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Commissioner of Income-tax Vs. Navabharat Enterprises (P.) Ltd. - Court Judgment

LegalCrystal Citation
SubjectDirect Taxation
CourtAndhra Pradesh High Court
Decided On
Case NumberCase Reference No. 108 of 1982
Judge
Reported in[1988]170ITR326(AP)
ActsIncome Tax Act, 1961 - Sections 35B, 35B(1) and 37
AppellantCommissioner of Income-tax
RespondentNavabharat Enterprises (P.) Ltd.
Appellant AdvocateM. Suryanarayana Murthy, Adv.
Respondent AdvocateS. Parvatha Rao, Adv.
Excerpt:
.....within india is not relevant as cl. (viii) is essentially concerned with rendering services outside india. the services extracted by the assessee are in connection with streamlining the contract for the export of goods and as such cl. (viii) applies. note- sec. 35b has been omitted by dtl (amendment) act, 1987 w.e.f. 1-4-1989. income tax act 1961 s.35b export market development allowance--weighted deduction--expenditure on obtaining information regarding marketability of goods held: sub-cl. (ii) of s. 35b is obviously aimed at giving relief in the event of spending the amount for survey of export potential. therefore, the expenditure incurred by the assessee for obtaining information regarding market potentiality for the goods sought to be put in the stream of export is..........deduction for performance of services relatable to execution of a contract for the supply of goods outside india. the payment is made to the corporation to ensure the financial capacity of the foreign buyer to fulfil the commitment of deferred payment and insulate the assessee against the risk of nonrecovery from the foreign buyer. the location of the office of the corporation within india is not relevant as sub-clause (viii) is essentially concerned with rendering services outside india. it is not necessary that the person or corporation rendering services should be situated outside india and it is sufficient to attract sub-clause (viii) if services are rendered outside even if the corporation performing such services is situated within india. the services extracted by the.....
Judgment:

Rama Rao, J.

1. The question referred at the instance of the Commissioner of Income-tax is :

'Whether, on the facts and in the circumstances of the case, the assessee is entitled to weighted deduction under section 35B of the Income-tax Act, 1961, in respect of Rs. 2,05,211 incurred for export credit guarantee insurance ?'

2. The assessee claimed weighted deduction of certain items of expenditure amounting to Rs. 10,74,535. Out of this amount, the Income-tax Officer declined to allow the claim for an amount of Rs. 6,02,113. Out of the amounts disallowed by the Income-tax Officer, a sum of Rs. 2,05,211 represented the expenditure incurred for export credit guarantee insurance and both the appellate authorities concurrently held that weighted deduction should be allowed and this reference is concerned with this amount only. The appellate authorities held that the payment is made to the export credit guarantee corporation for the information furnished to the assessee regarding credit-worthiness of the foreign purchaser but also providing a guarantee for payment of such amount and such activity for obtaining information and arranging guarantee falls within sub-clause (ii) of section 35B(1)(b) of the Act and as such is eligible for weighted deduction.

3. Learned standing counsel for the Revenue contends that the expenditure does not fall within any of the clauses under section 35B of the Income-tax Act and as such the exemption granted by the Tribunal is not justified. Learned counsel for the assessee, seeking to sustain the order of the Tribunal contends that the deduction under section 35B should be considered from a broad perspective and the expenditure claimed is within the purview of sub-clauses (ii) and (viii) of section 35B(1)(b). To appreciate the rival contentions, it is necessary to get at section 35B to the extent relevant, which is as follows :

'35B. (l)(a) Where an assessee, being a domestic company or a person (other than a company) who is resident in India, has incurred after the 29th day of February 1968, but before March 1, 1983, whether directly or in association with any other person, any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) referred to in clause (b), he shall, subject to the provisions of this section, be allowed a deduction of a sum equal to one and one third times the amount of such expenditure incurred during the previous year : ......

(b) The expenditure referred to in clause (a) is that incurred wholly and exclusively on -

(i) advertisement or publicity outside India in respect of the goods, services or facilities which the assessee deals in or provides in the course of his business;

(ii) obtaining information regarding markets outside India for such goods, services or facilities;

*(iii) distribution, supply or provision outside India of such goods, services or facilities, not being expenditure incurred in India in connection therewith or expenditure (wherever incurred) on the carriage of such goods to their destination outside India or on the insurance of such goods while in transit, where such expenditure is incurred before the 1st day of April, 1978;

*(iv) maintenance outside India of a branch, office or agency for the promotion of the sale outside India of such goods, services or facilities;

*(v) preparation and submission of tenders for the supply or provision outside India of such goods, services or facilities, and activities incidental thereto;

*(vi) furnishing to a person outside India samples or technical information for the promotion of the sale of such goods, services or facilities;

(vii) travelling outside India for the promotion of the sale outside India of such goods, services or facilities, including travelling outward from, and return to, India;

*(viii) 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;

(ix) such other activities for the promotion of the sale outside India of such goods, services or facilities as may be prescribed.'

4. Section 35B bearing the caption of export markets development allowance is in the nature of a subsidy designed to provide more deduction than the deduction normally allowed under section 37 of the Act with a view to give impetus to export potential. The expenditure relatable only to export of goods is eligible for weighted deduction under this provision. Clause (b) of sub-section (1) enumerates the diverse sorts of expenditure eligible for deduction and the texture of expenditure embodied therein is closely integrated with export business. The expenditure claimed by the assessee comprises payments made for obtaining information regarding the marketability of goods and to the export credit guarantee corporation for the purpose of being apprised of the credit-worthiness of the foreign buyer and also providing guarantee for the payment. Sub-clause (ii) contemplates deduction of expenditure for information regarding markets outside India. This is obviously aimed at giving relief in the event of spending the amount for survey of export potential. Therefore, the expenditure incurred by the assessee for obtaining information regarding market potentiality for the goods sought to be put in the stream of export is squarely within the purview of sub-clause (ii). The Appellate Tribunal held that both the items of expenditure fall within sub-clause (ii).

5. In so far as the payment to export credit guarantee corporation is concerned, it is difficult to accommodate the expenditure within the precincts of sub-clause (ii). But, however, learned counsel for the assessee sought to sustain the allowance under sub-clause (viii). Sub-clause (viii) envisages deduction for performance of services relatable to execution of a contract for the supply of goods outside India. The payment is made to the corporation to ensure the financial capacity of the foreign buyer to fulfil the commitment of deferred payment and insulate the assessee against the risk of nonrecovery from the foreign buyer. The location of the office of the corporation within India is not relevant as sub-clause (viii) is essentially concerned with rendering services outside India. It is not necessary that the person or corporation rendering services should be situated outside India and it is sufficient to attract sub-clause (viii) if services are rendered outside even if the corporation performing such services is situated within India. The services extracted by the assessee are in connection with streamlining the contract for the export of goods and as such sub-clause (viii) applies.

6. Learned standing counsel for the Revenue invited us to the decision in CIT v. Southern Sea Foods P. Ltd. : [1983]140ITR855(Mad) . In this case, the assessee indented the services of another company for the purpose of procuring orders from foreign buyers in respect of export of prawns and shrimps to foreign countries and paid a certain amount by way of commission. In the context of considering whether such payment can be allowed as a deduction under section 35B of the Act, the Madras High Court held that the commission paid for getting orders does not fall within the items of expenditure set out in clause (b). The nature of activity in the instant case is entirely different and, therefore, this decision does not apply. In K. Vensimal & Sons v. CIT : [1986]157ITR807(Mad) , the assessee claimed weighted deduction in respect of various items of expenditure relating to salary, rent, packing, freight and insurance, cooly, insurance premium paid to the Export Credit Guarantee Corporation, trade expenses and legal expenses and, in so far as the insurance premium paid to the Export Credit Guarantee Corporation was concerned, the Madras High Court held that the deduction is admissible as the expenditure is solely and exclusively relatable to export. In CIT v. Vippy Solvex Product (P.) Ltd. : [1986]159ITR487(MP) , the assessee-company claimed weighted deduction on the interest paid to the bank on export-packing credit account and the amounts were taken on credit for purchase of raw material for manufacturing goods to be exported outside India. The Madhya Pradesh High Court, applying sub-clause (viii), held that this expenditure is incurred in connection with the execution of a contract outside India and as such the deduction is admissible. In CIT v. Raunaq International Ltd. : [1986]158ITR701(Delhi) , the assessee claimed deduction for expenditure for repairs and renewals, directors' remuneration and electricity and power and 100 per cent. of the expenditure on foreign customers and in the context of considering the contention on behalf of the Revenue that these items of expenditure were incurred in India and not entitled to weighted deduction, the Delhi High Court held that the assessee-company is one which has, as its main business, export and more than 80 per cent. of its sales are export sales and the expenditure is intended to promote export development and these items of expenditure are attributable to export sales and as such they are entitled to weighted deduction. In Handicrafts & Handloom Export Corporation of India v. CIT : [1983]140ITR532(Delhi) the Delhi High Court, reiterating the same view, held that any expenditure incurred with a view to develop its export and expenses for administrative establishments located at Delhi and Madras attending to the export business are allowable.

7. Taking a clue from the wide observations in the decision of the Delhi High Court, learned counsel for the assessee contends that the items of expenditure categorised under clause (b) should be given a broad connotation and any expenditure connected with export directly or even in a remote manner is eligible for deduction. We are unable to subscribe to this proposition. Section 35B is obviously intended to give extra deduction for the items of expenditure contemplated therein with a view to give an incentive and fillip to the export market. This additional deduction over and above the normal deduction under section 37 of the Act should be allowed if the expenditure is strictly within the contours of the items of expenditure comprised in clause (b) and if a liberal or stretched interpretation is given, the object of giving additional deduction will be defeated.

8. We agree with the conclusion of the Appellate Tribunal that the items of expenditure in question fall within sub-clauses (ii) and (viii) of section 35B(1)(b).

9. In the result, the question is answered in the affirmative and in favour of the assessee.


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