1990 (2) TMI 13 - HC - Income Tax

Summary

Issues Involved:
1. Nature of royalty and commission payments to foreign companies.
2. Nature of commission and brokerage paid to agents.
3. Disallowance u/s 40A(5) of the Income-tax Act, 1961.
4. Classification of commission and brokerage as sales promotion expenses u/s 37(3A) of the Income-tax Act, 1961.

Summary:

Issue 1: Nature of Royalty and Commission Payments to Foreign Companies
The Tribunal examined whether royalty and commission payments to various foreign companies were revenue expenses and thus allowable as business expenditure. The Income-tax Officer (ITO) had disallowed these payments, considering them capital in nature, as they provided the assessee with enduring benefits. However, the Tribunal, following the precedent set by the Calcutta High Court in Agarwal Hardware Works (P.) Ltd. [1980] 121 ITR 510, affirmed that these payments were revenue expenses. The agreements did not indicate an outright sale of assets but rather a temporary transfer of technical know-how, which would revert to the foreign companies upon termination. The Supreme Court's decision in CIT v. Ciba of India Ltd. [1968] 69 ITR 692 was also cited, reinforcing that such payments are revenue in nature. Consequently, the question was answered in the affirmative and in favor of the assessee.

Issue 2: Nature of Commission and Brokerage Paid to Agents
The Tribunal addressed whether commission and brokerage paid to agents were sales promotion expenses and thus disallowable u/s 37(3A). The ITO had classified these payments as sales promotion expenses. However, the Tribunal upheld the Commissioner of Income-tax (Appeals)'s view that these payments were made on actual sales and did not constitute sales promotion expenses. The court noted that "sales promotion" must be construed ejusdem generis with "advertisement and publicity," and mere selling costs do not fall under this category. The relevant circular from the Central Board of Direct Taxes (Circular No. 240, dated May 17, 1978) was also considered, which clarified that expenditures like commission and brokerage for selling goods do not qualify as sales promotion expenses. Thus, the question was answered in the affirmative and in favor of the assessee.

Issue 3: Disallowance u/s 40A(5)
For the assessment years 1977-78 and 1978-79, the Tribunal examined the disallowance made by the ITO u/s 40A(5). The Commissioner of Income-tax (Appeals) had deleted these disallowances, and the Tribunal affirmed this decision. The court referenced its earlier decision in Hindustan Motors Ltd. v. CIT [1985] 156 ITR 223, which supported the assessee's position. Therefore, the question was answered in the affirmative and in favor of the assessee.

Issue 4: Classification of Commission and Brokerage as Sales Promotion Expenses u/s 37(3A)
The Tribunal considered whether commission and brokerage paid to agents could be classified as sales promotion expenses u/s 37(3A). The ITO had disallowed these expenses, but the Commissioner of Income-tax (Appeals) and the Tribunal found that these payments were made on actual sales and did not qualify as sales promotion expenses. The court emphasized that "sales promotion" must be construed narrowly and does not include all selling costs. The relevant circular from the Central Board of Direct Taxes further clarified this distinction. Consequently, the question was answered in the affirmative and in favor of the assessee.

Conclusion:
All questions referred in R. A. No. 683/(Cal) of 1984, R. A. No. 684/(Cal) of 1984, R. A. No. 685/(Cal) of 1984, and R. A. No. 686/(Cal) of 1984 were answered in the affirmative and in favor of the assessee. There was no order as to costs.