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Judgment
Balasubrahmanyan, J.—There are certain provisions in the I.T. Act, 1961, which cannot be explained from the purely fiscal point of view.
Some of these provisions have been introduced in the statute in order to advance the policy of the State, and for non-fiscal considerations. Section
35B of the Act is one of such provisions. By means of this provision, Parliament hopes to promote and develop export markets for domestic
companies and other resident persons and firms in India carrying on export trade and other activities abroad. Ordinarily, in the computation of a
taxpayer''s business income allowance for items of expenditure cannot exceed the actual amount of expenditure. But the relief granted under s. 35B
for the express purpose of promoting export markets takes the form of granting to the assessee concerned what is termed as a ""weighted
allowance, that is to say, an allowance equivalent to the expenditure incurred plus one-third of that amount. Since, however, the object of the
provision is not purely fiscal, but, on the contrary, to advance the policy of the state to promote exports, the section has laid down strict conditions
for the grant of the weighted allowance. In the very nature of the allowance and the object with which the concerned provision has been engrafted
in to the general scheme of the Act, it is essential that, in every case in which the weighted allowance is claimed by a given assessee, it must be
ensured that the statutory conditions are strictly fulfilled.
In this case, the assessee is a domestic company carrying on business in the export of prawns and shrimps to foreign countries. For procuring
orders from foreign buyers, the assessee engaged the services of a company called Messrs, B.C.Mody Export Pvt. Ltd., Bombay. In
consideration of this company having secured export orders for the assessee of the aggregate value of Rs. 58,94,800, the assessee paid Rs.
14,737 by way of commission to this company. The question in the relevant assessment was whether the assessee was entitled only to an
allowance of the actual expenditure by way of payment of commission in the sum of Rs. 14,737 or whether the assessee was entitled to a weighted
allowance as provided in s. 35B of the Act in the sum of Rs. 19,649 (Rs. 14,737 plus one-third thereof).
The ITO disallowed the assessee''s claim for weighted allowance under s. 35B but granted a deduction of Rs. 14,737 alone. The AAC
disagreed with the ITO and granted the assessee the added allowance asked for under s. 35B. On the Department''s appeal against the order of
the AAC, the Tribunal agreed with the AAC and held that the assessee was entitled to the weighted allowance under s. 35B of the Act.
Section 35B of the Act refers to several items of expenditure, with reference to each one of the items of expenditure, there are conditions
attached, which have to be fulfilled by an assessee before he could successfully claim the weighted allowance granted under the section. According
to the Tribunal, the assessee was entitled to have the weighted allowance either under sub-clause (ii) or under sub-clause (iv) or under sub-cl.(viii)
of s. 35B(1)(b) of the Act.
In this reference, the determination of the Tribunal to this effect is challenged by the Department. It is, therefore, essential to examine whether the
commission paid by the assessee to M/s. B.C.Mody Export Pvt. Ltd., in consideration of the latter having secured export orders for the assessee,
can be fitted in with either sub-clause (ii) or sub-clause (iv) or sub-clause (viii) of s. 35B(1)(b).
Sub-clause (ii) says that the expenditure, in order to be eligible for weighted allowance, must be expenditure incurred wholly and exclusively for
obtaining information regarding markets outside India for such goods, services or facilities"". In the present case, the Tribunal has clearly narrated
the facts as advanced by the assessee in regard to the payment of commission. According top the assessee, the commission was paid to M/s.
Mody Export Pvt. Ltd., in consideration of their having secured export orders. The question is whether this is expenditure covered by clause (ii). In
our judgment, it does not. Clause (ii) does not deal with obtaining of export orders; it relates to obtaining of information regarding markets outside
India. Information about markets outside India, international market intelligence, world market surveys and the like, are matters of a general nature.
In contrast, the securing of export orders is a matter having particular reference to the particular commodity in question with which the foreign
buyer was concerned, the price to be agreed, the quality and the quantity, the mode of carriage, delivery and other particulars. It would be a gross
understatement, if not a misstatement , to say that procuring orders is merely procuring information concerning the export markets. Sub-clause (ii)
would not, therefore, apply to this case. The Tribunal was in error in thinking otherwise.
Sub-clause (iv) refers to expenditure incurred wholly and exclusively on ""maintenance outside India of a branch office or agency for the
promotion of the sale outside India of such goods, services or facilities"". In the present case, there is no whisper in the contentions put forward
before the Tribunal and no finding by the Tribunal either that the assessee had been maintaining outside India a branch or an office or even an
agency for sales promotion of prawns or shrimps. Besides, the particular payment for which the weighted allowance is asked for in the present
case, viz., Rs. 14,737, is not an expenditure incurred wholly and exclusively for maintenance of any branch, office or agency in any foreign country.
On the contrary, the amount was paid as commission for securing export orders. Clause (iv) therefore, is not applicable. The Tribunal was in error
in thinking that it applied.
Clause (viii), relied on by the Tribunal, refers to expenditure incurred by the assessee wholly and exclusively in regard to performance of
services outside India in connection with or incidental to the execution of and contract for the supply of goods abroad. Mr. Mani, learned counsel
for the assessee, submitted that the commission paid to Mody Export Pvt. Ltd., can well be brought within the ambit of this sub-clause. We cannot
accept this submission as tenable for, as we earlier mentioned, the commission to Mody Export Pvt. Ltd., was avowedly paid, not for the
execution of a contract, but for procuring firm orders. In the sequence of acts connected with any contract, formation of the contract comes first,
the execution of the contract comes afterwards. Procuring orders comes at a stage even anteri to the formation of a contract. What was paid to
Mody Export Pvt. Ltd., was only in connection with the procuring of orders, and it had nothing to do with the formation of any contract. It cannot,
therefore, be regarded as a payment made for services connected with the execution of the contract.
Mr. Mani, however, attempted to put the present case within the ambit of sub-clause (viii), taking advantage of the expression ""incidental to the
execution of the contract"" occurring in the said sub-clause. Learned counsel submitted that if procuring of the contract cannot be regarded as a part
of the process of the execution of the contract, it can at least as a part of the process of the execution of the contract, it can at least be regarded as
a process which is ""incidental"" to the execution of the contract. Learned counsel''s line of argument was something like this: if there is no contract,
there can be no question of executing it, and for a contract to be there, orders must be procured, and, therefore, procuring of orders must be held
to be incidental to the execution of the contract.
We do not, however, accept the far-fetched way in which the incidentalness to the process of procuring the orders is sought to be included
within the meaning of the expression ""execution of the contract"" or ""services incidental to the execution of the contract"". Any service, in order to be
incidental to the execution of the contract"", cannot, at the same time, be service incidental to the formation of the contract. The two processes,
namely, formation of the contract and its execution, are dissociated both as to nature and as to time. By no stretch of language or semantics, can
the procuring of a contract be brought within the ambit of the expression ""services incidental to the execution of the contract"". Sub-clause (viii) also
does not apply to the present case.
It was not suggested by the Tribunal that any other sub-clause in s. 35B would apply to the assessee, nor was any argued by Mr. Mani for the
assessee in this reference. He did not refer to the other sub-clause under s. 35B to say that if any of them would apply to the present case. Since
the only provisions relied on by the Tribunal for supporting the grant of the weighted allowance have been found to be inapplicable, the assessee
must fail in this reference, and the question of law must be answered in favour of the Department.
We may, however add that the reason given by the ITO in disallowing the assessee''s claim for weighted allowance was that the commission to
Mody Export Pvt. Ltd., was paid, not outside India, but within this country. Although the assessment order does not, in terms, refer to sub-clause
(iii) of s. 35B(1)(b), it is easy to see that this was the sub-clause, which the ITO had in mind. The sub-clause provides that where the expenditure
relates wholly exclusively to the distribution, supply, or provision outside of goods, services or facilities, then, ordinarily, that is eligible for weighted
allowance. But, that is subject to certain conditions and restrictions. One of the restrictions is that the expenditure in question must not have been
incurred in India. If the expenditure for distribution, supply or provision of goods outside India is incurred in India, then the weighted allowance will
not be exigible. Likewise, in the case of expenditure for the carriage of goods and services overseas to their destination, wherever the expenditure
is incurred, even if in foreign countries such expenditure cannot claim the weighted allowance.
In the present case, the ITO disallowed the assessee''s claim on the score that the commission, although it might have related to the distribution
or supply of goods outside India, was paid only in India to Mody Export Pvt. Ltd., and hence it could not be regarded as an expenditure not
incurred in India. It seems to us that, if the commission can at all brought under any one of the provisions under s. 35B, it can be brought only
under sub-clause (iii) of s. 35B(1)(b). It is here that the assessee faces the chief difficulty in applying sub-clause (iii), namely, that the commission
was paid in India and not outside India. It is clear that the expenditure thus fails to fulfil one off the important conditions under sub-clause (iii).
The question of law for our decision has been formulated thus by the Tribunal in the case stated:
Whether, on the facts and in the circumstances of the case, the assessee was entitled to the weighted deduction u/s 35B of the Income Tax Act,
1961, in respect of the commission paid of Rs. 14,737 ?
Having regard to the reasons stated above, we answer the question of law in the negative and against the assessee. The department will have
its costs from the assessee. Counsel''s fee Rs. 500.