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:
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.
The Indian Lawyer & Allied Services