TMI Blog1991 (4) TMI 106X X X X Extracts X X X X X X X X Extracts X X X X ..... 1981) by a common order dated February 26, 1983. Though there are six different assessees, the assessment years involved in this batch of cases are 1976-77, 1977-78, 1978-79, 1979-80 and 1980-81. The Revenue filed applications under section 256(1) of the Income-tax Act, in the 12 cases, before the Income-tax Appellate Tribunal praying to refer three questions of law. But, the Income-tax Appellate Tribunal referred a common question of law for all the 12 cases, which was the subject-matter of I. T. R. Nos. 91 to 102, 203 and 211 of 1984. The said common question was to the following effect : Whether, on the facts and in the circumstances of the case, the commission payments made in India in respect of exports made by the assessees to the U. S. S. R. are entitled to weighted deduction under section 35B of the Income-tax Act, 1961 ? The said referred cases (I. T. R. Nos. 91 to 102, 203 and 211 of 1984) as also O. Ps. Nos. 8381, 8382, 8384, 8387, 8388, 8450, 8451, 8676, 8677, 8712, 8713 and 8737 of 1984 were heard and disposed of by a common judgment by a Bench of this court on June 18, 1987. The judgment is reported in CIT v. Kerala Nut Food Co. [1990] 185 ITR 150. For the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1976-77 dated June 17, 1978), along with a copy of the circular of the Central Board of Direct Taxes dated December 28, 1981. It was so done, because the said two documents were not available when the matter was heard on the earlier occasion. In the common order dated February 26, 1983, the Appellate Tribunal had made a specific reference to the decision of the Special Bench of the Income-tax Appellate Tribunal in the case of J. Hemchand and Co., and also the fact that the said Special Bench decision was accepted by the Department and so followed by the Tribunal in similar cases, whenever applicable. In this batch of 12 referred cases, along with the statement of the case, the Income-tax Appellate Tribunal has forwarded as annexure-H the decision of the Special Bench of the Tribunal in ITA Nos. 3255 and 3330/Bom of 1976-77 dated June 17, 1978, and as annexure H-1 a copy of the Circular of the Central Board of Direct Taxes-F. No. 268/738/SI-ITJ dated December 28, 1981, styled as Instruction No. 1441. We heard counsel for the applicant/Revenue, Mr. P. K. R. Menon, as also counsel for the respondents/assessees, Mr. P. Balachandran. The salient facts of the case are not in dispute. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not qualify for weighted deduction under section 35B(1)(b) of the Act. The Appellate Tribunal, in its common order dated February 26, 1983, referred to the decision of the Special Bench of the Income-tax Appellate Tribunal in J. Hemchand and Co.'s case (ITA Nos. 3255 and 3330/(Bom) of 1976-77 dated June 17, 1978), and held that the commission payments to parties who brought about the export sales is allowable under sub-clauses (1) and (ii) of clause (b) of sub-section (1) of section 35B for the reason that it was these agents who furnished information to the assessees about the foreign buyers and publicised the goods of the assessees to those buyers and it was they who brought together the buyer and the seller for concluding the sales and that it was through them that the goods were supplied outside India. On these premises, the Tribunal allowed the weighted deduction under section 35 B (1) (b) (i) and (ii) of the Income-tax. Act. It is the aforesaid decision of the Appellate Tribunal which is challenged before us. As stated earlier, we are concerned with the cases of six different assessees involving the assessment years 1976-77, 1977-78, 1978-79, 1979-80 and 1980-81. Se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... day of February, 1968, whether directly or in association with any other person, any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) referred to in clause (b), he shall, subject to the provisions of this section, be allowed a deduction of a sum equal to one and one-third times the amount of such expenditure incurred during the previous year : Provided that in respect of the expenditure incurred after the 28th day of February, 1973, by a domestic company, being a company in which the public are substantially interested, the provisions of this clause shall have effect as if for the words 'one and one-third times', the words 'one and one-half times' had been substituted. (b) The expenditure referred to in clause (a) is that incurred wholly and exclusively on (i) 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 ; (ii) obtaining information regarding markets outside India for such goods, services or facilities ; (iii) distribution, supply or provision outside India of such goods, services or facilities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... India. That being so this expenditure is allowable under subclauses (i) and (ii) of clause (b) of-sub-section (1) of section 35B. Annexure-H1 is a copy of the circular issued by the Central Board of Direct Taxes dated December 28, 1981. It will be useful to extract the entire circular, which is to the following effect: Instruction No. 1441-XXVII/1/93-Deduction under section 35B-ITAT's decision in the case of J. Hemchand and Company (ITA Nos. 3255 and 3330/BOM of 1976-77, dated June 17, 1978) -Clarification regarding. Attention is drawn to the Board's Instruction No. 1302 dated January 29, 1980. It was clarified therein that the sole question to be determined in considering the admissibility of weighted deduction is whether the expenditure in question is one covered by any of the subclauses of clause (b). The Board also accepted that in case there is composite expenditure a part of which may relate to any of the purposes mentioned in the sub-clauses, the claim can be allowed in respect of and to the extent the expenditure can be said to be incurred wholly and exclusively with reference to any of the items specified in clause (b) of section 35B(1). In particular, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the activities referred to in the sub-clauses, such proportionate expense can be taken for the purpose of this section as wholly and exclusively spent on such activity. 4. It may be clarified that the Board agrees with the above interpretation of the provisions of section 35B. The Tribunal has also correctly stated in the said order that whether a particular claim made by an assessee falls under any one or more of the activities specified, in those sub-clauses, can at best be judged only with reference to the facts of the particular case and the nature of the claim. The Tribunal thereafter examined the various items of expenses. It appears to the Board that the decision of the Tribunal in respect of some items of expenses treating them as admissible for weighted deduction wholly or proportionately, may be controversial and not acceptable to the Department, In particular its decision to allow 75% of salary of persons handling export business could still be a matter of dispute, because though accepting that the assessee's employees as part of their duty could not have avoided attending also to such work as falls within the excluded category in sub-clause (iii), it decided to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; Keshavji Ravji and Co. v. CIT [1990] 183 ITR 1 (SC); K. P. Varghese v. ITO [1981] 131 ITR 597, 612 (SC) and CIT v. Punalur Paper Mills Ltd. [1988] 170 ITR 37 (Ker). It is evident from perusal of annexure H and annexure H-1 that the commission payment made to parties to bring about the export sales will be entitled to weighted deduction irrespective of the fact whether the same is incurred in India or outside India. In this batch of 12 cases, the Appellate Tribunal referred to its earlier decision in the case of C. Tharian and Sons, Kottarakara (ITA Nos. 48 and 411 (Cochin) 78-79) for the assessment years 1975-76 and 1976-77 and held that the commission paid to the agent in India on export to Russia falls under sub-clauses (i) and (ii) of section 35B(1)(b) of the Act. The plea of the Revenue that the expenditure is in connection with the distribution of the assessee's goods and so hit by sub-clause (iii) of section 35B(1)(b) was rejected by the Appellate Tribunal. C. Tharian and Sons' case, referred to by the Appellate Tribunal in paragraph 8 of its order, came up before this court in ITR Nos. 7 and 8 of 1982 (CIT v. C. Tharian and Sons [1987] 166 ITR 607) and a Bench ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ), specifically urged and accepted by the Appellate Tribunal in this batch of cases, throws a flood of light and logic to the reasoning and conclusion regarding the applicability of section 35B of the Income-tax Act and the eligibility for the deduction claimed. Even if the circular of the Central Board of Direct Taxes has gone beyond the parameters drawn in section 35B of the Income-tax Act, in so far as the circular contained a provision beneficent to the assessee, the circular should be given effect to and that has been rightly so done by the Appellate Tribunal. The Income-tax Appellate Tribunal adverted to the plea of the Revenue that the commission payment made to the seller's agent (Indian agent) will fall only under sub-clause (iii) and repelled the same. In its reasoning, the Appellate Tribunal referred to the statement of Kasturi Nagesh Pai and Co. (seller's agent) to the Income-tax Officer detailing their role in the transaction as extracted in the assessment order dated February 29, 1980. The Appellate Tribunal also referred to the sample form of the contract containing the general terms and conditions, the contracts signed by the agents on behalf of the selle ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia for their goods. When they give the Trade Representation regular market reports like the raw cashew nuts position both in India and other producing countries, the price prevailing in all these sources of supply, the kernel's price on consultation with the exporters, what the agents actually do is to give advertisement and publicity outside India in respect of the goods of the assessee and obtain information regarding markets outside India for such goods. These are services incidental to the formation of the contract failing under sub-clauses (i) and (ii) of clause (b) of section 35B (1). On a resume of the facts and circumstances stated above, it cannot be denied that the commission payments made by the assessees are for services rendered to them. The services are incidental to the formation of the contract falling under sub-clauses (i) and (ii) of clause (b) of section 35B(1) of the Income-tax Act. It is evident that the agents render positive and specific services for the marketing of the goods in which the assessee deals in the course of his business. The commission agents obtained information regarding the markets outside India regarding the goods for export. They ..... X X X X Extracts X X X X X X X X Extracts X X X X
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