J U D G M E N T PARIPOORNAN, J.
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. The short matter that the arises for consideration in this appeal is the interpretation to be places on Section 80-0 of the Income-tax Act, 1961. 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. The respondent is the Central Board of Direct Taxes, Government of India, New Delhi. 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. 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. 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. 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. 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. 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. 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". 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. 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. 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 80-0 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, hows the following details :-
Remittance Statement for the period :1-12-1983 to 10-1-1984 "FACULTATIVE SECTION"
(M/S. SEDGWICK OFFSHORE RESOURCES LTD) BALANCE OF ACCOUNT BROKERAGE DEBIT CREDIT DEBIT CREDIT Ref. PARTICULARS U.S.$ U.S.$ U.S.$ U.S.$ UNITED INDIA INSURANCE CO. LTD.
9-1-84 Facultative Reinsurance A/c. Oil and Natural Gas Commission Offshore Activities Package Policy -
Period -
1-8-1982 to 31-1-1984 -
6 the final instalment of Premium due on 1-11-83 as per Closing Particular No. MH/ONGC/23/82 dated 3-1-1984.
9-1-84 Facultative Reinsurance A/c Oil and Natural Gas Commission Offshore Activities Package Policy Terrorist Cover Period: 1-12-1983 to 10-1-1984.
"FACULTATIVE SECTION"
(M/S. SEDGWICK OFFSHORE RESOURCES LTD.) BALANCE OF ACCOUNT BROKERAGE DEBIT CREDIT DEBIT CREDIT Ref. PARTICULARS U.S.$ U.S.$ U.S.$ U.S.$ UNITED INDIA INSURANCE CO. LTD.
Period:-
1-8-1982 to 31-1-1984-
6th and final Instalment of Premium due on 1-11-83 as per Closing Particular No. MH/ONGC/22/82 dated 3-1-1984. 24,474.08 760,85 9-1-84 Facultative Reinsurance A/c Oil and Natural Gas Commission Offshore Activit ies Package Policy -1st and 2nd Layers 6th and final Instalment of Premium due on 1-11-83 as per Closing Particular No. MH/ONGC/21/82 dated 3-1-1984. 148,750.00 9,375.00 1,060,891.68 71,004.48 Balance.. 1,060,891..68 71,004.48
--------------------------------------------- 1,060,891.68 1,060,891.68 71,004.48 71,004.48 ============================================= Balance due to You U.S.S 1,060,891.68 Less:- Brokerage due by you U.S.S 71,004.48
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Net Balance due to you U.S.S. 989,887.20
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================== (Emphasis supplied) By communication dated 11.3.1986, the respondent regretted their inability to approve the agreement submitted by the appellant for the purposes of Section 80-0 of the Income-tax Act for the reason "that income under the agreement is generated in India and is not received in convertible foreign exchange as required under the provisions of section 80-0". The communications in that regardare evidenced by Annexure-C series dated 11.3.1986. It is further seen that the steps taken by the appellant to review the Annexure-C proceedings were futile videAnnexure D. It is thereafter, the appellant moved the High Court of Delhi in Civil Writ No. 3086 of 1987. A Bench of the High Court of Delhi by order dated 29.10.1987, dismissed the said writ petition, stating thus :
...... The case of the petitioners is that they had to remit about one million dollars in consideration of certain services which they had conducted on behalf of the foreign company and by way of their fees, they retained the foreign exchange worth six lakhs and, therefore, they submit that if falls within the expression 'such income received in convertible foreign exchange in India". We are afraid, we do not agree with the submission of the learned Counsel for the petitioner. To attract this section, the assessee must receive convertible foreign exchange from abroad. By retaining their fees they are not receiving any foreign convertible foreign exchange. We find no merit in the petition and the same is accordingly dismissed."
(Emphasis supplied) It is therefore, the appellant has filed the above appeal from the judgment of the Delhi High Court.
2. The short question that arises for our consideration is the interpretation to be placed on Section 80-0 of the Income-tax Act.
"80-0 Deduction in respect of royalties, etc., from certain foreign enterprises :-
Where the gross total income of an assessee, being an Indian company, includes any income by way of royalty, commission, fees or any similar payment received by the assessee from the Government of a foreign State or a foreign enterprise in consideration for the use outside India of any patent, the use outside India of any patent, invention, model, design, secret formula or process, or similar property right, or information concerning industrial, commercial or scientific knowledge, experience or skill made available or provided to such Government or enterprise by the assessee, or in consideration of technical services rendered or agreed to be rendered outside India to such Government or enterprise by the assessee, under an agreement approved in this behalf by the Chief Commissioner or the Director General; and such income is received in convertible foreign exchange in 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 an subject to the provisions of this section a deduction of an amount equal to fifty per cent of the income so received in, or brought into, India, in computing the total income of the assessee. Provided that the application for the approval of the agreement referred to in this section is made to the Chief Commissioner, or as the case may be, the Director General in the prescribed manner before the 1st day of October of the assessment year in relation to which the approval is first sought :
XXX XXX XXX XXX Explanation -- For the purpose 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." (Emphasis supplied)
3. 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. 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 80-0 of the Income-tax Act ?
4. Provision similar to Section 80-0 of the Act were originally available in the former Section 85 of the Income tax Act, 1961. While moving the bill relevant to the Finance Act No. 2 of 1967, the then Finance Minister highlighted the fact that fiscal encouragement need to be given to Indian industries to encourage them to provide technical know-how and technical services to newly developing countries. It is also seen that the objective was to encourage Indian companies to develop technical know-how and to make it available to foreign companies so as to augment the foreign exchange earnings of this country and establish a reputation of Indian technical know-how for foreign countries. The objective was to secure that the deduction under the Section shall be allowed with reference to the income which is received in convertible foreign exchange in India or having been received in convertible foreign exchange outside India, is brought to India by and on behalf of taxpayers in accordance with the Foreign Regulations. So also, any income used by the Reserve Bank of India, shall be deemed to have been brought into India in accordance with the Foreign Exchange Regulations on the date on which such permission was given. This is evident from the Circular of Central Board of Direct Taxes, New Delhi (Circular No. 138 dated 17.06.1974) which is available at pages 9 to 11 of the paperbook.
5. Dr. Gaurishanker, Senior Counsel for the appellant (assessee) vehemently contended that the provisions of Section 80-0 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 80-0 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. 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 80-0 of the Act. On the other hand, Senior Counsel for the Revenue, Sri Section 80-0 of the Act and 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 80-0 of the Act.
6. Counsel for the Revenue brought to our notice the decision in Patron Engineering Construction P.Ltd. and Another v. Central Board of Direct Taxes and Others, 175 I.T.R. 523, and contended that the income must be directly received by the assessee - the Indian company, and if it is not so directly received, any other substitute arrangement which may have the effect of receipt by the assessee is of no avail. In the said case, the question that arose for consideration was, whether an Indian company doing business or having a branch or establishment in a foreign country can be called a "foreign enterprise", and the question was answered in the negative. It was held that the words "foreign enterprise" occurring in Section 80-0 of the Act do not include foreign branch of Indian company. In the said case, the impact of the words "received by an assessee from the Government of a foreign state or foreign enterprise" occurring in Section 80-0 did not arise for consideration nor was considered. The facts of the said case are distinguishable.
7. Circular No. 731 dated 20.12.1995 promulgated by the respondent filed as Annexure-B (page 8 of the supplementary paperbook) is relevant and affords guidance in understanding the purport of Section 80-0 of the Act :
Section 80-0 of the Income-tax Act, 1961 Deduction - Royalties, etc, from receipt of brokerage by reinsurance agent, operating in India on behalf of principals abroad, from gross premia before remittance to his foreign principals.
CIRCULAR NO. 731, DATED 20-12-1995
1. Under the provisions of section 80-0 of the Income-tax Act, 1961 an Indian company or a non-corporate assessee, who is resident in India is entitled to a deduction of fifty per cent of the income received by way of royalty, commission, fees, etc. from foreign Government or foreign enterprise for the use outside India of any patent, invention, model design, secret formula or process, etc., or in consideration of technical or professional services rendered by the resident. The deduction is available if such income is received in India in convertible foreign exchange, or having exchange outside India, is brought in by or on behalf of the Indian company or aforementioned assessee in accordance with relevant provisions of Foreign Exchange Regulation Act, 1973 for the time being in force.
2. Reinsurance brokers, operating in India on behalf of principles abroad, are required to collect the reinsurance premia from ceding insurance companies in India and remit the same to their principals. In such cases, brokerage can be paid either by allowing brokers to deduct their brokerage out of the gross premia collected from Indian insurance overseas or they could simply remit the gross premia and get back their brokerage in the form of remittance through banking channels.
3. The Reserve Bank of India have expressed the view that since the principle underlying both the transactions is the same, there is no difference between the two modes of brokerage payment. In fact, the former method is administratively more convenient and the reinsurance brokers had been following this method till 1987 when they switched over to the second method to avail of deduction under section 80-0 of the Act.
4. The matter has been examined. The condition for deduction under section 80-0 is that the receipt should be in convertible foreign exchange. When the commission is remitted abroad, it should be in a currency that is regarded as convertible foreign exchange according to FERA. Board are of view that in such cases the receipt of brokerage by a reinsurance agent in India from the gross premia before remittance to his foreign principles will also be entitled to the deduction under the section 80- 0 of the Act.
(Emphasis supplied) The said circular which seeks to declare and clarify the real scope and impact of Section 80-0 of the Act, is certainly binding on the respondent which issued it.
8. 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 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 80-0 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.