TMI Blog1995 (3) TMI 47X X X X Extracts X X X X X X X X Extracts X X X X ..... d company and is engaged in the manufacture of auto electrical equipment. It filed a return for the assessment year 1976-77 and besides other claims, made a claim for weighted deduction under section 35B of the Income-tax Act, 1961 (for short, "the Act"), on items including inspection agency and interest on export banking credit paid to the State Bank of India. In respect of the above, the Income-tax Officer held against the assessee. The Commissioner (Appeals) upheld the Income-tax Officer's order. The Tribunal has affirmed the Commissioner's order and stated regarding the third question that the assessee undertakes to produce, at the hearing of the present reference, the requisite number of certified copies of the Tribunal's statement of the case, dated September 26, 1981, in R. A. Nos. 35 and 37/(Mds) of 1981 in I. T. A. Nos. 1564 and 1673/(Mds) of 1979. We are given to understand that the reasons for rejecting the assessee's claims as respects the inspection agency fee and interest on export packing credit paid to the State Bank of India are stated in the said order and the Tribunal has only adopted the reasonings in the said order by the above statement. The assessee, however, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... b) of sub-section (1) of section 35B of the Act. Learned counsel for the assessee, on the other hand, has submitted that fees paid to the export inspection agency are for furnishing to a person outside India the technical information for the promotion of the sale of goods manufactured by the assessee and thus referable to item (vi) of sub-section (1) of section 35B of the Act, and interest on export packing credit paid to the State Bank of India is incidental to the execution of the contract for the supply outside India of goods manufactured by it, falling under item (viii) in clause (b) of sub-section (1) of section 35B of the Act. Section 35B(1) has contemplated a deduction of a sum equal to one and one-third times the amount of such expenditure incurred during the previous year not being in the nature of capital expenditure or personal expenses of the assessee referred to in clause (b) to an assessee being a domestic company or a person other than a company who is resident in India, if the expenditure is incurred after the 29th day of February, 1968, whether directly or in association with any other person and in case the expenditure is incurred after the 28th day of February, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ause (b) of sub-section (1) of section 35B, other activities for the promotion of the sale outside India of the goods, services or facilities which the assessee deals in or provides in the course of his business shall be as follows, namely:--- (a) conducting of pre-investment surveys or the preparation of feasibility studies or project reports : Provided that the pre-investment surveys are conducted or the feasibility studies are made or the project reports are prepared on the request in writing made by the Central Government or a foreign party to whom such goods, services or facilities are likely to be sold or provided by the assessee ; (b) maintenance outside India of a warehouse for the promotion of the sale outside India of such goods ; (c) maintenance of a laboratory or other facilities for quality control or inspection of such goods : Provided that in a case where only part of the sales is made outside India, the amount of expenditure incurred on the maintenance of such laboratory or other facilities which shall qualify for deduction under clause (a) of sub-section (1) of section 35B shall not exceed the amount which bears the same proportion as the value of the tur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t this expenditure was incurred in connection with the execution of any contract for supply outside India. It is significant that even incidental expenditure will be covered under this clause as the language shows if the expenditure is in connection with or incidental to the execution of the contract. In this view of the matter, therefore, on the findings of fact arrived at by the learned Tribunal, it appears that the view taken by the Tribunal is correct." Learned counsel for the Revenue, however, has drawn our attention to a judgment of the Calcutta High Court in the case of Brooke Bond India Ltd. v. CIT [1992] 193 ITR 390 and contended that item (viii) is attracted to expenditure on performance of services outside India and the rest of this provision indicates that not any or every service outside India would qualify for weighted deduction but only such expenditure as has been incurred for "performance of services outside India in connection with, or incidental to, the execution of any contract for the supply outside India of such goods, services or facilities". He has submitted on the strength of this judgment that in order to be eligible to weighted deduction on the export m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s further drawn our attention to a judgment of the Gujarat High Court, in the case of Isabgul Export Corporation v. CIT [1994] 205 ITR 227, which has considered whether the expenditure incurred on payment of interest to the bank would fall under any of the items of section 35B(1) of the Act and held as follows (at page 229): "So far as expenditure of Rs. 88,855 incurred for payment of interest and bank charges is concerned, it does not fall under any of the sub-clauses of clause (b) of section 35B(1). The assessee would be entitled to weighted deduction under section 35B(1)(a) only if the expenditure is of the nature referred to in clause (b) of section 35B(1). The Tribunal was, therefore, right in holding that the said expenditure also did not qualify for weighted deduction under section 35B." The Gujarat High Court has again taken the same view in the case of Testeels Ltd. v. CIT [1994] 205 ITR 230 as follows (at page 237): "It is clear that, in order to fall under sub-clause (viii), the expenditure has to be incurred for performance of services outside India and such performance of services outside India has to be in connection with, or incidental to, the execution of any ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ia. Purchase of raw materials from the credit or loan facility given by the bank to the assessee was part of the business of the assessee and it was from these raw materials that it manufactured goods which it exported in execution of the contract. In our opinion, the assessee has not rendered or performed any services outside India as contemplated by sub-clause (viii) and, therefore, interest paid by it to the bank on the credit or loan facility given to it would not be covered by sub-clause (viii) and it would not, therefore, be eligible for weighted deduction." The judgment of the Madhya Pradesh High Court is distinguished by the Gujarat High Court in these words (at page 239 of 205 ITR) : "With respect, we are unable to agree with the view taken by the Division Bench of the Madhya Pradesh High Court. It is not correct to say that sub-clause (viii) contemplates that expenditure incurred in connection with the services rendered outside India or expenditure incurred in connection with or incidental to the execution of any contract for supply outside India of such goods will be covered under this section. In our opinion, the correct position is that sub-clause (viii) contemplat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing, the status of the thing, the association of the thing with another thing, etc. "Information" is imparting of knowledge about a thing or a substance or a fact to any other person. Since in item (vi) above, "information" is qualified by the word "technical" and the performance is specified by a qualifying expression "for the promotion of the sale", it is clear that the assessee can claim deduction for furnishing to the buyer information in respect of the technical nature or character of the goods, services or facilities. Such information can be furnished to the buyer by permitting him to have inspection of the goods. The buyer can be represented by an agent or can depend upon any agency in India, provided such agency has some authority from the buyer or by law or sanction from the licensing authorities in the country. A Bench of the Calcutta High Court in the case of Union Carbide India Ltd. v. CIT [1987] 165 ITR 558 has considered the question whether the expenses on account of export agency inspection fee are covered by section 35B of the Act and are entitled to weighted deduction. The material facts before the court were as follows (at page 563): "Union Carbide (India) Ltd. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court has said (at page 566): "....we are not inclined to interfere with the decision of the Tribunal and we answer the question in the affirmative and in favour of the assessee. " The question has fallen for the decision by the Andhra Pradesh High Court in the case of CIT v. Navabharat Enterprises (P.) Ltd. (No. 2) [1988] 170 ITR 332. The question before the Andhra Pradesh High Court was, whether the money expended on obtaining the Agmark, qualified for deduction under section 35B(1)(b)(vi) of the Act. After referring to the judgment of the Calcutta High Court in Union Carbide India Ltd.'s case [1987] 165 ITR 558, and taking notice of the legislative intendment, the court has observed (at page 362) : "We did not find any averment either in the order of the Appellate Assistant Commissioner or the Tribunal or the statement of the case that the Agmark is wholly and exclusively necessary for the purpose of submitting technical information to the foreign buyers for the promotion of the sale of goods (tobacco) of the company. It is also not the case that the certification by the Indian Standards Institution as an Agmark is a condition precedent to export of tobacco or a term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stitute for the assessee's decision of interest on trade by the Revenue's opinion or the opinion of the court. The requirement is, furnishing of technical information to a person outside India for promotion of the sale. The assessee has taken the decision that certain technical information is necessary and he has engaged accordingly any person or agency. The Revenue in such a situation cannot say that the services of such person or agency were not necessary for the supply of technical information to a buyer outside India. It is indeed difficult to perceive why any seller will need any export agency's inspection, before the goods are exported or there is any contract for the sale of goods, unless he feels it necessary to do so or at least thinks, it shall be helpful in promoting the sale of goods, services or facilities, abroad. The judgment of the Calcutta High Court in the case of Union Carbide [1987] 165 ITR 558 has gone by the logic that the concerned authorities were satisfied that the expenditure upon the report of the agency concerned for the promotion of export was necessary. It has, however, not said what may be the basis or what can be the basis or what should be the basis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the assessee. The legislative intent to promote exports and give deductions on expenditure incurred wholly or exclusively for export markets development on items specified in clause (b) of section 35B(1) was confined to expenses wholly and exclusively referred to in clause (b), such as advertisement or publicity outside India in respect of the goods, services or facilities, obtaining information regarding the markets outside India, distribution, supply of provision outside India, of such goods, services or facilities, maintenance outside India of a branch, office or agency for the promotion of sale, etc., including furnishing to a person outside India samples or technical information for the promotion of sale of such goods, services or facilities. Any expenditure falling outside the items referred to in clause (b) was/is not includible for deduction under clause (a) of section 35B(1) of the Act. When the Legislature has chosen to further restrict, it has used such expressions and in particular mentioned in item (iii) of clause (b), distribution, supply or provision outside India of such goods, services or facilities, not being an expenditure incurred in India in connection therew ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r is required under any law, warrant or request in writing made by the Central Government or the foreign party to whom such goods, services or facilities were/are likely to be sold or provided by the assessee. A closer look, however, at the provision under rule 6AA reveals that it is in the nature of restriction to what, in certain circumstances, would have been found includible under item (vi) of clause (b) of sub-section (1) of section 35B of the Act and thus a clarificatory rule so that claims in respect of pre-investment surveys, preparation of feasibility studies or project reports are kept within the limitations of strict requirements of the law as engrafted under section 35B(1)(b)(vi) of the Act and in cases where there are doubts whether any pre-investment survey or feasibility study or project report was at all necessary and if it was done, it was for furnishing to a person outside India technical information for the promotion of sale, it is disallowed unless conducted, made or prepared on the request in writing made by the Central Government or a foreign party to whom such goods, services or facilities were/are likely to be sold or provided by the assessee. The Calcutta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... prescribe the manner in which such rights and responsibilities may be exercised and enforced in a court are " procedural laws". In CWT v. Sharvan Kumar Swarup and Sons [1994] 210 ITR 886, the Supreme Court has quoted a passage from Salmond's Jurisprudence (Twelfth edition, page 461), which points out the distinction between "substantive law" and "law of procedure" in these words (at page 892) : " 'What, then, is the true nature of the distinction ? The law of procedure may be defined as that branch of the law which governs the process of litigation. It is the law of actions---jus quod ad actiones pertinet---using the term action in a wide sense to include all legal proceedings, civil or criminal. All the residue is substantive law, and relates, not to the process of litigation, but to its purposes and subject-matter. Substantive law is concerned with the ends which the administration of justice seeks ; procedural law deals with the means and instruments by which those ends are to be attained. The latter regulates the conduct and relations of courts and litigants in respect of the litigation itself ; the former determines their conduct and relations in respect of the matters liti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation date and making such adjustments therein as the circumstances of the case may require. . . . (b) where the assessee carrying on the business is a company not resident in India and a computation in accordance with clause (a) cannot be made. . . ." The minority opinion reads as follows (at pages 792-793): " But the power conferred upon the tax officer by section 7(2) is to arrive at a valuation of the assets, and not to arrive at the net wealth of the assessee. Section 7(2) merely provides machinery, in certain special cases for valuation of assets, and it is from the aggregate valuation of assets that the net wealth chargeable to tax may be ascertained. The power conferred upon the tax officer to make adjustments as the circumstances of the case may require is also for the purpose of arriving at the true value of the assets of the business.... This is an artificial rule adopted with a view to avoid investigation of a mass of evidence which it would be difficult to secure or, if secured, may require prolonged investigation. . ." In Murarilal Mahabir Prasad v. B. R. Vad [1976] 37 STC 77 (SC), it has been pointed out that procedural law, generally speaking, is applicable ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... if the statute is curative or merely declaratory of the previous law, retrospective operation is generally intended. In Punjab Traders v. State of Punjab, AIR 1990 SC 2300, the Supreme Court has noted that the main object of the amendment Act was to clarify the previous Act, that is, E. P. Molasses (Control) Act, as according to it, the law before the amendment applied in equal measure to a khandsari unit as it applied to any other sugar factory. According to the Supreme Court, the definition of "sugar" in the original Act included a khandsari unit. The court observe that the amendment Act was merely clarificatory and it was always well understood in trade that khandsari sugar was also sugar and that any reference to sugar, in the absence of specific exclusion or qualification, was capable of equal application to sugar of all kinds including khandsari. Even if it is true that persons who deal with the statute understood its provisions in a restricted sense, such mistaken construction of the statute did not bind the court, so as to prevent it from giving its true construction. We have prospected a little further than the Calcutta and Andhra Pradesh High Courts and found that in s ..... X X X X Extracts X X X X X X X X Extracts X X X X
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