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Smt. Kunti Verman Petitioner v. Central Board Of Direct Taxes And Another S
Factual and Procedural Background
The petitioner (Smt. Kunti Verman) is the substituted party for her late husband, Dr. Lal C. Verman. Dr. Verman entered into a retainership agreement with the General Electric Company (TEMPO), a New York incorporated company, dated August 25, 1974, which the opinion states was subsequently modified by supplementary agreements (the opinion contains references to supplementary agreements dated both November 4, 1977 and November 4, 1974, and to one dated June 27, 1975). Under the agreement Dr. Verman was retained to provide consulting services abroad for a specified term and to be paid in foreign currency at a stated daily/ monthly rate.
Dr. Verman applied to the Government of India for approval of the agreement under section 80-RRA of the Income-tax Act, 1961. By letter dated February 28, 1976 the Government rejected the application for two reasons: (a) the relationship was said to be that of an independent contractor rather than an employer-employee relationship; and (b) the concession under section 80-RRA had been announced in the Lok Sabha on February 28, 1975 (by introduction of the Finance Bill, 1975) and the retainership agreement was entered into on August 25, 1974 (i.e., before the provision came into force), so the concession was said to be unavailable. Aggrieved, Dr. Verman filed a writ petition; following his death his wife was substituted as petitioner. The writ petition challenged the Government's refusal to approve the agreement under section 80-RRA.
Legal Issues Presented
- Whether a consultant or technician retained and paid in foreign currency by a foreign company falls within the ambit of section 80-RRA (i.e., whether the expressions “employee”/“employer” and “remuneration” in section 80-RRA cover retainers/consultants and fees and are not limited to a conventional salary–employee relationship).
- Whether section 80-RRA (inserted by the Finance Act, 1975) is applicable to payments/periods relevant to the assessment year 1975-76 and specifically to an agreement entered into on August 25, 1974 — in other words, whether the timing of the agreement (before introduction/passage of the Finance Bill/Act) precludes the claimed benefit.
Arguments of the Parties
Petitioner's Arguments
- The petitioner relied on the Supreme Court decision in Central Board of Direct Taxes and others v. Aditya V. Birla (1988) 170 I.T.R. 137 (and related High Court decisions), which, it was submitted, holds that the expressions “employee” and “employer” cover consultants and technicians and that “remuneration” is not limited to “salary”.
- The petitioner argued that section 80-RRA came into force from April 1, 1975 and therefore applied to the assessment year 1975-76 (the previous year ending March 31, 1975), so the petitioner’s husband’s claim for the accounting period ending March 31, 1975 was within the scope of the provision.
Respondents' Arguments
- The Government of India defended its rejection, arguing that the contractual relationship was that of an independent contractor (not employer/employee), and therefore section 80-RRA did not apply.
- The Government also contended that because the retainership agreement was entered into on August 25, 1974 (prior to the announcement/introduction of the Finance Bill on February 28, 1975), the concession under section 80-RRA was not available to the petitioner.
Table of Precedents Cited
| Precedent | Rule or Principle Cited For | Application by the Court |
|---|---|---|
| Central Board of Direct Taxes and others v. Aditya V. Birla, (1988) 170 I.T.R. 137 | Held that the expressions “employee” and “employer” cover consultants and technicians; “remuneration” is not to be confined to salary and covers fees received by consultants/technicians paid in foreign currency. | The court relied on this Supreme Court ruling as controlling: it concluded that a consultant/technician retained by a foreign employer and paid in foreign currency falls within section 80-RRA (subject to fulfillment of conditions), and therefore the Government's first reason for refusal (that the relationship was not employer-employee) was unsound. |
| Aditya V. Birla v. Central Board of Direct Taxes, (1986) 157 I.T.R. 470 (Bombay High Court) | Earlier High Court decision affirmed by the Supreme Court on the same legal point regarding the scope of “employee”/“remuneration”. | The opinion cites the Supreme Court's affirmation of the High Court's view to support the conclusion that retainers/consultants are covered by section 80-RRA. |
| Ellis v. Joseph Ellis & Co., [1905] 1 KB 324 (CA) | Interpreted the verb “to employ” to mean to retain and pay a person; “employ” may not always require actual, continual service and depends on context. | The opinion cites this authority (through the Aditya V. Birla discussion) to explain how “employ” may be interpreted in statutory contexts and to support the broader understanding of “employee” in section 80-RRA. |
| Morren v. Swinton and Pendlebury Borough Council, [1965] 1 WLR 576 (QB) | Held an engineer appointed to supervise works (not subject to the authority’s supervision) to be an “employee” within a statute’s meaning — illustrating contextual interpretation of “employee”. | The court used the case as an illustrative authority (via discussion in Aditya V. Birla) to support the proposition that “employee” can include persons such as consultants/technicians depending on statutory context. |
Court's Reasoning and Analysis
The court first reproduced the full text of section 80-RRA of the Income-tax Act, 1961, including the 50% deduction rule for remuneration received in foreign currency from a foreign employer for services rendered outside India, the 36-month proviso, the conditional rules in sub-section (2) and the Explanation defining “foreign employer” and “technician”. The statutory text and definitions formed the foundation of the analysis.
The court then considered the Supreme Court's interpretation in Central Board of Direct Taxes v. Aditya V. Birla (supra). That decision held that the expressions “employee” and “employer” in section 80-RRA have a wide amplitude and include consultants and technicians; “remuneration” is not restricted to “salary” and therefore fees paid to consultants in foreign currency are covered. The opinion quoted and relied on the Supreme Court's reasoning (including references to English authorities such as Ellis and Morren used by the Supreme Court) to conclude that a consultant retained and paid by a foreign employer falls within the statutory language of section 80-RRA, subject to the section's conditions.
Applying that legal principle to the facts of this case, the court observed:
- Dr. Verman was retained as a consultant/technician and paid a fee in foreign currency by a foreign employer. The agreement specified payment terms (the opinion cites clause 2 of the agreement specifying a stated dollar rate plus 17% per day for each day worked).
- It was common ground that the petitioner’s husband was not employed beyond 36 months (so the proviso limiting deduction after 36 months did not apply), and his bio-data showed he was a highly qualified and experienced technician (so the statutory requirement as to being a technician was not a ground for rejection).
- The Government's first reason for rejecting approval — that the contractual relationship was of an independent contractor and not employer-employee — was inconsistent with the Supreme Court's interpretation that consultants/technicians are encompassed by the statutory terms.
On the second ground, the court examined the temporal operation of the Finance Act, 1975 which inserted section 80-RRA. The court quoted section 2 of the Finance Act, 1975, which provided that, unless otherwise provided, sections 2 to 30 of that Act shall be deemed to have come into force from 1 April 1975. From this the court concluded that section 80-RRA was in force from 1 April 1975 and applied for the assessment year 1975-76 (i.e., the previous year ending March 31, 1975). Because the petitioner’s husband claimed benefit for the accounting period ending March 31, 1975, the section was applicable. The court further noted that section 80-RRA does not require that the agreement for which approval is sought must be executed after the Finance Act or after introduction of the Bill; therefore the Government’s temporal reasoning was legally unsound.
Having found both reasons for refusal to be incorrect as a matter of law and noting no other disqualifying grounds identified by the Government, the court concluded that the Government's order of February 28, 1976 could not stand and that the agreement should be approved under section 80-RRA.
Holding and Implications
Holding: The writ petition was allowed; the court quashed the Government of India’s order dated February 28, 1976, and directed the Government to accord approval to the agreement dated August 25, 1974 as modified by the supplementary agreements (the opinion contains references to supplementary agreement dates including November 4, 1977 or November 4, 1974, and June 27, 1975) under section 80-RRA of the Income-tax Act, 1961. The approval was to be accorded within four weeks.
Implications:
- Direct effect: The Government's refusal to approve the agreement was set aside and the Government was ordered to approve the agreement under section 80-RRA, thereby enabling the petitioner (as successor-in-interest to her late husband’s claim) to obtain the statutory deduction/benefit subject to the terms of section 80-RRA.
- The opinion does not purport to lay down a new precedent; it applies and follows the existing Supreme Court authority in Central Board of Direct Taxes v. Aditya V. Birla to the facts before it.
D.V Petition allowed.
Anil Dev Singh, J.:— The petitioner is the wife of late Dr. Lal C. Verman, who had entered into an agreement with the General Electric Company (TEMPO), a company incorporated in New York, dated August 25, 1974, as modified subsequently by supplementary agreements dated November 4, 1977, and June 27, 1975. By that agreement Dr. Verman, who was the original petitioner, was retained by the company for the period commencing from August 25, 1974 to August 24, 1975. As per the terms of the agreement. Dr. Verman was required to perform his services at the rate of 338 dollars plus 17% per. day for each days work during the term of the agreement payable at the end of each month. He was to advice and act as a consultant to the company on problems relating to formulation of detailed plans and programmes for the development, staffing and equipment of the Korean Standard System. Petitioner's husband made an application to the Government of India for approval of the agreement under section 80-RRA of the Income Tax Act, 1961 (for short ‘the Act’). This application was rejected by the Government of India by its letter dated February 28, 1976 for twin reasons, namely, (a) the relationship between the applicant and the foreign party was not that of an employer and an employee as the status of the former under the contract was that of an independent contractor; and (b) “the concession under section 80-RRA was announced in the Lok Sabha on February 28, 1975, by introduction of the Finance Bill, 1975, while the retainership agreement was ‘entered into on August 25, 1974”, i.e, prior to coming into force of the said provision, and, therefore, the concession was not available to the petitioner. Feeling aggrieved by the rejection of his application, the petitioner's husband filed the present writ petition in which after his death his wife Smt. Kunti Verman has been substituted as the petitioner.
2. Learned counsel appearing for the petitioner submitted that the view taken by the Government of India is not in consonance with the decision of the Supreme Court rendered in Central Board of Direct Taxes and others v. Aditya V. Birla, (1988) 170 I.T.R 137, whereby it affirmed the decisions of the Bombay High Court in Aditya V. Birla v. Central Board of Direct Taxes, (1986) 157 I.T.R 470. and in Central Board of Direct Taxes v. Aditya V. Birla, (1988) 170 I.T.R
136. Learned counsel pointed out that section 80-RRA of the Act talks of payment of “remuneration” for rendering services outside India and while it uses the words “employer” and “remuneration” it does not use the words “employee” or “salary”. He submitted that this goes on to show that the word “remuneration” cannot be restricted to mean “salary” alone.
3. The other argument of the learned counsel for the petitioner is that since section 80-RRA came into force from April 1, 1975, it was effective for the assessment year 1975-76, i.e, for the previous year ending on March 31, 1975, and was, therefore, applicable. Learned counsel for the respondents, however, contends otherwise and has argued that the reasons advanced by the Government of India for rejecting the application of the petitioner's husband are correct in law.
4. I have considered the submissions or the learned counsel for the parties. I am of the opinion that the order passed by the Government of India dated February 28, 1976 cannot be allowed to stand.
5. At this stage it will be convenient to extract section 80-RRA of the Act which is as follows:—
“80-RRA. (i) Where the gross total income of an individual who is a citizen of India includes any remuneration received by him in foreign currency from any employer (being a foreign employer or an Indian concern) for any service rendered by him outside India, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the individual, a deduction from such remuneration of an amount equal to fifty per cent thereof:
Provided that where the individual renders continuous service outside India under or for such employer for a perod exceeding thirty-six months, no deduction under this section shall be allowed in respect of the remuneration for such service relating to any period after the expiry of the thirty-six months aforesaid.
(2) The deduction under this section shall be allowed—
(i) In the case of an individual who is or was, immediately before undertaking such service, in the employment of the Central Government or any State Government, only if such service is sponsored by the Central Government;
(ii) in the case of any individual, only if he is a technician and the terms and conditions of his service outside India are approved in this behalf by the Central Government or the prescribed authority.
Explanation—For the purpose of this section,—
(a) ‘foreign currency’ shall have the meaning assigned to it in the Foreign Exchange Regulation Act, 1973 (46 of 1973);
(b) ‘foreign employer’ means,—
(i) the Government of a foreign State; or
(ii) a foreign enterprise; or
(iii) any association or body established outside India;
(c) ‘technician’ means a person having specialised knowledge and experience in—
(i) constructional or manufacturing operations or muning or the generation or distribution of electricity or any other form of power; or
(ii) agriculture, animal, husbandry, dairy farming, deep sea fishing or ship building; or
(iii) public administration or industrial or business management; or
(iv) accountancy; or
(v) any field of natural or applied science (including medical science) or social science; or
(vi) any other field which the Board may prescribe in this behalf.
who is employed in a capacity in which such specialised knowledge and experience are actually utilised.”
6. Interpreting the aforesaid section, the Supreme Court in Central Board of Direct Taxes and others v. Aditya V. Birla, (1988) 170 I.T.R 137, (4) held as follows:—
“We find that the amplitude of the expressions “employee” and “employer” covers the cases of a consultant or a technician.
. . . . . . . . . . . . . . . . . . . . . . . .
In our opinion, employment as a technician for the purpose indicated by Shri Palkhivala could also be an object of the Act in such a case the fee received by a consultant or a technician would also come within the purview of the section concerned.
. . . . . . . . . . . . . . . . . . . . . . . .
The employer is one who employs the services of other persons. In the context of this Act, therefore, the expression “employee” will include a consultant or a technician employed by the foreign company because he would be working for others for hire. It is true that the respondent may serve more than one master. A man may in certain circumstances serve two masters; very often he does serve many. The expression “to employ” has been considered in Ellis v. Joseph Ellis & Co., [1905] 1 KB 324(CA)(5) and does not mean generally to find actual employment; it rather means to retain and pay a person whether employed or not but if employed then to be employed in the work only in respect of which contract is made. “Medical advisers may be employed at a salary to be ready in case of illness: members of theatrical establishments in case their, labour should be needed; household servants in performance of their duty when their masters wish; in these and other similar cases, the requirement of actual service is distinct from the employment by the party employing”. In an agreement to “retain and employ”, “employ” means only to “retain” in the service “and is mere tautology”. See in this connection, Stroud's Judicial Dictionary, 4th edition, Vol. 2, at page 893. The expression, however, must depend upon the context of the particular provision in which the expression appears. It was held in England that an engineer appointed by a local authority to supervise the execution of works, but not subject to the local authority's supervision, is nevertheless an “employee” within the meaning of section 40(1) of the Local Government Superannuation Act, 1937, in Morren v. Swinton and Pendlebury Borough Council, [1965] 1 WLR 576 (QB). (6) In Chambers; 20th Century Dictionary employee” has been indicated to mean to occupy the time or attention of “Employment” means an act of employing. In the Concise Oxford Dictionary, “employee” means a person employed for wages. “Employ” means use of services of persons. It follows, therefore, that it comprehends a wholetime servant or a part-time engage. It is significant that section 80 RRA of the Act uses the expression “remuneration” and not salary to be entitled to deduction. In the aforesaid view of the matter, we see no warrant to restrict the meaning of the expression “remuneration” only to salary received by an employee abroad. The literal meaning is clear and we need not bother any more about the intention or the purpose. The intention, in our opinion, is writ large. In principle also, we are unable to find any rationale or reason for the distinction sought to be made on behalf of the Revenue.”
7. Thus it is apparent that the Supreme Court has held that a consultant or a technician employed by a foreign company and receiving remuneration from the latter in foreign currency would be entitled to avail the benefit of the provisions of section 80-RRA of the Act subject of course to the fulfilment of the conditions mentioned therein. In the above decision it is also pointed out that section 80-RRA of the Act uses the expression “remuneration”. Therefore, if a person has been retained by a foreign employer and is paid a fee in foreign currency, the payment of the fee will be covered under the term “remuneration” which is of a wide amplitude. Similarly, when a foreign employer agrees to pay to a consultant whose services are being utilised on retainership basis the payment would still be covered under the term “remuneration”. Again, section 80-RRA applies where an individual receives payment from a foreign employer for any service rendered by him outside India. The reasoning of the Government of India that the contract between parties does not establish the relationship of an employer and an employee and therefore section 80-RRA of the Act is not attracted, is not sound, “in view of the law laid down by the Supreme Court in Central Board of Direct Taxes and others v. Aditya V. Birla (supra). Petitioner's husband was a consultant and received retainership for the services rendered outside India from a foreign employer. At this stage it will be necessary to refer to clause 2 of the agreement dated August 25, 1974, which reads as follows:—
“The company agrees to pay the Consultant in consideration this retainer and services to be performed hereunder at the rate of One Hundred Thirty Eight Dollars ($ 138.00) plus Seventeen Per Cent (17%) per day for each day worked during the term of this agreement, payable at the end of each month.”
8. It is common ground that the petitioner's husband was not employed beyond 36 months by the foreign company. A perusal of the bio-data of the petitioner's husband (page 31 of the writ petition) clearly shows that he was a highly qualified and experienced technician and, therefore, the Government of India has not rejected the contract on that account. Therefore, the first reasoning of the Government of India for not approving the contract for the purposes of section 80-RRA of the Act was entirely incorrect.
The second reasoning that concession under section 80-RRA of the Act was not applicable as the said section came into effect much after the execution of the retainership agreement is also unsustainable. section 80-RRA of the Income-tax Act was inserted by section 17 of the Finance Act, 1975. At this stage it will be convenient to set out section 2 of the Finance Act, 1975, which gives the date when section 17 of the said Act came into force:—
“2. Save as otherwise provided in this Act, Sections 2 to 30 shall be deemed to have come into force from 1st day of April, 1975”
9. Thus, section 80-RRA which was inserted by section 17 of the Finance Act, 1975, came into force from the 1st day of April, 1975, and was introduced from the assessment year 1975-76. This being so the benefit of the provision would be available in respect to the period relevant to the assessment year 1975-76. In other words, it means that the benefit would be available for accounting year ending on March 31, 1975. The petitioner's husband was claiming the benefit for the accounting period ending on March 31, 1975. Besides, section 80-RRA does not provide that agreement for which approval is sought should be subsequent to the date of the passing of the Finance Act or introduction of the Bill. Therefore, the second ground on which the impugned order was based suffers from apparent illegality.
10. Since both the grounds on which the approval was rejected by the Government of India were wrong and since the Government of India did not disqualify the petitioner's husband from claiming the benefit on any other ground, the agreement, therefore, needs to be approved.
11. Accordingly, the writ petition succeeds and the rule is made absolute. The order of the Government of India dated February 28, 1976, is quashed. The Government of India is directed to accord approval to the agreement dated August 25, 1974 as modified by supplementary agreements dated November 4, 1974 and June 27, 1975, under section 80-RRA of the Income-tax Act, 1961. The approval be accorded by the Government of India within four weeks. Dasti.
D.V Petition allowed.
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