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Petitioner: CENTRAL BOARD OF DIRECT TAXES and others VS Respondent: OBEROI HOTELS (INDIA) PVT. JUDGMENT
Court Name: Supreme Court of India Judge(s): D. P. Wadhwa, Mrs. Sujata V. Manohar Title:CENTRAL BOARD OF DIRECT TAXES and others vs OBEROI HOTELS (INDIA) PVT.
JUDGMENT
Reported As: 1998 PTD 3550 Result: Appeal dismissed Judgment JUDGMENT ' D.P. WADHWA, J.---The Central Board of Direct Taxes (CBDT) is in appeal. It is aggrieved by the judgment dated May 29, 1981 (see (1982) 135 ITR 257), of a Division Bench of the Delhi High Court quashing its non-Approval under section 80-0 of the Income Tax Act, 1961 (for short "the Act"), to an agreement dated November 29, 1969, entered into by the respondent with Soaltee Hotel Pvt. Ltd., Kathmandu (Nepal), a foreign enterprise. Section 80-0 is as under: "80-0. 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; under an agreement approved by the Board in this behalf, 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 for regulating payments and dealings in foreign exchange, there shall be allowed, in accordance with and subject to the provisions of this section, a deduction of the whole of the income so received in, or brought into, India in computing the total income of the assessee:
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' Provided that the application for the approval of the agreement referred to in this subsection is made to the Board before the 1st day of October of the assessment year in relation to which the approval is first sought: ' Provided further that approval of the Board shall not be necessary in the case of any such agreement which has been approved for the purposes of the deduction under this section by the Central Government before the 1st day of April, 1972, and every application for such approval of any such agreement pending with the Central Government immediately before that day shall stand transferred to the Board for disposal. ' Explanation--The provisions of the Explanation to section 80-N shall apply for the purposes of this section as they apply for the purposes of that section..." ' The impugned judgment is reported in (1982) 135 ITR 257 (Delhi). ' As required by section 80-0, the respondent sought approval of the agreement as falling within the purview of the section. The Central Board of Direct Taxes declined to grant approval. However, it did not communicate any ground as to on what basis approval was not granted. The respondent filed a writ petition in the Delhi High Court, it being Civil Writ Petition No,1301 of 1975. The writ petition was allowed by a Division Bench of the Delhi High Court on January 5, 1979, with a direction to the Central Board of Direct Taxes to consider the matter afresh and give a decision after granting a hearing to the respondent. This order of the Division Bench is reproduced hereunder: "The impugned order declining to give approval to the agreement under section 80-0 of the Income Tax Act, 1961, does not give any reasons for the decision. The reasons now stated in the counter affidavit have become known to the petitioner for the first time. The petitioner had no opportunity of meeting the same. The impugned order is, therefore, set aside and the case is sent back to the Board for a fresh consideration of the request of the petitioner for the approval of the agreement under section 80-0 and the new decision by the Board will be given after giving a hearing to the petitioner. The writ petition is allowed in the above terms. No order as to costs." ' After that the respondent represented its case before the Central Board of Direct taxes but again the Central Board of Direct Taxes did not find any ground under the section to approve the agreement and by order dated February 26, 1980, communicated its decision to the respondent. We reproduce the relevant portion of this order of the Central Board of Direct Taxes as under (pages 63-64 of the paper book): "(2) The Board have carefully reconsidered the matter in pursuance of the directions contained in the judgments of the Delhi High Court in the Civil Writ Petitions Nos.429 of 1974 and 1301 of 1975, on the basis of the written and oral arguments advanced by you. It is regretted that the Board does not consider it necessary to revise the decisions already communicated to you in the Board's orders referred to above owing to the following reasons: (1) The services being rendered by you to the foreign party in both cases are in the nature of managerial services. As observed by the Delhi High Court in Civil Writ No,901 of 1975 (J.K Bombay Ltd. v. CBDT (1979) 118 1TR 312) the running of a business or the management of a business does not amount to the rendering of technical services. (2) What is being given under the agreements can also not be viewed as information concerning industrial, commercial or scientific knowledge or skill. It is not as if some information is being supplied by you which is made use of by the foreign parties. Under the two agreements. You are yourself functioning in the foreign countries. (3) Though your name is being utilized by the two foreign hotels, and the fee received for the use of your trade, name would be covered by the provisions of section 80-0 yet the amount relatable to this aspect of the total services rendered under the two agreements would be so small that it is not easy to quantify the same for purpose of section 80-0 of the Income Tax Act, 1961,"
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' This led the respondent to approach the High Court again by filing a writ petition on July 28, 1980, which was allowed by a judgment dated May 29, 1981, which is now impugned before us. In order to appreciate the rival contentions, it will be appropriate to refer to some of the clauses of the agreement which the respondent entered into with the foreign enterprise. ' The foreign enterprise owned and operated in Kathmandu (Nepal) a hotel under the name and style of Soaltee and a restaurant at Tribhuvan Airport, Kathmandu. This foreign enterprise wanted to construct and add to its hotel approximately 190 more rooms and also wanted to obtain contracts for various airlines catering operating at Tribhuvan Airport. The respondent had a name and worldwide reputation in the hotel field and was experienced and had the technical skill for providing professional architectural, engineering and decorating services and was qualified to assist in planning, designing, constructing, furnishing and equipping of hotels and was also engaged in the development, leasing and operation of hotels under the name "Oberoi group" in the interest of facilitating international travel and trade. In view of the name and tradition, experience and skill of the respondent in the hotel industry for profitable operation of hotels and for bringing the hotel to international standards and for ensuring better operational results and promotion of the business of the hotel. The foreign enterprise desired that its operations be taken over by the respondent with effect from December 1, 1969, on the terms and conditions set out in the agreement. The parties agreed (formulated from the agreement): (1) During the term of the agreement the hotel of the foreign enterprise shall be known and designated as the Hotel Soaltee Oberoi. (2) The agreement will remain in force for fifteen years. It could be extended for a further period of five years at the option of the respondent on the same terms and conditions. (3) The respondent would recruit and train the requisite staff of the hotel through such training programme including hotel schedule, if any, and other training techniques, as it shall deem, necessary. The respondent shall select suitable personnel for adequate and proper training in hotel management and operation, always giving preference however to Nepalese nationals. (4) The respondent would use its best efforts to advertise and promote the business of the hotel through its existing facilities. Soaltee Hotel, the foreign enterprise, subject to later amortization and reimbursement as provided in the agreement, shall pay or reimburse the respondent in full for all costs and expenses of the said training and for all the costs of advertising, promotion, literature, travel and business entertainment including celebrations and ceremonies incurred prior to or concurrently with the beginning of full operation of the hotel by the respondent. (5) The respondent in consultation with the foreign enterprise will make available for the hotel, its staff of consultants and specialists who were qualified to provide advice in the various departments and aspects of hotel operations. The services of the members of the respondent's staff and of any outside consultants engaged by the respondent on retainer will be rendered on the basis of reimbursement by the foreign enterprise through the respondent of the salaries of the respondent's personnel during the time they rendered services directly for Hotel Soaltee and reimbursement of the amounts paid to such consultants under their retainer plus other expenses incurred by such personnel and consultants in performing services for the hotel of the foreign enterprise. (6) The respondent was to provide training and instruction for key personnel for the Hotel Soaltee in order to prepare them to serve the hotel in the capacities for which they would be trained. Such key personnel to be trained will be placed in existing hotels of the respondent and will be instructed and supervised by the management of such hotels and progress reports will be made to the board on such personnel. Travelling and other expenses of the trainees shall be borne by the foreign enterprise though the respondent shall make arrangement for their boarding and lodging at its own cost and also pay suitable pocket allowances to them.
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(7) The respondent was to use the Hotel Soaltee solely for the operation of a first class hotel on international standards and all activities in connection therewith which are customary or usual for such operation. It is understood that the respondent shall have within the terms and provisions of the agreement, absolute discretion in the operation of the hotel but the same shall always be and be deemed to be owned by the foreign enterprise exclusively. (8) The foreign enterprise and the respondent shall be entitled to 85 per cent and 15 per cent respectively of the gross operating profits as defined under the terms of the agreement. The agreement prescribed as to how payments of their respective shares would be met for each financial year. (9) The respondent was to maintain full and adequate books of account and other records reflecting the results of the operation of the hotel in accordance with the uniform system of accounts for hotels though not inconsistent with the provisions of law applicable in Nepal. (10) Provision was to be made as to, how the amount received during the operation of the hotel shall be deposited in the bank account and how that account had to be operated. The respondent was to submit a monthly budget of the estimated income and expenditure in detail and the gross operating profits in terms of the agreement to the foreign enterprise. The agreement contained details as to how allocation was to be made for meeting different expenses and for payment of taxes, etc. Gross operating profits and gross operating losses were defined. A limit was put on expenses to be incurred for advertisement, etc., which could not be more than three per cent of the total sales. (11) For worldwide promotion of the hotel, the foreign enterprise desired that the respondent shall, in any manner it regards fit and proper, make necessary arrangements with any company or companies, agency or agencies in any one or more countries for specialized hotel services and worldwide reservation facilities. (12) At the time of taking over the operation of the Hotel Soaltee, the respondent is to purchase the existing stock of food and beverages, etc., and the foreign enterprise shall be paid the cost thereof. The amount paid by the respondent to the foreign enterprise shall be payable to the respondent out of the revenue of the hotel before the expiry of one year. (13) There is a provision for repairs, maintenance, alterations, structural repairs and changes in the hotel. (14) The respondent is to deliver to the foreign enterprise on or prior to the end of each month a profit and loss statement showing the results of the operation of the hotel for the preceding calendar month and year-to-date and containing other details. (15) The respondent is to have due representation in the board of directors of the foreign enterprise and at least one person nominated by the respondent which always would represent it in all the meetings, deliberations and any decisions arrived therein in connection with the hotel business. ' These are some of the main terms of the agreement which according to the appellant did not satisfy the requirement of section 80-0 of the Act. ' The High Court in the impugned judgment, after examining the terms of the agreement in detail, observed that it could not be disputed that the running of a modern hotel required highly specialized management techniques, i,e,, a combination of scientific management and highly specialized inn-keeping and that the modern system of preparation of food and beverages also involved considerable technical skill and know-how. The High Court, however, negative the plea of the respondent that it was making available to the foreign enterprise the information concerning industrial, commercial or scientific knowledge, experience or skill as the High Court did not find any such provision in the agreement. The High Court was, therefore, of the opinion that the respondent was rendering technical services to the foreign enterprise and would in any case fall within the purview of section 80-0 of the Act.
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' Mr. Shukla. Learned counsel for the Central Board of Direct Taxes, contended that since the High Court did not agree with the respondent that it was giving any information to a foreign company as there was no provision in the agreement, it was only the first part of section 80-0 which this Court was to examine if the agreement was in consideration of technical services rendered or agreed to be rendered outside India by the respondent that it could claim deduction of the income received in India or abroad in computing the total income of the respondent which is received by way of royalty, commission, fee or any other similar payment. We do not think, however, that we can debar the respondent from bringing its case in the first part of section 80-0 which provides for similar payment received by the assessee in consideration for the use outside India, of information concerning industrial, commercial and scientific knowledge. Experience or skill made available or provided or agreed to be made available or provided to a foreign enterprise by the assessee. The respondent can certainly support the agreement as falling under section 80-0 on any ground on which it had approached the High Court in its writ jurisdiction. We, therefore, have to examine if the agreement in question falls within the purview of section 80-0 on any of the conditions stipulated therein entitling the respondent to claim deduction. Mr. Shukla referred to the guidelines issued by the Central Board of Direct Taxes to examine if the agreement provides for technical services or managerial services or both. He also referred to Circular No,187, dated December 23, 1975, of the Central Board of Direct Taxes. The circular is reproduced in (1976) 102 ITR (St.) 83. The circular also sets out the form of the application for approval of the agreement under section 80-0 of the Act. We may reproduce the relevant part of the circular as under: ' Circular No,187, dated December 23, 1975. ' SUBJECT: SECTION 80-0 OF THE INCOME TAX ACT, 1961--GUIDELINES FOR APPROVAL OF AGREEMENTS. ' With the twin objective of encouraging the export of Indian technical know-how and augmentation of the foreign exchange resources of the country, section 80-0 of the Income Tax Act, 1961, provides for concessional tax treatment in respect of income by way of royalty, commission, fees or any similar payment received from a foreign Government or a foreign enterprise, subject to the satisfaction of certain conditions laid down in the said section. 2. One of the conditions for availability of the tax concession under section 80-0 is that the agreement should be approved by the Central Board of Direct Taxes in this behalf. The application for the approval of the agreement is required to be made to the Central Board of Direct Taxes before the 1st day of October of the assessment year in relation to which the approval is first sought. The form of application for this purpose has been standardized and specimen is given in the Appendix. 3. The object of the provision when it was first introduced as section 85-C in the Income Tax Act, 1961, was stated in Board's Circular No,4-P (LXXVI-61) of 1966, to be to encourage Indian companies to export their technical know-how and skill abroad and augment the foreign exchange resources of the country. This 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 evolved the following guidelines for the grant of such approval: (ii) An agreement which is in very general or broad terms or is either vague or does not give sufficient details may not be approved... (iv) Information concerning industrial, commercial or scientific knowledge, experience or skill made available or provided, or agreed to be made available or provided, should be information not merely of a statistical type collected or collated from commercial or scientific journals or other commonly available sources of information, but it should be information concerning the industrial, commercial or scientific knowledge, experience or skill possessed or developed by the Indian party and which is made available or provided to the foreign party under the agreement. Information
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regarding trade enquiries or reports regarding the credit or trade-worthiness in individual cases will not qualify for this purpose (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, organization, sales, finance and accounts, will not qualify for this purpose Technical services which are rendered or to be rendered in India will also not qualify for this purpose. (vi) Agreements for recruitment or mere supply of technical personnel from India for service outside India will not be eligible for approval. (vii) Agreements which provide for participation in business or management operations abroad simplicity in return for a specified percentage of commission or profit will not be eligible for approval... ' It may be pointed out that these guidelines are merely illustrative and should not be taken as exhaustive. These may be modified or supplemented in due course in the light of the different types of cases which come up for approval. Even where the agreement is bona fide and genuine, the Board may refuse approval in appropriate cases where in the opinion of Board, grant of approval would not be in the larger public interest or where it would not further the objectives underlying the tax concession..." ' It was submitted that taking into account the provisions of section 80-0 and the guidelines on the subject, the Central Board of Direct Taxes rightly came to the conclusion that the agreement did not justify itself for approval. There was no arbitrariness or discrimination in the guidelines. Mr. Shukla said that the agreement was basically for the respondent to manage and run the entire hotel of the foreign enterprise. He stressed on the recital in the agreement which said that the agreement was to run and operate the hotel by the respondent for a period of 15 years with an option to extend the agreement for a further period of five years. Mr. Shukla referred to other clauses of the agreement relating to operation, the amount payable, accounts, capital, representation in the board of directors, filing of suits and to defend the same as agents of the foreign enterprise and also the clauses relating to training of hotel personnel and providing consulting services and the like clauses. He said that other clauses of the agreement merely provided as to how the agreement was to operate and what were the rights, duties and obligations of the respondent while operating the hotel of the foreign enterprise. It was only the expertise of the respondent in the area of running hotel which it was going to provide. Mr. Shukla said that it was, in fact, only managerial services that were to be provided under the agreement and that management of the hotel of foreign enterprise would not fall within the provisions of section 80-0. It was submitted that it could not be said that the Central Board of Direct Taxes did not consider the terms of the agreement with reference to section 80-0 and the guidelines issued by it and arrived at a decision which was unreasonable under the circumstances. He said that considering the scope of judicial review of administrative decisions, which might even be quasi-judicial, this Court should set aside the impugned judgment of the High Court as that Court wrongly interfered in the exercise of its power of judicial review of the decision taken by the Central Board of Direct Taxes not granting, approval to the agreement. After all, it was the Central Board of Direct Taxes which was the best judge to see if the agreement fulfilled the requirements of law as it was the Central Board of Direct Taxes which was the concerned authority to grant or not to grant approval and had the advantage of various agreements which came for its approval by other assessees. Mr. Shukla said that the two earlier judgments of the Delhi High Court in J.K. (Bombay) Ltd. v. CBDT (1979) 118 ITR 312 and Ghai Lamba Catering Consultants P. Ltd. v: CBDT (1980) 124 ITR 301 were not correctly distinguished by the High Court. In the present case, he said that if the principles laid down in those
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two judgments were applied, the agreement certainly would not come within the scope of grant of approval. Mr. Shukla said that the respondent took complete charge of running the hotel of the foreign enterprise as the terms of agreement showed and as a matter of fact, the respondent took over the hotel of the foreign enterprise itself for 20 years. He referred to the decision of the Karnataka High Court in HMT Ltd. v. CBDT (1991) 188 ITR 457. Finally, Mr. Shukla said that one did not have to render services by becoming master. He said that the respondent might be good in hotel management and it might earn profit and bring the money to the country, but then it had to pay taxes as per the law of this country and that it was not that all agreements entered into by any assessee with a foreign enterprise must fall under section 80-0 merely because the agreements would bring precious foreign exchange to the country. ' Mr. Dave, learned counsel for the respondent, submitted that there was no contradiction in the principles laid down by the Delhi High Court in its earlier two decisions and in the present impugned judgment. He referred to the decision of this Court in Continental Construction Ltd. v. CIT (1992) 195 1TR 81, Mr. Dave submitted that the perception of management had undergone a big change. He said the distinction drawn by the Central Board of Direct Taxes was superficial and the agreement squarely satisfied the ingredients of section 80-0. What section 80-0 provided was allowance of a deduction of an…
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