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Mere newspaper cuttings does not amount to proof of sharing commercial expertise: Bombay HC upholds Tribunal’s decision.

 

CASE TITLE – Hindustan Export & Import Corporation Private Limited v. The Deputy Commissioner of Income Tax

CASE NUMBER – Income Tax Appeal No. 225 of 2002

DATED ON – 07.05.2024

QUORUM – Justice K.R. Shriram and Justice Dr. Neela Gokhale

FACTS OF THE CASE

The Appellant is a private limited company. An agreement was executed on 2nd February, 1987 by and between Appellant and M/s. Arianespace France (“Arianespace”), the shareholders of which, it is stated, are all Government-controlled companies belonging to European Space Agencies and unconnected with Appellant. The main business of Arianespace was to launch satellites and place them in orbit above the Earth. Arianespace was desirous of reducing its costs by placing bulk orders on its subcontractors based on information about launch business worldwide, collected from its international network of consultants. It is Appellant’s case that it was one such consultant of Arianespace appointed under the said agreement. The agreement was revised and extended on 10th December, 1987, 20th February, 1990 and 12th March, 1993. As per the latest agreement, the Appellant was obliged to provide information to Arianespace regarding current regulations and market conditions in India. A lumpsum consideration was agreed upon and was revised upwards from time to time. The duration of the last agreement was up to 31st December 1996. Appellant received a sum of Rs.75,11,850/- from Arianespace during the relevant year being AY 1995- 96. After deducting 20% towards the expenditure, Appellant claimed a deduction of Rs.30,40,740/- under Section 80-0 of the Act in its return of income filed for AY 1995-96. The Assessing Officer (“AO”) in his assessment order dated 25th March, 1998 refused the deduction on various grounds including a) the information provided by the Appellant under the said agreement comprised only of newspaper cuttings freely available and hence, cannot be treated as ‘information concerning commercial knowledge and experience’; b) there were no written reports of any analysis; c) Appellant had no experience in Satellite business; and d) there was nothing to indicate that the information was utilized outside India. The appellant challenged the assessment order before the Commissioner of Income Tax (Appeals) which appeal was dismissed by an order dated 18th March, 1999. The aggrieved Appellant preferred an appeal to the Income Tax Appellate Tribunal (‘ITAT’), which also confirmed the non-allowance of deduction under Section 80-0 of the Act by its order dated 8th November, 2001.

ISSUE

Whether on the facts and in the circumstances of the case and in law the Tribunal ought to have allowed the deduction under Section 80-0 of the Income Tax Act, 1961?

LEGAL PROVISIONS

Section 80-0 of the Income Tax Act of 1961, which prescribes the conditions to be fulfilled for an Indian person or Enterprise to claim deductions in respect of royalties, etc from foreign enterprises.

CONTENTIONS BY THE APPELLANT

It was Appellant’s case that the information required to be sent in terms of the agreement was sent to Arianespace regularly by post and assessments and analyses were discussed orally at personal meetings with representatives of both sides to maintain confidentiality of information.  The Senior Counsel appearing for the Appellant stated that the rejection of the Appellant’s claim under Section 80-0 of the Act is perverse and completely contrary to the facts of the case. According to him, the Appellant had received fees in consideration for furnishing information concerning commercial knowledge and for rendering technical services and the Tribunal ought to have appreciated the absence of written reports on account of confidentiality of information. Relying on the provision of Section 80- 0 of the Act existing at the relevant time, he also submitted that the Section only required approval of the Chief Commissioner of Income Tax (‘CCIT’) to the agreement executed. The approval of the CCIT was granted after referring to the agreements furnished to him and was for ‘Assessment Years 1991-92 onwards till income under the agreement accrues fully subject to a disallowance of 20% of the payment as attributable to services rendered in India.’ The appellant pointed out that firstly, an agreement existed, secondly, fees have been paid to it by Arianespace for valuable commercial information which the company used outside India, thirdly, the fees received by Appellant were in convertible foreign exchange, which were all requirements of the provision. Once, there exists approval by the CCIT for all subsequent years the AO is bereft of his powers to re-examine and reconsider the approval while passing the assessment order.

CONTENTIONS BY THE RESPONDENT

The Respondent contests the Appeal on the ground that the mere sharing of newspaper cuttings does not amount to information concerning industrial, commercial, or scientific knowledge, experience or skill which is a pre-condition to seek deduction under Section 80-0 of the Act. Appellant has been unable to provide any analysis, report or assessments purportedly furnished to Arianespace and hence, Appellant is not eligible for deduction under Section 80-0 of the Act. The crux or the basis of the income allowed as a deduction under Section 80-0 must be necessarily determined by the Assessment Officer on the facts of each case. The lead counsel for the Respondent submits that the approval of the CCIT is qualified and always subject to any amendment to the provision of the Act and subject to legal conditions.

COURT ANALYSIS AND JUDGEMENT

From the contents of the communications of Appellant with the CCIT, two things stood clear, firstly, the information sought by Arianespace was to be collected from a vast number of user departments and secondly that analysis and interpretation of the information was done at quarterly meetings between the parties. It was based on these two pivotal clarification statements that the CCIT approved the agreement. Admittedly, the agreements were extended from time to time, albeit with a revised scope of work, however, the Appellant insisted that the approval once accorded operated for all subsequent AY’s from 1991-1992 till the existence and continuity of the agreement. During the assessment proceedings of AY 1995- 1996, the Appellant in its response dated 12th March, 1988 to a query posed by the AO stated that while newspaper articles are regularly sent, the evaluation and assessment projects are orally discussed over the phone and when they meet officials of Arianespace in India or France. It informed the AO that no reports were prepared by it and neither Appellant nor Arianespace maintained any record of any telephonic conversations nor any meetings convened as per its claim. It was in these circumstances that Appellant’s claim of deductions under Section 80-O was rejected by the AO. The Court was unable to accept the contention of the Appellant. Approval was accorded by the CCIT on the basis of specific statements made by the Appellant that information to be shared pursuant to the agreement was collected and collated from User Departments and analysis and assessments were to be done during quarterly meetings. They Court further mentioned that Newspaper cuttings are not precluded from being shared as information but by themselves they do not constitute any commercial expertise. And also were of the view that the AO is well within his rights to request Appellant to furnish proof of sharing the information with Arianespace for which approval was granted by the CCIT and from the replies of Appellant to the AO, it was quite clear that Appellant had not provided material to Arianespace as represented by it before the CCIT while seeking approval as newspaper cuttings are not information collected or collated from User Departments. And thus, they had no hesitation in accepting the decision of the AO in rejecting this claim of the Appellant. The Court iterated that according to the letter dated 27th March, 1992, by which the CCIT granted approval for the deduction, it was mentioned in paragraph 4 that the grant of deduction and the amount eligible will be assessed by the AO at the time of assessment and the approval granted is also subject to any amendments in the said Act from time to time.  The Court held that the Appellant simply failed to act in aid of its intent disclosed in the application form, based on which approval was granted and that the AO cannot be accused of reviewing or revoking approval granted by the CCIT in the present matter. As the AO simply seeks to verify as to whether the Appellant has acted in terms of the approval granted by the CCIT. And the AO is well within his rights so to do and has not overstepped his jurisdiction. The Court also endorsed the decision of the ITAT and held that the appeal cannot be entertained and was accordingly dismissed.

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Judgement Reviewed by – Gnaneswarran Beemarao