Per Shri P. S. Dhillon, Judicial Member - The revenue has field Appeal No. 496 (Bom.) of 1981 against the order of the Commissioner (Appeals) who partly allowed the appeal of the assessee against the order of the Fourth ITO passed in the assessment year 1975-76 while the assessee has field Appeal Nos. 3907 and 3908 (Bom.) of 1981 against the order of the Commissioner, who passed an order section 263 of the Income-tax Act, 1961 (the Act) directing the ITO to withdraw the weighted deduction allowed by him under the provision of section 35B of the Act in the assessment years 1976-77 and 1977-78 with reference to the melting charges and to recompute the total income and tax thereon, accordingly.
2. We are disposing of these three appeals consolidating together since the grounds raised in these appeals are common, so much so that the submission and the contentions of the parties are also common.
3. The assessee is a registered firm. The assessment years involved in these appeals are 1975-76, 1976-77 and 1977-78 for which previous years ended on 31-12-1975, 31-12-1976 and 31-12-1977, respectively. The business of the assessee is mainly of export business. The system of accounting is mercantile.
4 & 5. [These paras are not reproduced here as they involve minor issues.]
6. Now, we come to the common issue regarding the weight deduction on the expenditure expended on melting and refining charges paid for silver for the years under consideration.
The ITO allowed the export market development allowance to the assessee under section 35B on the items of expenditure of melting and refining of silver for the years under consideration. However, the commissioner (Appeals) on the perusal of the income-tax records for the assessment years under consideration found that the orders of the ITO for both the years were erroneous insofar as they were prejudicial to the interests of the revenue for the following reasons :
'The Income-tax Officer has allowed weighted deduction under section 35B of the Income-tax Act, 1961, on melting and refining charges of Rs. 25,17,966 for assessment year 1976-77 and of Rs. 7,87,447 for assessment year 1977-78. Copies of the agreements or contracts field by the assessee before the ITO reveal that on receipt of the silver consignment abroad, certain procedures will be followed abroad to determine the amount payable to the assessee in lieu of the silver exported. The net amount so determined only constituted the sale price to be accounted for by the assessee. Instead the assessee has determined the gross amount as the sale price and the various amounts deducted therefrom by the parties abroad as expenses incurred by the assessee. In fact such amounts deducted to determine the sale price did not constitute expenses incurred by the assessee abroad and, therefore, weighted deduction under the provision of section 35B on such amounts was not allowable to the assessee. Even presuming but without admitting that such amounts constituted expenses incurred by the assessee abroad, it would increase only the cost of the product article exported and the assessee was not entitled to the weighted deduction under section 35B on any part of the cost of the product or article exported. While finalising the assessments for the two assessment years under consideration, the ITO erroneously allowed weighted deduction under section 35B by treating such amounts deducted as express other than those forming part of cost of the product or article exported or under the belief that the same are covered by the provisions of section 35B (1) (b).'
Accordingly, he issued a notice under section 263 on the assessee intimating it that an order under section 263 was proposed to be passed in both the years either setting aside the assessment and directing the ITO to make the assessment afresh or, in the alternative, modifying the said orders of assessment so as to ready the aforesaid errors, and requiring the assessee to show cause either personally or in writing on or before 21-9-1981 as to why such orders should not be passed. In response to this notice, Shri M. J. Doshi, chartered accountant, filed written explanation vide letter dated 22-9-1981 and also filed the following :
'(i) A copy of letter No Sil/BA/GMP/1976, dated 20-11-1976 from the State Trading Corpn. of India Ltd., addressed to All Silver Exporters associated with STC for export of silver.
(ii) Copies of 3 debit notes received from Macatta & Goldsmid Ltd., London - debit note bearing earlier Nos. -i.e., 713000 and 713827 subsequently is not known. Since this is not relevant, this is ignored.
(How debit Note No. 714295 happened to be issued on 16-1-1976 while debit notes bearing earlier Nos. - i.e., 713000 and 713827 subsequently is not known. Since this is not relevant, this is ignored.)
(iii) Copy of CIT (A)-IIs order No. CIT (A) II/AV/24/1978-79 dated 21-11-1980 in the case of the assessee for assessment year 1975-76.
(iv) A Copy of CIT, Bombay City VIIs order No. BC. VII/RP-1/80-81 dated 17-2-1981 in the case of Nirmal Exports for assessment year 1976-77.'
On hearing Shri Doshi and going through the record before him, he rejected the explanation and the contention of Shri Doshi to the aforesaid notices and thereby held that in the circumstance, the assessee was not entitled to weighted deduction under section 35B on melting charges as was rightly concluded by the AAC for the assessment year 1975-76 as the ITO had incorrectly allowed such weighted deduction on melting charges for the assessment years under consideration. He thereby directed the ITO to withdraw the weighted deduction allowed by him under the proviso to section 35B for the assessment years under consideration in respect of melting charges and to recompute the total income and tax thereon, accordingly, observing as under :
'If the assessee has agreed to sell to the persons abroad pure silver ingots as manufactured by the assayers and refiners abroad, the melting charges, etc., is nothing but part of the cost of the silver ingots. In such a case, the assessee will not be entitled to deduction under section 35B on such melting charges, as was held by the IAC in the assessees case for assessment year 1975-76. If the assessee in the alternative, had agreed to reimburse the foreign buyers, in principles the assessee agreed to reduce the sale price, accordingly. In other words as rightly held by the IAC in the proceedings for assessment year 1975-76, this did not constitute an expenditure incurred by the assessee for the supply of silver abroad but is an expenditure incurred by the foreign buyers and reimbursed by the assessee (not connected with or incident to the supply of goods) for the purposes of determining the amount payable by the foreign buyers to the assessee. The circular dated 20-11-1976 issued by the STC not only intimated the rate of such charges but also desired that the exporters should take such charges while making offers, i.e., the offers, should be increased ultimately. As already indicated earlier, the assessee is only supplier of silver and no after supply service whatsoever are rendered. The price is quoted for 999 purity of silver while the silver as exported from India was not of that purity. In such a case, naturally any buyer will have to ascertain the real quantity of silver received from the assessee, which can be done only by recourse to remolding and making silver ingots of 999 purity. The debit notes have been issued only to regularise the accounts. If the assessee has not agreed to sell outside India sliver ingots as manufactured by foreign assayers and refiners, such an expenditure, if at all, is one after the supply of goods connected with realisation of the amount due from foreign buyers. Such an expenditure is not covered by the provisions of section 35B. It is also apparent that t he so-called charge includes insurance charges, transportation charges, etc., incurred by the foreign buyers. Even if the same is for and on behalf of the assessee, such items of expenses are clearly outside the purview of section 35B. To sum up the so-called melting charge is either part and parcel of the cost of silver ingots agreed to be supplied abroad or, in the alternative, not an expenditure incurred by the assessee (leave aside wholly and exclusively) connected will or incidental to the supply of goods abroad. In the circumstances, the assessee is not entitled to the weighted deduction under section 35B on such melting charges as was rightly concluded by the IAC for 1975-76. As the ITO has incorrectly allowed such weighted deduction on melting charges in the assessment for assessment years 1976-77 and 1977-78, I hereby direct the ITO to withdraw the weighted deduction allowed by him under the provision of section 35B in the assessment for assessment years 1976-77 and 1977-78 with reference to the melting charges and to recompute the total income and tax there on, accordingly.'
7. The assessee has preferred these appeals against the orders of the Commissioner under section 263. At the time of hearing these appeals, Shri K. R. Sampath, the learned counsel for the assessee merely contending on merits stated that the expenditure on melting and refining of sliver in dispute for both the years under consideration is a subject-matter of weighted deduction in view of sub-clause (viii) of section 35B (1) (b). In support of it, he reiterated the same stand which was there before the Commissioner. He relies on the paper book containing pages 1 to 50. On the other hand, learned departmental representative contends that the expenditure in dispute on melting and refining of silver is nothing else than the cost of the goods to be sold to the foreign buyers. He further contends that the amount involved is in respect of compensation paid by the assessee to the foreign buyers for non-supply of the silver as required under the terms and conditions of the contract to supply silver to foreign buyers which is anything less than payment of demurrages for breach of contract. He further contends that when the assessee has accepted less sale price from the buyers on account of expenditure on melting and refining silver by them, then the assessee has agreed that the sale price is not that much which he as asked for but the same is which is to be paid on deduction of the charges incurred by the buyers for melting and refining silver in London and as such the difference between the sale price and the sale price received by the assessee for on account of it cannot be taken as expenditure incurred by the assessee for the purpose of performance of foreign contract. He relies on the order of the Commissioner.
8. On hearing the parties and going through the record, we are of the opinion that the contention of the learned departmental representative, referred to above, are well founded and must prevail. The reasons are that the assessee is to supply silver to the foreign buyer according to the terms and conditions of the contract. But the parties are at liberty to change this on their mutual consent. However, from the contract and relevant letters between the parties and from the findings of the Commissioner, the following position emerges :
'(a) Even if 999 purity of silver as certified by an Indian party is exported, the foreign buyer will not accept the certified goods at its face value (reasons behind such decision is consideration).
(b) What will be done by the buyer abroad on receipt of the goods abroad is refining and covering into ingots by assayers and refiners abroad which ingots alone are acceptable in foreign market and the charges connected therewith will be a charge on the sale price and the sale price will be redetermined on the basis of 999 purity silver obtained on after melt.
the assessee had agreed to supply silver abroad in ingots as manufactured by foreign assayers and refiners.
(c) While invoicing by the assessee, even impurity embedded in the silver ingots as exported from India is also considered as sliver. If this impurity is removed abroad on remolding, the same is considered as silver lost on remolding for the purpose of accounting.
(d) Even insurance charges, transportation charges, etc., are also deducted from the invoice price depending upon the contract.'
Thus, there is no doubt in our mind that the assessee has agreed to sell to the foreign buyers all the silver manufactures by the assessee on the terms and conditions stated in the contract referred to above, which say that even if 999 purity of silver as certified by an Indian party is exported, the foreign buyer will not accept the certified goods at its face value. When this is so, then the melting and refining charges incurred in London by the foreign buyers on the silver ingots manufactured and exported by the assessee and thereto the assessee agreed to deduct charges from the sale price of the silver exported from its invoice, cannot be said to be an expenditure on the supply of silver in respect of the performance of foreign contract between the assessee and the foreign buyers. The reason is that it is nothing else than the part of cost price of the silver to be supplied by the assessee to the foreign buyers in terms of sale contract between the assessee and the foreign buyers.
Apart from it, it is immaterial if the assessee had a certificate of the STC showing that the silver exported to the foreign buyers is in accordance with the terms and conditions of the sale contract of silver. The reason is that it is for the purchaser of the silver to say that silver is not supplied by the assessee as required under the contract and under the contract it is to be in the manner which after melting and refining silver in London came into being. And if the expenses are incurred by the foreign buyers for such exported silver on melting and refining and the foreign buyers claimed such expenses to be incurred by them by on behalf of the assessee and the assessee agreed to it, then it is not at all an expenditure incurred by the assessee for the performance of foreign contract and as such the certificate of the STC referred to above is no help to the assessee for its claim. Therefore, the sale price claimed by the assessee is excessive to the extent of such charges and as such the amount of such charges is loss of business being deficiency in quality and form of silver exported by the assessee to the foreign buyers.
Besides, when the assessee agreed to supply under the contract to its foreign buyers, then it is to be of quality and in the form of shape as required under the contract and if there is dispute between the assessee and the buyers in respect of its quality and form then if the buyers bring silver in that form and quality as he thinks to be purchased by him and to be supplied by the assessee then whatever expenses are incurred for such purpose by the buyers and the assessee agreed to pay expenses to the foreign buyers by making a deduction in the invoice then these expenses are nothing else then the payment of compensation or damages for the breach of contract being defective in the quality of goods supplied. We are supported in our view in the decision of the Tribunal in the case of Union Industries [IT Appeal No. 1405 (Bom.) of 1979, dated 9-5-1980] where the judicial member was a party. Besides, the order of the Commissioner is based on cogent and relevant reasons and we do not see that the assessees counsel has rebutted these reasons of the Commissioner either by making fresh arguments or by bringing fresh material on record; rather he reiterated the stand of the assessee which was there before the Commissioner, hence, we agree with his reasons.
9. The common issue which is there in the revenues appeal for the assessment year 1975-76 is ground No. (1) which is as under :
'On the facts and in the circumstances of the case and in law, the learned Commissioner (Appeals) erred in holding that the expenditure of Rs. 7,32,876 incurred by the assessee on Melting and Refining charges is qualified for weighted deduction under section 35B ?'
Since, we have determined this issue in the assessees appeal for the assessment years 1976-77 and 1977-78 against the assessee, for these reasons, we determine this issue, accordingly, and thereby set aside the order of the Commissioner (Appeals) on this issue for the assessment year 1975-76 holding therein that no weighted deduction is to be allowed on Rs. 7,32,876 incurred by the assessee on melting and refining charges.
10. In the result, the assessees appeals is dismissed while the departmental appeal is partly allowed.