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2009 (1) TMI 5 - HC - Income TaxPacking credit - loan or advance for the purpose of purchase processing and packing of goods - weighted deduction u/s 35B - Section 35B(1)9b)(viii) operates only when there is a performance of services outside India - Mere obtaining of a packing credit loan or payment of interest thereon in India cannot be said to entail the performance of any service outside India - weighted deduction under Section 35B(1)(b)(viii) on interest paid on export packing credit loans will not be deductible
Issues Involved:
1. Eligibility of insurance, freight, and export inspection agency charges for weighted deduction under Section 35B of the Income Tax Act, 1961. 2. Applicability of revised rates of depreciation as per the Income Tax Fourth Amendment Rules, 1983, for the assessment year 1980-81. 3. Deductibility of interest paid on export packing credit loans under Section 35B(1)(b)(viii) of the Income Tax Act, 1961. Issue-wise Detailed Analysis: 1. Eligibility of Insurance, Freight, and Export Inspection Agency Charges for Weighted Deduction under Section 35B: The court addressed whether insurance (Rs. 8,82,300), freight (Rs. 91,67,940), and export inspection agency charges (Rs. 1,31,077) were eligible for weighted deduction under Section 35B of the Income Tax Act, 1961. The court referred to previous judgments to resolve this issue. In the case of M.H. Daryani Vs. C.I.T. (202 ITR 731), it was held that expenditure on insurance and freight is not eligible for weighted deduction under Section 35B. Similarly, in Dr. Beck and Co. (India) Ltd. Vs. CIT (206 ITR 311), the court held that export inspection charges are not deductible under Section 35B. Following these precedents, the court answered the question in the affirmative and against the assessee. 2. Applicability of Revised Rates of Depreciation for Assessment Year 1980-81: The second question was whether the revised rates of depreciation as per the Income Tax Fourth Amendment Rules, 1983, which were inserted w.e.f. 2.4.1983, would apply for the assessment year 1980-81. Both counsels agreed that this issue was covered by the judgment in CIT Vs. Mirza Ataullaha Baig (202 ITR 291). The court in that case held that any amendment in the Act or Rules effective after the 1st of April of a financial year would not apply to the assessment for that year. Thus, the court answered this question in the affirmative and against the assessee. 3. Deductibility of Interest Paid on Export Packing Credit Loans: The third question involved the deductibility of interest paid on export packing credit loans amounting to Rs. 11,45,253 under Section 35B(1)(b)(viii). The court considered a judgment of the Andhra Pradesh High Court in CIT Vs. Coromandel Agro Products Oil Ltd. (230 ITR 335), which held that interest paid on "packing credit loan" was not necessarily entitled to a weighted deduction under Section 35B(1)(b)(viii) and (ix). The court noted that Section 35B is designed to permit deduction of expenditure incurred wholly and exclusively on performance of service outside India in connection with the execution of any contract for the supply outside India of goods, services, or facilities. The court also reviewed the definition of "packing credit" under the Export Credit (Interest Subsidy) Scheme 1968, which indicates it is a loan for pre-shipment activities within India, not for services performed outside India. The court referred to various other judgments supporting this view, including Lukas TVS Ltd. Vs. CIT (217 ITR 382) by the Madras High Court and Testeels Ltd. Vs. CIT (205 ITR 230) by the Gujarat High Court, both of which held that interest on export packing credit loans is not entitled to weighted deduction. The court disagreed with the Madhya Pradesh High Court's judgment in CIT Vs. Vippy Solvex Product Pvt. Ltd. (159 ITR 487), which allowed such deductions. The court concluded that interest paid on packing credit loans does not qualify as expenditure on performance of services outside India and thus is not deductible under Section 35B(1)(b)(viii). The question was answered in the negative and in favor of the revenue. Conclusion: The reference was disposed of with no order as to costs, with all questions answered against the assessee and in favor of the revenue.
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