Karnataka H.C : the Appellate Tribunal grossly erred in dismissing the appeal without considering the submissions made by the appellant challenging the reopening of the assessment by initiating proceedings under section 147 of the Act

High Court Of Karnataka

H. Raghavendra Rao vs. DCIT

Assessment Year : 1997-98

Section : 80-O

Dilip B. Bhosale And B. Manohar, JJ.

IT Appeal No. 828 Of 2007

March  5, 2014

JUDGMENT

B. Manohar, J. – The assessee filed this appeal under section 260A of the Income-tax Act, 1961 (for short “the Act”), challenging the order dated July 13, 2007, made in I. T. A. No. 82/Bang/2005 passed the by the Income-tax Appellate Tribunal, Bangalore Bench “A” (for short “the Tribunal”), dismissing the appeal filed by the assessee confirming the order passed by the authorities below in respect of deduction under section 80-O of the Act, for the assessment year 1997-98.

2. The assessee, in the status of an individual, filed return of income for the assessment year 1997-98 declaring the total income of Rs. 5,23,576 on October 29, 1997, and claimed deduction under section 80-O of the Act. The said return was processed under section 143(1) of the Act on March 26, 1998. Subsequently, the Assessing Officer issued notice dated September 27, 2000, under section 148 of the Act for reopening the assessment. On receipt of the notice, the assessee, vide letter dated October 13, 2000, requested the Assessing Officer to treat the returns filed on October 29, 1997, as the returns filed in response to the notice under section 148 of the Act. Further, requested the Assessing Officer to furnish a copy of the reason recorded for initiating reassessment proceedings. In pursuance of the notice, an authorized representative of the assessee appeared and produced necessary documents and argued the matter. The Assessing Officer after hearing the matter on various dates held that the assessee is not entitled for the benefit of deduction under section 80-O of the Act since the assessee has rendered service in India as per Explanation (iii) to section 80-O of the Act. Accordingly, by his order dated December 26, 2001, reassessed the income of the assessee under section 143(3) of the Act and demanded interest under sections 234B and 234C of the Act.

3. The assessee being aggrieved by the reassessment order dated December 26, 2001, passed under section 143(3) of the Act preferred an appeal before the Commissioner of Income-tax (Appeals)-II, Bangalore (for short ‘the appellate authority’) on various grounds. The appellate authority, after re-examining the matter and taking into consideration the retainer agreement entered into between the assessee and M/s. Buckeye Corporation P. Ltd. held that in view of Explanation (iii) to section 80-O, the assessee is not entitled for the relief and dismissed the appeal by his order dated October 25, 2004.

4. Being aggrieved by the order passed by the appellate authority, the assessee preferred an appeal before the Tribunal, mainly contending that reopening of the assessment is contrary to law and the assessee is entitled for deduction under section 80-O of the Act. In view of Circular No. 700, dated March 23, 1995 ([1995] 213 ITR (St.) 78), passed by the Central Board for Direct Taxes (for short “the CBDT”), the Appellate Tribunal after re-examining the matter held that the assessee has rendered his service in India and received the fees in foreign exchange out of the retainer agreement entered into between the assessee and the foreign enterprises and in view of Explanation (iii) to section 80-O of the Act, the assessee is not entitled for any relief and dismissed the appeal. Being aggrieved by the order passed by the Tribunal, the assessee preferred this appeal.

5. The instant appeal was admitted for considering the following substantial questions of law :

“(1) Whether, on the facts and in the circumstances of the case and in law, the Appellate Tribunal grossly erred in dismissing the appeal without considering the submissions made by the appellant challenging the reopening of the assessment by initiating proceedings under section 147 of the Act ?

(2) Whether, on the facts and in the circumstances of the case and in law, the Appellate Tribunal erred in not examining the documents produced by the appellant to appreciate that the assessee had been producing fax receipts sent to Singapore demonstrated that he had rendered the services from India but not in India ?”

6. Sri K. P. Kumar, learned senior advocate appearing for M/s. Vasan Associates for the appellant, contended that the order passed by the Appellate Tribunal confirming the order passed by the first appellate authority as well as the assessing authority is contrary to law. He submitted that, reopening of the assessment under section 147 of the Act is contrary to law. It is not open to the Assessing Officer for reappraisal of the opinion already reached and change of opinion is not permitted under the law. Hence, reopening of the assessment is without jurisdiction. He further submitted that the Assessing Officer had failed to furnish the reason for reopening the assessment. The appellate authority failed to appreciate the Circular dated March 23, 1995, issued by the Central Board of Direct Taxes. He submitted that the assessee is an advocate by profession. He entered into a retainer agreement with M/s. Buckeye Corporation P. Ltd. He has given legal opinion on all matters required by the company since the said company wanted to establish an industry in India. The assessee being the resident of India has fulfilled all the conditions as prescribed under section 80-O of the Act. In consideration of professional service rendered or agreed to be rendered outside India, he received fee in convertible foreign exchange and it was brought to India. Hence, he is entitled for deduction of 50 per cent. of the income so received or brought to India in computing total income of the assessee. The services rendered by the assessee is out of India to a foreign enterprises. The circular issued by the Central Board of Direct Taxes, vide Circular No. 700, dated March 23, 1995, categorically states that as long as technical and professional services are rendered from India and are received by a foreign Government or enterprise outside India, deduction under section 80-O 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. The Tribunal misunderstood and misread the circular. He also relied upon the judgments reported in CIT v. Inchcape India (P.) Ltd. [2005] 273 ITR 92/143 Taxman 234 (Delhi) ; Li & Fung India (P.) Ltd. v. CIT [2008] 305 ITR 105/172 Taxman 236 (Delhi) ; CIT v. Eicher Consultancy Services Ltd. [2008] 167 Taxman 64 (Delhi) and sought for allowing the appeal.

7. On the other hand, Sri K. V. Aravind, learned counsel appearing for the Revenue, argued in support of the order passed by the Tribunal and contended that the assessee is not entitled for the benefit under section 80-O of the Act. The retainer agreement entered into between the assessee and M/s. Buckeye Corporation P. Ltd. clearly disclose that the assessee has to act as an advocate and render all legal services and to conduct cases in India in view of Explanation (iii) to section 80-O of the Act. The assessee is not entitled for any deduction. In support of the said contention, learned counsel for the Revenue relied upon the judgment in Anand & Anand v. CIT [2006] 286 ITR 432/152 Taxman 113 (Delhi) and sought for dismissal of the appeal.

8. We have carefully considered the arguments addressed by the learned counsel for the parties and perused the orders impugned and other relevant records.

9. The assessee filed the return of income in the status of an individual for the assessment year 1997-98 declaring the total income and also claiming deduction under section 80-O of the Act. The said returns was processed under section 143(1) of the Act. Subsequently, the Assessing Officer noticed that the assessee has not fulfilled the conditions of the provisions of section 80-O and issued notice under section 148 of the Act for reopening of the assessment. The authorized representative of the assessee appeared and produced the necessary documents and also made available the retainer agreement entered into between the assessee and M/s. Buckeye Corporation P. Ltd. The Assessing Officer noticing some of the clauses of the agreement held that the services rendered by the assessee in relation to legal proceedings in the court within the country to the clients who are stationed outside the country, though the payment has been made under the convertible foreign exchange, the said receipt will not fall under section 80-O of the Act, more particularly, Explanation (iii) to section 80-O of the Act. Some of the clauses of the agreement read thus :

“(i) That the company hereby retains and appoints the said advocate to act as its advocate and to render all legal advice and give opinion on all matters required by the company including but not limited to requisitions made, therefore, to the said company and to represent it in all matters which may be pending in any of the courts brought by or against the said company and representations before any Tribunal regulatory or administrative authority during the continuance of this agreement and to examine all abstracts of title, documents and correspondences and prepare all agreements and contracts and do all such acts and render all such legal services as the said company or any of its officers or directors, acting officially, may require.

(ii) This agreement shall be terminable at the option of either party with prior notice of three months subject to the stipulation that the right of termination shall not be exercised during the first year of its operation. That the advocate engages to attend to all the legal matters of the said company and also to send notices of demand or otherwise for recovery of outstanding dues to the company, to reply to notices received by the company from others, to enter into correspondence in the above matters with the said persons to take legal proceedings arising in any matters with the said persons, to take legal proceedings and make representations to all governmental and non-governmental entities arising in any matters connected with the business of the company and to defend such matters in the courts or before other authority in this behalf, to render legal advice in connection with any matters arising out of the business carried on or intended to be carried on by the company, to represent the company and act, plead and appear for the company in all legal matters whether in court or before any tribunal regulatory or administrative authority and other non-governmental entities or elsewhere in India, to draft deeds or other documents usually drafted by lawyers for a client, and to give opinion in writing on requests being made thereof on facts stated to the said advocate orally or in writing.”

10. In order to obtain deduction under section 80-O of the Act, the services rendered or agreed to be rendered outside India or rendered from India but shall not include the services rendered in India. For better appreciation of the facts, section 80-O of the Act as it stood at the relevant point in time reads 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 out side 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,—

(i) ‘convertible foreign exchange, means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the law for the time being in force for regulating payments and dealings in foreign exchange ;

(ii) 39;foreign enterprise’ means a person who is a non-resident ;

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

11. Reading of the above section makes it very clear that deduction is admissible under section 80-O only if the income of the assessee includes receipt by it from the Government of a foreign State or foreign Enterprises in convertible foreign exchange in consideration of professional services rendered or agreed to be rendered outside India to such enterprises by the assessee. Explanation (iii) to section 80-O of the Act makes a clear distinction between the services rendered or agreed to be rendered outside India which expression includes services rendered from India. However, it will not include services rendered in India. In the instant case, reading of some of the clauses of the agreement makes it very clear that in convertible foreign exchange by way of fee received by the assessee for the services rendered in relation to legal proceedings in court within this country, it falls under Explanation (iii) to section 80-O, i.e., services rendered or agreed to be rendered in India. Hence, the assessee is not entitled to claim deduction. Further, reading of the clarification made by the Central Board of Direct Taxes in its circular dated March 23, 1995, it is very clear that “the technical and professional services are rendered from India and are received by a foreign Government or enterprises outside India, deduction under section 80-O would be available to the person rendering the services even if the foreign recipient of the service utilizes the benefit of such services in India”. In the instant case, admittedly the service has been rendered in India representing the foreign company in the litigation brought forward by or against the said company. For the services rendered in India, the company has to pay $10,000 payable on or before 5th of every month as a retainer fee in convertible foreign exchange. Hence, the Board Circular will not come to the aid of the assessee. To avail of the benefit under section 80-O, he has to come within the purview of Explanation (iii) to the said section. In the instant case, the assessee is rendering services in India to a foreign company, hence he is not entitled for any deduction.

12. The judgments relied upon by the learned senior advocate are not applicable to the facts of the present case. In Li & Fung India (P.) Ltd. (supra) the Delhi High Court examined the matter with regard to the managerial services rendered by the assessee which falls under the technical services. In Inchcape India (P.) Ltd. (supra), the Delhi High Court examined the services rendered with regard to the dyeing and testing divisions, whether it is technical service or not ? Further, in Eicher Consultancy Services Ltd. (supra) the Delhi High Court has dealt with providing consultancy services to the foreign company in Faridabad. The said judgments are not applicable to the facts of the present case. On the other hand, the judgment of the Delhi High Court in Anand & Anand (supra) is squarely applicable to the facts of the present case. In the said case, the court was dealing with the legal services rendered by the firm to a foreign company. The Delhi High Court, after examining section 80-O and also the clarification issued by the Central Board of Direct Taxes, held that the assessee is not entitled for any deduction under section 80-O of the Act. The relevant paragraph 7 of the said judgment reads as under (page 436) :

“There is, in our opinion, no merits in the contention urged by Mr. Vohra. The legislative intent behind the provision of section 80-O is much too clear from Explanation (iii) to the same to need any detailed exercise involving interpretation of that provision. The Explanation makes it abundantly clear that a deduction under section 80-O is not allowable if the foreign receipts are relatable to services rendered in India. A professional’s service can be rendered within India as much as it can be rendered from India. It would depend upon the nature of the service and not on whether the provider and the recipient of the service are located in two different countries. For instance, in cases where a professional offers his professional advice to a client who is stationed outside India, the service can be said to be rendered from India because it is only the rendition of advice from the professional to the recipient that is flowing outside the country. The flow of technical or professional expertise and knowledge of an expert located in India to a recipient outside India would doubtless constitute service rendered from India. At the same time, the service rendered by the expert may be limited to his advice or opinion on a subject. It may at times be accompanied by the experts doing various other acts within or outside the country. If the service is limited to advice with or without acts to be performed outside the country, payments received in foreign exchange would qualify for deduction. That may not be so in cases where a professional, as in the case of the appellant before us, offers its professional services in courts within the country and receives payment for rendition of such services. In such a situation, what the client gets is services of the professional rendered in India in relation to a matter which is pending in the courts here. The fact that the client who eventually benefits from such service in India is stationed outside the country is not the sole criterion. Payments received by any such professional for such services would not, therefore, qualify for deduction under section 80-O.”

13. We are in respectful agreement with the view taken by the Delhi High Court in the case referred to above. The Tribunal, the first appellate authority and the assessing authority on examining the matter concurrently held that the assessee is not entitled for deduction under section 80-O of the Act. We find no infirmity or irregularity in the order passed by the authorities below. On re-examining the matter, we also found that the assessee is not entitled for any deduction under section 80-O of the Act. Hence, the substantial questions of law framed in this appeal are held against the assessee. Accordingly, the appeal is dismissed.

[Citation : 363 ITR 238]