The Indian Hume Pipe Co. Ltd. v. The Central Board Of Direct Taxes & Others

Mrs. Sujata V. Manohar, J.:— The petitioner is a Public Limited Company registered under the Indian Companies Act, 1956. The petitioner carries on business of manufacture and sale of hume pipes. In the course of its business over the years the petitioner has acquired considerable technical knowledge, information and skill relating to manufacture of all types of concrete pipes-plain, reinforced, prestressed etc. The petitioner also has Research and Development Department for development of its own designs for manufacture of prestressed concrete pipes.

2. An organisation known as “The Water and Power Development Consultancy Services (India) Ltd.” (hereinafter referred to as ‘WAPCOS’) is established by the Government of India with the object of providing consultancy services in connection with planning, development of irrigation, water supply, power, flood control and integrated agricultural development. In or about October 1974 the Rangoon City Development Committee requested WAPCOS to provide consultancy services for Rangoon City Muncipal Water Supply Project. WAPCOS were required to supervise inter alia, production of prestressed concrete pipes, laying of prestressed concrete transmission mains and specials from Pugyi reservoir to Rangoon and construction and supervision of prestressed concrete pipe plant.

3. WAPCOS in turn requested the petitioners to collaborate with WAPCOS. The petitioners agreed to make their technical expertise available for the said work. By their letter of 17th December 1974 the petitioners agreed to supply their expertise for the various jobs set out in that letter. The petitioners also mentioned that their experts wilt be backed by the Designs and Development Organisation of the petitioners in discharging their duties efficiently; they-would also provide facilities for training the engineering staff of Rangoon City Municipal Committee, if so required, at their works in India. The petitioners agreed to limit their role to that of Consulting Engineers. Thereafter the work of providing consultancy services to Rangoon City Municipal Committee at Rangoon Burma for the Rangoon Water Supply Project was awarded, with the approval of the Asian Development Bank, to WAPCOS. The contract between Rangoon City Development Committee and WAPCOS is dated 5-2-1976. Under the contract the services of certain personnel which are specified by name in the contract, agreed to be provided as set out in that contract. All the personnel who are so required to provide their services are the personnel of the petitioners. The agreement sets out the payments to be made for the services of these personnel and the rates at which these payments are to be made. These are the only payments to be made under the contract of 5-2-1976.

4. Prior to the finalisation of the said contract, WAPCOS by their letter dated 3rd December 1975 addressed to the petitioners conveyed to them the terms and conditions on which the contract was to be finalised by them with Rangoon City Municipal Committee. Paragraph 2 of the said letter stated that 20% of the total payment to the experts under the contract from the petitioners, will be retained by WAPCOS to cover promotional and other overheads and 80% will be made available to the petitioners. The latter said: “We will make the payment available to you in foreign exchange and local currency in the same proportion as received by us.” In paragraph 3 it was set out as follows:

“We will be given an advance payment of US $ 100,000/- out of which equivalent to US $ 19,810/- will be paid in local Kyats in Rangoon. We would made available to you the proportionate advance when received, after signing of the contract.”

5. Thus, under the terms and conditions of the contract between Rangoon City Development Committee and WAPCOS the payments were in respect of services of the personnel of the petitioners. The agreement between the petitioners and WAPCOS shows that WAPCOS and the petitioners were to divide the total payment received under the contract dated 5-2-1976 in proportion of 20% and 80%. WAPCOS were bound to hand over the entire share of 80% of the petitioners received under the said contract between Rangoon City Development Committee and WAPCOS to the petitioners. In other words, though WAPCOS received the entire payment from Rangoon City Development Committee, in respect of the share of the petitioners, WAPCOS were merely the agents receiving payment on behalf of the petitioner. This is also clear from the letter of 31st March 1980 which the petitioners have obtained from Rangoon City Development Committee. The letter of Rangoon City Development Committee confirms that since inception they were aware of the petitioners' association with WAPCOS in rendering consultancy services at Rangoon for their project because these facts were clearly revealed in the global tender submitted by WAPCOS for this project. The petitioners' participation was recognised and approved before the contract was awarded to WAPCOS. What is important, the letter says: “…your share of fees for rendering consultancy services to us was permitted by us to you along with WAPCOS share of fees through the good offices of WAPCOS as your agent in our foreign exchange.” Subsequently after WAPCOS obtained permission of the Reserve Bank of India, the petitioners, as from December 1978 onwards, are receiving directly payment in foreign currency viz. U.S dollars from WAPCOS in respect of the services rendered by them under the said contract.

6. The petitioners by their letter of 26th September 1977 made an application to the Central Board of Direct Taxes for approval of the agreement dated b-2-1976 under Section 80-O of the Income Tax Act, 1961. By their reply dated 19th April 1978 the application of the petitioners has been rejected by the Central Board of Direct Taxes on the ground that the agreement of 5-2-1976 is not directly between the petitioners and the foreign party, namely Rangoon City Development Committee, Burma. The letter sets out that since the agreement is through Water and Power Development Consultancy Services (I) Ltd., Delhi, which is another Indian concern, the agreement does not qualify for registration under Section 80-O of the Income Tax Act, 1961.

7. Section 80-O of the Income Tax Act, 1961 at the material time was as follows:

80-O. Where the gross total income of an assesses, being an Indian company, includes any income by way of royalty, commission, fees, or any similar payment received by the asssessee 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 of skill made available or provided or agreed to be made available or provided to such Government or enterprises 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 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 the income so received in, or brought into India in computing the total income of the assessee.

8. Under Section 80-O, therefore, as it was in force at the relevant time, a deduction of the whole of the income brought into India was available while computing, the total income of the assessee if the income qualified under Section 80-O. The relevant requirements of Section 80-O for the present case are (i) income should be by way of fees or any similar payment; (ii) it should be received by the assessee from a foreign enterprise; (iii) it should be in consideration of technical services rendered or agreed to be rendered outside India to such foreign enterprise by the assessee; (iv) such-technical services should be rendered by the assessee under an agreement approved by the Board in this behalf; and (v) 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 the present case, the income received by the petitioners is by way of fees. These fees are in consideration of technical services rendered outside India by the petitioners to a foreign enterprise, namely Rangoon City Development Committee. The fees have been paid by Rangoon City Development Committee in US dollars, which have been brought into India. The fees are for services rendered under the agreement of 5-2-1976. The question is whether the agreement dated 5-2-1976 between WAPCOS and Rangoon City Development Committee is an agreement of the kind contemplated under Section 80-O which qualifies for approval by the Board. The second objection which is now raised by the department is that the payments are not received in India by or on behalf of the assessee. According to the department, the assessee has received payments from WAPCOS which is an Indian Company and hence such payments do not qualify for deduction under Section 80-O.

9. The application of the petitioners for approval of the agreement of 5th February 1976 has been rejected on the ground that there is no privity of contract between the petitioners and Rangoon City Development Committee. Now, Section 80-O does not state that the agreement should be between the assessee and the foreign party. Section 80-O requires that the fees should have been received in consideration of technical services rendered under an agreement approved by the Board. In the present case, the technical services have been rendered by the petitioners to the Rangoon party under the agreement of 5th February 1976. Although the agreement is not between the petitioners and the Rangoon party, the agreement in terms refers to the personnel of the petitioners by name who are required to render technical services to the Rangoon party outside India. There can be no doubt that the services rendered by the petitioners are pursuant to the agreement of 5th February 1976. Although the name of the petitioners is not mentioned in that agreement, the detailed bio-data concerning the personnel who are required to render technical services to the Rangoon party would clearly show that the technical experts are the employees of the petitioners. In fact, the Rangoon City Development Committee has clarified by its letter of 31st March 1980 that it was throughout aware of the association of the petitioners in the contractual work and in fact there was an express approval given to the petitioners' participation in the said work. Thus the petitioners have rendered technical services under the agreement of 5-2-1976 to the Rangoon City Development Committee. The petitioners have, therefore, fulfilled all the requirements of Section 80-O. There is nothing in Section 80-O which requires that the agreement referred to therein must be between the assessee and the foreign party.

10. In this connection my attention was also drawn to the provisions of section 80-MM of the Income Tax Act, 1961 which has since been repealed with effect from 1-4-1984. Under section 80-MM “the gross total income of an assessee, being an Indian Company, includes any income by way of royalty, commission or any other payment………received by the assessee from any person carrying on a business in India in consideration………under an agreement entered into by the assessee with such person on or after the 1st day of April, 1969, and approved by the Board in this behalf, there shall………be allowed a deduction from such income of an amount equal to lorry per cent thereof……..” (Italics mine). The language of section 80-MM shows that where an agreement is required to be between an assessee and a third party, the section in terms prescribes this requirement. Any such express requirement that the agreemerit should be between the assessee and the foreign party is absent from Section 80-O. Therefore, under section 80-C it is not necessary that the agreement referred to therein should be between the assessee and the foreign party. All that is required is that the assessee should have rendered (inter alia) technical services under an agreement; and this agreement should be approved by the Board. The rejection of the petitioner's application for approval of the agreement on the ground that there is no privity of contract between the assessee and the foreign party, therefore, is not warranted by the provisions of Section 80-O. The section merely requires that fees should have been received in consideration of technical services rendered under an agreement approved by the Board. The petitioner qualify under this provision for getting the agreement of 5-2-1976 approved. The Board, therefore, cannot refuse its approval only on the ground that the petitioners are not parties to the agreement.

11. It is further submitted on behalf of the department that in the present case the assessee has not received any income inconvertible foreign exchange from outside India. It is the submission of the department that the income received by the assesses is the payment received by the assessee from WAPCOS pursuant to an agreement between WAPCOS and the petitioners. In the first place, this was not a ground for rejecting the petitioner's application. Anyway, this submission is not supported by the terms of the agreement of the 5th February 1976 or the nature of the arrangement between the petitioners and WAPCOS. As set out earlier, the petitioners are entitled to receive payment in their own right in respect of services rendered by the employees of the petitioners outside India. Under the agreement between WAPCOS and the petitioners, WAPCOS are entitled to retain 20% of this income for their promotional expenses and over-heads. The balance of 80% of the income is to be received by the petitioners. WAPCOS are merely the agents of the petitioners for the purpose of receiving this 80% of the payment which in turn is handed over by WAPCOS to the petitioners in India. In the absence of the Reserve Bank of India permission, the payment which was received in foreign exchange by WAPCOS was converted into Indian rupees and handed over to the petitioners. This cannot make any difference to the fact that the payment was received in foreign exchange on behalf of the petitioners by WAPCOS and it is brought into India on behalf of the petitioners. In fact, under the same agreement after obtaining permission of the Reserve Bank of India the petitioners are now receiving payment in foreign exchange as from December 1978 onwards. The income, therefore, which is derived by the petitioners under the contract of 5th February 1976 is an income received in convertible foreign exchange outside India and brought into India on behalf of the assessse in accordance with law in force.

12. In this connection my attention was drawn to a decision of my brother Pratap, J., dated 10th June 1985 in 1(Gannon Dunkerley & Co. Ltd. v. The Central Board of Direct Taxes, New Delhi), in Writ Petition No. 1044 of 1981. In that case Gannon Dunkerley & Co. Ltd. had acted as sub-contractors of Engineering Projects (India) Ltd. in respect of a contract entered into by Engineering Projects (India) Ltd. with the Government of Kuwait. There was an agreement between Gannon Dunkerley & Co. Ltd. and Engineering Projects (India) Ltd. under which Gannon Dunkerley & Co. Ltd. had worked in Kuwait. The application of Gannon Dunkerley & Co. Ltd. for approval of this agreement with Engineering Projects (India) Ltd. under Section 80-O of the Income Tax Act was rejected by the Board on the ground that the agreement was with an Indian Company and hence it did not qualify for approval under Section 80-O. This contention of the Board was negatived by the High Court, which held that the main conditions and ingredients of Section 80-O were complied with. The Court said that the object of Section 80-O is to encourage the export of Indian technical know-how and argumentation of foreign exchange resources of the country. Bearing in mind the object, the agreement in question fulfilled the objectives for which Section 80-O was enacted and hence it should be held as covered by Section 80-O. The learned Judge in that case on facts came to the conclusion that the agreement in question there complied with the conditions of Section 80-O.

13. In the present case there is nothing in Section 80-O which requires that the agreement should necessarily be between the assessee and the foreign party. If the conditions set out in Section 80-O are fulfiled, the agreement would qualify for approval by the Board. The agreement of 5th February 1976, for reasons set out above qualifies for such approval.

14. In the premises, the petition is allowed and the rule is made absolute in terms of prayers (a) and (b).

15. The respondents to pay to the petitioners, the costs of the petition.

Petition allowed.