Karnataka High Court
Chief Commissioner Of Income-Tax vs Mysore Sales International Ltd. on 16 March, 1991
Equivalent citations: [1992]195ITR457(KAR), [1992]195ITR457(KARN)
Author: N. Venkatachala
Bench: N. Venkatachala
JUDGMENT K. Shivashankar Bhat, J.
1. Under section 256(2) of the Income-tax Act, 1961, the following question was called for to be answered by this court :
"Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in upholding the order of the Commissioner (Appeals) directing the Income-tax Officer to consider the payment of commission to foreign agents as qualifying for weighted deduction as admissible under sub-clause (iv) of section 35B(1) without considering the fact that sub-clause (b) (iii) of section 35B of the Income-tax Act, 1961, has been omitted with effect from April 1, 1978 (sic) ?"
2. The assessee is an agent to effect sales of sandalwood oil and other goods manufactured by a public sector undertaking belonging to the State Government which is now known as Karnataka Soap and Detergents Limited.
3. For the purpose of effecting sales abroad, the assessee entered into certain agreements whereby sub-agents were appointed for different territories in foreign countries like the U. S. A. and Japan. The copies of the agreements produced before us show that the sub-agent is appointed for a particular period and, during the said period, the assessee had the right to terminate the sub-agency by giving appropriate notice. The sub-agent was to be paid commission at 1.5% of the C & F value of sales of sandalwood oil in the territory of the sub-agent against orders secured by the sub-agent. However, in the agreement entered into with the sub-agent for Japan, the assessee reserved the right to accept orders direct from the buyers in respect of which the sub-agent would be paid a commission equal to half the commission payable to the sub-agent on orders secured by it. The sub-agents are not to deal in or in any manner associate with the trade in sandalwood oil manufactured by anybody other than the principal of the assessee. There is also a term under which the sub-agent was required to guarantee sale of a minimum quantity of sandalwood oil per annum in the relevant territory. If there is a shortfall in the sale from this minimum, there is a separate clause to deal with the situation. The sub-agents were expected to create a continuous demand for the sandalwood oil by proper advertisement, travelling, etc., at the cost of the sub-agent. However, the sub-agent in the U. S. A. was to be reimbursed towards such expenses incurred for brand publicity not exceeding half a per cent, of the total sales turnover.
4. The present question referred to us pertains to the assessment years 1979-80 and 1980-81. The assessee claimed the deduction under section 35B(1)(b)(iv) of the Income-tax Act in respect of the commission paid to the sub-agents. The relevant provisions of section 35B read thus :
"(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, 1988, but before the 1st of March, 1983, whether directly or in association with any other person, any expenditure (not being in the nature of capital expenditure or personal expenses of the assess) 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.
(1) (b) The expenditure referred to in clause (a) is that incurred wholly and exclusively on - ...
(iv) maintenance outside India of a branch, office or agency for the promotion of the sale outside India of such goods, services or facilities." (rest omitted here).
5. The assessee's claim was accepted by the Appellate Tribunal which affirmed the relief granted to the assessee by the Commissioner (Appeals). The Appellate Tribunal held that the agency agreement shows that it was in substance an agreement to promote sales abroad and if such an agreement were not to fall within section 35B, it will be difficult to imagine any other agreement which was meant to be encouraged under section 35B.
6. No doubt the purpose of section 35B is to provide allowance in respect of the expenditure incurred in connection with the export markets development. Even though most of the allowances referred to in section 35B would have been allowed under section 37 of the Act as an expenditure laid our or expended wholly and exclusively for the purposes of the business, section 35B was enacted to give weighted deduction, that is to say, the assessee who is entitled to the benefit of section 35B could claim something in excess of the actual expenditure incurred, as a deduction. While section 37 permits deduction of a sum equal to the sum expended, under section 35B, the assessee is allowed a deduction of a sum equal to one and one-third times the amount of such expenditure. Therefore, it is clear that section 35B is an exception to the normal rule and this was enacted obviously to encourage exports and to earn goodwill for Indian goods in foreign markets. This provision was in force only for a limited period. Even within section 35B, some of the clauses were omitted earlier to the omission of clause (iv) quoted above. The Appellate Tribunal proceeded on the assumption that, if the benefit of deduction under the said sub-clause (iv) is not granted, the reference to agency in the said sub-clause will become otiose. We do not think so. The sub-clause (iv) permits a deduction in respect of expenditure incurred wholly and exclusively on maintenance outside India of a branch, office or agency. The word "agency" occurs along with the other two words "branch" and "office". Therefore, the meaning attributable to the agency will have to be something which has some flavour resembling that of a branch or office. This apart, the principal, i.e., the assessee, has to maintain such agency. The expenditure that can fall within this clause is an expenditure incurred for the maintenance of such agency. The word "maintenance" cannot be equated with the concept of payments made depending upon the actual work turned out. It indicated that, irrespective of the work turned our, the agency was maintained for its upkeep or preservation or sustenance; this alone could be termed as maintenance of an agency. In the instant case, the agents were paid, depending upon the work turned our. If the agent fails to procure any sales, the assessee need not pay anything to the agent. Therefore, the agent will have to maintain itself in the relevant territory. The assessee was not responsible of the maintenance of the agent in any manner. No term of agreement provides for the payment of any amount by the assessee to the foreign agent for the latter's maintenance in the said territory. It is also not possible to infer that the commission payable to the agent comprehends within itself the amounts referable to the possible expenditure for the maintenance of such agent.
7. The above approach of ours finds full support in the opening sentence of clause (b) of section 35B(1). The expenditure which qualifies for the weighted deduction should be the one that was incurred "wholly and exclusively" one the various activities referred to in sub-clauses (i) to (ix) of clause (b). If the expenditure is relatable to anything else, certainly this provision cannot be attracted. Further, under sub-clauses (iv), the expenditure incurred for the maintenance of the agency should be for the promotion of the sales outside India. Therefore, the maintenance of the agency for the sale promotional purposes alone is covered by the relevant words of sub-clause (iv) and such expenditure should be entirely incurred for the said purpose. The commission paid in the instant case certainly includes a remuneration for the agent for procuring a particular sale and it is not a commission for the promotion of the sales as such by building up a market for sandalwood oil generally.
8. Learned counsel for the assessee cited a decision of the Kerala High Court in CIT v. Pooppally Foods [1986] 161 ITR 729. The Bench observed that (headnote) :
"Commission paid to an agent in a foreign country for promotion of export trade would attract any one of the sub-clause (ii), (iii), (iv) and (viii) of clause (b) of section 35B(1) of the Income-tax Act, 1961, particularly so, when the Revenue never before had chosen to raise the point such expenditure would not fall within the ambit of any of the clauses in section 35B of the Act for entitlement to weighted deduction."
9. A perusal of the facts of the said case indicated that the relevant question was raised for the first time before the High Court. The Revenue had not set up the case that even if the payment was to an agent and was in the nature of commission, the assessee would not be entitled to claim weighted deduction under section 35B, before the lower authorities nor before the Appellate Tribunal (vide page 732 of 161 ITR). With utmost respect to the learned judges, we find that the observation of the court therein were quite wide and there has been no discussion about the scope of the various sub-clauses of section 35B(1). However, the Bench was very guarded when it held that the said provisions were applicable because (at page 732 of 161 ITR) :
"... particularly so, when the Revenue never before had chosen to raise the point that such expenditure would not fall within the ambit of any of the clauses in section 35B of the Act for entitlement to weighted deduction."
10. In the view we have taken above, it is unnecessary for us to consider the general principles found in the law of agency.
11. Consequently, the question referred to us is answered in the negative and in favour of the Revenue.