Holding

A 'foreign enterprise' under section 80‑0 means an enterprise situated in a foreign country and created or registered under the law of that country; a branch or unit of an Indian company abroad does not qualify.

Summary

Petron Engineering Construction Pvt. Ltd. entered into agreements with Toyo Engineering India Ltd. to provide technical services for a project of a Japanese firm in Iraq and sought approval under section 80‑0 of the Income‑Tax Act, 1961 for a deduction on royalties received. The Central Board of Direct Taxes rejected the application, holding that the income was received from an Indian company, not a "foreign enterprise" as required by the statute. The Supreme Court examined the meaning of "foreign enterprise" and held that it refers only to an enterprise situated abroad and created or registered under the law of that foreign country; a branch or unit of an Indian company abroad does not qualify. Consequently, the appellant failed to satisfy the condition that income must be received from a foreign enterprise, and the appeal was dismissed. The Court also rejected the arguments for liberal construction, canalisation, and reliance on the provision’s object, emphasizing the plain language of the statute.

Issues considered

The proper interpretation of the term 'foreign enterprise' under section 80‑0 of the Income‑Tax Act, 1961.
Whether an Indian company's branch, unit or establishment abroad can be treated as a foreign enterprise for the purpose of section 80‑0.
Whether income received from an Indian intermediary (Toyo Engineering India Ltd.) can satisfy the requirement that the income be received from a foreign enterprise.
Whether section 80‑0 can be liberally construed to permit canalisation of income through an Indian company.
Whether the object of the provision (encouraging export of technical know‑how) can override the literal condition of receipt from a foreign enterprise.

Legislation cited

Income Tax Act, 1961s. 80-0, s. 85-C

Subjects

Income-tax ActSection 80-0foreign enterprisedeductionroyaltiestechnical know-howstatutory interpretationliberal constructioncanalisationforeign exchange

Judgment

{

A
PETRON ENGINEERING CONSTRUCTION PVT.
LTD. & ANOTHER
v.
CENTRAL BOARD OF DIRECT TAXES & OTHERS

DECEMBER 13, 1988
B
[MURARI MOHON DUTT ANDS. NATARAJAN, JJ.)
! ..-
Income-tax Act, 1961: Section 80-0-Deduction in respect of
royalties-Permissible only when it is from government of foreign state
or foreign enterprise.
(
Words and Phrases: "Foreign enterprise"-'Foreign Company'
-Meaning of.

Interpretation of statutes: Interpretation of expressions to be con-
. , sistent with the thing or objects included within it: Court to look at the
D setting in which the words are used; in the case of an exemption provi-
sion, liberal interpretation to be made without impairing the legislative
requirement and the spirit of the provision. '

Messrs Toyo Engineering Corporation, a company registered in
Japan, undertook to render technical services in respect of Iraqi Stor-
E age Terminal Project Installations and engaged Toyo Engineering India
Ltd.,· au Indian Company, for work connected with the project. Toyo
..
Engineering India Ltd., in turn, entered into two agreements with the
appellant-company to perform certain construction and related services
of the project work.

F The apJ>!'llant sought approval of the said agreements from the
respondent-the Central Board of Direct Taxes-under section 80-0 of
I
the Income Tax Act, 1961 which provided for deduction from total
income in respect of royalties etc. received from the Government of a
foreign State or a for·eign enterprise. The respondent refused to
.
;

approve the said agreements on the ground that there was no privily of
q contract between the appellani-compapy and the foreign enterprise and
the contract price was received by the appellant from Toyo Engineering
lndia·Ltd. which was an Indian Company and could not be regarded a ..
foreign enterprise within the meaning of section 80-0. Iii

The appellant filed a writ petition before the Bombay High Court
:H" challenging the order refusing approval. The learned Single Judge dis- I

1058
j;•.
''"-'
-~, '

PETRONENGG. v. CENTRAL BOARD OF TAXES 1059
1
missed the petition on the ground inter alia that the payment was not A
received by the appellant-company from the Government of a foreign
State or a foreign enterprise. On appeal, the Division Bench held that
(i) in order to attract the provision of section 80-0, the payment must he
received by the Indian company from the Government of a foreign State ·
or a foreign enterprise, (ii) the expression 'foreign enterprise' must
have the colour from the words "Government of a foreign State" and B
must be read to mean an enterprise of a foreign national or a foreign
ownership which would not include a branch of unit of an Indian Com-
pany in a foreign country.

In this Court, it was contended by the appellant that (i) the con-
cept of ownership for the purpose of deciding whether an enterprise was c
a foreign enterprise or not should not be introduced in section 80-0,
and if any enterprise satisfied the test of location it should be held to be
a foreign enterprise within the meaning of section 80-0; (ii) in any
event, it was possible to define the expression "foreign enterprise" as
an enterprise located outside India, and when two interpretations were
possible the inter[lrctation which was favourable to the assessee should D
be adopted; (Hi; £.< the provision of section 80-0 was an exemption
provision, it should be construed liberally and, upon such liberal con-
struction, it should be held that Toyo India was a foreign enterprise;
(iv) the appellant-company having fulfilled the objectives of section
80-0, it should he held that the requirement of the section was satisfied,
and consequently the appellant-company was entitled to deduction of .E
Income Tax; and (v) section 80-0 should be construed as permitting
canalisation.

On the other hand, the Revenue contended that the plain meaning
of the words "foreign enterprise" was an enterprise having a foreign
nationality, and if an Indian company opened an enterprise in a foreign F
country but did not get the enterprise registered under the law of that
country, it would remain an Indian enterprise and not become a foreign
enterprise.

Dismissing the appeal, it was
'" G
HELD: (I) It appears from the legislative background that in
1971 the expression '~foreign company" occurring in section 80-0 was
•\ changed into "Government of a foreign State or a foreign enterprise".
-,: ~
There can be no doubt that the expression "foreign enterprise" is a
wider term than "foreign company" and will incltide within it also a
' foreign company. [1066F-Gj H
1060 SUPREME COURT REPORTS [1988] Supp. 3 S.C.R.

(2) The interpretation of a term should be such as to be consistent
A
with the things or objects that are included within it. In other words,
the meaning of the expression cannot be different for different objects
included in the expression. [1067B]

(3) If an Indian company having a branch, unit or establishment
B in a foreign country cannot be regarded a foreign company, then, for
the same reason, a branch, unit or establishment of an Indian company
situated in a foreign country or doing business in such foreign country
cannot be included within the meaning of the expression "foreign
enterprise". [1067C]

(4) The test of location is one of the tests for deciding whether an
c enterprise is a foreign enterprise or not within the meaning of section
80-0. But that is not the only test. Ownership is also a creterion for
deciding whether an enterprise is a foreign enterprise or not. But, again
that is not the sole test. [106701

D (5) A "foreign enterprise" is an enterprise situated in a foreign
country having been created or registered in accordance with the law of
such country. This view finds support from the setting in which the
expression has been placed and the circumstances in which the law
came to be passed. [1067G; 1068BJ

E R.L. Arora v. State of Uttar Pradesh, [1964] 6 SCR 784, referred
to.

(6) The expression "foreign enterprise" admits of only one
interpretation. To interpret it as an enterprise located outside India will
not be full and complete and will render the meaning of the expression
F inconsistent with the objects included within it, having regard to the
(
change effected by the legislature. [1068E-FJ

Commissioner of Income-tax, Lucknow v. Madho Pd. Jatia,
[1976] 105 ITR 179; Commissioner of Income-tax v. Vegetable Products
Ltd ... [1973] 88 ITR 192 and Commissioner of Income-tax, Punjab v.
G Kulu Valley Transport Co. P. Ltd., [1970] 77ITRSI8,distinguished.

(7) It is true that an exemption provision should be liberally con-
strued, but this does not mean that such liberal construction should be
made doing violence to the plain meaning of such exemption provision.
Liberal construction will be made whenever it is possible to be made /
H without impairing the legislative requirement and the spirit of the
provision. [1068H; 1069AJ
,o}_-,

•PETRON ENGG. v. CENTRAL BOARD OF TAXES 1061

(8) Not only the objectives of a provision of a statute have to be A
fulfilled, but also the condition for the applicability of the provision
have also to be fulfilled. In the instant case, the appellant failed to fulfil
the two material conditions in so far as the income was received by it not
from a foreign enterprise but from an Indian company, and the agree-
ments entered into by it were with an Indian company and not with a B
foreign enterprise. [1071B-D]

Gannon Dunkerley and Co. Ltd. v. Central Board of Direct
Taxes, [1986] 159 !TR 162 and Indian Hume Pipe Co. Ltd. v. Central
Board of Direct Taxes, [1987] 165 !TR 537, referred to.

(9) The High Court was not right in holding that section 80-0 did c
noi require that the agreement should be made with the Government of
a foreign State of a foreign enterprise. Section 80-0 refers to three
parties, namely, Government .,fa foreign State, foreign enterprise and
the assessee. It is clear from the section that the agreement must be
between the assessee on the one hand and the Government of a foreign
D
State or a foreign enterprise on the other. [1071E-G]

( 10) Whether canalisation should be permitted or not, is
absolutely a matter for the legislature. It is not incumbent on the legisla-
ture to provide for canalisation although it has been conceded by the
respondent's counsel that canalisation is desirable. In view of the
plain language of the section, it is not possible to construe the sec-
E
tion as ·providing canalisation. That is not the intention of the
Legislature. [1073B-C]

Seaford Court Estates Ltd. v. Asher, [1949) 2 K.B. 481,
referred to. F ,
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 353 I
of 1988.

From the Judgment and Order dated 11.8.1987 of the Bombay
High Court in Appeal No. 752/86 in W.P. No. 538/ 1982.

.. V. Rajgopal, K.M. Sharma and Randhir Jain for the Appellants.
G

Dr. V. Gauri Shankar, Ms. A. Subhashini and M.K. Shashidha-
ran for the Respondents.
'l H
The Judgment of the Court was delivered by
1062 SUPREME COURT REPORTS [1988] Supp. 3 S.C.R.

A OliTT, J. This appeal by special leave is directed against the
judgment of the Division Bench of the Bombay High Court dismissing
the appeal preferred by the appellants against the judgment of a Single
Judge of the High Court dismissing the writ petition of tbe petitioners
whereby they challenged the order dated January 5, 1982 of the
respondent No. 1, the Central Board of Direct Taxes, rejecting the
B application of the appellant-company under section 80-0 of the
Income Tax Act, 1961, hereinafter referred to as 'the Act'.

By two agreements, one dated April 5, 1980 and the other dated
August 14, 1980, entered into between the appellant-company and
,.
Toyo Engineering India Ltd. (for short 'Toyo India'), the appellant-
company agreed to render technical services in respect o'f Iraqi Storage
c Terminal Project Installations in consideration of payment to it by way
of fees payable under the said agreements. In the said agreement dated
April 5, 1980, it is stated inter alia that Toyo India has been engaged by
Toyo Engineering Corporation (for short 'TEC'), a Company
organised and existing under the laws of Japan having its registered
D office at Tokyo, Japan, for the Project of Storage Terminal of State
Organisation for Oil Project, a public Organisation organised and ex-
isting under the laws of Iraq. Toyo India has in its turn engaged the .i
appellant-company to perform certain construction and related
services by the appellant-company of the project work as set out in the
said agreement.
E
The appellant-Company by its letter dated October 23, 1980
requested the respondent No. 1, the Central Board of Direct Taxes,
for the approval of the said agreements under section 80-0 of the Act.
The respondent No. 1 after giving the appellants a hearing, by its order
dat,ed January 5, 1982, refused to approve the said agreements for
' p purposes of section 80-0 of the Act inasmuch as in the view of the
respondent No. l, the essential conditions laid down in section 80-0
I
were not satisfied. The respondent No. 1 in its said order pointed out
inter alia that according to the said agreements, the contract price was
received by the appellant-company from Toyo India, an India(! Com-
pany. In other words, income by way of royalty, commission, fees, etc.
G had not been received by the appellant-company from the Govern-
ment of a foreign State or a foreign enterprise, and that the agree-
ments had been 'entered into by the appellant-company with Toyo
India, and Indian company, and not with a foreign State or a foreign
enterprise. Further, it was stated by the respondent No. 1 th•t as there
was no privily of contract between the appellant-company and tbe
H foreign enterprise, it could not be said that the income had heen
PETRON ENGG. v. CENTRALBOARn°OFTAXES [DUTT, J.) 1063

received by the appellant-Company in consideration of the use outside , A
india of patent>, inventions, etc. made available or provided or agreed
to be made available or provided to a Government of a foreign State or
to a foreign enterprise or in consideration of technical services
rendered or agreed to be rendered outside India to such Government
or enterprise by the appellant-company.
B
Being aggrieved by the said order dated January 5, 1982 of .the
respondent No. 1 refusing to approve the said two agreements, the
appellants filed a writ petition before the Bombay High Court chal-
lenging the said order. A learned Single Judge of the Bombay High
Court by his judgment dated June 23, 1986 dismissed the writ petition
on the ground inter alia that the payment was not received by the C
appellant-company from the Government of a foreign State or a
foreign enterprise and, as such, it was not entitled to any relief under
section 80-0 of the Act.

On appeal by the appellants against the judgment of the learned
Single Judge, the Division Bench of the High Court held that in order D
to attract the provision of section 80-0, the payment must be received
by an Indian company from the Government of a foreign State or a
foreign enterprise, and that the words "foreign enterprise" must have
the colour from the words "Government of a foreign State" and must
be read to mean an enterprise of a foreign national or a foreign owner-
ship. Further, the words "foreign enterprise" could not be held to E
apply to an establishment or undertaking or branch or unit of an Indian
company in a foreign country. Such establishment, undertaking,
branch or unit might well be an enterprise, but not a foreign enterprise
within the meaning of the said words. In that view of the matter, the
Division Bench of the High Court, as stated already, upheld the judg-
ment of the learned Single Judge and dismissed the appeal preferred F
by the appellants. Hence this appeal by special leave."

At this stage, we may refer to section 80-0 of the Act as it stood
during the assessment year 1980-81 which is the relevant period for this
appeal. Section 80-0 provides as follows:
G
"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 fc;ireign enterprise in consideration for the t.ise H
1064 SUf.REME COURT REPORTS [1988] Supp. 3 S.C.R.

outside India of any patent, invention, model, design, sec-
A ret formula or process, or similar property right, or infor-
mation concerning industrial, commercial or scientific
knowledge, experience or skill made available or provided
or agreed to be made available or provided to such Govern-
ment or enterprise by the assessee, or in consideratio.n of
B technical services rendered or agreed to be rendered out-
side India to such Government or enterprise by the asses-
see, under an agreement approved by the Board in this
behalf, 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 excha~ge outside India, is brought
c into India, by or on behalf of the assessee in accordance
with any law for the time being in force for regulating pay-
ments and dealings in foreign exchange, there shall be
allowed, in accordance with and subject to the provisions
of this section, a deduction of the whole of the income so
D 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 sub-section is made to the
Board before the 1st day of October of the ass.essment year
E in relation to which the approval is first sought:

Provided further that approval of the Board shall not
be necessary in the case of any such agreement which has
been approved for the purposes of the deduction under this
section by the Central Government before the 1st day of
April, 1972, and every application for such approval of any
such agreement pending with the Central Government
immediately before that day shall stand transferred to the
Board for disposal."

The following principal conditions must be fulfilled so as to at-
G tract the provision of section 80-0:

1. The assessee must be an Indian company.

2. The income by way of royalty, commission, fees etc., must be
received by the assessee from the Government df a foreign State
(
H or a foreign enterprise.
':'lif""" _~;;-~
'
PETRONENGG. v. CENTRAL BOARD OF TAXES (DUTT, J.] 1065

3. The consideration shall be for the use outside India of any
A
patent, invention, model, design etc. made available or provided
to such Government or enterprise by the assessee or technical
services rendered or agreed to be rendered outside India to such
Government or enterprise by the assessee.

4. The agreement must be approved by the Board. B

5. The income received by the assessee shall be in convertible
foreign exchange.

__6. The deduction shall be in respect of the whole of such income
re~ived in or brought into India.
c
One of the principal points that.is involved in this appeal relates
to the interpretation of the ·expression "foreign enterprise". The
respondent No. 1 refused to approve the agreements entered into by
the appellants with Toyo India principally on the ground that Toyo
India is not a foreign enterprise. According to the respondent No. 1, D
Toyo Indiais an Indian Company and cannot be regarded a foreign
enterprise within the meaning of section 80-0. The learned Single
Judge and the Division Bench of the High Court have also taken the
same view and upheld the order of the respondent No. 1 refusing to
approve the agreements.
E
It is not disputed that Toyo India has been engaged by TEC. The
latter Company is, admittedly, a foreign Company organised and es-
tablished by the laws of Japan for the Project of Storage Terminal of
State Organisation for Oil Project. By the said agreements, Toyo India
engaged the appellant-company to perform certain construction and
related services for the project work as set out in the agreements. F

It is urged by Mr. Rajagopalan, learned Counsel appearing on
behalf of the appellants, that'the High Court is wrong in its view that
Toyo India is not a foreign enterpnse. COunsel submits that the test of
the, expression "foreign enterprise" is the location of the enterprise
which will clinch the issue. It is submitted that as the establishment of G
Toyo India, with which we are _;:oncerned, is a branch, unit or on
undertaking in Iraq, it should be regarded a foreign enterprise within
the meaning of section 80-0 of the Act. According to the learned
Counsel, the concept of ownership for the purpose of deciding whether
an enterprise is a foreign enterprise or not should not be introduced in
section 80-0 and if any enterprise satisfied the test of location or, in H
'
1066 SUPREME COURT REPORTS [1988] Supp. 3 S.C.R.
I
A other words, if an enterprise is situate in a foreign country, it should be
held to be a foreign enterprise within the meaning of section 80-0.

On the other hand, Dr. Gauri Shankar, learned Counsel appear-
ing on behalf of the respondents, submits that the plain meaning of the
words "foreign enterprise" is an enterprise having a foreign nationa-
B lity. According to the learned Counsel, a "foreign enterprise" means
an enterprise created or established in a foreign country under the law
of that country. If an Indian company opens an enterprise in a foreign
country, but does not get the enterprise registered under the law of
that country it will, in the view of the learned Counsel, remain an
Indian enterprise and not a foreign enterprise.
c Before considering the contentions of the learned Counsel for
both parties relating to the interpretation of the expression "foreign
enterprise" occurring in section 80-0, we may refer to the legislative
background. Under section 85-C of the act, which was introduced by
the Finance Act, 1966 and which came into force with effect from
D April 1, 1961, Indian companies could obtain concession to the extent
of 25 per cent of its income if the foreign exchange was received from a
company which was neither an Indian company nor a domestic com-
pany. Section 80-0 was inserted in the Act by the Finance Act 2 of
1967 and it came into force with effect from April 1, 1968. Section
80-0, as it stood on that day, provided that the payer should b'e a
E foreign company and the relief was enlarged to 60 per cent. Finance
Act 2 of 1971 mad.e an amendment in section 80-0 changing the payer
from "foreign company" to "Government of a foreign State or a
foreign enterprise" and enlarging the relief to 100 per cent. Even up to
this day, no change has been made in respect of the payer.

F It, thus, appears from the legislative background or the legisla-
tive changes that from "foreign company" it has been changed into /
"Government of a foreign State or a foreign enterprise". It is apparent
that the expression "foreign enterprise" has been substituted for
"foreign company" while the words "Government of a foreign State"
have been inserted. There can be no . doubt that the expression
o "foreign enterprise" is a wider term than "foreign company".
"Foreign enterprise" will include within it also a foreign company.
Now a foreign company is a company incorporated under the law of the
foreign country concerned. An Indian company doing business or hav-
ing a branch, unit or establishment in a foreign country cannot be
called a foreign company. Thus, in the case of a foreign enterprise
H which is a foreign company, such company must be incorporated in
PETRON ENGG. v. CENTRAL BOARD OF TAXES [DUTT, J.] 1067

accordance with the law of the foreign country in question. Keeping A
this in view, the question that arises is whether a branch, unit or
establishment of an Indian company doing business in a foreign
country can be said to be a foreign enterprise. In our view, it is difficult
to regard such branch, unit or establishment a "foreign enterprise"
within the meaning of section 80-0 of the Act. Tlie interpretation of a
term should be such as to be consistent with the things or objects that B
are included within it. In other words, the meaning of the expression
cannot be different for different obiects included in the expression. If
an Indian company having a branch, unit_ or establishment in a foreign
country cannot be regarded a foreign company, then, for the same
reason, a branch, unit or establishment of an Indian company situate
in a foreign country or doing business in such foreign country cannot
be included within the meaning of the expression "foreign enterprise". c

The test of location, as contended by the learned Counsel
appearing on behalf of the appellants, is no doubt one of the tests for.
deciding whether an enterprise is a foreign enterprise or not within the
meaning of section 80-0 of the Act, but that is not the only test. In D
order that an enterprise can be called a foreign enterprise for the
purpose of section 80-0, there can be no doubt that it has to be _
located in a foreign country. The High Court has decided the issue on
the ground of foreign ownership. Undoubtedly, ownership is also a.
crieterion for deciding whether an enterprise is a foreign enterprise or
not. But, again that is not the sole crieterion or test and, as has been E
observed before, location of an enterprise is also a test for deciding
whether an enterprise is a foreign enterprise or not.

Now we may consider the contention of Dr. Gauri Shankar that a
"foreign enterprise" means an enterprise created and registered under
the foreign law. The guestion of creatio_n of an enterprise under the f
foreign law necessarily comes in, as the expression "foreign enterprise"
includes within It a foreign company. Thus, oor.<idering the above
aspects and to give the expression "foreign enterprise" as used in
section 80-0 a consistent and reasonable meaning, we are of the view
that a "foreign enterprise" is an enterprise situate in a foreign country
having been created _or registered in accordance with the law of such G
country. It will now be profitable for us to refer to a decision of this
Court in R.L. Arora v. State of Uttar Pradesh, [1964] 6 SCR 784, where
it has been held that a literal interpretation is not always the only
interpretation of a provision In a statute and the Court has to look at
the setting in which the words are used and the circumstances in which
the law came to. be passed to decide whether there is something H

"''
• 1
1068 SUPREME COURT REPORTS [1988] Supp. 3 S.C.R. (

implicit behind the words actually used which control the literal mean-
A
ing of the words used ..The expression "foreign enterprise" in section
80~0 has been placed after the words "the Government of a foreign
State". The view which we take as to the interpretation of the exptes-'
sion "foreign enterprise" finds support from the setting in which the ·
expression has been placed and the circumstances in which the law
B · came to be passed.

It is, however, urged by Mr. Rajagopalan, learned Counsel for
the appellants, that it may be that a foreign enterprise can be defined
in the manner we have done, at the same time the definition of the
expression on the basis of the test of location cannot altogether be
ruled out. In any event, it .js possible to define the expression "foreign
c enterprise" as an enterprise located outside India. Counsel submits
that when two interpretations are possible to be made, the interpreta-
tion which is favourable to the assessee should be adopted. In support
of that contention learned Counsel has, placed reliance upon a few
decisions of this Court in Commissioner of Income Tax, Lucknow v.
D Madho Pd. Jatia, [1976] 105 ITR 179; Commissioner of Income Tax v.
Vegetable Products Ltd., [ 1973] 88 lTR 192 and Commissioner of In-
come Tax, Punjab v. Kulu Valley Transport Co. P. Ltd., (1970] 77 JTR
518.

The above principle of law is well established and there is no
E doubt that. But the question is whether two views are possible to be
taken on the interpretation of the expression "foreign enterprise''. In
our opinion, the expression "foreign enterprise" admits of only one
interpretation. The interpretation which the learned Counsel for the
appellants wants to put on the expression will not be full and complete
and will render the meaning of the expression inconsistent with the
F objects included within it, having regard to the change effected by the
Legislature from "foreign company" to the present expression
' already noticed. We are, therefore,
"foreign enterprise", as has been
unable to accept the interpretation of the expression as submitted on
behalf of the appellants.

G We are also unable to accept the contention of the appellants
that as the provision of section 80-0 is an exemption provision, it
should be construed liberally and, upon such liberal construction, it
should be held that Toyo India is a foreign enterprise. It is true that an
exemption provision should be liberally construed, but this does not
mean that such liberal construction should be made doing violence to r
H the plain meaning of such exemption provision. Liberal construction
PETRON ENGG. v. CENTRAL BOARD OF TAXES !DUTT, J.] 1069
'
will be made whenever it is possible t.o be made without impairing the
A
legislative requirement and the spirit of the provision. In our opinion,
to construe "foreign enterprise" in section 80·0 as including within it
an Indian company or a branch or unit of such company simply
because it is located in a foreign country would be against the plain
meaning of the term and the legislative intent.
B
We may now consider another argument of the apP.ellants based
on the objective of the provision of section 80-0. It is submitted by the
learned Counsel for the appellants that the objectiv~s of section 80·0 _
are to encourage Indian companies to export their technical know-how
and thereby augment the foreign exchange resources of the country .
. Counsel submits that the ma,iq objective of the section is to augment
the foreign exchange resourees of the country, and that the appellant· c
Company having earned foreign exchange, it should be held that the
requirement of the section is satisfied and, accordingly, the appellant·
Company is entitled to deduction of Income Tax. On the other hand,
Dr. Gauri Shankar, points out that the main objective of section 80-0
is not the earning of foreign exchange. According to him, the principal D
purpose for which the deduction is allowed to an assessee is that con·
tained in the speech of the Finance Minister on the floor of Parliament
at the time of introduction of section 85-C into the Act. A copy of the
speech has been handed over to us and has also been supplied to the
learned Counsel for the appellants. In his speech, the Hon'ble Finance
Minister stated inter alia that "some fiscal encouragement needs to be E
given to our industries to encourage them to provide technical "know·
now" and technical services to newly developing countries". In view of
the speech, it is urged by Dr. Gauri Shankar that the principal objec·
tive of section 80-0 is to supply technical .know· how and render techni·
cal services by Indian companies to newly developing countries.
Counsel submits that it will be wrong to say that the principal objective F
of section 80·0 is to augment the foreign exchange resources of the
country.

Although there is no indication in section 80-0 regarding the
supply of technical know-how or rendering technical services to newly
developing countries, yet it may be reasonable to infer from the said G
speech of the Finance Minister that at the time section 85-C was intro·
duced in the Act one of the objectives was to supply technical know·
how and render technical services to newly developing countries.
Foreign exchanges can be earned by various other modes, but that will
not in all cases entitle the assessee to a deduction of Income Tax.
Section 80-0, as it stood during the relevant period with which we are H
1070 SUPREME COURT REPORTS [1988] Supp. 3 S.C.R.
.'
concerned, grants cent percent deduction of tax. In the context of such
A
deduction of tax, it will not be unreasonable to presume that the
- principal objective of section 80-0 is to supply technical know-how or
render technical services to developing countries. In the circum-
stances, the contention of the appellants that as the appellant-Com-
pany has fulfilled the principal object of section 80-0 by earning
B foreigft exchange, the respondent No. 1 should have approved the
agreements for the purpose of section 80-0 cannot be accepted.

It is, however, submitted on behalf of the appellants that apart
from the question as to what is the principal objective of section 80-0,
the appellant-Company has fulfilled both the objectives, namely, it has
supplied technical know-how to a foreign enterprise through an Indian
c company, and that it has also earned foreign exchange. It is urged on
behalf of the appellants that although the appellant-Company may not
have directly supplied technical know-how to or directly received fees,
commission etc. from the foreign enterprise in convertible foreign ex-
change, in effect the appellant-Company having saiisfied the objec-
0 tives of section 80-0 indirectly, it is entitled to a deduction of Income
Tax. In support of this contention, much reliance has been placed on
two Single Bench decisions of the Bombay High Court, which will be
referred to presently. In Gannon Dunkerley and Co. Ltd. v. Central
Board of Direct Taxes, [1986] 159 ITR 162, the facts are more or less
similar to those in the present case and it has been held that the main
E conditions imposed by section 80-0 has been complied with by the
petitioner-Company and the Central Board of Direct Taxes should
have approved the agreement. The same view has been taken in the
other Single Bench decision of the Bombay High Court in Indian
Hume Pipe Co. Ltd. v. Central Board of Direct Taxes, [1987] 165 ITR
537. Both the above decisions have been considered by the Division
F Bench in -the impugned judgment and the Division Bench could not
agree with the view expressed in those decisions.

Mr. Rajagopalan has pressed us to hold on the basis on the said
Single Bench.decisions of the Bombay High Court that the objectives
of the section having been fulfilled, the agreements should have been
O approved by the Central Board of Direct Taxes. Attractive though the
argument is, we regret, we are unable to accept the same. It is true that
viewed in the light of the submissions made on behalf of the appel-
lants, the objectives of the section are to some extent fulfilled, but we
cannot, at the same time, ignore the plain language of the section.
Section 80-0 unequivocally provides that the income by way of
H royalty, commission, fees etc. shall be received by the assessee from
PETRONENGG.v.CENTRALBOARDOFTAXES[DUTI, J.J 1071
) ..
the Government of a foreign State or a foreign enterprise and, indeed,
A
that is one of the principal conditions for the application of the section.
The assessee has to fulfil that condition before he can claim any deduc-
tion of Income Tax or approval of an agreement. The fulfilment of the
objectives of a provision of a statute, without fulfiling the condition
laid down in ·plain and clear language will not enable one to have the
benefit of the section. In our opinion, not only the objectives .of a B
provision of a statute have to be fulfilled, but also the conditions for
the applicability of the provision have also to be fulfilled. The fulfil-
ment of conditions of a provision of an Act in most cases will also be
fulfilment of the objectives of the provision. But the converse may not
be true. In other words, the fulfilment of the objectives may not satisfy
the conditions required to be fulfilled by the provision. In the instant
case, the appellant-Company received its income by way of royalty, c
commission, fees or any similar payment not from the Government of
a foreign State or a foreign enterprise, but from an Indian company.
The appellant-Company has, therefore, failed to fulfil the principal
condition of section 80-0 of the Act. In the circumstances it is difficult
to accept the contention of the appellants that as they have indirectly D
fulfilled the objectives of the section, the Central Board of Direct
Taxes was not justifi~d in not approving the agreeme!lts.

In the impugned judgment, the High Court has held that section
80-0 does not require that the agreement should be made with the
Government of a foreign State or a foreign enterprise. We are unable E
to accept this view of the High Court. Section 80-0 refers to three
parties, namely, Government of a foreign State, foreign enterprise and
the assessee. It is clear from section 80-0 that the agreement must be
between the assessee on the one hand and the Government of a
foreign State or a foreign enterprise on the other. When section 80-0
speaks of the supply of know-how by the assessee t'1_ a Government of F
a foreign State or a foreign enterprise and the receipt of income by way
of royalty, commission etc. from the Government of a foreign State or
a foreign enterprise, it is unreasonable to think that the agreement
under which the technical know-how shall be supplied and the income
shall be received by the assessee in convertible foreign exchange, may
not be with the Government of a foreign State or a foreign enterprise G
but with some other party. It is manifestly clear from the provision of
section 80-0 that the agreement shall be entered into by and between
•ii the assessee and the Government of a foreign State or a foreign
enterprise.

In the instant case, no such agreement has been entered i::'.o by H
1072 SUPREME COURT REPORTS [1988] Supp. 3 S.C.R.
'(

A the appellant-Company with the Gove111ment of a foreign State or a
foreign enterprise. In that respect also, the appellant-Company does
not fulfil another condition of section 80-0 which is also very material.
The agreements which have not been approved by the Central Board
of Direct Taxes have been, as already noticed, entered into between
the appellant-Company and Toyo India which is not a foreign
B enterpdse but an Indian Companay. In view of the facts stated above,
the Central Board of Direct Taxes was justified in not approving the
agreements in question.

Lastly, it is argued on behalf of the appellants that section 80-0
should be construed as permitting canalisation and if so construed, the
appellant-Company will be entitled to the benefit of the section. Qn
c the other hand, it is the contention of Dr. Gauri Shankar that in view
of the specific mandate of section 80-0 that the income of the assessee
shall be directly received from the foreign enterprise, the question of
canalisation does not arise. In other words, it is submitted that canali-
sation is not contemplated by section 80-0. In reply to the contention
D of Dr. Gauri Shankar, Mr. Rajagopalan submits that it is a lacuna on
the part of the Legislature in not providing for canalisation in fulfil-
ment of the objectives referred to above. In support of his contention,
much reliance has been placed by him on the observation of Lord
Denning in the decision in Seaford Court Estates Ltd. v. Asher, [1949]
2 K.B. 481. In that case, Lord Denning observed as follows:
E
"A judge, believing himself to be fettered by the supposed
rule that he must look to the language and nothing else,
laments that the draftsmen have not provided for this or
that, or have been guilty of some or other ambiguity. It
would certainly save the judges trouble if Acts of Parlia-
F ment were drafted with divine prescience and perfect cla-
rity. In the absence of it, when a defect appears a judge
cannot simply fold his hands and blame the draftsman. He
must set to work on the constructive task of finding the
intention of Parliament, and he must do this not only from
language of the statute, but also from a consideration of the
G social conditions which gave rise to it, and of the mischief
which it was passed to remedy, and then he must supple-
ment the written word so as to give "force and life" to the
intention of the legislature."

The above observation of Lord Denning does not, in our
H opinion, help the appellants. The entire observation is based on a
PETRONENGG:v.CENTRALBOARDOFTAXES[DUTT, J.] 1073

defect appearing in the provision of a statute. In our view, there is no A
defect in the provision of section 80-0. It may be that the Legislature
• has not provided for canalisation, but that cannot be said to be a
lacuna or a defect in the provision. Whether canalisation should be
permitted or not, is absolutely a matter for the Legislature. It is not
incumbent on the Legislature to provide for canalisation, although it
has been frankly conceded by Dr. Gauri Shankar that canalisation is B
desirable and a reasonable one. In the circumstances, in view of the
plain language of the section, we do not think that we can construe the
section as providing canalisation, that is to say, income by way of
royalty, commission etc. need not be received directly from the
Government of a foreign State or a foreign enterprise, but through
ano.ther Indian company. This is not the intention of the Legislature. c
For the reasons aforesaid, the appeal is dismissed. There will,
however, be no order as to costs.
'
R.S.S. Appeal dismissed.
D

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