TESTEELS LIMITED Vs. COMMISSIONER OF INCOME TAX

JUDGEMENT

(1.) THE Tribunal has referred to us for our opinion the following question :

(2.) THE assessee is public limited company and the assessment year under reference is 1977 78, the year of account being financial year ending on 31st March, 1977. In the course of assessment for the said assessment year, the assessee claimed export markets development allowance or in other words, weighted deduction under S. 35B of the IT Act, 1961 ('the Act') in respect of the items of expenditure mentioned in the question and other items of expenditure with which we are not concerned in this reference. The ITO, the Commissioner (A) and the Tribunal disallowed the assessee's claim for weighted deduction in respect of the aforesaid expenditure. The Tribunal has, therefore, at the instance of the assessee, referred to us for our opinion the question set out above.

(3.) IT will be convenient to deal with each item of expenditure for which opinion is sought separately. Advertisement (Local) The assessee had incurred expenditure of Rs. 25,825 for giving advertisement in Times of India on account of the visit of President of Loas to India. Under sub cl. (i) of cl. (b) of S. 35B(1) the expenditure incurred for advertisement or publicity outside India qualifies for weighted deduction. Since the aforesaid expenditure was incurred for advertisement in India, it would not qualify for weighted deduction. Therefore, the Tribunal and the authorities below were right in not allowing the assessee's claim for weighted deduction in respect of the said expenditure. 1/2 salary of Mr. TSK Chari The assessee had paid salary of Rs. 50,000 to its employee Mr. TSK Chari, who was incharge of the export department. The assessee claimed weighted deduction in respect of the entire salary. The ITO allowed the assessee's claim for weighted deduction only to the extent of 20 per cent of the salary paid to Mr. TSK Chari. In the appeal, however, the Commissioner following the decision of the Tribunal in respect of earlier year directed the ITO to allow weighted deduction in respect of half of the salary paid to Mr. TSK Chari. The Tribunal following its earlier decision confirmed the view taken by the Commissioner. It is not the case of the assessee that Mr. TSK Chari was not looking after the business other than export. He may be exclusively incharge of the export department but that does not mean that he was not doing any work other than export. But even if he were exclusively dealing with the export business and no other business of the assessee, the expenditure incurred for payment of his salary would qualify for weighted deduction only if it falls under one or more of the sub clauses of cl. (b) of S. 35B(1). It is not stated as to what duties Mr. TSK Chari was performing. It was having regard to the facts and circumstances of the case that the Tribunal attributed 50 per cent of the expenditure incurred for payment of salary to Mr. TSK Chari to the matters falling under the relevant sub clauses of cl. (b) of S. 35B(1) and allowed weighted deduction in respect thereof. We do not see any reason to interfere with the view taken by the Tribunal. It may also be pointed out that in the earlier year when the Tribunal allowed weighted deduction only in respect of 50 per cent of expenditure incurred for payment of salary to Mr. TSK Chari the assessee did not seek any reference. We, therefore, uphold the view taken by the Tribunal in regard to the expenditure incurred for payment of salary to Mr. TSK Chari. Bank guarantee charges The assessee had incurred expenditure of Rs. 93,024 by way of bank guarantee commission. It appears that the assessee's bank had given guarantee when tenders were submitted to parties outside India and for that purpose it had charged commission of Rs. 93,024. The assessee's contention was that since the expenditure was incurred for export development, it was entitled to claim weighted deduction in respect thereof. There is no sub clause in cl. (b) of S. 35B(1) which covers expenditure incurred for export development, as claimed by the assessee. In our opinion, the expenditure, which the assessee had incurred, was in connection with the supply of goods outside India and such expenditure would fall under sub cl. (iii) of cl. (b) of S. 35B(1). However, the assessee would not be entitled to claim weighted deduction in respect of the said expenditure inasmuch as the expenditure is incurred in India. The expenditure incurred in India in connection with supply of goods outside India does not qualify for weighted deduction under the said sub cl. (iii). The Tribunal was, therefore, right in rejecting the assessee's claim for weighted deduction in respect of the said expenditure. Interest on export credits The assessee had incurred expenditure of Rs. 10,98,881 in paying interest to its bank on the advances and loans given for purchase of raw materials. This facility of advance or loan given by the bank is described as 'Banking credit facility'. The assessee claimed weighted deduction in respect of the said expenditure. The ITO, the Commissioner and the Tribunal have rejected the assessee's claim. The Tribunal rejected the claim of the assessee relying on decision of its Special Bench in the case of J. Hemchand & Co. vs. Second ITO (1982) 1 SOT 150 (Bom) (SB). It is contended on behalf of the assessee that the aforesaid expenditure, in respect of which the assessee had claimed weighted deduction, would fall under sub cl. (viii) of cl. (b) of S. 35B(1) and, therefore, the assessee is entitled to weighted deduction in respect of the said expenditure. It is submitted that the assessee had performed services outside India by supplying goods to foreign buyers and it was for rendering such services that it had to purchase raw materials. It is the case of the assessee that from the credit, advances or loans given by the bank it purchased raw materials to manufacture the products or goods, which were exported and it had to pay interest to the bank for such credit advances or loans. Therefore, according to the assessee, the expenditure in paying interest to the bank was incurred in performance of services outside India and such expenditure, which falls under sub cl. (viii) of cl. (b), qualifies for weighted deduction. In support of this contention strong reliance was placed by the assessee on the decision of the Madhya Pradesh High Court in the case of CIT vs. Vippy Solvex Product (P) Ltd. (1985) 47 CTR (MP) 44 : (1986) 159 ITR 487 (MP) and the decision of the Andhra Pradesh High Court in the case of CIT vs. Navabharat Enterprises (P) Ltd. (1988) 170 ITR 326 (AP). The assessee is entitled to weighted deduction as provided in cl. (a) of S. 35B in respect of expenditure referred to in cl. (b). Therefore, in order to qualify for weighted deduction, expenditure, must be of one of the kinds enumerated in cl. (b). If the expenditure falls under any of the sub clauses of cl. (b), the assessee, who has incurred such expenditure, would be entitled to weighted deduction under cl. (a). The assessee has claimed weighted deduction in respect of the expenditure incurred for payment of interest on packing credit facility account under sub cl. (viii) of cl. (b). In order that an expenditure may fall under sub cl. (viii), the assessee has to establish that the expenditure was incurred in performance of services outside India in connection with or incidental to the execution of any contract for the supply outside India of such goods, services or facilities. It is clear that in order to fall under sub cl. (iii) the expenditure has to be incurred for performance of services outside India and such performance of services outside India has to be in connection with or incidental to the execution of any contract for the supply outside India of goods, services or facilities. Weighted deduction under S. 35B(1)(a) is an incentive for export. Therefore, expenditure, in respect of which weighted deduction is allowed, has to be in connection with or incidental to the execution of any contract for the supply outside India of goods, services or facilities. But so far as sub cl. (viii) is concerned, as pointed out above, it deals with expenditure, which is incurred in performance of services outside India. However, performance of services outside India has to be in connection with or incidental to the execution of any contract for the supply outside India of such goods, services or facilities. As pointed out above, provision for weighted deduction is made to give incentive to export. If no services are performed outside India in connection with or incidental to the execution of any contract for the supply outside India of goods, services or facilities, the expenditure incurred for performance of services would not be covered by sub cl. (viii). In the instant case, the assessee is given facility of credit or loan for buying raw materials for the manufacture of goods, which were exported. Firstly, no services are performed in taking credit or loan facility from the bank in order to purchase raw materials for manufacture of goods. Secondly, even if any services were performed, such services are not performed outside India. We fail to see what services are rendered when assessee takes advantage of credit or loan facility from the bank and pays interest to it. It is the business of the assessee to manufacture goods and sell or export the goods, which are manufactured. The activity of export of goods outside India by itself would not be services contemplated by sub cl. (viii). What is contemplated by sub cl. (viii) is performance of services outside India in connection with or incidental to the execution of any contract for supply outside India of such goods services or facilities. What the assessee has done is to enter into a contract with foreign buyer for supply of goods outside India. That is part of the business of the assessee and supply of goods to the foreign buyer by exporting them outside India would not amount to rendering of any services. Services, performance of which is contemplated by sub cl. (viii), have to be rendered outside India. Purchase of raw materials from the credit or loan facility given by the bank to the assessee was part of the business of the assessee and it was from these raw materials that it manufactured goods, which it exported in execution of the contract. In our opinion, the assessee has not rendered or performed any services outside India as contemplated by sub cl. (viii) and, therefore, interest paid by it to the bank on the credit or loan facility given to it would not be covered by sub cl. (viii) and it would not, therefore, be eligible for weighted deduction. In Vippy Solvex Product (P) Ltd.'s case (supra), on which strong reliance was placed on behalf of the assessee, the facts were as follows : The assessee, which manufactured and exported deoiled cakes, claimed that a sum of Rs. 4,72,960 incurred by it as expenditure was eligible for weighted deduction under S. 35B. The break up of the expenditure was as follows :