Davy Powergas India Pvt. Ltd. Vs. Central Board of Direct Taxes and Another - Court Judgment

Excerpt:
- indian penal code, 1860 [c.a. no. 45/1860].sections 124-a, 153-a, 153-b, 292, 293 & 295a; [f.i. rebello, smt v.k. tahilramani & a.s. oka, jj] declaration as to forfeiture of book held, the power can be exercised only if the government forms opinion that said publication contains matter which is an offence under either of sections 124-a, 153-a, 153-b, 292, 293, 295a of i.p.c., - .4. the conditions in section 80-o are required to be satisfied to be satisfied before the assessee is entitled to a deduction from the income so received as set out in that section. the nature of the work clearly does not fall within the purview of section 80hhb. the conclusion, therefore, of the central board of direct taxes that the activities under the agreement include installation of a plant outside india, which amounts to a 'foreign project' within the meaning of section 80hhb, is clearly without application of mind to the terms of the agreement. it has said that section 80-o only empowers the board to approve the contract on being satisfied that it gives rise to receipts qualifying for deduction under section 80-o and nothing more.mrs. sujata manohar, j.1. the petitioner-company is engaged in the activity of rendering technical services, preparation of designs and providing technical know-how to a number of industries. it claims to have a staff of more than 200 highly qualified engineers. the petitioner-company entered into an agreement dated september 21, 1982, with an english company known as 'albright and wilson limited'. the english company was engaged in setting up a factory in thailand for the manufacture of sodium tripolyphosphates (stpp). under the agreement of september 21, 1982, the petitioners agreed to provide certain services to messrs. albright and wilson limited, as set out in schedule 1 of the agreement.2. by their application dated april 19, 1983, filed before the central board of direct taxes, the petitioners applied for the approval of this agreement under section 80-o of the income-tax act, 1961. the central board of direct taxes, however, after some correspondence, by its letter dated february 24, 1986, rejected the application of the petitioners and declined to approve the agreement under section 80-o of the income-tax act 'for the reasons that the activities under the agreement include installation of plant outside india which amounts to execution of 'foreign project' within the meaning of section 80hhb of the income-tax act and hence outside the scope of section 80-o.' the present petition challenges this refusal of approval by the central board of direct taxes to the agreement of september 21, 1982.3. chapter vi-a of the income-tax act provides for deductions to be made in computing total income. section 80-o forms a part of group c under this chapter, dealing with deductions in respect of certain incomes. the material part of section 80-o provides :'where the gross total income of an assessee, being an indian company, 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 services rendered or agreed to be rendered outside india to such government or enterprise by the assessee. . . . there shall be allowed. . . . a deduction of an amount equal to. . . .' 4. the conditions in section 80-o are required to be satisfied to be satisfied before the assessee is entitled to a deduction from the income so received as set out in that section. section 80-o at the material time contained a proviso to the effect that this deduction would be available provided an application for the approval of the agreement in the prescribed form is made before the central board of direct taxes as set out therein. accordingly, the petitioners had applied for approval of the central board of direct taxes under section 80-o.5. from april 1, 1983, section 80hhb has been inserted in chapter vi-a. the relevant part of this section is as follows :'80hhb. - (1) where the gross total income of an assessee being an indian company or person (other than a company) who is resident in india includes any profits and gains derived from the business of, - (a) the execution of a foreign project undertaken by the assessee in pursuance of a contract entered into by him, or (b) the execution of any work undertaken by him and forming part of a foreign project undertaken by any other person in pursuance of a contract entered into by such other person, . . . . there shall. . . . be allowed. . . . a deduction from such profits and gains of an amount equal to. . . . (b) 'foreign project' means a project for - (i) the construction of any building, road, dam, bridge or other structure outside india; (ii) the assembly or installation of any machinery or plant outside india; (iii) the execution of such other work (of whatever nature) as may be prescribed.' 6. by reason of sub-section (5) of section 80hhb, if the income accrues to an assessee in respect of execution of a foreign project as defined in section 80hhb, it would be eligible for deduction under section 80hhb and not under any other head forming part of group c of chapter vi-a. this is to say, where the income falls under section 80hhb, it would not be eligible for any deduction under section 80-o.7. in the light of these two sections, we have to examine the terms of the agreement which are before us. the recital in the agreement refers to the petitioner as the 'contractor'. the recitals refer to the contractor being in possession of specialised design, expertise and engineering skills. the recitals also refer to the fact that the contractors agreed to make available to messrs. albright and wilson limited the required engineering expertise for the use by them outside india for the implementation of a project for construction of a sodium tripolyphosphates (stpp) plant in thailand. clause 2 of the agreement states as follows :'2.0 subject and scope of the work and technical services covered by the contract : 2.1 in consideration of the payment by the client to the contractor of the contract price in accordance with clauses 3 and 4 below, the contractor shall provide the following services being those defined in schedule 1 of this agreement. 2.1.1. the technical services comprising but not limited to design engineering for civil, mechanical, electrical, piping and instrumentation for the plant in thailand.' 8. schedule 1 which is annexed to the agreement defines the scope of service to be rendered by the contractor. in respect of project management, the petitioners are required, inter alia, to develop an overall project schedule. they are also required to undertake cost control and to prepare and continuously update the equipment list of the plant. under the heading 'engineering services', they are required to prepare p and i diagrams based on the flow sheets and related date, as set out therein. under the heading 'piping', they have to prepare plant layout and equipment, general arrangement, drawings, piping specifications and various other drawings, as set out therein. they are also required to carry out technical evaluation of quotations for material supply and prepare installation tender documents. under the heading 'mechanical', they are required to produce specifications, review drawings furnished by selected vendors, prepare load lists for use by civil and structural departments and to prepare equipment erection tender documents. similarly, under the headings 'civil engineering', 'structural engineering', 'electrical' and 'instrumentation' also the petitioners are required to prepare drawings, schedules, quotations and also carry out technical evaluation of quotations which may be received. under the heading 'engineering support services' they are required to prepare lubrication schedules for the plant and prepare spare parts schedules also. the agreement is in terms only for rendering of these services. 9. the question is whether such an agreement can be considered as falling under section 80hhb. the term 'foreign project' is defined under section 80hhb as a project for the construction of any building, road, dam, bridge or other structure outside india or the assembly or installation of any machinery or plant outside india. the agreement in question does not require the petitioners either to construct any structure outside india or to assemble any plant or machinery outside india, nor are they required to execute this work as a part of a foreign project undertaken by somebody else. the nature of the work clearly does not fall within the purview of section 80hhb. the petitioners have in their application, set out against column 5 that the income to be received is in consideration for supply of detailed designs, technical information and specifications of equipment for exclusive use by the foreign enterprise in the construction of sodium tripolyphosphate (stpp) project in thailand, including fees for deputation from time to time of engineers and technicians in the employment of the applicant-company, who have the skill and expertise for rendering the technical obligations undertaken in terms of the agreement dated september 21, 1982. they have also, in the course of correspondence, stated that they are not concerned with the work of construction. the conclusion, therefore, of the central board of direct taxes that the activities under the agreement include installation of a plant outside india, which amounts to a 'foreign project' within the meaning of section 80hhb, is clearly without application of mind to the terms of the agreement.10. section 80-o provides for deduction, inter alia, in respect of fees which may be received in consideration of technical services rendered or agreed to be rendered outside india to a foreign enterprise. it also covers income in consideration for use outside india of information concerning industrial, commercial or scientific knowledge, experience or skill made available to a foreign enterprise by the assessee. therefore, the language of section 80-o directly covers the agreement in question.11. in this connection mr. kaka, learned advocate for the petitioners, has drawn our attention to the decision of the supreme court in the case of continental construction ltd. v. cit : [1992]195itr81(sc) . the supreme court in that case considered the provisions of section 80hhb and section 80-o. it has said that section 80-o only empowers the board to approve the contract on being satisfied that it gives rise to receipts qualifying for deduction under section 80-o and nothing more. all that the board has to do is to grant an approval to the agreement for the purpose of section 80-o. it has nothing more to do. the supreme court has also clarified that after the insertion of section 80hhb, in the matter of a receipt governed by section 80hhb and section 80-o, the former and not the latter would prevail. the present case falls entirely under section 80-o and looking to the terms of the agreement, the board ought to have granted to the petitioners approval under section 80-o as the provisions of section 80hhb are not attracted at all. there is a clear non-application of mind by the board to the relevant facts in the light of section 80-o and 80hhb.12. in the premises, the petition succeeds and the rule is made absolute in terms of prayers (a) and (b).13. the respondents to pay to the petitioners the costs of the petition.