PETITIONER:
PETRON ENGINEERING CONSTRUCTION PVT.LTD. & ANOTHER
Vs.
RESPONDENT:
CENTER BOARD OF DIRECT TAXES & OTHERS
DATE OF JUDGMENT13/12/1988
BENCH:
DUTT, M.M. (J)
BENCH:
DUTT, M.M. (J)
NATRAJAN, S. (J)
CITATION:
1989 AIR 501 1988 SCR Supl. (3)1058
1989 SCC Supl. (2) 7 JT 1988 (4) 666
1988 SCALE (2)1556
ACT:
Income-tax Act. 1961: Section 80-O–Deduction in respect
of rolyalties—Permissible only when it is from government
of foreign state or foreign enterprise.
%
Words and Phrases: Foreign enterprise–Foreign Company -
-Meaning to.
Interpretation of statutes: Interpretation of
expressions to be consistent with the thing or objects
included within it: Court to look at the setting in which
the words are used; in the case of an exemption provision
liberal interpretation to be made without impairing the
legislative requirement and the spirit of the provision.
HEADNOTE:
Messrs Toyo Engineering Corporation, a company
registered in Japan, undertook to render technical services
in respect of Iraqi Storage Terminal Project Installations
and engaged Toyo Engineering India Ltd., an Indian Company,
for work connected with the project. Toyo Engineering India
Ltd., in turn, entered into two agreements with the
appellant-company to perform certain construction and
related services of the project work.
The appellant sought approval of the said agreements
from the respondent–the Central Board of Direct Taxes–
under section 80-0 of the Income Tax Act, 1961 which
provided for deduction from total income in respect of
royalties etc. received from the Government of a foreign
State or a foreign enterprise. The respondent refused to
approve the said agreements on the ground that there was no
privity of contract between the appellant-company and
the foreign enterprise and the contract price was
received by the appellant from Toyo Engineering
India LTD. which was an Indian Company and could not be
regarded a foreign enterprise within the meaning of section
80-0.
The appellant filed a Writ petition before the Bombay
High Court challenging the order refusing approval. The
learned Single Judge dismissed the petition on the ground
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PG NO 1059
inter alia that the payment was not received by the
appellant-company from the Government of a foreign State or
a foreign enterprise. On appeal, the Division Bench held
that (i) in order to attract the provision of section 80-0,
the payment must be received by the Indian company from the
Government of a foreign State or a foreign enterprise, (ii)
the expression ‘foreign enterprise’ must have the colour
from the words “Government of a foreign State” and must be
read to mean an enterprise of a foreign national or a
foreign ownership which would not include a branch of unit
of an Indian Company in a foreign country.
In this Court, it was contended by the appellant that
(i) the concept of ownership for the purpose of deciding
whether an enterprise was a foreign enterprise or not should
not be introduced in section 80-0 and if any enterprise
satisfied the test of location it should be held to be a
foreign enterprise within the meaning of section 80-0; (ii)
in any event, it was possible to define the expression
“foreign enterprise” as an enterprise located outside India,
and when two interpretations were possible the
interpretation which was favourable to the assessee should
be adopted; (iii) as the provision of section 80-0 was an
exemption provision, it should be construed liberally and,
upon such liberal construction, it should be held that Toyo
India was a foreign enterprise; (iv) the appellant-company
having fulfilled the objectives of sectio 80-0, it should be
held that the requirement of the section was satisfied and
consequently the appellant-company was entitled to deduction
to Income lax: and (v) section 80-0 should be construed as
permitting canalisation.
On the other hand, the revenue contended that the plain
meaning of the words “foreign enterprise” was an enterprise
having a foreign nationality, and if an Indian company
opened an enterprise in a foreign country but did not get
the enterprise registered under the law of that country, it
would remain an Indian enterprise and not become a foreign
enterprise.
Dismissing the appeal, it was
HELD: (I) It appears from the legislative background
that in 1971 the expression “foreign company” occurring in
section 80-0 was changed into “Government of a foreign State
or a foreign enterprise . There can be no doubt that the
expression “foreign enterprise” is a wider term than
“foreign company” and will include within it also a foreign
company. [l066F-G]
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(2) The interpretation of a term should be such as to be
consistent with the things or objects that are included
within it. In other words, the meaning of the expression
cannot be different for different objects included in the
expression. L1067B]
(3) If an Indian company having a branch, unit or
establishment in a foreign country cannot be regarded a
foreign company, then, for the same reason, a branch, unit
or establishment of an Indian company situated in a foreign
country or doing business in such foreign country cannot be
included within the meaning of the expression “foreign
enterprise”. [1067C]
(4) The test of location is one of the tests for deciding
whether an enterprise is a foreign enterprise or not within
the meaning of section 80-O. But that is not the only test.
Ownership is also a creterion for deciding whether all
enterprise is a foreign enterprise or not. But, again that
is not the sole test. [1067D]
(5) A “foreign enterprise” is an enterprise situated in
a foreign country having been created or registered in
accordance with the law of such country. I his view finds
support from the setting in which the expression has been
placed and the circumstances in which the law came to be
passed. [1067G; 1068B]
R.L. Arora v. State of Uttar Pradesh, [1964] 6 SCR 784,
referred to.
(6) The expression ”foreign enterprise. admits of only
one interpretation. To interpret it as an enterprise located
outside India not be full and complete and will render the
meaning of the expression inconsistent with the
objects included within it, having regard to the
change effected by the legislature. [1068E-F]
Commissioner of Income-tax Lucknow v. Madho pd. jatia
[1976] 105 ITR 179; Commissioner of Income-tax v. Vegetable
products Ltd.. [l973l 88 IlK 192 and Commissioner of Income-
tax, Punjab v. Kulu Valley Transport Co. P.Ltd ., [1970] 77
ITR 518, distinguished.
(7) It is true that an exemption provision should be
liberally construed, but this does not mean that such
liberal construction should be made doing violence to the
plain meaning of such exemption provision. Liberal
construction will he made whenever it is possible to be made
without impairing the legislative requirement and the spirit
of the provision. [1068H; 1069A]
PG NO 1061
(8) Not only the objectives of a provision of a statute
have to be fulfilled, but also the condition for the
applicability of the provision have also to be fulfilled. In
the instant case, the appellant failed to fulfil the two
material conditions in so far as the income was received by
it not from a foreign enterprise but from an Indian company,
and the agreements entered into by it were with an Indian
company and not with a foreign enterprise. [1071B-D]
Gannon Dunkerley and Co. Ltd. v. Central Board of Direct
Taxes, [1986] 159 ITR 162 and Indian Hume Pipe Co. Ltd. v.
Central Board of Direct Taxes, [1987] l65 ITR 537, referred
to.
(9) The High Court was not right in holding that section
80-O did not require that the agreement should be made with
the Government of a foreign State of a foreign enterprise.
Section 80-O refers to there-parties, namely,Government of a
foreign State, foreign enterprise and the assessee. It is
clear from the section that the agreement must be between
the assessee on the one hand and the Government of a foreign
State or a foreign enterprise on the other. [1071E-G,]
(10) Whether canalisation should he permitted or not.
is absolutely a matter for the legislature. It is not
incumbent on the legislature to provide for canalisation
although it has been conceded by the respondent’s counsel that
canalisation is desirable. In view of the plain language of the
section ,it is not possible to construe the section as providing
canalisation. That is not the intention of the Legislature.
[1073B-C]
Seaford Court Estates Ltd. v. Asher, [1949] 2 K.B. 481
referred to.
JUDGMENT:
CIVIL APPELLATE JURISDICTION Civil Appeal No – 3531 of
1988.
From the Judgment and Order dated 11.8.19887 of the
Bombay High Court in Appeal No 752/86 in W.P No 538/1982.
V. Rajgopal, K.M Sharma and Randhir Jain for the
Appellants.
Dr. V. Gauri Shankar. Ms. A. Subhashini and
M.K.Shashidharan for the Respondents.
The Judgment of the Court was delivered by
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DUTT, J. This appeal by special leave is directed
against the judgment of the Division Bench of the Bombay
High Court dismissing the appeal preferred by the appellants
against the judgment of a Single Judge of the High Court
dismissing the writ petition of the petitioners whereby they
challenged the order dated January 5 1982 of the respondent
No. 1 the Central Board of Direct Taxes rejecting the
application of the appellant-company under section 80-O of
the Income Tax Act, 1961, hereinafter referred to as the
Act’.
By two agreements one dated April 5 1980 and the other
dated August 14,1980 entered into between the appellant-
company and Toyo Engineering India Ltd. (for short ‘Toyo
India’). the appellant-company agreed to render technical
services in respect of Iraqi Storage Terminal Project
Installations in consideration of payment to it by way of
fees payable under the said agreements. In the said
agreement dated April 5,1980 it is stated inter alia that
Toyo India has been engaged by Toyo Engineering Corporation
(for short ‘TEC’), a Company organised and existing under
the laws of Japan having its registered office at Tokyo,
Japan for the Project of Storage Terminal of State
Organisation for Oil Project. a public Organisation
organised and existing under the law of Iraq. Toyo India has
in its turn engage the appellant-company to perform certain
construction an6 related services by the appellant-company
of the project work as set out in the said agreement.
The appellant-Company by its letter dated October 23,
1980 requested the respondent No. 1, the Central Board of
Direct Taxes, for the approval of the said agreements under
section 80-O of the Act. The respondent No. 1 after giving
the appellants a hearing, by its order dated January 5,
1982, refused to approve the said agreements for purposes of
section 80-O of the Act inasmuch as in the view of the
respondent No. 1, the essential conditions laid down in
section 80-O were not satisfied. The respondent No. 1 in
its said order pointed out inter alia that according to the
said agreements, the contract price was received by the
appellant-company from Toyo India, an Indian Company. In
other words, income by way of royalty, commission, fees,
etc. had not been received by the appellant-company from the
Government of a foreign State or a foreign enterprise, and
that the agreements had been entered into by the appellant-
company with Toyo India, and Indian company, and not with a
foreign State or a foreign enterprise. Further, it was
stated by the respondent No. 1 that as there was no private
of contract between the appellant-company and the foreign
enterprise, it could not be said that the income had been
PG NO 1063
received by the appellant-Company in consideration of the
use outside india of patents inventions etc. made available
or provided or agreed to be made available or provided to a
Government of a foreign State or to a foreign enterprise or
in consideration of technical services rendered or agreed to
be rendered outside India to such Government or enterprise
by the appellant-company.
Being aggrieved by the said order dated January 5 1982
of the respondent No. 1 refusing to approve the said two
agreements the appellants filed a writ petition before the
Bombay High Court challenging the said order. A learned
Single Judge of the Bombay High Court by his judgment dated
June 23, 1986 dismissed the writ petition on the ground
inter alia that the payment was not received by the
appellant-company from the Government of a foreign State or
a foreign enterprise and, as such, it was not entitled to
any relief under section 80-O of the Act.
On appeal by the appellants against the judgment of the
learned Single Judge the Division Bench of the High Court held
that in order to attract the provision of section 80-O the
payment must be received by an Indian company from the Government
of a foreign State or a foreign enterprise. and that the words ’
foreign enterprise” must have the colour from the words
Government of a foreign State” and must be read to mean an
enterprise of a foreign national or a foreign ownership. Further
the words “foreign enterprise” could not he held to apply to an
establishment or undertaking or branch or unit of an Indian
company in a foreign country. Such establishment, undertaking,
branch or unit might well be an enterprise, but not a foreign
enterprise within the meaning of the said words. In that of the
matter, the Division Bench of the High Court as stated already,
upheld the judgment of the learned Single Judge and dismissed the
appeal preferred by the appellants. Hence this appeal by special
leave.
At this stage we may refer to section 80-O of the Act as
it stood during the assessment year 1980-81 which is the
relevant period for this appeal. Section 80-O provides as
follows:
“80-O, Deduction in respect of royalties, etc. from
certain foreign enterprises.-Where the gross total income of
an assessee, being an Indian company, includes any income by
way of royalty, commission, fees or any similar payment
received by the assessee from the Government of a foreign
State or a foreign enterprises in consideration for the use
PG NO 1064
outside India 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 made available or provided or agreed to
be made available or provided to such Government or
enterprise by the assessee or in consideration of technical
services rendered or agreed to be rendered out-side India to
such Government or enterprise by the assessee under an
agreement approved by the Board in this behalf and such
income is received in convertible foreign exchange in India
or having been received in convertible foreign exchange
outside India or having been converted into convertible
foreign exchange outside India is brought into India by or
on behalf of the assessee in accordance with any law for the
time being in force for regulating payments and dealings in
foreign exchange there shall be allowed in accordance with
and subject to the provisions of this section a deduction of
the whole of the income so received in or brought into India
in computing the total income of the assessee:
Provided that the application for the approval of the
agreement referred to in this sub-section is made to the
Board before the 1st day of October of the assessment year
in relation to which the approval is first sought:
Provided further that approval of the Board shall not be
necessary in the case of any such agreement which has been
approved for the purposes of the deduction under this
section by the Central Government before the Ist day of
April 1972 and every application for such approval of any
such agreement pending with the Central Government
immediately before that day shall stand transferred to the
Board for disposal.”
The following principal conditions must he fulfilled so
as to attract the provision of section 80-O:
1. The assessee must be an Indian company.
2. The income by way of royalty commission fees etc.
must be received by the assessee from the Government of a
foreign State or a foreign enterprise.
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3. The consideration shall be for the use outside India
of any patent invention model design etc. made available or
provided to such Government or enterprise by the assessee or
technical services rendered or agreed to be rendered outside
India to such Government or enterprise by the assessee.
4. The agreement must be approved by the Board.
5. The income received by the assessee shall be in
convertible foreign exchange.
6. The deduction shall be in respect of the whole of
such income received in or brought into India.
One of the principal points that is involved in this
appeal relates to the interpretation of the expression
“foreign enterprise”. The respondent No. 1 refused to
approve the agreements entered into by the appellants with
Toyo India principally on the ground that Toyo India is not
a foreign enterprise. According to the respondent No. 1 Toyo
India is an Indian Company and cannot be regarded a foreign
enterprise within the meaning of section 80-O. The learned
Single Judge and the Division Bench of the High Court have
also taken the same view and upheld the order of the
respondent No. 1 refusing to approve the agreements.
It is not disputed that Toyo India has been engaged by
TEC. The latter Company is admittedly a foreign Company
organised and established by the laws of Japan for the
Project of Storage Terminal of State Organisation for Oil
Project. By the said agreements Toyo India engaged the
appellant-company to perform certain construction and
related services for the project work as set out in the
agreements.
It is urged by Mr. Rajagopalan learned Counsel appearing
on behalf of the appellants that the High Court is wrong in
its view that Toyo India is not a foreign enterprise.
Counsel submits that the test of the expression “foreign
enterprise” is the location of the enterprise which will
clinch the issue. It is submitted that as the establishment
of Toyo India with which we are concerned is a branch unit
or on undertaking in Iraq it should be regarded a foreign
enterprise within the meaning of section 80-O of the Act.
According to the learned Counsel the concept of ownership
for the purpose of deciding whether an enterprise is a
foreign enterprise or not should not be introduced in
section 80-O and if any enterprise satisfied the test of
location or in other words if an enterprise is situate in a
PG NO 1066
foreign country it should be held to be a foreign enterprise
within the meaning of section 80-O.
On the other hand Dr. Gauri Shankar learned Counsel
appearing on behalf of the respondents submits that the
plain meaning of the words “foreign enterprise” is an
enterprise having a foreign nationality. According to the
learned Counsel a “foreign enterprise” means an enterprise
created or established in a foreign country under the law of
that country. If an Indian company opens an enterprise in a
foreign country but does not get the enterprise registered
under the law of that country it will in the view of the
learned Counsel remain an Indian enterprise and not a
foreign enterprise.
Before considering the contentions of the learned
Counsel for both parties relating to the interpretation of
the expression foreign enterprise” occurring in section 80-O
we may refer to the legislative background. Under section
85-C of the act which was introduced by the Finance Act 1966
and which came into force w1th effect from April 1, 1961.
Indian companies could obtain concession of the extent of 25
per cent of its income if the foreign exchange was received
from a company which was neither an Indian company nor a
domestic company. Section 80-O was inserted in the Act by
the Finance Act 2 of 1967 and it came into force with effect
from April 1, 1968. Section 80-O as it stood on that day
provided that the payer should be a foreign company and the
relief was enlarged to 60 per cent. Finance Act 2 of 1971
made an amendment in section 80-O changing the prayer from
“foreign company” to “Government of a foreign State or a
foreign enterprise” and enlarging the relief to 100 per
cent. Even up to this day no change has been made in
respect of the payer.
It thus. appears from the legislative background or the
legislative changes that from ‘foreign company” it has been
changed into “Government of a foreign State or a foreign
enterprise”. It is apparent that the expression foreign
enterprise” has been substituted for “foreign company”
while the words “Government of a foreign State”have been
inserted. There can be no doubt that the expression “foreign
enterprise’ is a wider term than “foreign company” “Foreign
enterprise” will include within it also a foreign company
Now a foreign company is a company incorporated under the
called a foreign company. Thus in the case of a foreign
enterprise which is a foreign company such company must be
incorporated in accordance with the law of the foreign
PG NO 1067
country in question. Keeping this in view the question that
arises is whether a branch unit or establishment of an
Indian company doing business in a foreign country can be
said to be a foreign enterprise. In our view it is difficult
to regard such branch unit or establishment a ‘foreign
enterprise” within the meaning of section 80-O of the Act.
The interpretation of a term should be such as to be
consistent with the things or objects that are included
within it. In other words the meaning of the expression
cannot be different for different objects included in the
expression. If an Indian company having a branch unit or
establishment in a foreign country cannot be regarded a
foreign company then for the same reason a branch unit or
establishment of an Indian company situate in a foreign
country or doing business in such foreign country cannot be
included within the meaning of the expression “foreign
enterprise”.
The test of location as contended by the learned Counsel
appearing on behalf of the appellants is no doubt one of the
tests for deciding whether an enterprise is a foreign
enterprise or not within the meaning of section 80-O of the
Act but that is not the only test. In order that an
enterprise can be called a foreign enterprise for the
purpose of section 80-O there can be no doubt that it has to
be located in a foreign country. The High Court has decided
the issue on the ground of foreign ownership. Undoubtedly.
ownership is also a criterion for deciding whether an
enterprise is a foreign enterprise or not. But again that is
not the sole criterion or test and as has been observed
before location of an enterprise is also a test for deciding
whether an enterprise is a foreign enterprise or not.
Now we may consider the contention of Dr.Gauri Shankar
that a “foreign enterprise” means an enterprise created and
registered under the foreign law. The question of creation
of an enterprise under the foreign law necessarily comes in
as the expression foreign enterprise”includes within it a
foreign company. Thus considering the above aspects and to
give the expression “foreign enterprise” as used in section
80-O a consistent and reasonable meaning we are of the view
that a “foreign enterprises an enterprise situate in a
foreign country having been created or registered in
accordance with the law of such country. It will now be
profitable for us to refer to a decision of this Court in R.
L. Arora v . State of Uttar Pradesh, [1964]6 SCR 784, where
it has been held that a literal interpretation is not always
the only interpretation of a provision in a statute and the
Court has to look at the setting in which the words are
used and the circumstances in which the law came to be
passed to decide whether there is something implicit behind
PG NO 1068
the words actually used which control the literal meaning of
the words used. The expression “foreign enterprise” in
section 80-O has been placed after the words “the Government
of a foreign State”. The view which we take as to the
interpretation of the expression “foreign enterprise” finds
support from the setting in which the expression has been
placed and the circumstances in which the law came to be
passed.
It is however urged by Mr. Rajagopalan learned Counsel
for the appellants that it may be that a foreign enterprise
can be defined in the manner we have done at the same time
the definition of the expression on the basis of the test of
location cannot altogether be ruled out. In any event it is
possible to define the expression “foreign C enterprise” as
an enterprise located outside India. Counsel submits that
when two interpretations are possible to be made the
interpretation which is favourable to the assessee should be
adopted. In support of that contention learned Counsel has
placed reliance upon a few decisions of this Court in
Commissioner of Income Tax;. Lucknow v. D Madho Pd. Jalia,
[1976] 105 ITR 179; Commissioner of income Tax v. Vegetable
Products Ltd., [1973] 88 ITR 192 and Commissioner of Income Tax,
Punjab v. Kulu Valley Transport Co. P. Ltd., [1970] 77 ITR 518.
The above principle of law is well established and there
is no doubt that. But the question is whether two views are
possible to he taken on the interpretation of the expression
‘foreign enterprise. In our opinion the expression “foreign
enterprise” admits of only one interpretation. The
interpretation which the learned Counsel for the appellants
wants to put on the expression will not be full and complete
and will render the meaning of the expression inconsistent
with the objects included within it having regard to the
change effected by the Legislature from ‘foreign company’ to
the present expression “foreign enterprise” as has been
already noticed. We are therefore-unable to accept the
interpretation of the expression as submitted on behalf of
the appellants.
We are also unable to accept the contention of the
appellants that as the provision of section 80-O is an
exemption provision, it should be construed liberally and
upon such liberal construction. it should be held that Toyo
India is a foreign enterprise. It is true that an exemption
provision should be liberally construed but this does not
mean that such liberal construction should be made doing
violence to the plain meaning of such exemption provision.
Liberal construction will be made whenever it is possible to
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be made without impairing the legislative requirement and
the spirit of the provision. In our opinion to construe
“foreign enterprise” in section 80-O as including within it
an Indian company or a branch or unit of such company simply
because it is located in a foreign country would be against
the plain meaning of the term and the legislative intent.
We may now Consider another argument of the appellants
based on the objective of the provision of section 80-O. It
is submitted by the learned Counsel for the appellants that
the objectives of section 80-O are to encourage Indian
companies to export their technical know-how and thereby
augment the foreign exchange resources of the country.
Counsel submits that the main objective of the section is to
augment the foreign exchange resources of the country and
that the appellant-Company having earned foreign exchange it
should be held that the requirement of the section is
satisfied and accordingly the appellant- Company is entitled
to deduction of Income Tax. On the other hand Dr. Gauri
Shankar points out that the main objective of section 80-O
is not the earning of foreign exchange. According to him the
principal purpose for which the deduction is allowed to an
assessee is that contained in the speech of the Finance
Minister on the floor of Parliament at the time of
introduction of section 85-C into the Act. A copy of the
speech has been handed over to us and has also been supplied
to the learned Counsel for the appellants. In his speech.
the Hon’ble Finance Minister stated inter alia that ‘some
fiscal encouragement needs to be given to our industries to
encourage them to provide technical know-now” and technical
services to newly developing countries. In view of the
speech it is urged by Dr. Gauri Shankar that the principal
objective of section 80-O is to supply technical know-how
and render technical services by Indian companies to newly
developing countries. Counsel submits that it will he wrong
to say that the principal objective of section 80-O is to
augment the foreign exchange resources of the country.
Although there is no indication in section 80-O
regarding the supply of technical know-how or rendering
technical services to newly developing countries yet it may
be reasonable to infer from the said speech of the Finance
Minister that at the time section 85-C was introduced in the
Act one of the objectives was to supply technical know-how
and render technical services to newly developing countries.
Foreign exchanges can be earned by various other modes but
that will not in all cases entitle the assessee to a
deduction of Income Tax. Section 80-O. as it stood during
the relevant period with which we are concerned grants cent
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percent deduction of tax. In the context of such deduction
of tax it will not be unreasonable to presume that the
principal objective of section 80-O is to supply technical
know-how or render technical services to developing
countries. In the circumstances the contention of the
appellants that as the appellant-Company has fulfilled the
principal object of section 80-O by earning foreign
exchange the respondent No. I should have approved the
agreements for the purpose of section 80-O cannot he
accepted.
It is however submitted on behalf of the appellants that
apart from the question as to what is the principal
objective of section the appellant-Company has fulfilled
both the objectives namely it has supplied technical know-
how to a foreign enterprise through an Indian company and
that it has also earned foreign exchange. it is urged on
behalf of the appellants that although the appellant-Company
may not have directly supplied technical know-how to or
directly received fees commission etc. from the foreign
enterprise in convertible foreign exchange in effect the
appellant-Company having satisfied the objectives of section
80-O indirectly it is entitled to a deduction of Income Tax.
In support of this contention much reliance has been placed
two Single Bench decisions of the Bombay High Court which
will be referred to presently. In Gannon Dunkerley and Co.
Ltd. v. Central Board of Direct Taxes, [1986] 159 ITR 162,
the facts are more or less similar to those in the present
case and it has been held that the main conditions imposed
by section 80-O has been complied with by the petitioner-
Company and the Central Board of Direct Taxes should have
approved the agreement. The same view has been taken in the
other Single Bench decision of the Bombay High Court in
Indian Hume Pipe Co. Ltd. v . Central Board of Direct Taxes,
[1987] 165 ITR 537. Both the above decisions have been
considered by the Division Bench in the impugned judgment
and the Division Bench could not agree with the view
expressed in those decisions.
Mr. Rajagopalan has pressed us to hold on the basis on
the said Single Bench decisions of the Bombay High Court
that the objectives of the section having been fulfilled,
the agreements should have been approved by the Central
Board of Direct Taxes. Attractive though the argument is,
we regret, we are unable to accept the same. It is true
that viewed in the light of the submissions made on behalf
of the appellants, the objectives of the section are to some
extent fulfilled, but we cannot, at the same time, ignore
the plain language of the section. Section 80-O
unequivocally provides that the income by way of royalty,
commission, fees etc. shall be received by the assessee from
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the Government of a foreign State or a foreign enterprise
and indeed that is one of the principal conditions for the
application of the section. The assessee has to fulfil that
condition before he can claim any deduction of Income Tax or
approval of an agreement. The fulfilment of the objectives
of a provision of a statute without fulfiling the condition
laid down in plain and clear language will not enable one to
have the benefit of the section. In our opinion not only the
objectives of a provision of a statute have to be fulfilled
but also the conditions for the applicability of the
provision have also to be fulfilled. The fulfilment of
conditions of a provision of an Act in most cases will also
be fulfilment of the objectives of the provision. But the
converse may not be true. In other words the fulfilment of
the objectives may not satisfy the conditions required to be
fulfilled by the provision. In the instant case the
appellant-Company received its income by way of royalty
commission fees or any similar payment not from the
Government of a foreign State or a foreign enterprise but
from an Indian company. The appellant-Company has therefore
failed to fulfil the principal condition of section 80-O of
the Act. In the circumstances it is difficult to accept the
contention of the appellants that as they have indirectly
fulfilled the objectives of the section the Central Board
of Direct Taxes was not justified in not approving the
agreements.
In the impugned judgment the High Court has held that
section 80-O does not require that the agreement should be
made with the Government of a foreign State or a foreign
enterprise. We are unable to accept this view of the High
Court. Section 80-O refers to three parties namely.
Government of a foreign State. foreign enterprise and the
assessee. It is clear from section 80-O that the agreement
must be between the assessee on the one hand and the
Government of a foreign State or a foreign enterprise on the
other. When section 80-O speaks of the supply of know-how by
the assessee to a Government of a foreign State or a foreign
enterprise and the receipt of income by way of royalty
commission etc. from the Government of a foreign State or a
foreign enterprise it is unreasonable to think that the
agreement under which the technical know-how shall be
supplied and the income shall be received by the assessee in
convertible foreign exchange may not be with the Government
of a foreign State or a foreign enterprise but with some
other party. It is manifestly clear from the provision of
section 80-O that the agreement shall be entered into by and
between the assessee and the Government of a foreign State
or a foreign enterprise.
In the instant case no such agreement has been entered
into by the appellant-Company with the Government of a
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foreign State or a foreign enterprise. In that respect also
the appellant-Company does not fulfil another condition of
section 80-O which is also very material. The agreements
which have not been approved by the Central Board of Direct
Taxes have been as already noticed entered into between the
appellant-Company and Toyo India which is not a foreign
enterprise but an Indian Company. In view of the facts
stated above the Central Board of Direct Taxes was justified
in not approving the agreements in question.
Lastly it is argued on behalf of the appellants that
section 80-O should be construed as permitting canalisation
and if so construed the appellant-Company will be entitled
to the benefit of the section. On the other hand it is the
contention of Dr. Gauri Shankar that in view of the specific
mandate of section 80-O that the income of the assessee
shall be directly received from the foreign enterprise the
question of canalisation does not arise. In other words it
is submitted that canalisation is not contemplate.1 by
section 80-O. In reply to the contention of Dr. Gauri
Shankar Mr. Rajagopalan submits that it is a lacuna on the
part of the Legislature in not providing for canalisation in
fulfilment of the objectives referred to above. In support
of his contention. much reliance has been placed by him on
the observation of Lord Denning in the decision in Seaford
Court Estates Ltd. v . Asher [1949] 2 K.B. 481. In that case
Lord Denning observed as follows:
“A judge believing himself to he fettered by the
supposed rule that he must look to the language and nothing
else laments that the draftsmen have not provided for this
or that or have been guilty of some or other ambiguity. It
would certainly save the judges trouble if Acts of
Parliament were drafted with divine prescience and perfect
clarity. In the absence of it when a defect appears a judge
cannot simply fold his hands and blame the draftsman. He
must set to work on the constructive task of finding the
intention of Parliament and he must do this not only from
language of the statute but also from a consideration of the
social conditions which gave rise to it and of the mischief
which it was passed to remedy. and then he must supplement
the written word so as to give “force and life” to the
intention of the legislature.”
The above observation of Lord Denning does not in our
opinion help the appellants. The entire observation is based
on a defect appearing in the provision of a statute. In our
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view there is no defect in the provision of section 80-O. It
may be that the Legislature has not provided for
canalisation but that cannot be said to he a lacuna or a
defect in the provision. Whether canalisation should be
permitted or not is absolutely a matter for the Legislature.
It is not incumbent on the Legislature to provide for
canalisation although it has been frankly conceded by Dr.
Gauri Shankar that canalisation is desirable and a
reasonable one. In the circumstances in view of the plain
language of the section we do not think that we can construe
the section as providing canalisation that is to say income
by way of royalty commission etc. need not be received
directly from the Government of a foreign State or a foreign
enterprise but through another Indian company. This is not
the intention of the Legislature.
For the reasons aforesaid the appeal is dismissed. There
will however be no order as to costs.
R.S.S. Appeal dismissed.