COMMISSIONER OF INCOME TAX Vs. SIVANANDHA STEELS LIMITED

JUDGEMENT

(1.) THE assessee entered into an agreement with H.M.T. (International) Ltd., Australia, which is the wholly owned subsidiary of H. M. T. Limited, Bangalore, for the territory of Australia for the products manufactured by the assessee, namely, steel castings of all descriptions. THE agent during the currency of the agreement was required to use its best endeavours to promote the sale of the products of the assessee by securing orders for the purpose from the parties in Australia at such prices and on such terms as to delivery, warranty, etc., as mutually agreed upon from time to time. THE agent was also required to endeavour his best to market, in the territory to Australia the products offered by the assessee for mutual benefit. Both parties were to advise each other over the market situation, competitors, development, improvement, priority in execution of orders booked, etc.

(2.) THE agent maintained an office in Australia and it has been stated in the agreement that the agent has an adequate organisation to secure orders for the castings manufactured by the assessee. THE agent was to be paid a commission of five per cent. on f. o. b. value of the orders received through the agent or directly by the assessee on account of the agent's efforts from the agency territory of Australia and accepted by the assessee. THE commission was payable upon the actual realisation made by the assessee. THE commission was payable in Australian dollars. THE assessee had reserved liberty to appoint other agents for the same territory. THE period of agency was to be from April 1, 1979, for a period of three years.

(3.) THE expenditure qualifying for weighted deduction under Section 35B(1)(b)(iv) is the expenditure incurred wholly and exclusively outside India on a branch or office of the assessee, or on maintaining" an agency for the promotion of the sale outside India of such goods, services o.r facilities. All the payments required to be made to the agent under the agreement cannot be regarded as payments made for maintaining the agency, especially where the payments made are by way of commission on the sales effected. Such commission necessarily includes the profits realised by the agent from having functioned as the agent. Such profit realised by the agent cannot be regarded as forming part of the expenditure incurred by the assessee on the promotion of the sale of its products by maintaining the agency. A mere commission paid on sales effected cannot be regarded as expenditure on promotion of marketing the product. It is necessary that the agent maintains an office abroad and the promotion of sales of the assessee's products is made through that office of the agent. It is the expenditure incurred by the assessee on maintaining such office of the agent that qualifies for deduction.