Per Shri B. V. Venkatramaiah, Accountant Member - The common point involved in these appeals is about weighted deduction under section 35B of the Income-tax Act, 1961 (the Act), on interest paid to banks on (i) packing loan and export bills, (ii) bank charges incurred on exports, and (iii) shipping expenses including fee for quality certificate and fumigation certificate. The assessee has not been successful before the authorities below and is in appeal before us.
2. As regards item No. (iii) above, for the reasons stated in our orders in IT Appeal Nos. 208 and 209 (Bang.) of 1982 dated 28-5-1984, we agree with the Commissioner (Appeals) and dismiss the ground raised by the assessee. Bank charges do not also qualify for weighted deduction in the light of the decision of the special Bench of the Tribunal in J. H. & Co. v. Second ITO 1 SOT 150 (Bom.).
3. This leaves us with the claim for weighted deduction on interest paid to banks on packing loan and export bills. The interest is paid on loans advanced by banks in connection with export of goods. The loans are advanced at subsidised rate of interest. The method of obtaining packing credits appears to be as follows : "The assessee contracts the potential buyers abroad and after entering into an agreement for export of Indian goods, he approaches the bank for providing facilities under the packing credit scheme. The bank advances amounts only on the basis of the contract entered into. The advance is made available only after an irrevocable letter of credit is opened in favour of the assessee by the foreign buyer. The letter of credit, the purchase contract and other documents like Bill of Lading, if any, are furnished to the bank. the bank calculated the invoice price on the basis of the contracts and after retaining a margin, the balance is credited to the assessees accounts. The assessee has to give an undertaking that the loan taken on the packing credit will be repaid by the realisation of the sale proceeds. As a matter of fact, the sale document are entrusted to the bank for realisation and it is credited to the assessees account on the receipt of the sale proceeds. The assessee cannot change any part of the contract. He cannot change the destination or the quality or the part price. The Reserve Bank of India has, from time to time, prescribed rules to be adhered to for availing of the export packing credit." The assessees claim was that since this was essentially an expenditure incurred in connection with the export of goods it was entitled to weighted deduction. It was argued that section 35B (1) (b) (viii) applied. This was, however, rejected by the IAC, who made the assessment, following his directions under sections 144A and 144B of the Act for the assessment year 1978-79. The Commissioner (Appeals) agreed with his and the assessee is in appeal.
4. The learned counsel for the assessee submitted that an Indian exporter could not compete with the foreign exporter under normal conditions because of the high cost of production of goods here. In order to promote exports, banks were permitted to advanced loans at favourable rates of interest to exporters. Since export could not have taken place but for these soft loans, it was argued that interest paid on these loans was an expenditure wholly incurred for the purposes of export and was entitled to weighted deduction under section 35B (1) (b) (viii) being expenditure incurred in the performance of services outside India in connection with or incidental to the execution of the contract for supply of goods. Reliance was placed on a decision of the Tribunal Bombay Bench C in Income-tax Appeal No. 393 (Bom.) of 1980 and Income-tax Appeal No. 672 (Bom.) of 1981 where interest on packing credit had been allowed weighted deduction by the Tribunal.
The learned departmental representative, however, stated that this was not expenditure falling within section 35B (1) (b) (viii). It was of the same category as export duty and freight charges on which weighted deduction had already been refused by the Tribunal in its order in Income-tax Appeals Nos. 208 and 209 (Bang.) of 1982 as also the decision of the Karnataka High Court in the case of Ullal Narayan Mallya & sons (1975) 1 KLJ 487.
5. We have considered the arguments advanced by both sides. Every type of expenditure incurred in connection with export does not qualify itself for weighted deduction. If that were so, even cost of purchase of goods or manufacture would have been allowed weighted deduction.
Secondly, packing credit cannot be considered an expenditure incurred for the purpose of obtaining credit. The credit is already obtained.
The assessee simply pays interest. No expenditure is incurred by the assessee in obtaining the loan. Therefore, it would be wrong to consider that interest was an expenditure incurred by the assessee for obtaining credit at a concessional rate. If that were so, there would have been no difference between loans obtained at ordinary rates of interest in the market and the concessional loans. Interest paid on all loans would have been entitled to weighted deduction because all the loans were obtained for the export business. We do not see any valid distinction between the two types of loans. We have already stated that no expenditure was incurred by the assessee in obtaining the credit.
This is an expenditure incurred after the credit is obtained. The ratio of the decision of the Karnataka High Court in Ullal Narayan Mallya & Sons case (supra) would apply to the issue before us. Section 35B (1) (b) (viii) would apply not only to such expenditure which are of the nature of an after sales service. Interest would, therefore, fall out of the pale of section 35B (1) (b) (viii) for the same reasons as freight and export duty.