Gannon Dunkerley And Co. Ltd. And Another v. Central Board Of Direct Taxes And Others

Pratap, J.:— The central issue in this petition relates to the interpretation of section 80-O of the Income-tax Act, 1961.

2. The 1st petitioner is a public limited company (hereinafter “the company”), petitioner No. 2 being one of its directors and shareholders. The company is engaged in civil and mechanical engineering, construction work, export, rendering technical consultancy services in India and abroad. One Engineering Projects (India) Limited (hereinafter “EPI”), a company registered under the Indian Companies Act, 1913, is wholly owned by respondent No. 4—Union of India. The objects of this latter company are, inter alia, to undertake engineering construction and projects both in India and abroad. As part of its foreign business and enterprise, in this case at Kuwait, where EPI has an office, it entered into an agreement or contract with the Government of Kuwait for setting up what is known as the 35th Brigade Camp at Alsadd in Kuwait. It was known as the 35th Brigade Camp Project. Under the contract thus entered into by EPI with the Government of Kuwait, EPI was entitled to associate with various other contractors to undertake and carry out different parts of the said project for the Government of Kuwait.

3. In pursuance thereof, the company here was selected as one such contractor by EPI and an agreement was entered into between the company and EPI under which agreement the company had to carry out certain work relating to the aforesaid project as an associate of EPI. The company started the work accordingly in or about August, 1978. On or about September 22, 1979, the company made an application to respondent No. 1, Central Board of Direct Taxts (hereinafter “the Board”), for approval of this agreement under section 80-O of the Income-tax Act, 1961 (hereinafter “the Act”). However, by its letter dated February 17, 1981 (exhibit G), the Board regretted its inability to grant the approval on the ground that the said agreement had been entered into with an Indian company, whereas section 80-O contemplated receipt of fees, etc., from a foreign government/foreign enterprise for the supply of technical know-how/technical services under an agreement. It is this refusal that is challenged by the company in this petition under article 226 of the Constitution.

4. Hearing Mr. Dilip Dwarkadas, learned counsel for the petitioners and Mr. J.P Devadhar, learned counsel for the respondents, and going through the impugned order as also the relevant portions of the agreement between the company and EPI in the context of section 80-O of the Act, a just, fair and reasonable interpretation would, in the view of this court, be that the company deserves approval of its agreement as claimed. There is no dispute that if the said agreement had been entered into specifically or in express terms with a foreign Government, the company would be entitled to the approval as claimed, as all conditions except the one above-mentioned stood fulfilled. The Board declined to grant approval on the only ground that the agreement was with an Indian company. That, however, was only apparently the position based on a superficial view of the matter. Going through section 80-O and considering the agreement and its various terms and the undisputed position on certain relevant aspects, including the paramount object (vide Board's circular, exhibit C, to the petition) behind section 80-O, the agreement here more than deserves to be approved under the said provision.

5. The agreement makes it clear that the employer is the Ministry of Defence of the Government of Kuwait. It is further clear that the company was entitled to and in fact received the payments in foreign country in foreign exchange, namely, Kuwaiti Dinars. Indeed, it is an admitted position not only that all payments were to be made in Kuwaiti Dinars but the same were to be made in Kuwait itself. Also undisputed is the position that the payments made in foreign exchange to the company at Kuwait were brought to India in accordance with law and with the permission of the Reserve Bank of India. Further, undisputed position is that the company rendered all and the entire technical and other services within the meaning section 80-O of the Act in a foreign country. Still further, EPI, a Government company registered in India, also had its branch office at Kuwait. One also cannot ignore the fact that the enterprise also was in a foreign country, namely, at Kuwait, and that it was in all material respects a foreign enterprise.

6. The terms and conditions of the agreement between EPI and the company further clearly show that the completion date would be when EPI receives in writing from the employer, namely, the Government of Kuwait, that it has satisfactorily accepted the work. The agreement further categorically specifies that all payments shall be made in Kuwaiti Dinars for the entire period of the project. The agreement further specifies that 40% of the total mobilisation advance shall be paid to the company in Indian rupees but on terms equivalent to the amount due to the company in Kuwaiti Dinars. Still further, balance 60% of the mobilisation advance had to be and was paid to the company in Kuwaiti Dinars. The company here had also to comply with all the labour and other laws as prevalent in Kuwait. Still further, the company had to reimburse EPI, the insurance premium on policies taken out by EPI for the workmen employed at Kuwait and such policies also were to be from the Kuwaiti Insurance Company. The petitioner-company herein was also liable to pay in foreign exchange penalty for delay fixed at Rs. 3,000 Kuwaiti Dinars per day of delay. The company had to further see to it that all work executed under this contract conforms in all respects to the requirements of the British Factory act of 1937 and rules in Kuwait. Still further, under clause 44 of the agreement, the company shall be subjected, inter alia, also to the provisions of the Kuwait income-tax laws.

7. Considering these several and diverse provisions, the inference is irresistible that the income received by the company here is income by by way of royalty, commission, fees or other similar payment received by it from and qua a foreign enterprise in consideration of technical services rendered outside India to a foreign government within the meaning of section 80-O of the Act. In this context, it is also relevant to note that the company had obtained registration from the Engineering Export Promotion Council and had also obtained the approval of the Reserve Bank of India as also the approval of the Industrial Development Bank of India. Also relevant is the circumstance that the quality and quantity of the work and services rendered by the company at Kuwait were checked and examined by the architects appointed by the Government of Kuwait who had to certify that the work was done satisfactorily and in accordance with the requirements of the Government of Kuwait. Indeed, no payment could be made to the company without such checking and certification.

8. The object of section 80-O of the Act, as indicated by the Board itself under its circular dated December 27, 1975 (exhibit C), is to encourage the export of Indian technical know-how and augmentation of foreign exchange resources of the country. Both these objects or objectives more than satisfactorily stand fulfilled in the present case. Indeed, contrary is not even the contention of the respondents. The agreement also complies with the guidelines evolved by the Board in its aforesaid circular.

9. It is a bona fide agreement. It is not in the least vague. Indeed, it gives sufficient and several details. Still further, it is not an agreement merely for participation simpliciter in business or management operations abroad nor is it motivated by any extraneous considerations whatsoever.

10. Thus, once the outer veil is removed and the core and substance is reached, seen and considered, one finds that the main conditions and ingredients of section 80-O of the Act stand well complied with. The apparent must be distinguished from and not confused with the real. The emerging reality must be given effect to. A superficial and narrow interpretation can only defeat the benevolent purpose behind section 80-O and the substance of the matter gets shrouded under a technicality which cannot be permitted to supersede the dominant intention of this provision. Indeed, if benefit under section 80-O was not to be made available to the company qua this project and this carefully prepared agreement, one may as well wonder for what earthly reason then would the company take all the trouble of the heavy and onerous responsibilities flowing from this agreement. It may as well work and concentrate on projects in India itself. Refusal to grant approval, in a case such as this, can as well shy away and discourage Indian companies from entering into and accepting foreign enterprises. That, in turn, can well slow down the flow of the much needed foreign exchange which our country in its present developmental and takeoff stage desperately needs. The view taken by the Board seeks to put the clock back and is a step backward at a time when the need is for a forward thrust and movement. Even if one were to assume the view taken by the Board to be a remotely plausible one, strong leaning and inclination and one fully in consonance with the national objectives (one of which is to earn foreign exchange as fast and as much as possible) should, in a case as the instant one, be to encourage Indian companies and entrepreneurs going ahead with undertaking foreign enterprises which bring to our country foreign exchange it so desperately needs at this juncture in its economic and industrial development.

Hence order:

11. This petition thus succeeds and the same is allowed. The impugned order dated February 17, 1981 (exhibit G), is set aside and quashed. The respondents are directed to approve the agreement (exhibit B) under section 80-O of the Income-tax Act, 1961.

12. Rule is made absolute in terms aforesaid but, in the circumstances, with no order as to costs.