Assessee not eligible for deduction u/s. 80RRA if the technical services provided by the assessee are not approved by the Govt.

ITAT Mumbai

I.T.A. No.: 6242/Mum/2009

Assessment Year: 2002- 03
&

I.T.A. No.: 6243/Mum/2009

Assessment Year: 2004- 05

ORDER

Per T.R. Sood (AM):

These appeals filed by the assessee are directed against the order dated 18.09.2009 of Commissioner of Income Tax (Appeals)-32, Mumbai and relates to the assessment years 2002-03 and 2004-05.

2. In both these appeals identical grounds have been raised through which the following two disputes have been raised:-

“1. Confirmation of the rejection of the claim of deduction u/s. 80RRA of Rs. 8,48, 155/-.

2. Rejection of the alternate claim of deductions u/s. 80(0).”

3. After hearing both the parties we find that assessee who is an Electronic Engineer and expert in Lazer Technology has rendered some technical services to the foreign parties and claimed deduction u/s.80 RRA. The deduction was denied by the AO because assessee had not fulfilled the condition as per section 80 RRA, sub section (2), clause (ii).

4. The assessee had also claimed alternate deduction u/s. 80-O. This was also denied because the services provided by assessee did not fall in the categories of patent, invention, design or registered trade-mark as envisaged by section 80-0.

5.  On appeal, the learned CIT (Appeals) observed that in earlier years question of deduction u/s.80-0 was set aside by the Tribunal and, therefore, the same was open and he made detailed examination of the same. In respect of claim for deduction u/s.80 RRA it was observed that since there was a requirement for approval of the terms and conditions of services provided outside India, and since no such approval was granted, the assessee was not eligible for deduction u/s.80 RRA in respect of deduction u/s. 80-0. He decided the issue against the assesee vide para 5.7 to 5.9 of CIT(Appeals) order which is as under :-

“5.7 If we read Sec. 80-0 in contradistinction to Sec. 80RRA, it is apparent that deduction u/s.80-0 is not available to just any technician. The heading of Sec. 80-0 is “Deduction in respect of royalties, etc., from certain foreign enterprises” as against heading in the case of Sec. 80RRA which is “Deduction in respect of remuneration received for services rendered outside India.”

5.8 From the plain reading of the respective sections, it is clear that deduction u/s. 80 0 is only in respect of royalty and such royalties are receivable in respect of patent, invention, design or registered trade­mark. The tax incentive u/s. 80-0 is contemplated to encourage the export of Indian know-how and skills abroad. This incentive was to encourage them to exploit their patent rights, trademark and technical know-how abroad. It is not meant merely to sell their technique as technical know-how, which is the case for availing deduction u/s.8ORRA. In other words, deduction u/s. 80-0 is available for export of much higher skills which can quality as a design or even better an invention, or they should be capable of being patented or registered as trade-marks. It is not available for ordinary export of skills.

5.9 Having said so, it is now important to examine the operations of the appellant to determine whether these would fall within the structure provided for claiming the deduction 80-0. when the Ld. AR of the appellant was asked to give the details of activities of the appellant it was stated that the appellant is an individual who is a qualified Electronics Engineer specialising in laser technology. As per the appellant’s own admission given in the statement of facts filed along with the appeal, the appellant has been rendering technical service to his local as well as foreign enterprises. The appellant claims to have received remuneration from foreign enterprises in lieu of technical services for innovative ideas given to his customers. When the Ld. AR was probed further to note the exact nature of the activity, my attention was drawn to page 15 of the paper book which is copy of an invoice NO.LAS/ 10810, which describes the receipt of US$ 4550 as “charges for technical consultancy in software, hardware, laser optics and other related development work.”

6. Before us the learned counsel of the assesee submitted that approval was refused mainly because assessee had not travelled outside India. Then he referred to the decision of Honourable Bombay High Court in case of Taru Jethmal Lalvani Vs. Secretary, Ministry of Finance [1990] 185 ITR 0418, wherein it was observed that there was no condition for travelling abroad and, therefore, assessee was entitle to deduction u/s. 80RRA.

7. In any case, in the alternative assessee was entitled for deduction u/s. 80 0 because assessee was a qualified engineer and an expert in laser technology and had provided following services:-

“1. Tropicallising of electronic circuitry.

2. Developed software which led to controlling loss of material, especially because the raw materials used were diamonds.

3. By applying new ideas and subsequent implementation of optical changes which led to narrowing down the laser beam.

4. He made drastic changes in the technology in coiling of lasers which helped in saving a lot of electric power consumed by the laser machines.

5. He re-routed the electric connections into three areas of importance and used low power UP sec to protect the equipment and saved a lot in maintenance cost.”

8. He submitted that even when a design was supplied, the same was held to be eligible for deduction u/s.80-0. In this regard, he refereed to Honourable Bombay High Court in case of CIT vs. Charles M. Correa [2010] 323 ITR 174, wherein deduction u/s. 80-0 was held to be liable even to as Architecture for providing technical services. Similarly, deduction was held to be liable by Chennai bench of the Tribunal in case of On track Systems Ltd. vs. ACIT [2007] 108 ITD 279, where assessee was a Computer Engineer and had approval of services for designing web sides.

9. On the other hand, learned DR submitted that as per page 1 and 2 of the paper book assessee’s application for approval of terms and conditions of the services for the purpose of the name u/s. 80RRA has already being rejected by Government of India. As per clause (ii), sub section (2) there is specific requirement that such services should be approved and in the absence of approval deduction u/s.80 RRA has been rightly denied by the learned CIT (Appeals). He further referred to section 80-0 and submitted that the provision for deduction envisaged is in the nature of royalty or where assessee is owner of some kind of intellectual property, whereas assessee has only given software and other technical services as mentioned in para 5.9 of the learned CIT (Appeals) order.

10. We have considered the rival submission carefully. As far as the claim of deduction 80 RRA is concerned the relevant portions of the section reads as under:-

“80RRA (1) Where the gross total income of an individual who is a citizen of India includes any remuneration received by him in foreign currency from any employer (being a foreign employer or an Indian concern) for any service rendered by him outside India, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the individual, [a deduction from such remuneration of an amount equal to –

(i) sixty per cent of such remuneration for an assessment year beginning on the 1^st day of April, 2001:

(ii) forty~five per cent of such remuneration for an assessment year beginning on the 1^st day of April, 2002.

(iii) Thirty per cent of such remuneration for an assessment year beginning on the ^1st day of April,2003.

(iv) fifteen per cent of such remuneration for an assessment year beginning on the 1^st day of April,2004.

As is brought into India by, or on behalf of, the assessee in convertible foreign exchange 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 and no deduction shall be allowed in respect of the assessment year beginning on the 1^st day of April, 2005 and any subsequent assessment year]:

(2) The deduction under this section shall be allowed‑

(3) (i) in the case of an individual who is or was, immediately before undertaking such service in the employment of the Central Government or any State Government, only if such service is sponsored by the Central Government;

(ii) in the case of any other individual, only if he is a technician and the terms and conditions of his service outside India are approved in this behalf by the Central Government or the prescribed authority.”

Thus it is clear that as per clause (ii), sub section (2) in case of an assessee who was not an employee of Central Government or State Government, then his technical services has to be approved by the Central Government. Admittedly such service where not approved and this fact further become clear from the letter dated 07.06.2005 issued by Minister of Finance, Department of Revenue, Central Board of Direct Taxes, through which approval was refused.

11. The contention of the learned counsel of the assessee is that such refusal was made because assessee had not travelled abroad and Honourable Bombay High Court had already held that no such foreign travel is required for the purpose of deduction u/s. 80 RRA, sounds attracted. The careful pursuance of this judgement shows that in case of Taru Jethmal Lalvani vs. Secretary, Ministry of Finance (Supra), the assessee had moved the Honourable Bombay High Court by way of writ petition against the refusal of grant of permission of the services and Honourable Bombay High Court had quashed the refusal. This could be done because Honourable High Court has writ jurisdiction and Tribunal has no such power to interfere in the administrative actions taken by the Central Board of Direct Taxes. If the approvals of the technical services have not been granted, obviously then assessee is not entitled for deduction u/s.80RRA. The Tribunal cannot go beyond its scope to hold that CBDT was not correct in refusing the permission for which assessee could have taken appropriate steps before the Honourable High Court. In the light of this discussion we are of the view that assessee is not entitle for deduction u/s.

80 RRA.

12. As far as deduction u/s.80 – 0 is concerned it reads as under:-

“Deduction in respect of royalties, etc. from certain foreign enterprises.

80-0 [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 oustside 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 -“

From the above it becomes clear that unless and until some kind of intellectual property has been used, this deduction is not available. This concept further becomes clear from the decision of Hon’ble Bombay High Court in case of CIT vs. Charles M. Correa (supra), the following paras are relevant : –

“The issue before the court is as to whether the assessee had fulfilled the conditions specified in section 80-0. During the previous year relevant to the assessment year in question, the assessee had two contracts – the first relating to the development of a new Brain and Cognitive Centre for Massachusetts Institute of Technology and the second in respect of the Ismaili Centre, Toronto. Under the first contract in which the assessee was described as an associate architect, the assessee had to provide architectural and design services primarily in schematic and design development phases. Under the second contract where the assessee was described as a consultant, the assessee was required to assist the architect with the design for the construction of the project. In the present case, as the facts before the court would show that it has not been disputed that the assessee did as a matter of fact provide the designs. Nor is it disputed that the designs provided by the assessee were used outside India. Moreover, it is an admitted position that income in convertible foreign exchange was received by the assessee in India.

Section 80-0, inter alia, contains the following requirements :

(i) the gross total income of the assessee, being an Indian company or a person resident in India must include any income received by the assessee from the Government of a foreign state or a foreign enterprise ;

(ii) the income must be received in consideration of the use outside India of any patent, invention, design or registered trademark; and

(iii) such income must be received in consideration of the use outside India of any patent, invention, design or registered trademark; and

(iii) such income must be received in convertible foreign exchange in India or having been received in convertible foreign exchange outside India must be brought into India, by or on behalf of the assessee, in accordance with any law for the time being in force regulating payments and dealings in foreign exchange. The deduction that is allowed is in terms of the provisions of section 80-0, and varies From the question of law that has been framed by the Revenue, it appears that the contention is that the assessee was providing professional services and could not be regarded as the owner of intellectual property. There is no merit in the submission. The income in respect of which a deduction is claimed under section 80-0 was not income, generally speaking received for rendering professional services outside India. The income which was received was specifically in consideration for use outside India of the designs which were supplied by the assessee. For the purposes of section 80-0, use that is made outside India may be single or multiple use, which may vary upon the facts and circumstances of each case. So long as the use has taken place outside India and the payment which is received in convertible foreign exchange ins in India for the use of intellectual property of the stated description outside India, the benefit of the deduction would have to be granted. The assessee had prepared designs in India and had supplied them to its foreign counterpart outside India in pursuance of the contracts noted earlier. Explanation (iii) to section 80-0 clarifies that services rendered or agreed to be rendered outside India would include services rendered from India but not to include services rendered in India. There is no dispute about the fact that the designs were supplied and used outside India. All the conditions requisite for an exemption under section 80-0 were fulfilled.”

From the above it is clear that even in case of Architecture who has provided designing services may be eligible for deduction u/s. 80-O.

13. In the case before us, assessee has not supplied any design or not used any intellectual property. The learned counsel had emphasised that assessee had provided technical know how but there is nothing on record to show that assessee was in possession of any technical know how. Nature of services provided has been noted by the learned CIT (Appeals) from the invoices which is as under :-

“charges for technical consultancy in software, hardware, laser optics and other related development work.”

This shows that assessee was merely providing technical services or some kind of software for which deduction is not available u/s. 80-O. Therefore, in case of On track Systems Ltd. (supra) also, the fact was that assessee had provided services of designing the website that is why deduction was held to be allowable. But in the case before us services was not provided in designing to his customers.