Income Tax Appellate Tribunal - Delhi
Continental Construction Ltd. vs Income-Tax Officer on 6 April, 1992
Equivalent citations: [1992]41ITD614(DELHI)
ORDER
M.C. Agarwal, Judicial Member
1. This is an appeal by the assessee arising out of its assessment for assessment year 1983-84. We have heard the learned counsel for the assessee and the learned Departmental Representative and have perused the material placed before us.
2. The first point raised in this appeal is about the assessee's claim for weighted deduction in terms of Section 35B of the Income-tax Act, 1961. The assessee is a civil contractor and was, during the year under consideration, executing some projects in foreign countries like Libya and Iraq. For that purpose the assessee was maintaining offices and work force in those countries. The assesses did not claim weighted deduction under Section 35B before the Assessing Officer because it was claiming that its entire income is exempt under Section 80-O. The assessee's claim for relief under Section 80-O was negatived and in the appeal preferred by the assessee and alternative claim for relief in terms of Section 35B was set up. The CIT (Appeals) upheld the Assessing Officer's finding that the assessee was not entitled to exemption under Section 80-O of the Act. He held that the assessee could be entitled to some relief under Section 80HHB and restored the matter to the Assessing Officer for examining whether the assessee deserved any relief under that section. The CIT (Appeals) also restored the matter regarding the claim of the assessee for weighted deduction under Section 35B to the ITO directing the Assessing Officer to examine the assessee's claim and allow weighted deduction to the extent admissible in accordance with law. Thereafter the Assessing Officer examined the matter and passed an order dated 27-9-1985 negativing the assessee's claim. The Assessing Officer held that since the assessee was engaged in the execution, of a foreign project of civil construction there was no sale of goods as held by the Hon'ble Supreme Court in the case of State of Madras v. Gannon Dunkerley & Co. (Madras) Ltd. AIR 1958 SC 560, and, therefore, the expenditure in question was not for the promotion of sales of goods. The assessee appealed to the CIT (Appeals), who has also taken the same view. The learned CIT (Appeals) concluded his findings as below:-
3.4 Having considered the rival arguments and counter arguments the issue has to be decided against the assessee. Weighted deduction is admissible not for rendering services abroad but on expenditure of specified types for development of export markets with regard to goods or services exported from India. The assessee has not been able to show that any such expenditure was incurred on export promotion for goods or services from India.
3.5 According to the assessee's arguments the expenditure was on services rendered abroad and hence all expenses outside India are entitled to weighted deduction. The following extracts bears repetition.
'If there is no sale of material, plant and machinery etc. the appellant is definitely rendering various services in putting up the foreign project. It is extending various facilities to the foreign Government enterprises for whom the appellant has undertaken such foreign projects. If as per the decision in Gannon Dunkerley & Co. case, the execution of foreign project is a works contract, then it necessarily involves the services by the assessee. It cannot be questioned that the assessee has rendered various services of survey, feasibility, proper location and advise accordingly to the clients, purchase of various equipments etc. to the satisfaction of the client, installing the same and completing the project to the utmost satisfaction of the client.' In the context of the facts the ITO has rightly placed reliance on the judgment of the Supreme Court in the case of State of Madras v. Gannon Dunkerley & Co. AIR 1958 SC 560. The execution of a foreign project does not involve any export of goods or services as such. The scheme of Section 35B, which is aimed at encouraging export promotion activities like advertisement and publicity abroad or maintenance of an office or agency for promotion of sale outside India of such goods or services as are exported or for travelling abroad in that connection, does not fit into the type of activities involved in execution of foreign projects. Agreeing with the reasoning of the Income-tax Officer, this ground is rejected.
3. Section 35B allows an extra deduction in respect of a certain expenditure incurred by an assessee during the previous year. The expenditure on which weighted deduction was allowable was specified in Sub-clauses (i) to (ix) of Sub-clause (b) of Section 35B(1), which are reproduced below:-
(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, not being expenditure incurred in India in connection therewith or expenditure (wherever incurred) on the carriage of such goods to their destination outside India or on the insurance of such goods while in transit;
(iv) maintenance outside India of a branch, office or agency for the promotion of the sale outside India of such goods, services or facilities;
(v) preparation and submission of tenders for the supply or provision outside India of such goods, services or facilities, and activities incidental thereto;
(vi) furnishing to a person outside India samples or technical information for the promotion of the sale of such goods, services or facilities;
(vii) travelling outside India for the promotion of the sale outside India of such goods, services or facilities, including travelling outward from, and return to, India;
(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;
(ix) such other activities for the promotion of the sale outside India of such goods, services or facilities as may be prescribed.
4. Section 35B was enacted by the Finance Act, 1968 with effect from 1-4-1968. There was an amendment by the Finance (No. 2) Act, 1980 w.e.f. 1-4-1981, by which Sub-clauses (ii). (iii), (v) , (vi)and (viii) were deleted. We have before us assessment year 1983-84 and, therefore, the assessee's claim is that the expenditure incurred by it falls within the remaining Sub-clauses (i), (iv) and (vii). The learned counsel for the assessee contended that the judgment of the Hon'ble Supreme Court in the case of Gannon Dunkerley & Co. (Madras) Ltd. (supra) was not relevant to the issue because that was a judgment dealing with the scope of sale of goods within the meaning of the Madras General Sales-tax Act, while Section 35B speaks of sale outside India of goods, services or facilities which an assessee deals in or provides in the course of his business. The learned Departmental Representative, on the other hand, supported the view taken by the authorities below and contended that relief under this provision of law would be admissible only if there is sale of goods or services outside India and as held by the Hon'ble Supreme Court in the case of Gannon Dunkerley & Co. (Madras) Ltd. (supra) in the case of execution of a works contract there is no such sale.
5. We have given our careful consideration to the respective arguments. The Hon'ble Supreme Court in the case of Gannon Dunkerley & Co. (Madras) Ltd. (supra) was dealing with the scope of sale of goods under the Madras General Sales-tax Act read with the Government of India Act, 1935. That was a case of building contractor and the question was whether when the building contractor use building materials in the construction of the building, there was a sale of those materials by the contractor to the principal. The Hon'ble Madras High Court had held that there was no such sale and this view was upheld by the Hon'ble Supreme Court. The Hon'ble Supreme Court observed as below : -
In a building contract, the agreement between the parties is that the contractor should construct a building according to the specifications contained in the agreement, and in consideration therefore receive payment as provided therein, and as will presently be shown there is in such an agreement neither a contract to sell the materials used in the construction, nor does property pass therein as movables. It is, therefore impossible to maintain that there is implicit In a building contract a sale of materials as understood in law.
6. The learned counsel for the assessee also referred to the Hon'ble Supreme Court's judgment dated 15-1-1992 in the assessee sown case, i.e., Continental Construction Ltd. v. CIT [Civil Appeal No. 3458 of 1990], wherein the Hon'ble Supreme Court while dealing with the assessee's claim for relief under Section 80-O observed that there can be no doubt at all that under the contract technical services were rendered by the assessee to foreign Government. The learned counsel for the assessee, therefore, contended that the ratio of the judgment of the Hon'ble Supreme Court in the case of Gannon Dunkerley & Co. (Madras)Ltd. (supra) does not apply to the facts of the case and to the provisions of Section 35B.
7. We have reproduced the relevant clauses of Section 35(1)(b). Section 35B provides relief to all assessees who, in one way or the other, develop export market. They may be engaged in the sale of goods or rendering services or providing facilities. In Sub-clause (0 of Sub-clause (b) of Section 35B(1) the word "provides" has also been used along with the word "deals", which shows that in the case of services or facilities the word "deals" may not be appropriate. In Sub-clauses (iv) and (viii) reference is made to the promotion of sale outside India of such goods, services or facilities. The words ' sale' if restrictly interpreted would take the services or facilities out of the scope of these clauses because services and facilities cannot normally be sold in the same way as goods are sold. A doctor or a lawyer, who render services to his clients cannot normally be said to be selling those services. If an Indian has some establishment outside India from which it provides certain facilities to foreigner, it may be inappropriate to describe the provision of those facilities as sale of those facilities, take for example, an Indian company puts a communication satellite in the orbit and allows the use of the facilities provided by the satellite to parties outside India, it would be inappropriate to say that those facilities are being sold. Thus, in the ordinary language sale does not cover services and facilities, but here we are not interpreting sale as understood by people in common parlance or sale as defined in the Sales of Goods Act or in the sales-tax Laws. We have to interpret this word as it has been used in the various clauses of Section 35B(1)(b). Since in Clauses (iv) and (vii) the word 'Sale' has been used with reference to services and facilities also , the scope of the word' Sale' cannot be restricted as it was done in the case of Gannon Dunkerley' s Co. (Madras) Ltd. (supra). In our View, the word 'sale' used in Section 35B includes within its scope what could otherwise be described as rendering of services or providing of facilities. If we do not do so, then Section 35B would not apply to cases in which only services are rendered or facilities are provided. That would amount to making the words 'services' and 'facilities' redundant. This is not permissible and as a necessary consequence the word' sale' has to be given a wider interpretation as referred to above. We, therefore, hold that relief under Section 35B would be available to an assessee even if there is no sale of goods and there is only rendering of services or provisions of facilities. We also hold that the assessee while executing projects outside India is engaged in providing goods and services.
8. As mentioned above, in order to be eligible for weighted deduction the expenditure has to be incurred wholly and exclusively for the purposes specified in the various clauses of Sub-clause (b) of Section 35B(1). For the year under consideration the clauses that were in operation were (0, (iv) and (vii). Sub-clause (j) dealt with advertisement or publicity. The assessee has not incurred any such expenditure and, therefore, does not claim any relief under that clause. The assessee's plea was that it is entitled to weighted deduction under Sub-clauses (iv) and (vii). According to it has offices outside India in connection with the execution of the foreign projects and, therefore, the expenditure incurred on the maintenance of those offices and the expenditure incurred on the travelling of people from India to those offices comes under the aforesaid clauses. The learned Departmental Representative, on the other hand, contended that the assessee was, in the year under consideration, executing only contracts that it had secured earlier and the offices that it maintained in the various countries or the work force employed by it, was only in relation to the execution of already procured contracts and not for the promotion of the sale outside India of goods, services or facilities. It was contended that the law requires that the expenditure should be incurred wholly and exclusively for the promotion of sale outside India of goods, services or facilities by the maintenance outside India of a branch, office or agency or by travelling, and that the establishments maintained by the assessee for the execution of the contracts were for actually rendering services, etc., and not for the promotion thereof. According to him, the use of the word "promotion" in the two clauses is important and expenditure which is incurred actually on selling goods or rendering services or providing facilities cannot be expenditure for the promotion of sale, etc. He also pointed out that actual expenditure incurred on the execution of works or the rendering of services, etc., was eligible for weighted deduction under Clauses (iii) and (viii) of Section 35B(1)(6), as originally enacted and as those clauses have been deleted with effect from 1-4-1981, the remaining clauses have to be interpreted strictly and if the interpretation as put by the learned counsel for the assessee is accepted, then the deletion by the Legislature of Sub-clauses (iii) and (viii) would become meaningless, as entire expenditure incurred on the execution of works outside India could be claimed under Clauses (iv) and (vii). The learned counsel for the assessee, on the other hand, refuted the said contentions and contended that the assessee is not claiming weighted deduction in respect of the entire expenditure, but is claiming the same only with reference to expenditure debited to the profit and loss account. According to him, the expenditure debited to the works account is not claimed to be eligible for weighted deduction. He also contended that in any case weighted deduction may be allowed in respect of the administrative staff, which is not actually employed for execution of the works. According to him, execution of works outside India by itself promotes the sale of goods, services or facilities and, therefore, such expenditure is also for the promotion of sales.
9. We have given our careful consideration to the respective arguments. Section 35B grants an extra relief and must be interpreted in a realistic manner. The assessee is admittedly executing foreign projects and as held by the Hon'ble Supreme Court in the assessee's own case is entitled to relief under Section 80HHB of the Act. Section 80HHB deals with income derived from the business of execution of foreign projects undertaken by an assessee and 25% of the income from such business is exempt subject to certain conditions prescribed in the Act. Section 35B grants weighted deduction in respect of expenditure. The three clauses that now remain in Section 35B(1)(b) deal with (i) advertisement and publicity, (ii) maintenance outside India of a branch, office or agency for the promotion of sale, and (Hi) travelling outside India for promotion of sale. The other clauses that deal with actual expenditure incurred in relation to sales or rendering of services or execution of works have been deleted by the Legislature. In such a situation, it seems to us that when Sub-clause (iv) speaks of maintenance outside India of a branch, office or agency for the promotion of sale outside India of such goods, services or facilities, it means that the branch, office or agency is only for advertisement or liaison work and does not actually sell the goods or render the services or provide the facilities. Similarly, when Clause (vii) deals with travelling outside India for the promotion of sale outside India of such goods, services or facilities, it refers only to promotional travelling and no travelling for actually selling the goods or rendering services or providing facilities. Take for example, the case of a lawyer practising in India, who is engaged by a foreign customer to render legal service to him in a foreign court. The lawyer goes out to another country and render services. The expenditure incurred by the lawyer on going out of India and coming back would not, in our view, be expenditure for the promotion of rendering services outside India and would not come within Sub-clause (vii) aforesaid. In the case of the present assessee it had already obtained several contracts in foreign countries and all its offices situate in foreign countries were engaged in the execution of those contracts an co-ordinating the activities between the places of work, the administrative offices and the Head Office in India, etc. The expenditure incurred in connection with those offices cannot be said to be expenditure for the promotion of sale outside India of goods, services or facilities. The execution of foreign projects may indirectly promote the assessee's business and help it procuring similar other projects in foreign countries, but simply because of such a contingency, the expenditure incurred by the assessee cannot be said to be incurred wholly and exclusively for the purposes of maintenance outside India of a branch or office or for travelling outside India for the promotion of sale of goods, services or facilities. We, therefore, agree with the authorities below that the assessee is not entitled to weighted deduction under Section 35B in respect of any expenditure incurred by it in relation to its offices situate outside India or on the travelling of its directors or other employees. We uphold their findings.
10. to 13. [These paras are not reproduced here as they involve minor issues.]