30 October 1996
Supreme Court
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M/S J.B. BODA & CO. PVT. LTD Vs CENTRAL BOARD OF DIRECT TAXESNEW DELHI.

Bench: B.P. JEEVAN REDDY,K. S. PARIPOORNAN
Case number: Appeal Civil 933 of 1989


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PETITIONER: M/S J.B. BODA & CO. PVT. LTD

       Vs.

RESPONDENT: CENTRAL BOARD OF DIRECT TAXESNEW DELHI.

DATE OF JUDGMENT:       30/10/1996

BENCH: B.P. JEEVAN REDDY, K. S. PARIPOORNAN

ACT:

HEADNOTE:

JUDGMENT:                       J U D G M E N T      PARIPOORNAN, J. 1.   The   petitioner in  Writ Petition  No. 3086 of 1987 in the High  Court of  Delhi, has filed this appeal against the judgment of  the High  Court  dated  29.10.1987.  The  short matter that  the arises  for consideration in this appeal is the interpretation  to be  places on  Section  80-0  of  the Income-tax Act,  1961. Appellants  a  private company. It is engaged in  the brokerage  business as  reinsurance-brokers. It received  a commission  @ 3  to 6  percent,  relating  to maritime and  other insurance. The respondent is the Central Board of  Direct Taxes,  Government of  India, New Delhi. In respect of  insurance risk  covered by  Indian or    foreign insurance  companies, appellant arranges for the reinsurance of portion of risk with various reinsurance companies either directly or through foreign brokers. In return for the above services, the appellant company receives a percentage of the premium received   by  the foreign companies as its share of brokerage. For  a period of 19 months from 1.3.1980, Oil and Natural Gas  Commission   insured all their offshore oil gas exploration and  production operation  with the United India Insurance Company,  Madras. In  respect  of  this  insurance risk,  the  appellant  contacted  Messrs  Sedgwick  Offshore Resources  Ltd,   London  who  are  brokers  in  London  for placement   of reinsurance business. The appellant furnished all  the  details  about  the  risk  involved,  the  premium payable, the  period of  coverage and  the portion  of  risk which is  sought to  be reinsured.  The said  London brokers contacted   various    underwriters   and    after   getting confirmation about  the portion  of  the  risk  the  foreign reinsures  were   prepared     to  undertake,  informed  the appellant about  such reinsurance  coverage. Thereafter, the Indian Ceding  Company handed  over the  total premium to be paid by  it to  the  foreign  reinsurance  company,  to  the appellant for  onward transmission.  When this  amount   was given to  the appellant approached the Reserve Bank of India with a  statement showing  the amount  of  foreign  currency payable as  reinsurance premium to the foreign parties after deducting the  amount brokerage  due to  the appellant. This balance  amount  after  the  deducting  the  brokerage,  was

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remitted to  the London  brokers with  the permission of the Reserve Bank  of India.  According  to  the  appellant,  the amount  of   commission  retained   by  it  was  receipt  of convertible foreign exchange without a corresponding foreign remittance within  the meaning  of Section  9 of the Foreign Exchange Regulation  Act. It  is evident  that the appellant company by   an   agreement  with the  foreign company, with the approval  of the  Reserve Bank  of India  remits premium received to  the foreign  insurance company on behalf of the Indian insurance  company and  while doing so, it deducts in terms of  foreign exchange  fee payable  to it  while making remittances themselves.  The Indian insurers make payment in rupees to  the  appellant  for  the  amount  of  reinsurance premium to  be remitted  to the  foreign company, furnishing all particulars  with an advice to the appellant to approach the Reserve  Bank of India for necessary permission to remit in US  Dollars the  reinsurance premium  abroad. Thereafter, the appellant  writes to the Reserve Bank of India enclosing the remittance   application  in Form "A-2" as prescribed by the Exchange  Control Manual together with the statement and Auditor’s Certificate. These can  be seen from Annexure-A. A statement is  also attached  thereto, which  shows that  the gross amount of the reinsurance premium to be remitted in US Dollars,   under the  heading "Balance  of Account"  and the amount of  brokerage also is mentioned in US Dollars, earned by the  appellant on  the reinsurance premium to be remitted under the  heading "Brokerage".  While in the normal course, the entire  premium should be remitted abroad to the foreign parties and  than the  foreign  reinsurer  would  remit  the commission  back   to  the   appellant,  who   supplied  the information, under  the procedure   adopted  and approved by the Reserve Bank of  India, the appellant  remits the amount after deduction  the exchange.  Thus, the  appellant entered into an  agreement with  M/s.  Sedgwick  offshore  Resources Limited, London  for supply of know-how and, while remitting the  reinsurance  premium  of  US  Dollars  1060891.68,  the appellant  remitted   a  fee  of  US  Dollars  989887.20  on 11.1.1984 to the Union Bank of India, thus retaining the fee of 71004.48 Dollars for the technical services rendered. The appellant, stating  that in  the Assessment Years 1982-83 to 1984-85, the   reinsurance  brokerage determined  in foreign exchange is  retained in  India  under  the  agreement  M/s. Sedgwick offshore  Resources Ltd., and so it would amount to receipt of  income in   terms  of   foreign exchange  as per section 80-0  of the  Income-tax Act, sought approval of the Respondent, Central  Board of  Direct Taxes  as mentioned in Annexure-B. The  remittance  statement  annexed  along  with Annexure-A available  at pages  25-26 of the with paperbook, hows the following details :-                 Remittance Statement for the                period :1-12-1983 to 10-1-1984                    "FACULTATIVE SECTION"            (M/S. SEDGWICK OFFSHORE RESOURCES LTD)               BALANCE OF ACCOUNT     BROKERAGE                    DEBIT     CREDIT     DEBIT         CREDIT Ref. PARTICULARS   U.S.$     U.S.$       U.S.$        U.S.$        UNITED INDIA        INSURANCE        CO. LTD. 9-1-84 Facultative        Reinsurance        A/c. Oil and        Natural Gas        Commission        Offshore

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      Activities        Package        Policy -        Period -        1-8-1982        to 31-1-1984 -        6 the final        instalment of        Premium due on        1-11-83 as per        Closing Particular        No. MH/ONGC/23/82        dated 3-1-1984. 9-1-84 Facultative        Reinsurance        A/c Oil and Natural        Gas Commission        Offshore        Activities        Package        Policy        Terrorist        Cover               Period: 1-12-1983 to 10-1-1984.                    "FACULTATIVE SECTION"           (M/S. SEDGWICK OFFSHORE RESOURCES LTD.)               BALANCE OF ACCOUNT     BROKERAGE                    DEBIT     CREDIT     DEBIT         CREDIT Ref. PARTICULARS   U.S.$     U.S.$       U.S.$        U.S.$       UNITED INDIA       INSURANCE       CO. LTD.       Period:-       1-8-1982 to       31-1-1984-       6th and final       Instalment of       Premium due on       1-11-83 as per       Closing Particular       No. MH/ONGC/22/82       dated 3-1-1984.        24,474.08     760,85 9-1-84 Facultative        Reinsurance A/c        Oil and Natural        Gas Commission        Offshore Activit        ies Package        Policy -1st and        2nd Layers        6th and final        Instalment of        Premium due on        1-11-83 as per        Closing Particular        No. MH/ONGC/21/82        dated 3-1-1984.      148,750.00    9,375.00                             1,060,891.68   71,004.48        Balance..       1,060,891..68               71,004.48                ---------------------------------------------                1,060,891.68 1,060,891.68 71,004.48 71,004.48                ============================================= Balance due to You             U.S.S 1,060,891.68 Less:- Brokerage due by you    U.S.S    71,004.48        -------------------------------------------

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                              ------------------- Net Balance due to you         U.S.S.  989,887.20     ---------------------------------------------                                ==================                                (Emphasis supplied)      By  communication   dated  11.3.1986,   the  respondent regretted their inability to approve the agreement submitted by the  appellant for  the purposes  of Section  80-0 of the Income-tax  Act  for  the  reason  "that  income  under  the agreement is  generated in  India and  is  not  received  in convertible  foreign   exchange  as   required   under   the provisions   of section  80-0". The communications  in  that regardare evidenced by Annexure-C series dated 11.3.1986. It is further  seen that  the steps  taken  by the appellant to review the  Annexure-C proceedings  were futile videAnnexure D. It  is thereafter,  the appellant moved the High Court of Delhi in  Civil Writ  No. 3086  of 1987. A Bench of the High Court of Delhi by order dated 29.10.1987, dismissed the said writ petition, stating thus :      ...... The  case of the petitioners      is that they had to remit about one      million dollars in consideration of      certain  services  which  they  had      conducted on  behalf of the foreign      company and  by way  of their fees,      they retained  the foreign exchange      worth  six  lakhs  and,  therefore,      they submit  that if  falls  within      the     expression   ’such   income      received  in   convertible  foreign      exchange in  India". We are afraid,      we  do   not  agree   with      the      submission of  the learned  Counsel      for the petitioner. To attract this      section, the  assessee must receive      convertible foreign  exchange  from      abroad.  By  retaining  their  fees      they are  not receiving any foreign      convertible  foreign  exchange.  We      find no  merit in  the petition and      the same is accordingly dismissed."           (Emphasis supplied)      It is  therefore, the  appellant has  filed  the  above appeal from the judgment of the Delhi High Court. 2.   The short question that arises for our consideration is the interpretation  to be  placed on  Section  80-0  of  the Income-tax Act.      "80-0  Deduction   in  respect   of      royalties,   etc.,   from   certain      foreign enterprises :-      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,      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,

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    experience or  skill 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  in    this      behalf by the Chief Commissioner or      the  Director   General;  and  such      income is  received  in convertible      foreign  exchange  in  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 an      subject to  the provisions  of this      section a  deduction of  an  amount      equal to  fifty  per  cent  of  the      income so  received in,  or brought      into,  India,  in  computing    the      total income of the assessee.      Provided that  the application  for      the  approval   of  the   agreement      referred to  in this    section  is      made  to the Chief Commissioner, or      as the  case may  be, the  Director      General in  the  prescribed  manner      before the  1st day  of October  of      the assessment  year in relation to      which the approval is first      sought :      XXX    XXX  XXX    XXX      Explanation --  For the  purpose of      this section :-      (i) "convertible  foreign  exchange      "means foreign  exchange  which  is      for the  time being  treated by the      Reserve   Bank    of    India    as      convertible  foreign  exchange  for      the purposes  of the  law for   the      time being  in force for regulating      payments and  dealings in   foreign      exchange;      (ii) "foreign enterprise" means a      person who is a non resident."           (Emphasis supplied) 3.   It is  common ground  that remittance  to   the foreign insurance company on behalf of the Indian insurance company, as also  the receipt  of   the amount  of brokerage  by  the Indian company,  should be done only with the concurrence of the Reserve  Bank of India. The remittance application along with the  relevant details  and the  statement (Annexure-A), shows the  amount due   to the foreign company in US dollars as also the brokerage due to the appellant in US dollars and adjustment is  made accordingly.  The appellant  instead  of remitting the  entire amount  to the  foreign reinsurer  and then  receiving  remittance  from  the  said  reinsurer  the commission due to it, entered into an agreement with foreign reinsurer, that while remitting  the reinsurance premia, the

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appellant would  retain the  fee due to it for the technical services rendered and this arrangement is effected only with the concurrence   or  the permission  of the Reserve Bank of India. The  question in the permission  of  the Reserve Bank of India.  The question  in the  instant case,  is   whether instead of  remitting the  amount to  the foreign  reinsures first and  receiving the  commission due  to  the  appellant later,   the arrangement by which the appellant remitted the reinsurance   premia, after  retaining the fee due to it for technical services rendered, will satisfy the requirement of Section 80-0 of the  Income-tax Act ? 4.   Provision similar  to Section  80-0  of  the  Act  were originally available  in the former Section 85 of the Income tax Act,  1961. While  moving the  bill  relevant    to  the Finance Act  No. 2  of 1967,  the    then  Finance  Minister highlighted the  fact that  fiscal encouragement need  to be given to  Indian industries  to encourage  them  to  provide technical  know-how   and     technical  services  to  newly developing countries. It is also seen that the objective was to encourage Indian companies to  develop technical know-how and to  make   it available  to foreign  companies so  as to augment the  foreign exchange  earnings of  this country and establish a  reputation of  Indian  technical  know-how  for foreign countries.  The objective  was to  secure  that  the deduction under  the Section shall be allowed with reference to the  income which  is  received  in  convertible  foreign exchange in  India or  having been  received in  convertible foreign exchange  outside India,  is brought to India by and on behalf  of taxpayers  in   accordance  with  the  Foreign Regulations. So  also, any  income  used by the Reserve Bank of India, shall be deemed to have been brought into India in accordance with the Foreign Exchange Regulations on the date on which such permission was given. This is evident from the Circular  of  Central  Board  of  Direct  Taxes,  New  Delhi (Circular No.  138 dated  17.06.1974) which  is available at pages 9 to 11 of the paperbook. 5.   Dr. Gaurishanker,  Senior  Counsel  for  the  appellant (assessee)  vehemently  contended  that  the  provisions  of Section 80-0  of the  Income-tax Act will apply to the cases like the  present one where the commission earned is for the supply of  such information  as is  received  by  a  foreign enterprise, which  instead of  getting the  gross commission first and  then  remitting  it  back  to  persons  like  the appellant its  brokerage, permits  the appellant  to  retain amount due and remit only the net amount. It was argued that the financial  and the accounting effect is the same and the mere fact  that the  amount is  retained in  India with  the approval of  the foreign  reinsurer and  the Reserve Bank of India would  not take away the basic feature, that the sound of income  of the  appellant  was  the  agreement  with  the foreign reinsurer  and it  is  in  fact  received  from  the foreign reinsurer  for services rendered. In other words, it is contended  that the  transaction contemplated  by Section 80-0 of  the Income-tax Act need not necessarily be achieved by the  form of  external remittance  followed  by  internal remittance and  the legal  nature  and  the  effect  of  the transaction will remain the same when the amount is credited straight away  by making  adjustments  instead  of  adopting atwo-way traffic.  Appellant’s counsel  also brought  to our notice the  latest circular  of the  Central Board of Direct Taxes, New  Delhi (Circular  No. 731 dated 20.12.1995) which has in  turn accepted   that  the receipt  of brokerage by a reinsurance company  is India  from the  gross premia before remittance to  its foreign  principles will also be entitled for deduction  under Section  80-0 of  the Act. On the other

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hand, Senior  Counsel for  the Revenue,  Sri Section 80-0 of the Act  and contended  that in  order to  qualify  for  the deduction, the  amount by  way of  royalty, commission,  etc should be  received  by  the  assessee  under  an  agreement approved in  this behalf  and such income should be received in convertible  foreign exchange in India. Counsel contended that the  Central Board  of Direct  Taxes was  justified  in declining    to  approve  the  agreement  submitted  by  the appellant since  the income under the agreement is generated in India and is not received in convertible foreign exchange as required under Section 80-0 of the Act. 6.   Counsel for  the Revenue  brought  to  our  notice  the decision  in  Patron  Engineering  Construction  P.Ltd.  and Another v.  Central Board  of Direct  Taxes and  Others, 175 I.T.R. 523,  and contended  that the income must be directly received by the assessee - the Indian company, and  if it is not so  directly received,  any other substitute arrangement which may  have the  effect of receipt by the assessee is of no avail.  In the  said case,  the question   that arose for consideration was,  whether an Indian company doing business or having a branch or establishment in a foreign country can be called  a "foreign  enterprise",  and  the  question  was answered in  the  negative.  It  was  held  that  the  words "foreign enterprise" occurring in Section 80-0 of the Act do not include  foreign branch  of Indian  company. In the said case, the  impact of the words "received by an assessee from the Government  of a  foreign state  or foreign  enterprise" occurring in  Section 80-0  did not  arise for consideration nor was  considered.  The  facts  of  the    said  case  are distinguishable. 7.   Circular No.  731 dated  20.12.1995 promulgated  by the respondent filed  as Annexure-B (page 8 of the supplementary paperbook) is relevant and affords guidance in understanding the purport of Section 80-0 of the Act :      Section 80-0 of the Income-tax Act,      1961 Deduction  -  Royalties,  etc,      from  receipt   of   brokerage   by      reinsurance  agent,   operating  in      India  on   behalf  of   principals      abroad, from  gross  premia  before      remittance    to     his    foreign      principals.      CIRCULAR NO. 731, DATED 20-12-1995      1. Under  the provisions of section      80-0 of the Income-tax Act, 1961 an      Indian company  or a  non-corporate      assessee, who  is resident in India      is entitled to a deduction of fifty      per cent of the  income received by      way of  royalty, commission,  fees,      etc.  from  foreign  Government  or      foreign enterprise  for    the  use      outside  India   of   any   patent,      invention,  model   design,  secret      formula or  process,  etc.,  or  in      consideration   of   technical   or      professional services  rendered  by      the  resident.   The  deduction  is      available   if   such   income   is      received in  India  in  convertible      foreign   exchange,    or    having      exchange outside India,  is brought      in by  or on  behalf of  the Indian      company or  aforementioned assessee      in   accordance    with    relevant

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    provisions  of   Foreign   Exchange      Regulation Act,  1973 for  the time      being in  force.      2. Reinsurance  brokers,  operating      in India  on behalf  of  principles      abroad, are required to collect the      reinsurance  premia   from   ceding      insurance companies  in  India  and      remit the same to their principals.      In such  cases,  brokerage  can  be      paid either  by allowing brokers to      deduct their  brokerage out  of the      gross premia collected from  Indian      insurance overseas  or  they  could      simply remit  the gross  premia and      get back  their  brokerage  in  the      form of  remittance through banking      channels.      3. The  Reserve Bank  of India have      expressed the  view that  since the      principle   underlying   both   the      transactions is  the same, there is      no difference between the two modes      of brokerage  payment. In fact, the      former method  is  administratively      more convenient and the reinsurance      brokers  had  been  following  this      method till 1987 when they switched      over to  the second method to avail      of deduction  under section 80-0 of      the Act.      4. The  matter has  been  examined.      The condition  for deduction  under      section 80-0  is that  the  receipt      should be  in  convertible  foreign      exchange. When   the  commission is      remitted abroad,  it should be in a      currency  that   is   regarded   as      convertible    foreign     exchange      according to  FERA.  Board  are  of      view that in such cases the receipt      of brokerage by a reinsurance agent      in   India from  the  gross  premia      before remittance  to  his  foreign      principles will also be entitled to      the deduction under the section 80-      0 of the Act.           (Emphasis supplied)      The said  circular which  seeks to  declare and clarify the real  scope and  impact of  Section 80-0  of the Act, is certainly binding on the respondent which issued it. 8.    The  facts brought  out in  this case, are clear as to how the  remittance to  the foreign  reinsurance company  is made through  the Reserve  Bank of  India in conformity with the  agreement   between  the   appellant  and  the  foreign reinsurer, and  that the  remittance that  the amount due to the foreign  reinsureres as  also the  brokerage due  to the appellant and  the balance  due to  the foreign reinsurer is remitted (and  expressed so) in dollars. It is common ground that the  entire transaction  effected through  the media of the Reserve  Bank of  India is expressed in foreign exchange and in  effect the retention of the fee due to the appellant is dollars for the services rendered. This, according to us, is receipt  of income  in convertible  foreign exchange.  It seems to  us that  a "two  way traffic"  is unnecessary.  To

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insist on a formal remittance to the foreign reinsures first and thereafter   to  receive the commission from the foreign reinsurer, will  be an  empty formality  and  a  meaningless ritual, on  the facts  of this  case. On  a perusal  of  the nature of the transaction and in particular the statement of remittance filed  in the Reserve Bank of India regarding the transaction filed in the Reserve Bank of India regarding the transaction, we  are  unable  to  uphold  the  view  of  the respondent that  the income under the agreement is generated in India  or that  the  amount    is  one  not  received  in convertible foreign  exchange. We  are of  the view that the income is received in India in convertible foreign exchange, in a  lawful and  permissible  manner  through  the  premier institution concerned with the subject-matter -- the Reserve Bank of India. In this view, we hold that the proceedings of the Central Board of Direct Taxes dated 11.3.1986, declining to approve the agreements of the appellant with M/s Sedgwick offshore Resources  Ltd. London  for the purposes of section 80-0 of  the Income-tax  Act, are  improper and  illegal. We declare  so.   we  direct  the  respondent  to  process  the agreements in  the light  of the  principles laid down by us herein above. The appeal is allowed. There shall be no order as to costs.