Commissioner of Income Tax vs Aspinwall Co. (Travancore) Ltd.

Arijit Pasayat, C. J.

Heard.

In compliance with the direction given by this court in O. P. No. 17909 of 1995, the Income Tax Appellate Tribunal, Cochin Bench, Cochin (in short "the Tribunal"), has referred the following questions for opinion of this court in terms of Section 256(2) of the Income Tax Act, 1961 (in short "the Act") :

"1. Whether, on the facts and in the circumstances of the case, the assessee is entitled to weighted deduction under Sub-clause (viii) of Section 35B(1)(b) of the Income Tax Act in respect of interest on packing credit ?

Whether, on the facts and in the circumstances of the case, the circular/instruction dated December 28, 1981, relied on by the Tribunal has application to the claim/facts of the case ?"

The factual position as set out in the statement of case is as follows : The assessee is a limited company engaged in the business of export of coir products. It claimed weighted deduction u/s 35B of the Act, in respect of interest on packing credit amounting to Rs. 1,61,385. The Assessing; Officer and the Commissioner of Income Tax (Appeals) (in short "the CIT (A)") did not allow the claim. The matter was carried in second appeal before the Tribunal. Relying on a decision of the Madhya Pradesh High Court in Commissioner of Income Tax Vs. Vippy Solvex Product Private Limited, , the Tribunal allowed the claim.

In support of the application it is stated by learned counsel for the Revenue that the true ambit of Section 35B(1)(b)(viii) was not kept in view by the Tribunal. Learned counsel for the assessee submitted that the interest that was paid on packing credit was for the purpose of manufacture of articles to be exported on the basis of pre-existing orders and, therefore, the amount in question clearly qualified for deduction.

For appreciating the rival submissions, it is necessary to take note of Section 35B(1)(b)(viii) which reads :

"35B. Export markets development allowance.--(1) (a) Where an assessee, being a domestic company or a person (other than a company) who is resident in India, has incurred after the 29th 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, but before the 1st day of April, 1978, 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--. . .

(viii) 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 ;"

The expenditure referred to in Clause (a) of Section 35B(1)(b) has to be of the nature stipulated in the provision itself, i.e., it must have been incurred wholly and exclusively on 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.

The certificate of the bank which advanced the loan is relevant. The same reads as follows :

"Aspinwall and Company (Travancore) Limited, Alleppey, had maintained with us during the year ended 31st December, 1979, an export packing credit account. Advances from this account were given to the company only for the purchase of raw materials for manufacturing/processing coir products to be exported out of India. These advances were made only when the company submitted firm export contracts entered into with foreign buyer. This credit facility carried an interest of 11 per cent. per annum with quarterly rest. Export packing credit finance is extended at concessional rate of interest as per the Reserve Bank of India directives from time to time. The advance amount was determined at 75 per cent. of the FOB value of the export order and was recovered while negotiating the documents after shipment. The credit amount had to be settled within a period of six months from the date of availment. The interest on packing" credit account availed by the company during the year ended December 31, 1979, amounted to Rs. 1,59,182.29. The total amount advanced during the year ended December 31, 1979, under this advance account amounted to Rs. 1,41,57,696.18. The company had not defaulted in settling the amounts advanced/interest in time."

(A portion of the certificate has been underlined as indicated above, for the purpose of emphasis). It is, therefore, obvious from the certificate itself that the advance was given only for the purpose of purchasing raw materials for manufacturing/processing coir products to be exported out of India.

The expenditure in order to qualify for weighted deduction is required to have been incurred wholly and exclusively on performance of services outside India in connection with, or incidental to, the execution of any contract for supply outside India of such goods. We are not concerned with the other categories, i.e., services or facilities. Purchase of raw materials which go into the ultimate finished product per se does not come under the provision. Interest charged by the bank was for advance for purchasing raw materials. It is fairly accepted by learned counsel for the assessee that such interest is chargeable as revenue expenditure in the accounts of the assessee. The expenditure cannot be said to be in connection with or incidental to the execution of the contract for the supply. Merely because the expenditure was incurred in India for supply outside India, per se it would not qualify for weighted deduction. It is submitted by learned counsel for the assessee that each and every expenditure which has nexus with the supply of goods is covered by the provision. We do not find any substance in this plea. The expenditure has not been made for supply of goods. It is linked with the manufacture of goods, as the loan was availed of for purchase of raw materials. There is marked distinction between an expenditure relatable to manufacture and one relatable to supply. The stand of the assessee that unless there is manufacture, there cannot be any supply is not acceptable. If that interpretation is accepted, practically every expenditure would be covered and there was no necessity for the Legislature to make specific stipulations. That cannot certainly be the legislative intent. That being the position, we are of the view that the assessee was not entitled to weighted deduction. The answer to the first question is in the negative, in favour of the Revenue and against the assessee. It is not necessary to answer the second question, in view of the answer to the first question.

Income Tax reference is disposed of accordingly.