1. This judgment will dispose of Civil Writ Petition No. 46 of 1979 also as the agreements in the two cases are identical. The questionfor decision raised in these two petitions is whether the agreements in question satisfy the requirements of Section 80-O of the I.T. Act, 1961.
2. The petitioner-company entered into an agreement on the 16th day of January, 1971, with M/s. G. L. Restaurants Ltd. having its registered office at 79/81, Mortimer Street, in the county of London. Some of the relevant clauses of the said agreement are as follows :
'(1) One of the objects of the Indian company is to act as managers and consultants to companies and other business concerns and undertakings engaged in any of the business of hotel, restaurant, cafe, tavern, refreshment room and lodging-house keepers especially outside India.
(3) Mr. Ghat and Mr. Lamba in their own right are experienced in the successful management of catering establishments in India and abroad.
(4) The English company. Mr. Ghai and Mr. Lamba and an Indian partnership firm by the name of Kwality Restaurant and Ice Cream Co. have been working an agreement since the year one thousand nine hundred and sixty-six in the running of Gaylord Restaurant in London on the understanding that the management of the English company would be under the overall supervision of Mr. Ghai and Mr. Lamba together with Mrs. Kaul.
(7) The Indian company is agreeable to and capable of rendering assistance in the running of restaurants and making available technical know-how for that purpose and the English company is interested in availing such assistance and utilising such technical know-how which is at the disposal of the Indian company.
(8) The English company in consideration of the Indian company having agreed to assist the English company in the manner mentioned hereinbefore and in view of the Indian company having agreed to place at the disposal of the English company services of its directors, Mr. Ghai and Lamba, on a part-time basis has agreed with the Indian company to pay to the Indian company certain of its profits and to reimburse the Indian company, Mr. Ghai and Mr. Lamba for the expenses incurred while performing their duties towards the English company.
(10) It is intended that the Indian company will be authorised to nominate two directors on the board of directors of the English company and that for the time being Mr. Ghai and Mr. Lamba shall be such directors and on the death or retirement of either of- thorn an alternative director shall only be appointed by agreement with the remainder of the Board.
3. NOW THIS AGREEMENT WITNESSETH as follows :--
4. For the consideration aforesaid and in consideration of these presents and the agreement hereinbefore contained the English company, the Indian company and Mr. Ghai and Mr. Lamba for themselves and on behalf of the Indian company hereby mutually agree as follows:
1. The Indian company and/or Mr, Ghai and Lamba will use their best endeavors and their experience and expertise to promote and establish the English company in accordance with its memorandum and articles of association and in order to carry out their duties to the best advantage. Mr. Ghai and Mr. Lamba (or such substitutes as shall be nominated by the Indian company with the consent of Mrs. Kaul) together with, Mrs. Kaul shall have such powers and authority as shall be agreed from time to time including sole authority and final decision in all matters of major policy of the English company. In the absence of Mr. Ghai and Mr. Lamba, Mrs. Kaul shall exercise, management of the English company except in respect of major policy decisions which shall only be made in concurrence with Mr. Ghai and Mr. Lamba.
3. In return for the services rendered and to be rendered by the Indian company and Mr. Ghai and Mr. Lamba, the Indian company shall in every year bo entitled to twenty-five per cent. (25%) of the annual net profits of the English company (after charging the salary of the then secretary for the time being but before any directors' remuneration or appropriation of profits) payment to be made in the manner hereinafter set out.
4. In addition the Indian company shall be entitled to twenty-five per cent. (25%) of all net capital profits arising for the benefit of the English company including any surplus arising on a winding up (except a winding up for the purpose of reconstruction) of the English company, the payment to be made as and when such capital profits are distributed by the English company.
11. No employees shall bo seconded to the English company from India unless previously approved by Mrs. Kaul.
13. No director of either company, Mr. Ghai, Mr. Lamba nor Mrs, Kaul, shall be interested in England in any business competing or likely to compete with the English company and any further restaurants shall be joint ventures by the parties hereto. '
5. The total number of shares floated by M/s. G. L. Restaurants P. Ltd., London, is 20,000 and out of these 20,000 shares, 6,400 shares are held by the petitioner-company.
6. The petitioner-company along with its letter dated September 21, 1972, addressed to the Central Board of Direct Taxes submitted an application on the prescribed pro forma along with a copy of the agreement for rendering technical services with G. L, Restaurants P. Ltd., London, for approval of the agreement under Section 80-O of the I.T. Act, 1961. While giving details of technical services rendered or agreed to be rendered outside India by the petitioner-company, the petitioner-company stated 'Technical Collaboration & Management of the Gaylord (India) Restaurant, 79-81, Mortimer Sheet, London W-1.' The nature of income in respect of whichthe deduction was claimed was stated to be the share of profits and dividends on shares held by the Reserve Bank license. After hearing the petitioner-company, the Central Board of Direct Taxes, respondent No. 1 herein, refused to accord approval to the agreement in question. The reasons for the said refusal are stated in the letter of respondent No. 1 dated 15th April, 1974, The said letter is as follows :
'I am directed to refer to your letter No. GHL/74/38 dated the 25th January, 1974, on the above subject and to state that the Board had regretted their inability to approve the above agreement under Section 80-O of the I.T. Act, 1961, because it is with a foreign enterprise which is a joint venture and the agreement cannot be said to be on a principal to principal basis. Further, the services to be rendered are not those contemplated under Section 80-O of the Act.
2. As the capital investment of the Indian enterprise in the foreign enterprise is with a view, as per their admission, to prevent their being excluded from having a say in the restaurant after it started functioning, approval under Section 80N of the Income-tax Act could also not be granted.'
7. It is against this order that the present petition was filed by the petitioner-company.
8. We had an occasion to analyze the provisions of Section 80-O of the I.T. Act, in Civil Writ Petition No. 901 of 1975 decided by us on January 17, 1979 [J.K. (Bombay) Ltd. v. CBDT : 118ITR312(Delhi) . After considering the entire scheme of Section 80-O, it was held in that case that the significant features of Section 80-O were as follows (p. 316):
'(1) The provision of deduction applies only to royalty, commission, fees or any similar payment. These payments are received by a company either for supplying information or for rendering technical services. This postulates that the Indian company does not become a part of the foreign enterprise. If the two merge together then the identity of the Indian company would be lost and what would be paid would be not royalty or commission or fees, but rather a share in the profits.
(2) The identity of the Indian company being distinct from that of the foreign enterprise, the Indian company must not run the foreign company. If it does so, it is difficult to separate the management function exercised by the Indian company from the day to day working of the foreign company.'
9. Applying the test laid down in the aforesaid judgment there is no escape from the proposition that the agreement in question is nothing but a joint venture. The petitioner-company is holding about 30 per cent. of theshare capital of the company and is entitled to 25% of the annual net profits and it is further significant to note that the petitioner-company is also entitled to 25% of all the net capital profits arising for the benefit of the English company including any surplus arising on winding up. The petitioner-company is the sole authority for major policy decisions of the English company. A perusal of the relevant clauses of the agreement reproduced above, leave no manner of doubt that the main function of the petitioner-company is to manage and run the restaurants and, in return, the Indian company is entitled to a particular percentage of profits. The agreement does not in terms state as to what type of technical services are to be rendered by the Indian company.
10. The learned counsel for the petitioner tried to distinguish the judgment in Civil Writ No. 901 of 1975 [J. K. (Bombay) Ltd. v. CBDT : 118ITR312(Delhi) on the ground that, in the present case, the services of Mr. Ghai and Mr. Lamba are on a part time basis and as such they cannot be considered as managing the restaurants. It was also pointed out that the Indian company has no power to appoint any employee in the English company without the previous approval of Mrs. Kaul. In our opinion, taking the totality of the clauses of the agreement, these two clauses are very insignificant. It is a clear case of joint venture and the management is practically left with the petitioner-company. The petitioner-company is entitled to dividends on its shareholding and is getting 25% of the annual net profits. In the circumstances, the said payments cannot be termed as royalty, commission, fees or any similar payment.
11. The last contention of the counsel for the petitioner was that the approval has been denied by the Central Board of Direct Taxes after an inexplicable and inordinate delay, when the petitioner had already incurred considerable expense in the foreign country in pursuance of the assurances already having been given at the very inception, by the Ministries of Tourism, Commerce and Finance that the approval would be forthcoming. It was submitted that the petitioner was assured by a letter dated February 27, 1969, from the Director, Ministry of Finance, Department of Economic Affairs, New Delhi, that the deduction will be available after certain conditions were fulfillled, and it was pursuant to such assurance that the petitioner fulfillled the conditions and incurred considerable expenses in making available to the foreign enterprise technical, commercial and scientific knowledge, know-how and expertise and also incurred diverse obligations in the foreign country with the foreign enterprises. We have perused the letter dated 27th February, 1969, and all that the said letter says is that the concession envisaged in Section 80-O and Section 80N of the I.T. Act, 1961, would be available to the Ghai Lamba Catering Consultants P. Ltd. provided the following conditions are satisfied:
(a) Ghai Lamba Catering Consultants Private Limited is incorporated as a company under the Companies Act, 1956.
(b) The Indian company enters into a regular agreement with the foreign company for the supply to the latter of technical know-how and other services in return for fees, royalty, etc.
(c) The duly executed agreement referred to in (b) above is approved by the Central Government before the first October of the relevant assessment year. After the agreement is executed, it may be submitted to the Department of Revenue for approval.
12. In our opinion, this letter cannot be said to be any definite assurance given to the petitioner. In any case, the Central Board of Direct Taxes acting as quasi-judicial authority is not bound by any such letter issued by the Director, Ministry of Finance, Department of Economic Affairs, New Delhi.
13. For the reasons stated above, the cases are fully covered by the ratio in our judgment in Civil Writ Petition No. 901 of 1975 [J.K. (Bombay) Ltd. v. CBDT : 118ITR312(Delhi) and we are of the opinion that the respondent No. 1 was fully justified in refusing to accord the approval under Section 80-O of the I.T. Act, 1961. Accordingly, the writ petitions are dismissed with no order as to costs.