1. The assessee is a Government undertaking. The common grounds of appeal for all these years relate to disallowance of surtax liabilities claimed as the revenue expenditure for the purpose of the assessee's business and the non-grant of relief under Section 35B of the Income-tax Act, 1961 ('the Act').
2. The point relating to the allowance of surtax liability is covered by the decision of the Tribunal in the case of Amar Dye-Chem. Ltd. v.ITO  3 SOT 384 (Bom.) (SB) against the assessee.
3. The assessee claimed weighted deduction under Section 35B of Rs. 29,09,639 being 50 per cent of the overall expenses incurred by the assessee under various heads for the assessment year 1975-76. Likewise for the assessment years 1976-77 and 1977-78, Section 35B relief of Rs. 31,53,035 and Rs. 34,51,047 were claimed. The ITO disallowed the claim.
According to the ITO, the assessee neither performed any services outside India nor executed any contract for the supply outside India of any goods, services or facilities. Even if the assessee is regarded as an exporter of goods or services, according to the ITO, the assessee was not entitled to weighted deduction in respect of the expenses claimed since they were incurred in India.
4. On appeal the Commissioner (Appeals), upheld the order of the ITO.In so doing, he relied on his decision for the assessment year 1977-78 in the assessee's own case.
5. For the assessee the same points as made before the authorities below were repeated. According to the learned counsel for the assessee, the revenue failed to appreciate the fact that the assessee is doing valuable services to the exporters of goods in India by making enquiries as to the status of the foreign buyers and also guaranteeing payment in respect of goods sold and services rendered to foreign buyers on credit. The expenses, in respect of which the relief under Section 35B was claimed, were incurred by the assessee wholly, necessarily and exclusively for the promotion of the export of goods and services outside India. Reference was made in this connection to the detailed activities of the corporation. The assessee was engaged in the vital task of promoting exports which was very important for the country, in view of the sensitive balance of payment position and the widening trade gap because of import of oil at inflationary prices, etc. According to the learned counsel, even a businessman, who contributes at a second or remoter stage of improvement of exports, is entitled to the relief. There was no reason, therefore, why the assessee vitally engaged in increasing the export activity of the country should not be entitled to the exports market development allowance. Not only through its direct operations in India and abroad but also by the substantial services rendered to other traders in the cause of export, the assessee was entitled to the export development allowance. The corporation rendered various services and undertook the risk of recovering money from foreign parties on behalf of the exporters who insured their risks regarding the export credit with the corporation. The corporation, thus, promoted exports of goods from India, the services rendered by it insured credit risk involved in overseas trade. Thus, all the expenses were incurred for the purposes of promoting services outside India and incidental to the export activity in India.
6. For the department, stress is laid on the orders of the authorities below. It is pointed out that the assessee's business is credit insurance. Even though it is sought to be made out that the assessee is a vicarious exporter of goods and services outside India, the factual positron is that this claim cannot be accepted. In fact, according to the learned counsel, the assessee is not an exporter of goods or services at all. The assessee had not performed any services outside India nor executed any contract for supply of goods outside India, services or facilities. It is also pointed out that the expenses are incurred in India which itself shows the ineligibility of the assessee for the relief.
7. This is a case where for the 3 years under appeal the claim for Section 35B relief prayed for, amounts almost to a crore of rupees.
Such claims would be there for other years also, because the assessee continues the same business. Against this quantitative importance of the dispute, we are really surprised that neither the department nor the assessee's representatives have gone in detail into the exact nature of the activities carried on by the assessee to come to a conclusion as to whether it is entitled to relief under Section 35B in respect of the expenses incurred. A consideration of the allowability requires a detailed analysis of the activities of the assessee on the one hand, the expenses in connection with the relief is prayed for and their relevance to the provisions of Section 35B on the other hand. In the absence of full details of the nature of the activities of the assessee, the assessee's representatives were asked to produce details.
Several pamphlets, circulars, including a monograph on the 25 years of the Export Credit & Guarantee Corporation Ltd. (ECGC) were produced before us by them. Even though with considerable labour, we should cull out something about the exact nature of the work done by the assessee.
In our opinion, the departmental authorities have dismissed the claim of the assessee by a general statement to the effect that the assessee does not supply goods or services abroad and even though in an appropriate case the payments made to the assessee by other traders would entitle the latter to relief under Section 35B, the assessee itself cannot be considered as eligible for the same. The expression used in this connection by the ITO and the learned counsel for the department before us is a 'vicarious claim to export performance'. In our view such a general statement without going into the particulars does not help us to decide the assessee's case. It requires, however, to be stated that an assessee in order to be entitled to the relief under Section 35B should satisfy the conditions in the section itself and also be in a position to bring the execution of the work in respect of which the relief is claimed under any of the nine Sub-heads provided in Section 35B.8. The assessee started initially as ERIC 'Export Risks Insurance Corporation in 1957 and thereafter had its name changed over to the present one of 'Export Credit & Guarantee Corporation Ltd.' ECGC. It was realised that it was a risky operation to export goods to other countries, risky in the sense that the payment for the goods might not be received due to circumstances in the inporting country over which neither the exporter nor the importer had control. While general insurance companies willingly underwrote risks relating to fire, plunder, riots, loss in accidents, etc., no company in this country was willing to underwrite a risk involving the bankruptcy of the importers abroad or due to changes caused by political upheavals. According to the Kapur Committee, which went into the question of "insuring against loss from export credit risks, the insured is enabled to sell on credit terms and thereby successfully compete with exporters from other countries and thus increase the volume of his business especially when the pattern of exports was undergoing a change. In the fifties, India's exports of jute fabrics, tea, minerals and cotton textiles had established buyers and no attempt was being made to venture out into new countries. Young adventurous firms could discover new markets only if export credit insurance could be readily made available to them.
This was a facility which many of his competitors in foreign countries enjoyed in abundance".
The risks covered by ERIC included insolvency and default, war and civil commotion, restrictions on transfer of money and on imports and exports and any other risks caused by factors beyond the control of the exporter or the buyer.
...recognised the problem of export finance as a constraint to export promotion and devised the Packing Credit Guarantee Scheme which was a forerunner of many other guarantees that came into being in later years. The guarantee, which is considered by export credit insurers as an important innovation, has not only generated substantial volume of business for the corporation but has also credited a climate in which banks could grant need-based credit facilities to exporters on a liberal basis.
A pamphlet issued by the ECGC states that while general insurers take care of general risks, the ECGC protects the exporters against various types of export credit risks. In pursuance of the above objects of the ECGC, it had developed various activities on the insurance, re-insurance, guarantee and other lines of interest to exporters mainly. In the field of insurance it had developed standard policies to deal generally with risks. Specific policies are designed to protect Indian firms against the risk of not receiving payments in respect of : (c) construction works including turnkey projects undertaken overseas.
The specific policies may relate to specific shipments, comprehensive or political risk or specific contracts. In the case of goods manufactured to buyers' specifications and not easily saleable to alternate buyers, the exporter could obtain a credit covering even a pre-shipment risk. Under the contract policies the risk of loss due to the governmental ban on export of goods after the date of contract is also covered. When Indian firms render services to foreign parties, they are exposed to payment risks similar to those involved in export of goods. The services policy offers protection to the Indian firms against such payment risks. A wide range of services like technical or professional services, hiring or leasing can be covered under the policies and special schemes of the ECGC relate to insurance cover for buyers credit and lines of credit. Agreements with its counterparts in other countries extend to joint insurance facilities for the benefit of Indian entrepreneurs entering into foreign collaboration ; overseas insurance investments and exchange fluctuations risks claims. A principal activity of the ECGC is to offer guarantees to banks and financial institutions to enable exporters to obtain increased credit facilities from them. The boom in connection with the activity in West Asain countries led to the quick realisation of the importance of the insurance cover needed by project's exports so that Indian contractors could bid in a successful manner through the packing of the cover provided by the corporation. The ECGC has entered into agreements with other Export Credit Insurance organisations, such as, the German Organisation (Hermes) for reciprocal arrangement for granting insurance cover to joint contractors of both countries. Apart from the substantial volume of business underwritten in financial terms, the activities of the corporation extend to other fields also. Considering the exporters' needs of policies and guarantees changing from time to time, the corporation has evolved new schemes like Packing Credit Guarantee Scheme, 1960, Construction Works Policy, 1980, Overseas Investment Insurance, 1978, Exchange Fluctuation Risk Cover, 1980 and the Reinsurance of Corporation's Business, 1981. Each one of these is primarily designed to aid and protect the export activities of Indian traders.
10. The Packing Credit Guarantee is designed to protect the bank which grants packing credit advances to exporters from loss arising due to the insolvency or the protracted default of the exporter. Thus, protected banks could grant pre-shipment credit on a more liberal basis. Such pre-shipment advances cover purchase, manufacture and processing or packing of goods exported against firm contracts of sale.
Advances given by banks to Indian firms engaged in export of services or those which undertake construction work abroad to meet preliminary expenses in this connection are also eligible for cover under this guarantee. There are variations of these guarantees specially to suit for post-shipment export, Export Finance, Export Production Finance, Export Performance and Transfer Guarantee.
11. The transfer guarantee seeks to safeguard Indian bank which add confirmation to letters of credit opened by banks abroad in favour of Indian exporters. The transfer guarantee covers both commercial and political risks, such as : (i) insolvency of the bank in the foreign country which has opened a letter of credit ; (ii) failure of the opening bank to pay insured debt to insured within the prescribed time ; (iii) laws or regulation which prevent, restrict or control the transfer of the insured debt to India ; (v) war, hostilities, civil war, rebellion, insurrection or other disturbances in the country of the opening bank.
12. An analysis of the above activities of the ECGC indicates that selling of goods, commodities or services to foreign buyers involves two inherent risks, viz., (1) Marine and General Risks ; and (2) Export Credit Risks. While general insurance takes care of the former, the ECGC takes care of the latter. To extend credit to a foreign buyer, the exporter has firstly, to find the resources to offer credit and secondly, be prepared to face the risk involved in offering such credits. There are commercial risks like the overseas buyers going bankrupt or defaulting and political risks like wars, disturbances or import and exchange restrictions. According to the pamphlet issued by the ECGC : 1. By reducing the element of risk in extending credit to buyers, export insurance enables our exporters to make an all-out effort to increase their export business. It places our exporters in a position of competitive equality with exporters in other countries who have access to such facilities.
ECGC's role is to provide a backbone to India's export drive by (1) providing exporters with a range of credit risk insurance covers, both commercial and political, against losses in export of goods and services and (2) offering guarantees to banks and financial institutions to enable exporters to obtain better credit facilities from them.
Besides providing insurance cover and guarantees, ECGC has in recent years become a catalyst in India's export promotion drive. ECGC provides a platform for exporters to highlight their problems. ECGC has helped to streamline procedures and remove bottlenecks. With its recent computer facilities the Corporation has begun to programme vast reference information on buyers abroad as well as other vital information needed by Indian exporters. ECGC also periodically organises seminars and workshops on export development involving exporters, commodity boards, banks, financial institutions and Government bodies.
13. Being a financial institution, the activities of the ECGC are more allied to the financial side of the exporting community. It provides primarily guarantee to the banks who finance exports and also directly provides varied types of insurance to the exporters themselves.
Insurance cover such as under life or general insurance may involve an element of intelligent speculation based on the mortality rates, accidents, etc., but it is clear that even these activities involve a substantial study of the general situation in the country, the activities carried on, etc. Even such insurers do not conduct their business by equating the premia received to the likely losses to be paid for and counting the difference as chance would have it as profits. There is always a deliberate attempt to gather information and apply technical rules and formulae to work out the premium rates, the types of policies, the nature of risk involved, etc. In the case of a corporation like ECGC which specialises in risks connected with export activity, certainly it cannot do business by a mere equating of the premia received and the amounts to be paid for on risk. Like all insurers and more in view of its activity abroad, the ECGC has to collect substantial information, make elaborate study, co-operate or collaborate with foreign institutions, etc., in order to carry on its export insurance business. Where the risk involves the financial position of the foreign purchaser, the ECGC may have to take recourse to recover amounts from him and help the exporter also in this regard.
An advice to exporters runs as under : 1. If your buyer defaults, do not arrive at a composite arrangement without the prior approval of the corporation. Remember the corporation will eventually have to shoulder the burden of any arrangement and it is not bound by any commitments you may make without its prior approval.
Do not extend the tenure of the bill without the prior approval of the corporation.
2. Ensure that your buyer has complied with all the foreign exchange requirements to facilitate quick repatriation of funds where the payment has been made in local currency. ECGC can guide you on the various foreign exchange formalities applicable.
14. An instance mentioned refers to the difficult foreign exchange position in Nigeria which caused inordinate transfer delays for Indian exporters. The delay in receipt of payment started having adverse effects in the working of the exporters and had also an unfavourable impact on the exports of the country. The corporation had to take special efforts to stem this difficulty for which purpose the managing director and other officials of the company had to visit Nigeria and have discussions with the exchange control authorities there. The corporation had often to confer with and meet importers, the Government officials and others abroad. For the purpose of fixing its premium rates and adopting recovering procedure where necessary, the corporation has divided the countries into various groups depending on the nature of their economy, political and economic stability, etc.
Grappling with conflicts, problem of guaranteeing and recovering demands and acquiring comprehensive knowledge about the situation in the foreign lands over the years, the ECGC has built up a machinery to keep itself well informed about developments all over the world. The corporation is a member of the International Association of Export Credit Insurance registered in Berne (Switzerland) popularly known as Berne Union. The corporation's officials and executives attend the Union meetings and also partake of all the activities relating to its business in other foreign countries.
15. The nature of the activities of the ECGC summarised in some respect above, thus, clearly indicates that it has immediate and direct connection with the export activities of the country. The work of the corporation is thus substantially associated with and in fact is an exquisite necessity in the case of several exporters. For the role of the ECGC in accelerating exports, the Government of India conferred on the corporation the highest national award for outstanding export efforts in 1973. We were, there fore, very much intrigued that an assessee whose activities formed the backbone of the country's export performance should be denied the exports markets development allowance even though other less active participants in the exports sphere, who make use of and at a remote stage the corporation's activities, should get the benefit. Even though the principal thrust of the corporation's activity relates to guarantee and insurance, this involves substantial work "abroad, such as travelling, collecting information, etc., for which purpose substantial amounts out of the earnings of the company have to be spent. The expenditure of the company is incurred both in India and outside, for instance, in respect of salaries, travelling expenses, publicity and miscellaneous expenses which later involve collection of data about outsiders. Quite a good part of the expenses out of those incurred abroad might fall into one or other of the clauses in Section 35B(1)(b). In our opinion, therefore, there is clear performance even outside India of services by the assessee which facilitates export activity. Where the exporter enters into an agreement for supply of goods to an outsider and amounts have to be spent for recovery of the debt outside and on that score be entitled to the relief under Section 35B, we do not see how the assessee who, along with such exporter, renders activity to collect the same debt partly for the exporter and partly for reimbursement of the differences paid off by way of guarantee or policy amounts would not be entitled to the allowance under Section 35B. This does not stand in the position of what the authorities below described as 'vicarious activity'. The corporation directly renders work for the collection of amounts, etc., in connection with sale of goods, services and facilities. Though the corporation directly may not sell these, its income also arises only from such sale, though through the intermediary of the actual exporter.
We have, therefore, no hesitation in holding that the assessee is entitled to relief under Section 35B in respect of some of the expenditure incurred by it.
16. As pointed out above, the assessee has claimed allowance under Section 35B to the extent of nearly a crore of rupees for the 3 years under appeal. These cover expenses like salaries, rent, travelling, publicity, etc. We have given above our understanding about the activities of the asses-see-company to enable one to find out how much of this would entitle for the export allowance and what expenses, if at all, would fall under different Sub-clauses of Section 35B(1)(b). The full details have to be gathered and analysed. The authorities below have rejected the entire claim on the ground that the assessee is not involved in export activity. For this reason apparently the expenses have noot been analysed or gone into We, therefore, remit the matter back to the ITO to proceed on the basis that the assessee carries on activity entitling it to allowance under Section 35B and computing the allowance on the basis of the details and the nature of the expenses.
The assessee should be permitted to produce all evidence necessary for the purpose.