The Judgment of the Court was delivered by

Ramanujam, J.:— The following questions have been referred to this court by the Income-tax Appellate Tribunal at the instance of the Revenue:

“(1) Whether, on the facts and in the circumstances of the case, the sum of Rs. 5,12,306 being 25% of the technical service charges paid to Mansfield Tyre and Rubber Company was liable to be disallowed as capital expenditure?

(2) Whether, on the facts and in the circumstances of the case, the assessee was entitled to relief under section 80J in respect of its Kottayam unit?

(3) Whether, on the facts and in the circumstances of the case, the assessee was entitled to a deduction of incremental liability of the provision for gratuity?

(4) Whether, on the facts and in the circumstances of the case, the royalty relatable to export sales was entitled to weighted deduction under section 35B?

2. So far as the first question is concerned, we find that in the assessee's own case for an earlier assessment year, a similar question was referred to this court in T.C Nos. 774 and 775 of 1976 CIT v. Madras Rubber Factory Ltd., [1983] 144 ITR 678), and this court after a detailed consideration answered the question against the Revenue by its judgment dated September 17, 1982.

3. Since the decision rendered in that case is squarely applicable to the facts of this case, following the said decision we have to answer the first question against the Revenue.

4. Coming to the second question, we find that in assessee's own case for the earlier assessment year, a similar question was referred to this court in T.C No. 188/78 and this court by its order dated July 5, 1983, answered the question in the affirmative and against the Revenue. Therefore, following the said decision of this court in T.C No. 188 of 1978, CIT v. Madras Rubber Factory Ltd., [1984] 149 ITR 405 the second question is answered in the affirmative and against the Revenue.

5. The third question relates to the point as to whether the assessee is entitled to a deduction of incremental liability of the provision for gratuity as claimed by it. It is seen that the assessee's claim for allowance of a provision for gratuity was rejected by the ITO in the absence of the amount being calculated as per the scientific actuarial valuation. The AAC upheld the disallowance. When the matter was before the Tribunal, the assessee had worked out the incremental liability on actuarial basis at Rs. 5,59,644. Having regard to the fact that the actual incremental liability had been worked out by the assessee on an actuarial, basis at Rs. 5,59,644, the Tribunal held that the assessee is entitled to claim the allowance but directed the ITO to verify the figures and determine the actual incremental liability for gratuity for the grant of allowance. Aggrieved by the allowance of the said claim by the Tribunal, the third question has been referred. It is the contention of the learned counsel for the Revenue that as the actual figure of the provision made for gratuity pertaining to the year or that of earlier years are not available either from the orders of the authorities below or from the assessee's books of account, the ITO as well as the AAC disallowed the claim. But the Tribunal has allowed the claim only on the basis of certain figures furnished by the assessee as representing the incremental liability and directed the ITO to verify the figures and allow the proper incremental liability for gratuity. It is no doubt true that it is only when the matter came up before the Tribunal, the incremental liability has been worked out as per the actuarial basis and at the earlier stage, the incremental liability could not exactly be determined on a scientific and actuarial basis. The mere fact that the assessee was not able to exactly calculate the actual incremental liability at any earlier stage cannot be taken to deprive it of an allowance if it is entitled to the same under the provisions of the statute. If the assessee has worked out the incremental liability as per the actuarial basis and furnished the figures before the ITO, he could not have rejected the assessee's claim for allowance of the said incremental liability. The fact that the assessee did not do it before the ITO, but did it only before the Tribunal does riot take away the right of the assessee to claim allowance for the gratuity liability incurred by him for the accounting year. As pointed out by this court in Commissioner Of Income-Tax, Tamil Nadu-V v. Sitalakshmi Mills Ltd., [1983] 141 ITR 415, it has now become well established that where an employer has a gratuity scheme rendering him liable to pay gratuity to workmen and where having regard to the liability which might arise under the scheme, the employer obtains a scientific actuarial calculation under which the present discounted value of the gratuity liability is ascertained and where the employer charges his profit and loss account with the incremental value of the year and also makes a provision for that amount, the employer will be entitled to compute his net profits after deducting the figure of incremental liability. That the assessee will be entitled to deduct the incremental liability for payment of gratuity during the accounting year, if he had made a claim on the basis of actuarial valuation, is clear from the decision of the Supreme Court in Vazir Sultan Tobacco Co. Ltd. v. CIT, [1981] 132 ITR 559 (SC). It has been held by the Supreme Court that the assessee is entitled for deduction of incremental liability towards the gratuity payable by him and if the incremental liability has been worked out on the basis of an actuarial valuation. The assessee cannot be deprived of that benefit merely because the incremental liability was worked out on an actuarial basis not at the stage when the matter was with the ITO, but at the stage when it was before the Tribunal.

6. In this case, the Tribunal has not straightaway allowed the deduction on the basis of the figures furnished by the assessee of the actuarial incremental liability as has been worked out on a scientific and actuarial basis. Therefore, we are not in a position to interfere with the order of the Tribunal. We have to, therefore, answer the question No. 3 in the affirmative and against the Revenue.

7. Then we come to question No. 4. This question No. 4 has been raised in the context of the following fact. The assessee entered into a know-how agreement with a foreign company called Messrs. Mansfield Tyre and Rubber Company, U.S.A As per the know-how agreement dated September 4, 1961, the foreign company has to provide the requisite know-how for the establishment of a factory for the manufacture of tyres and tubes. The agreement provides that for the supply of the necessary know-how, the assessee has to pay royalty to the foreign company at 2½ per cent, of the assessee's gross sales price for the first 1,20,000 tyres and 1,20,000 tubes sold by them in a year and at 2 per cent, of gross sales price for all tyres in excess of 1,20,000 up to 1,80,000 and tubes in excess of 1,20,000 up to 1,80,000 and at 1½ per cent, of the gross sales price for all tyres and tubes in excess of 1,80,000 up to 2,40,000 and 1 per cent, of gross sales price for all tyres and tubes in excess of 2,40,000 sold by them in a year. The agreement also provided that in addition the assessee will have to pay 2 per cent, of his gross sales price of other products manufactured by him in such year with respect to which technical or instructional assistance was furnished by the foreign company. It also provided that the percentage fees are to be computed by converting Indian funds to US dollars at the official rate of exchange and paid within 90 days after the end of each quarter.

8. In respect of the payments of the percentage fees paid to the foreign collaborator in pursuance of that agreement, the assessee claimed allowance under s. 35B of the I.T Act contending that the royalty paid to the foreign collaborator related to the export of tyres and tubes and, therefore, the royalty paid is entitled to the allowance under s. 35B. The ITO disallowed this claim on the following grounds. The royalty was paid only for technical assistance rendered in India for the establishment of the factory and the manufacture of tyres and tubes and not for enabling the assessee to export goods. Therefore, the payment of technical services charges was not specifically connected with the export made by the assessee and, therefore, (not?) entitled to the allowance under s. 35B of the Act. The matter was taken to the AAC, but without success. Then the matter was taken to the Tribunal by the assessee contending that under the collaboration agreement, the royalty has been paid for technical and advisory service, that the percentage fee referred to is on the gross sales price of the goods exported and sold outside India, as per clause 2(f) and 4 of the Collaboration Agreement and, therefore, the entire royalty paid should be taken to be a payment made in respect of the export of sales price effected by the assessee and, therefore, the relief under s. 35B should be granted. Before the Tribunal, the Revenue, on the other hand, contended that the royalty, paid was not for export, but for the manufacture of goods in India by adopting the know-how provided by the collaborators and also for the use of its name and this has nothing to do with the export and, therefore, the royalty amounts cannot come within the scope of the relief under s. 35B. In the face of these rival contentions, the Tribunal has held as follows: The royalty payment is partly for the use of the name and partly for the use of the technique. Both these things take place at the time of manufacture of the goods. The royalty payments, however, are computed at a particular percentage of the sales price. If there were no sales, no royalty would be payable. Merely because goods were produced in India by adopting the technical process the assessee has got from the foreign collaborator, it cannot be stated that the royalty payment is also referable to the production stage. The royalty, however, came into existence only at the moment of sale in view of the particular clause in the Collaboration Agreement. As per the terms of the Collaboration Agreement, the royalty should, therefore, be taken as relating to sales which are partly local and partly exports. According to the Tribunal the question to be considered was whether the assessee had made any payment of royalty with reference to the sales effected and there being some export sales in the absence of which there is no necessity to pay royalty under the terms of the agreement, it is to be held that the royalty paid in respect of the export sales should be regarded as expenditure in connection with the export business. Thus, the Tribunal has proceeded on the basis that unless the assessee has made exports of tyres and tubes manufactured by it, it is not liable to pay royalty to the foreign collaborator and that the royalty paid solely and exclusively related to export sales and, therefore, the applicability of s. 35B of the Act cannot be avoided. We are of the view that the Tribunal has not properly considered the terms of the know-how agreement and the scope of s. 35B of the Act. It is obviously in error in taking the view that unless the assessee, has exported goods, no liability to pay royalty to the foreign collaborator arises. As a matter of fact, the liability to pay the royalty arises as soon as the assessee effected sales of the tyres and tubes manufactured by it with the technical know-how provided by the foreign collaborator. The liability to pay the royalty at a particular percentage of the gross sales price arises only when tyres and tubes are sold for export. The Tribunal in its order refers to clause 2(f) of the Collaboration Agreement as supporting its view. But a scrutiny of the said clause in the collaboration agreement shows the contrary. The royalty is payable for the service rendered by the foreign collaborator by furnishing the know-how in the matter of manufacture of tyres and tubes and also for the use of the name of the foreign collaborator and it has nothing to do with exports. The quantum of the royalty is determined with reference to the gross sales price received by the assessee in any particular year. Merely because the royalty is quantified with reference to the sales price it cannot be said that the royalty is payable on realisable sales. Clause 2(f) of the Agreement which has been referred to by the Tribunal clearly shows that the royalty is payable at a particular percentage of the sales price in respect of the sales effected by the assessee whether they are local or export sales.” Therefore, the payment of royalty is contemplated between the parties without reference to the export. It is not, therefore, possible to agree with the view taken by the Tribunal that royalty is payable only on export sales, and, therefore, the royalty paid by the assessee to the foreign company should be taken to relate only to export sales and, therefore, the assessee is entitled to the benefit of s. 35B. As already stated, the terms of the collaboration agreement do not say that the royalty is payable only when the goods manufactured are sold by the assessee in the foreign market which is the assumption made by the Tribunal in this case. Further, we find that the Tribunal has committed an error in proceeding on the basis that any expenditure incurred in connection with the export will fall within the scope of s. 35B. As a matter of fact, s. 35B contemplates, two conditions. One is that the expenditure should have been incurred wholly and exclusively for the object referred to in clause (b) of sub-s. (1) of s. 35B. In this case on the facts it is clear that the percentage, fee paid by the assessee to the foreign collaborator is referable to all the sales effected and not exclusively referable to the export sales. As already stated, the Tribunal has not gone into the question as to in which of the items referred to in clause (b) the royalty paid by the assessee will fall. The learned counsel for the assessee submits before us that the expenditure will fall under clause (b)(iii) of sub-s. (1) of s. 35B of the Act. That clause deals with 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. Here the payment of percentage fee paid by the assessee to the foreign collaborator is an expenditure incurred by the assessee in connection with the establishment of the factory and for the manufacture of tyres and tubes with the technical know-how furnished by the foreign company. As already stated merely because the quantum of royalty is worked out on the basis of a percentage of the total sales it cannot be taken to have been paid in connection with the sales of tyres and tubes. Therefore, the expenditure cannot be taken to have been incurred in connection with the distribution, supply or sale of goods outside India, which alone will fall under clause (b)(iii) of sub-s. (1) of s. 35B. Therefore, in any view of the matter, the assessee's claim under s. 35B of the Act cannot legally be sustained. The question of law as framed proceeds on the basis that the royalty paid is relatable to export sales. We have already held that the Tribunal is not justified in proceeding on that basis in view of the specific clauses contained in the know-how agreement entered into between the assessee and the foreign collaborator which clearly shows that the royalty is payable only in relation to the know-how provided by the foreign collaborator and not in relation to export sales as has been wrongly assumed by the Tribunal. Hence, the question No. 4 has to be re-framed so as to focus the true controversy between the parties. We, therefore, re-frame the question as follows:

(4) Whether, on the facts and in the circumstances of this case, the royalty paid by the assessee was entitled to weighted deduction under section 35B?

9. For the reasons set out above, this question as re-framed has to be answered in the negative and in favour of the Revenue. There will be no order as to costs.