterprise in a foreign land, regardless of its ownership. The words ” foreign enterprise ” cannot, upon an interpretation of s. 80-O of the IT Act, 1961, be held to apply to an establishment or undertaking or branch or unit of an Indian company in a foreign country. Such establishment, undertaking, branch or unit may well be an if enterprise “, but it is not a ” foreign enterprise ” within the meaning of these words as used in s. 80-O.

In the judgment in Indian Hume Pipe’s case (supra), the learned judge held, on facts, that the payment had been received in foreign exchange on behalf of the assessee by the Organisation established by the Government of India and, therefore, he agreement was one that ought to have been registered under s. 80-0 of the IT Act, 1961. In the case of Gannon Dunkerley & Co. Ltd. (supra), there was, apparently, no argument about the import of the words ” foreign enterprise “.

Our attention was drawn by Mr. Dwarkadas to Circular No. 187 of the Board dated December 23, 1975 (See (1976) 102 ITR (St) 83) which says that s. 80-0 of the IT Act, 1961, had been enacted with the twin object of encouraging the export of Indian technical know-how and the augmentation of the foreign exchange resources of the country. The construction that we have placed upon s. 80-0 does not militate against these objects. The foreign exchange resources of a country are augmented when foreign exchange comes into the country from the Government of a foreign State or an enterprise of, or owned by, the nationals of a foreign country. Foreign exchange already in the hands of an Indian enterprise in a foreign country will not necessarily augment the foreign exchange resources of the country when paid over to another Indian.

In our view, therefore, the learned single judge was right in the view that he took upon this aspect. The other aspect, which was canvassed by the respondents before the learned single judge was that the agreement referred to in s. 80-O of the IT Act, 1961, had necessarily to be with the Government of a foreign State or a foreign enterprise. The learned judge disagreed. Mr. Dhanuka learned counsel for the respondents, sought to support the learned judge’s order by submitting that it was a necessary implication of the language employed in s. 80-0 that the agreement should be with the Government of a foreign State or a foreign enterprise, which the present agreements were not.

We are unable to accede to this submission because the section does not specify who the party of the other part of the agreement should be. It is, therefore, difficult to imply that the party of the other part must be the Government of a foreign State or a foreign enterprise. This is all the more so when one sees that in relation to the use of patents, inventions etc., and the utilisation of technical services, the section makes it explicit that such use or utilisation must be by ” such Government or enterprise “.

Even in the terms of the objects of the section, there is no reason why the agreement should be restricted to one entered into with the Government of a foreign State or a foreign enterprise. Regardless of who the party of the other part is, if the conditions of the section have been complied with, there will be an augmentation of the foreign exchange resources of the country.

The appeal is dismissed. No order as to costs.

[Citation : 171 ITR 80]

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