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

( 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 andmetal 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,and transfer of technical knowledge to the foreign company by the petitioners. This agreement has been approved for the purpose of sectionof 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 ofyears 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 makeprovisions 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 sectionof 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 sectionof 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 sectiontax Act, 1961, the Chief Commissioner ofBombay, held that the main thrust of the agreement under reference was the provision of managerial service which fell outside the ambit of sectionof the Act, and, therefore, declined to grant approval under sectionof the Act by the impugned order dated April 11, 1991.

Reasoning: 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.