M/S J.B. Boda & Co. Pvt. Ltd vs Central Board Of Direct Taxes (Supreme Court); DATE OF JUDGMENT: 30/10/1996
BRIEF FACTS
1. The petitioner in Writ Petition No. 3086 of 1987 in the High Court of Delhi, has filed this appeal against the judgment of the High Court dated 29.10.1987.
2. The short matter that the arises for consideration in this appeal is the interpretation to be places on Section 80-O of the Income-tax Act, 1961.
3. Appellants a private company. It is engaged in the brokerage business as reinsurance-brokers. It received a commission @ 3 to 6 percent, relating to maritime and other insurance.
4. The respondent is the Central Board of Direct Taxes, Government of India, New Delhi.
5. In respect of insurance risk covered by Indian or foreign insurance companies, appellant arranges for the reinsurance of portion of 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.
6. For a period of 19 months from 1.3.1980, Oil and Natural Gas Commission insured all their offshore oil gas exploration and production operation with the United India Insurance Company, Madras.
7. In respect of this insurance risk, the appellant contacted Messrs 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 risk which is sought to be reinsured.
8. The said London brokers contacted various underwriters and after getting confirmation about the portion of the risk the foreign reinsures were prepared to undertake, informed the appellant about such reinsurance coverage.
9. 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 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 brokerage due to the appellant. This balance amount after the deducting the brokerage, was remitted to the London brokers with the permission of the Reserve Bank of India.
10. According to the appellant, the amount of commission retained by it was 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 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 US 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 Auditor’s Certificate.
11. 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 US Dollars, under the heading “Balance of Account” and the amount of brokerage also is mentioned in US Dollars, earned by the appellant on the reinsurance premium to be remitted under the heading “Brokerage”.
12. While in the normal course, the entire premium should be remitted abroad to the foreign parties and than the foreign reinsurer 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 deduction the exchange.
13. Thus, the appellant entered into an agreement with M/s. Sedgwick offshore Resources Limited, London for supply of know-how and, while remitting the reinsurance premium of US Dollars 1060891.68, the appellant remitted a fee of US Dollars 989887.20 on 11.1.1984 to the Union Bank of India, thus retaining the fee of 71004.48 Dollars for the technical services rendered.
14. 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 M/s. 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 approval of the Respondent, Central Board of Direct Taxes as mentioned in Annexure-B. The remittance statement annexed along with Annexure-A available at pages 25-26 of the with paperbook.
15. It is common ground that remittance to the foreign insurance company on behalf of the Indian insurance company, as also the receipt of the amount of brokerage by the Indian company, should be done only with the concurrence of the Reserve Bank of India. The remittance application along with the relevant details and the statement (Annexure-A), shows the amount due to the foreign company in US dollars as also the brokerage due to the appellant in US dollars and adjustment is made accordingly. The appellant instead of remitting the entire amount to the foreign reinsurer and then receiving remittance from the said reinsurer the commission due to it, entered into an agreement with foreign reinsurer, that while remitting the reinsurance premia, the appellant would retain the fee due to it for the technical services rendered and this arrangement is effected only with the concurrence or the permission of the Reserve Bank of India. The question in the permission of the Reserve Bank of India.
16. The question in the instant case, is whether instead of remitting the amount to the foreign reinsures first and receiving the commission due to the appellant later, the arrangement by which the appellant remitted the reinsurance premia, after retaining the fee due to it for technical services rendered, will satisfy the requirement of Section 80-O of the Income-tax Act ?
Section 80-O of Income Tax Act “Deduction in respect of royalties, etc., from certain foreign enterprises”
Where the gross total income of an assessee, being an Indian company or a person (other than a company) who is resident in India, includes any income received by the assessee from the Government of a foreign State or foreign enterprise in consideration for the use outside India of any patent, invention, design or registered trade mark 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 an amount equal to-
i) forty per cent for an assessment year beginning on the 1st day of April, 2001;
(ii) thirty per cent for an assessment year beginning on the 1st day of April, 2002;
(iii) twenty per cent for an assessment year beginning on the 1st day of April, 2003;
(iv) ten per cent for an assessment year beginning on the 1st day of April, 2004,
of the income so received in, or brought into, India, in computing the total income of the assessee and no deduction shall be allowed in respect of the assessment year beginning on the 1st day of April, 2005 and any subsequent assessment year :
Provided that such income is received in India within a period of six months from the end of the previous year, or within such further period as the competent authority may allow in this behalf:
Provided further that no deduction under this section shall be allowed unless the assessee furnishes a certificate, in the prescribed form, along with the return of income, certifying that the deduction has been correctly claimed in accordance with the provisions of this section.
Explanation.-For the purposes of this section,-
(i) “convertible foreign exchange” means foreign exchange which is for the time being treated by the Reserve Bank of India as convertible foreign exchange for the purposes of the law for the time being in force for regulating payments and dealings in foreign exchange;
(ii) “foreign enterprise” means a person who is a non-resident;
(iii) services rendered or agreed to be rendered outside India shall include services rendered from India but shall not include services rendered in India;
(iv) “competent authority” means the Reserve Bank of India or such other authority as is authorised under any law for the time being in force for regulating payments and dealings in foreign exchange.
17. Dr. Gaurishanker, Senior Counsel for the appellant (assessee) vehemently contended that the provisions of Section 80-O of the Income-tax Act will apply to the cases like the present one where the commission earned is for the supply of such information as is received by a foreign enterprise, which instead of getting the gross commission first and then remitting it back to persons like the appellant its brokerage, permits the appellant to retain amount due and remit only the net amount. It was argued that the financial and the accounting effect is the same and the mere fact that the amount is retained in India with the approval of the foreign reinsurer and the Reserve Bank of India would not take away the basic feature, that the sound of income of the appellant was the agreement with the foreign reinsurer and it is in fact received from the foreign reinsurer for services rendered. In other words, it is contended that the transaction contemplated by Section 80-O of the Income-tax Act need not necessarily be achieved by the form of external remittance followed by internal remittance and the legal nature and the effect of the transaction will remain the same when the amount is credited straight away by making adjustments instead of adopting atwo-way traffic.
18. Appellant’s counsel also brought to our notice the latest circular of the Central Board of Direct Taxes, New Delhi (Circular No. 731 dated 20.12.1995) which has in turn accepted that the receipt of brokerage by a reinsurance company is India from the gross premia before remittance to its foreign principles will also be entitled for deduction under Section 80-O of the Act.
19. On the other hand, Senior Counsel for the Revenue, contended that in order to qualify for the deduction, the amount by way of royalty, commission, etc should be received by the assessee under an agreement approved in this behalf and such income should be received in convertible foreign exchange in India. Counsel contended that the Central Board of Direct Taxes was justified in declining to approve the agreement submitted by the appellant since the income under the agreement is generated in India and is not received in convertible foreign exchange as required under Section 80-O of the Act.
DECISION OF SUPREME COURT
20. The 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 it.
The 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 reinsurer, and that the remittance that the amount due to the foreign reinsureres as also the brokerage due to the appellant and the balance due to the foreign reinsurer is remitted (and expressed so) in dollars.
It is common ground that the entire transaction effected through the media of the Reserve Bank of India is expressed in foreign exchange and in effect the retention of the fee due to the appellant is 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 reinsures 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 11.3.1986, declining to approve the agreements of the appellant with M/s Sedgwick offshore Resources Ltd. London for the purposes of section 80-O of the Income-tax Act, are improper and illegal.
We declare so, we direct the respondent to process the agreements in the light of the principles laid down by us herein above. The appeal is allowed. There shall be no order as to costs.
CONCLUSION: from above decision it is clear that if a reinsurance broker deduction it’s commission and remit balance commission to the foreign re-insurers with the permission of Reserve Bank of India adn according to the terms and conditions of an agreement with the broker and the foreign re-insurer, then commission retained by the Indian Re-insurance broker will be deemed as received from Foreign Re-insurer in convertible foreign exchange and in compliance with the provisions of Section 80-O of the Income Tax Act,1961.
DISCLAIMER: above case law is only for information and knowledge of readers. The views expressed here are the personal views of the author and same should not be taken as professional advice. In case of necessity do consult with tax professionals.
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