Itxa/1164/2007 Of Sgs Inida Private Limited , Sgs House v. The Joint Commissioner Of Income - Tax

IN THE HIGH COURT OF JUDICATURE AT BOMBAYORDINARY ORIGINAL CIVIL JURISDICTION INCOME TAX APPEAL NO. 1165 OF 2007WITHINCOME TAX APPEAL NO. 1163 OF 2007WITHINCOME TAX APPEAL NO. 1164 OF 2007WITHINCOME TAX APPEAL NO. 1166 OF 2007WITHINCOME TAX APPEAL NO.1257 OF 2007 SGS India Pvt. Ltd. SGS House, 4B Adi Sankaracharya Marg,Vikhroli (W), Mumbai – 400 023 .. Appellant v/s. The Joint Commissioner of Income-TaxSpecial Range 20, Aayakar Bhavan, M.K. Road,Mumbai – 400 020 ..Respondent Mr. R. Murlidhar a/w Mr. Atul Jasani for the appellant Mr. Suresh Kumar a/w Ms. Samiksha Kanani for the respondent CORAM : M.S. SANKLECHA & SANDEEP K. SHINDE, J.J. JUDGEMENT RESERVED ON : 1[st] AUGUST, 2018JUDGEMENT PRONOUNCED ON : 13[th] AUGUST, 2018 Judgment : - (Per M.S. Sanklecha, J.) 1.These five appeals under Section 260A of the Income Tax Act,1961 (the Act) challenge the order dated 27[th] February, 2007 passed bythe Income Tax Appellate Tribunal (the Tribunal). The commonimpugned order relates to Assessment Years 1992-93, 1994-95, 1995-96, 1996-97 and 1997-98. Thus, these five appeals. 2.On 12[th] August, 2008, all the five appeals were admitted on the following identical substantial questions of law :- (i)Whether on the facts and in the circumstances of the caseand in law, the Tribunal sought to have held in view of theconsistent stand of the respondent for the assessment years 1985-86 to 1991-92 that the entirety of the net receipts of theAppellant were eligible for deduction under section 80-O of theAct, he had no jurisdiction to take the view that a portion of suchreceipts was attributable to alleged “routine services” in thepresent year in the absence of any change in the facts andcircumstances? (ii) Whether on the facts and in the circumstances of the caseand in law, the Tribunal ought to have held that the respondenthad no jurisdiction to categorize a portion of the receipts of theAppellant for professional services as attributable to alleged“routine services” in the light of the admitted position that theAppellant was rendering a consolidated report? (iii)Whether on the facts and in the circumstances of the caseand in law the Tribunal ought to have held that even the alleged“routine services” were an integral and an indivisible part of theprofessional work carried out by the Appellant and theconsideration thereof was eligible for deduction under section80-O? (iv)Whether on the facts and in the circumstances of the case and in law, the Tribunal erred in taking the view that activitieslike supervising the weight loading and storage of goods were“routine services” when the facts on record clearly showed thatsuch activities required a high degree of technical knowledge andexpertise and could not be performed by lay persons? 3.It is an admitted position that the facts and the law applicable inall the five appeals are identical. Therefore, for the purposes of theseappeals, we refer to the facts set out in the appeal filed for AssessmentYear 1992-93. These facts are as follows :- (a)The appellant is engaged in providing technical and professionalservices. These in the nature of quality control, inspection, testing andverification of goods. (b)On 27[th] December, 1978, the appellant entered into an agreementwith M/s. Societe Generale De Surveillance S.A., Geneva (for short“foreign company”) for rendering various technical and professionalservices with regard to import / export of goods by the foreign companyfrom and to India. On expiry of the aforesaid agreement anotheragreement dated 8[th] March, 1984 was entered into with the foreigncompany and the same was renewed by separate agreements from timeto time, the last such agreement was dated 31[st] March, 1994. (c)The salient features of the agreement dated 8[th] March, 1984 are as follows :- (a)The appellant is engaged in providing technical and professionalservices. These in the nature of quality control, inspection, testing andverification of goods. (b)On 27[th] December, 1978, the appellant entered into an agreementwith M/s. Societe Generale De Surveillance S.A., Geneva (for short“foreign company”) for rendering various technical and professionalservices with regard to import / export of goods by the foreign companyfrom and to India. On expiry of the aforesaid agreement anotheragreement dated 8[th] March, 1984 was entered into with the foreigncompany and the same was renewed by separate agreements from timeto time, the last such agreement was dated 31[st] March, 1994. (c)The salient features of the agreement dated 8[th] March, 1984 are as follows :- “Whereas the Foreign Enterprise is one of the largest worldorganizations directly or indirectly connected with InternationalTrade, import and export of various sophisticated items in hugequantities and other bulk movements between Internationalboundaries; And Whereas the Foreign Enterprise is often appointed bythe Governments of Foreign States to act as inspection agents; And Whereas in the course of its business activities, tradeand rendering services, the Foreign Enterprise is required toobtain detailed, specialized and highly technical information,analysis and report concerning various items required to beimported or exported from one country to the other and everytime it is not possible to obtain this highly scientific and technicalinforma5tion from so many countries of the world by deputing itsown specialized employees and experts and it is therefore not onlynecessary but also the practice of the Foreign Enterprises to availof services from time to time to time of local experts who possesssuch technical knowledge, experience and skill; And Whereas theIndian Company which is an expert having been found to possesssuch technical and scientific knowledge, experience and skill andfully equipped for this purpose to the satisfaction of the ForeignEnterprises. At the request of the satisfaction of the ForeignEnterprise, the Indian company has been rendering the technicalservices referred to herein below to or at the request or on behalfof the Foreign Enterprise, pursuant to an Agreement dated 27[th]December, 1978; And Whereas the parties hereto are desirous of extendingthe previous Agreement between them. Now it is hereby agreed by and between the parties hereto as under: 1. The Indian Company agrees t render to render to teForeign Enterprise or at its request or on its behalf mainly thefollowing technical services or any one of them amongst others: (a) Physical and Chemical test; (b) Sampling analysis; (c) Qualitative and quantitative analytical tests, scientific andtechnical inspection and verification; (d) Quality evaluation of packing material; (e) Preparation and submission of technical report includingproject report as and when necessary; (f) Expert advice and certificates pertaining to goods, materials,articles, things, etc. mainly exported outside India. (g) And professional and technical services of any other nature asare specified herein. 2. In consideration of the above technical services or any oneof them rendered by the Indian Company to the ForeignEnterprise at its request or for and on its behalf, the ForeignEnterprise shall pay to the Indian Company in convertible foreignexchange in India in accordance with the law for the time beingin force in regulating bills and payments in foreign exchange atrates as per schedule of fees annexed hereto. The ForeignEnterprise shall settle accounts as far as possible every month,but not later than three months. (f) Expert advice and certificates pertaining to goods, materials,articles, things, etc. mainly exported outside India. (g) And professional and technical services of any other nature asare specified herein. 2. In consideration of the above technical services or any oneof them rendered by the Indian Company to the ForeignEnterprise at its request or for and on its behalf, the ForeignEnterprise shall pay to the Indian Company in convertible foreignexchange in India in accordance with the law for the time beingin force in regulating bills and payments in foreign exchange atrates as per schedule of fees annexed hereto. The ForeignEnterprise shall settle accounts as far as possible every month,but not later than three months. 5.The Indian Company, in addition to the above technicalservices, will also provide its special expertise and experiencewhich it has built up and formulated with experience of last 30years on various Indian items under the diverse and wide-rangingIndian conditions and circumstances. The Indian Companywhenever called upon by the Foreign Enterprise will also provideand render technical services such as pre qualification survey,inspection and report, metallurgical consultancy, conductingevaluation, evaluation of corrosion and erosion and leakdetection test.” (d)In respect of the fees received from the foreign company fortechnical services rendered under the agreement of 27[th] December,1978 and 8[th] March, 1984, the appellant made claim for deductionunder Section 80-O of the Act. During the period 1980 to 1984 i.e.A. Y. 1980-81 to 1984-85, the appellant approached the Central Bord of Direct Taxes (CBDT) for approval of the above agreements andtechnical services. The CBDT called upon the appellant to supply the break up of fees received under the following categories :- (i)Laboratory / testing charges (ii) Professional charges (iii)Inspection fees (iv)Export fees; and (v)Other expenses (e) On submission of the above break up, the approval was granted from the Assessment Years 1980-81 upto 1984-85 being 100% deduction on account of Laboratory / testing charges and 33 1/3 % onaccount of professional charges under Section 80-O of the Act. The feesattributable in respect of other services rendered to foreign companywas not granted any deduction under Section 80-O of the Act. (f)The appellant protested at this arbitrary bifurcation of the feesreceived for technical services from the foreign company. This, on theground that the services rendered are part of the continuous operationwhich culminates into technical services to the foreign party. It is forthe final report i.e. Technical services, that it is paid for in foreignexchange by the foreign company. As a consequence of the above, theCBDT while approving the agreement dated 8[th] March, 1984 forAssessment Year 1985-86 for the purposes of Section 80-O of the Actvaried its earlier approval. Instead of fixing the percentage allowable,the CBDT directed that the consideration attributable to the technicalservices which would qualify for deduction under Section 80-O of theAct was to be determined by the Assessing Officer. (g)In consequence of the above direction, the Assessing Officer forthe Assessment Years 1985-86 to 1991-92 allowed the claim fordeduction of 50% of the net foreign exchange earnings under Section80-O of the Act. This on the total fees received from the foreigncompany after deducting expenses therefrom to earn the foreign exchange. (g)In consequence of the above direction, the Assessing Officer forthe Assessment Years 1985-86 to 1991-92 allowed the claim fordeduction of 50% of the net foreign exchange earnings under Section80-O of the Act. This on the total fees received from the foreigncompany after deducting expenses therefrom to earn the foreign exchange. (h)However, during the Assessment Year 1992-93, the AssessingOfficer called upon the appellant to bifurcate its receipts into fiveheads referred to hereinabove (as done by the CBDT) for consideringdeduction under Section 80-O of the Act. Finally, the Assessing Officerby assessment order dated 30[th] March, 1995 adopted the samemethodology as was done by the CBDT in its approval to the agreementfor Assessment Years 1980-81 to 1984-85 i.e. 100% deduction onaccount of laboratory / testing charges and 33 1/3% on account ofprofessional charges. The other claims on account of services renderedto the foreign company was disallowed in toto. (i)Being aggrieved by the order dated 13[th] March 1995, theappellant filed an appeal to the Commissioner of Income Tax (Appeals)[CIT(A)]. By an order dated 14[th] September, 1995, the CIT(A) heldthat there is no basis / reasons whatsoever for the Assessing Officer todeviate from the consistent practice of the Assessing Officer allowingdeduction at 50% of the net foreign exchange earnings received from aforeign company in consideration of the technical services rendered forthe Assessment Years 1985-86 to 1991-92. This in view of its activitiesremaining the same even for A.Y. 1992-93. Further, the CIT(A) drawsattention that this very issue of deduction under Section 80-O of the Act for Assessment Year 1985-86 was the subject matter of revision underSection 263 of the Act by the Commissioner of Income Tax (CIT).However, it also records the fresh assessment order passed underSection 143(3) of the Act, the Assessing Officer did not disturb thededuction which was granted under Section 80-O of the Act in theearlier assessment order which was subject to revision under Section263 of the Act. On merits also while allowing the appeal, it held thatthe so called routine services are a part of technical services and cannotbe excluded from the services rendered. (j)Thereafter, our attention was drawn to the order dated 4[th]January, 2007 of the Tribunal, emanating from reopening proceedingsunder Section 148 of the Act for Assessment Years 1985-86 and 1991-92. The Assessing Officer sought to reopen the assessment forAssessment Years 1985-86 and 1991-92 seeking to excude from theclaim of deduction under Section 80-O of the Act, to the extent ofcertain services. The Tribunal set aside the reopening notices as itfound that regular assessment for Assessment Years 1985-86 and 1991-92 were made under Section 143(3) of the Act and deduction underSection 80-O of the Act was granted after due application of mind.Thus, seeking to reopen those assessments were mere a change ofopinion as there was no change in facts and / or in law which would warrant issuing notices for reassessment for Assessment Years 1985-86and 1991-92. warrant issuing notices for reassessment for Assessment Years 1985-86and 1991-92. (k)In the meantime, the respondent-Revenue had filed an appeal tothe Tribunal from the order dated 14[th] September, 1995 of the CIT(A)for the Assessment Year 1992-93. The impugned order dated 27[th]February, 2007 of the Tribunal holds that the provisions of Section80-O of the Act have to be applied independently for each assessmentyear and on consideration of the services rendered by the appellant tothe foreign company, it was found that the routine services which arerendered in India would not form a part of preparation and forwardingtechnical information to be used outside India for deduction underSection 80-O of the Act. This on the ground that the services renderedby the appellant were held routine services rendered in India and notrendered outside India from India. Thus, 20% of the considerationreceived was excluded from the benefit of deduction under Section 80-O of the Act. The balance consideration received was allowed indetermining deduction under Section 80-O of the Act. 4.On the aforesaid facts, we shall now take up the substantialquestions of law admitted for our consideration. 5.Regarding question no.(i) :- (a)The learned Counsel for the Appellant submits that for the earlierAssessment Years i.e. from A. Y. 1985-86 up to 1991-92, deductionunder Section 80-O of the Act was allowed at 50% of the net foreignexchange earnings on the total fees received from the foreign company.This after deducting expenditure incurred to earn the foreign exchange.The Principle of consistency and the law of precedent would requirethat even for the subject Assessment Years i.e. Assessment Years 1992-93 to 1997-98, the Revenue ought to have followed its earlier decisions,particularly, as there is no change in fact and /or in law. In support,reliance is placed upon the decisions of this Court in PCIT v/s. M/s.Quest Investment Advisors Pvt. Ltd., (Income Tax Appeal No. 280 of2016) rendered on 28[th] June, 2018. (b)It is further submitted on behalf of the Appellant that theTribunal by its order 4[th] January, 2008 set aside the re-openingproceedings taken for Assessment Years 1985-86 and 1991-92, onidentical issue as being without jurisdiction. Thus, the Tribunal ought tohave allowed deduction under Section 80-O of the Act, as has beenallowed for the Assessment Years 1985-86 to 1991-92 by the AssessingOfficer. (c)In the present case, we find that there has been admittedly change in law w.e.f. A.Y. 1992-93. This by inclusion of sub-clause (iii) of Explanation to Section 80-O of the Act. The aforesaid Explanation of Section 80-O of the Act added w.e.f. 1[st] April, 1992 reads as under :- “Section : 80-O (iii) services rendered or agreed to be rendered outside Indiashall include services rendered from India but shall not includeservices rendered in India.” The above Explanation for the first time specifically excludes servicesrendered in India while allowing deduction to services rendered fromIndia. (d)The services rendered by the Appellant to the foreign company,inter alia, involves the activity of inspection, supervision of loading andstorage etc. These are activities which are in the nature of routineservices and admittedly carried out in India. In the above facts, theimpugned order of the Tribunal disallowed the deduction under Section80-O of the Act to the extent of 20% of the consideration received asattributable to the activity being rendered in India and not beingservices rendered from India. (e)Thus, the principle of consistency and/or doctrine of precedentswould not apply in the present facts, as undisputedly there is a changein law. The impugned order of the Tribunal on facts found that theroutine services were rendered in India and not from India. Thus, (d)The services rendered by the Appellant to the foreign company,inter alia, involves the activity of inspection, supervision of loading andstorage etc. These are activities which are in the nature of routineservices and admittedly carried out in India. In the above facts, theimpugned order of the Tribunal disallowed the deduction under Section80-O of the Act to the extent of 20% of the consideration received asattributable to the activity being rendered in India and not beingservices rendered from India. (e)Thus, the principle of consistency and/or doctrine of precedentswould not apply in the present facts, as undisputedly there is a changein law. The impugned order of the Tribunal on facts found that theroutine services were rendered in India and not from India. Thus, would not qualify for deduction under Section 80-O of the Act.Moreover, the decision of the Tribunal in the case of re-opening of anAssessment for A. Y. 1985-86 and 1991-92 being held to be bad by theTribunal by order dated 4[th] January, 2007 will not help the Appellant asthe tests to be applied to determine whether or not, re-opening of anAssessment is permissible under the law, would be entirely differentfrom assessment done in regular proceedings. The jurisdiction toreopen an assessment is a very limited jurisdiction hemmed in byvarious limitations, amongst them being no notice for reopening can beissued only on a change of opinion. In any event, there is admittedly, achange in law for the subject assessment years from the A. Y. 1985-96and 1991-92 for which reopening notice was issued. Thus, the samewould not have any impact on the present proceedings. (f)In the above view, this question is answered in the negative i.e. infavour of the Respondent-Revenue and against the appellant-assessee. 6.Regarding question Nos. (ii) and (iii) :- (a)It is contended by the appellant-assessee that the fees received bythe Appellant is for a consolidated report which also includes routineservices. Although these routine services are rendered in India it is anintegrated and indivisible part of the technical services rendered to a foreign company as evidenced by the report. Therefore, it is notpermissible to exclude some part of the technical services on the groundthat it is rendered in India. (b)Moreover, it is submitted that the use in India of the technicalservices will not deprive the appellant the benefit of deduction underSection 80-O of the Act. In support, Appellant places reliance upon thedecision of the Delhi High Court in the case of CIT v/s. EicherConsultancy Services Ltd., 167 Taxman 64. In the aforesaid case, theassessee therein provided professional services of managementconsultancy services to a foreign party abroad. The foreign party paidassessee therein in foreign exchange and the assessee claim the benefitof Section 80-O of the Act. The services so rendered to the foreigncompany were used by the foreign company in India. It was in theabove context, that the Appellant states that rendering of the services inIndia, would not deprive the Appellant the benefit of Section 80-O ofthe Act. (c)We find that the aforesaid case would have no application to thepresent facts, as the services which are being rendered in respect ofinspection, loading/ unloading are services which are all rendered inIndia to the foreign company and not a case like in Eicher ConsultancyServices Ltd. (supra) where services are rendered to the foreign party from India and the foreign party then uses these services/ technicalknow how/ technical knowledge in India. (d)In fact, Mr. Suresh Kumar, learned Counsel for the Revenueinvites our attention to the decision of the Delhi High Court in Anand & (c)We find that the aforesaid case would have no application to thepresent facts, as the services which are being rendered in respect ofinspection, loading/ unloading are services which are all rendered inIndia to the foreign company and not a case like in Eicher ConsultancyServices Ltd. (supra) where services are rendered to the foreign party from India and the foreign party then uses these services/ technicalknow how/ technical knowledge in India. (d)In fact, Mr. Suresh Kumar, learned Counsel for the Revenueinvites our attention to the decision of the Delhi High Court in Anand & Anand v/s.CIT 152 Taxman 113 and the Karnataka High Court in thecase of H. Raghavendra Rao v/s. DCIT 49 Taxmann.com 425. In boththe aforesaid cases, the Courts held that where an Advocate rendersservices in India, when he argue the matter for the foreign company inIndia, then the Advocate will not be entitled to the benefit of Section80-O of the Act. However, when the Advocate gives an opinion to aforeign party, then it would stands covered by Section 80-O of the Actas it satisfies Explanation (iii) thereto, namely – rendering of servicesfrom India to a foreign party abroad. (e)It was also contended that the fees are received for the entirereport from the foreign company. Thus, the so called routine servicesare an indivisible part of the report and cannot be excluded. (f) We note that Section 80-O of the act very clearly restricts thebenefit of deduction thereunder, only to the extent technical servicesare rendered from India. The routine services are undisputedly servicessuch as supervising, loading/ unloading/ storage rendered in India andnot out side and / or from India. Therefore, would not qualify for deduction under Section 80-O of the Act. This, even if, it forms a part ofconsolidated report furnished to the foreign party. (g)In the above view, Question Nos. (ii) and (iii) are to be answeredin the negative i.e. in favour of the Respondent-Revenue and againstthe appellant-assessee. 7.Regarding question no.(iv) :- (a)Appellant submits that the work of supervising, loading andunloading, storage of goods in the ship were highly specialized servicesrequiring technical knowledge. Thus, the consideration receivedthereon could not be denied on the ground that they are routineservices. (b)We find that loading and storage of goods for services which mayrequire special expertize would not necessarily be in the nature oftechnical services. In fact, clause (5) of the Agreement (extractedabove) entered into by the Appellant with the foreign company,specifically provides that whatever special expertise or experience isrequired, keeping in mind the Indian conditions, the said services wouldbe over and above technical services rendered under the Agreement. Itwould, therefore, be in the nature of special expertize which would notnecessarily amount to technical services. (c)In any event, this routine services such as supervising, loadingand storage of good, even if it requires high degree of technical knowhow and experience, it would still be a services rendered in India andnot a service rendered from India. Consequently, it would be hit byExplanation (iii) of the Act to Section 80-O of the Act. (d)In the above view, this question is answered in the negative i.e. infavour of the Respondent-Revenue and against the appellant-assessee. 8. In the above view, all the substantial questions of law areanswered in favour of the respondent Revenue and against theappellant-assessee for all the subject assessment years i.e. AssessmentYears 1992-93 to 1997-98. 9. Accordingly, all these five Appeals relating to Assessment Years1992-93, 1994-95, 1995-96, 1996-97 and 1997-98 are dismissed. Noorder as to costs. (SANDEEP K. SHINDE J.) (M.S. SANKLECHA, J.)