| Headnote |
Assessee-Engineering and Construction Company-Undertaking of foreign projects-Approval by Central Board of Direct Taxer-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 'fee' etc.-Deductions - Scope of-Assessee-Whether entitled to relief under S. 80-0 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 litigation project, water supply project etc.-Services involving specialised knowledge, experience and skill in constructional operations-- Whether are 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. 80-0 and 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 Taxe Circulars No. 187 dated 23.12.1975 & 253 dated 30.4.1979. Letters dated 28.10.83 and 31.7.1985-Board 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.Words and Phrases:'business of execution of a foreign project', 'profits derived', 'royalty', 'similar', 'technical services'-Meaning of. Section 80-0 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, describingitself as Engineers and Contractors, executed projects overseas and in India. It undertook certain contracts for construction, inter alia, of a damand irrigation project, a fibre-board factory and a huge water supply project in foreign countries. One of its projects, called the KarkhProject, 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 KarkhWater Supply Scheme. Since tenders had been called for from consortia the assessee associated with the State Contracting Company for Waterand Sewerage Projects, Baghdad (SCC) and formed a consortium and the said consortium entered into an agreement on 17 .12.1980 with theIraqi Government. The terms of the consortium between the assessee and SCC were set out in another agreement dated 18.12.1980 dividingthe area~ 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 80-0 of theIncome-Tax Act, 1961. In para S(a)(ii) of the proforma of the application prescribed for the purpose, the assessee indicated that "informationconcerning industrial, commercial, or scientific knowledge or skill" was being made available outside India; and in Column S(b) thereof itmentioned that technical services would be rendered by the assessee to 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 insertedto 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 foreignproject undertaken by the assessee with the government of a foreign State/enterprise. Sub-section (5) of section 80-HHB provided that notwithstanding any provision in Chapter VIA of the Act, no part of any consideration or of the income comprised in the consideration payable tothe 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 forthe 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 years 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 ofRs. 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 InspectingAssistant Commissioner (IAC) declined to grant the assessee any deduction under section 80-0 not only in respect of these two projects but alsofor 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 totalincome at Rs. 89,41,35,103 raising a tax demand of Rs. 66,07,72,982. On appeal, the Commissioner of lncome Tax (Appeals) agreed with the IAC to the extent that the assessee 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 approval of the CBDT section 80-HHB (5) ruled out the grant of relief under section 80-0 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 80-0, 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 IT AT 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 80-0; the receipts of the assessee from the contracts did not fall within the category of.receipts for which deduction is provided in section 80-0; 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 80-0. 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 or its business or 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 80-0 as the receipts did not fall under any of the categories .either or 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 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 foreigngovernment; (5) even assuming that the whole or atleast a part of the consideration payable to the assessee falls under section 80-0, still as persub-section (S) 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 80-0 it 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 80-0. On behalf of the assessee it was contended that since the insertion of section 80-HHB has not resulted in the deletion of section 80-0, 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 affect 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 80-0 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 80-0 is granted (on whatever date it be) the approval should ensure for the entire period of contract and cannot be restricted to any particular assessment year or years. On the question whether the assessee is entitled to a deduction under section 80-0 or section 80-HHB or partly under one or partly under the other or under neither of the provisions. |
