Case: M/S J.B. Boda &amp; Co. Pvt. Ltd Vs. Central Board Of Direct Taxesnew Delhi

v. CBDT 1989 (175) ITR 523 (SC) , and contended that the income must be directly received by the assessee--the Indian company, and if it is not so directly received, any other substitute arrangement which may have the effect of receipt by the assessee is of no avail. In the said case, the question that arose for consideration was, whether an Indian company doing business or having a branch or establishment in a foreign country can be called a " foreign enterprise ", and the question was answered in the negative. It was held that the words " foreign enterprise " occurring in section 80-O of the Act do not include a foreign branch of an Indian company. In the said case, the impact of the words " received by an assessee from the Government of a foreign State or foreign enterprise " occurring in section 80-O did not arise for consideration nor was considered. The facts of the said case are distinguishable. Circular No. 731 (see 1996 (217) ITR(St) 5), dated December 20, 1995, promulgated by the respondent filed as annexure " B " (page 8 of the supplementary paper book) is relevant and affords guidance in understanding the purport of section 80-O of the Act. " Section 80-O of the Income-tax Act, 1961 -- Deduction -- Royalties, etc., from certain foreign enterprises -- In case of receipt of brokerage by reinsurance agent, operating in India on behalf of principals abroad, from gross premia before remittance to his foreign principals. 7. Circular No. 731, dated 20-12-1995 1. Under the provisions of section 80-O of the Income-tax Act, 1961, an Indian company or a non-corporate assessee, who is resident in India, is entitled to a deduction of fifty per cent. of the income received by way of royalty, commission, fees ; etc., from a foreign Government or foreign enterprise for the use outside India of any patent, invention, model, design, secret formula or process, etc., or in consideration of technical or professional services rendered by the resident. The deduction is available if such income is received in India in convertible foreign exchange or having been converted into convertible foreign exchange outside India, is brought in by or on behalf of the Indian company or aforementioned assessee in accordance with the relevant provisions of the Foreign Exchange Regulation Act, 1973, for the time being in force 2. Reinsurance brokers, operating in India on behalf of principals abroad, are required to collect the reinsurance premia from ceding insurance companies in India and remit the same to their principals. In such cases, brokerage can be paid either by allowing the brokers to deduct their brokerage out of the gross premia collected from Indian insurance companies and remit the net premia overseas or they could simply remit the gross prentia and get back their brokerage in the form of remittance through banking channels 3. The Reserve Bank of India have expressed the view that since the principle underlying both the transactions is the same, there is no difference between the two modes of brokerage payment. In fact, the former method is administratively more convenient and the reinsurance brokers had been following this method till 1987 when they switched over to the second method to avail of deduction under section 80-O of the Act 4. The matter has been examined. The condition for deduction under section 80-O is that the receipt should be in convertible foreign exchange. When the commission is remitted abroad, it should be in a currency that is regarded as convertible foreign exchange according to FERA. The Board are of the view that in such cases the receipt of brokerage by a reinsurance agent in India front the gross premia before remittance to his foreign principals will also be entitled to the deduction under section 80-O of the Act." (emphasis supplied) 8. The said circular which seeks to declare and clarify the real scope and impact of section 80-O of the Act, is certainly binding on the respondent which issued it. 9. The facts brought out in this case are clear as to how the remittance to the foreign reinsurance company is made through the Reserve Bank of India in conformity with the agreement between the appellant and the foreign reinsurers, and that the remittance statement filed along with annexure " A " which evidences that the amount due to the foreign reinsurers as also the brokerage due to the appellant and the balance due to the foreign reinsurers is remitted (and expressed so) in dollars. It is common ground that the entire transaction effected through the medium of the Reserve Bank of India is expressed in foreign exchange and in effect the retention of the fee due to the appellant is in dollars for the services rendered. This, according to us, is receipt of income in convertible foreign exchange. It seems to us that a " two-way traffic " is unnecessary. To insist on a formal remittance to the foreign reinsurers first and thereafter to receive the commission from the foreign reinsurer, will be an empty formality and a meaningless ritual, on the facts of this case. On a perusal of the nature of the transaction and in particular the statement of remittance filed in the Reserve Bank of India regarding the transaction, we are unable to uphold the view of the respondent that the income under the agreement is generated in India or that the amount is one not received in convertible foreign exchange. We are of the view that the income is received in India in convertible foreign exchange, in a lawful and permissible manner through the premier institution concerned with the subject-matter -- the Reserve Bank of India. In this view, we hold that the proceedings of the Central Board of Direct Taxes dated March 11, 1986, declining to approve the agreements of the appellant with Sedgwick Offshore Resources Ltd., London, for the purposes of section 80-O of the Income-tax Act, are improper and illegal. We declare so.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]The provisions similar to section 80-O of the Act were originally available in the former section 85C ofthe Income-tax Act, 1961. While moving the Bill relevant to the Finance (No. 2) Act, 1967, the then Finance Minister highlighted the fact that fiscal encouragement needed to be given to Indian industries to encourage them to provide technical know-how and technical services to newly developing countries. It is also seen that the objective was to encourage Indian companies to develop technical know-how and to make it available to foreign companies so as to augment the foreign exchange earnings of this country and establish a reputation of Indian technical know-how for foreign countries. The objective was to secure that the deduction under the section shall be allowed with reference to the income which is received in convertible foreign exchange in India or having been received in convertible foreign exchange outside India, is brought to India by and on behalf of taxpayers in accordance with the foreign exchange regulations. So also, any income used by the taxpayers outside India in the manner permitted by the Reserve Bank of India, shall be deemed to have been brought into India in accordance with the foreign exchange regulations on the date on which such permission was givenThe said circular which seeks to declare and clarify the real scope and impact of section 80-O of the Act, is certainly binding on the respondent which issued itThe facts brought out in this case are clear as to how the remittance to the foreign reinsurance company is made through the Reserve Bank of India in conformity with the agreement between the appellant and the foreign reinsurers, and that the remittance statement filed along with annexure " A " which evidences that the amount due to the foreign reinsurers as also the brokerage due to the appellant and the balance due to the foreign reinsurers is remitted (and expressed so) in dollars. It is common ground that the entire transaction effected through the medium of the Reserve Bank of India is expressed in foreign exchange and in effect the retention of the fee due to the appellant is in dollars for the services rendered. This, according to us, is receipt of income in convertible foreign exchange. It seems to us that a " two-way traffic " is unnecessary. To insist on a formal remittance to the foreign reinsurers first and thereafter to receive the commission from the foreign reinsurer, will be an empty formality and a meaningless ritual, on the facts of this case. On a perusal of the nature of the transaction and in particular the statement of remittance filed in the Reserve Bank of India regarding the transaction, we are unable to uphold the view of the respondent that the income under the agreement is generated in India or that the amount is one not received in convertible foreign exchange. We are of the view that the income is received in India in convertible foreign exchange, in a lawful and permissible manner through the premier institution concerned with the subject-matter -- the Reserve Bank of India. In this view, we hold that the proceedings of the Central Board of Direct Taxes dated March 11, 1986, declining to approve the agreements of the appellant with Sedgwick Offshore Resources Ltd., London, for the purposes of section 80-O of the Income-tax Act, are improper and illegal. We declare so.