1. This appeal by the assessee for Assessment Year 1978-79 arises out of the order of CIT(A)-X, Chennai.
2. The only issue involved in grounds of appeal relates to allowability of deduction Under Section 80-O of the I.T. Act, 1961. The facts of the case as emerge out from the material on record are that the assessee is proprietor of M/s SNQS International, Tirupur. He is a foreign exchange earner by rendering services to foreign buyers of hosiery goods. For A.Y. 1997-98, the assessee received commission on which deduction Under Section 80-0 @ 50% amounting to Rs. 44, 83,074/- was claimed. Before assessing officer, the assessee vide his letter dated Nil explained the nature of work done as under: (a) Sourcing: "In locating suitable sources for our international clients depending upon their requirements for exp. If a client from UK is interested in buying knitted garments we help them by locating suitable and reputed manufacturers of like products in Tirupur".
(b) Negotiating: "We help in finalizing prices between our international clients of various market levels and the manufacturers".
(c) Quality controlling: "Once orders are finalized by our client, it is our responsibility to ensure that the orders are executed by the manufacturers in such a manner that the product is of the buyers required quality stands. We have a team of quality controllers who monitor the quality of goods at all stages of production and ensure that the end product that is exported is upto our client's expectations".
(d) Shipping logistics: "We also ensure that the goods are shipped as scheduled which is of prime importance to our client owing to the nature of business. For these purposes we have separate shipping coordinators who advise proper shipping procedures to the manufacturers so as to enable proper dispatch of goods and documents and advise the buyer of the shipment details." 3. Before the AO, the Id.A.R. of the assessee relied on the decision of the Hon'ble Supreme Court in the case of CBDT and Ors. v. Oberoi Hotels India P. Ltd. 231 ITR 148 in support of the claim for deduction Under Section 80-O. The assessing officer distinguished the facts of the case of the assessee from the facts of the said case. In that case services were rendered abroad (Kathmandu) where the foreign company was situated. The issue for consideration in the case of Oberoi Hotels (supra) was whether the services rendered by it amounted to technical services (prior to amendment).The Apex Court held that the services rendered are professional services amounting to technical nature and therefore, eligible for deduction Under Section 80-O of the Act. But in the case of the present assessee, the services were rendered in India for which the assessee was in receipt of consideration in foreign currency. The assessee's claim based on Board's circular No. 700 dated 23-03-1995 was also rejected on the ground that the service by way of sourcing, negotiating, quality controlling and shipping are rendered to overseas buyers in India. The AO therefore, came to the conclusion that the assessee was not eligible for deduction Under Section 80-O of the Act.
4. Before the CIT(A), the assessee submitted that under Explanation (iii) to the proviso to Section 80-0, it has been explained that services rendered or agreed to be rendered outside India shall include services rendered from India but shall not include the services rendered in India. There was some ambiguity in the explanation and that has been clarified by the CBDT in its circular No. 700 dated 23.03.1995 clarified as follows: "It is clarified that as long as the technical and professional services are rendered from India and are received by a foreign Govt.
or enterprise outside India, deduction Under Section 80-O would be available to the person rendering the services even if the foreign recipient of the services utilizes the benefit of such services in India." It was further submitted that the foreign recipients have utilized the services of the assessee in India and so, even though the services are rendered in India, he is eligible for exemption Under Section 80-O. The services rendered by the assessee are technical and professional as decided by the Supreme Court in CBDT v. Oberoi Hotels India P. Ltd. 231 ITR 148 (SC), in which the services were rendered in India. He also stated that even in case, the principles in the Circular No. 700 of the CBDT is not accepted as applicable in this case, the fact that is that the services of the assessee have been rendered partly abroad and partly in India and exemption Under Section 80-O is applicable to the services rendered outside India. For practical reasons the services rendered in India and outside may be taken as equal and relief granted.
5. The ld. CIT(A) relying on the order of his predecessor in earlier years held that the activities of the assessee indicate that the services were rendered in India and therefore the assessee was not be eligible for deduction Under Section 80-O. He also observed that the circular issued by the CBDT does not provide that services rendered "from India" will include services "in India", He was also of the view that the facts of the case decided by the Hon'ble Supreme Court relied upon by the assessee were distinguishable from the facts of the assessee's case.
6. Before us the ld. AR of the assessee argued that the interpretation of Section 80-O made by the AO and CIT(A) is not proper. The cases decided by courts of law and circular of the CBDT indicate that 'services' need not be carried out outside India. In this case, assessee's services in locating suitable sources for international clients and other related services were utilized by non-resident parties and hence the assessee is entitled to deduction Under Section 80-0. He relied on following decisions: (6) Overseas Merchandise Inspection Co. India P. Ltd. v. DCIT, 89 ITD 698(Cal.) 7. On the other hand, the ld. D R relying on the agreement entered into between the assessee and foreign enterprises, submitted that the services were rendered in India and therefore the assessee was not eligible for deduction under Section 80-O of the Act. He relied on the following decisions: 8. We have considered the rival submissions. Section 80-O as applicable for A.Y. 1997-98 is reproduced as under: "Where the gross total income of on 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 similar payment received by the assessee from the Government of a foreign State or a foreign enterprise in consideration of 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..........." In other words, deduction Under Section 80-O will be available if gross total income of: (ii) includes any income by way of royalty or commission, fee or similar payments (v) 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 etc.
and the income is received in India or brought into India in convertible foreign exchange within the specified period, such assessee will be entitled to deduction @ 50% of such income included in gross total income.
9. From a plain reading of the provisions of Section 80-O, it is clear that income received in convertible foreign exchange should have nexus with services rendered concerning any patent, invention, model design, industrial/commercial information etc. to a foreign enterprise or Government of foreign State and such information is used by such foreign party outside/from India. In the instant case, the assessee's claim is that it has rendered professional and technical services to parties partly in India and partly outside India and for the purposes of deduction Under Section 80-O services rendered in India should also be considered. The expression "agreed to be made available or provided...." appearing in Section 80-O indicate that the terms of the agreement must specify the services to be rendered outside India or from India and there should be nexus between the income received in convertible foreign exchange and such services rendered. In order to ascertain the nature of services rendered, it is necessary to examine the terms and conditions of the agreement entered into between foreign enterprises and the assessee. During the year under consideration the assessee has received commission from four parties. The copy of agreement with only one party namely 'M/s Perimark' was filed before the Assessing Officer. Its relevant portion is reproduced as under: " We write to confirm your appointment as a buying agent for Penneys and Perimark on a non-exclusive basis, in respect of various suppliers to whom you will be our representative.
Commission of 3% will be payable on the net value of all purchases which you introduce, and this will be paid to you on production of an invoice giving details of the supplier with supplier invoice number, our order number, Kimball number, quantities etc.
Payments will be made to you at the same time as the Supplier is paid, and will be by 'Swift Transfer' to our nominated bank account.
We expect that you will carry out the following functions, and any other that may arise from time to time: 1. Locate and source manufacturers and suppliers of products that may be of interest to us.
4. Progress and chase orders and production with suppliers, and liaise with our buyers.
5. Advise us of any situation that may affect our position in the market, 6. Assist with any problems that may arise with regulatory bodies and financial institutions.
We require an up to date listing of those supplies that you will represent, and will need this list to be amended as new suppliers are introduced or old suppliers are deleted.
This agreement will run for one year from 31^st January, 1997 to 30^th January, 1998 and will automatically renew on a month by month basis unless terminated by either party giving one months notice." 10. A perusal of terms and conditions enumerated in the agreement, it is clear that the assessee had provided services to M/s Perimark as a buying agent. The assessee under the terms of appointment as a buying agent was required to locate the manufacturers, suppliers of products and supply of samples of goods and fabric, ensuring quality control during production; monitoring the progress and chasing of orders etc..
The assessee as per terms of agreement was the representative of foreign enterprises in respect of various suppliers. The assessee was to receive commission at the same time when the supplier was paid.
Therefore the relationship between the assessee and foreign enterprise was that of principal and agent and for rendering the services as an agent the assesee was paid commission @ 3% of net value of purchases.
Further, a letter dated 23-1-1997 from M/s France Sales Knitwear is also available in the paper book filed by the assessee. As per this letter the assessee in the capacity of buying agent was paid commission @ 3% on CIF value of goods supplied. Also in brief profile of the assessee (P-36 of paper book), the assessee has introduced himself to the foreign parties as 'leading buying agency' based in Tirupur with branch offices in Madras, Bombay and Colombo. Therefore, the terms and conditions of agreement with PERIMARK, letter of France Sales Knitwear, introduction profile prove conclusively that the assessee had provided services to foreign enterprises as a buying agent in procuring goods on behalf of the principals.
The assessee's claim that it was providing professional and technical services pertaining to manufacturing, fabric and products, shipping etc. to foreign enterprises, thus does not emerge out from the wordings of the agreement and his activities. There is no evidence on record to prove the assessee was rendering technical and professional services to foreign enterprises from India and such services were delivered and used by such enterprises from /outside India.
11. Another condition for allowability of deduction under Section 80-O to be satisfied is that the specified services rendered should be used by the foreign party. Hon'ble Delhi High Court in the case of EPW Da Costa and Another (supra) examined the scope of word 'use' appearing in Section 80-O. It is held: "The word 'use' is very general word. It is not necessary that the use to which the information is put to use must be practical, that is to say, it must result in manufacturing of some concrete thing. The foreign enterprises (in this case BBC, a broadcasting Corporation) can be said to use the information when it formulates or modifies its broadcasting programmes to India according to guidelines given to BBC by the said information." In the case of assessee it is a question of guess as to what professional and technical services were rendered which were used by the foreign enterprises for their business purpose from India or outside India except purchase of goods through the assessee, the buying agent.
Therefore, the question of 'use' of such services by the foreign enterprise does not arise.
12. As a matter of fact, the foreign enterprise appointed the assessee as their buying agent and the assessee had rendered services as buying agent in the capacity of their representative to the foreign parties.
If the assessee was rendering services on principal to principal basis, he should have received commission, the moment the services were rendered. But in this case as per the terms of payment, the amount was to be received @ 3% of net purchases (FOB value) and that too at the time when supplier was paid. In a case where if goods sent by the assessee were not matching with the samples, the consignment would have failed and consequently the assessee would have lost the commission also because the supplier would not get the payment. Therefore the buying agency services rendered as an agent by no stretch of imagination could be considered as professional and technical services which could be used by a foreign enterprise outside/ from India. In fact, no information was provided by assessee apart from being a buying agent to foreign enterprises which could be used outside India.
13. The assessee had relied on several decisions in support of his contention that professional and technical services were rendered to foreign enterprises. In case of E.P.W.Da Costa v. Union of India , the assessee entered into agreement with BBC, a foreign enterprise under which the assessee was to undertake an audience research study in Hindi speaking areas in Indian States to assess radio listening habits of people and to use their technical knowledge to advise on a questionnaire in the proposed audience research was held to be entitled for approval by CBDT for the purposes of deduction under Section 80-O of the Act. The other orders of various ITATs relied upon by the assessee are distinguishable on facts that in those cases the assessee were collecting commercial or technical knowledge, supplying them to foreign parties and such information was used by foreign enterprises for their business purposes outside India.
Therefore, assessee's case is not covered by the decisions relied upon by it. The assessee being buying agent, the decision of Hon'ble Supreme Court would also not apply to the facts of the case before us. The facts are distinguishable.
14. Hon'ble Madras High Court in the case of CIT v. Standard Motor Products of India Ltd. (1962) 46 ITR 814 (Mad) held that the exemption or concession under these provisions is to be strictly construed. This in order to be entitled to exemption or concession, an assessee must strictly come under the terms of the provisions. But in construing these provisions one must construe these provisions reasonably in the context of the purpose for which these provisions have been introduced.
It is also settled law that the onus is on the assessee to prove that he qualifies for the deduction. This has not been discharged by the assessee. Question of liberal interpretation in the absence of evidence that assessee is entitled for deduction, does not arise. Hon'ble Supreme Court in case of Novopan India Ltd. v. Collector of Central Excise and Customs, Hyderabad "Exemption being in the nature of exception to be construed strictly at the, stage of determination whether assessee falls within its terms or not and in case of a doubt or ambiguity, benefit of it must go to the State. But once the provision is found applicable to him.
full effect must be given to it" In view of above decisions, the request by the assessee that services rendered partly outside India and partly inside India should be liberally construed to mean rendered from India cannot be accepted.
Such an interpretation would open flood gates for exemption Under Section 80-O in case of all buying agents, which is not the intention of the legislature.
15. Considering the discussions in foregoing paragraphs, the services rendered by assessee as buying agent will not qualify to come within the ambit of expression 'professional and technical services rendered.
The services by way of sourcing, negotiating, quality controlling and shipping logistics have been carried out by the assessee in the capacity of a buying agent as per terms and conditions of 'buying commission agreement'. The reliance placed by the ld. AR of the assessee on various decisions will be of no help on the ground that in all those cases technical/commercial know-how or design etc. were supplied out of India. Circular No. 700 of the CBDT relied on by the assessee will not be applicable as the assessee had not provided any professional or technical services/information to foreign enterprises to be used outside from India other than acting as buying agent for the principals. In order to be entitled to exemption or concession, an assessee must strictly come under the terms of the provisions. Since the services rendered as buying agent do not satisfy the conditions for deduction under Section 80-O, we are of the view that assessee is not entitled for deduction.