1. Revenue has filed the present appeal against the order of the learned Commissioner of Income-tax (Appeals) XLIII, Mumbai ('CIT(A)' in short). The appeal relates to the assessment year 1992-93.
2. Parties represented by their respective representative and counsel have been heard. They have made oral as well as written submissions, in extenso, at the time of hearing.
Ground Nos. 1: Admissibility of deduction Under Section 80-O of the Income-tax Act, 1961 "1. On the facts and in the circumstances of the case, the learned CIT(A) has erred in allowing the claim of the assessee Under Section 80-O of the I. T. Act 1961 in respect of the income from clearing and forwarding business done outside India, although the assessee has not rendered any technical or professional service as held in the case of CIT v. Jeevanlal Lallubhai & Co. reported at 206 ITR 548 (Bom.)." 4. Briefly stated, the facts of the case, as relevant to the aforesaid ground of appeal, are as follows: The assessee-firm, during the previous year relevant to the assessment year under appeal, i.e., 1992-93, was engaged in the business of packing, moving, clearing and forwarding of household goods in India and outside India. Ground No. 1 is concerned with the nature of the activities of the assessee involving clearing and forwarding business done outside India and not with the activities of the assessee within the country. Hence, we shall deal with the nature of the activities of the assessee that were conducted outside India. During the relevant previous year, the assessee used to raise composite bills charging its customers for movement and transportation of goods including their packing/unpacking, loading/unloading, actual transportation, clearance of various formalities involved en route from the point of their origin in India to the ultimate point of their destination abroad. This is evident from the copies of two bills annexed to the assessment order, by way of illustration, which are not disputed. Thus, the activities performed by the assessee in India and abroad were composite in character and were part of the assessee's business of moving the goods from one place in India to another place abroad. In the combined bills so raised by the assessee on the customers, the assessee trifurcated the total charges under three heads, namely, (a) the charges for the activities to be handled at the point of origin including their physical packing, loading/unloading, customs clearance, pre-shipment formalities, etc., associated with transfer of goods; (b) charges for transportation of goods including air freight/shipping charges; and, (c) charges for the activities handled at the port of arrival including transfer to and temporary storage of consignment at the bonded warehouse/facility, re-loading, actual transportation of goods from the port/warehouse to the actual destination, their unloading/unpacking etc. It is thus apparent that the assessee offered a composite package of services to its customers, both Indians and Non-Indians, involving various activities from the point of origin to the ultimate point of destination so as to ensure effective and safe movement of their goods.
While all the activities involving movement of goods within India were performed by the assessee itself, the activities required to be performed outside India were performed by certain foreign parties (described by the assessee as 'destination agents') engaged by the assessee. The assessee had shown gross receipts amounting to Rs. 1,35,00,037/- as attributable to the aforesaid services rendered outside India which it claimed to have been received in convertible foreign exchange from its customers. After deducting expenses of Rs. 29,53,150/-, the assessee showed net receipts of Rs. 1,05,46,937/- for the alleged services claimed to have been rendered outside India on which it claimed deduction Under Section 80-O of the Income-tax Act, 1961. The Assessing Officer examined the claim of the assessee for deduction Under Section 80-O but rejected the same by a detailed order of assessment dated 30.3.1998. On appeal, the learned CIT(A) allowed the claim of the assessee against which the Revenue has filed the present appeal before the Tribunal.
5. In support of the appeal, the learned Commissioner of Income-tax - Departmental Representative ('DR' in short) took us through various observations made in the assessment order and the order of the learned CIT(A). He also referred to his written submissions filed before us.
His submissions, in brief, were the same as mentioned by the AO in his assessment order. He has relied upon the following decisions: (iii) CIT v. International Clearing and Shipping Agency, 242 ITR 426 (Mad.) which has quoted, with approval, the observations of the Hon'ble Supreme Court in Cochin Shipping Co. v. ESI Corporation 81 FJR 387 (SC) as follows: "The assistance rendered by the clearing and shipping agent to those who import or export, by attending to the documentation and ensuring the clearance of goods, cannot be regarded as profession based on intellectual attainments or personal service rendered on account of possession of specialized skill and knowledge based on higher learning and intellectual skill." (iv) CIT v. Jeevanlal Laloobhai & Co., 206 ITR 548 (Bom.) for the proposition that the activities of a firm of clearing, forwarding and shipping agents does not amount to profession.
(v) Eastman Consultants P. Ltd. v. CBDT, 132 ITR 637 (Bom.) for the proposition that (a) the tax incentive contemplated Under Section 80-O is basically for encouraging Indian companies to export their know-how and skill abroad, (b) mere supply of particulars or bio-data of various Indians willing to work abroad and their selection or recruitment accordingly in India is a situation falling far too short of the requisites necessary for attracting the benefits of this section, and (c) widely worded though the provisions of Section 80-O are, the section does not cover a case as the case before the High Court.
(vi) Petron Engineering Construction (P) Ltd. v. CBDT, 175 ITR 523 (SC).
6. In reply, Ms. Arati Vissanji, the learned counsel for the assessee, supported the order of the learned CIT(A) and made her submissions on the following lines: (i) The assessee-firm possessed requisite expertise and professional competence to render the services which it had agreed to render to the customers abroad. In support of her submission, she took us through various pages of the paper-book filed by her in support of her claim that the assessee-firm was a member of various internationally renowned 'professional' bodies specialising in movement of goods and that the assessee possessed certificates issued by such international bodies. She also took us through the papers placed by her in her paper book showing the details of the assignments handled by the assessee. She also submitted that the assessee firm had trained staff holding diplomas from FIDI. (ii) Services rendered by the destination agents were in fact the services rendered on behalf of the assessee-firm to its customers abroad as the destination agents had performed their services in terms of the instructions given by the assessee-firm to them and in terms of their appointment. She contended that since the destination agents were the agents of the assessee, hence, the services rendered by them would be treated to have been rendered by the assessee-firm.
Her submission was that it was not necessary that, in order to claim deduction Under Section 80-O, the assessee must itself perform or render the services. According to her, the services performed by the destination agents or the employees of the assessee, as per the instructions of the assessee, were sufficient enough for the assessee to meet the requirement of rendering the services abroad.
(iii) The terms technical services' and 'professional services' contemplated by Section 80-O were comprehensive enough to take within their ambit the services rendered by the assessee-firm to its customers.
(iv) The assessee firm had received convertible foreign exchange in consideration of the services rendered by it to its customers.
7. In support of her submissions, Ms. Vissanji relied upon the following decisions: (i) Order dated 5^th November, 2003 passed by the Tribunal in Tristar Consultants, ITA No. 2857/Mum./98 for the interpretation of the term 'professional services' and for the proposition that the services rendered by a recruitment agent were professional services within the meaning of Section 80-O. (ii) CIT v. R. Jayalakshmi, 240 ITR 773, 776 (Mad.) for the proposition that the terms technical services' and 'professional services' were terms of comprehensive meaning.
(iv) Continental Construction Ltd. v. CIT, 195 ITR 81 (SC) for the proposition that fees for technical services include consideration for rendering of any managerial, technical or consultancy services and also for the proposition that the services rendered through medium of others would also qualify for deduction Under Section 80-O. (v) CBDT v. Oberoi Hotels (India) Pvt. Ltd., 231 ITR 148 (SC) for the proposition that services rendered for managing a hotel including promotion of business and training of staff involved expertise, skill and technical knowledge and hence constituted technical and professional services.
(vi) JB Doda & Co., 233 ITR 271 (SC) for the proposition that re-insurance agents in India were entitled to deduction Under Section 80-O in respect of brokerage received from London brokers.(SC) and CIT v. Gujarat Aluminum Extrusions P Ltd., 263 ITR 453 (Guj.) for the proposition that Section 80-O being an incentive provision should be liberally construed.
(viii) Berger Paints Ltd. v. CIT, 266 ITR 99 (SC) for the proposition that if the Department has accepted and not challenged the decision in the case of one assessee, it was not open to the Department to challenge it in the case of other assesses without due cause.
8. We have carefully considered the rival submissions and perused the materials placed before us by the respective parties. Section 80-O as it stood at the material point of time read as under: "80-O. Deduction in respect of royalties, etc., from certain foreign enterprises. (1) Where the gross total income of an assessee, being an Indian company or a person (other than a company) who is resident in India, includes any income by way of royalty, commission, fees or any similar payment received by the assessee 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 or skill made available or provided or agreed to be made available or provided to such Government or enterprise by the assessee, or in consideration of technical or professional services rendered or agreed to be rendered outside India to such Government or enterprise by the assessee, 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 or regulating payments and dealings in foreign exchange, there shall be allowed, in accordance with and subject to the provisions of this section, deduction of an amount equal to fifty per cent. of the income so received in, or brought into, India, in computing the total income of the assessee : Provided that such income is received in India within a period of six months from the end of the previous year, or where the Chief Commissioner or Commissioner is satisfied (for reasons to be recorded in writing) that the assessee is, for reasons beyond his control, unable to do so within the said period of six months, within such further period as the Chief Commissioner or Commissioner may allow in this behalf.
(i) "convertible foreign exchange" means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the law for the time being in force for regulating payments and dealing in foreign exchange; (iii) Services rendered or agreed to be rendered outside India shall include services rendered from India but shall not include services rendered in India." 9. The claim of the assessee is that it had received payments from its customers in consideration of technical or professional services rendered or agreed to be rendered outside India in convertible foreign exchange and hence its case falls squarely within the four corners of Section 80-O. Three distinct issues therefore arise for our consideration: (i) Whether the services reportedly rendered abroad were 'professional service' or technical service' within the meaning of Section 80-O or mere business services rendered abroad, i.e., movement of their goods from the point of origin to the ultimate point of destination; (ii) Whether the impugned 'charges' recovered by the assessee from its customers were in consideration of any technical or professional service rendered by the assessee to them abroad; and, (iii) Whether the services/activities actually performed by the destination agents abroad for which they were paid by the assessee could be treated to have been rendered by the assessee, 10. The term 'professional service' as used in Section 80-O is not defined by the Income-tax Act, 1961 though the term 'profession' has been defined in Sub-section (36) of Section 2 as including vocation.
The definition is inclusive in nature in that it includes vocation. It does not however comprehensively define as to what a profession is.
There are inherent difficulties in defining the term 'profession' or 'professional service' as there are no well defined parameters which could be universally applied to describe a particular service as professional or technical service. This is what makes our task difficult. In Currie v. Commissioners of Inland Revenue, (1921) 2 KB 332, 340-341 (CA), Scrutton, LJ observed: ".... In my view it is impossible to lay down any strict legal definition of what is a profession, because persons carry on such infinite varieties of trades and businesses that it is a question of degree in nearly every case whether the form of business that a particular person carries on is, or is not, a profession.
Accountancy is of every degree of skill or simplicity. I should certainly not assent to the proposition that as a matter of law every accountant carries on a profession or that every accountant does not. The fact that a person may have some knowledge of law, does not, in my view, determine whether or not the particular business carried on by him is a profession. Take a case that I put during the argument, of a forwarding agent. From the nature of his business he has to know something about railway Acts, about the classes of risk that are run in sending goods in a particular way, and under particular forms of contract. That may or may not be sufficient to make his business a profession. Other persons may require rather more knowledge of law, and it must be a question of degree in each case. Take the case before Rowlatt J. of a photographer: Cecil v. Inland Revenue Commissioners, 36 Times L.R. 164. Art is a matter of degree, and to determine whether an artist is a professional man again depends, in my view, on the degree of artistic work that he is doing. All these cases which involve questions of degree seem to me to be eminently questions of fact, which the Legislature has thought fit to entrust to the Commissioners, who have, at any rate, from their varied experience, at least as much knowledge, if not considerably more, of the various modes of carrying on trade than any judge on the bench." "....... That I myself am disposed to attach some importance in findings as to whether a profession is exercised or not to the fact that the particular man is a member of an organized professional body with a recognized standard of ability enforced before he can enter it and a recognized standard of ability enforced while he is practicing it. I do not, for a moment, say it settles the matter, but if I were deciding a question of profession I should attach some importance to that feature." 11. As regards the meaning of the term technical service' as occurring in Section 80-O, the Hon'ble Delhi High Court has held in J K (Bombay) Limited v. CBDT, 118 ITR 312 (Delhi) as under: "The object of Section 80-O is best known to the Ministry of Finance which conceived the idea of giving this incentive to Indian companies. It is the Ministry of Finance through the Central Board of Direct Taxes which administers this provision. Considerable importance has, therefore, to be given to the understanding of this provision by the Board. Circular No. 187, dated 23rd December, 1975, issued by the Board, published in [1976] 102 ITR 83 (statutes section), explains what the Board understands to be the scope of technical services contemplated by Section 80-O. In paragraph 3(v) it is stated in the circular that: "the technical services rendered or agreed to be rendered to the foreign party should relate to productive fields such as,-- (b) generation or distribution of electricity or any other form of power, or (d) engineering services. Services such as those relating to management, organisation, sales, finance and accounts, will not qualify for this purpose." "Agreements which provide for participation in business or management operations abroad simpliciter in return for a specified percentage of commission or profit will not be eligible for approval." 12. In Petron Engineering Construction (P) Ltd. v. CBDT, 175 ITR 523 (SC), the Hon'ble Supreme Court has laid down the following, amongst others, propositions: (i) As expressed in the speech of the Finance Minister white introducing Section 85C in the Income-tax Act, 1961, the principal objective of Section 80-O is to supply technical know-how or render technical services to developing countries and not the mere augmentation of foreign exchange resources; and (ii) Liberal construction will be made wherever it is possible to be made without impairing the legislative requirement and the spirit of the provision.
The Hon'ble Court held: "Although there is no indication in Section 80-O regarding the supply of technical know-how or rendering technical services to newly developing countries, yet it may be reasonable to infer from the said speech of the Finance Minister that at the time when Section 85C was introduced in the Act, one of the objectives was to supply technical know-how and render technical services to newly developing countries. Foreign exchange can be earned by various other modes, but that will not, in all cases, entitle the assessee to a deduction of income-tax. Section 80-O, as it stood during the relevant period with which we are concerned, grants cent per cent deduction of tax. In the context of such deduction of tax, it will not be unreasonable to presume that the principal objective of Section 80-O is to supply technical know-how or render technical services to developing countries. In the circumstances, the contention of the appellants that as the appellant company has fulfilled the principal object of Section 80-O by earning foreign exchange, respondent No. 1 should have approved the agreements for the purpose of Section 80-O cannot be accepted." 13. In Continental Construction Ltd. v. CIT, 185 ITR 178 (Delhi): affirmed by the Hon'ble Supreme Court in Continental Construction Co., 195 ITR 81 (SC); it has been held: ".....Analysing the provision further, it will be noticed that it is not any type of income which is entitled to the benefit under the said provision. The income, to which the said provision applies, must be of the nature of royalty, commission, fee or similar payment. Broadly speaking, this type of income is usually derived not from the supply or sale of tangible goods. A royalty is ordinarily received by giving a right to another person to use a property belonging to the owner. For example, royalty has been stated to be compensation paid under a licence granted by the owner of a patent or a copyright to another person who wishes to use the same. The right which the owner has is an intangible commodity though the same is in respect of a material object, namely, patent or a drawing. Similarly, commission is usually paid for services rendered by one person to another. A fee would also be receipt of money for services rendered, for example, by a professional engineer or an architect. The services which are to be rendered, in such a case, are in discharge of their professional functions and duties.
According to the said provision, any other payment which is received should also be of a similar nature in order that a claim under Section 80 can be made. Broadly speaking, the income which is contemplated under Section 80-O which is entitled to the benefits under the said provision has to be either for professional services rendered or a receipt for permission to use an intellectual property of the assessee. This is evident from the fact that the section itself states that the income which is received is to be in consideration, for use outside India, of any patent, invention, model, design, secret formula, process or information concerning industrial, commercial, scientific knowledge, experience or skill.
All this would fall in the category of, what is more commonly known as, "know-how". In other words, Section 80-O was enacted with a view to give benefit to Indian companies for the supply of know-how including information concerning industrial, commercial or scientific knowledge, experience or skill. Section 80-O is also applicable in the case of receipt of consideration for technical services rendered outside India but then again, this income which is received must necessarily be by way of royalty, fee or commission or a similar payment." 14. At this stage, it may be useful to have a broad conceptual framework of 'service', 'professional service' and technical service' and then to see whether any and every skilled service will qualify to be called 'professional' or technical' service for the purposes of Section 80-O. The term 'service', as relevant for the purpose in hand, has been defined at page 1372 in Black's Law Dictionary - Seventh Edition - as "5. An intangible commodity in the form of human effort, such as labor, skill or advice contract for services." According to P. Ramanatha Aiyer's 'The Law Lexicon' --Reprint 2002 - General Editor: Justice Y.V. Chandrachud, one of the several meanings of the term 'service' as given at p.1748 is as follows: "1. The action of serving, helping or benefiting; conduct tending to the welfare or advantage of another." From the aforesaid, it is clear that there are three important characteristic features of "service": one, it is not a tangible commodity like goods and commodities but an intangible commodity; two, it is rendered in the form of human effort, skill or advice; and, three, it is rendered to satisfy the human need. From the aforesaid description, it is quite clear that the term "service" is of wide import and takes within its ambit all forms of services involving employment of human skill, regardless of whether it is purely intellectual skill or manual skill or combination of both. The activities performed by a barber (hair or beauty saloon, as they are now called), a masseur, a bar attender, a tailor, washer-man (laundry), a porter, a maid, a taxi driver, a cleaner, a transporter, a packer, a share-broker, a medical practitioner, a lawyer, an architect, an engineer, a security-man, a telephone service provider, etc., are no doubt fall within the description "service" and also involve specialized skill but the question here is whether the services provided by all of them can be said to be "professional service" or "technical service" within the meaning of Section '80-O, or, in other words, whether the term "service" is interchangeable with "professional service" or "technical service".
15. We shall first take up the term "professional service". The word 'service' is prefixed by 'professional'. As stated above, the term "professional service" has not been defined under the Income-tax Act, 1961. If we turn to page 1532 of P. Ramanatha Aiyer's Law Lexicon (supra), the term "professional service" has been defined as follows: "Service done by one who does a profession [Section 2(2)(iii), Chartered Accountants Act and Section 16(3), ill. (b), Indian Contract Act]." The term "Profession" is defined at page 1531 of the said Law Lexicon as follows: "Profession. A 'profession' involves the idea of occupation requiring either purely intellectual skill or if any manual skill, as in painting and sculpture or surgery, skill controlled by the intellectual skill of the operator, as distinguished from an occupation which is substantially the production or sale or arrangements for the production or sale of commodities. CIT v. Manmohan Das, (1966) 59 ITR 699, 710 (SC) [Income-tax Act, 1961, Section 28]." The term 'professional' is defined at page 1226 of Black's Law Lexicon (supra) as follows: "professional, n. A person who belongs to a learned profession or whose occupation requires a high level of training and proficiency". First element of 'professional service' is that it requires is a purely intellectual skill and not manual skill. Then, we have the dictum in Currie v. Commissioners of Inland Revenue (supra) according to which, importance is also to be attached, while judging whether a profession is exercised or not, to the fact that the particular man is a member of an organized professional body with a recognized standard of ability enforced before he can enter it and a recognized standard of ability enforced while he is practicing it. This aspect assumes greater importance in certain situations. For example, the services rendered by a lawyer to his client by virtue of his enrolment with the Bar Council will no doubt be a professional service.
But when the same lawyer is elevated and occupies a high judicial office discharging the judicial functions of the State, can it be said that he is still rendering professional service? The answer lies in the fact that, as a lawyer, he was rendering 'professional service' by virtue of his enrolment with a professional body, i.e., the Bar Council and in the further fact that he was rendering service pursuant to a contract for service with his client. When the same lawyer is elevated and occupies a high judicial office, he discharges the judicial functions of the State not by virtue of his enrolment with a professional body but by virtue of his appointment to the high judicial office and also because of the fact that, as a holder of the judicial office, he discharges his functions in pursuance of a contract of service and in discharge of his judicial functions. Thus, the enrolment of a professional with a professional body is another highly relevant factor in judging whether a given 'service' is 'professional service' though this factor by itself may not always settle the issue. In Currie (supra), the services rendered by a firm of accountants to his clients seeking repayment of taxes from the Inland Revenue Service were not held to be the professional service. Similar proposition holds good for other professions also. Thirdly, a 'professional service' involves some kind of 'service' towards the society. Professional service is not a saleable commodity like goods or a business service. Professional service is not guided so much by profit considerations as by professional ethics which requires a particular standard of service to be maintained regardless of the payment being made by the client.
Ethics, moral as well as legal, bind all the professionals, be it the profession of law, medicine, theology or any other profession. However, standards and contents of ethics may vary from profession to profession but the common thread in all the professional services is that they are generally guided more by professional ethics than by profit motive.
Again this aspect may not be decisive but, at the same time, it cannot be said to be an irrelevant consideration in judging whether a profession is exercised or not. As against this, a business service is guided pre-dominantly by profit motive and hence the quality or standard of service depends upon the payment being made by the customers. To sum up, following elements, in our humble view, are relevant in judging whether a 'service' is 'professional service' or not: (i) The term 'profession' involves the idea of occupation requiring either purely intellectual skill as in the case of learned professions, i.e., law, medicine, theology, etc., or if any manual skill as in painting or sculpture or surgery, etc. is required, that skill is controlled by the intellectual skill of the operator, as distinguished from an occupation which is substantially the production or sale of commodities or mere supply of services as distinguished from professional service. The distinction between mere service through employment of mainly manual skill, on one hand, and 'professional service' through employment of purely intellectual skill by the members of a learned profession, on the other hand, is real and not illusory.
(ii) It is equally relevant to bear in mind as to whether the man rendering the service is a member of an organized professional body with a recognized standard of ability enforced before he can enter it and a recognized standard of ability enforced while he is practicing it to arrive at the finding as to whether a profession is exercised or not though this fact by itself may not always settle the issue. Enrolment of a professional with a professional body is different from the membership of a body of traders or trade/business associations.
(iii) 'Professional service' unlike business service is not a saleable commodity and hence is not guided so much by profit considerations as by professional ethics which requires a particular standard of service to be maintained towards the client.
16. To conclude, while every professional service amounts to service but every service does not amount to 'professional service'. It is therefore not possible to treat every service as 'professional service'.
17. We shall now take up the term technical service'. The term technical service' has not been defined in the Income-tax Act, 1961.
Deduction as available Under Section 80-O in respect of technical services' was originally available Under Section 85-C till 31.3.1968.
The object of the said provision when it was first introduced as Section 85C in the Income-tax Act, 1961, was stated in Board's Circular No. 4P (LXXVI-61) of 1966, to be to encourage the Indian companies to export their technical know-how and skill abroad and augment the foreign exchange resources of the country. The same position was reiterated in Board's Circular No. 72 explaining the changes introduced by the Finance (No. 2) Act, 1971. Keeping in view the purpose behind this tax incentive and the requirements of the statutory' provisions, the Board have explained the nature and scope of technical service' in its Circular No. 175 dated 23.12.1975 as follows: "(v) The technical services rendered or agreed to be rendered to the foreign party should relate to productive fields, such as, (a) mining, or (b) generation or distribution of electricity or any other form of power, or (c) constructional, industrial or manufacturing operations, or (d) engineering services. Services, such as, those relating to management, organisation, sales, finance and accounts, will not qualify for this purpose." The said Circular has been cited in J K (Bombay) Limited v.CBDT, 118 ITR 312 (Delhi) and Continental Construction v. CIT, 195 ITR 81 (SC). The Hon'ble Bombay High Court has held in Godrej Boyce Manufacturing Co. Ltd. v. CCIT, 203 ITR 947 (Bom.) {approved by the Hon'ble Supreme Court in CBDT v. Oberoi Hotels Ltd., 231 ITR 148 (SC)} that it is not possible to postulate as a general proposition of law that all managerial services must necessarily be non-technical services. Thus, even managerial services are required to be technical in nature for the purposes of deduction under Section 80-O. In the context in which the said phrase occurs in Section 80-O, the- term technical service' would signify the services of technical nature delivered by a person having technical knowledge and expertise in the various fields of engineering, as explained in the Circular of the Board (supra). It is payment in consideration of such expertise that is sought to be covered by Section 80-O for deduction. In our view, services which require purely or pre-dominantly manual or non-technical skill with little or no engineering expertise in rendering them will be clearly outside the scope of technical service' within the meaning of Section 80-O.18. Now, the next question is as to what is the true import of the phrase "in consideration of technical or professional services rendered or agreed to be rendered outside India to such Government or enterprise by the assessee." At page 1298 in Black's Law Dictionary (supra), the term Vender' has been defined to mean as follows: "render, vb. 1. To transmit or deliver render payment. 2. (Of a judge) to deliver formally render a judgment. 3. (Of a jury) to agree on and report formally render a verdict. 4. To pay as due render an amount." Thus, the focus of Section 80-O is that it is the professional expertise or technical know-how of the assessee seeking deduction Under Section 80-O which should be delivered or transmitted outside India to the Government of a, foreign State or a foreign enterprise. In taking this view, we have the guidance of the decision in HMT Ltd. v. CBDT, 188 ITR 457 (Karn.) in which the Hon'ble Court has held: "I will proceed on the basis that the service rendered by the petitioner in imparting training to the Nigerian personnel in India is not a technical service for the purpose of this case. It is not necessary to decide whether such imparting of knowledge also falls within the expression of "rendering of technical service". The petitioner gives training to the personnel of the Nigerian Government in India. Section 80-O of the Act provides that, where any consideration is received in respect of any patent, invention, model, design, secret formula or process or similar property right, or information concerning industry, commerce or scientific knowledge, experience or skill made available or provided or agreed to be made available or provided to such enterprises by the assessee for use outside India, the deduction would be attracted. It is clear from a reading of this clause that imparting of scientific knowledge, experience or skill made available shall be of the assessee as the latter clause "by the assessee" dearly controls the earlier expressions used in this connection. Here, in the present case, the Nigerian personnel are trained in India and, once they go out of the country, it is their skill that is used outside; it is not the skill of the assessee that is used outside. Therefore, even assuming for a moment that the argument of learned counsel for the petitioner is right, that does not come within the expression "technical service", and as such service is not rendered by the assessee outside India, by imparting training to the personnel of the Nigerian Government, it cannot be said that the same would fall within the deduction granted under Section 80-O of the Act. Therefore, the view of the Board on this aspect of the matter appears to be correct." It is obvious from the aforesaid that the emphasis of Section 80-O is that (i) the Indian company or a person (other than a company) who is resident in India should possess the requisite technical expertise or skill; (ii) it is the skill or expertise of the assessee itself that should be transmitted or delivered outside India for use; and (iii) it should be so transmitted or delivered outside India to the Government of a foreign State of a foreign enterprise. The relevant question to ask, in our view, is therefore, whether it is the skill or expertise of an Indian company or person which is being delivered or transmitted outside India.
19. Keeping the aforesaid in view, we shall now proceed to examine the facts as available on record to ascertain as to whether the services provided to the customers of the assessee were mere business service or professional/technical service and whether they were rendered by the assessee outside India so as to fall within the four corners of Section 80-O.20. The fact that the assessee was engaged in the business of packing, moving, clearing and forwarding of household goods in India and outside India is fairly clear from the finding recorded in the assessment order as also from Clause 5 of the Deed of Partnership dated 18^th January 1979 which provides: "The partnership shall continue to be that of removing, clearing, forwarding, shipping, packing, storage and other commodities and also such other business of a similar or allied nature as the partners may from time to time agree to carry on in this partnership." The letter-heads on which the assessee has issued the Bills and which are annexed to the assessment order also describes the activities of the assessee thus: "MOVING, STORAGE, RELOCATIONS, EXHIBITIONS, SHIPPING, FREIGHT FORWARDING". It is in pursuance of its business, as aforesaid, that the assessee performed various activities during the relevant previous year in India and abroad. It is equally clear that the assessee was not engaged in rendering the aforesaid services abroad de hors the movement of goods undertaken by it.
21. While all the activities of packing and movement of goods including pre-shipment and customs formalities within India were handled by the assessee itself, it had engaged certain foreign parties, described by the assessee as 'destination agents', to handle similar activities abroad. Perusal of the bills annexed with the assessment order shows that the assessee itself treats destination services as a part of its overall business activity of moving, clearing, forwarding, shipping, packing, storage of goods that it offers to its customers from the point of origin to the point of destination. In other words, the activities performed by the destination agents engaged by the assessee were incidental to its main activity which was of moving the goods.
Thus, these services had no independent existence and hence were not liable to be considered in isolation of the main activity. What deserves to be considered is the totality of all the activities performed by the assessee including the activities performed abroad towards its customers. Considered from this point of view, the irresistible conclusion is that the customers had paid to the assessee for composite package involving movement of goods from the point of origin to the point of destination and not for the activities or services performed abroad alone.
22. The AO has examined a few bills, on sample basis, and concluded that the amounts allocated for 'destination services' have no rational basis for allocation. He has given detailed reasoning in the assessment order to arrive at the aforesaid conclusion. His observations are that such allocations have been inflated in order to claim larger deduction Under Section 80-O. Be that as it may, the fact remains that the assessee has given no rational basis for calculating or allocating the amounts for destination services and hence we are inclined to agree with the finding of the AO, which are backed by detailed reasoning, that the amounts allocated there-under were inflated.
23. The 'destination agents' engaged by the assessee are firms and companies well known for the quality of their services in the field of moving the goods in their respective territories and that is the reason why the assessee engaged them to look after certain activities in their territories. It is their expertise which has led the assessee-firm to engage them for undertaking certain activities abroad. Thus, the short point to be noted is that it is not the assessee which itself has transmitted or delivered the services abroad. It is in fact the destination agents who have rendered or delivered their services and undertaken certain activities abroad for which they were paid by the assessee. Thus, there is a direct nexus between the destination agents who provided certain services abroad and the payment made to them by the assessee in consideration thereof. It would therefore be a contradiction in terms to say that it is the professional or technical expertise or skill of the assessee which has been delivered or transmitted or rendered abroad. The correct statement of fact, in our humble view, is that it is the assessee which has paid to the destination agents for the services rendered by them abroad to the assessee. As far as the assessee is concerned, it has not only claimed the said expenditure incurred by it but also added a significant mark-up while billing its customers for those services/activities undertaken abroad. There is nothing on record to show that it is the technical expertise or skill possessed by the assessee which was transmitted or delivered abroad. That is also not the claim of the assessee. The claim of the assessee is that the services were provided by the destination agents as per the instructions of the assessee. The claim of the assessee that it had supervised the activities of the destination agents, apart from being unsubstantiated, would also not, in our view, mean that it was the technical expertise or skill of the assessee itself which was delivered or rendered abroad to the Government of a foreign State or a foreign enterprise.
24. The activities performed by the assessee abroad included clearance of customs formalities, temporary storage of the goods and their transportation, from the port to the destination, their unloading and unpacking at the destination. Performance of all these activities, no doubt, required some skill but we cannot think of any business or human activity which can be performed without any skill or, so to say, specialised skill. Does it mean that all such business or occupational activities will cease to be so and will qualify to be called as professional or technical services? In our view, mere employment of specialized skill in conducting the business or human activity would not convert that business or human activity into a technical service or professional service within the meaning of Section 80-O. The sum and substance of the activities undertaken by the assessee abroad through its destination agents is nothing but a part of its business of packing and moving the goods from one place to another place.
25. The emphasis of Section 80-O is on receipt of royalty, fee, commission or payment of similar nature in consideration of, inter-alia, technical or professional services rendered. In the case before us, the assessee claims to have performed certain activities abroad in order to move the goods from one place to another place in consideration of which it claims to have received payments from its customers. Such payments received by the assessee were not designated by the assessee or its customers as royalty, fee, commission or any payment of similar nature as is required to be made in consideration of rendering the professional or technical services abroad. Payment was not made by the customers just for the sake of having destination services abroad but for the entire job of moving the goods from the point of origin to the point of destination. It is therefore immaterial as to how the assessee shows the receipt in the bills raised by it or in its books. It is well settled that it is the substance of the transaction that is decisive and not the form in which it is recorded or shown. And the substance of the transaction is that the assessee has simply rendered to its customers the services of moving the goods from one part of the globe to another part and was accordingly paid for it.
Any activity that was performed either in India or abroad was in pursuance of its business to move the goods for which it was paid by its customers. The customers did not pay the assessee in consideration of mere performance of certain activities abroad. Hence the treatment given by the assessee by trifurcating the charges in the bills or in its account books is immaterial and would not change the character of receipt from being one for the movement of goods to the other for the performance of certain services abroad.
(i) The destination services/activities arranged by the assessee abroad would not, in our view, qualify to be called 'professional service' for four reasons. One, the services rendered by a mover or packer cannot, in our view, be said to be based on purely intellectual skill, rather his activities are based more on manual skill than intellectual skill and, in that view of the matter, employment of any intellectual skill by him is merely incidental to the execution of job which essentially requires manual input. It is impossible to conceive the idea that a packer or mover of goods will be able to accomplish his job by using purely intellectual skill sans manual skill. This is not to say that his job, or, for that matter, any other job, does not require any intellectual skill at all but the degree of intellectual skill that is required is not the same as manual skill. Two, the assessee-firm is not a member of any professional body though it contends that it is a member of certain international bodies devoted to the cause of packing and moving the goods but those bodies are more in the nature of trade associations than a professional body like the Bar Council, Medical Council, etc.
Three, the services organized by the assessee abroad are purely business services guided solely by profit considerations. Four, the jobs undertaken by the assessee abroad as a part of its moving and packing business falls far short of being called 'professional service' within the meaning of Section 80-O. (ii) The services organized by the assessee abroad can also not be called technical service' for two reasons: one, there is no evidence on record to hold that the services claimed to have been rendered outside India were in the nature of technical service'; and, two the services rendered abroad were that of a packer and mover and any incidental application of intellectual skill would not convert a purely manual or business service of packing and moving into technical service.
(iii) In order to attract the provisions of Section 80-O, it is also necessary that the assessee should receive the payment in "consideration of technical or professional services rendered or agreed to be rendered outside India" to the Government of a foreign State or foreign enterprise by the assessee. What the section requires is that it should be the expertise or skill or professional or technical service of the assessee that should be transmitted or delivered outside India to the Government of a foreign State or foreign enterprise. If the professional or technical service of the assessee is not delivered or transmitted or rendered outside India, the benefit of Section 80-O will not accrue to the assessee. As mentioned earlier, it is the service of the destination agents based on their own skill and expertise that was delivered or performed abroad for which the payments were made to them by the assessee.
This is clearly outside the scope of Section 80-O in as much as it is the assessee which had made the payments in consideration of the services of the foreign enterprises instead of the services of the assessee being delivered or transmitted abroad and payments being made by the said foreign enterprises to the assessee. Since the destination services of the foreign enterprises, namely the destination agents were delivered or rendered abroad by the said foreign enterprises, namely, the destination agents utilizing their own skill and expertise though, of course, at the instance of and on payment by the assessee, those very services, in our view, could not be said to have been delivered or transmitted or rendered by the assessee-firm so as to entitle it to claim deduction Under Section 80-O. (iv) The aforesaid proposition needs further appreciation in the light of the phrase "in consideration of technical or professional services rendered or agreed to be rendered outside India to such Government or enterprise by the assessee" in Section 80-O. It requires a direct nexus between the person rendering/delivering the professional or technical services on one hand and the payment being received by him in consideration thereof on the other hand. The person claiming the benefit under Section 80-O must establish in the first instance three ingredients, namely, (i) possession of technical or professional qualification so as to make him capable of rendering the requisite technical or professional services; (ii) the fact that such technical or professional services based on the aforesaid expertise of the assessee have actually been rendered (in the sense of it being delivered or transmitted) or agreed to be rendered abroad by him; and (iii) payment has been received in consideration of delivery or transmission of such professional or technical services of the assessee abroad to the Government of a foreign State or a foreign enterprise. In the case before us, the factual matrix is that it is the destination agents who (i) had the requisite expertise of their own which led to their being engaged by the assessee as such, (ii) had rendered, by virtue of their own expertise, certain services to the assessee, and (iii) were paid by the assessee for such services in foreign exchange. What the assessee has done in the case before us is that it had simply billed its customers not only for the amounts that it was to pay to the destination agents for their services abroad but also added a significant mark up. It is this amount which the assessee recovered from its customers and on which it claimed deduction Under Section 80-O. Mere realization in foreign exchange is not sufficient for claiming the deduction under Section 80-O: Petron Engg. Construction v. CBDT, 175 ITR 523 (SC). Section 80-O applies where the professional or technical services of the assessee have been actually delivered or rendered outside India and not where exactly the same services which have already been rendered abroad are sought to be further relayed or transmitted through an Indian assessee like the one before us. It is the destination agents who rendered the services abroad and were also paid for it by the assessee. The assessee cannot claim deduction Under Section 80-O on such relayed service. It is not the case of the assessee before us that it had rendered any other service abroad over and above the services already performed by the destination agents. Mere receipt of foreign exchange by the assessee by raising the bills on the customers charging them for the aforesaid expenditure incurred or agreed to be incurred by the assessee on destination services as increased by a significant mark up cannot, in our view, form the basis for claiming the deduction Under Section 80-O. (v) It has been held by the Hon'ble Supreme Court in Petron Engg.
Construction (supra) and the Hon'ble jurisdictional High Court in Eastman Consultants (P) Ltd. v. CBDT, 132 ITR 637 (Bom.) that tax incentive contemplated Under Section 80-O is basically for encouraging the Indian companies to export their know-how and skill abroad. The case of the assessee is squarely hit by the aforesaid principle in two ways: first, it has not exported any technical know-how or skill of its own; rather it is the foreign parties, i.e., destination agents who have utilized their own skill and expertise while rendering the services abroad, and, second, the services rendered abroad by the destination agents were neither technical nor professional services but only a business service which the assessee organized for its customers at the places where it did not have its own network or its presence.
27. Having considered all the factual aspects of the case, we are of the view that the payments made to the assessee by its customers were not made in consideration of any technical or professional services rendered by the assessee abroad but in consideration of a purely composite package of business services offered by the assessee for moving the goods of the customers from one place to another place.
Rendering of any service abroad was incidental to the attainment of the main object of moving the goods. Merely because such services were incidental to moving the goods, it cannot be said that the payments were made by the customers for the aforesaid incidental services alone notwithstanding the fact that the assessee has shown them to be so in the bills. The job of a packer and mover of goods is to efficiently pack and safely move the goods from one place to another place and not to render any technical or professional service per se to the customers who are interested in having their goods safely packed and moved to the destination. Widely worded though the provisions of Section 80-O are, the section does not cover the services involved in packing and moving the goods of the customers. The requisites of Section 80-O are not, in our view, fulfilled in the case before us.
28. The issue whether the business of clearing and forwarding the goods amounts to professional service is also covered by the law laid down by the Hon'ble Supreme Court in Cochin Shipping Co. v. ESI Corporation, AIR 1993 SC 252. In that case, the appellant was engaged in the business of clearing and forwarding operations. It was also authorised to transact its business at the Cochin Custom House under the terms of Section 202 of the Sea Customs Act and the Rules made there-under.
Licence was also issued under the said provision. The question arose whether the establishment of the appellant, who was carrying on the activity of clearing and forwarding operations, was a "shop" for the purpose of application of the Employees' State Insurance Act, 1948. The Supreme Court held as under (at page 258 of AIR 1993 SC): "The appellant is carrying on stevedoring, clearing and forwarding operations. Clearing the documents, even it be in the customs house, is 'necessary for the export or import of goods. These services form part of the carrier's job. It cannot be gainsaid that the appellant is rendering service to cater to the needs of exporters and importers and others who want to carry the goods further. Therefore, it is a shop carrying on systematic economic or a commercial activity." 29. The issue in hand is also covered, in our view, by the decision of the Hon'ble jurisdictional High Court in CIT v. Jeevanlal Lallubhai, 206 ITR 548 (Bomb.) in which the Hon'ble Court has held as under: "... Following the ratio of the above decision* and the decision of this court in CIT v. Lallubhai Nagardas and Sons [1993] 204 ITR 93, we are of the clear opinion that the activities of the assessee as clearing, forwarding and shipping agents did not constitute a profession and, as such, it was not entitled to the benefit of the lower rates of taxes applicable to registered firms deriving income from a profession as provided in Sub-Paragraph II of Paragraph C of Part I of the First Schedule to the Finance Act, 1976, and the Finance (No. 2) Act of 1977.
30. The aforesaid propositions of law are squarely applicable to the case of the assessee before us. In our view, the services offered by the assessee are essentially business services and hence cannot be termed as professional service or technical service within the meaning of Section 80-O. What Section 80-O requires is the export of technical or professional know-how and not mere performance of any business service/activity abroad. Payments made in consideration of business service or receipts attributable to a business activity are clearly outside the scope of Section 80-O.31. We shall now turn to the submissions made by the learned counsel for the assessee.
32. Ms. Vissanji submitted that the services rendered abroad by the destination agents were in fact rendered by the said agents on behalf of the assessee. We have carefully considered the submissions of the learned counsel. There is nothing on record to show that the destination agents were the 'agents' of the assessee or acted as agents on behalf of the assessee towards third parties. The assessee has not established any of the ingredients of the agency to show that the destination agents were, in fact, agent of the assessee or that they acted as such on its behalf. The relationship of agent and principal between the said agents and the assessee has not been proved either before us or before any of the authorities below. We are therefore unable to hold that the said destination agents were the agents of the assessee. On the other hand, the evidence available on record shows that they had rendered certain services at the instance of and on payment by the assessee in foreign exchange. The relationship between the assessee and the said destination agents was that of a person receiving the service and paying for it and the other providing the service and being paid for it or, in other words, that of a purchaser and seller of service for consideration.
33. Ms. Vissanji vehemently relied upon the observations made by the Hon'ble Supreme Court in Continental Construction Co. v. CIT, 195 ITR 81 (SC) according to which, in order to say, that a person is rendering such services to another, it is not necessary that the services should be rendered by the former personally and not through the medium of others. The Hon'ble Court has made the aforesaid observations to repel the differentiation sought to be made between the technical services rendered to the assessee by its employees/technicians and technical services rendered by the assessee to a foreign constituent. The relevant observations made by the Hon'ble Court read as under: ".....The assessee is a company and any technical services rendered by it could only be through the medium of its employees, skilled and unskilled, and, even if the contract had not related to a turnkey project, the assessee's employees would have been answerable only to the assessee and none else though, perhaps, in such an event, the other party to the contract may have retained a larger degree of control and supervision in the execution of the contract. Even where the contractor is an individual or firm and not a company, a contract of this magnitude can be executed only through the medium of employees or other personnel engaged by the assessee. The fact that, physically speaking, it is only such employees that render services and that, so far as they are concerned, they render services only to their employer and not to the other contracting party are in no way inconsistent with, or repugnant to, the notion that, so far as the foreign Government is concerned, it looks only to the assessee for the rendering of the technical services under the contract. The High Court has pointed out that a person who manufactures television set ordered by another cannot be said to render technical services to the latter. In our view, that analogy is not apposite in the context of a contract of the nature, magnitude and specialisation with which we are concerned here. Where a person employs an architect or an engineer to construct a house or some other complicated type of structure such as a theatre, scientific laboratory or the like for him, it will not be incorrect to say that the engineer is, in putting up the structure, rendering him technical services even though the actual construction and even the design thereof may be done by the staff and labour employed by the engineer or architect. Where a person consults a lawyer and seeks opinion from him on some issue, the advice provided by the lawyer would be a piece of technical service provided by him even though he may have got the opinion drafted by a junior of his or procured from another expert in the particular branch of the law." 34. In the matter before us, there is no evidence before us to show that the job that was executed abroad was executed by the employees or staff of the assessee as in Continental Construction (supra) or by employing the professional or technical expertise of the assessee.
Further, there is no evidence before us to hold that it is the technical expertise or skill or know-how of the assessee that was transmitted or delivered abroad by the destination agents. The case before us is simple in that it is the assessee which entrusted the work to certain foreign parties whom it designated as 'destination agents' and who actually performed the task as required of them and, in consideration thereof, were paid for it. The assessee had simply instructed the said destination agents as to what job was to be done.
Know-what is different from technical know-how. In Continental Construction before the Hon'ble Supreme Court, the relationship between the assessee and its employees was based on contract of service whereas the relationship between the assessee before us and the parties which actually did the job abroad was based on contract for service.
Secondly, it was the service or skill of the assessee in Continental Construction that was delivered or transmitted to the foreign enterprises abroad whereas, in the case before us, it is not the skill or expertise of the assessee or its employees that was delivered abroad. The assessee did nothing to deliver or render its skill or service abroad except to trifurcate the bill and charge its customers for the destination services actually delivered by certain foreign parties by adding a substantial mark-up. Besides, the assessee, in the case before us, was paid by its customers for organizing certain composite services and not for rendering any technical or professional service per se abroad. There is no delivery or transmission of the service of the assessee to any foreign enterprise or the Government of a foreign State. And then what is being done abroad is nothing but the work of a clearing and forwarding agent whereas, in Continental Construction, the work that was done abroad involved engineering skills and expertise. Thus, in the aforesaid case before the Hon'ble Supreme Court, the factual matrix was altogether different. Observations made therein cannot, in our humble view, be globally applied without considering the facts of individual case. On the other hand, the case of the assessee is covered by the ratio laid down in HMT Ltd. v. CBDT, 188 ITR 457 (Karn.).
35. Another submission that was vehemently made by the learned counsel for the assessee was that Section 80-O was a beneficial provision and hence the same should be liberally applied. This aspect has recently been considered by the Hon'ble Supreme Court in IPCA v. CIT, 266 ITR 521 (SC) in the context of the provisions of Section 80HHC which are also tax incentive provisions. The Hon'ble Court has held: "Undoubtedly Section 80HHC has been incorporated with a view to provide incentives to export houses. Even though a liberal interpretation has to be given to such a provision, the interpretation has to be as per the wordings of this section." In Novopan India Ltd., 1994 Supp. (3) SCC 606 and Union of India v. Wood Papers Ltd., (1990) 4 SCC 256, the Hon'ble Court has held that even the tax incentive provisions should be considered strictly and benefit of any ambiguity or doubt should go the State. In CIT v. Veeraswami Nainar, 55 ITR 35 (Mad.): affirmed in Indian Overseas Bank v. CIT, 77 ITR 512 (SC), the Hon'ble Court has held that where the assessee fails to satisfy the conditions requisite for obtaining the allowance, it will not be for the Court to embark upon what the general object of the exemption was, and whether the conditions imposed were of a theoretical or technical nature, which, in the interest of justice, should be dispensed with. Decision of the Hon'ble Supreme Court in Petron Engineering (supra) is also apposite.
36. Ms. Vissanji relied heavily upon the fact that the Departmental authorities themselves have accepted the claim of the company succeeding the assessee-firm for deduction Under Section 80-O in subsequent years and hence it was not open to the Department to dispute its allowability in the present appeal in view of the judgment in Berger Paints Ltd. v. CIT, 266 ITR 99 (SC). The Ld. DR, on the other hand, has seriously disputed the aforesaid submission of the assessee and contended that the assessee has neither claimed the deduction Under Section 80-O in subsequent years nor has the Department allowed the same to the assessee. We have considered the rival submissions. We are neither in a position nor do we have the jurisdiction to comment upon the correctness of the Departmental action in subsequent years. It is however not the case of the assessee that the Departmental authorities had allowed, before passing the assessment order in question, deduction to the assessee Under Section 80-O in earlier years or to other assesses carrying on identical business, as was the case in Berger Paints (supra). Be as it may, the appeal as brought before us has got to be adjudicated on the basis of the facts brought on record and in the light of the relevant law as applicable to the assessment year under appeal. It is for the supervisory officers in the Income-tax Department to examine this aspect and take such action as they may deem fit in accordance with law. A copy of this order may be endorsed to the Chief Commissioner of Income-tax IV, Mumbai to enable him to do the needful.
37. While reaching the aforesaid conclusions, we have duly considered all the submissions including the authorities cited by the respective counsels and representatives for the parties during the course of their oral submissions as also in their paper-books/written submissions filed before us.
38. In view of the above, Ground No. 1 taken by the Department is allowed in its favour. Ground No. 2: Receipt of money in convertible foreign exchange "2. On the facts and in the circumstances of the case, the learned CIT(A) has erred in deciding that the amount of Rs. 9,18,125/- received by the assessee from Indian companies from the accounts with the banks in India are in the nature of receipts in convertible foreign exchange." 40. The Assessing Officer considered the provisions of Section 80-O which, inter-alia, required that income by way of royalty, fee, commission or any payment of similar nature in consideration of technical or professional services rendered or agreed to be rendered outside India to such Government or enterprise by the assessee, should have been received by the assessee 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 or regulating payments and dealings in foreign exchange. According to him, it was mandatory that such royalty, fee, commission or any other payment of similar nature is received from the Government of a foreign State or a foreign enterprise. The AO examined the list of parties from whom payments were received by the assessee. He noticed that two of the aforesaid parties were Indian companies and not foreign enterprises within the meaning of Clause (ii) of the Explanation to Section 80-O.He identified those two companies as (i) Hindustan Diamond Co. Ltd., and (ii) Roche Products Ltd. He has given detailed reasons in the assessment order as to how the aforesaid companies were Indian companies.
41. On appeal, the learned CIT(A) disposed of the issue with the following observations: "2.5. Deduction Under Section 80-O is available on foreign exchange earned from rendering technical or professional services, outside India, to a foreign enterprise. According to the AO, the appellant received some amounts in respect of invoices of 3 Indian companies & some other amounts from Rupee accounts with Indian Bank. The AO deducted the total of such receipts as detailed in Annexure 'B' of assessment order at Rs. 9,18,125/- from the foreign exchange receipts from services rendered abroad, while computing deduction Under Section 80-O." "2.6. The appellant contends that the amounts received in Indian rupees are out of bank accounts "funded by remittances from abroad".
The appellant has filed letter from RBI and copy of notification of RBI dated 1.1.1974 at page 68 to 70 of the paper book, according to which such amounts have to be treated as foreign exchange. As such the same appears to be allowable. As regards payments of Rs. 30,585/- & 23,350/- from Indian companies, it has been explained that the job as well as payment was given by the 'foreign enterprise' and only the address of their Indian collaborator were mentioned in the bill for easy contact. Necessary documents in support have been filed at pages 71 to 83 of paper book. Assessee's claim is clearly allowable in this respect and the AO is directed to allow the same." 42. Ground No. 2 involves two issues: one, whether the payments were received from the Government of a foreign State or a foreign enterprise as required Under Section 80-O; and two, whether the payments were received in convertible foreign exchange in India. It is one of the statutory conditions for claiming the deduction Under Section 80-O that the income by way of royalty, commission, fees or any similar payment should have been received by the assessee from the Government of a foreign State or a foreign enterprise. The term 'foreign enterprise' is defined in Clause (ii) of the Explanation to Section 80-O to mean a person who is a non-resident. The assessee claims to have received payments from a large number of parties which, it claims, to be foreign enterprises. We have gone through the list of such parties. However, we are not expressing any view as to whether such parties answer the description of a 'foreign enterprise' as we feel that this aspect of the matter has not been properly examined with reference to the definition of 'foreign enterprise' as given in Section 80-O read with the relevant provisions of the Income-tax Act, 1961. We therefore reverse the order of the learned CIT(A) in this behalf and restore the matter to him with the direction to examine and record a specific finding as to whether each of the parties from whom payments are claimed to have been received is a 'foreign enterprise' within the meaning of the Explanation to Section 80-O and then to re-decide the issue in accordance with law, We shall now deal with the second issue.
One of the statutory conditions that must be fulfilled is that, in case the assessee claims to have received the payments in India, the payment should have been received in convertible foreign exchange in India. The certificates and the notifications of RBI on which the learned CIT(A) has relied upon were not produced before the AO. It is therefore considered appropriate to set aside the order of the learned CIT(A) in this behalf also and restore the matter to his file with the direction to re-examine and re-decide the issue in accordance with law after giving reasonable opportunity of hearing to both the parties.
43. Though we have already held, while disposing of Ground No. 1, that the services claimed to have been rendered by the assessee were neither professional nor technical nor were rendered by the assessee, it, however, needs to be examined further as to whether the parties from whom payments were claimed to have been received were foreign enterprises within the meaning of the Explanation (ii) to Section 80-O.The assessee would not be entitled to deduction Under Section 80-O unless it shows to have fulfilled this condition also. It would therefore not be appropriate to allow a finding to go on record without due examination of all the facts necessary for holding that the assessee had received payments in convertible foreign exchange from a foreign enterprise. We therefore reverse the order of the learned CIT(A) on both the aforesaid issues and restore them to his file for recording the requisite finding and re-deciding the matter in accordance with law. If considered necessary, the learned CIT(A) may call for a remand report on both or any of the aforesaid issues which have been restored to him.
44. Ground No. 2 is treated as allowed in favour of the Department in terms of the aforesaid directions.
Ground No. 3: Expenditure on foreign travel and other expenses relating to activities Under Section 80-O "3. On the facts and in the circumstances of the case, the learned CIT(A) has erred in restricting the expenditure on foreign travel relating to the business eligible for deduction under Section 80-O, just to a portion of 25% without considering the details furnished by the assessee." "4. On the facts and in the circumstances of the case, the learned CIT(A) has erred in reducing the expenditure of salary, postage, telephone & telex and custom clearance expenditure allocated on pro-rata basis without giving any opportunity to the assessing officer and without following the procedure of Rule 46A for admission of new evidence." 46. Briefly stated, the facts of the case as relevant to ground No. 3 are that the AO asked the assessee to justify the expenditure on foreign travel. In reply, the assessee explained before the AO that as it was doing the business with the clients and agents abroad, it treated the foreign travel expenditure as directly related to the business done abroad and therefore as relating to the income from services rendered abroad, vide para 9.1 of the assessment order. Taking note of the aforesaid, the AO held that a sum of Rs. 6,15,588/- being expenditure on foreign travel was liable to the deducted from the net receipts in respect of activities falling Under Section 80-O. On appeal, the learned CIT(A) held as under: "2.16........ As regards foreign travel the expenditure relates to entire foreign exchange earning. The appellant has claimed deduction Under Section 80-O on 25% of total receipts, which pertain to services rendered abroad, A part of traveling would relate to that.
But part of the expenditure would relate to the activities in India also. It would therefore be fair & reasonable to deduct 25% of the travel expenses as having direct nexus to foreign exchange earning for services abroad." 47. Facts as relevant to Ground No. 4 are that the AO worked out the actual income relatable to the receipt in respect of which the assessee had claimed deduction Under Section 80-O after deducting direct expenses and pro-rata indirect expenses. The AO held that the expenses debited to the Profit & Loss Account which were incurred in India, also had nexus with the earning of foreign exchange for services rendered abroad and hence he applied the pro-rata method and worked out the indirect expenditure at Rs. 29,72,351/- as relatable to services abroad and deducted the same from the foreign exchange earning. On appeal, the learned CIT(A) held as under: ".....Section 80-O being a beneficial legislation to encourage FE earning must be interpreted in a liberal manner so as to encourage exports. Further expenses having direct nexus with the earning of FE should be deducted before computing deduction Under Section 80-O. The appellant has submitted calculation in respect of expenses incurred in India having nexus with services rendered abroad at p.
110 to 114 of the paper book which has been perused by me. It comes to Rs. 3,61,795/- as under: -Salaries : 34,047 @ 25% of salaries of related staffForeign Travel : 1,53,897 @ 25% totalPostage, Telephone : 1,66,878 @ 25% of totalCourier Charges : 6,972 @ 25% of total If a deduction has to be made on the above account, the same will have to be restricted to the above said amount and the AO is directed to restrict the disallowance to this figure." 48. It is also the grievance of the Revenue that the learned CIT(A) has admitted certain new evidences in contravention of Rule 46A of the Income-tax Rules, 1962 while deciding the issue under consideration. We have carefully considered the rival submissions. The Revenue is right in its submission that it is the net amount of foreign exchange earning that is eligible for deduction under Section 80-O: CIT v. Asian Cables Corporation, 262 ITR 535 (Bom.). Section 80-O provides for deduction in respect of income and not in respect of gross receipts of foreign exchange. Therefore, direct and indirect expenses relating to the income claimed to be eligible for deduction Under Section 80-O deserve to be deducted in order to arrive at the figure of net receipts. The order of the learned CIT(A) with regard to the matters covered by Ground Nos.3 and 4 are therefore set aside and the matter is restored to him with the direction to re-examine and re-decide the issue in accordance with law after providing reasonable opportunity of hearing to both the parties. He is also directed to ascertain the quantum of expenses, both direct as well as indirect, incurred on earning the receipts Under Section 80-O and deduct the same from the gross receipts so as to arrive at net receipts eligible for deduction Under Section 80-O.Ground No. 5: Addition of Rs. 29 lakhs for services rendered to Chase Manhattan Bank "5. On the facts and in the circumstances of the case, the learned CIT(A) has erred in deleting the addition of Rs. 29 lakhs made for amounts required for the services rendered to Chase Manhattan Bank." 51. Briefly stated the facts of the case as relevant to the aforesaid ground of appeal are that the assessee, at the instance of Chase Manhattan Bank, undertook to shift the goods of Shri Sudhir Desai, an executive of the said Bank from Mumbai to New York. The assessee had raised pro-forma invoice against which the Bank paid Rs. 14 lakhs as advance. The Bank however asked the assessee to wait for shifting the goods pending completion of certain formalities at the Bank level. The assessee therefore kept the goods in its warehouse and raised additional claim for further payment of 96,000 US $ which worked out to about Rs. 29 lakhs against which the Bank went to the Court upon which the Hon'ble Bombay High Court passed an ad-interim order dated 22.8.1991 directing the assessee to deposit Rs. 15 lakhs in the Court out of which the Court allowed the assessee to withdraw Rs. 7 lakhs without furnishing security and further sum of Rs. 8 lakhs on furnishing bank guarantee. All these withdrawals permitted by the Court were subject to the result of the suit. The assessee was also directed to shift the goods. The assessee thus withdrew the said sum of Rs. 15 lakhs out of the disputed amount in addition to Rs. 14 lakhs which it had already received from the Bank on raising the pro-forma invoice.
The assessee also shifted and delivered the goods at New York on 5.2.1992. Both the parties subsequently agreed that the said sum of Rs. 14 lakhs + Rs. 15 lakhs recovered by the assessee pursuant to the order dated 22.8.1991 passed by the Hon'ble Court would be treated to be the full and final settlement of the claim. Since the parties had subsequently stage noted that none of the aforesaid amounts, i.e., Rs. 15 lakhs or Rs. 14 lakhs or both, i.e., Rs. 29 lakhs was declared as income for the assessment year under appeal on the ground that the matter was under adjudication before the High Court. The AO however brought both the amounts to tax. On appeal, the learned CIT(A) deleted the entire addition on the ground that the amount was under dispute and hence was not in the nature of income in the hands of the assessee.
52. We have considered the rival submissions. Perusal of the order dated 22.8.1991 passed by the Hon'ble High Court, a copy of which is annexed to the assessment order, shows that the dispute taken by the Bank to the Hon'ble High Court was with regard to the extra claim of Rs. 29 lakhs made by the assessee and not with regard to Rs. 14 lakhs as already acknowledged and paid by the Bank as also received by the assessee in lieu of which it had originally agreed to shift and deliver the goods at New York. Thus, the aforesaid amount, i.e., Rs. 14 lakhs was clearly exigible to tax as there was no dispute with regard to the said amount. As regards the extra claim of Rs. 29 lakhs made by the assessee, the Hon'ble Court allowed the assessee to withdraw Rs. 15 lakhs. It is not known as to how the aforesaid amount was accounted for by the assessee in its books and as to when it was offered by the assessee to tax. In this view of the matter, we reverse the order of the learned CIT(A) in this behalf and restore the matter to his file with the direction to bring the relevant material on record and re-decide the issue in accordance with law after giving reasonable opportunity of hearing to both the parties.
53. Ground No. 5 is treated as allowed subject to the aforesaid directions. Ground No. 6: Admissibility of Depreciation on Madras property "6. On the facts and in the circumstances of the case, the learned CIT(A) has erred in allowing depreciation of Rs. 93,344/- in respect of Madras property which is a vacant land as per the purchase deed dated 6.5.1991 and without considering that the land is not a depreciable asset and without considering that the entire cost of Rs. 9,33,439/- for vacant land." 54. Facts, as relevant to the aforesaid ground of appeal, are that the assessee had purchased the property at Madras from M/s GS Steers & Co.
for a sum of Rs. 8,10,000/-during the previous year relevant to the assessment year under appeal. The assessee had paid stamp duty and registration charges which together with the purchase price aggregated to Rs. 9,33,439/- on which it claimed depreciation of Rs. 93,344/-. The AO examined the purchase deed in detail and came to the conclusion that what was purchased was only a vacant piece of land without any structure thereon. The AO therefore asked the assessee to furnish the details of structure on the vacant piece of land that was purchased, the date as well as cost of construction of the said structure, and the sources from which the cost of construction was met. Assessee failed to respond to the query raised by the AO and hence he disallowed the depreciation claimed by the assessee. On appeal, the learned CIT(A) allowed the depreciation on the ground that the assessee had raised bills on its customers for storage of their goods which showed the existence of structure on the said property. The Revenue is now in appeal against the aforesaid order of the CIT(A).
55. We have considered the rival submissions. In our view, the Revenue is entitled to succeed in view of the materials brought by the AO on record. He has given detailed reasoning for disallowing the claim of the assessee for depreciation. It is undisputed that what the assessee had purchased was a vacant piece of land. It gave no evidence to show before the AO to establish that the said piece of land had any structure on it. The assessee could not explain as to how and from which source it built or acquired the structure. Acquisition or construction of structure on the said piece of land after it had been purchased was also not proved. It is not known as to how the assessee came to be the owner of the structure, in question. We are therefore unable to hold that the assessee was the owner of the said structure on which it has claimed depreciation. We therefore reverse the order of the learned CIT(A) and restore the order of the AO in this behalf.
"7. On the facts and in the circumstances of the case, the learned CIT(A) has erred in deleting the disallowance of Rs. 38,966/- made for entertainment Under Section 37(2A)." 58. Facts of the case, as relevant to the aforesaid ground of appeal, are that the assessee had claimed expenditure of Rs. 11.99 lakhs as staff welfare expenses which included expenditure of Rs. 3,89,666/- on account of tea, coffee, etc. The AO disallowed 10% thereof as not being for the employees. On appeal, the learned CIT(A) deleted the disallowance on the ground that there was no basis for making the disallowance.
59. Having heard the parties and considered the materials on record, we feel that the impugned disallowance made by the AO should not have been disturbed by the CIT(A). There was no evidence to hold that the entire expenditure shown by the assessee was incurred on the employees alone and not on others. The ad hoc disallowance of 10% as made by the AO cannot therefore be said to be excessive or unreasonable. We therefore reverse the order of the learned CIT(A) in this behalf and restore the order of the AO. "8. On the facts and in the circumstances of the case, the learned CIT(A) has erred in deleting the disallowance of rent of Rs. 20,412/- made without considering that such rent of preceding previous year was actually debited to the P & L Account."' 62. Briefly stated the facts of the case, as relevant to the aforesaid ground of appeal, are that the assessee was found to have debited rent of Rs. 20,412/- to the Profit & Loss Account. The rent, however, did not relate to the previous year under consideration but to the preceding year. Noting that the assessee was following mercantile system of accounting, the AO disallowed the rent which, on appeal, was allowed by the learned CIT(A).
63. Having heard the parties, we are of the view that the assessee has brought no material on record to show that the impugned expenditure had arisen or accrued during the previous year under consideration. It is also not in dispute that the rent did not relate to the previous year under consideration. The order of the learned CIT(A) allowing the rent is therefore reversed and that of the AO is restored.
"9. On the facts and in the circumstances of the case, the learned CIT(A) has erred in deleting the disallowance of Rs. 54,600/- made Under Section 40A(3) for want of any proof justifying the circumstanced requiring such payments in cash." 66. Facts of the case as relevant to the aforesaid ground of appeal are that the tax auditors of the assessee reported in their tax audit report that the assessee had paid Rs. 11,200/-, 13,700/- and Rs. 14,900/- in cash (Total: Rs. 39,800/-) to Delhi Tyres as the party receiving the payment had insisted on cash payment for purchase of tyres. On being asked to explain, the assessee filed the tyre bills and submitted before the AO that the party was not ready to accept the payment by cheque or draft and therefore there was no option except to make the said payments in cash for purchase of tyres. The AO however held that the said cash payments were hit by Section 40A(3) and thus made the impugned addition. On appeal, the learned CIT(A) has deleted the addition.
67. We have carefully perused the facts and considered the submissions.
The case of the assessee is that it had purchased tyres for which the payee insisted on cash payment. The assessee had no option in the matter. Assessee has conducted substantial business. We have no reason to doubt the correctness of the assessee's statement for such a small amount. Considering all the facts and circumstances of the case, we feel that the order of the learned CIT(A) in this behalf does not warrant any interference by us. Ground No. 9 is dismissed.
Ground No. 10: Nature of Income from Interest on Fixed Deposits with Banks "10. On the facts and in the circumstances of the case, the learned CIT(A) has erred in treating the bank fixed deposit interest as income from business, though such interest income is assessable under the head "Income from other Sources".
69. The assessee had shown interest of Rs. 6,91,086/- received on fixed deposits as business income. The AO taxed the same as income from other sources. On appeal, the learned CIT(A) directed the AO, following the decision of the Hon'ble jurisdictional High Court in Godavari Sugar Mills Ltd. v. CIT, 191 ITR 359 (Bom.), to assess the said amount as income from business and not as income from other sources. It is against this order of the CIT(A) that the Revenue is in appeal before the Tribunal.
70. We have carefully considered all the facts of the case and also the submissions made by both the parties. The CIT(A) has held the interest income as taxable as income from business on the ground that the assessee has invested surplus money in FDRs temporarily out of business expediency for giving bank guarantee for business purpose and for keeping some spare money to meet any business contingency. However, there is no evidence before us to sustain the aforesaid finding recorded by the learned CIT(A). No such explanation seems to have been given before the AO. We therefore consider it appropriate to set aside the order of the learned CIT(A) and restore the matter to him with the direction to bring the relevant material on record and re-decide the issue afresh in accordance with law after giving reasonable opportunity of hearing to both the parties.
71. Ground No. 10 is treated as allowed with the directions, as aforesaid.