Case: Central Board Of Direct Taxes &amp; Ors. New Delhi Vs. Oberoi Hotels (India) Pvt. Ltd

As required by Section 80-0, the respondent sought approval of the agreement as falling within the purview of the section. CBDT declined to grant approval. However, it did not communicate any ground as to on what basis approval was not granted Respondent filed a writ petition in the Delhi High Court, it being Civil Writ Petition No. 1301 of 1975. The writ petition was allowed by a Division Bench of the Delhi High Court on January 5, 1979 with a direction to the CBDT to consider the matter afresh and give a decision after granting hearing to the respondent. This order of the Division Bench is reproduced hereunder:"The impugned order declining to give approval to the agreement under Section 80-0 ofthe Income Tax Act, 1961, does not give any reasons for the decision. The reasons now stated in the counter affidavit have become known to t he petitioner for the firs t time. The petitioner had no opportunity of meeting the same. The impugned order is, therefore, set aside and the case is sent back to the Board for a fresh consideration of the request of the petitioner for the approval of the agreement under Section 80-0 and the new decision by the Board will be given after giving a hearing to the petitioner. The writ petition is allowed in the above terms. No order as to costs." *After that respondent represented its case before CBDT but again CBDT did not find any ground under the Section to approve the agreement and by order dated February 26, 1980, communicated its decision to the respondent. We reproduce the relevant portion of this order of CBDT as under: (pages 63-64 of the PB)"2. The Board have carefully reconsidered the matter in pursuance o the directions contained in the judgments of the Delhi High Court in the Civil Writ Petition Nos. 429 of 1974 and 1301 of 1975, on the basis of the written and oral arguments advanced by you. It is regretted that the Board does not consider it necessary to revise the decisions already communicated to your in the Boards orders referred to above owing to the following reasons:-(1) The services being rendered by you to the foreign party in both cases are in the nature of managerial services. As observed by the Delhi High Court in Civil Writ No. 901 of 1975 (M/s. J.K. Bombay Ltd. vs. CBDT and another) the running of a business or the management of a business does not amount to the rendering of technical services(2) What is being given under the agreements can also not be viewed as information concerning industrial, commercial or scientific knowledge or skill. It is not as if some information is being supplied by you which is made use of by the foreign parties. Under the two agreements, you are yourself functioning in the foreign countries(3) Though your name is being utilised by the two foreign hotels, and the fee received for the use of your trade name would be covered by the provisions of Section 80-0 yet the amount relatable to this aspect of the total services rendered under the two agreements would be so small that it is not easy to quantity the same for purpose of Section 80-0 ofthe Income Tax Act, 1961" *This led the respondent to approach the High Court again by filing writ petition on July 28, 1980 which was allowed by judgment dated May 29, 1981, which is now impugned before us. In order to appreciate the rival contentions, it will be appropriate to refer to some of the clauses of the agreement which the respondent entered into with the foreign enterpriseForeign enterprise owned and operated in Kathmandu (Nepal) a hotel under the name and style of Soaltee and a restaurant at Tribhuvan Airport, Kathmandu. This foreign enterprise wanted to construct and add to its hotel approximately 190 more rooms and also wanted to obtain contracts for various airlines catering operating at Tribhuvan Airport. Respondent had a name and worldwide reputation in the hotel field and was experienced and had the technical skill for providing professional, architecture, engineering and decorating services and was qualified to assist in planning, designing, constructing, furnishing and equipping of hotels and was also engaged in the development, leasing and operation of hotels under the name "Oberoi Group" in the interest of facilitating international travel and trade. In view of the name and tradition, experience and skill of respondent in hotel industry for profitable operation of hotels and for bringing the hotel to international standards and for ensuring better operational results and promotion of business of Hotel, foreign enterprise desired that its operations be taken over by the respondent with effect from December 1, 1969 on terms and conditions set out in the agreement. Parties agreed (formulated form the agreement):(1) During the term of the agreement hotel of the foreign enterprise shall be known and designated as the Hotel Soaltee Oberoi(2) Agreement will remain in force for fifteen years. It could be extended for a further period of five years at the option of the respondent on the same terms and conditions.(3) Respondent would recruit and train the requisite staff of the hotel through such training programme including hotel schedule, if any, and other training techniques, as it shall deem necessary. Respondent shall select suitable personnel for adequate and proper training in hotel management and operation, always giving preference however to Napalese nationals(4) Respondent would use its best efforts to advertise and promote the business of the hotel through the existing facilities. Soaltee Hotel, the foreign enterprise, subject to later amortisation and reimbursement as provided in the agreement shall pay or reimburse the respondent in full for all costs and expenses of the said training and for all the costs of advertising, promotion, literature, travel and busines s entertainment including celebrations and ceremonies incurred prior to or concurrently with the beginning of full operation of the hotel by the respondent(5) Respondent in consultation with foreign enterprise will make available for the hotel, its staff of consultants and specialists who were qualified to provide advice in the various departments and aspects of hotel operations. The services of the members of respondent staff and of any outside consultants engaged by respondent on retainer will be rendered on the basis of reimbursement by the foreign enterprise through the respondent of the salaries of respondent personnel during the time they rendered services directly for hotel Soaltee and reimbursement of the amounts p aid to such consultants under their retainer plus other expenses incurred by such personnel and consultants in performing services for the hotel of the foreign enterprise. (6) Respondent was to provide training and instruction for key personnel for the hotel Soaltee in order to prepare them to serve the hotel in the capacities for which they would be trained. Such key personnel to be trained will be placed in existing hotels of the respondent and will be instructed and supervised by the Management of such hotels and progress reports will be made to the Board on such personnel. Travelling and other expenses of the trainees shall be borne by the foreign enterprise though the respondent shall make arrangement for their boarding and lodging at its own costs and also pay suitable pocket allowances to them.(7) Respondent to use the hotel Soaltee solely for the operation of a first class hotel on international standards and all activities in connection therewith which are customary or usual for such operation. It is understood that respondent shall have within the term and provisions of the agreement, absolute discretion in the operation of the hotel but the same shall always be and be deemed to be owned by the foreign enterprise exclusively(8) Foreign enterprise and the respondent shall be entitled to 85% and 15% respectively of the Gross Operating Profits as defined under the terms of the agreement. The agreement prescribed as to how payments of their respective shares would be met for each financial year(9) The respondent to maintain full and adequate books of accounts and other records reflecting the results of the operation of the hotel in accordance with the uniform system of accounts for hotels though not inconsistent with the provisions of law applicable in Nepal(10) Provision to be made as to how the amount received during the operation of the hotel shall be deposited in the bank account and how that account had to be operated. Respondent was to submit monthly budget of estimated income and expenditure in detail and the Gross Operating Profits in terms of the agreement to the foreign enterprise. The agreement contained details as to how allocation was to be made for meeting different expenses and for payment of taxes etc. Gross Operating Profits and Gross Operating Losses were defined. Limit was put on expenses to be incurred for advertisement etc. which could not be more than 3% of the total sales(11) For worldwide promotion of the hotel, foreign, enterprise desired that respondent shall, in any manner it regards fit and proper, make necessary arrangements with any company or companies, agency or agencies in any one or more countries for specialised hotel services and worldwide reservation facilities.(12) At the time of taking over the operation of the Hotel Soaltee, respondent to purchase the existing stock of food and beverages etc. and the foreign enterprise shall be paid the cost thereof. The amount paid by respondent to the foreign enterprise shall be payable to the respondent out of the revenue of the hotel before the expiry of one year(13) There is provision for repairs, maintenance, alterations, structural repairs and changes in the hotel(14) Respondent to deliver to the foreign enterprise on or prior to the end of each month a profit and loss statement showing the results of the operation of the hotel for the preceding calendar month and year to- date and containing other details(15) Respondent to have due representation in the Board of Directors of the foreign enterprise and at least one person nominated by respondent which always would represent it in all the meetings, deliberations any decisions arrived therein in connection with the hotel businessThese are some of the main terms of the agreement which according to the appellant did not satisfy the requirement of Section 80-0 of the ActHigh Court in the impugned judgment, after examining the term of the agreement in detail, observed that it could not be disputed that the running of a modern hotel required highly specialised management techniques, i.e., combination of scientific management and highly specialised inn-keeping and that the modern system of preparation of food and beverages also involved considerable technical skill and know-how. High Court, however, negatived the plea of the respondent that it was making available to the foreign enterprise the information concerning industrial, commercial or scientific knowledge, experience or skill as High Court did not find any such provision in the agreement. High Court was, therefore, of the opinion that the respondent was rendering technical services to the foreign enterprise and would in any case fall within the purview of Section 80-0 of the Act.

Reasoning: There is no gainsaying that running a w ell equipped modern hotel is no ordinary affair. One needs a great deal of expertise skill and technical knowledge for the purpose. If we examine the agreement, it provides for rendering of technical services and also professional services fo r obtaining of Hotel Soaltee, a foreign enterprise. CBDT fell into an error in considering particularly the clause in the agreement which provided for operation of the Hotel Soaltee by the respondent. The agreement has to be seen as a whole and so examined it is quite apparent that it provided for rendering of not only technical services for operating the hotel of the foreign enterprise but also providing for professional and other services in connection with operating of the hotel. Section 80-0 was enacted with the twin objects of encouraging the export of Indian technical know-how and augmentation of foreign exchange resources of the country. We have seen above that after the amendment of section 80-0 by Finance (No. 2 Act of 1991) the words "technical or professional services" have been inserted in place of the words "technical services". But this Court in Continental Construction Ltd. case took the view that the amendment was only of clarificatory nature and the term "technical services" always included within it professional services as well. This Court has gone even to the extent that when a person consults the lawyer and seeks his opinion on certain issue the advice rendered by the lawyer would be a piece of technical service. Considering the scope of the agreement and the width of Section 80-0 we are of the opinion that the agreement provides for "information concerning industrial, commercial or scientific knowledge, experience or skill made available " by the respondent to the foreign enterprise for running of the Hotel Soaltee. Mr. Dave is right when he submits that in view of the judgment of this court in Continental Construction Ltd. case Circular No. 187 dated December 23, 1975 of the CBDT may perhaps require certain changes so as it is in conformity with Section 80-0 of the Act. In J.K. (Bombay) Ltd. case Delhi High court was of the view that remuneration obtained by running or managing a foreign company would be in the nature of profits while Sections 80-0 deliberately restricted itself to income by way of royalty, commission or fees and included other types of remuneration. We do not think that this is a correct statement as the royalty, commission or fees can be in terms of percentage of profits earned by the foreign enterprise on account of services rendered by the Indian Company. It is substance of the case which matters and not the name. The view taken by the Bombay High Court in Godrej and Boyce Mfg. Co. Ltd. case commends to us. As it is more in consonance with the provision of Sections 80-0 and the object which it seeks to achieve. Karnataka High Court in the case of HMT Ltd. has rather taken a narrow view of the provision of Sections 80-0. Applying the principles of law as laid down by Court in Continental Construction Ltd. case and the term "technical services" which included "professional services" and the nature of services agreed to be rendered by the respondent to the foreign enterprise we are of the view that CBDT was not right in not granting approval of the agreement to the respondent under Sections 80-0 of the Act. We have also seen the scope of circulars issued b y the CBDT and had these are to be acted upon in various decisions of this Court. In the matter of the nature as in the present case and the legislative intention to give relief we have to draw interpretation to the term "technical services" which includes "professional services" as well. basic purpose of Sections 80-0 is the spread by an Indian assessee of any patent, invention, model, design, secret formula or process, or similar property right, or information concerning industrial, commercial or scientific knowledge, experience or skill of the assessee for use outside India and it that process to receive income to augment the foreign exchange resources of the country. The assessee can also made available to foreign enterprise technical and professional services expertise of which it possesses for earning foreign exchange for the country.When exercising power of judicial review, courts have to see that the authority acts within the scope o f its powers and, if discretion is conferred on the authority, it exercises the same in reasonable manner keeping in view the object which the statute seeks to achieve. We have no doubt that the decision of CBDT in not granting approval to the agreement was in good faith and it is the latest development of law both on the scope of judicial review and interpretation of Sections 80-0 that the decision has to be reversed. As law stands today with reference to Section 80- 0, it can be said that CBDT took into account the considerations which were not relevant or germane to the real issue. In this view of the matter there is no ground for interference in the impugned judgment of the High Court. It was submitted by Mr. Shukla that in view of the decision in Godrej and Boyce Mfg. Co. Ltd. (supra) of the Bombay High Court, this Court, if it decides to hold that the decision of the CBDT was not correct, the matter should be again remanded back to CBDT to grant approval or otherwise of the agreement keeping in view the latest development in law and the parameters laid down by us in this case. Normally, we would have adopted this very course, but in the present case, the matter relates to the year 1970 we do not find it will be proper for us to interfere in the impugned judgment of the High Court and sent the matter back to the CBDT for fresh appraisal.