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

The short matter that arises for consideration in this appeal is the interpretation to be placed on section 80-O ofthe Income-tax Act, 1961. The appellant is a private company. It is engaged in the brokerage business as reinsurance brokers. It receives a commission at 3 to 6 per cent., relating to maritime and other insurance. The respondent is the Central Board of Direct Taxes, Government of India, New Delhi. In respect of insurance risk covered by Indian or foreign insurance companies, the appellant arranges for the reinsurance of a portion of the risk with various reinsurance companies either directly or through foreign brokers. In return for the above services, the appellant-company receives a percentage of the premium received by the foreign companies as its share of brokerage. For a period of 19 months from March 1, 1980, the Oil and Natural Gas Commission insured all their offshore oil and gas exploration and production operations with the United India Insurance Company, Madras. In respect of this insurance risk, the appellant contacted Sedgwick Offshore Resources Ltd., London, who are brokers in London for placement of reinsurance business. The appellant furnished all the details about the risk involved, the premium payable, the period of coverage and the portion of the risk which is sought to be reinsured. The said London brokers contacted various underwriters and after getting confirmation about the portion of the risk the foreign reinsurers were prepared to undertake, informed the appellant about such reinsurance coverage. Thereafter, the Indian ceding company handed over the total premium to be paid by it to the foreign reinsurance company, to the appellant for onward transmission. When this amount was given to the appellant, the appellant approached the Reserve Bank of India with a statement showing the amount of foreign currency payable as reinsurance premium to the foreign parties after deducting the amount of brokerage due to the appellant. This balance amount after deducting the brokerage, was remitted to the London brokers with the permission of the Reserve Bank of India. According to the appellant, the amount of commission retained by it was a receipt of convertible foreign exchange without a corresponding foreign remittance within the meaning of section 9 of the Foreign Exchange Regulation Act. It is evident that the appellant-company by an agreement with the foreign company, with the approval of the Reserve Bank of India remits premium received to the foreign insurance company on behalf of the Indian insurance company and while doing so, it deducts in terms of foreign exchange the fee payable to it, while making remittances themselves. The Indian insurers make payment in rupees to the appellant for the amount of reinsurance premium to be remitted to the foreign company, furnishing all particulars with an advice to the appellant to approach the Reserve Bank of India for necessary permission to remit in U. S. dollars the reinsurance premium abroad. Thereafter, the appellant writes to the Reserve Bank of India enclosing the remittance application in Form " A-2 " as prescribed by the Exchange Control Manual together with the statement and auditors certificate. These can be seen from annexure " A ". A statement is also attached thereto, which shows that the gross amount of the reinsurance premium to be remitted in U. S. dollars, under the heading " Balance of account " and the amount of brokerage also is mentioned in U. S. dollars, earned by the appellant on the reinsurance premium to be so remitted under the heading " Brokerage ". While in the normal course, the entire premium should be remitted abroad to the foreign parties and then the foreign reinsurers would remit the commission back to the appellant, who supplied the information, under the procedure adopted and approved by the Reserve Bank of India, the appellant remits the amount after deducting the brokerage, which is also expressed in foreign exchange. Thus, the appellant entered into an agreement with Sedgwick Offshore Resources Limited, London, for supply of know-how and, while remitting the reinsurance premium of U. S. dollars 1, 060, 891.68, the appellant remitted a fee of U. S. dollars 989, 887.20 on January 11, 1984, to the Union Bank of India, thus retaining the fee of 71, 004.48 dollars for the technical services rendered. The appellant, stating that in the assessment years 1982-83 to 1984-85, the reinsurance brokerage determined in foreign exchange is retained in India under the agreement with Messrs. Sedgwick Offshore Resources Ltd., and so it would amount to receipt of income in terms of foreign exchange as per section 80-O of the Income-tax Act, sought the approval of the respondent, the Central Board of Direct Taxes as mentioned in annexure " B "By communication dated March 11, 1986, the respondent regretted their inability to approve the agreement submitted by the appellant for the purposes of section 80-O of the Income-tax Act for the reason " that income under the agreement is generated in India and is not received in convertible foreign exchange as required under the provisions of section 80-O." The communications in that regard are evidenced by annexure " C " series dated March 11, 1986. It is further seen that the steps taken by the appellant to review the annexure " C " proceedings were futile vide annexure " D ". It is thereafter the appellant moved the High Court of Delhi in Civil Writ No. 3086 of 1987. A Bench of the High Court of Delhi by order dated October 29, 1987, dismissed the said writ petition, stating thus" The case of the petitioners is that they had to remit about one million dollars in consideration of certain services which they had conducted on behalf of the foreign company and by way of their fees, they retained the foreign exchange worth six lakhs and, therefore, they submit that it falls within the expression such income received in convertible foreign exchange in India . We are afraid, we do not agree with the submission of learned counsel for the petitioner. To attract this section, the assessee must receive convertible foreign exchange from abroad. By retaining their fees they are not receiving any foreign exchange in India but only retaining the convertible foreign exchange. We find no merit in the petition and the same is accordingly dismissed." *It is thereafter the appellant has filed the above appeal from the judgment of the Delhi High Court

Court's reasoning:
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.