Case: Godrej and Boyce Manufacturers Company Limited Vs. S. B. Potnis, Chief Commissioner of Income-Tax

B.N. SRIKRISHNA J. ( 1 ) BY this petition under article 226 of the Constitution of India, the petitioners impugn an order dated April 11, 1991, made by the Chief Commissioner of Income-tax, Bombay, declining to grant approval for the purpose of section 80-O of the Income-tax Act, 1961 (hereinafter referred to as "the Act"), to an agreement dated April 18, 1978, between the petitioners and a company in indonesia known as "p. T. Godrej, Indonesia" (which shall, hereinafter be referred to as "the foreign company" ). ( 2 ) THE petitioners are well known manufacturers of steel and metal products such as sates, security equipment, indexing reference and retrievable systems, storage, shelving and locking systems including slotted angles, seating and desk systems, hospital fabrication equipment, locks and locking devices, cash boxes, cabinets and custom-oriented metal fabrication, etc. They entered into two agreements dated April 18, 1978, with the foreign company for establishing plant in Indonesia for the manufacture of the same line of products as manufactured by the petitioners in India. ( 3 ) ONE agreement (exhibit e), dated April 18, 1978, is specifically titled "technical Assistance agreement" and makes detailed provisions for supply of technical information, know-how and transfer of technical knowledge to the foreign company by the petitioners. This agreement has been approved for the purpose of section 80-O of the Act by order dated April 11, 1991. This petition is not concerned with this agreement.( 4 ) THE second agreement, (exhibit a), dated April 18, 1978, is specifically titled "management service Agreement". Under this agreement, the petitioners were to take over the responsibility for the working and management of the foreign company for a period of twenty-five years with effect from April 18, 1978. For the aforesaid purpose, the petitioners were required to loan to the foreign company the services of their "fully qualified and experienced managers, engineers, technicians, production specialists and such other personnel as may be necessary not only for the setting up of the companys said plant but also for the overall working and management of the company". Clauses VI, VII, VIII, IX and X of this agreement make wide-ranging provisions for the giving of all marketing, industrial, manufacturing, commercial and scientific knowledge, experience and skill for the efficient working and management of the foreign company and require the petitioners to faithfully, diligently, honestly, and to the best of their ability and power, "transact, perform and superintend all such matters and things relating to the business and affairs of the foreign company". The petitioners were required to have control over the "general management" of the foreign companys business transactions and charge and custody of all the property, books of account, papers, documents and effects belonging to the foreign company. They were required to keep or cause to be kept proper and complete books of account of the dealings and working of the foreign company and also prepare and keep or cause to be prepared and kept, quarterly reports and accounts and such other estimates and such further or other reports and accounts as the board of directors direct them from time to time. Clause VII, particularly, vests in the petitioners, through its personnel deputed to work in Indonesia, several powers which, inter alia, include the powers to raise money other than in the ordinary course of business enter into contracts of a capital nature, mortgage, charge or otherwise encumber the whole or any part of the capital of the company or to guarantee the obligations or duties of any person or company, issue shares or loan capital in the company and also to sell or dispose of or agree to sell or dispose of the whole or a substantial part of the assets of the company other than in the ordinary course of business, to call a general meeting of the foreign company. ( 5 ) BY an application dated September 19, 1989, made in the appropriate form, the petitioners applied to the prescribed authority for approval of this agreement for the purpose of section 80-O of the Art. Upon scrutiny of the detailed provisions contained in this agreement, the respondents took the view that this agreement did not qualify for approval under section 80-O of the Act, since the crux of the management service agreement was that the petitioners would take over responsibility for the working and management of the foreign company for a stipulated period. Relying upon the judgment of the Delhi High Court in J. K. (Bombay) Ltd. v. CBDT [1979] 118 itr 312 , which took the view that managerial services do not amount to "technical services" within the meaning of section 80-O of the Income-tax Act, 1961, the Chief Commissioner of income-tax. Bombay, held that the main thrust of the agreement under reference was the provision of managerial service which fell outside the ambit of section 80-O of the Act, and, therefore, declined to grant approval under section 80-O of the Act by the impugned order dated April 11, 1991.( 6 ) MR. Dwarkadas, learned counsel for the petitioners, took us through the material provisions of the agreement and contended that the agreement was not an agreement for management simpliciter, as understood by the Department. He submits that it also includes rendering of "technical services" as the petitioners were obliged, under the terms of agreement, to depute, inter alia, fully qualified and experienced managers, engineers, technicians, production specialists and such other personnel in order to carry out its contractual obligations. He also drew the attention of the court to the letter dated February 14, 1991, (exhibit c), addressed by the petitioners in response to the queries raised, in which the petitioners had given the names of various personnel who had been deputed to render technical services. He highlighted the fact that all of them were personnel who are carrying out technical work in the petitioners factory in india. ( 7 ) RELYING on the judgment of the Supreme Court in Continental Construction Ltd. v. CIT [1992] I95 ITR 81, learned counsel contends that the Supreme Court having taken the view that even professional service could, perhaps, amount to technical service within the meaning of section 80-O of the Act, the view of the agreement taken by the respondents is unduly narrow and runs counter to the law laid down by the Supreme Court in this judgment. ( 8 ) MR. Dwarkadas fairly admits that the Delhi High Court, in the judgment in J. K. (Bombay)Ltd. s case [1979] 118 ITR 312 , relied upon by the Departmental authorities, did take the view that rendering of managerial services did not amount to technical services, but draws a distinction that technical service rendered in that case was mere managing agency and not technical service requiring true expertise. Had the situation been one which called for technical expertise, probably the decision might have been different, submits learned counsel. He also contends that it is for this reason that the Delhi High Court had to slightly modify its view in a subsequent judgment, in Oberoi Hotels (India) Pvt. Ltd. v. CBDT [1982] 135 ITR 257 (Delhi ). In this case, the Oberoi Hotels had agreed to take over and manage a hotel in Kathmandu, Nepal, in all its various aspects. The Division Bench of the Delhi High Court went into the details of the agreement and concluded that, though the agreement did amount to an agreement for rendering managerial services, considering the expertise required in running a five star hotel, it could not be postulated that the "managerial services" rendered under the agreement in question would not amount to "technical services" within the meaning of section 80-O of the Act. In this view of the matter, the Delhi High Court directed the income-tax authorities to approve the agreement for the purpose of section 80-O of the Act.( 9 ) THOUGH Mr. Dwarkadas drew our attention to another judgment of the Calcutta High Court in the case of Simon Carves India Ltd. v. ITO [1986] 159 ITR 167 , we do not think that this judgment is of relevance and, therefore, refrain from discussing it. ( 10 ) FINALLY, Mr. Dwarkadas drew our attention to the decision of the Supreme Court in Bajaj tempo Ltd. v. CIT [1992] 196 ITR 188 , wherein the Supreme Court has highlighted that a provision in a taxing statute granting incentives for promotion of growth and development should be construed liberally; and since a provision for promoting economic growth has to be interpreted liberally, the restriction on it too has to be construed strictly so as to advance the objective of the provision and not to frustrate it. In the light of this principle adopted by the supreme Court for interpretation of provisions in a taxing statute intended to promote growth and development, the petitioners contend that the expression "technical services" used in section 80-O must also receive a liberal interpretation as the section is intended to promote economic growth, particularly where there is foreign participation which would bring in substantial foreign exchange earning. It we adopt a liberal interpretation, then there would be no difficulty in holding that the agreement for management services also would qualify for approval under section 80-O of the Act, according to the petitioners. ( 11 ) FOR the Department, Dr. Balasubramanian contended that the petitioners had themselves decided to bifurcate their contractual obligation into two categories. One was for supply of information with regard to technical matters which was signed separately and styled as "technical Assistance Agreement"; the Department had no objection to approving this and, rightly, this agreement has been approved under section 80-O. The other was with regard to managerial services, styled as "management Service Agreement", which is a pure and simple agreement to render managerial services of such nature which does not amount to "technical service" within the meaning of section 80-O of the Act. When Dr. Balasubramanians attention was pinpointed to the contractual obligation of the petitioners, even under the management service agreement, to provide fully qualified and experienced managers, engineers, technicians and production specialists, learned counsel had to concede that it was an agreement under which the services rendered were partly technical and partly other than technical. He submits that, in the absence of the illumination thrown upon section 80-O by the judgment of the Supreme Court in Continental Constructions case [1992] 195 ITR 81 , the Department took the view of rejecting the agreement in its entirety, and this court should not interfere therewith. ( 12 ) IN our view, it is not possible to postulate, as a general proposition of law, that all managerial services must necessarily be non-technical services it depends on the nature of the expertise required for rendering the managerial services. Ultimately, it would be a matter of evaluation of the factual details and a decision against the background of the factual matrix of each case. We are of the view that the Department, not having the benefit of the Supreme Courts judgment in Continentals case [1992] 195 ITR 81 , rejected the application made by the petitioners by taking a somewhat rigid view of the matter. However, now that Continentals case [1992] 195 ITR 81 has illuminated and elucidated the legal position, we are of the view that the matter must go back to the concerned respondents for a decision in accordance with the law as laid down by the Supreme Court in Continental Constructions case [1992] 195 ITR 81.

Decision reasoning: 1[ds]In the light of this principle adopted by the supreme Court for interpretation of provisions in a taxing statute intended to promote growth and development, the petitioners contend that the expression "technical services" used in sectionmust also receive a liberal interpretation as the section is intended to promote economic growth, particularly where there is foreign participation which would bring in substantial foreign exchange earning. It we adopt a liberal interpretation, then there would be no difficulty in holding that the agreement for management services also would qualify for approval under sectionof the Act, according to the petitioners.12 ) IN our view, it is not possible to postulate, as a general proposition of law, that all managerial services must necessarily beservices it depends on the nature of the expertise required for rendering the managerial services. Ultimately, it would be a matter of evaluation of the factual details and a decision against the background of the factual matrix of each case. We are of the view that the Department, not having the benefit of the Supreme Courts judgment in Continentals case [1992] 195 ITR 81  , rejected the application made by the petitioners by taking a somewhat rigid view of the matter. However, now that Continentals case [1992] 195 ITR 81     has illuminated and elucidated the legal position, we are of the view that the matter must go back to the concerned respondents for a decision in accordance with the law as laid down by the Supreme Court in Continental Constructions case [1992] 195 ITR 81.