J K BOMBAY LIMITED Vs. CENTRAL BOARD OF DIRECT TAXES

JUDGEMENT

(1.) The question for decision raised by these writ petitions is whether the services of managing agents rendered by an Indian Company to a foreign company are "technical services" within the meaning of section 80-0 of the Income-tax Act, 1961 (the Act). Messrs. J. K. (Bombay) Ltd., an Indian Company, that is the managing agents, entered into two agreements with two foreign companies, namely, (1) The Raymond Woollen Mills (Kenya) Limited, and (2) Raymond (Mauritius) Limited. As the foreign companies were desirous of setting up Woollen Spinning and Weaving Plants and the managing agents were the managing agents of a woollen mill in India and possessed technical information and expert industrial, A commercial and scientific knowledge, experience and skill with regard to the setting up and working of woollen spinning and weaving plants, the managing agents agreed to act as the managing agents of the foreign companies for certain fixed terms. The managing agents were to be remunerated for their services by payment of 10 per cent of the net profits of the foreign companies. The managing agents were to be responsible for the design, lay-out, engineering and initial operation of the plant, for the detailed specifications of the machinery and the procurement thereof and shall make available to the company all technical information and expert industrial, commercial and scientific knowledge, experience and skill to the foreign company. In short, the managing agents were to run these foreign companies by performing the functions of management. The agreement with the foreign companies were submitted by the managing agents for approval to the Central Board of Direct Taxes. By the impugned orders, dated 17th July, 1974 in the present writ petition and 17th March, 1976 in the connected writ petition (No. 570 of 1976), the Board declined to grant its approval to these agreements. The main reason for rejecting the applications was that the role of the managing agents was primarily to manage and run the plant and not to provide or render technical services or supplying technical information of the nature provided for in Section 80-0 of the Act. The petitions seek quashing of these orders.

(2.) Section 80-0, which is to be construed is as follows : "(1) 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 Indiaor 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 the income so received in, or brought into, India in computing the total income of the assessec : Provided that the application for the approval of the agreement referred to in this sub-section is made to the Board before the last day of October of the assessment year in relation to which the approval is first sought : Provided further that approval of the Board shall not be necessary in the case of any such agreement which has been approved for the purposes of the deduction under this section by the Central Government before the 1st day of April, 1972, and every application for such approval of any such agreement pending with the Central Government immediately before that day shall stand transferred the Board for disposal.

(3.) The total scheme of the provisions of the Act in the context of which section 80-0 has to be construed may first be considered. Chapter Vl-A of the Act is entitled "Deductions to be made in Computing Total Income". The object of section 80-0 is apparently to encourage Indian companies to earn foreign exchange in consideration of the use outside India of information concerning industrial, commercial or scientific knowledge, experience or skill made available or In consideration of technical services rendered to a foreign Government or enterprise. The royalty, commission, fees or any similar payment received as such consideration by the assessee would be entitled to he deducted from the total income of the assessee for the purpose of assessment of income-tax in India. For the purpose of construction. the following significant features of section 80-0 may be noted : (1) The provision of deduction applies only to royalty, commission, fees or any similar payment. These payments are received by a company either for supplying information or for rendering technical services. This postulates that the Indian company docs not become a part of the foreign enterprise. If the two merge together then the identity of the Indian company would be lost and what would be paid would be not royalty or commission or fees, but rather a share in the profits. (2) The identity of the Indian company being distinct from that of the foreign enterprise, the Indian company must not under the foreign company. If it does so, it is difficult to separate the management function exercised by the Indian Company from the day to day working of the foreign company. (3) This necessity of the Indian company having a separate identity explains why the meaning of "technical services" to be rendered by an Indian company under Section 80-0 would have to be different from the meaning of technical services rendered by an individual. An individual would not become a part of the company under which he is serving. He would remain an employee. He cannot run a company as a whole. It would apear, therefore, that the definition of "technician" in section 80RRA(2), Explanation (c) is much wider than the scope of "technicalservices" envisaged in Section 80-0. The same reason explains why the definition of ''technician" in section 10(6) (vii) Explanation includes industrial or business management techniques. For the same reason technical services in section 9(l)(vii). Explanation 2 includes managerial services, while such services arc not included in Section 80-0.