: GOSWAMI, J. - This judgment will dispose of Civil Writ petition No. 46 of 1979 also as the agreements in the two cases are identical. The question for decision raised in these two petitions is whether the agreement in question satisfy the requirements of s. 80-O of the IT Act 1961.
1. The petitioner company entered into agreement on the 6th day of January, 1971 with M/s. G.L. Restaurant 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, house-keepers, especially outside India etc.
2. Mr. Ghei and Mr. Lamba in the own right are experienced in the successful management of catering establishments in India and aboard;
3. The English Company, Mr. Ghei and Mr. Lamba and the Indian partnership firm by the name Kwality Restaurant and Ice Cream Company have been working on 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 over all supervision of Mr. Ghei and Mr. Lamba together with Mrs. Kaul;
4. The Indian Company is agreeable 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.
5. 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 Mr. Ghei and Mr. Lamba on a part-time basis as agreed with the English Company to pay to the Indian Company certain of its profits and to re-imburse the Indian Company, Mr. Ghei and Mr. Lamba for the expenses incurred while performing their duties towards the English Company.
6. 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. Ghei and Mr. Lamba shall be such Directors and on the death or retirement of either of them an alternate shall only be appointed by agreement with the remainder of the Board.
Now this Agreement Witnesseth as follows :
2. For the consideration aforesaid and in consideration of these presents and the agreement hereinbefore contained the English Company and Mr. Ghei and Mr. Lamba for themselves and on behalf of the Indian Company hereby mutually agree as follows :-
1. 'The Indian Company and/or Mr. Ghei and Mr. Lamba will use their best endeavors their endeavors and their experience and expertise to promote and to establish the English Company in accordance with its Memorandum and Articles of association and in order to carry out their duties to their best advantage, Mr. Ghei 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 to from time to time including the authority and final decision in all matters of major policy of the English Company. In absence of Mr. Ghei 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. Ghei and Mr. Lamba.
2. In return for the services rendered and be rendered by the Indian Company and Mr. Ghei and Lamba, the Indian Company shall in every year be entitled to 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.
3. In addition, the Indian Company shall be entitled to 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 re-construction) of the English Company, the payment to be made and when such capital profits are distributed by the English Company.
4. No employees shall be seconded to the English Company from India unless previously approved by Mrs. Kaul.
5. No Director of either Company Mr. Ghei and Mr. Lamba with Mrs. Kaul, shall be interested in England in any business of competing or likely to compete with the English Company, and any further restaurant shall be joint ventures by the parties hereto.'
The total number of shares floated by M/s. Ghei Lamba Restaurant Pvt. Ltd. London, is 20,000 and out of these 20,000 shares, 6,400 shares held by the petitioner company.
3. The petitioner company along with its letter sated 21-9-1972 addressed to the Central Board of Direct Taxes, submitted an application on the prescribed proforma along with a copy of the agreement for rendering technical services with Ghei Lamba Restaurant Pvt. Ltd., London, for approval of the agreement u/s 80-O of the IT 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 and management of the Gaylord (Indian) Restaurant, 79-81, Mortimer Street, London, W-I'. The nature of income in respect of which 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 :-
1. 'I am directed to refer to your letter No. G.H.L., 74-18 dated 25th January, 1974 on the above subject and to state that the Board regret their inability to approve the above agreement u/s 80-O of the IT 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 u/s 80 of the Act.
2. As the capital investment of the Indian enterprise in the foreign enterprise is with a view as per their admissions, to prevent their being excluded from having a say in the Restaurant after it has started function, approval u/s 80-N of the IT Act could also not be granted'. It is against this order that the present petition was filed by petitioner company. We had occasion to analyze the provisions of s. 80-O of the Income-tax Act in the Civil Writ Petition No. 901/75 decided by us on January 17, 1979. After considering the entire scheme of s. 80-O, it was held in that case that the significant features of s. 80-O were as follows :-
1. The provision of deduction applies only to royalties, commission, fees or any similar payments. 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 merge in the foreign company. If it does so, it is difficult to separate the management function exercised by the Indian Company the day-to-day working of the foreign company.'
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% share capital of the company and is entitled to 50% of the annual net profit and it is further significant to note that the petitioner company is also entitled to 25% of all 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 Restaurant and in return, the Indian Company is entitled to a particular percentage of profit. The agreement does not, in turn, state as to what type of technical services are to be rendered by the Company.
4. Learned counsel for the petitioner tried to distinguish the judgment in Civil Writ No. 901/75 on the ground that in the present case, the services of Mr. Ghei and Mr. Lamba are on a part-time basis and as such, they cannot be considered as managing the Restaurant. It was also pointed out that the Indian Company has no power to appoint any employee in the English Company without previous approval of Mrs. Kaul. In our opinion, taking the totality of the clauses of the agreement, these 2 clauses are very insignificant. It is clear case of joint venture and the management is practically left with the petitioner company. The petitioner company is entitled to dividends on its share-holding and is getting 25% of the annual net profits. In the circumstances, the said payments cannot be termed as royalty commission, fee or any similar payments.
5. The last contention of the counsel for the petitioner by the Central Board of Direct Taxes and after inexplicable and inordinate delay, when the petitioner had already incurred considerable expenses in the foreign country in pursuance of the assurance already having been given at the very inception by the Ministry of Tourism, Commerce and Finance that the approval would be forthcoming. It was submitted that the petitioner was assured by a submitted that the petitioner was assured by a letter dated 27th Feb. 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 and scientific knowledge, know-how and expertise and also incurred diverse obligations in the foreign country with the foreign enterprise. We have perused the letter dated 27th Feb./ 1969 and all that the said letter says is that the concession envisaged is. 80-O and s. 80-N of the IT Act, 1964, would be available to Ghei Lamba Catering Consultants Pvt. Ltd., provided the following conditions are satisfied :
(a) Ghei Lamba Catering Consultants Pvt. Ltd., 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) That the duly executed agreement referred to in (b) above, is approved by in Central Government before the 1st October of the relevant assessment year. After the agreement is executed, it may be submitted to the Department of Revenue for approval.
In our opinion, this letter cannot be said to be definite assurance given to the petitioner. In any case, the Central Board of Direct Taxes, acting as quasi-judicial authority, is bound by any such letter issued by the Director, Ministry of Finance, Department of Economic Affairs, New Delhi.
6. For the reasons stated, the cases are fully covered by the ration in our judgment in Civil Writ Petition No. 901/75 and we are of the opinion that the respondent No. 1 was fully justified refusing to accord the approval u/s 80-O of the Income-tax Act, 1961. Accordingly the Writ petitions are dismissed with no order as to costs.