SUPREME COURT HOLDS NOT EVERY INCOME FROM FOREIGN ENTITIES FALLS WITHIN THE AMBIT OF SECTION 80-O OF INCOME TAX ACT 1961

A Bench of the #SupremeCourt of India comprising of Justices A.M. Khanwilkar, Dinesh Maheshwari, and Sanjiv Khanna, has recently decided the case of Ramnath And Co. v. The Commissioner Of Income Tax, Civil Appeal Nos. 2506/2509 of 2020, vide Judgment dated 05.06.2020, arising out of SLP(C) Nos. 23535 23538 of 2016, upholding the Judgment dated 09.06.2016 of the High Court of #Kerala at Ernakulam (‘High Court’),  in an Appeal arising out of an Order of the #IncomeTax Appellate Tribunal (‘ITAT’). The Court decided the issue as to whether the income received by the appellants in #foreignexchange, for the services provided by them to foreign enterprises, qualifies for deduction under Section 80-O of the Income Tax Act, 1961 (‘the Act 1961’), as applicable during the respective assessment years from 1993-94 to 1997-98.

Section 80-O of the Income Tax Act, 1961 deals with deductions in respect of royalties, from foreign enterprises. While deciding the instant case, the 3 Judges Bench discussed the following background of the case:

Background

Ramnath & Co. is a firm engaged in the business of providing services to foreign buyers of Indian marine products (‘the Appellant’). The Appellant filed its return of income for the assessment year 1993-1994 on 29.10.1993 declaring total taxable income at Rs. 6,21,710/- while claiming 50% deduction (amounting to Rs. 22,39,825/-) under Section 80-O of the Act in relation to the amount of Rs. 44,79,649/- received by it as service charges from foreign enterprises.

The respective Assessing Officer/s denied such claim for deduction essentially with the finding that the services rendered by Assessee were the services rendered in India and not the services rendered from India and, therefore, the service charges received by the Assessee from the foreign enterprises did not qualify for deduction in view of clause (iii) of the Explanation to Section 80-O of the Act of 1961.

Section 80-O (iii) Explanation of the Act 1961 is reproduced hereunder as:

“Explanation.—For the purposes of this section,—

(iii) services rendered or agreed to be rendered outside India shall include services rendered from India but shall not include services rendered in India;”

However, the Appellant approached the ITAI, Cochin Bench seeking the deduction in accordance with the aforesaid provision under the Act 1961.

The ITAI accepted the claim for such deduction under Section 80-O of the Act 1961. It further held and recorded its finding in case of the Appellant for the assessment year 1993-94 that as per the agreements with the referred foreign enterprises, the Assessee had passed on the necessary information which were utilised by the foreign enterprises concerned to make a decision either to purchase or not to purchase; and hence, it was a service rendered from India.

However, the Revenue Department preferred an Appeal before the High Court against the Order so passed by ITAT in favour of the present Appellant. The High Court has essentially held, vide the impugned Judgment dated 09.06.2016 that the Assessee was merely a marine product procuring agent for the foreign enterprises, without any claim for expertise, capable of being used abroad rather than in India and hence, the services rendered by them do not qualify as the services rendered from India, for the purpose of Section 80-O of the Act of 1961. Therefore, the High Court has allowed the appeals of Revenue Department while setting aside the respective Orders of ITAT.

Consequently, the Appellant have preferred the instant Appeals before the Supreme Court.

Supreme Court Decision:

In view of the facts and circumstances of the instant case the Court went on to consider the terms and conditions in an existing agreement between the Appellant and the foreign buyers. It observed that the Appellant was essentially required to ensure supply of sufficient quantity of quality merchandise in proper packing and at competitive prices to the satisfaction of the principals. This was essentially a job of a procuring agent.

On the argument that Section 80-O of the Act needs to be interpreted and applied liberally. The Court said that that deductions, exemptions, rebates etc., are the different species of incentives extended by the Act 1961. Without expanding unnecessarily on variegated provisions dealing with different incentives, the Court said that it would suffice to notice that the proposition that incentive provisions must receive “liberal interpretation” leaning in favour of grant of relief to the Assessee is not an approach allowed by the Court.

It further held that “at and until the stage of finding out eligibility to claim deduction, the ambit and scope of the provision for the purpose of its applicability cannot be expanded or widened and remains subject to strict interpretation but, once eligibility is decided in favour of the person claiming such deduction, it could be construed liberally in regard to other requirements, which may be formal or directory in nature.”

Therefore, the Court noticed that even if certain services or information was sent by the Assessee to the foreign entities, the information did not fall in the category of such professional services or information which could justify its claim for deduction under Section 80-O of the Act.

Thus, Supreme Court dismissed the Appeal and upheld the Judgment of the High Court vide its Judgment dated 05.06.2020. Wherein, it held that for bringing any particular foreign exchange receipt within the ambit of Section 80-O of Act 1961 for deduction, it must be a consideration attributable to information and service contemplated by Section 80-O of the Act. Moreover, in case of a contract involving multiple or manifold activities and obligations, every consideration received therein in foreign exchange will not ipso facto fall within the ambit of Section 80-O of the Act 1961.

Lakshmi Vishwakarma

Associate

The Indian Lawyer & Allied Services

SUPREME COURT HELD AUCTION PURCHASER LIABLE FOR UNPAID ELECTRICITY DUES OF A PROPERTY

The Supreme Court has in a recent case of Telangana State Southern Power Distribution Company Limited v. Srigdhaa Beverages 2020 SCC Online SC 478 passed a Judgment dated 01-06-2020,where the Apex Court held the Respondent-Auction Purchaser liable for payment of outstanding #electricitydues of a property purchased on an ‘#asiswhereisbasis’.  

In this case, M/s. SB Beverages Private Limited (the #Debtor) failed to repay certain loan to Syndicate Bank (the #Creditor). As a result, the Creditor conducted an auction of a mineral water bottling plant (the Property) owned by the Debtor, under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (the Act). In the said #auction, the Creditor sold the Property to the Respondent (the Auction Purchaser) on an “as is where is, whatever there is and without recourse basis” under Rules 8 and 9 of the Security Interest (Enforcement) Rules 2002 (the Rules) for recovery of dues. Later, when the Respondent applied to the Appellant, Telangana State Southern Power Distribution Company Limited (#TSSPDCL), for electricity connection for running the Property, the Appellant refused to give electricity connection on the ground that there were previous electricity dues of Rs.50,47,715.00, which have to be now paid by the Respondent.

Thus, the Respondent-Auction Purchaser herein filed a Writ Petition in the Telangana High Court seeking quashing of the demands of TSSPDCL on the ground that a subsequent purchaser is not liable to pay outstanding dues of an earlier owner. The High Court allowed the Petitioner-Auction Purchaser to file proper application for power connection to the concerned authorities, vide Order dated 17-11-2017. Aggrieved by the High Court Order dated 17-11-2017, the Respondent-TSSPDCL filed a Writ Appeal before the Division Bench of the High Court, which was dismissed, vide Order dated 30-04-2018. Thus, aggrieved by the High Court Order dated 30-04-2018, TSSPDCL filed a Special Leave Petition in the Supreme Court seeking the setting aside of the High Court Orders dated 17-11-2017 and 30-04-2018, and the recovery of outstanding electricity dues from the last owner of the Property, i.e. the Respondent-Auction Purchaser herein.

The Apex Court made the following observations in this case:

1- That the terms and conditions of the Auction Sale Notice dated 25-05-2017 clearly mentioned that the Property would be sold on an “as is where is, what is there is and without any recourse basis” in all respects and subject to statutory dues, if any.

2- Further, the Auction Sale Notice dated 25-05-2017 specified that the Creditor or the Debtor or any other person would not be liable for any charge, lien, encumbrance, property tax dues, electricity dues, Government dues, etc in respect of the Property and that no claim for such dues would be entertained, after submission of the bid/confirmation of sale.

3- That the Respondent-Auction Purchaser must have inspected the premises of the Property and inquired about pending dues in all respects before purchasing the Property.

Thus, based on the aforesaid grounds, the Supreme Court held that electricity dues being statutory in nature under the Electricity Act 2003, the Respondent-Auction Purchaser would be liable to pay the statutory dues including electricity dues, as per the Auction Sale Notice dated 25-05-2017. Further, the Apex Court allowed the Appellant-TSSPDCL to recover the electricity dues from the last owner of the Property, i.e. the Respondent-Auction Purchaser.

Harini Daliparthy

Senior Legal Associate

The Indian Lawyer

COLLABORATIONS INVITED BETWEEN INDIA AND JAPAN PHARMACEUTICAL AND MEDICAL DEVICES SECTOR

Currently, India ranks amongst the top 20 global medical devices entities and has the 4th largest medical devices market in Asia. Recently, the Embassy of India, Tokyo and the Department of Pharmaceuticals, Ministry of Chemicals and Fertilizers, Government of India had organised a Webinar on 22-05-2020 to discuss the challenges and emerging opportunities in the field of Medical Devices and Pharmaceuticals and to boost the business and trade collaborations between India and Japan in the current and post-Covid-19 scenario.[1]

The Government of India has invited Japanese companies to avail the benefits of the following Schemes that have been introduced to boost domestic manufacturing of medical devices:

1- Production Linked Incentive Schemes 

This Scheme aims at providing financial incentive to promote domestic manufacturing of medical devices like cancer care or radiotherapy medical devices, radiology and imaging medical devices, etc. It further aims to attract investments in the medical devices sector. The incentive would be based on the incremental sales of goods manufactured in India.[2]

2- Promotion of Medical Devices Parks

The Government has introduced the Development of Common Facility Centre (CFC) for Medical Device Scheme to provide financial assistance to set up common facilities in a Medical Device Park, such as component testing centre, injection moulding centers, radiation testing centre, etc. The Central Government would provide Rs. 25 Crores per Medical Device Park CFC or 70% of the project cost of CFC, whichever is less, to the State Implementing Agency (SIA). The SIA would be responsible for the day to day management of the Medical Device Park.[3]

3- Further, the State Governments of Gujarat, Telangana, Himachal Pradesh and Goa have also offered them various incentives and taxation benefits, ease of doing business initiatives, land availability, infrastructural facilities, regulatory framework, etc, to attract investments in their respective states.

This collaboration between India and Japan may boost the growth of the pharma and medical devices industry and also, stabilize the global supply-chain of medical devices.


[1] https://pib.gov.in/PressReleasePage.aspx?PRID=1626121

[2]https://pharmaceuticals.gov.in/sites/default/files/Production%20Linked%20Incentive%20Scheme%20for%20Promoting%20Domestic%20Manufacturing%20of%20Medical%20Devices.pdf

[3] https://pharmaceuticals.gov.in/sites/default/files/SCHEME%20GUIDELINES.pdf