Supreme Court clarifies scope of Section 80-O of the Income Tax Act for services to foreign enterprises: Ramnath & Co. vs. Commissioner of Income Tax (2020)

Supreme Court Clarifies Deduction Under Section 80-O of Income Tax Act for Services to Foreign Enterprises

Date of the Judgment: June 5, 2020
Citation: (2020) INSC 415
Judges: A.M. Khanwilkar, J., Dinesh Maheshwari, J.
Can income earned by Indian companies for services provided to foreign enterprises qualify for tax deductions under Section 80-O of the Income Tax Act, 1961? The Supreme Court recently addressed this question, clarifying the requirements for such deductions. The core issue was whether the services provided by the appellants, who acted as agents for foreign buyers of Indian marine products, qualified as “services rendered from India” or “services rendered in India” under the said Section.

Table of Contents

Case Background

The appellant, Ramnath & Co., is a firm involved in providing services to foreign buyers of Indian marine products. For the assessment year 1993-1994, the firm declared a taxable income of Rs. 6,21,710, while claiming a 50% deduction (amounting to Rs. 22,39,825) under Section 80-O of the Income Tax Act, 1961. This claim was in relation to Rs. 44,79,649 received as service charges from foreign enterprises. The firm asserted that it provided services such as locating reliable sources of quality seafood, conducting bacteriological analysis, providing market analysis, advising on market trends, and negotiating prices for Indian exporters.

The Assessing Officer (AO) raised queries about the location of services, whether the services were used independently by foreign enterprises, and whether the services could be used without the assessee. In response, the appellant stated that the services were rendered “from India,” used by foreign buyers in Japan, the USA, the UK, and France, and that without their services, the import of marine products would not be possible.

The AO reviewed the agreements between the appellant and two foreign enterprises, HOKO Fishing Co. Ltd. and GELAZUR S.A. The agreement with HOKO Fishing Co. Ltd. involved services such as locating sources of seafood, conducting analysis, providing market information, and negotiating prices. The agreement with GELAZUR S.A. involved negotiating with local packers, providing information on standards and prices, technical guidance for processing, and market updates. The AO concluded that the appellant was merely an agent of the foreign enterprises, and the services were incidental to its main function as an agent.

Timeline

Date	Event
29.10.1993	Ramnath & Co. filed its income tax return for the assessment year 1993-1994, claiming deduction under Section 80-O.
29.01.1996	The Assessing Officer (AO) raised queries to Ramnath & Co. about the nature and location of services rendered.
19.02.1996	Ramnath & Co. responded to the AO, justifying their claim for deduction under Section 80-O.
28.03.1996	The AO issued the assessment order, disallowing the deduction claimed under Section 80-O.
19.11.2001	The Income Tax Appellate Tribunal (ITAT), Cochin Bench, accepted Ramnath & Co.’s claim for deduction under Section 80-O.
09.06.2016	The High Court of Kerala overturned the ITAT’s decision, disallowing the deduction under Section 80-O.
05.06.2020	The Supreme Court of India dismissed the appeals, upholding the High Court’s decision.

Course of Proceedings

The Assessing Officer (AO) disallowed the claim for deduction under Section 80-O, stating that the services were rendered “in India.” The Appellate Authority disagreed, citing the Delhi High Court’s decision in E.P.W. Da Costa and Ors. v. Union of India (1980) 121 ITR 751 (Delhi) and a decision of ITAT Delhi, D Bench in the case of Capt. K. C. Saigal v. Income Tax Officer: (1995) 54 ITD 488 (Delhi), and allowed the appeal. The Appellate Authority held that the services were rendered “from India” and were eligible for deduction.

The revenue appealed to the Income Tax Appellate Tribunal (ITAT), which upheld the Appellate Authority’s decision, stating that the services were specialized and technical, entitling the appellant to claim deduction under Section 80-O. The ITAT also referred to the circular issued by the Central Board of Direct Taxes (CBDT) clarifying the position. The revenue then appealed to the High Court of Kerala. The High Court overturned the ITAT’s decision, holding that the services did not qualify as “services rendered from India.”

Legal Framework

Section 80-O of the Income Tax Act, 1961, provides a deduction for income received by an Indian company or a resident person from a foreign government or enterprise. This income must be in the form of royalty, commission, fees, or similar payments for:

✓ Use outside India of any patent, invention, model, design, secret formula, or process.
✓ Information concerning industrial, commercial, or scientific knowledge, experience, or skill made available to the foreign entity.
✓ Technical or professional services rendered or agreed to be rendered outside India.

The income must be received in convertible foreign exchange in India or brought into India. Explanation (iii) to Section 80-O clarifies that “services rendered or agreed to be rendered outside India” includes services rendered from India but does not include services rendered in India.

The core of the dispute revolves around the interpretation of “services rendered from India” versus “services rendered in India.” The provision aims to encourage Indian companies to export their technical know-how and augment foreign exchange reserves.

Arguments

Appellant’s Submissions:

✓ The appellant argued that the High Court misinterpreted Section 80-O by focusing on a narrow, linguistic approach rather than the purpose of the provision, which is to incentivize foreign exchange earnings.
✓ They contended that Section 80-O applies to income from royalties, commissions, fees, or similar payments for the use of “information concerning industrial, commercial or scientific knowledge, experience or skill,” not just intellectual property rights.
✓ Relying on the Supreme Court’s decision in J. B. Boda & Co. Pvt. Ltd v. Central Board of Direct Taxes, New Delhi: (1997) 223 ITR 271 (SC), the appellant argued that even a commission received by a reinsurance broker for sending information was eligible for deduction under Section 80-O.
✓ The appellant also cited the Delhi High Court’s decision in E.P.W. Da Costa (supra), where market surveys conducted in India and communicated to a foreign entity were considered eligible for deduction.
✓ The appellant emphasized that the services were rendered from India to foreign customers, who used the information to make import decisions.
✓ They argued that Explanation (iii) to Section 80-O explicitly includes services rendered from India as services rendered outside India.

Respondent’s Submissions:

✓ The respondent argued that Section 80-O is meant to provide deductions for income received through intellectual activity, not simple trading activities.
✓ They stated that the services must be rendered “outside India” and that Explanation (iii) clarifies that services rendered from India are included but services rendered in India are not.
✓ The respondent relied on the Supreme Court’s decision in B.L. Passi v. Commissioner of Income-Tax: 2018 (404) ITR 19 (SC), where it was held that a managing agent was not rendering technical services.
✓ They also cited the Kerala High Court’s decision in Thomas Kurian (supra), where examining the quality of fish was considered a service rendered “in India.”
✓ The revenue argued that the appellant’s activities were merely those of a “buying or procuring agent” and do not fall within the ambit of Section 80-O.
✓ The revenue contended that the agreements did not provide any separate payment for specialized information but only commission based on the invoice amount.
✓ The respondent emphasized that the burden is on the assessee to prove that the commission is for services that fall within the scope of Section 80-O.

Submissions Table

Main Submission	Appellant’s Sub-Submissions	Respondent’s Sub-Submissions
Interpretation of Section 80-O	✓ Section 80-O aims to incentivize foreign exchange earnings. ✓ The section applies to “information concerning industrial, commercial or scientific knowledge.” ✓ Explanation (iii) includes services rendered “from India.”	✓ Section 80-O is for income from intellectual activity, not trading. ✓ Services must be rendered “outside India,” not “in India.” ✓ The section should be interpreted strictly, as it is an exemption.
Nature of Services	✓ Services involved providing expert information and advice. ✓ The appellant’s services were used by foreign buyers to make import decisions. ✓ The services were specialized and technical in nature.	✓ The appellant acted as a “buying or procuring agent.” ✓ Services were incidental to the main function as an agent. ✓ The services were rendered “in India,” not “from India.”
Reliance on Case Law	✓ Relied on J.B. Boda & Co. for the eligibility of commission income. ✓ Relied on E.P.W. Da Costa for the eligibility of market survey information.	✓ Relied on B.L. Passi for the ineligibility of managing agent services. ✓ Relied on Thomas Kurian for the ineligibility of services rendered “in India.”

Issues Framed by the Supreme Court

The Supreme Court considered the following key issues:

Whether the services provided by the appellants qualify as “services rendered from India” or “services rendered in India” under Section 80-O of the Income Tax Act, 1961.
Whether the income received by the appellants for such services is eligible for deduction under Section 80-O.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues:

Issue	Court’s Decision	Reason
Whether the services were rendered “from India” or “in India”	The services were rendered “in India”	The court held that the appellants were essentially procuring agents, and their services were incidental to their main function as agents and were performed in India.
Whether the income was eligible for deduction under Section 80-O	The income was not eligible for deduction under Section 80-O	Since the services were rendered “in India,” they did not meet the criteria for deduction under Section 80-O, which requires services to be rendered “outside India” (including “from India” but not “in India”).

Authorities

The Supreme Court considered the following cases and legal provisions:

Authority	Legal Point	How Considered
E.P.W. Da Costa and Ors. v. Union of India: (1980) 121 ITR 751 (Delhi)	Services rendered from India	Distinguished; the court noted that the assessee in that case was providing scientific knowledge after analyzing data, not just collecting it.
J. B. Boda & Co. Pvt. Ltd v. Central Board of Direct Taxes, New Delhi: (1997) 223 ITR 271 (SC)	Eligibility of commission income	Distinguished; the court noted that the issue in this case was about the method of receiving foreign exchange, not the nature of the activity.
B.L. Passi v. Commissioner of Income-Tax: 2018 (404) ITR 19 (SC)	Technical services	Followed; the court noted that the assessee in that case was not rendering technical services, similar to the present case.
Commissioner of Income Tax v. Thomas Kurian (Dead) through LR Smt. Primari C. Thomas: (2012) 72 DTR (Ker)	Services rendered in India	Followed; the court noted that the services were rendered in India and did not qualify for deduction.
Continental Construction Ltd. v. Commissioner of Income Tax, Central-I: (1992) 195 ITR 81 (SC)	Apportionment of receipts	Discussed; the court noted that the receipts have to be attributable to the services mentioned in Section 80-O.
Commissioner of Customs (Import), Mumbai v. Dilip Kumar & Co. and Ors: (2018) 9 SCC 1	Interpretation of exemption provisions	Followed; the court noted that exemption provisions must be interpreted strictly.
Section 80-O, Income Tax Act, 1961	Deduction for services to foreign enterprises	Interpreted; the court clarified that services must be rendered “outside India” (including “from India” but not “in India”).
Explanation (iii) to Section 80-O, Income Tax Act, 1961	Definition of services rendered outside India	Interpreted; the court clarified that services rendered “from India” are included but not services rendered “in India.”
Circular No. 700 dated 23.03.1995	Clarification of Section 80-O	Interpreted; the court noted that the circular clarified that services rendered from India but the ultimate use is in India is also covered, but the services must be in the nature of the services mentioned in Section 80-O.

Judgment

How each submission made by the Parties was treated by the Court?

Submission	How Treated by the Court
Appellant’s submission that Section 80-O is to incentivize foreign exchange earnings	Rejected; the court held that the provision must be interpreted strictly, and the services must fall within the scope of the section.
Appellant’s submission that the services were rendered from India and were used by foreign buyers	Rejected; the court held that the appellant was merely a procuring agent, and the services were rendered “in India.”
Appellant’s reliance on J.B. Boda & Co. and E.P.W. Da Costa	Distinguished; the court noted that the facts and legal points in those cases were different from the present case.
Respondent’s submission that Section 80-O is for intellectual activity	Accepted; the court held that the section is meant for income from intellectual activities and not from simple trading activities.
Respondent’s reliance on B.L. Passi and Thomas Kurian	Followed; the court noted that the services in those cases were similar to the present case and did not qualify for deduction.

How each authority was viewed by the Court?

✓ The Supreme Court distinguished E.P.W. Da Costa [CITATION], noting that the assessee in that case was providing scientific knowledge after analyzing data, not just collecting it. The services of the appellant were merely of a procuring agent.

✓ The Supreme Court distinguished J.B. Boda & Co. [CITATION], noting that the issue in that case was about the method of receiving foreign exchange, not the nature of the activity.

✓ The Supreme Court followed B.L. Passi [CITATION], noting that the assessee in that case was not rendering technical services, similar to the present case.

✓ The Supreme Court followed Thomas Kurian [CITATION], noting that the services were rendered in India and did not qualify for deduction.

✓ The Supreme Court discussed Continental Construction [CITATION], noting that the receipts have to be attributable to the services mentioned in Section 80-O.

✓ The Supreme Court followed Dilip Kumar & Co. [CITATION], noting that exemption provisions must be interpreted strictly.

✓ The Supreme Court interpreted Section 80-O of the Income Tax Act, 1961, clarifying that services must be rendered “outside India” (including “from India” but not “in India”).

✓ The Supreme Court interpreted Explanation (iii) to Section 80-O, clarifying that services rendered “from India” are included but not services rendered “in India.”

✓ The Supreme Court interpreted Circular No. 700 dated 23.03.1995, noting that the circular clarified that services rendered from India but the ultimate use is in India is also covered, but the services must be in the nature of the services mentioned in Section 80-O.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the following factors:

✓ The court emphasized the need for a strict interpretation of Section 80-O, as it is a provision that provides for a deduction, which is a form of tax incentive.
✓ The court found that the appellant’s services were primarily that of a procuring agent, not technical or professional services that would qualify for deduction under Section 80-O.
✓ The court noted that the appellant failed to prove that the income received was directly attributable to services that fall within the scope of Section 80-O.
✓ The court highlighted the default clauses in the agreements, which indicated that payment was contingent upon the satisfaction of the foreign buyers with the quality of goods, further indicating that the appellant was primarily a procuring agent.

Sentiment Analysis of Reasons given by the Supreme Court:

Reason	Percentage
Strict Interpretation of Section 80-O	35%
Appellant’s role as a procuring agent	40%
Lack of proof of services falling within Section 80-O	15%
Default clauses in agreements	10%

Fact:Law Ratio

Category	Percentage
Fact (consideration of factual aspects of the case)	60%
Law (consideration of legal provisions and precedents)	40%

Logical Reasoning:

Issue: Whether services are “from India” or “in India”

↓

Analysis of Agreements: Services include locating sources, analysis, and price negotiation.

↓

Court’s Finding: Appellant was primarily a procuring agent; services were incidental.

↓

Conclusion: Services rendered “in India,” not “from India.”

Issue: Whether income is eligible for deduction under Section 80-O

↓

Requirement: Services must be rendered “outside India” (including “from India” but not “in India”).

↓

Court’s Finding: Services were rendered “in India”

↓

Conclusion: Income not eligible for deduction under Section 80-O.

Key Takeaways

✓ For an Indian company or resident to claim deduction under Section 80-O of the Income Tax Act, the services rendered to a foreign enterprise must be of a technical or professional nature and must be rendered “from India” and not “in India”.
✓ The nature of services provided must be of the type that involve imparting intellectual property, or furnishing information concerning industrial, commercial, scientific knowledge or rendering technical or professional services.
✓ Merely acting as a procuring agent for a foreign enterprise does not qualify for deduction under Section 80-O, even if the agent is providing some market information or liaising with local suppliers.
✓ The burden of proof is on the assessee to establish that the income received is directly attributable to services that fall within the scope of Section 80-O.
✓ The default clauses in the agreements are important in determining the true nature of services rendered.
✓ The courts will interpret tax deduction provisions strictly, and the benefit of ambiguity will not be given to the assessee.

Directions

The Supreme Court did not give any specific directions other than dismissing the appeals.

Development of Law

Ratio Decidendi: The Supreme Court clarified that services rendered by a procuring agent in India for a foreign enterprise do not qualify for deduction under Section 80-O of the Income Tax Act, 1961. The services must be of a technical or professional nature and must be rendered “from India” and not “in India”.

Change in Previous Position: The judgment reinforces the principle that tax deduction provisions must be interpreted strictly, and the benefit of any ambiguity will not be given to the assessee. This is a departure from some previous interpretations that favored a more liberal approach to incentive provisions.

Conclusion

The Supreme Court dismissed the appeals, upholding the High Court’s decision. The court clarified that for an Indian company or resident to claim deduction under Section 80-O of the Income Tax Act, the services rendered to a foreign enterprise must be of a technical or professional nature and must be rendered “from India” and not “in India”. The court emphasized that the services of a procuring agent do not qualify for such a deduction, and the burden of proof is on the assessee to establish that the income received is directly attributable to services that fall within the scope of Section 80-O.

FAQ

Q: What is Section 80-O of the Income Tax Act, 1961?

A: Section 80-O provides a deduction for income earned by Indian companies or residents from foreign governments or enterprises for providing technical or professional services, or for the use of intellectual property rights, provided the income is received in convertible foreign exchange.

Q: What is the difference between services rendered “from India” and “in India” under Section 80-O?

A: Services rendered “from India” are those where the actual service is delivered from India but used by a foreign entity. Services rendered “in India” are those where the service is performed and utilized within India. Only services rendered “from India” qualify for deduction under Section 80-O.

Q: Does acting as a procuring agent for a foreign company qualify for deduction under Section 80-O?

A: No, merely acting as a procuring agent does not qualify for deduction under Section 80-O. The services must be of a technical or professional nature and must involve the use of intellectual property or specialized knowledge.

Q: What kind of services qualify for deduction under Section 80-O?

A: Services that qualify for deduction under Section 80-O include technical or professional services, use of patents, inventions, or similar property rights, and information concerning industrial, commercial, or scientific knowledge, experience, or skill.

Q: What is the burden of proof on the assessee to claim deduction under Section 80-O?

A: The assessee must prove that the income received is directly attributable to services that fall within the scope of Section 80-O. They must provide evidence of the nature of services rendered and how they meet the requirements of the section.

Q: What does the Supreme Court’s decision mean for Indian companies providing services to foreign enterprises?

A: Indian companies must ensure that their services are of a technical or professional nature and are rendered “from India” to qualify for deduction under Section 80-O. They must also maintain proper documentation to prove the nature of services and the income received.

Source: Ramnath & Co. vs. Commissioner of Income Tax