SECTION 80-O – ROYALTIES, ETC., FROM CERTAIN FOREIGN ENTERPRISES
601. Approval of agreement under which assessee-company receives royalty, etc., from Government of foreign State or foreign enterprise, which is eligible for deduction under the section – Guidelines therefor
CLARIFICATION 1
Attention is invited to the Board’s Circular No. 187 [F. No. 473/15/73-FTD], dated 23-12-1975 [Clarification 2] on the above subject laying down the guidelines for the grant of approval under section 80-O. The Board has had occasion to re-examine the aforesaid guidelines and it has been decided to modify the guidelines to the extent indicated below :
1. Para 3(iii ) of Circular No. 187, dated 23-12-1975 provided that the agreement should have been genuinely entered into on and after the date when the tax concession was announced by the introduction of the relevant Bill in the Lok Sabha. It has now been decided that approvals under section 80-O would not be denied on this ground. In other words, para 3(iii) of the circular, dated 23-12-1975 may be treated as deleted.
2. In para 3(ix ) of the said circular, it was mentioned that consideration for use of trademark would be outside the scope of section 80-O. It has now been decided that payments made for the use of trade marks are of the nature of royalty, and, therefore, fall within the scope of section 80-O.
3. It was also stated in para 3(ix) of the said circular that in the case of a composite agreement which specified a consolidated amount as consideration for purposes which included matters outside the scope of section 80-O, the Board may not approve such an agreement for the purposes of section 80-O if it was not possible to properly ascertain and determine the amount of the consideration relatable to the provision of the know-how or technical services, etc., qualifying for section 80-O. Thus, the benefit of section 80-O could be denied to the entire amount of royalty, commission, fees, etc., receivable under such an agreement. It has since been decided that in such cases approval would be granted by the Board subject to a suitable disallowance for the non-qualifying services, after taking into consideration the totality of the agreement, so that the balance of the royalty/fees, etc., which is for the services covered by section 80-O can be exempted.
Circular : No. 253 [F. No. 473/15/78-FTD], dated 30-4-1979.
CLARIFICATION 2
1. With the twin objectives of encouraging the export of Indian technical know-how and augmentation of the foreign exchange resources of the country, section 80-O provides for concessional tax treatment in respect of income by way of royalty, commission, fees or any similar payment received from a foreign Government or a foreign enterprise, subject to the satisfaction of certain conditions laid down in the said section.
2. One of the conditions for availability of the tax concession, under section 80-O is that the agreement should be approved by the Central Board of Direct Taxes in this behalf. The application for the approval of the agreement is required to be made to the Central Board of Direct Taxes before the 1st day of October of the assessment year in relation to which the approval is first sought. The form of application for this purpose has been standardised and a specimen is given in the Annex.
3. The object of the provision, when it was first introduced as section 85C, was stated in the Board’s Circular No. 4P (LXXVI-61) of 1966 to be to encourage Indian companies to export their technical know-how and skill abroad and augment the foreign exchange resources of the country. This was reiterated in the Board’s Circular No. 72 explaining the changes introduced by the Finance (No. 2) Act, 1971. Keeping in view the purpose behind this tax incentive and the requirements of the statutory provisions, the Board have evolved the following guidelines for the grant of such approval :
(i) An agreement which, in the opinion of the Board, is not bona fide and genuine and is a collusive arrangement for abuse of the tax concession admissible under section 80-O, will not be approved.
(ii) An agreement which is in very general or broad terms or is either vague or does not give sufficient details may not be approved.
[(iii)**
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(iv) Information concerning industrial, commercial or scientific knowledge, experience or skill made available or provided, or agreed to be made available or provided, should be information not merely of a statistical type collected or collated from commercial or scientific journals or other commonly available sources of information, but it should be information, concerning the industrial, commercial or scientific knowledge, experience or skill possessed or developed by the Indian party and which is made available or provided to the foreign party under the agreement. Information regarding trade enquiries or reports regarding the credit or trade worthiness in individual cases will not qualify for this purpose.
(v) The technical services rendered or agreed to be rendered to the foreign party should relate to productive fields such as (a) mining, or ( b) generation or distribution of electricity or any other form of power, or (c) constructional, industrial or manufacturing operations, or (d) engineering services. Services such as those relating to management, organisation, sales, finance and accounts, will not qualify for this purpose. Technical services which are rendered or to be rendered in India will also not qualify for this purpose.
(vi) Agreements for recruitment or mere supply of technical personnel from India for service outside India will not be eligible for approval.
(vii) Agreements which provide for participation in business or management operations abroad simpliciter in return for a specified percentage of commission or profit will not be eligible for approval.
(viii) Where the payment under the agreement is unreasonably excessive or is motivated by extraneous considerations, the Board may refuse to give approval in respect of the agreement.
(ix) In the case of a composite agreement specifying a consolidated amount as consideration for purposes which include matters outside the scope of section 80-O (e.g., use of trade-marks, supply of equipment, etc.) the amount of the consideration relating to the provision of technical know-how or technical services, etc., qualifying for purposes of section 80-O will have to be determined by the Income-tax Officer separately at the time of assessment after due appreciation of the relevant facts. Where, however, in the opinion of the Board, it will not be possible to properly ascertain and determine the amount of the consideration relatable to the provision of the know-how or the technical services, etc., qualifying for section 80-O, [the approval would be granted by the Board subject to suitable disallowance for the non-qualifying services, after taking into consideration the totality of the agreement, so that the balance of royalty/fees, etc., which is for the services covered by section 80-O can be exempted].
(x) In case of any change in the terms and conditions of an agreement already approved by the Board, the same should be notified to the Board for a fresh approval.
(xi) Approval is granted on the basis of facts as represented before the Board. In case of fraud or misrepresentation of the facts, etc., apart from other consequences, the Board reserves the right to revoke the order of approval. It may be pointed out that these guidelines are merely illustrative and should not be taken as exhaustive. These may be modified or supplemented in due course in the light of the different types of cases which come up for approval. Even where the agreement is bona fide and genuine, the Board may refuse approval in appropriate cases where in the opinion of the Board, grant of approval would not be in the larger public interest or where it would not further the objectives underlying the tax concession.
4. The grant of deduction from the gross total income under section 80-O is subject to fulfilling the other conditions laid down in the section in this behalf. The actual amount eligible for deduction will be determined by the Income-tax Officer at the time of assessment.
5. The retrospective amendment made by the Finance Act, 1974 may also be noted. The deduction, under section 80-O, will be admissible only with reference to the income which 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. This provision takes retrospective effect from April 1, 1968.
6. The benefit of section 80-O will, with effect from April 1, 1975, i.e., assessment year 1975-76, be available to Indian companies only, and will not be available to other assessees. Accordingly, agreements entered into by a person other than an Indian company will not be eligible for approval for the assessment year 1975-76 and onwards. Further, approval already given in respect of such agreements will cease to be operative as from April 1, 1975 and the taxpayers concerned shall not be entitled to tax relief under section 80-O in the assessments for the year 1975-76 and subsequent assessment years.
7. It would facilitate prompt disposal of applications for approval under section 80-O, if the information in the annexed proforma is furnished in triplicate, duly signed and certified to be correct by the person authorised to sign the return of income on behalf of the applicant. Relevant clauses, etc., of the agreement should be clearly indicated against the appropriate columns. Each application should also be accompanied by three copies of the agreements attested by a person authorised to do so in this behalf.
Circular : No. 187 [F. No. 433/15/78-FTD], dated 23-12-1975 as modified by Circular No. 253 [F. No. 473/15/73-FTD], dated 30-4-1979.
ANNEX – FORM OF APPLICATION FOR APPROVAL OF AGREEMENT
[To be furnished in triplicate]
1. ( i) Name and address of the applicant
( ii) Status (whether Individual/HUF/Firm/AOP /Indian Company)
( iii) Residential status (whether resident/not ordinarily resident/non-resident)
( iv) Circle where assessed to income-tax and Permanent Account Number
( v) Nature of the business carried on in India
2. Date of the agreement with the foreign party [certified true copy of the agreement to be enclosed]
[If the agreement was in fact entered into on a date earlier than that on which the agreement has been reduced to writing, please mention also such earlier date.]
3. ( a) Name and address of the foreign Government/enterprise from whom the assessee received/will receive income in respect of which deduction is claimed
( b) If assessed in India, circle where assessed and Permanent Account Number
4. Nature and location of business, if any, carried on in India by the foreign enterprise
5. Please state whether the income is received in consideration for—
(a) the use outside India of—
(i) any patent, invention, model, design, secret formula or process, or similar property right, or
(ii) information concerning industrial, commercial or scientific know-ledge, experience, or skill made available
(b) technical services rendered or agreed to be rendered outside India (Please also state the arrangements available with the applicant for rendering such technical services and the mode of rendering such services)
6. Does the agreement provide for supply of technical know-how or rendering of any services other than those covered by section 80-O (e.g., use of trade marks or supply of goods), if so, please specify them and also the amount of consideration receivable/received in respect of them
7. If the technical know-how falls under section 5(a)( i) above, please indicate :
(a) How the applicant acquired it or what arrangements he has made for acquiring it;
(b) What are the applicant’s own rights in respect thereof;
(c) Whether its provision to the other party to the agreement involves—
(i) transfer of all or any rights of the applicant in respect of it; if so, please specify the nature and extent of the right transferred and the manner of its transfer;
(ii) the imparting of any information concerning its working or use; if so, please specify the information imparted and the manner of its imparting;
(iii) its use by the other person to the agreement; if so, please specify the nature and manner of the use
8. If the technical know-how falls under section 5(a)( ii) above, please specify—
(a) the arrangements available with the applicant for obtaining and imparting it;
(b) the manner of imparting it
9. Has the applicant made any agreement or arrangement with any other person, in India or abroad, for obtaining the technical know-how, etc., to be provided under this agreement or for rendering technical services? If so, please give the following information :
(a) the name and address of such other person;
(b) details of the agreement or arrangement together with a certified copy of the written agreement, if any;
(c) the nature and extent of applicant’s relationship and association with such other person
10. Please state the nature of the income in respect of which deduction is claimed, viz.,
– Royalty
– Commission
– Fees
– Any similar payment
11. Please indicate the portion/amount (along with its computation) which is eligible for deduction under section 80-O of the Act
12. Please state the terms and mode of payment for supply of technical know-how, services, etc.
13. State the extent of interest, if any, which the Indian party (including its directors/partners) has in the foreign enterprise, either directly or indirectly
14. Has the Indian party any other agreement (for trade, technical collaboration or rendering service or for any other purpose) with the foreign party at 3 above; if so, copies should be furnished. Did the Indian party have any such agreement with the foreign party in the past; if so, copies should be furnished
15. Is the agreement under consideration, in renewal, extension, modification or substitution of any earlier agreement; if so, copies of the earlier agreement should be furnished
16. Please give particulars of any previous application for approval of the same or similar agreement with the foreign party at 3 above or any other foreign party :
(a) date of agreement;
(b) result of application (enclose copy of letter of approval/rejection)
17. (i) First assessment year in respect of which the approval of the Board is applied for and the subsequent assessment years for which the approval is desired to be operative;
(ii) Previous year ended;
(iii) Method of accounting followed in respect of income under this agreement.
18. Did the applicant provide similar technical know-how or render similar technical services as under the present agreement to any other person?
If so, please give brief particulars thereof, also indicating whether the agreement(s) in respect thereof was/were approved by the Central Government/Central Board of Direct Taxes.
19. Any other information which the applicant considers relevant.
Certified that the information furnished herein is true and correct to the best of my knowledge and belief.
Place………………………
………………………………………
Date………………………
Signature
Note : Please indicate the relevant clauses, etc., of the agreement in reply to the questions.
JUDICIAL ANALYSIS
EXPLAINED IN – The abovesaid circular was explained in Continental Construction Ltd. v. CIT [1992]195 ITR 81 (SC), with the following observations :
“It is thus clear that the Board has chalked out for itself, we think quite legitimately and properly, a very detailed and dominant rule as to the availability of exemptions under section 80-O. The guidelines are of general nature, fully sanctioned by the provisions of section 119(1) of the Act and, being instructions enuring to the benefit of the assessee, cannot be gone back upon by the Departmental Officers subordinate to the Board, particularly in a case where no steps have been taken—or even suggested as necessary to be taken—to cancel or revoke the approval already accorded. This is, indeed, a proposition well settled by a series of judicial decisions starting from Navnit Lal C. Jhaveri’s case [1965] 56 ITR 198 (SC)….” (pp. 132-133)
EXPLAINED IN – In Continental Construction Ltd. v. CIT [1990] 185 ITR 178 (Delhi) [affirmed by S.C. in [1992] 195 ITR 81], the said circular was explained with the following observations :
“According to the guidelines laid down by the Board and which are contained in the aforesaid circulars, it is clear that a composite agreement is not excluded from the benefit of section 80-O of the Act. Whereas the earlier Circular No. 187 had, inter alila provided that where it was not possible to properly ascertain or determine the amount of consideration relatable to the provisions of know-how or technical services, the Board would not, in such a case, approve the agreement under section 80-O but, in the latter Circular No. 253, it has been provided that even in such cases, approval would be granted ‘subject to a suitable dis- allowance for the non-qualifying services after taking into consideration the totality of the agreement, so that the balance of the royalty/fees, etc., which is for the services covered by section 80-O can be exempted’. According to these circulars, a composite agreement can be split and that slice which falls under section 80-O can be given the benefit of the said provision.
Both the Circulars Nos. 187 and 253 contemplated income from a part of a composite agreement being eligible for deduction under section 80-O of the Act. The difference between the two circulars is that whereas in the first circular it was provided that if it was not possible to properly ascertain and determine the amount of the consideration, then approval was not to be granted. This meant that there was to be, for the determination of the consideration relatable to the provision for know-how, no approximation or guess work. The consideration had to be properly ascertainable and determinable. The later Circular No. 253, however, provided that approval would be granted even if it was not possible to properly ascertain or determine the amount of the consideration. By providing that there would now be suitable disallowance for non-qualifying services by taking into consideration the totality of the agreement, the Board indicated that a certain amount of estimation was permissible. In income-tax law, it is well recognised, for example, when the books of account are rejected, that profits or income which may be subject to tax may have to be estimated. A similar principle seems to have been incorporated in the later Circular No. 253. It is, however, pertinent to note that in the later Circular No. 253 it is clearly provided that what would be entitled for disallowance is the “balance of the royalty, fees, etc.”. In other words, the amount which is allowable is to be in the nature of royalty and fee and not anything else. This is in consonance with the provisions of section 80-O. To put it differently, even the approximate figure out of a consolidated amount of consideration mentioned in a composite agreement which is to be allowed as deduction under section 80-O has to be in the nature of royalty, fee or commission and not anything else.
The important question, however, is, what is “a composite agreement” as understood by the Board in its Circular No. 187 and Circular No. 253 ? Paragraph 3(ix) refers to that type of “a composite agreement specifying a consolidated amount as consideration for purposes which include matters outside the scope of section 80-O (e.g., use of trade marks, supply of equipment, etc.)…” (emphasis added). This part of paragraph 3(ix) indicates the type of a composite agreement to which the two circulars were referring. The said circulars were not referring to a composite agreement providing for the execution of a turnkey project but the composite agreement referred to was one where some of the provisions of the agreement, which fall under section 80-O, could be separated from the other provisions, for example, the use of trade marks, supply of equipment, etc. This is in consonance with the form of the application for approval which, inter alia, requires an applicant to give an answer to the following query :
‘6. Does the agreement provide for supply of technical know-how or rendering of any services other than those covered by section 80-O (e.g., use of trade mark or supply of goods), if so, please specify them and also the amount of consideration receivable/received in respect of them.’
The composite agreement which is, therefore, referred to in the two circulars is such which provides for making available or giving materials, etc., by the Indian company in addition to providing for information, etc., contemplated by section 80-O. The two circulars do not in any way refer to the execution of a turnkey project as being covered by the provisions of section 80-O. (pp. 201-203)
The type of composite agreement which was referred to in the aforesaid circulars of the Board was where there was supply of commodities and things as well as technical know-how, some of which was covered by section 80-O and for which the amount of royalty, commission or fee was ascertainable. The circulars did not contemplate a composite agreement of a type which involved the execution of a project like constructing a dam or water works where it is impossible to determine from the agreement itself the consideration relating to matters falling within the scope of section 80-O. The said circulars contemplated a situation where a consolidated amount was payable and it would be easy to determine the value of matters outside the scope of section 80-O and exclude the same from the total consideration payable and the resultant figure would be regarded as relating to matters falling within the scope of section 80-O.” (p. 204)
EXPLAINED IN – In Blue Star Ltd. v. CBDT [1993] 67 Taxman 430 (Bom.), the abovesaid circular was explained with the following observation :
“In the case of composite agreements, the Board originally issued Circular No. 187 dated 23-12-1975. That circular has been modified by a Circular No. 253 dated 30-4-1979. In the circular of 30-4-1979, paragraph 3, inter alia, deals with a composite agreement in which a consolidated amount is mentioned as consideration which may include matters outside the scope of section 80-O. Under the previous circular it had been stated that the Board may not approve such an agreement for the purposes of section 80-O if it was not possible to properly ascertain and determine the amount of the consideration relatable to the provision of the know-how or technical services, etc., qualifying under section 80-O. The circular of 30-4-1979, however, sets out at p. 566 state that ‘It has since been decided that in such cases approval would be granted by the Board subject to a suitable disallowance for the non-qualifying services, after taking into consideration the totality of the agreement, so that the balance of the royalty/fees, etc., which is for the services covered by section 80-O, can be exempted’.
This circular has been approved by the Supreme Court in the case of Continental Construction Ltd. v. CIT [1992] 195 ITR 81/60 Taxman 429 (at page 132) and the Supreme Court has said that, …. the Board has chalked out for itself, we think quite legitimately and properly, a very detailed and dominant rule as to the availability of exemptions under section 80-O…., while granting the approval under section 80-O, the Board has not only the jurisdiction but also the responsibility of examining the agreement submitted for approval from all angles relevant to the deduction provided for under section 80-O and that it is not competent to the Department to question the maintainability of the claim for deduction under section 80-O in respect of the aspects gone into and decided upon by the Board. The Supreme Court has also made it clear that this does not deprive the Assessing Officer of all functions while making the assessment on the applicant. The officer has to satisfy himself (i) that the amounts in respect of which the relief is claimed are amounts arrived at in accordance with the formula, principle or basis explained in the assessee’s application and approved by the Board; (ii) that the deduction claimed in the relevant assessment year relates to the items, and is referable to the basis, on which the application for exemption was asked for and granted by the Board. The second of these functions is, particularly important as the approval for exemption granted in principle has to be translated into concrete figures for the purposes of each assessment.”
REFERRED TO – The above circular dated 23-12-1975 was referred to in M.N. Dastur & Co. Ltd. v. DCIT [1992] 40 ITD 521 (Cal. – Trib.), with the following observations :
“9. The twin objectives of the provisions of section 80-O are ‘encouraging the export of Indian technical know-how and augmentation of foreign exchange resources’. This is admitted in Circular No. 187 of CBDT, dated December 23, 1975. The provisions of section therefore cannot be construed in a manner which would defeat the purpose and intention of the legislature. A rational construction must give effect to legislative intent. Thus in a given case when both the objectives are satisfied, the deduction should be allowed subject of course to the provision of section 80AB. Thus, considered from any angle, the deduction has to be allowed on the income brought into India in the shape of convertible foreign exchange without taking into account expenses incurred in India. . . . .” (p. 527)
EXPLAINED IN – CBDT v. Oberoi Hotels (India) (P.) Ltd. [1988] 97 Taxman 453 (SC) with the observations that in view of the judgment of the Supreme Court in Continental Construction Ltd. case Circular No. 187, dated 23-12-1975 of the CBDT may perhaps require certain changes so as it to be in conformity with section 80-O.
