Deduction u/s 80-O was rightly denied as assesse worked only as an agent of foreign enterprises – Supreme Court
ABCAUS Case Law Citation:
ABCAUS 3317 (2020) (06) SC
Important case law relied upon by the parties:
E.P.W. Da Costa and Ors. v.Union of India: (1980) 121 ITR 751 (Delhi)
Capt. K. C. Saigal v. Income Tax Officer: (1995) 54ITD 488 (Delhi)
Godrej & Boyce Mfg. Co. Ltd. v. S.B. Potnis, Chief Commissioner: (1993) 203 ITR947 (Bom)
Commissioner of Income Tax v. Thomas Kurian (2012) 72 DTR (Ker)
Sun Export Corpn. v. Collector of Customs: (1997)6 SCC 564
Commissioner of Customs v. Dilip Kumar & Co. and Ors: (2018) 9 SCC 1
Commissioner of Income Tax v. Khursheed Anwar: (2009)311 ITR 468 (Mad)
M/s Continental Construction Ltd. v. Commissioner of Income Tax (1992) 195 ITR 81 (SC)
In the instant case, the appellants had been providing services to certain foreign buyers of frozen seafood and/or marine products and had received service charges from such foreign buyers/enterprises in foreign exchange.
The appellants claimed deduction u/s 80-O of the Income Tax Act 1961 (the Act). However the Assessing Officer, after going through the contents of the agreements with the foreign enterprises, was of the view that the appellant had worked only as an agent of the foreign enterprises in the matter of procurement of marine products from India; and all the services envisaged in the agreements were incidental to the carrying out of main function as agent.
The Assessing Officer denied such claim essentially with the finding that the services rendered by assessees were the ‘services rendered in India’ and not the ‘services rendered from India’ and, therefore, the service charges received from the foreign enterprises did not qualify for deduction in view of clause (iii) of the Explanation to Section 80-O of the Act.
The Income Tax Appellate Tribunal (ITAT) accepted the claim for the deduction u/s 80-O on the reasoning that as per the
agreements with the foreign enterprises, the assessee had passed on the necessary information which were utilised by the foreign enterprises concerned to make a decision either to purchase or not to purchase; and hence, it were a service rendered from India.
The High Court held that the assessees were merely marine product procuring agents for the foreign enterprises, without any claim for expertise capable of being used abroad rather than in India and hence, the services rendered by them do not qualified as the ‘services rendered from India’, for the purpose of Section 80-O of the Act.
Aggrieved, the assesses preferred appeal before the Hon’ble Supreme Court.
The Hon’ble Supreme Court observed that major and important factors related with Section 80-O of the Act of 1961, with reference to its background and its development, make it clear that the tax incentive for imparting technical know-how and akin specialities from India to the foreign countries ultimately took the shape in the manner that earning of foreign exchange, by way of imparting intellectual property, or furnishing the information concerning industrial, commercial, scientific knowledge, or rendering of technical or professional services to the foreign Government or foreign enterprise, was made eligible for deduction in computation of total income,. The finer details like those in Explanation (iii) of Section 80-O were also taken care of by providing that the services envisaged by Section 80-O ought to be rendered outside India but they may be rendered ‘from India’, while making it clear that the services which are rendered ‘in India’ would not qualify for such a deduction.
The Hon’ble Supreme Court pointed out that the proposition that in the matters of taxation, when two views are possible, the one favourable to assessee has to be preferred, stood specifically disapproved by the Constitution Bench which laid down that in no uncertain terms that exemption notification has to be interpreted strictly; the burden of proving its applicability is on the assessee; and in case of any ambiguity, the benefit thereof cannot be claimed by the subject/assessee, rather it would be interpreted in favour of the revenue.
The Hon’ble Supreme Court stated for the purpose of eligibility u/s 80-O, the service or activity has to precisely conform to what has been envisaged by the provision read with its explanation; and the other requirements of receiving convertible foreign exchange etc., are also to be fulfilled.
The Hon’ble Supreme Court rejected the contention of the appellant that the Apex Court had cautioned against making ‘a fortress out of the dictionary’ but the High Court had relied heavily on text and dictionary rather than the object of the provision.
The Hon’ble Supreme Court clarified that in taxing statute, the requirement of looking plainly at the language is more pronounced with no room for intendment or presumption. In this process, if natural, ordinary or grammatical meaning of any word or phrase is available unquestionably and fits in the scheme and object of the statute, the same could be, rather need to be, applied. The other guiding rules of interpretation would be the internal aides like definition or interpretation clauses in the statute itself. It is an accepted principle that when a word is not defined in the enactment itself, it is permissible to refer to the dictionaries to find out the general sense in which the word is understood in common parlance.
Deduction u/s 80-O not vailable to assesse acting as an agent
The Hon’ble Supreme Court observed that in the instant case, the agreements with the foreign entities primarily showed that the appellant was to locate the source of supply of the merchandise and inform the principals; to keep liaison with the agencies carrying out organoleptic/ bacteriological analysis and communicate the result of inspection; to make available to the foreign principals the analysis of seafood supply situation and prices; and to keep the foreign principals informed of the latest trends in the market and also to negotiate and finalise the prices. In lieu of such services, the appellant was to receive the agreed commission on the invoice amounts.
The Hon’ble Supreme Court observed that the activities/ services appellant was essentially to ensure supply of enough quantity of good quality merchandise in proper packing and at competitive prices to the satisfaction of the principals. This has essentially been the job of a procuring agent.
The Hon’ble Supreme Court pointed out that though the expressions “expert information and advice”, “analysis”, “technical guidance” etc., have been used in the agreements but, these expressions cannot be read out of context and de hors the purpose of the agreement. All the clauses of the agreements read together made it absolutely clear that the appellant was merely a procuring agent and it was his responsibility to ensure that proper goods are supplied in proper packing to the satisfaction of the principal.
The Hon’ble Supreme Court opined that all other services or activities mentioned in the agreements were only incidental to its main functioning as agent. Significantly, the payment to the appellant, whatever label it might have carried, was only on the basis of the amount of invoice pertaining to the goods. There had not been any provision for any specific payment referable to the so-called analysis or technical guidance or advice. Viewed from any angle, the services of the appellant were nothing but of an agent, who was procuring the merchandise for its principals; and such services by the appellant, as agent, were rendered in India. Even if certain information was sent by the assessee to the principals, the information did not fall in the category of such professional services or information which could justify its claim for deduction under Section 80-O of the Act.
Further the Hon’ble Supreme Court pointed out that as per agreements, if the quality of goods was found to be unsatisfactory to the principals after inspection, they shall have no responsibility to pay the agent’s fees. Whereas, in the ordinary circumstances, after completion of such service and its utilization by the foreign enterprises, the appellant was likely to receive the professional service charges.
Accordingly, the Hon’ble Supreme Court dismissed the appeal.
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