Chemical Consultants and Engineers Pvt. Ltd. vs Central Board of Direct Taxes

Venkataswami, J.—The petitioner-company is carrying on the business of consultants for providing technical know-how and expertise for

setting up and constructing and manufacturing various chemicals. The petitioner entered into an agreement with the Mysore Coffee curing Works

Limited on April 15, 1980, for furnishing technical know-how and making available their expertise and to undertake the design, engineering,

fabrication and supply of equipment, erection and commissioning of a batch process copper sulphate plant on turnkey basis. The petitioner-

company has agreed to receive by way of consultant''s fee a sum of Rs. 2 lakhs for rendering the following technical services :

In consideration of the fees to be received by the consultants as per clause III(1) of this agreement, the consultants shall render the following

technical services for the setting up of a copper sulphate plant, working on batch process and capable of producing three metric tonnes per day of

24 hours of technical grade copper sulphate starting from copper scrap consisting of mixture of burnt motor winding coils, copper strips, cut pieces

of sheets, etc., having minimum of 98 per cent. copper content and size not more than 2.5 mm thick x 6 mm wide x 300 mm long.

(a) Supply of know-how and transfer of technical know-how confined to the points as per enclosed annexure E of this agreement, for the

manufacture of copper sulphate.

(b) Carrying out the proper design and engineering of the copper sulphate plant.

(c) Preparation of engineering drawings for all the fabricated items.

(d) Inspection by periodic site visits of equipment to be procured by the company-industrial mancoolers, weighing scale, handling equipment,

platforms for equipment, mother liquor sump, crystalliser and the supervision of the foundations of the equipment.

(e) Preparation of detailed layout for equipment and process piping steam and water lines necessary for the process.

(f) Preparation of foundation sketches for equipment indicting overall dimensions and load details.

Erection and commissioning of the plant including training of local personnel, advice regarding pollution and environmental problems involved in

the process, if any, single line diagram for electrical connections, for equipment supplied by consultants, supply of operational manuals, specimen

instruction-sheets, data-sheets of operations, work-sheets, log-sheets and laboratory test procedures.

The consultants will provide lay-out drawings for equipment and process piping and basic details of the building such as length, breadth and

height. The building drawing made by the company will be approved by the consultants with respect to plant layout only.

The petitioner, treating the entire sum of Rs. 2 lakhs as fees agreed to be paid for the technical know-how/services, applied to the respondent

u/s 80MM of the Income Tax Act for approval. The respondent, by its first order dated January 28, 1981, held that the fee of Rs. 2 lakhs payable

under the agreement covers provision of commercial data relating to price of raw materials, demand for product, etc., procurement assistance,

erection, supervision involving managerial services and, therefore, the agreement can be granted only partial approval. Accordingly, the respondent

had given approval to the agreement only to the extent of 25 per cent. of the fee of Rs. 2 lakhs receivable under the agreement. On receipt of the

order dated January 28, 1981, the petitioner by its letter dated March 24, 1981, again moved the respondent for reconsideration of the said order.

Thereupon, the respondent, by its order dated April 24, 1981, modified its earlier order dated January 28, 1981, and stated that the agreement

has been approved to the extent of 50 per cent. of the fees of Rs. 2 lakhs receivable under the agreement. Still aggrieved, the petitioner has filed

this writ petition for quashing the impugned order dated April 24, 1981, and for directing the respondent to give approval to the full extent of the

fee receivable under the agreement, namely, Rs. 2 lakhs.

Learned counsel for the petitioner argued that no reasons have been given in the impugned order for restricting the approval to the extent of 50

per cent. only. The technical know-how furnished by the petitioner will fall within the scope of section 80MM(2) of the Income Tax Act. The

respondent committed an error in stating that the fee of Rs. 2 lakhs payable under the agreement covers provision of commercial data relating to

price of raw materials, demand for products, procurement assistance and erection, supervision involving managerial services. Learned counsel

further submitted that the entire services and technical assistance rendered to the Mysore Coffee Curing Works Limited will fall u/s 80MM(2) of

the Income Tax Act and the contrary view taken by the respondent is not sustainable.

Learned counsel for the petitioner invited my attention to the following decisions : SIMON CARVES INDIA LTD. Vs. CENTRAL BOARD

OF DIRECT TAXES AND ANOTHER., , R.G. Sales Pvt. Ltd. Vs. Income Tax Officer and Others, , Gannon Dunkerley and Co. Ltd. and

another Vs. Central Board of Direct Taxes and others, and Simon Carves India Ltd. Vs. Income Tax Officer and Others, .

Mr. N. V. Balasubramanian, learned counsel appearing for the Revenue, contending contra, submitted, that a fair reading of the clauses in the

agreement will clearly show that all the services to be rendered under the agreement for the consideration of Rs. 2 lakhs (enumerated above) will

not fall u/s 80MM(2) of the Income Tax Act as some of the items will fall outside that. For example, he invited my attention to certain items

mentioned in annexure ""E"" to the agreement whereunder the services to be rendered by the petitioner include availability of raw materials in India,

specification and annual requirements, methods of analysis of main raw materials and prevailing prices of raw materials. Learned counsel for the

Revenue further submitted that in the event of the respondent-Board coming to a conclusion that some of the items of services will fall outside the

scope of section 80MM(2) of the Income Tax Act, it is open to the Board to grant partial approval. The respondent having granted the partial

approval only after having applied its mind, this court may not entertain a further scrutiny on the ground that some more percentage should have

been allowed. Learned counsel invited my attention to the following decisions : Holtec Engineers P. Ltd. Vs. Central Board of Direct Taxes, ,

Petron Engineering Construction Pvt. Ltd. and Another Vs. Central Board of Direct Taxes and Others, and M/s. Continental Construction Ltd.

Vs. Commissioner of Income Tax, Central-I, .

I have considered the rival submissions.

In one sense, the impugned order of the respondent is not a speaking one. However, if the impugned order is read along with the original (main)

order dated January 28, 1981, the idea behind the granting of partial approval will be known. It is seen that certain items given in annexure E such

as availability of raw materials in India, specification and annual requirements, prevailing price of raw materials, all coming under the head ""raw

materials"" and expected demand, production figure in India and present selling price in India, all coming under the head ""commercial data"" do not

appear to come strictly under ""technical know-how/services"". However, learned counsel for the petitioner argued that inasmuch as the petitioner

has given a performance guarantee, it is necessary to look into the matters coming under ""commercial data"" and ""raw materials"" and, therefore, that

must be treated as coming under ""technical know-how/services"". Learned counsel also submitted that the petitioner is not doing any erection,

supervision involving managerial services under the agreement, to deny the full claim. Regarding the services rendered under ""commercial data"",

learned counsel submitted that the work relating to furnishing those data is negligible compared to the work relating to various other services

rendered under the agreement.

In SIMON CARVES INDIA LTD. Vs. CENTRAL BOARD OF DIRECT TAXES AND ANOTHER., , the learned judges of the Delhi High

Court observed as follows (headnote) :

The order of the Board refusing approval had to be quashed and the board had to reconsider the application, keeping in mind the opening words

of section 80MM indicating that the provision of technical know-how might relate to technical know-how which was likely to assist in the

manufacture or processing of goods, and the language of section 80MM(2)(ii) which included in the meaning of technical know-how the imparting

of information concerning the working of the use of a design.

The same learned judges have also held as follows (headnote) :

It is a question of fact or of judgment as to whether particular drawings or designs drawn on paper directly assist in the manufacture or processing

of goods or material or in the working or use of a designed plant. A reasonable view expressed by the Board on a question of fact or of judgment

would not ordinarily be reviewable by the court.

In R.G. Sales Pvt. Ltd. Vs. Income Tax Officer and Others, , a learned single judge of the Calcutta High Court held that there was no bar for

an assessee to have two characters, one to become a selling agent and, at the same time, to enter into a contract for the supply of technical

services. There cannot be any quarrel on this proposition of law.

In Gannon Dunkerley and Co. Ltd. and another Vs. Central Board of Direct Taxes and others, , a learned single judge of the Bombay High

Court has considered a case u/s 80-O of the Income Tax Act, which is not directly on the point.

In Simon Carves India Ltd. Vs. Income Tax Officer and Others, is again a case dealing with section 80-O of the Income Tax Act and,

therefore, it is also not helpful to the petitioner.

In Holtec Engineers P. Ltd. Vs. Central Board of Direct Taxes, on facts, a Division Bench of the Delhi High Court held that it is implicit in the

said section (section 80MM) that the provision of technical know-how must directly assist in the manufacture or processing of goods or material or

in the installation or erection of machinery or plant for such manufacture or processing or in any one or more of the other operations or activities

specified in sub-section (1) of section 80MM.

In Petron Engineering Construction Pvt. Ltd. and Another Vs. Central Board of Direct Taxes and Others, , the learned judges of the Supreme

Court held that an exemption provision should be liberally construed, but that does not mean that such liberal construction should be made even by

doing violence to the plain meaning of such exemption provision. Liberal construction can be made wherever it is possible to be made without

impairing the legislative requirement and the spirit of the provision.

In M/s. Continental Construction Ltd. Vs. Commissioner of Income Tax, Central-I, , the learned judges of the Supreme Court have held that

for the purpose of Income Tax, a principle of apportionment has always been applied in different contexts.

Bearing the above principles in mind, if we appreciate the facts of this case, one thing is certain, i.e., at least some of the technical services

agreed to be rendered by the petitioner-company for a consideration of Rs. 2 lakhs will not come within the scope of ""technical know-

how/services"". But his contention is that, the respondent has arbitrarily granted approval only for 50 per cent. without giving any reasons. As

pointed out earlier, the impugned order (on review petition) must be read along with the main order. If so done, it can be seen that the Board has

applied its mind before fixing 50 per cent. for approval, which cannot be lightly interfered with by this court, vide the decision in SIMON

CARVES INDIA LTD. Vs. CENTRAL BOARD OF DIRECT TAXES AND ANOTHER., .

In this view of the matter, I do not think there is any case for interference. The writ petition is, therefore, dismissed. No costs.