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Judgment
T.D.Sugla J.
By this petition under article 226 of the Constitution of India, the petitioner-company has challenged the legality and validity of the orders dated October 28, 1986, and dated June 23, 1987, passed by respondent No. 1, Central Board of Direct Taxes, New Delhi.
The Council of Industrial Research, a society registered under the Societies Registration Act, 1860, was interested in purchasing a paper plant for its Regional Research Laboratory, Hyderabad (for short "the purchaser"). The petitioner-company was in a position to supply that plant. On March 9, 1981, the purchaser and the petitioner entered into an agreement. The agreement, inter alia, provided that the petitioner shall, in addition to four complete units, namely, mould, press part, drying and cutting units, make available to the purchaser complete data, design, drawing and instructions in connection with therewith and also assist by supervising and rendering services in connection the installation of the four units. The consideration under the agreement was Rs. 8,50,000 which included Rs. 6,56,818 being the cost of the four complete units and Rs. 1,93,182 for the supply of technical know-how, i.e., complete data, design, drawing and instructions and for supervision and services in connection with the installation of the units.
The petitioner applied on September 24, 1983, to the Central Board of Direct Taxes (for short "the Board") for approval of the agreement dated March 9, 1981, u/s 80MM of the Income Tax Act, 1961 (for short "the Act"). The application was followed by a lot of correspondence between the petitioner and the Board. By letter dated January 13, 1986, the Board informed the petitioner that the agreement appeared to it to be for supply of goods and that the services mentioned in clause (f) of paragraph 2 of the agreement even if technical, did not amount to imparting of technical know-how and the agreement appeared to be for rendering services without the provision of technical know-how. It was stated that the agreement was, thus, hit by clause (viii) of the guidelines contained in the Central Board of Direct Taxes Circular No. 140, dated July 6, 1974 (see [1974] 95 ITR 144). The petitioner continued explaining its claim. Eventually, by its letter dated October 28, 1986, the Board accepted the claim partially. It held that the services referred to in clause (e) of paragraph 2 of the agreement had an element of provision of technical know-how. But, the entire amount or Rs. 1,93,182 which included consideration for supervision and services in connection with the installation of the four units did not qualify for the benefit u/s 80MM. In the absence of sufficient material for bifurcation, the Board further held that it would be reasonable to attribute the fees for technical know-how at 5 per cent. of the total value of the contract amounting to Rs. 8.50 lakhs, i.e., Rs. 42,500, as being covered u/s 80MM. A review application was filed by the petitioner on December 4, 1986, which was rejected by the Board, vide letter dated June, 23, 1987.
Shri Sathe, learned counsel for the petitioner, and Dr. V. Balasubramanian, learned counsel for the Revenue, have been heard at length. The case of the petitioner has all along been that even the services covered by clause (f) of paragraph 2 of the agreement were in the nature of supply of technical know-how and that actual installation of the plant and machinery was not undertaken by it. The actual installation was stated to have been done by somebody else. The petitioner has made these averments in the petition (see paragraphs 9, 10 and 11 of the petition). No affidavit-in-reply having been filed, the court has to proceed on the basis of uncontroverted averments in the petition.
The exact narration of services in the agreement for which the fee amount of Rs. 1,93,182 was received is :
"(e) Complete data, designs, drawings and the instructions in connection with (a), (b), (c) and (d) above.
(f) Supervision and services in connection with installation of the units specified at (a), (b), (c) and (d) above."
It may, thus, be taken that, in regard to the installation of the four units, the petitioner was only to guide those who were actually concerned with the installation of the units and the nature of services under clause (f) was not different from services contemplated under clause (e).
It is in this background that the court has to consider whether the impugned orders suffer from any patent error of law. Section 80MM has been deleted with effect from April 1, 1984. At the material time, the relevant portion of section 80MM(1) stood as under :
"(1) Where the gross total income of an assessee, being an Indian company, includes any income by way of royalty, commission, fees or any other payment (not being income chargeable under the head ''Capital gains''), received by the assessee from any person carrying on a business in India consideration for -
(i) the provision of technical know-how which is likely to assist in the manufacture or processing of goods or materials, or in the installation or erection of machinery or plant for such manufacture or processing, or in the working of a mine, oil well or other source of mineral deposits, or in the search for, or discovery or testing of, mineral deposits, or the winning of access to them, or in carrying out any operation relating to agriculture, animal husbandry, dairy or poultry farming, forestry or fishing, or
(ii) rendering services in connection with the provision of such technical know-how,
under an agreement entered into by the assessee with such person on or after the 1st day of April, 1969, and approved by the Board in this behalf, there shall, in accordance with and subject to the provisions of this section, be allowed as deduction from such income of an amount equal to forty per cent. thereof, in computing the total income of the assessee...."
It is thus evident that the provision of technical know-how can be both in connection with the installation or erection of machinery or plant and for the day-to-day functioning of the units. Moreover, the guidelines as per the Board''s Circular No. 140, dated July 6, 1974 (See [1974] 95 ITR 144), clause (viii) thereof reading as under also support the petitioner''s claim :
"Agreements for rendering services without the provision of any technical know-how within meaning of clause (i) of sub-section (1) read with sub-section (2) of section 80MM will not qualify for approval. In order to qualify for approval the services rendered under the agreement must be in connection with the provision of such technical know-how and these should be rendered by the person providing such technical know-how. There should be an inter-connection and inter-relationship between the services rendered and the provision of such technical know-how."
The result is that, even according to the guidelines, if the agreement is in connection with technical know-how and the services are rendered by a person providing such technical know-how and there is an interconnection and inter-relationship between the services rendered and the provision of such technical know-how, the agreement will qualify for approval u/s 80MM.
In my view, the Board has overlooked these two important and relevant aspects while considering the agreement in question for the purpose of approving it u/s 80MM. Its impugned orders/letters thus suffer from a patent error of law. The impugned orders/letters are, therefore, quashed. Since this is the only objection taken, the Board is directed to approve the agreement u/s 80MM as claimed by the petitioner.
Rule is, accordingly, made absolute in terms of prayer clauses (a) and (b).
No order as to costs.