# CENTRAL BOARD OF DIRECT TAXES AND ORS v. OBEROI HOTELS (INDIA l PVT. LTD

- **Citation:** [1998] 2 S.C.R. 501
- **Court:** Supreme Court of India
- **Decided:** 1998-03-30
- **Bench:** Sujata V. Manohar, D.P. Wadhwa
- **Source:** https://unisonlegal.in/judgment/supreme-court-of-india/central-board-of-direct-taxes-and-ors-v-oberoi-hotels-india-l-pvt-ltd-16326
- **Pages:** 27

## Headnote

B
Income-Tax Act, 1961
Section 80-0 -Technical or Professional
Service-Interpretation of-Respondent, an Indian Company entered into
agreement with foreign enterprise for rendering of technical services as well
as for providing professional and also other services for operating hotelC
Held, CBDT erred in not granting approval to respondent's agreement even
though the agreement satisfied the ingredients of Section 80-0 of the Act.
Remand-CBDT erred in not approving the respondent 's agreement
under Section 80-0 Holl'ever, as the matter is 28 years old, Supreme Court D
declined to remand the matte" to CBDT for fi'esh appraisal.
Technical or Professional Service-/11/e111retation of-Technical Services
include professional services as well.
Administrative Lm1~Judicial Review-Power of-Courts to see that
the authority acts within the scope of its power and exercise it in reasonable
manner keeping in view the object which the statute seeks to achieve.
The respondent sought approval of agreement with a foreign enterprise
for rendering technical, professional services etc., for operating a hotel, as
E
per Section 80-0. It was declined by CBDT without communicating the F
grounds. The Respondent filed a Writ Petition against the order of CBDT
and it was allowed by the High Court. CBDT was directed to consider the
matter afresh and give decision after hearing the respondent. Again on
representation by the respondent, CBDT declined to grant approval but this
time communicated the decision to the respondent. However, High Court
again reversed CBDT's order.
G
It was contended on behalf of the appellants that the agreement was
basically for the respondent to manage and run the entire hotel for a foreign
enterprise which was not in any way rendering technical services to foreign
enterprise and would not fall within the purview of Section 80-0 of IncomeTax Act.
H
501
502
SUPREME COURT REPORTS
[ 1998] 2 S.C.R.
A
Referring to circular No. 187 dated 23.12.1975 of CBDT, the
B
Respondent contended that the agreement squarely satisfied the ingredients
of Section 80-0. The respondent further submitted that construction which
benefited the assessee should be adopted and the circular should receive
liberal interpretation keeping in view the object of introduction of Section
80-0 in the statute.
Dismissing the appeal, this Court
HELD : I. The term "technical services" included "professional
services". The agreement entered with foreign enterprise by the respondent
C provides for rendering of technical services and also professional services
for operating the hotel of a foreign enterprise. CBDT erred in not granting
approval of the agreement to the respondent under Section 80-0 of the Act
even though the agreement satisfied the ingredients of Section 80-0 of the
Ac!.1526-GI
D
Col1fi11e11ta/ Construction ltd. v. Commissioner of Income-Tax, (1992)
1995 ITR 81 SC, relied on.
I.I. The CBDT fell into error in considering particularly the clause
in the agreement which provided for operation of the Hotel by the respondent.
The agreement has to be seen as a whole and so examined it is quite apparent
E that it provided for rendering of not only technical services for operating the
Hotel of the foreign enterprise but also providing for professional and other
services in connection with operating of the hotel. Section 80-0, was enacted
with the twin objects of encouraging the expert of Indian technical know-now
and augmentation of foreign exchange resources of the country. Therefore,
F
considering the scope of the agreement and the width of Section 80-0, it
could be said that the agreement provides for "information concerning
industrial, commercial or scientific knowledge, experience or skill made
available" by the respondent to the foreign enterprises for running of the
Hotel. !525-G-H; 526-A-CI
G
1.2. The view that remuneration obtajned by running or managing a
foreign· company would be in the nature of profits with Section 80-0
deliberately restricts itself to inc

## Text

_Characters 0–39,851 of 70,055. This is a partial read: ask again with offset=39851 for what follows._

CENTRAL BOARD OF DIRECT TAXES AND ORS.
A
v.
OBEROI HOTELS (INDIA l PVT. LTD.
MARCH 30, 1998
[SUJATA V. MANOHAR AND D.P. WADHWA, JJ.]
B
Income-Tax Act, 1961
Section 80-0 -Technical or Professional
Service-Interpretation of-Respondent, an Indian Company entered into
agreement with foreign enterprise for rendering of technical services as well
as for providing professional and also other services for operating hotelC
Held, CBDT erred in not granting approval to respondent's agreement even
though the agreement satisfied the ingredients of Section 80-0 of the Act.
Remand-CBDT erred in not approving the respondent 's agreement
under Section 80-0 Holl'ever, as the matter is 28 years old, Supreme Court D
declined to remand the matte" to CBDT for fi'esh appraisal.
Technical or Professional Service-/11/e111retation of-Technical Services
include professional services as well.
Administrative Lm1~Judicial Review-Power of-Courts to see that
the authority acts within the scope of its power and exercise it in reasonable
manner keeping in view the object which the statute seeks to achieve.
The respondent sought approval of agreement with a foreign enterprise
for rendering technical, professional services etc., for operating a hotel, as
E
per Section 80-0. It was declined by CBDT without communicating the F
grounds. The Respondent filed a Writ Petition against the order of CBDT
and it was allowed by the High Court. CBDT was directed to consider the
matter afresh and give decision after hearing the respondent. Again on
representation by the respondent, CBDT declined to grant approval but this
time communicated the decision to the respondent. However, High Court
again reversed CBDT's order.
G
It was contended on behalf of the appellants that the agreement was
basically for the respondent to manage and run the entire hotel for a foreign
enterprise which was not in any way rendering technical services to foreign
enterprise and would not fall within the purview of Section 80-0 of IncomeTax Act.
H
501
502
SUPREME COURT REPORTS
[ 1998] 2 S.C.R.
A
Referring to circular No. 187 dated 23.12.1975 of CBDT, the
B
Respondent contended that the agreement squarely satisfied the ingredients
of Section 80-0. The respondent further submitted that construction which
benefited the assessee should be adopted and the circular should receive
liberal interpretation keeping in view the object of introduction of Section
80-0 in the statute.
Dismissing the appeal, this Court
HELD : I. The term "technical services" included "professional
services". The agreement entered with foreign enterprise by the respondent
C provides for rendering of technical services and also professional services
for operating the hotel of a foreign enterprise. CBDT erred in not granting
approval of the agreement to the respondent under Section 80-0 of the Act
even though the agreement satisfied the ingredients of Section 80-0 of the
Ac!.1526-GI
D
Col1fi11e11ta/ Construction ltd. v. Commissioner of Income-Tax, (1992)
1995 ITR 81 SC, relied on.
I.I. The CBDT fell into error in considering particularly the clause
in the agreement which provided for operation of the Hotel by the respondent.
The agreement has to be seen as a whole and so examined it is quite apparent
E that it provided for rendering of not only technical services for operating the
Hotel of the foreign enterprise but also providing for professional and other
services in connection with operating of the hotel. Section 80-0, was enacted
with the twin objects of encouraging the expert of Indian technical know-now
and augmentation of foreign exchange resources of the country. Therefore,
F
considering the scope of the agreement and the width of Section 80-0, it
could be said that the agreement provides for "information concerning
industrial, commercial or scientific knowledge, experience or skill made
available" by the respondent to the foreign enterprises for running of the
Hotel. !525-G-H; 526-A-CI
G
1.2. The view that remuneration obtajned by running or managing a
foreign· company would be in the nature of profits with Section 80-0
deliberately restricts itself to income by way of royalty, commission or fees
and included other types of remuneration would not be tenable as the royalty,
commission or fees can be in terms of percentage of profits earned by the
foreign enterprise on account of services rendered by the Indian company.
H It is substance of the case which matters and not the name. Further Circular
+
t· ...
CENT. BO. OF DIRECT TAXES v. OBEROI HOTELS (P). LTD.
503
No. 187 dated December 23, 1975 of the CBDT may perhaps require certain A
changes so as to be in conformity with Section 80-0 of the Act. 1526-D-E)
J K. (Bombay) ltd. v. Central Board of Direct Taxes and another,
(1979) 118 ITR 312 (Del), overruled.
2. The legislative intention of Section 80-0 is the spread by an Indian B
assessee of any patent, invention, model, design, secret formula or process,
or similar property right, or information concerning !ndustrial, commercial
or scientific knowledge, experience or skill of the assessee for use outside
India and in that process to receive income to augment the foreign exchange
resources of the country. The assessee can also make availab.le to foreign C
enterprise technical and professional services expertise of which it possesses
for earning foreign exchange for the country. 1526-H; 527-A-BI
3. In exercising the power of judicial review courts are to see that the
authority acts within the scope of its power and exercise it in reasonable
manner keeping in view the object which the statute seeks to achieve. The D
decision of CBDT in not grating approval to the agreement was in good faith
~
~
and it is the latest development of law both on the scope of judicial review
and interpretation of Section 80-0 that the dedsion has to be reversed. As
law stands today with reference to Section 80-0, CBDT took into account the
consideration which were not relevant or germane to the real issue. In this
view of the matter there is no ground for interference of the impugned E
judgment of the High Court. 1527-C-D)
4. Even though the impugned judgment of High Court was right still
the matter is not remanded to CBDT for fresh appraisal as the matter was
28 years old. 1527-EJ
~ -t
God.re} and Boyce Mfg. Co. Ltd. v. SP. Points, Chief Commissioner of
Income-Tax and others, (1993) 203 ITR 947 (Bombay), approved.
JK. (Bombay) ltd. v. Central Board of Direct Taxes and another,
(1979) 118 ITR 312 (Del), overruled.
Continental Construction Ltd. v. CIT, (1992) 195 ITR 81 and HMT Ltd.
v. Central Board of Direct Taxes and another, (1991) 188 ITR 457
(Karnataka), referred to.
F
G
CIT, Bombay v. Mis. Gwalior Rayon Silk Manufacturing Co. Ltd.,
1199213 SCC 326; Hotel Balaji & Ors., v. State of A. P. & Ors., 119931 Supp. H
504
SUPREME COURT REPORTS
[1998] 2 S.C.R.
A 4 SCC 536; CIT Amritsar v. Straw Board Manufacturing Co. Ltd., 119891
Supp. 2 SCC 523; C.B.D.T & Ors. v. Aditya V Bir/a, 119881 Supp. SCC 120;
+
CIT, Madras v. South Arco/ District Co-operative !'vlarketing Society Ltd,
.....
(1989) 76 ITR 117; Keshavji Ravji & Co. & Anr. v. CIT, 119901 2 SCC 231;
CCE, Patna v. Usha Martin Industries, 119971 7 SCC 47; Poulose and
B Mathan v, CCE & Ors., 119971 3 SCC 50; Ghai Lamha Catering cons11/ta111s
Pvt. ltd. v. CBDT & Anr., (1980) 124 ITR; Oberoi Hotels (India) Pvt. Ltd.
v. CBDT, (1982) 135 ITR 257 and Bajaj Tempo Ltd. v. CIT, (1992) 196 ITR
188, New Encyclopedia Britannica, cited.
CIVIL APPELLATE JURISDICTION : Civil Appeal No. 5750 of
c 1985.
From the Judgment and Order dated 29.5.81 of the Delhi High Court in
Civil Writ Pet. No. 973/80.
K.N. Shukla, Rajiv Nanda and B.K. Prasad for the Appellants.
D
D.A. Dave, Ms. Kiran, Ms. Arpita Roy Chaudhary, Sanjay Katiyal and
Vineet Kumar for the Respondent.
The following Judgment of Com1 was delivered by :
D.P. W ADHW A, J. Central Board of Direct Taxes (CBDT) is in appeal.
E It is aggrieved by the judgment dated May 29, 1981 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, 196? entered into by the respondent with M/s. Soaltee Hotel Pvt. Ltd.
Kathmandu (Nepal) a foreign enterprise. Section 80-0 is as under:
F
G
"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
ofa 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
H
approved by the Board in this behalf, and such income is received in
CENT. BD. OF DIRECT TAXES v. OBERO! HOTELS (P). LTD. [D.P. WADHWA, J.] 505
convertible foreign exchange in India, or having been received in A
convertible foreign exchange outside India, or having been converted
into convertible foreign exchange outside India, is brought into India,
buy 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 B
so received in, or brought into India in computing the total income of
the assessee;
Provided that the application for the approval of the agreement
referred to in this sub-section is made to the Board before the 1st day C
of October of the assessment year in relation to which the approval
in 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 D
before the I st 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 SON E
shall apply for the purposes of this Section as they apply for the
purnoses of that section .... ,''
The impugned judgment is reported in (1982) 135 ITR 257 (Del).
As required by Section 80-0, the respondent sought approval of the F
agreement as falling within the purview of the section. CBDT declined to
grant approval. However, it did not communicate any ground as tci on what
basis approval was not granted Respondent filed a writ petition in the Delhi
High Court, it being Civil Writ Petition No. 1301of1975. The writ petition was
allowed by a Division Bench of the Delhi High Court on January 5, 1979 with G
a direction to the CBDT to consider the matter afresh and give a decision after
granting 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 H
506
A
B
SUPREME COURT REPORTS
[1998] 2 S.C.R.
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 respondent represented its case before CBDT but again
CBDT did not find any ground under the Section to approve the agreement
C and by order dated February 26, 1980, communicated its decision to the
respondent. We reproduce the relevant portion of this order of CBDT as
•mder : (pages 63-64 of the PB)
"2. The Board have carefully reconsidered the matter in pursuance
of the directions contained in the judgments of the Delhi High Court
D
in the Civil Writ Petition 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:-
E
F
G
(I) 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 (Mis. JK. Bombay
Ltd. v. CBDT and another) 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 bei.ng 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 utilised 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 quantity the same for purpose of
H
Section 80-0 of the Income Tax Act, 1961''.
.,....._
;..
....
CENT. BD. OF DIRECT TAXES v. OBEROI HOTELS (P). LTD. [D.P. WADHWA, J.] 507
This led the respondent to approach the High Court again by filing writ A
petition on July 28, 1980 which was allowed by 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.
Foreign enterprise owned and operated in Kathmandu (Nepal) a hotel B
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. Respondent had a name and
worldwide reputation in the hotel field and was experienced and had the c
technical skill for providing professional, architecture, engineering and
decorating services and was qualified to assist in planning, designing,
constrncting, furnish;ng 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 respondent in hotel industry for profitable D
> ""
operation of hotels and for bringing the hotel to international stanaards and
for ensuring better operational results and promotion of business of Hotel,
foreign enterprise desired that its operations be taken over by the respondent
with effect from December 1, 1969 on terms and conditions set out in the
agreement. Parties agreed (formulated from the agreement):
E
(I) During the term of the agreement hotel of the foreign enterprise shall
be known and designated as the Hotel Soaltee Oberoi.
(2) 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 F
. .(
terms and conditions .
(3) 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. Respondent shall select suitable
personnel for adequate and proper training in hotel management and operation, G
always giving preference ~owever to Napalese nationals.
>
( 4) Respondent would use its best efforts tc advertise and promote the
~
business of the hotel through its existing facilities. Soaltee Hotel, the foreign
enterprise, subject to later amortisation and reimbursement as provided in the
agreement shall pay or reimburse the respondent in full for all costs and H
508
SUPREME COURT REPORTS
[1998] 2 S.C.R.
A 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) Respondent in consultation with foreign enterprise will make available
B 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 respondent staff and of any outside consultants
engaged by respondent on retainer will be. rendered on the basis of
reimbursement by the foreign enterprise through the respondent of the salaries
C of respondent 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) Respondent was to provide training and instruction for key personnel
D 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
E
F
trainees shall be borne by the foreign enterprise though the respondent shall
make arrangement for their boarding and lodging at its own costs and also
pay suitable pocket allowances to them.
(7) Respondent 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 respondent shall have within the term 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) Foreign enterprise and the respondent shall be entitled to 85% and
G 15% 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 to maintain full and adequate books of accounts and
other records reflecting the results of the operation of the hotel in accordance
H with the uniform system of accounts for hotels though not inconsistent with
CENT. BO OF DIRECT TAXES 1·. OBEROI HOTELS (P) LTD. [D.P. WADHWA, J] 509
the provisions of law applicable in Nepal.
A
• -""(
(I 0) Provision 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. Respondent was to submit monthly budget of
estimated income and expenditure in detail and the Gross Operating Profits
in terms of the agreement to the foreign enterprise. The agreement contained B
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. Limit was put on expenses to be incurred for advertisement
etc. which could not be more than 3% of the total sales.
( 11) For worldwide promotion of the hotel, foreign, enterprise desired
that 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 countri.:s for specialised hotel services and worldwide reservation
facilities.
(12) At the time of taking over the operation of the Hotel Soaltee,
respondent to purchase the existing stock of food and beverages etc. and the
foreign enterprise shall be paid the cost thereof. The amount paid by
respondent to the foreign enterprise sliall be payable to the respondent out
of the revenue of the hotel before the expiry of one year.
(13) There is provision for repairs, maintenance, alterations, structural
repairs and changes in the hotel.
(14) Respondent to deliver to the foreign enterprise on or prior to the
c
D
E
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 F
containing other details.
(15) Respondent to have due representation in the Board of Directors
of the foreign enterprise and at least one person nominated by respondent
which always would represent it in all the meetings, deliberations any decisions
arrived therein in connection with the hotel business.
G
These are some of the main terms of the agreement which according to
the appellant did not satisfy the requiremrnt of Section 80-0 of the Act.
High Court in the impugned judgment, after examining the term of the
agreement in detail, observed that it could not be disputed that the running H
510
SUPREME COURT REPORTS
[1998] 2 S.C.R.
A of a modern hotel required highly specialised management techniques, i.e.,
combination of scientific management and highly specialised inn-keeping and
that the modern system of preparation of food and beverages also involved
considerab)e technical skill and know-how. High Court. however, negatived
the plea of the respondent that it was making available to the foreign enterprise
B the information concerning industrial, commercial or scientific knowledge,
experience or skill as High Court did not find any such provision in the
agreement. 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.
C
Mr. Shukla, learned counsel for CBDT, 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 agreeme!1t, it was only
the first part of$ection 80-0 which this Couit was to examine ifthe agreement
was in consideration of technical services rendered or agreed to be rendered
out side India by the respondent that it could claim deduction of the Income
D 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 use outside India,
E 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. 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 ifthe agreement in question falls within the purview of Section 80F 0 on any of the conditions stipulated therein entitling the respondent to claim
deduction. Mr. Shukla referred to the guidelines issued by the CBDT 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
CBDT. The circular is reproduced in (1976) 102 !TR 83 (Statutes). TI1e circular
also sets out the form of the application for approval of the agreement under
G Section 80-0 of the Act. We may reproduce relevant part of the circular as
under:
H
"Circular No. 187, dated December 23, 1975.
Subject : Section 80- 0 of the Income-tax Act, 1961 -Guidelines for
approval of agreements.
'( .. _
J... ..
CENT. BD. OF DIRECT TAXES v. OBEROI HOTELS (P). LTD. [D.P. WADHWA, l] 511
With the twin objectives of encouraging the export of Indian A
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 B
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 C
Taxes before the !st 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 standardised and a specimen is given in the
Appendix.
3.
The object of the provision when it was first introduced as Section D
85C in the Income-tax Act, 1961, was stated in Board's Circular No.
4P (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 E
and the requirements of the statutory provisions, the Board have
evolved the follo~ing guidelines for the grant of such approval:-
{i) ....
(ii) An agreement which is in very general or broad terms or is either F
vague or does not give sufficient details may Iiot be approved.
(iii) .....
(iv) Information concerning industrial, commercial or scientific
knowledge, experience or skill made available or provided, or G
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 H
512
A
B
c
D
E
F
SUPREME COURT REPORTS
[1998] 2 S.C.R.
provided to the foreign party under the agreement. Information
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
managements, organisation, 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 simpliciter in return for a specified
percentage of commission or profit will not be eligible for approval.
(viii) ... ..
(ix) .... ..
(x) .......... ..
(xi) .............. ..
It may be pointed out that these guide)ines 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 the Board, grant of approval would not be in
the larger public interest or where it would not further the objectives
underlying the tax concession.
G
(4) .......... ..
(5) .......... ..
(6) .......... ..
(7) .............. .
H
It was submitted that taking into account the provisions of Section 80-
CENT. BD. OF DIRECT TAXES v. OBEROI HOTELS (P). LTD. [D.P. WADHWA, J.]
5\3
O and the guidelines on the subject, CBDT rightly came to the conclusion that A
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 be run and operate the hotel by the respondent for a period B
of 15 years with an option to extend the agreement for a further period of 5
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 C
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 the managerial services that were to be
provided under the agreement and that management of hotel of foreign
enterprise would not fall within the provision of Section 80-0. It was submitted
that it could not be said that CBDT did not consider the terms of the
agreement with reference to Section 80-0 and the guidelines issued by it and
arrived 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 exercise of its
power cif judicial review of the decision taken by the CBDT not granting
approval to the agreement. After all, it was the CBDT which was the best
judge to see if the agreement fulfilled the requirements of law as it was the
CBDT which was 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 two earlier judgments of tlie Delhi High
Court in J.K. (Bombay) Ltd. v. Central Board of Direct Taxes & Anr., ( 1979)
D
E
F
118 !TR 312 (Del) and Ghai Lamba Catering Consultants P. Ltd. v. Central
Board of Direct Taxes & Anr. (1980) 124 ITR 30 I (Del) were not correctly G
distinguished by the High Court. In the present case, he said that if the
principles laid down in those 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 terms of agreement showed and as a matter fact
respondent took over the hotel of the foreign enterprise itself for 20 years. H
514
SUPREME COURT REPORTS
[ 1998) 2 S.C.R.
'
A He referred to the decision of the Karnataka High Court in HMT ltd v.
Central Board of Direct Taxes & Anr .. ( 1991) 188 !TR 457 (Kar)]. Finally, Mr.
Shukla said that one did not have to render services by becoming master. He
said that 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
B
the law of this country and that it was not that all agreements entered 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 by the Delhi High Court in its earlier
c two decisions and in the present impugned judgment. He referred to the
decision of this Court in Continental Construction Ltd. v. Commissioner of
Income-tax, (1992) 195 !TR 81 SC . Mr. Dave submitted that perception of
management had undergone a big change. He said the distinction drawn by
the CBDT was superficial and the agreement squarely satisfied the ingredients
of Section 80-0. What Section 80-0 provided was allowance of a deduction
D of an amount equivalent to 50% of the income received by way of royalty etc.
in consideration of use outside India information concerning industrial,
commercial or scientific knowledge, experience or skill or alternatively payment
received in consideration of technical services made available outside India.
Mr. Dave dwelved at length as to what would be technical services. He
E referred to the dictionary 1~eaning of the terms 'technical assistance' and
'technology'. But then one has to refer to dictionary definition if there is a
dispute if the services rendered are of technical nature or not.
Mr. Dave referred to us the judgment of the Delhi High Court in J.K.
(Bombay) 's case and Ghai Lamba 's, case and said that these judgments
F considered a very narrow concept of "technical services" or the "managerial
)'- ·~
-
.,.. ...
services". He said there was a qualitative difference in the agreements in
... •
those two cases and the subject matter of the agreement in the present case.
The statement in J.K. Bombay's, case (1979) 1 18 !TR 312, that the management
as a process is practised throughout in every organisation from top
management through middle management to operational management and, on
G the other hand, technical services occupy a much narrow field than the field
occupied by the management was explained in the case of Continental
Construction Company's case by the Supreme Court Judgment of this Court
in Continental Construction Company's case widened the scope of term used
in Section 80-0.
H
Mr. Dave referred to the "New Encyclopedia Britannica" where the term
... '!'
CENT. BD. OF DIRECT TAXES v. OBEROJ HOTELS (P) LTD. [D.P. WADHWA . .I.] 515
"technical assistance" had been considered. It states that technical assistance A
may involve sending experts into the field to teach skills and to help solve
problems in their areas of specialization, such as irrigation, agriculture, fisheries,
education, public health, or forestry. Jn "New Webster's Dictionary of the
English Language'' the word "technical" means what is characteristic of
particular art, science. profession, or trade and the word "technology" means B
the branch of knowledge that deals with the industrial arts and sciences;
utilisation of such knowledge; the knowledge and means used to produce the
material necessities of a society. It is submitted that the term "technical"
should receive broad interpretation tc include professional services as well.
The term "professional" was added in Section 80-0 w.e.f. April I, 1992 by
amending the section. This court in Continental Construction Company's C
case had stated that the insertion of the term "professional" in Section 800 was merely of clarificatory nature and "technical services" always included
in it "professional services". Reference was then made to CBDT circular No.
72 dated January 6, 1972 which dealt with the scope and effect of amendment
of Section 80-0 which was substituted in place of earlier one by finance (No.2)
Act, 1971 w.e.f. April I, 1972. According to this circular, the objective of this D
provision is to encourage Indian companies to develop technical know-how
and make it available to foreign companies so as to augment our foreign
exchange earnings and establish a reputation for Indian te.chnical know-how
in foreign countries and further in this concessions which were earlier available
to companies only are now available in all cases where the technical knowE
how or technical services are provided to a foreign Government or a foreign
enterprise, regardless of whether the foreign enterprise is a corporate body
or not. Referring to the later circular No. 187 dated December 23, 1975 of the
CBDT, Mr. Dave said that the case of the respondents squarely fell within
clause (iv) and he said that Clause (v) might even require reconsideration by
the CBDT in view of the judgment of this Court in Continental Construction F
Company's case. He also referred to clause (vii) of circular No. 187. lt was also
the submission of Mr. Dave that construction which benefited the assessee
should be adopted and that circular should receive liberal interpretation
keeping in view the object of introduction of Section 80-0 in the statute. In
this context, he referred to certain decisions of this Court. In CIT, Bombay v. G
Mis. Gwalior Rayon Silk Manufacturing Co. Ltd, [ 1992) 3 SCC 326 this Court
said that the words in the taxing statute should be given liberal interpretation.
Nothing is to be read in, nothing is to be implied; one can only look fairly
at the language used and nothing more and nothing less. It went on to add
that it was settled law that the expressions used in a taxing statute would
ordinarily be understood in the sense in which it was harmonious with the H
516
SUPREME COURT REPORTS
[ 1998] 2 S.C.R.
A object of the statute to effectuate the legislative animation.
In Hotel Balaji and others v. State of A.P. and others, [1993] Supp 4
)"--~
SCC 536 this Court observed as under:
"Though the Central Sales Tax is levied and collected by the
B
Government of India, Article 269 of the Constitution provides for
making over the tax collected to the States in accordance with certain
principles. Where, of course, the sa!e is an export sale within the
meaning of Section 5(1) of the Central Sales Tax Act (export sales) the
State may not get any revenue but larger national interest is served
thereby. It is for these reasons that tax on the purchase of raw material
C
is waived in these two situations. Thus, there is a very sound and
consistent policy, underlying the provision".
In Commissioner of Income Tax, Amritsar v. Straw Board manufacturing
Co. Ltd., [ 1989] Supp 2 SCC 523 the assessee had claimed concessional rates
of income tax, development rebate at higher rate and deduction under Section
D 80-E of the Income Tax Act, 1961 on the ground that the manufacture of straw
board was a priority industry. The question before this Court was whether
'!'
•
straw board could be said to fall within the expression "paper and pulp"
mentioned in the Schedule. The Income-tax Authority held that the assessee
could not be described as priority industry and the manufacture of straw
E board was not covered by the words "paper and pulp"
F
"This Court said:
''We have no doubt in our minds that it does. The expression has
been used comprehensively. It is necessary to remember that when a
provision is made in the context of a law providing for concessional
rates of tax for the purpose of encouraging an industrial activity a
liberal construction should be put upon the language of the statute.
From the material before us, which we have carefully considered, that
is the only reasonable conclusion to be reached in these cases."
In Central Board of Direct Taxes and others v. Aditya v. Bir/a, (1988]
G Supp sec 120, this Court was considering the scope of the term "remuneration"
as appeared in Section 80-RRA of the Act.