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income-tax Officer Vs. M.S.P. Exports (P.) Ltd. - Court Judgment

LegalCrystal Citation
CourtIncome Tax Appellate Tribunal ITAT Bangalore
Decided On
Judge
Reported in(1984)10ITD233(Bang.)
Appellantincome-tax Officer
RespondentM.S.P. Exports (P.) Ltd.
Excerpt:
.....board and as such it was an expenditure incurred in connection with or incidental to supply of goods outside india. reliance was also sought to be placed on some decisions of the tribunal at bombay. the commissioner (appeals) held as follows : 3. after a careful consideration of all the facts of the case i am of the opinion that weighted deduction has to be allowed on the export duty paid. in coming to the conclusion that the appellant is not entitled to weighted deduction, the income-tax officer has obviously proceeded on wrong premises. it is not correct to say that the duty is paid at the time or contract between the appellant company and the coffee board. from the evidence produced before me, it is clear beyond doubt that the payment of export duty has got nothing to do with the.....
Judgment:
2. The next ground is regarding allowance of weighted deduction under Section 35B of the Income-tax Act, 1961 ('the Act') with regard to export duty. The ITO in his order for 1977-78 has stated as follows: (a) Weighted deduction on export duty of Rs. 1,34,29,740: The assessee's authorised representatives consider that the assessee-company is eligible for the weighted deduction under Sub-clause (viii). According to them, the assessee is an exporter supplying goods in execution of contracts and as such expenditure incurred in this respect is covered by Sub-clause (viii). For this purpose, reliance is placed on the terms and conditions of sale. It is argued that the duty paid to the Government of India is wholly and exclusively for the purpose of export of such goods.

The duty paid is at the stage of contract of the assessee-company and Coffee Board in India. It is in no way connected with any agreement or contract with the foreign buyer. The export duty paid by the assessee company represents its selling price in India. As such, this item of expenditure cannot be treated as one entitled to the weighted deduction under any of the Sub-clauses.

Before the Commissioner (Appeals) it was urged on behalf of the assessee that the said expenditure had been incurred at the point of shipment of coffee and not at the time of signing the contract with the Coffee Board and as such it was an expenditure incurred in connection with or incidental to supply of goods outside India. Reliance was also sought to be placed on some decisions of the Tribunal at Bombay. The Commissioner (Appeals) held as follows : 3. After a careful consideration of all the facts of the case I am of the opinion that weighted deduction has to be allowed on the export duty paid. In coming to the conclusion that the appellant is not entitled to weighted deduction, the Income-tax Officer has obviously proceeded on wrong premises. It is not correct to say that the duty is paid at the time or contract between the appellant company and the Coffee Board. From the evidence produced before me, it is clear beyond doubt that the payment of export duty has got nothing to do with the contract with the Coffee Board. The shipping bills make it very clear that the duty is paid at the point of shipment of coffee. In other words, the duty is paid just before the commodity leaves the shores of India. Hence, the Income-tax Officer erred in his observation that the duty is paid when the contract is signed with the Coffee Board. The Income-tax Officer also erred in his presumption that the export duty represents selling price in India. This does not represent the selling price in India, because, the appellant does no business in India and besides, as stated earlier, the duty is paid at the point of shipment of coffee. As regards the Income-tax Officer's observation that the payment is not connected with the agreement or contract with the foreign buyer, as stated earlier, the export, of coffee is not permitted without payment of duty and to that extent it can be said that it is Connected with the agreement or contract entered by the appellant with the foreign buyer. The payment of export duty is directly connected with the export of coffee. This is a statutory payment without which, the coffee cannot be exported. In the circumstances, I agree with the appellant's claim that weighted deduction has to be allowed under Sub-clauses (ii) and (viii) of Clause (b) of Section 35B(1). The appellant also points out that a similar claim has been allowed in two cases by the Income-tax Appellate Tribunal Bombay, reported in Taxes and Planning issue of 15-9-1977 on page 19 and the April 1978 issue of the same publication, on page 374. I, therefore, direct the Income-tax Officer to allow weighted deduction on the sum of Rs. 1,34,29,740.

3. The learned standing counsel for the department raised a preliminary objection that the assessee had not objected to the denial of relief under Section 35B with regard to export duty during the proceedings under Section 144B of the Act and, therefore, the Commissioner (Appeals) ought not to have admitted this ground. However, this ground does not find a place in the grounds of appeal filed by the revenue on 7-11-1981. Further, it is seen that this is a legal contention raised on the basis of facts on record. We, therefore, hold that the Commissioner (Appeals) was justified in entertaining this ground.

4. The standing counsel for the revenue pointed out that the claim before the ITO was under Section 35B(1)(b)(viii). Before the Commissioner (Appeals) the claim was both under Sub-clauses (ii) and (viii). He submitted that the expenditure on export duty could not be equated with that 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 could not also be allowed under Sub-clause (ii) since it was an expenditure incurred in India. He submitted that the decision of the Karnataka High Court in Ullal Narayana Mallya and Sons's case (supra) with regard to freight and insurance charges would apply with equal force in the case of, export duty also. In Ullal Narayana Mallya and Sons' case (supra) having regard to the amendment of Section 35B(1)(b)(ii) in 1970, the claim under Sub-clause (iii) was given up. The assessee sought to rely on Sub-clause (viii). The Court held that Sub-clause (viii) would apply only to an after-sale service in outside countries having regard to the meaning of the words 'ancillary or incidental to a trade or business'.

The learned standing counsel submitted that the High Court judgment had placed the matter beyond doubt and the assessee's claim for weighted deduction on export duty was clearly untenable.

5. The learned counsel for the assessee submitted that export duty was not covered by the Karnataka High Court judgment. The Bombay High Court in the case of Universal Ferro and Allied Chemicals Ltd. v. P.G.K.Warrier [1983] 143 ITR 959 had questioned the correctness of the decision of the Special Bench in J.H. and Co. v. Second ITO [1982] 1 SOT 150 (Bom.). For this reason, cases involving similar claims were being remitted back to the ITO's by the Bombay Benches of the Tribunal.

In this case, the export duty was paid in connection with the execution of the contract for supply of goods outside India. The contract could not be fulfilled unless export duty was paid. This was not part of the cost of goods. The expenditure being for the purpose of facilitating the supply of goods outside India has to be treated on par with other expenditure of the same nature such as advertisement, publicity, commission, salary to export staff, passage, etc. It was, thus, pleaded that the order of the Commissioner (Appeals) in this behalf should be upheld. In the alternative, a plea was made to constitute a Special Bench.

6. We do not feel that it is necessary to constitute a Special Bench for resolving this dispute. A Special Bench of the Tribunal has already given a decision in this behalf which, however, has not been accepted by one of the High Courts, with regard to weighted deduction on freight, port trust certification charges, etc. On the same issue, the Karnataka High Court has held in favour of the revenue. It, therefore, remains for us to examine whether export duty is to be treated on par with expenses on carriage, freight, etc., or not.

The argument that export duty paid was an expenditure incurred wholly and exclusively in connection with or incidental to the execution of any contract for supply outside India of goods is fallacious. The logic that unless export duty was paid goods could not be sent out of the ports to foreign countries and as such the duty is an expenditure incurred wholly and exclusively in connection with the contract for supply outside India of goods is untenable. If the above logic were correct, even cost of goods and expenditure incurred on freight would qualify for weighted deduction. Unless an assessee produces goods, he cannot export them. Unless he carries them to the port, the goods cannot be exported. That way, every expenditure incurred by the assessee would have to be given relief under Section 35B(1) and the prohibitions contained in Section 35B(1)(b)(iii) and (viii) against allowance of weighted deduction on expenditure incurred in India would be rendered otiose. There is no dispute that export duty is an expenditure incurred in India. The first portion of Section 35B(1)(b)(iii) reads as follows : 35B(1)(6) The expenditure referred to in Clause (a) is that incurred wholly and exclusively on- (iii) distribution, supply or provision outside India of such goods, services or facilities, not being expenditure incurred in India in connection there with ....

Therefore, the expenditure incurred in India in connection with the supply of goods outside India is clearly not entitled to weighted deduction under Section 35B(1)(b)(iii).

7. We now examine the assessee's claim under Section 35B(1)(6)(vh7).

The clause reads as follows : 35B(1)(b) The expenditure referred to in Clause (a) is that incurred wholly and exclusively on- (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 ; The Karnataka High Court explained the implications of this Sub-clause in detail in the case of Ullal Narayana Mallya and Sons (supra). Though they were examining the allowability of the assessee's claim under Section 35B with regard to freight charges which the assessee claimed was permissible under Sub-clause (vim), the observations would apply with equal force to the claim for weighted deduction on export duty also, for the simple reason that the assessee has based its claim on Sub-clause (viii). Paragraphs 9, 10, 11 and 12 of the judgment would make the position clear. These are as follows : 9. The question for decision is whether the activities performed by the assessee in the matter of shipment of the goods at Indian ports to foreign destinations, obtaining bills of lading, payment of freight, whether in Indian currency or foreign currencies, preparations of bills of exchange and presentation of the bills with the necessary shipping documents to the foreign buyers or their agents for payment, constitute 'performance of service in connection with or incidental to' the execution of the contracts for supply of cashewnut, kernel or cashew shell oil outside India.

35B. Export market development allowance.-(1)(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, 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' ; (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.' Note : The clause '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' shown within the inverted commas in Sub-clause (ii) of Sub-section (1)(b) of Section 35B was added retrospectively by Section 8 of Act 19 of 1970.

In view of the amendment retrospectively made to Sub-clause (iii), Shri Viswanatha Iyer did not contend that the assessee's claim falls under the said Sub-clause. His case was that the claim falls under Sub-clause (viii). The view of the Tribunal was that the acts of the assessee in shipping the goods are essential parts in the execution of the contract itself and they are not acts performed in connection with or incidental to the same.

10. In our opinion, what is contemplated by Sub-clause (viii) is the rendering of after-sales service by the assessees marketing their goods outside India. It is common knowledge that manufacturers back up their sales with after-sales service and for that purpose provide a network of service centres or authorised dealers service stations. To a sale they attach a service policy which entitles the buyer to free warranty service for the period of warranty and even after the expiry of the warranty period, service by expert technicians employed by the manufacturers. To give an illustration, the well known manufacturers of Kirloskar engines, say in their advertisements for their engines that their engines have the backing of a countrywide service network of distributors to deliver to their customers genuine spare parts and render the after-sales service. The Remington Company which manufactures typewriters and electric shavers issues service policies when it sells typewriters or electric shavers manufactured by it. The company has Remington Factory service centres and authorised dealers service stations all over the world. These service stations provide free servicing during the warranty period and thereafter, supply genuine spare parts and also service at the lowest possible cost. This is the pattern of trade today. Manufacturers of goods, particularly, light engineering goods back up their sales with after-sales service.

Indian exports of such goods to countries outside India can capture markets only if they provide after-sales service for which they may have to set up factory service centres or authorised dealers service stations. Exporters have necessarily to incur expenditure in providing after-sales service in outside countries. It is such expenditure that is covered by Sub-clause (Viii).

11. The words 'in connection with' or 'incidental to' in Sub-clause (viii) have to be given effect to. The word 'incidental' has the same meaning as 'ancillary'. Stroud's Judicial Dictionary (Third Edition, Volume I, at page 135) says : 'A work is 'ancillary or incidental' to a trade or business when it is not necessary thereto or a primary part thereof ...' The decision of the Court of Appeal in Pearce v. London and South Western Railway [1900] 2 QB 100 has been relied on. The word 'connect' means to joint or attach. Therefore, the words 'connected with' cannot take the antecedent acts which are necessary or primary part in the execution of the contract of sale or supply of goods outside India.

12. The assessee's contracts were CIF contracts under which it had to ship the goods at Indian ports to foreign destinations. The loading of goods on board the ships at Indian ports obtaining bills of lading, payment of freight and presentation of the bills of exchange with the shipping documents to the foreign buyers or their agents, are all necessary acts done in the execution of the contracts for supply of goods outside India. It is not the case of the assessee that it has rendered any after-sales service in respect of the goods supplied outside India. Therefore, the view taken by the Tribunal in our judgment, is right. Accordingly, we answer the question referred in the affirmative and against the assessee.

It is, therefore, obvious that export duty cannot be considered as expenditure incurred in connection with or incidental to the execution of any contract for the supply outside India of coffee. We, accordingly, reverse the order of the Commissioner (Appeals) in this behalf.

8 to 10. [These paras are not reproduced here as they involve minor issues.]


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