Bombay High Court
Dr. Beck And Co. (India) Ltd. vs Commissioner Of Income-Tax on 15 February, 1993
Equivalent citations: [1993]202ITR922(BOM)
Author: Sujata V. Manohar
Bench: Sujata V. Manohar
JUDGMENT U.T. Shah, J.
1. These are cross-references and two question each are referred to us by the Tribunal under section 256(1) of the Income-tax Act, 1961, (for short, "the Act"), at the instance of the assessee as well as the Revenue. The question referred to at the instance of the assessee are :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that cash payments made by the assessee to its employees by way of reimbursement of medical expenses should be taken into account for the purpose of computing disallowable expenditure under section 40A(5) for the assessment years 1972-73 and 1973-74 ?
2. Whether, on the facts and in the circumstances of the-case, the Tribunal was justified in law in holding that no weighted deduction under section 35B was allowable for the assessment years 1972-73 and 1973-74 in respect of the commission amounts of Rs. 5,09,195 and Rs. 3,71,718, respectively ?"
2. The questions referred to at the instance of the Revenue are :
"1. Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that roadways in the factory premises should be treated as 'plant' and not as part of the factory structure and that depreciation and development rebate should be allowed on such factory roads by treating them as factory plant for the assessment years 1972-73 and 1973-74 ?
2. Whether, for the assessment years 1972-73 and 1973-74, on the facts of the and in the circumstances of the case, the Tribunal was justified in law in allowing the assessee's claim for depreciation in respect of the asset used for scientific research on which relief under section 35 was already allowed in earlier years ?"
3. At the time of hearing, both the parties stated that apart from question No. 2 referred to us at the instance of the assessee, the other questions are covered by the decision of this Court or the Supreme Court.
4. Question No. 1 referred at the instance of the assessee is covered by the decision of this Court in the case of CIT v. Indokem P. Ltd. [1981] 132 ITR 125 in favour of the assessee.
5. In this view of the matter, we answer the question referred to us in the negative, i.e., in favour of the assessee and against the Revenue.
6. Question No. 1 referred to us at the instance of the Revenue is covered by the decision of the Supreme Court in the case of CIT v. Gwalior Rayon Silk Mfg. Co. Ltd. [1992] 196 ITR 149. Respectfully following the said decision, we hold that the roadways within the factory premises are to be treated as "buildings" for the purpose of granting depreciation to the assessee. In this view of the matter, the assessee would not be entitled to development rebate on such assets.
7. It is an agreed position that the issue raised in question No. 2 referred to us at the instance of the Revenue is covered by the decision of the Supreme Court in the case of Escorts Ltd. v. Union of India [1993] 199 ITR 43, in favour of the Revenue. In this view of the matter, we answer this question in the negative, i.e., in favour of the Revenue and against the assessee.
8. Now, we shall deal with the issue raised in question No. 2 referred to us at the instance of the assessee. The assessee is a company engaged in the manufacture of insulating enamels, varnishes and resins for the electrical industry. The assessment years are 1972-73 and 1973-74 and the relevant previous years ended on June 30, 1971, and June 30, 1972, respectively.
9. The assessee had entered into a collaboration agreement with Dr. Beck and Co., A. G. Germany (hereinafter referred to as the German Company) in respect of manufacture of the articles in which the assessee was dealing. The assessee was allowed to export the manufactured articles to countries like South Korea, Indonesia, Burmah and Pakistan on non-exclusive basis without any claim for commission thereon. In the course of its business, the assessee obtained permission of the German Company to export the goods manufactured by it to the Union of Soviet Socialist Republics on non-exclusive basis. Vide their letter dated March 21, 1963, the German Company acceded to the assessee's request and it was agreed that the assessee would pay "a minimum commission" of six per cent. net, i.e., not subject to taxation in India. The commission is payable in D. M. Subsequently, vide their letter dated September 23, 1969, the German Company agreed to receive three per cent. commission instead of six per cent. originally decided upon by the parties.
10. On the aforesaid facts, the assessee paid commission to the German company on the export of goods to the U. S. S. R. and claimed weighted deduction under section 35B of the Act. The Income-tax Officer, however, did not allow the weighted deduction claimed by the assessee on the ground that the German company had not booked any export order for the assessee. This Commission was paid to the German company for giving permission to the assessee to export products to the U. S. S. R. This action of the Income-tax Officer was confirmed by the first appellate authority and thereafter by the Tribunal. It may be mentioned that while confirming the action of the Income-tax Officer, the Tribunal was of the view that the commission though paid to the German Company did not fall in any of the sub-clauses, i.e., sub-clauses (i) to (ix) of clause (b) of sub-section (1) of section 35B of the Act. The Tribunal further held that the payment of commission to the German Company was nothing but compensation paid to the German Company for allowing the assessee to do the business in the U. S. S. R. The Tribunal further found that nothing was brought on record to suggest that the German company had obtained any orders from the U. S. S. R. or in any way rendered any services in connection with the export business to the U. S. S. R. In other words, the Tribunal held that since the German company had not rendered any specific services which could fall in any of the sub-clauses (i) to (ix), the assessee was not entitled to weighted deduction on the omission paid to the German company.
11. Learned counsel for the assessee, after inviting our attention to sub-clauses (ii) and (iii) of clause (b) of sub-section (1) of section 35B of the Act, submitted that the Tribunal had failed to appreciate the assessee's contention that the assessee had paid commission to the German company on supply of goods to the U. S. S. R. In this connection, he placed before us a copy of the order of the Tribunal for the assessment year 1982-83 and pointed out that as some material was not looked into by the Income-tax authorities, the Tribunal had remitted the matter to the file of the Income-tax Officer with a view to redecide this issue afresh. He, therefore, strongly urged that since this is a recurring issue and proper facts are not brought on record, we may remit this matter to the Tribunal with appropriate directions. However, on a querry raised by the Bench, learned counsel for the assessee was fair enough to state that the material on which the assessee had relied before the Tribunal for the assessment year 1982-83 was not produced or available on the record in respect of the year under reference. We may also mention that learned counsel for the assessee has also filed an affidavit dated February 9, 1993, in this connection, wherein the additional material on which the assessee had relied for the assessment year 1982-83 is stated.
12. After some discussion with learned counsel for the assessee, we indicated to him that it was not possible at this late stage to entertain his request for sending the matter back to the Tribunal with appropriate directions. We, therefore, requested him to make his submission on the merits of the case.
13. Learned counsel for the assessee submitted that since the provisions of section 35B are incentive provisions for augmenting exports, the same should be construed liberally. Further, he submitted that even if there are two views possible in respect of the interpretation of the provision of that section, the view in favour of the assessee should be preferred. He invited our attention to the letters dated March 21, 1963 and September 23, 1969, referred to above with a view to impress upon us that but for payment of commission to the German company, it would not have been possible for the assessee to export goods to the U. S. S. R. In other words, he submitted that since the commission was paid to the German company on the supply of goods to the U. S. S. R., the assessee would be entitled to weighted deduction under section 35B of the Act. In support of his submissions, he referred to two decisions (i) CIT v. Bishnauth Tea Co. Ltd. and (ii) CIT v. South Arcot Dist. Co-operative Marketing Society Ltd. . He had also stressed the point that the commission was paid to the German Company on percentage basis, and that too, on each export made to the U. S. S. R.
14. Learned counsel for the Revenue, on the other hand, took us through the orders of the Income-tax authorities as well as of the Tribunal and submitted that what was paid to the German company was not commission but compensation for allowing the assessee to export its goods to the U. S. S. R. In this connection, he invited our attention to the relevant portions of the orders of the Income-tax authorities as well as the Tribunal where in they have clearly stated that the so called commission was paid by way of compensation to the German company. Accordingly to him, since there was no direct or indirect nexus between the payment of the commission and export of goods to the U. S. S. R., there was no question of granting any weighted deduction to the assessee in respect of commission payment to the German company.
15. In order to resolve the dispute, it would be necessary to refer to the relevant provisions of the Act. Section 35B of the provides for weighted deduction known as "export markets development allowance". The relevant portion of the said section reads as under :
"35B. (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.....
(b) The expenditure referred to in clause (a) is that incurred wholly and exclusively on.....
(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....."
16. According to the assessee, since it had paid commission on supply of goods to the U. S. S. R. parties, it was entitled to weighted deduction on the commission paid to the German company. The Revenue, on the other hand, is of the view that the commission was not paid to the German company on the supply of goods to the U. S. S. R. but the amount was paid by way of compensation.
17. It is no doubt true that an incentive provision like the present one with which we are dealing in this reference, has to be interpreted liberally. However, at the same time, we should not lose sight of the fact that there should be some nexus either directly or indirectly between the expenditure incurred by the assessee and the business carried on by it. In the instant case, there was already an arrangement with the German company to supply goods to certain Asian countries without any payment of commission. However, when the assessee thought of exporting goods to the U. S. S. R. it approached the German company for the necessary permission. The German Company agreed to the supply of such goods to the U. S. S. R. provided it was paid commission on certain percentages basis. Surely this type of arrangement cannot fall within the purview of sub-clause (iii) of clauses (b) of sub-section (1) of section 35B of the Act. In fact, as noted above, the Tribunal has given a clear finding that nothing was brought on record to suggest that the German company had obtained any orders from the U. S. S. R. or in any way rendered any services in connection with the export business of the assessee. This finding of the Tribunal is not challenged as perverse or otherwise. In this view of the matter, it is not possible for us to accept the assessee's contention that it should be granted weighted deduction on the commission paid to the German company in respect of exports made to the U. S. S. R. The Fact that the assessee could not have supplied the goods to the U. S. S. R. without paying commission to the German company, in our opinion, would not be sufficient in order to enable it to claim weighted deduction under section 35B of the Act. The German company ought to have rendered certain services to the assessee in regard to the export to the U. S. S. R. No evidence has been brought on record in this regard.
18. For all these reasons, we answer the question in the affirmative, i.e., in favour of the Revenue and against the assessee. NO. order as to costs.