Continental Construction Ltd. Vs. Commissioner of Income-Tax, Central [1992] INSC 8 (15 January 1992)
Rangnathan, S. Rangnathan, S. Ramaswami, V. (J) Ii Ojha, N.D. (J)
CITATION: 1992 AIR 803 1992 SCR (1) 57 1992 SCC Supl. (2) 567 JT 1992 (1) 140 1992 SCALE (1)65
ACT:
Income-tax Act, 1961 : Ss. 9(1)(vi),(vii),119(1),80-0,80-HHB :
Assessee-Engineering and Construction Company- Undertaking of foreign projects-Approval by Central Board of Direct Taxes-payments in respect of consideration for supply of technical information for use outside India and rendering Technical Services to foreign Government Enterprise-Whether `similar' to `royalty', `Commission or `free' etc.- Deductions-Scope of Assessee-Whether entitled to relief under S. 80-O for assessment years earlier to 1983-84 - Whether eligible for deductions under s. 80-HHB for assessment years 1983-84 onwards.
Assessee Company-Foreign contracts-Execution of- Construction of dam and irrigation project, water supply project etc.-Services involving specialised knowledge, experience and skill in constructional operations-Whether ar technical services.
"Technical Services"-Whether can be rendered through medium of employees, skilled and unskilled.
Foreign projects of `composite' activities-Activities falling partly under S. 80-HHB-Whether relief can be granted under each sections separately.
Activities of foreign contract falling under S. 80-0 as well as Section 80-HHB-Deductions-Whether can be computed under s. 80-HHB only.
Central Board of Direct Taxes-Circulars No. 187 dated 23.12.1975 & 253 dated 30.4.1979. Letters dated 28.10.83 and 31.7.1985-Board's power to grant approval to foreign contracts-Purpose and scope of: Guidelines for approval nature of: Approval once granted-Whether to continue for subsequent assessment years for the same agreement.
58 Words and phrases :
`business of execution of a foreign project', profits derived', `royalty', `similar', `technical services'-Meaning of.
HEAD NOTE:
Section 80-O of the Income Tax Act, 1961 provides for a deduction in computing the total income, in respect 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 Central Board of Direct Taxes in this behalf.
The appellant-assessee, a civil construction company, describing itself as Engineers, and contractors executed projects overseas and in India. It undertook certain contracts for construction, inter alia, of a dam and irrigation project, a fibre-board factory and a huge water supply project in foreign countries. One of its projects, called the Karkh Project, which constituted a major portion of its gross total income was with the Iraqi Government through the Baghdad Water Supply Administration (BWSA). The contract was for the design, manufacture, delivery, supply, construction and installation for the first stage of Karkh Water Supply Scheme. Since tenders had been called for from consortia the assessee associated with the State Contracting Company for Water and Sewerage Projects, Baghdad (SCC) and formed a consortium and the said consortium entered into an agreement on 17.12.1980 with the Iraqi Government. The terms of the consortium between the assessee and SCC were set out in another agreement dated 18.12.1980 dividing the areas of responsibility (the packages) under the contract between the two.
The assessee applied to the Central Board of Direct Taxes (CBDT) for latter's approval to the contracts "for the supply of Civil construction know-how to the Government of Iraq" under Section 80-O of the Income-Tax Act, 1961. In para 5(a)(ii) of the proforma of the application prescribed for the purpose, the assessee indicated that "information concerning industrial, commercial, or scientific knowledge or skill" was being made available outside India; and in Column 5(b) thereof it mentioned that technical services would be rendered by the assessee to 59 BWSA, Government of Iraq through its Indian Engineers, Scientists, technicians and semi-skilled labours to be inducted for that purpose.
Meanwhile, by the Finance Act, 1982, section 80-HHB was inserted to the Act with effect from 1.4.1983, providing for 25% deduction from the profits and gains derived from the business of execution of a foreign project undertaken by the assessee with the government of a foreign State-enterprise.
Sub-section (5) of section 80-HHB provided that not withstanding any provision in Chapter VIA of the Act, no part of any consideration or of the income comprised in the consideration payable to the assessee for execution of a foreign project shall qualify for deduction for any assessment year under any such other provision.
The CBDT accorded its approval on 28.10.1983. However, with respect to Karkh and Diwaniyah projects, the approval was granted for the assessment year 1982-83, stating that for the subsequent period section 80-HHB, which came into force w.e.f. 1.4.1983, would be operative.
The assessee claimed and obtained deduction under section 80-0 in respect of some of the contracts in some assessment year between 1976-77 to 1980-81.
For the year 1983-84, the assessee returned a gross total income of Rs. 72,67,45,938 but as against this it claimed a deduction of Rs. 89,16,19,198 : of this, the deduction claimed in respect of karkh and Diwaniyah projects came to Rs. 77,84,29,446 and Rs. 6,36,85,436 respectively.
As Board's approval under section 80-0 in respect of these two contracts was limited to the assessment year 1982-83, the Inspecting Assistant Commissioner (IAC) declined to grant the assessee any deduction under section 80-0 not only in respect of these two projects but also for the others, holding that section 80-HHB, and not section 80-0, applied to the agreements. However, relief was not granted even under section 80-HHB on the ground that conditions for exemption specified thereunder were not fulfilled. The IAC determined assessee's total income at Rs. 89,41,35,103 raising a tax demand of Rs. 66,07,72,982.
On appeal, the Commissioner of Income Tax (Appeals) agreed with the IAC to the extent that the assesse was not entitled to relief under section 80-0 because :
(1) the approval of the CBDT for three of the contracts did not extend to assessment year 1983-84;
(2) all the contracts undertaken by the assessee were in the nature of `foreign projects' within the meaning of section 80-HHB; and
(3) notwithstanding the 60 approval of the CBDT section 80-HHB
(5) ruled out the grant of relief under section 80-O for any of the projects.
He however, set aside the assessment and directed the IAC to reappraise assessee's claim for exemption under section 80- HHB holding that the assessee, being under a bona-fide belief all through that it was entitled to relief under section 80-O, did not have a proper opportunity of putting forth its claim for relief under section 80-HHB.
The assessee appealed to the Income Tax Appellate Tribunal (ITAT). During the pendency of the appeal before ITAT, the CBDT, by its letter dated 31.7.1985 modified the original letter of approval dated 28.10.1983 and made the approval operative even for years subsequent to assessment year 1982-83.
The ITAT affirmed the order of the C.I.T. but, at the request of the assessee, made a reference to the High Court.
The High Court answered the reference against the assessee holding that the execution of the work by the assessee fell under section 80-HHB and not under section 80-O; the receipts of the assessee from the contracts did not fall within the category of receipts for which deduction is provided in section 80-O; that the Board's approval was a qualified one which fully authorised and empowered the officer to determine whether all the conditions of the section were fulfilled as well as the amount, if any, which could be deducted under section 80-O, In the assessee's appeal to this Court, it was contended by the Revenue that
(1) the receipts of the assessee under the contract were profits and gains of its business of execution of foreign projects under sub-clauses (i) and (ii) of clause (b) of s. 80-HHB and did not qualify for deduction under section 80-O as the receipts did not fall under any of the categories either of royalty, commission, fees or `any similar payment', and the assessee either made any information available nor rendered any technical service to its foreign clients;
(2) the contract for Karkh Water Supply Project was in the nature of a turnkey project as the client wanted the project to be executed by the consortium complete in all respects and handed over to it, and the client was neither interested in the details of the information possessed or the services rendered by the contractor nor was the assessee as per consortium agreement, concerned with any part of the contract other than the "civil works";
(3) the assessee neither rendered any technical service nor made such information available either to the consortium or to the foreign government, but the information possessed by it and the services rendered in these respects by its engineers and other employees were utilised by the 61 assessee itself;
(4) the contract being an integral indivisible one, it was not permissible to the assessee to dissect the consideration as attributable to its several ingredients and apportion a part of it as being payment for information made available or technical services rendered to the foreign government;
(5) even assuming that the whole or atleast a part of the consideration payable to the assessee falls under section 80-O, still as per sub-section (5)of section 80-HHB the assessee would be eligible for deduction under section 80-HHB only; and
(6) even if the assessee's case falls under section 80-O to will be entitled to relief not on the entire profits derived by it but only to that portion of the receipts as can be described as having the character enumerated in section 80-O On behalf of the assessee it was contended that since the insertion of section 80-HHB has not resulted in the deletion of section 80-O, the two sections should be read harmoniously and given effect to together restricting the operation of section 80-HHB to contracts entered into on or after 1.4.1983 so as not to effect the contracts entered into before that date and approved by the Board; that even after the insertion of section 80-HHB there is room for applicability of section 80-O in relation to a contract of composite activities and section 80-HHB applies only to construction-installation activity simpliciter; and that once an approval under section 80-O is granted (on whatever date it be) the approval should ensure for the entire period of contract and connot be restricted to any particular assessment year or years.
On the question whether the assessee is entitled to a deduction under section 80-O or section 80-HHB or partly under one or partly under the other or under neither of the provisions.
Dismissing the assessee's appeal, this Court,
HELD :
1.1 The assessee was entitled to the relief under section 80-O for assessment years earlier to 1983-84 and the approval granted by the Board under that section was right and proper. However, for the assessment year 1983-84, the assessee does not qualify for deduction on the terms of that section as the contract receipts are fully covered by the provisions of section 80-HHB and the deduction under that section will prevail over the relief that might have been otherwise available in view of the terms of section 80- HHB(5). [p.116AB]
1.2 The assessee's claim for exemption under section 80-HHB deserves to be considered afresh after giving the assessee an opportunity of being heard, as directed by the CIT (Appeals) and confirmed by the ITAT and the High Court. [p. 86BC] 62 Continental Construction Ltd. v. Commissioner of Income Tax. (1990) 185 ITR 230, affirmed.
2.1 Eligibility of an item to tax or deduction can hardly be made to depend on the label given to it by the parties. An assessee cannot claim deduction under section 80-O 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. [p. 100BC]
2.2 The receipts by way of royalty, fees, commissions and `similar payments' envisaged by section 80-O may be derived in the course of a business or profession and constitute part of the profits and gains of such business or profession. For instance, the fees received by a consulting scientist, an architect or an engineer for providing technical services to others will nevertheless be assessable as part of the profits and gains from such profession. [p. 90DE]
2.3 The essence of the exemption under section 80-O lies, not in consigning the receipt to one of the pigeonholes or `royalty', `commission' or `fees' but in examining whether the receipt is a payment in consideration of one of the two situations envisaged in the section : e.g., where the assessee is the owner of a patent or invention, he may generally permit another to make use of patent or invention, in consideration of a `royalty' payment; or, where the assessee is in possession or technical know-how, he may be prepared to allow another to make use thereof in consideration of a `fee' to the assessee; or he may stipulate a consideration in the form of a commission based on the sales of the products the other party is able to manufacture with the aid of such invention or know-how, or an assessee may have achieved some speciality and he may agree to lend his services to some other person and stipulate a consideration therefor which may be variously described. [p. 92E-G] Gestetner Duplicators Pvt. Ltd. v. C.I.T., (1979) 117 I.T.R. 1 (S.C.); Cloth Traders P. Ltd. v. C.I.T., (1979) 118 ITR 243 & Distributors (Baroda) P. Ltd. v. Union, (1985) 155 ITR 120, referred to.
2.4 The word `similar' occurring in section 80-O connotes that the payment made to the assessee need not be in the nature of royalty, commission or fees only; it could be any payment of like nature, made in 63 consideration of the use or supply of such an asset, knowledge or services in the same manner as royalty, fees or consideration could be. Therefore, any type of payment received by an assessee will qualify for deduction under the section so long as it is a payment made in consideration of one of the two types of transaction referred to in the section. [p. 93AB]
2.5 In column 5 of the applications for approval under section 80-O the assessee stated that the payments under the contracts did not come under category (a) (i) but they did fall under categories a (ii) and (b) enumerated therein.
The finding of the Tribunal in this regard is not one of fact based on an admission; it proceeds on an incorrect appreciation of the contents of assessee's application for approval. [pp. 93G; 94AB]
3.1 The expression "technical services" has a very broad connotation and it has been used in section 9(1) (vii) of the Act also so widely as to comprehend professional services. [p. 98CD]
3.2 Services involving specialised knowledge experience and skill in the field of constructional operations are "technical services". The Board's guidelines specifically say so. [p.98DE]
3.3 Any engineering contract involves technical services more so, a contract of the nature and magnitude involved in the instant case. The contract executed by the assessee was no ordinary contract; the activities thereunder involved technical and expertise. It was executed jointly with an enterprise that was nothing but an instrumentally of the foreign State. [p. 95B-F]
3.4 The assessee had made available technical information to the foreign Government for use outside India and had also rendered technical services to the foreign Government of the nature outlined in section 80-O. [pp.98F; 100F]
4.1 The assessee is a company and any technical services rendered by it can only be through the medium of its employees, skilled and unskilled. [p. 97E]
4.2 In order to say that a person is rendering technical services to another, it is not necessary that the service should be rendered by the former personally and not through the medium of others. [p.98EF]
5.1 Section 80-HHB provides for an exemption in respect of profits from a "foreign project" undertaken outside India in the course of 64 business. The expressions "business of execution of a foreign project" or work forming part of it or the `profits derived' from the business, take in all aspects of a business involving than activities referred to in subsection (2) (b) of section 80-HHB together with all activities, commitments and obligation ancillary and incidental thereto and the profits flowing therefrom. The definition cannot be restricted to the mere physical activity or putting up the superstructure, machinery or plant but should be understood to take within its fold all utilisation of technical knowledge or rendering of technical services necessary to bring about the construction, assembly and installation. [p. 102FG]
5.2 Section 80-HHB comes into force on 1.4.1983 and should be applicable for assessment year 1983-84 onwards in all cases. It does not contain even a reference to section 80-O and so its applicability cannot depend on the formation of the contract subsequent to that date or to the date of its approval under the latter section being after that date. [p. 115A]
5.3 Section 80-HHB does not confer an additional benefit; sub-section (5) in no uncertain terms states that the benefit thereunder will take away the benefit, if any, under any other provision. This has to be given effect to. [p. 115F]
5.4 The assessee is entitled to deduction under section 80-O on the terms of that section even for 1983-84 and subsequent years. It becomes disentitled to the relief not because it does not fulfil the requirements of section 80-O but only because section 80-HHB(5) stands in the way and mandates that in cases to which both provisions apply, relief under section 80-HHB will alone be available. [p. 114G]
5.5 The fact that the income in question may qualify for deduction under section 80-HHB does not necessarily exclude the applicability of the provisions of section 80-O.
The language of sub-section (5) of section 80-HHB which gives precedence to a claim under section 80-HHB over one under any other provision, itself necessarily postulates the possibility of the whole or part of the consideration payable to an assessee for the execution of a foreign project qualifying for deduction under any other provision as well. [pp.86G; 87A]
5.6 The statutory interdict cannot be frustrated by the terms of an approval of the Board under section 80-O. Such approval, at its best, cannot overreach the limitations imposed on the relief available under that section as a consequence of section 80-HHB(5). [p.107BC] 65
5.7 The legislature has clearly envisaged the possibility of the same receipts qualifying for deduction under section 80-HHB as well as under any other provision of the Act and has specifically provided that, in such a case, the terms of Section 80-HHB will prevail over the provisions of such other provision. [p. 106FG]
5.8 One cannot decline to give effect to the applicability of a statutory provision on the ground of hardship or on the ground that it restricts the relief which, but for the insertion of the section, would have been available to the assessee, particularly when the section itself envisages the possibility of the assessee being also eligible for relief under another section and makes special provision for that eventuality. [p. 115BC]
5.9 The assessee was able to get 100% relief in earlier years only because the contract is of such nature that it consists only of the rendering or technical services so that the fields of the two exemptions completely overlap. On the other hand, it is possible to conceive of foreign projects wherein the construction and installation aspect and information or technical services aspect are kept separate.
Equally, there can be cases falling under section 80-O which do not at all relate to a "foreign project" as defined under section 80-HHB. In such cases the two provisions will continue to operate independently. [p.115F-H]
6.1 The Board was fully justified in considering the receipts of the assessee as falling under section 80-O and in granting approval to the contract. [p. 105BC]
6.2 Board's approval for the purpose of section 80-O cannot be tentative or provisional or qualified. The Board can neither limit the relief to certain assessment years only nor can it restrict or enlarge the scope of the relief that can be granted under the section. [p. 106AB]
6.3 Once a contract stands approved under section 80-O in relation to the first assessment year, the approval enures for the entire duration of the contract. Section 80- O does not envisage an application for approval of the contract every assessment year or the limitation of the approval granted by the Board to any particular assessment year. [p. 105DE] C.I.T. v. Institute of Public Opinion, (1982) 134 I.T.R. 23 (Del.), referred to.
6.4 The Board's approval in respect of assessment years earlier to 66 1983-84 will enable the assessee to claim like relief under section 80-O for all subsequent years too. But, after the insertion of Section 80-HHB, in the matter of receipts government both by Section 80-HHB and Section 80-O, the former and not the latter will prevail. [p. 106BC]
6.5 The Board's decision of 31.7.1985 extending the approval beyond 1982-83 cannot be given effect to in the same way as its earlier approval letter of 28.10.1983 for the reasons : (1) the jurisdiction of the Board is to grant approval to a contract cannot only for the purpose of section 80-O, it has no jurisdiction to pronounce on the availability or otherwise of an exemption under section 80- HHB and the Board's opinion as to this, even if expressly stated, cannot bind the Officer, (2) the relief under section 80-HHB is not dependent on the approval of the Board and is for a totally different type of transaction; (3) the letter of 31.7.1985 is also a decision in an individual case and cannot be treated as a general circular incorporating a policy decision by the Board that in all cases of a particular type government by both sections relief may be given under section 80-O; (4) the Board in the 1985 letter only stated, and rightly, that the approval under section 80-O would enure for 1982-83 onwards, for the approval of the Board is to the contract and so long as the contract subsists the relief should be granted on the terms of section 80-O; and (5) the approval which otherwise qualifies the assessee for relief is no doubt still effective but its power to qualify for relief if taken away by the new statutory provision. [pp.114DG; 115B]
6.6 The reasons to vest power of approval in the Board are that it is considered better equipped, both on considerations of times as well as the technical knowledge needed to examine the ramifications of technical international contracts and decide how far the relevant contract and the receipts there under are of the nature intended to be covered by the exemption clause and that the applicant is sure to take steps to obtain necessary approval at a state earlier to the implementation of the contract and he can know well before-hand where he stands in the matter of tax exemption. [p. 110C-F]
6.7 After the power of approval was vested in the Board, elaborate guidelines, as provided, inter alia, in Board's Circular NO. 187 dated 23.12.1975 and Circular No.
253 dated 30.4.79, were drawn up which clearly envisage a detailed examination, by the Board, of the terms of the contract submitted to it for scrutiny from all angles relevant for a decision as to eligibility for exemption under section 80-O. These guidelines have also since attained statutory recognition as the proforma earlier prescribed by the Board has virtually been incorporated in Rule 67 11E and Form prescribed thereunder. The proforma calls for details of the analysis of the receipts under the contract.
[pp. 111AB; 113BC]
6.8 The Board has chalked out for itself, quite legitimately and properly, a very detailed and dominant rule as to the availability of exemptions under section 80-O.
The guidelines are of general nature, fully sanctioned by the provisions of section 119(1) of the Act and, being instructions enuring to the benefit of the assessee, cannot be gone back upon by the Department Officers subordinate to the Board, particularly in a case where no steps have been taken - or even suggested as necessary to be taken - to revoke the approval already accorded. [p.112 FG] Navnitlal Javeri's case (1965) 56 I.T.R. 198(SC), relied on.
6.9 While granting the approval under Section 80-O, the Board has not only the jurisdiction but also the responsibility of examining the agreement submitted for approval from all angles relevant to the deduction provided for under section 80-O and it is not competent to the Department to question the maintainability of the claim for deduction under section 80-O in respect of the aspects gone into and decided upon by the Board. [p.113DE] 6.10 However, the assessing officer is not deprived of his functions. He has to satisfy himself that (i) 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) the deduction claimed in the relevant assessment year relates to the items and is referable to the basis on which application for exemption was asked for and granted by the Board; (iii) 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 this section" nor the various "conditions" outlined in the letter of approval add anything to or detract anything from the scope of the approval. [p.113E-H]
7.1 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 68 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. [p.100DE] Kanga & Palkhivala on the Law and Practice of Income- Tax (Vol. I Eighth Edition), referred to.
7.2 Contracts of the type envisaged by section 80-O 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. [p. 100CD]
7.3 If, a contract obliges the assessee to make available information and render services to the foreign Government of the nature outlined in section 80-O, 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. [p.100FG]
CIVIL APPELLATE JURISDICTION : Civil Appeal NO. 3458 of 1990.
Appeal by certificate from the Judgment and Order dated 24.5.1990 of the Delhi High Court in I.T.R. No. 110 of 1987.
F.S. Nariman, Srinivasan, Bishamber Lal Khanna, Harsh Salve, Subhash Sharma, D.N. Sawhney, Ms. Geetanjali Mohan and Vineet Kumar for the Appellant.
S.C. Manchanda, Ms. A. Subhashini and B.B. Ahuja for the Respondents.
The Judgment of the Court was delivered by RANGANATHAN, J. This is an appeal preferred by M/S. Continental Construction Ltd. (hereinafter called `the assessee') from the judgment of the Delhi High Court in I.T.R. 110 to 112 of 1987 (reported in 1990-185 I.T.R.178) answering, against the assessee, the following questions of law referred to it under section 256 of the Income Tax Act, 1961 (`the Act') :
1. "Whether on the facts and in the circumstances of the case the Tribunal is right in holding that the income arising from the 69 activities pursuant to the seven agreement with foreign governments /enterprises, etc. are governed by the provisions of section 80-HHB of the Income-Tax Act, 1961 and not of section 80-O of that Act?
2. "Whether on the facts and in the circumstances of the case, the Tribunal was right in holding that notwithstanding the approvals granted by the Board to the seven agreements for the purpose of section 80-O, for the purpose of assessment for assessment year 1983-84, the income arising from these contracts have to be brought under section 80-HHB of the Income-Tax Act, 1961?" 3."Whether on the facts of the case, the Tribunal is right in holding that the income from the entire activities under the seven agreements cannot be bifurcated and is wholly covered under section 80- HHB of the Income Tax Act, 1961?" 4."Whether on the facts and in the circumstances of the case, the Tribunal is right in holding that the assessee company is not an `industrial company' as defined in the Finance Act, 1982?" The first two Income-Tax References were made to the High Court at the instance of the assessee which was dissatisfied with the decision of the Income Tax Appellate Tribunal on these qestions : there were two references because the above qestions arouse out of two cross-appeals before the Tribunal - one by the assessee and the other by the Department. This appeal by the assessee, CA. 3458 of 1990 is disposed by the present judgment.
The third reference (I.T.R. 112/87) was made by the Tribunal at the instance of the Department on a totally different question which related to the interpretation of sections 40(c) and 40A(5) of the Act. The High Court answered all the three references in favour of the assessee and the aggrieved Commissioner of Income Tax (C.I.T.)_ has preferred an appeal to this Court from that part of the judgment being C.A. 3458-A of 1990. But that question has no connection with the other four question set out earlier.
We have, therefore, delinked the appeal by the C.I.T. for separate hearing. Also, of the four questions posed above in the assessee's appeal, counsel for the appellant has stated that he is not pressing question No. 4 before us. We, therefore, do not express any opinion on it and merely dismiss the appeal in so far as this question is concerned.
In the result, we confine this judgemnt to the assessee's appeal and to the first three of the four questions set out above.
The questions arise out of the assessee's assessment to income tax for 70 the assessment year 1983-84 (the calendar year 1982 being the relevant previous year). Section 80-O of the Act, under which the assessee claimed deductions, provides for a deduction, in computing the total income , in respect of royalties etc. from certain foreign enterprises. This topic was originally dealt with by section 85-C. Section 80-O was substituted in its place w.e.f. April 1, 1968. The section has since undergone amendments from time to time. As on 1.4.83, the provision, in so far as is relevant for our purposes, was in the following terms :
Section 80-O Deduction in respect of royalties etc.
from certain foreign enterprises.
"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 assesse, 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 the whole of such income so received in, or brought into India in computing the total income of the assessee.
During the currency of this provision, the Finance Act, 1982 introduced a new section 80-HHB w.e.f. 1.4.1983. This provision reads thus :
Section 80-HHB Deduction in respect of profits and gains from projects outside India - (1) Where the gross total income of an assessee being an Indian company or a person (other than a company) who is resident in India includes any profits and gains derived from the business of 71 (a) the execution of a foreign project undertaken by the assessee in pursuance of a contract entered into by him, or (b) the execution of any work undertaken by him an forming part of a foreign project undertaken by any other person in pursuance of a contract entered into by such other person, with the Government of a foreign State or any statutory or other public authority or agency in a foreign State, or a foreign enterprise, there shall, in accordance with and subject to the provision of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to twenty five per cent thereof :
Provided that the consideration for the execution of such project or, as the case may be, of such work is payable in convertible foreign exchange.
(2) For the purposes of this section - (a) "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 Foreign Exchange Regulation Act, 1973 (46 of 1973), and any rules made thereunder :
(b) "foreign project" means a project for - (i) the construction of any building, road, dam, bridge or other structure outside India;
(ii) the assembly or installation of any machinery or plant outside India;
(iii) the execution of such other work (of whatever nature) as may be prescribed.
(3) The deduction under this section shall be allowed only if the following conditions are fulfilled, namely :- (i) the assessee maintains separate accounts in respect of the profits and gains derived from the business of the execution of the foreign project, or, as the case may be, of the work forming part of the foreign project undertaken by him and, 72 where the assessee is a person other than an Indian company or a co-operative society, such amounts have been audited by an accountant as defined in the Explanation below sub-section (2) of section 288 and the assessee furnishes, along with his return or income, the report of such audit in the prescribed form duly signed and verified by such accountant :
(ii) an amount equal to twenty five per cent of the profits and gains referred to in sub-section (1) is debited to the profit and loss account of the previous year in respect of which the deduction under this section is to be allowed and credited to a reserve account (to be called the "Foreign Project Reserve Account") to be utilised by the assessee during a period of five years next following for the purposes of his business other than for distribution by way of dividends or profits;
(iii) an amount equal to twenty five per cent of the profits and gains referred to in sub-section (1) is brought by the assessee in convertible foreign exchange into India, in accordance with the provisions of the Foreign Exchange Regulation Act, 1973 (46 of 1973), and any rules made there under, within a period of six months from the end of the previous year referred to in clause (ii) or, where the Chief Commissioner or Commissioner is satisfied (for reasons to be recorded in writing) that the assessee is, for reasons beyond his control, unable to do so within the said period of six months, within such further period as the Chief Commissioner or Commissioner may allow in this behalf :
Provided that where the amount credited by the assessee to the Foreign Projects Reserve Account in pursuance of clause (ii) or the amount brought into India by the assessee in pursuance of clause (iii) or each of the said amounts is less than twenty five per cent of the profits and gains referred to in sub-section (1), the deduction under that sub-section shall be limited to the amount so credited in pursuance of clause (ii) or the amount so brought into India in pursuance of clause (iii) whichever is less.
(4) If at any time before the expiry of five years from the end of the previous year in which the deduction under sub-section (1) is allowed, 73 the assessee utilises the amount credited to the Foreign Projects Reserve Account for distribution by way of dividends or profits or for any other purpose which is not a purpose of the business of the assessee, the deduction originally allowed under sub-section (1) shall be deemed to have been wrongly allowed, and the Income-tax Officer may, notwithstanding anything contained in this Act, recompute the total income of the assessee for the relevant previous year and make the necessary amendment; and the provisions of section 154 shall, so far as may be, apply thereto, the period of four years specified in sub-section (7) of that section being reckoned from the end of the previous year in which the money was so utilised.
(5) Notwithstanding anything contained in any other provision of this Chapter under the heading "C- Deductions in respect of certain incomes", no part of the consideration or of the income comprised in the consideration payable to the assessee for the execution of a foreign project referred to in clause (a) of sub-section (1) or of any work referred to in clause (b) of that sub-section shall qualify for deduction for any assessment year under any such other provision." .lm The three questions which are now for consideration before us raise the issue whether the assessee is entitled to a deduction under section 80-O or section 80-HHB or partly under one and partly under the other or, indeed, under neither of the provisions. We shall now proceed to set out the factual background in which the issues arise.
The assessee is a civil construction company which describes itself as Engineers and Contractors. It has executed a large number of projects overseas and in India, its projects include dams, irrigation and hydel projects, water supply and sewerage plants, marine and harbour works, airports etc. 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 n Baghdad which was of the total values of 534 million dollars. For these contracts the assessee obtained the approval of the Central Board of Direct Taxes (Board' or `C.B.D.T.') in terms of section 80-O. A broad outline of these projects can be gathered from the following table :
74 ------------------------------------------------------------------------- S. Name of Date of Name of the Date of Period of No. Project agreement Other contrac- approval approval as per ing party by Board Board's letter ------------------------------------------------------------------------- 1.Abu Sukhair 6.9.75 State Organisation 11.8.76 For assessment Project of Industrial Design years 1976-77 & Construction, Mini- to 1978-79 stry of Industry & Minerals, Baghdad (Iraq) 2.Wadi Ghan 8.8.77 Socialist people's Lib 31.8.78 For the assess- Dam -yan Arab Jamahiriya, ment years 1978- Secretariat of Dams and 79 and onwards Water Resources, Tripoli, (Libya) 3.Ammara 15.3.78 State Contracting Co. 22.2.79 "Assessment years Project for Water and Sewerage 1979-80 to Projects, Ministry of 1982-83" Municipalities, Republic of Iraq 4.Nassir- 14.12.78 Ministry of Housing & 7.2.80 "Assessment years iyah Construcion, Govt of 1980-81 and onw- Project Iraq ards" 5.Sulaim- 10.10.79 Ministry of Housing & 31.5.80 "Assessment years aniyah Construction, Govt of 1980-81 and onw- Project Iraq ards".
6.West Bank 12.4.80 Baghadad Sewerage Board 23.7.80 "Assessment years Project Construction, Govt of 1980-81 and onw- Iraq ards" 7.Karkh 17.12.80 Amanat Al-Asima, 28.10.83 "For the assessem- Project Baghdad Water Supply ent year 1982-83.
Administration, Govt. For the subseque- of Iraq, Baghdad nt period your attention is in- vited to the pro- ision of s. 80 HHB which are operative w.e.f. 1.4.83" 8.Diwan- 10.1.81 Water & Sewerage 28.10.83 -do- iyah Projects, Baghdad Project 75 In the light of these approvals, the assessee claimed and obtained deduction under section 80-O in respect of the receipts from the first six of the contracts in some of the assessment years between 1976-77 to 1980-81.
For the assessment year 1983-84, the assessee returned a gross total income or Rs. 72,67,45,938 but, as against this, it claimed a deduction of Rs. 89,16,19,198 in respect of seven of the above contracts, the eight having been completed much earlier. Of this, the deduction claimed in respect of the Karkh and Diwaniyah projects came to Rs. 77,84,29,446 and Rs. 6,36,85,436 respectively. As pointed out above, the letter of approval of the Board under section 80-O in respect of these two contracts dated 28.10.83 was limited to the assessment year 1982-83. The Inspecting Assistant Commissioner (I.A.C.), Sri Hari Narain, who completed the assessment on 26.3.1984 declined to grant the assessee any deduction under section 80-O not only in respect of these two contracts but also in respect of the other five. He was of opinion that it was section 80-HHB that applied to these agreements and not section 80-O.
However, he declined to grant any relief to the assessee even under section 80-HHB as the conditions for exemption specified in that sub-section were not fulfilled. In the result, he determined the assessee's total income at Rs. 89,41,35,103 as against the NIL income returned by the assessee, thus raising a tax demand of Rs. 66,07,72,982.
On appeal, the Commissioner of Income-tax (Appeals) gave the assessee partial relief. He agreed with the IAC that the assessee was not entitled to relief under section 80-O because : (1) the approval of the CBDT for three of the contracts did not extend to assessment year 1983-84; (2) all the contracts undertaken by the assessee were in the nature of `foreign projects' within the maning of section 80-HHB; and (3) even where the contracts had the approval of the CBDT the non-obstante provisions of section 80-HHB (5) ruled out the grant of relief under section 80-O for any of the projects. He however, felt that as the assessee had been under a bonafide belief all through that it was entitled to relief under section 80-O, it had not had a proper opportunity of putting forth its claim for relief under section 80 HHB. He, therefore, set aside the assessment to enable both sides to marshall their evidence and to enable the IAC to reappraise the assessee's claim for exemption under that section. The order of the CIT was dated 26.3.85.
The Income-tax Appellate Tribunal (ITAT) agreed with the CIT. Its conclusion, set out succinctly in para 48 of its order was thus :
"To conclude this point, we would hold that the income and consideration received by the assessee in the execution of all the seven contracts in general and the Karkh work in particular fell 76 under the provisions of section 80-HHB as the contracts were for execution of foreign projects.
We further hold that in view of the provision of section 80-HHB (5) the claim of the assessee under section 80-O cannot be considered inspite of the approval orders of the Board. This ground in the assessee's appeal has, therefore, to be rejected and the conclusion arrived at by the learned Commissioner of Income-Tax (Appeals) is upheld," It may be mentioned here that, before the appeal was heard by the ITAT, the CBDT on a representation made by the assessee and after some enquiry and correspondence, issued on 31.7.85 a letter modifying the original letter of approval of 28.10.83 in respect of the Karkh and Diwaniyah contracts. By this letter, the CBDT directed the substitution of the following words in place of the word quoted in the last column of the table set out earlier:
"Assessment year 1982-83 and onwards".
In other words, the CBDT lifted its earlier limitation of approval only to assessment year 1982-83 and made it operative even for subsequent assessment years. There has been some criticism, on behalf of the assessee, of the manner in which the Department has sought to get over the effect of modification letter attributing it to some misunderstanding or confusion. One of the assessee's principal grievances is that the ITAT has erred in accepting this explanation, treating the approval of 28.10.1983 as a qualified one and ignoring the letter of 31.7.85. We shall discuss this aspect later.
The ITAT, at the request of the assessee, referred the four questions of law which we have set out earlier for the decision of the High Court. The High Court came to the conclusion that the receipts of the assessee from the contracts did not fall within the category of receipts for which deduction is provided in section 80-O. It was of the view that the Board's approval was a qualified one which fully authorised and empowered the officer to determine whether all the conditions of the section are fullfilled as well as the amount, if any, which could be deducted under section 80-O. The Court also came to the conclusion that the execution of the work by the assessee, in the present case, fall under section 80 HHB and not section 80-O. In the result, questions 1 to 3 were answered against the assessee and in favour of the Revenue. The assessee, has, therefore, preferred these appeals.
As pointed out earlier, the assessee's claim for deduction relates to seven contracts and depends on the terms and conditions of each one of them. However, the Karkh Water Supply scheme contracts has been taken as the 77 model or specimen for purposes of discussion both because the terms and conditions of all the contracts are more or less similar and also because the deduction claimed in respect of this contract constitutes an overwhelmingly high percentage of the assessee's total claim. We shall also, therefore, proceed to discuss the issues raised in the light of the terms and conditions of this contract and the approval given therefor. Before doing so, we would like to point out that for the assessment year 1983-84 with which we are concerned, a discussion of the relative spheres of section 80-HHB and section 80-O would be called for and the assessee may get full or partial relief under either or neither of the sections for the said assessment year; but if, in the process, we come to the conclusion that the provisions of section 80-O can have no application to the contracts in question, such conclusion is bound to have repercussion also on the deductions claimed by, and allowed to, the assessee under that section in the earlier years in respect of some of the contracts.
The Baghdad Water Supply Administration (BWSA) invited tenders from 'experienced engineering consortia" to submit tenders "for the design, manufacture, delivery, supply, construction and installation, complete under a single contract of the works required" for the first stage of the Karkh Water Supply Scheme. The works comprised 'a River intake and pumping station on the west bank of the River Tigris about 30 kms. north of Baghdad; raw water pumping through twin 1800 mm diameter pumping mains to a nearby treatment works; treatment comprising essentially pre- settlement, clarification and chemical coagulation, rapid gravity sand filtration and disinfection with chlorine:
treated water storage; treated water pumping through twin 2200 mm diameter transmission pipelines to the city area, and distribution and storage within the west bank part of the city area and within the municipalities of Abu Ghraib and Taji". Five volumes of documents containing instructions, conditions, general specifications and requirements, specifications for plant and civil works, schedules, and supplementary information and a sixth volume containing 99 drawings were issued along with the tender documents. Since tenders had been called for from Consortia, the assessee joined hands with the State Contracting Company for Water and Sewerage Projects, Baghdad (SCC) to form a consortium and was able to bag the contract and an agreement was entered into on 17.12.80 between the Iraqi Government and the Consortium. The terms of the consortium between the assessee and SCC were set down in an agreement dated 18.12.80 which divided the areas of responsibility (the packages) under the contract between the two. Broadly speaking, the SCC was made responsible for the Reservoir works while the assessee was made responsible for the civil works. The total value of the contract was 325,750,000 Iraq Dinars (ID) of which 65% was 78 payable in U.S. dollars, pound sterling or Swiss francs.
The value of the package of the assessee was ID 152,956,253 (75% of which was payable in the said foreign exchange).
On 3rd March, 1981, the assessee applied to the CBDT for according approval to the contract "for the supply of civil construction know-how to the Government of Iraq" under section 80-O of the Act. A proforma prescribed by the Revenue was filled up and enclosed to the application. Para 5 to 11 of this proforma run as follows :
5. Please state whether the income is received in consideration for- (a) the use outside India of (i) any patent, invention model, design , secret, formula or process, or similar property right : No (ii) information concerning in- dustrial, commercial or sci- entific knowledge, experi- ence, or skill made available Yes (b) technical services rendered Techincal services will be or agreed to be rendered outside rendered by us to Baghadad India (Please also state the arr- Water Supply Administration, angements availabe with the appli- Government of Iraq in accord- cant for rendering such technical ance with the said agreement services and the mode of tendering dated 17.12.80. The technical such services). know-how and services will be rendered by us through our qu- alified experienced and skilled Engineers, Scientists and Tech- nicians, for that purpose, a strength or about 1,800 Indian Engineers, Tecnicians and semi- skilled labours will be inducted.
6.Does the Agreement provide for The agreement also provides for supply of technical know-how or the supply use of goods as per rendering of any services other details given below :
than those covered by section 80-0(e.g. use of trade marks or supply of goods) if so Machinery, plant, Equipment, Ve- please specify them and also hicles cement, steel-bars, Sand the amount of consideration Aggregate, Bitumen, Fencing-fabri c, receivable/received in resp- Shuttering material, Steel pipes, ect of them. Patent items, projection cladding ceiling, Joining, Steel Pipes wit h joining and aductile iron pipes e tc.
The cost of 79 supply of these tiems will be det er- mined at the close of each year a s the work progresses. The total va lue of the contract is ID 152,956,253 .
After taking out the net cos t of machinery & equipment and other e mbed- ded items, as mentioned above (in whi- ch no profit elements is involved ), from the total value of the Contr act the remaining amount will be the value of technical know-how and s erv- ices to be rendered by us under t his contract, It is this amount for w hich we are seeking exemption u/s 80-O .
7.If technical know-how falls Not applicable.
under 5(a)(i) above, please indicate.
(a) how the applicant acquired Not applicable.
it or what arrangements he has made for acquiring it (b) What are the applicant's own Not applicable.
rights in respect thereof (c) Whether its provision to the other party to the agreement involves :- (i) transfer of all or any rights of the applicant in respect of Not applicable.
it, if so, please specify the nature and extent of the right transferred and the manner of its transfer :
(ii)the imparting of any information concerning its working or use; if so, please specify the information Not applicable.
imparted and the manner of its imp- arting;
(iii)its use by the other person to the agreement if so, please specify the nature and manner of the use. Not applicable.
8.If the technical know-how falls under (a)(ii) above, please specify 80 (a) the arrangements available with the we have on our rolls qual ifed applicant for obtaining and impart- Engineers and Technicians who ing it have already acquired the re- quisite scientific knowle dge, experience and skill for giv- ing such technical know-h ow and it is they, who will be imparting the same to the client by executing the w orks at the site in Iraq.
(b) the manner of imparting it The Engineers and Technici ans will be working for about 5 years at the site of const r- uction to impart the techn ical know-how and services on b e- half of our Company.
9. Has the applicant made any agree- ment or arrangement with any other person in India or abroad for obta- ining the technical know-how etc., Not applicable.
to be provided under this agreement or for rendering technical services? If so please give the follwing infor- mation :
(i) the name and address of such Not applicable.
other person;
(ii) details of the agreement or ar- rangement together with a cer- Not applicable.
tified copy of the written agreement, if any.
(iii)the nature, and extent of appli- cant's relationship association Not applicable.
with such other person.
10. Please state the nature of the income Income out of imparting c ivil in respect of which deducation is claimed, construction know-how and viz.., services for the connstru c- tion of work of Karkh Wat er Supply Scheme, Baghdad.
Royalty Commissin Fees 81 Any similar payment
11. Please indicate the portion/amount (alongwith its computation) which is Please see our reply under eligible for deduction under section S. No. 6 of this form.
80-O of the Act.
On 9.7.81, the C.B.D.T. called upon the assessee to clarify four aspects of its application : (i) the details or the materials and equipment to be supplied by the assessee under the contract and the quantum of profit thereon; (ii) whether any engineers, scientists and technicians were recruited in India and there was any fee attributable to such services ; (iii) whether any tests on materials and workmanship were carried out in India and there was any fee attributable to such tests; and (iv) the break-up of the fee relating to the supply of information/know-how and rendering of the technical services. The assessee answered in the following terms on 4.8.1981 :
"As desired, the information/ clarification is furnished below :- (i) Our contract is for civil construction and know-how. The use of materials and equipment is part of these services. There is no separate supply of materials and equipment.
As such the question of any separate quantum of profit on the same does not arise. As the material is purchased locally in Iraq, there is no possibility or making any profit on its consumption in execution of the works.
(ii) The qualified experienced skilled engineers, scientists and technicians are our employees and sent to Iraq for executing the work under contract. We do not avail of the service of any agency for the purpose. As such there are no recruitment expenses involved. Consequently no fee can be attributed on the transfer of our workers to foreign country.
(iii)No tests will ever be taken in India because all works will be executed in Iraq. The question of attributing any fees to such test in India, therefore, does not arise. These tests are part of the process undertaken to render technical know-how (Vi) The profits which will accrue to our Company will be the gross contracts receipts less expenses incurred in supplying technical know- how and execution of the works, It is 82 estimated that this will be about 25% of the contract value. The exact amount may vary and will be known only after the works have been completed." There was further correspondence, discussion and hearing including a detailed letter of the assessee dated 24.12.1981 and clarificatory letters dated 15.2.1982, 17.3.1982, 9.10.1982, some of the contents of which may have to be referred to later. Eventually, the C.B.D.T. accorded its approval to the agreements, as already maintained, on 28.10.1983. The letter of approval has to be extracted here. It runs :
"I am directed to refer to your application 3.3.1981 received with your letter No. 601/IT/80-O dated 3.3.1981 and to convey the approval of the Central Board of Direct Taxes to the agreement entered into between you and M/S. Amanat Al-Asima Baghdad Water Supply Administration, Government of Iraq, Baghdad, on 17.12.1980 for the purpose of section 80-O of the Income-Tax Act, 1961, for the assessment years 1982-83. For the subsequent period your attention is invited to the provision of Sec. 80-HHB which are operative w.e.f. 1.4.1983.
2. The income allowable as a deduction for the assessment year 1981-82 and onwards would be the income computed after accounting for expenses incurred in earning such income i.e. net income.
3. The actual deduction to be allowed will, however, be such portion of the income which has been 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 in accordance with the law for the time being in force for regulating payment and dealings in foreign exchange.
4. The grant of deduction from the total Income will be subject to your fulfilling the other conditions laid down in the Act in this behalf.
The amount eligible for deduction will be determined by Income-tax Officer at the time of assessment.
5. This approval is subject to any amendment in the provisions of the Income-tax Act, 1961, from time to time.
83
6. I am further to add that the approval accorded by this letter is only for the purpose of section 80-O of the Income-tax Act, 1961, and should not be construed to convey the approval of the Central Government or Central Board of Direct Taxes or any other statutory authority under the Government for any other purposes." It may be mentioned that even while the assessee's applications for approval to the Kharkh & Diwaniya contracts were pending, the Finance Act, 1982 had amended the Act to insert section 80-HHB with effect from 1.4.1983.
This amendment compelled the assessee to send a letter to the C.B.D.T. on 9.10.82 explaining that this new provision would not stand in the way of approval being accorded to its contracts under section 80-O. But despite the pleas in this letter the C.B.D.T., in para 1 of its letter of approval of 28.10.1983 restricted the approval to assessment year 1982-83. The assessee, therefore, wrote again in detail on 2.12.1983, urging the Board that the reference to section 80-HHB in the letter of approval was uncalled for and that the approval granted should be made valid for the entire duration of the contract. The material on record shows that this letter was the subject of careful consideration by the C.B.D.T. which finally issued a clarification in the following terms on 31.7.1985, more than a year and a half later :
"With reference to your representation dated 2.12.83 on the above subject, I am directed to say that for the words and figures "assessment years 1982-83. For the subsequent period your attention is invited to the provision of section 80-HHB which are operative w.e.f. 1.4.83," appearing at the end of para 1 of the Board's letter F. NO. 473/46/81- FTD dated 28.10.83, the following words and figures may please be substituted :
"assessment years 1982-83 and onwards" It appears that though the above intimation to the assessee was cryptic, the CBDT had decided to extend the period of operativeness of its approval under section 80-O only after consulting the Attorney General of India (A.G.).
The CBDT had circulated the opinion of the A.G. in this case along with the statement of case put up to him for opinion to all the officers of the Departments. On 14.8.1985, the CIT Central-I), New Delhi wrote a letter to the concerned member of
