Chief Commissioner Of Income-Tax v. H.M.T (International) Ltd.

K. Shivashankar Bhat, J.:— In respect of the assessment years 1980–81 and 1981–82, the questions referred respectively read as follows:

“1. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in confirming the orders of the Commissioner of Income-tax (Appeals) who held that the assessee is entitled to weighted deduction under section 35B in respect of expenses incurred on delegation, export promotion, compliments, etc.? (Question of 1980–81)

2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in confirming the order of the Commissioner of Income-tax (Appeals) who held that the assessee is entitled to weighted deduction under section 35B in respect of delegation expenses of Rs. 3,03,954 and the expenditure on complimentary articles given to foreign delegates amounting to Rs. 32,280?” (Question of 1981–82)

2. Though the questions are differently worded, there is no dispute that the answer in I.T.R.C No. 75 of 1991 would govern the question referred in I.T.R.C No. 20 of 1991 also.

3. The assessee is engaged in export of goods. This is an admitted position. The assessee claimed weighted deduction under Section 35B in respect of the expenditure incurred towards complimentaries and give aways to foreign delegates and similarly the assessee claimed weighted deduction in respect of the expenditure on the said foreign delegates as export promotion activities. Since the claim of the assessee was not accepted by the Income-tax Officer, the assessee approached the Commissioner of Income-tax (Appeals). Ground (a) before the said appellate authority pertains to the present question. The Commissioner (Appeals) accepted the appeal and observed that a similar issue has been already dealt with by the said authority while disposing of the assessee's appeal for the assessment year 1978–79. The Appellate Tribunal rejected the Revenue's appeal observing that a similar contention of the Revenue has been rejected when raised for the assessment year 1979–80. Mr. Raghavendra Rao, learned counsel for the Revenue, contended that the expenditure incurred is within India and, therefore, on the face of it, the claim of the assessee under section 35B cannot be entertained. According to learned counsel for the Revenue, only the expenditure incurred outside India could be the subject of weighted deduction under section 35B. Mr. Kumar, learned counsel for the assessee, on the other hand, relied heavily on clause (ii) of section 35B(1)(b).

4. Under section 35B(1)(a), provision is made for export markets development allowance referred to as any expenditure referred to in clause (b). Sub-clause (ii) of this clause (b) would read thus: the expenditure incurred wholly and exclusively on obtaining information regarding markets outside India for such goods, services or facilities. We may also refer to clause (i) which refers to the expenditure incurred wholly and exclusively on 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.

5. According to the assessee, the delegates from foreign countries are received and entertained so that the assessee could obtain proper information regarding the markets outside India for the goods marketed by the assessee.

6. The fact that the assessee has been receiving such delegates is not in dispute. In fact, during the earlier years, the expenditure incurred in respect of such delegations has been accepted by the Revenue.

7. However, Mr. Raghavendra Rao relied on a decision of the Madras High Court in V.D Swami and Co. Pvt. Ltd. v. CIT, [1984] 146 ITR 425. It was a case where the deduction was claimed under sub-clause (iii) of section 35B(1)(b). The language of the sub-clause is quite clear that it specifically excludes the expenditure incurred in India from being considered for the purpose of weighted deduction. While considering the scope of the said clause, the High Court observed (at page 428):

“As earlier mentioned, sub-clause (iii) of section 35B(1)(b) expressly excludes ‘expenditure not being expenditure incurred in India in connection therewith’. To maintain that weighted deduction is available even where expenditure is incurred inside India would go against the teeth of this specific exclusionary provision. A look at the other sub-clauses of section 35B(1)(b), such for instance as sub-clauses (i), (iv), (vi), (vii), (viii) and (ix), also shows the insistence of Parliament that the weighted deduction cannot be exigible unless the expenditure under the different heads are incurred ‘outside India’, a phrase which occurs again and again in the various sub-clauses. To accept learned counsel's argument that the Indian situs of the export expenditure is no disqualification for eligibility for weighted deduction would be to bring in, under one broad indiscriminate sweep, all expenses in an exporter's business. If that were the position, Parliament need not have troubled to enact so many clauses in section 35B. The section would have been simpler and been enacted differently.”

8. While comparing sub-clause (iii) with the other sub-clauses, the Madras High Court in fact has not referred to sub-clause (ii) at all. It has referred only to such of the sub-clauses which involved expenditure outside India. In fact, the reasoning of the Madras High Court would support the contention of the assessee because if the expenditure incurred in India were to be outside the scope of the weighted deduction under sub-clause (ii), Parliament certainly would have used similar words as in sub-clause (iii). Commissioner Of Income-Tax v. Navabharat Enterprises (P.) Ltd. (No. 2). (No. 2), [1988] 170 ITR 332, is a decision of the Andhra Pradesh High Court. In the said case, expenditure incurred on Agmark charges, export licence fee, etc., was held not eligible for the weighted deduction on the ground that there was no evidence of nexus between expenditure and export promotion. Therefore, the decision therein rested solely on the facts of the particular case. Bombay Burmah Trading Corporation Ltd. v. Commissioner Of Income-Tax., [1991] 188 ITR 122 is a decision of the Bombay High Court, the ratio of which would support the contention of the assessee rather than of the Revenue in the instant case. It was a case where the export emanated not from India but from elsewhere. In spite of such a fact, the High Court held that the exporter was entitled to claim the benefit under section 35B. At pages 124 and 125, the court held as follows:

“It is not in dispute that the assessee satisfied all the requirements of section 35B, except in regard to the requirement, according to the Revenue, that the export should be made from India. To get the advantage of the deduction under section 35B, the expenditure has to be incurred wholly and exclusively on the performance of services outside India in connection with or incidental to the execution of any contract for the supply outside India of goods which the assessee deals in in the course of its business. The assessee deals in tea in the course of its business. The expenditure was incurred in regard to the performance of services outside India, i.e, in East Africa and the United Kingdom, in connection with the execution of a contract for the supply of tea in the United Kingdom. The provision does not require that the export should be from India. The provision, read plainly, entitles the assessee to the deduction thereunder.”

9. Mr. Raghavendra Rao strongly relied on the decision of this court in Chief, Chief Commissioner Of Income-Tax v. Mysore Sales International Ltd., [1992] 195 ITR 457. It was a case wherein certain commission paid to a foreign agent was sought to be brought within sub-clause (vi) of clause (b). Since the assessee had not maintained any agency outside India, it was held that the said sub-clause was not attracted. The decision again is based on the facts of the said case. Learned counsel for the assessee relied on a decision of the Delhi High Court in Handicrafts and Handloom Export Corporation of India v. CIT, [1983] 140 ITR 532. It was held therein that administrative expenses incurred by the assessee in India would qualify for weighted deduction to the extent it can be correlated, on analysis, to any of the activities listed in sub-clauses (i) to (viii) of clause (b) of section 35B(1). However, subclause (iii) would stand excluded from this principle. The same principle was followed in Commissioner Of Income-Tax, Delhi (Central-I) v. Raunaq International Ltd., [1986] 158 ITR 701 (Delhi). The court stated that, except for expenditure falling under clause (iii), the expenditure falling under the other clauses of section 35B of the Income-tax Act, 1961, need not necessarily be incurred in (sic) India; all that is necessary is that the expenditure should promote development of exports in the various aspects referred to in those clauses. A reading of the judgment shows that several items of expenditure which were incurred in India for the promotion of exports were considered for weighted deduction; so long as the expenditure has a direct nexus to the promotion of exports, the expenditure would normally be eligible for weighted deduction. In Commissioner Of Income-Tax v. Bata India Ltd., [1989] 178 ITR 669 which is a decision of the Calcutta High Court, certain expenditure incurred towards the visiting personnel from foreign countries in connection with a conference in India for promotion of exports was the subject-matter of a claim under section 35B. The High Court had affirmed the order of the Tribunal which directed the Appellate Assistant Commissioner to decide whether the expenses claimed by the assessee were incurred for the purpose of export promotion. At page 672, the Bench observed thus:

“All the purposes mentioned in sub-clauses (i) to (viii) are activities for the promotion of the sale outside India. The language employed in sub-clause (ix) ‘such other activities for the promotion of the sale outside India….’ clearly implies that the activities mentioned in sub-clauses (i) to (viii) are also activities for the purpose of promotion of sale outside India. In other words, apart from the activities which may be prescribed under sub-clause (ix), the other activities specifically mentioned in sub clauses (i) to (viii) are also for export promotion. The activities mentioned in sub-clauses (i) to (viii) do not cease to be activities for the promotion of the sale outside India of such goods, services or facilities because the expression ‘activities for promotion of sale outside India as not been specifically used in any of these sub-clauses. Advertisement or publicity outside India in respect of goods, services or facilities, obtaining information regarding markets outside India for such goods, services or facilities, distribution, supply or provision outside India of such goods, services or facilities, maintenance outside India of a branch office or agency for the promotion of the sale outside India of such goods, services or facilities or for carriage of goods to their destination outside India or insurance of goods in transit, maintenance of a branch office or agency for export promotion, preparation and submission of tenders for supply and provision outside India of such goods, services or facilities, furnishing samples or technical information outside India for promotion of export sale, for eign travel for promotion of sale outside India, actual performance of services outside India in connection with the execution of any contract for supply outside India of goods, services or facilities are all instances of ‘activities for the promotion of sale outside India’ of goods, services or facilities.”

10. Therefore, there can be no doubt that, if actually there was an expenditure incurred for obtaining information regarding markets outside India or if there is a direct nexus between the expenditure incurred and the promotion of exports, prima facie the expenditure will be entitled to weighted deduction under section 35B. In the instant case, it cannot be disputed that the expenditure claimed by the assessee towards the foreign delegates was an expenditure which has a direct nexus to the export activities of the assessee.

11. Accordingly, the questions are answered in the affirmative and against the Revenue.