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

Citation: [1988] SUPP. 3 S.C.R. 1058 · Decided: 13-12-1988 · Supreme Court of India · Bench: M.M. DUTT · Disposal: Dismissed

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Judgment (excerpt)

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PETRON ENGINEERING CONSTRUCTION PVT. 
LTD. & ANOTHER 
v. 
CENTRAL BOARD OF DIRECT TAXES & OTHERS 
DECEMBER 13, 1988 
[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 
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setting in which the words are used; in the case of an exemption provi-
sion, liberal interpretation to be made without impairing the legislative 
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requirement and the spirit of the provision. 
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Messrs Toyo Engineering Corporation, a company registered in 
Japan, undertook to render technical services in respect of Iraqi Stor-
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. 
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The apJ>!'llant sought approval of the said agreements from the 
respondent-the Central Board of Direct Taxes-under section 80-0 of 
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 
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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. 
The appellant filed a writ petition before the Bombay High Court 
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challenging the order refusing approval. The learned Single Judge dis-
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1058 
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PETRONENGG. v. CENTRAL BOARD OF TAXES 
1059 
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missed the petition on the ground inter alia that the payment was not 
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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 
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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 
a foreign enterprise or not should not be introduced in section 80-0, c 
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 
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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 
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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 
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HELD: (I) It appears from the legislative background that in 
1971 the expression '~foreign company" occurring in section 80-0 was 
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changed into "Government of a foreign State or a foreign enterprise"

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