Bookmark
PDF
Share
CaseIQ

Ghai Lamba Catering Consultants P. Ltd. v. Central Board Of Direct Taxes And Another.

Delhi High Court

Apr 27, 1979

Judgment

Subsequent
References

CaseIQ

Important Paras

Please sign up to view Important Paras.

Smart Summary (Beta)

Factual and Procedural Background

This judgment disposes Civil Writ Petition No. 46 of 1979 and another petition because the agreements in both cases are identical. The central procedural context is a challenge to the decision of the Central Board of Direct Taxes (respondent No. 1) refusing approval of an agreement under section 80-O of the Income-tax Act, 1961.

Brief factual narrative (as stated in the opinion):

On 16 January 1971 the petitioner-company entered into an agreement with M/s. G.L. Restaurants Ltd., a London company, to render assistance, technical know-how and management services for running restaurants. Relevant clauses described the Indian company acting as manager/consultant, the availability of services of directors Mr. Ghai and Mr. Lamba on a part-time basis, and the intention that the Indian company nominate two directors on the board of the English company.
The agreement provided that the Indian company would receive 25% of annual net profits of the English company and 25% of all net capital profits (including surplus on winding up, subject to an exception for reconstruction), and would have significant managerial authority (including major policy decisions).
M/s. G.L. Restaurants P. Ltd. issued 20,000 shares; the petitioner held 6,400 shares (stated as about 30% of share capital).
The petitioner applied to the Central Board of Direct Taxes for approval of the agreement under section 80-O, supplying the agreement and describing the services as "Technical Collaboration & Management of the Gaylord (India) Restaurant" and characterising the income as share of profits and dividends.
The Central Board of Direct Taxes refused approval by letter dated 15 April 1974, stating that the arrangement was with a foreign enterprise which is a joint venture (not a principal-to-principal technical services agreement), that the services were not those contemplated under section 80-O, and that approval under section 80N could not be granted because the Indian enterprise's capital investment was intended to secure influence in the restaurant.
Against that refusal the petitioner filed the present writ petition. The court considered earlier analysis of section 80-O in Civil Writ Petition No. 901 of 1975 (J.K. (Bombay) Ltd. v. CBDT [1979] 118 ITR 312 (Delhi)) and applied its test to the present agreement.

Legal Issues Presented

Whether the agreements in question satisfy the requirements of section 80-O of the Income-tax Act, 1961.

Arguments of the Parties

Petitioner's Arguments

The services of Mr. Ghai and Mr. Lamba were on a part-time basis and therefore they could not be considered as managing the restaurants (aiming to distinguish this case from the prior J.K. (Bombay) Ltd. decision).
The Indian company had no power to appoint any employee in the English company without the previous approval of Mrs. Kaul, suggesting limits on managerial control.
The Central Board of Direct Taxes denied approval after an inordinate and inexplicable delay, despite assurances from the Ministries of Tourism, Commerce and Finance that approval would be forthcoming; the petitioner relied on a letter dated 27 February 1969 from the Director, Ministry of Finance, as an assurance that the concession under sections 80-O and 80N would be available if conditions were fulfilled, and contended it incurred expenses in reliance on that assurance.

Respondent's (Central Board of Direct Taxes) Position

The Board refused approval on the grounds that the arrangement was with a foreign enterprise which is a joint venture and the agreement could not be regarded as being on a principal-to-principal basis required by section 80-O.
The services to be rendered were not those contemplated under section 80-O.
Because the Indian enterprise's capital investment was, by their admission, intended to prevent exclusion from having a say in the restaurant, approval under section 80N could not be granted.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
J.K. (Bombay) Ltd. v. CBDT, [1979] 118 ITR 312 (Delhi)	The interpretation of section 80-O: (1) deduction applies only to royalty, commission, fees or similar payments for supplying information or rendering technical services, which postulates that the Indian company remains distinct from the foreign enterprise; (2) the Indian company must not run the foreign company, because if it does the payments are indistinguishable from a share in profits rather than fees/royalty/commission.	The court applied the test established in this precedent to the present agreement, finding that the present arrangement was essentially a joint venture/management arrangement and not a principal-to-principal technical-services relationship; consequently the agreement did not meet the requirements of section 80-O.

Court's Reasoning and Analysis

The court's analysis proceeded primarily by reference to the ratio of its earlier judgment in J.K. (Bombay) Ltd. v. CBDT. The court identified the significant features of section 80-O from that precedent:

Section 80-O permits deduction only for payments that are royalty, commission, fees or similar payments received for supplying information or rendering technical services; this presupposes that the Indian company remains distinct from the foreign enterprise and does not merge with it.
The Indian company must not run the foreign company; if the Indian company runs the foreign company, the payments are functionally a share of profits rather than fees/royalty/commission.

Applying those tests to the agreement under challenge, the court observed the following factual elements (all taken from the agreement and the petition):

The petitioner holds about 30% of the share capital of the English company (6,400 of 20,000 shares).
The petitioner is entitled contractually to 25% of annual net profits and 25% of net capital profits (including surplus on winding up, subject to the stated exception).
The agreement contemplated that the Indian company (through named directors) would have sole authority and final decision in all matters of major policy, and the main function was to manage and run the restaurants.
The agreement did not specify in terms what type of technical services were to be rendered.

On these facts the court concluded that the arrangement was a joint venture: the Indian company effectively participated in management and was contractually entitled to a share of profits and capital gains. The court therefore held that the payments under the agreement could not be characterised as royalty, commission, fees or similar payments contemplated by section 80-O.

The court addressed each of the petitioner's attempted distinctions and contentions, as follows:

The contention that the services of the directors were on a part-time basis and thus could not amount to managing the restaurants was rejected: the court found these clauses insignificant in light of the totality of the agreement and the effective managerial control evidenced elsewhere in the contract.
The limitation that no employees could be seconded without approval of Mrs. Kaul was also treated as insignificant when read in context with the other clauses granting substantial management authority to the petitioner-company.
The petitioner’s reliance on a letter dated 27 February 1969 from the Director, Ministry of Finance, as an assurance that the deduction would be available if certain conditions were met was rejected: the court found the letter did not constitute a definite assurance and held that the Central Board of Direct Taxes, acting as a quasi-judicial authority, was not bound by that letter.

Because the present cases fell squarely within the ratio in J.K. (Bombay) Ltd. v. CBDT, the court found no escape from the conclusion that approval under section 80-O was rightly refused.

Holding and Implications

Holding: The writ petitions are dismissed. The court held that the respondent No. 1 (Central Board of Direct Taxes) was fully justified in refusing to accord approval under section 80-O of the Income-tax Act, 1961, for the agreement in question. The petitions were dismissed with no order as to costs.

Implications:

Direct effect on the parties: The petitioner’s application for approval under section 80-O was denied and the writ petitions challenging that denial were dismissed; the petitioner remains without the sought approval and no costs were awarded.
Broader legal implication as reflected in the opinion: The court applied an existing precedent (J.K. (Bombay) Ltd. v. CBDT) and determined that these cases are fully covered by that ratio. The decision applies the established test for distinguishing payments that qualify under section 80-O (fees, royalty, commission for technical services where identity of the Indian company remains distinct and it does not run the foreign enterprise) from arrangements that are effectively profit-sharing/joint ventures and therefore outside the scope of section 80-O.

Show all summary ...

Goswamy, J.:— This judgment will dispose of Civil Writ Petition No. 46 of 1979 also as the agreements in the two cases are identical. The question for decision raised in these two petitions is whether the agreements in question satisfy the requirements of s. 80-O of the I.T Act, 1961.

2. The petitioner-company entered into an agreement on the 16th day of January, 1971, with M/s. G.L Restaurants Ltd. having its registered office at 79/81, Mortimer Street, in the county of London. Some of the relevant clauses of the said agreement are as follows:

“(1) One of the objects of the Indian company is to act as managers and consultants to companies and other business concerns and undertakings engaged in any of the business of hotel, restaurant, cafe, tavern, refreshment room and lodging-house keepers especially outside India.

(3) Mr. Ghai and Mr. Lamba in their own right are experienced in the successful management of catering establishments in India and abroad.

(4) The English company. Mr. Ghai and Mr. Lamba and an Indian partnership firm by the name of Kwality Restaurant and Ice Cream Co. have been working an agreement since the year one thousand nine hundred and sixty-six in the running of Gaylord Resturant in London on the understanding that the management of the English company would be under the overall supervision of Mr. Ghai and Mr. Lamba together with Mrs. Kaul.

(7) The Indian company is agreeable to and capable of rendering assistance in the running of restaurants and making available technical know-how for that purpose and the English company is interested in availing such assistance and utilising such technical know-how which is at the disposal of the Indian company.

(8) The English company in consideration of the Indian company having agreed to assist the English company in the manner mentioned hereinbefore and in view of the Indian company having agreed to place at the disposal of the English company services of its directors, Mr. Ghai and Lamba, on a part-time basis has agreed with the Indian company to pay to the Indian company certain of its profits and to reimburse the Indian company, Mr. Ghai and Mr. Lamba for the expenses incurred while performing their duties towards the English company.

(10) It is intended that the Indian company will be authorised to nominate two directors on the board of directors of the English company and that for the time being Mr. Ghai and Mr. Lamba shall be such directors and on the death or retirement of either of them an alternative director shall only be appointed by agreement with the remainder of the Board.

NOW THIS AGREEMENT WITNESSETH as follows:—

For the consideration aforesaid and in consideration of these presents and the agreement hereinbefore contained the English company, the Indian company and Mr. Ghai and Mr. Lamba for themselves and on behalf of the Indian company hereby mutually agree as follows:

1. The Indian company and/or Mr. Ghai and Lamba will use their best endeavours and their experience and expertise to promote and establish the English company in accordance with its memorandum and articles of association and in order to carry out their duties to the best advantage. Mr. Ghai and Mr. Lamba (or such substitutes as shall be nominated by the Indian company with the consent of Mrs. Kaul) together with Mrs. Kaul shall have such powers and authority as shall be agreed from time to time including sole authority and final decision in all matters of major policy of the English company. In the absence of Mr. Ghai and Mr. Lamba, Mrs. K???ul shall exercise management of the English company except in respect of major policy decisions which shall only be made in concurrence with Mr. Ghai and Mr. Lamba.

3. In return for the services rendered and to be rendered by the Indian company and Mr. Ghai and Mr. Lamba, the Indian company shall in every year be entitled to twenty-five per cent. (25%) of the annual net profits of the English company (after charging the salary of the then secretary for the time being but before any directors' remuneration or appropriation of profits) payment to be made in the manner hereinafter set out.

4. In addition the Indian company shall be entitled to twenty-five per cent. (25%) of all net capital profits arising for the benefit of the English company including any surplus arising on a winding up (except a winding up for the purpose of reconstruction) of the English company, the payment to be made as and when such capital profits are distributed by the English company.

11. No employees shall be seconded to the English company from India unless previously approved by Mrs. Kaul.

13. No director of either company, Mr. Ghai, Mr. Lamba nor Mrs. Kaul, shall be interested in Enlgand in any business competing or likely to compete with the English company and any further restaurants shall be joint ventures by the parties hereto.”

3. The total number of shares floated by M/s. G.L Restaurants P. Ltd., London, is 20,000 and out of these 20,000 shares, 6,400 shares are held by the petitioner-company. The petitioner-company along with its letter dated September 21, 1972, addressed to the Central Board of Direct Taxes submitted an application on the prescribed pro forma along with a copy of the agreement for rendering technical services with G.L Restaurants P. Ltd., London, for approval of the agreement under s. 80-O of the I.T Act, 1961. While giving details of technical services rendered or agreed to be rendered outside India by the petitioner-company, the petitioner-company stated “Technical Collaboration & Management of the Gaylord (India) Restaurant, 79-81, Mortimer Street, London W-1.” The nature of income in respect of which the deduction was claimed was stated to be the share of profits and dividends on shares held by the Reserve Bank licence. After hearing the petitioner-company, the Central Board of Direct Taxes, respondent No. 1 herein, refused to accord approval to the agreement in question. The reasons for the said refusal are stated in the letter of respondent No. 1 dated 15th April, 1974. The said letter is as follows:

“I am directed to refer to your letter No. GHL/74/38 dated the 25th January, 1974, on the above subject and to state that the Board had regretted their inability to approve the above agreement u/s 80-O of the I.T Act, 1961, because it is with a foreign enterprise which is a joint venture and the agreement cannot be said to be on a principal to principal basis. Further, the services to be rendered are not those contemplated under section 80-O of the Act.

2. As the capital investment of the Indian enterprise in the foreign enterprise is with a view, as per their admission, to prevent their being excluded from having a say in the restaurant after it started functioning, approval under section 80N of the Income-tax Act could also not be granted.”

4. It is against this order that the present petition was filed by the petitioner-company.

5. We had an occasion to analyse the provisions of s. 80-O of the I.T Act, in Civil Writ Petition No. 901 of 1975 decided by us on January 17, 1979 [J.K (Bombay) Ltd. v. CBDT, [1979] 118 ITR 312 (Delhi)]. After considering the entire scheme of s. 80-O, it was held in that case that the significant features of s. 80-O were as follows (p. 316):

“(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 does 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 run 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.”

6. Applying the test laid down in the aforesaid judgment there is no escape from the proposition that the agreement in question is nothing but a joint venture. The petitioner-company is holding about 30 per cent, of the share capital of the company and is entitled to 25% of the annual net profits and it is further significant to note that the petitioner-company is also entitled to 25% of all the net capital profits arising for the benefit of the English company including any surplus arising on winding up. The petitioner-company is the sole authority for major policy decisions of the English company. A perusal of the relevant clauses of the agreement reproduced above, leave no manner of doubt that the main function of the petitioner-company is to manage and run the restaurants and, in return, the Indian company is entitled to a particular percentage of profits. The agreement does not in terms state as to what type of technical services are to be rendered by the Indian company.

7. The learned counsel for the petitioner tried to distinguish the judgment in Civil Writ No. 901 of 1975 [J.K (Bombay) Ltd. v. CBDT, [1979] 118 ITR 312 (Delhi)] on the ground that, in the present case, the services of Mr. Ghai and Mr. Lamba are on a part time basis and as such they cannot be considered as managing the restaurants. It was also pointed out that the Indian company has no power to appoint any employee in the English company without the previous approval of Mrs. Kaul. In our opinion, taking the totality of the clauses of the agreement, these two clauses are very insignificant. It is a clear case of joint venture and the management is practically left with the petitioner-company. The petitioner-company is entitled to dividends on its shareholding and is getting 25% of the annual net profits. In the circumstances, the said payments cannot be termed as royalty, commission, fees or any similar payment. The last contention of the counsel for the petitioner was that the approval has been denied by the Central Board of Direct Taxes after an inexplicable and inordinate delay, when the petitioner had already incurred considerable expense in the foreign country in pursuance of the assurances already having been given at the very inception, by the Ministries of Tourism, Commerce and Finance that the approval would be forthcoming. It was submitted that the petitioner was assured by a letter dated February 27, 1969, from the Director, Ministry of Finance, Department of Economic Affairs, New Delhi, that the deduction will be available after certain conditions were fulfilled, and it was pursuant to such assurance that the petitioner fulfilled the conditions and incurred considerable expenses in making available to the foreign enterprise technical, commercial and scientific knowledge, know-how and expertise and also incurred diverse obligations in the foreign country with the foreign enterprises. We have perused the letter dated 27th February, 1969, and all that the said letter says is that the concession envisaged in s. 80-O and s. 80N of the I.T Act, 1961, would be available to the Ghai Lamba Catering Consultants P. Ltd. provided the following conditions are satisfied:

(a) Ghai Lamba Catering Consultants Private Limited is incorporated as a company under the Companies Act, 1956.

(b) The Indian company enters into a regular agreement with the foreign company for the supply to the latter of technical know-how and other services in return for fees, royalty, etc.

(c) The duly executed agreement referred to in (b) above is approved by the Central Government before the first October of the relevant assessment year. After the agreement is executed, it may be submitted to the Department of Revenue for approval.

8. In our opinion, this letter cannot be said to be any definite assurance given to the petitioner. In any case, the Central Board of Direct Taxes acting as quasi-judicial authority is not bound by any such letter issued by the Director, Ministry of Finance, Department of Economic Affairs, New Delhi.

9. For the reasons stated above, the cases are fully covered by the ratio in our judgment in Civil Writ Petition No. 901 of 1975 [J.K (Bombay) Ltd. v. CBDT, [1979] 118 ITR 312 (Delhi)] and we are of the opinion that the respondent No. 1 was fully justified in refusing to accord the approval under s. 80-O of the I.T Act, 1961. Accordingly, the writ petitions are dismissed with no order as to costs.