JUDGMENT
R.C. Mankad, Actg. C.J.
1. The assessee is a private company engaged in the business of manufacture and sale of wool. It also exports groundnuts known as H. P. S. I the previous year relevant to the assessment year 1978-79, it exported H. P. S. and it is in connection with this export that it claimed weighted deduction under section 35B of the Income-tax Act, 1961 (“the Act” for short), with which we are concerned in the present reference. It is submitted that the normal practice which was adopted in the export of H.P.S. was that the foreign buyer had to pay cash against documents. In other words, the foreign buyer was required to pay the price of the goods to the bank at the time of retiring the documents. The foreign buyer, however, informed the assessee that, on account of credit squeeze and dear money position which was prevailing, it was not in a position to make payment on presetation of the documents and bill. The foreign buyer informed the assessee that it was possible to make payment of the price of the goods supplied only on arrival of the steamer and that the business could be done only on that condition. It is the assessee’s case that, as a result of the new arrangement, it had incurred an expenditure of Rs. 2,26,093 in rendering services to the foreign buyer, outside India. The expenditure was incurred in paying service charges to tthe bank in providing the facility to make payment on arrival of the ship. According to the assessee, the said expenditure fell under sub-clause (viii) of clause (b) of section 35B(1) and it was, therefore, enttled to claim weighted deduction in respect of the said expenditure under section 35B(1) of the Act. The Income-tax Officer refused to allow the claim of the assessee on the ground that the expenditure was incurred in India. In the appeal preferred by the assessee, the Commissioner of Income-tax (Appeals) (“the Commissioner” for short), held that the expenditure which the assessee had incurred was, in no sense, an expenditure on any activity connected with exports. It was only part and parcel of the mode of realisation of the price of the goods exported in which some extra interest was borne by the assessee. The Commissioner held that no services could be said to have been performed by the assessee outside India in giving credit facility to the foreign buyer. He, therefore, held that the Income-tax Officer was right in rejecting the assessee’s claim. Being aggrieved by the order of the Commissioner, the assessee carried the matter in appeal before the Income-tax Appellate Tribunal (“the Tribunal” for short). The Tribunal, following the decision of its Special Bench in the case of J. Hemchand and Co., confirmed the view taken by the Commissioner. It is in the background of the above facts that the Tribunal has referred to us, for our opinion, the following question, under section 256(1) of the Act, at the instance of the assessee :
“Whether, on the facts and in the circumstances of the case, the Tribunal was justified in law in holdng that the assessee was not entitled to claim weighted deduction on interest of Rs. 2,26,093 and whether the Tribunal has further erred in not drawing the requisite distinction between the aforesaid amount of interest and the other interest of Rs. 2,84,220 on which weighted deduction was not claimed byh the assessee ?”
2. In the contract of export entered into by the assessee with the foreign buyer, the usual term was to the effect that payment of the price of the goods exported would be made on retirement of ducuments and bill. The documents and the bill were set by the assessee that, on account of the credit squeeze, it was in a position to do business only on the condition that the payment for the goods supplied would be made only on arrival of the steamer. In other words, the foreign buyer was willing to buy the goods only if the payment of the price of the goods supplied was to be made not on the retirement of documents but on the arrival of the steamer in which the goods were shipped. The assessee agreed to the above condition and, as a result thereof, it had to pay a sum of Rs. 2,26,093 to the bank by way of interest or service charges. It may be mentioned here that it is not made clear as to how exactly the bank recovered the said charges of Rs. 2,26,093, whether it was service charges. The basis on which the amount of Rs. 2,26,093 to the bank. The question is whether the said payment or expenditure would fall under sub-clause (viii) of section 35B(1)(b). The expenditure which would qualify for weighted deduction under section 35B(1) is the expenditure which is referred to in clause (b) of the said provision. Under sub-clause (viii) of clause (b), expenditure 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 would qualify for weighted deduction. Would the expenditure incurred by tthe assessee in making payment to the bank as aforesaid amount to expenditure incurred by it in performance of the services outside India in connection with or incidental to the execution of the contract for the supply outside India of such goods, services or facilities would qualify for weighted deduction. Would the expenditure incurred by the assessee in making payment to the bank as aforesaid amount to expenditure incurred by it in performance of the services outside India in connection with or incidental to the execution of the contract for the supply of the goods outside India ? The expenditure was incurred by the assessee for making payment to the bank because it had agreed with the foreign buyer that the payment for the goods supplied would be made on the arrival of the steamer. In view of this agreement, the foreign buyer was not required to pay for the goods supplied till the goods arrived by the steamer and it was for giving such facility under the contract that the assessee was required to pay for the goods supplied till the goods arrived by the steamer and it was for giving such facility under the contract that the assessee was required to pay to its bank Rs. 2,26,093. The facts stated above do not disclose that the assessee had rendered any service to the foreign buyer outside India. In other words, there was no performance of services outside India for which the assessee had incurred the aforesaid expenditure. Unless the assessee performs some services outside India for the supply of the goods exported, it would not be entitled to weighted deduction in respect of the expenditure incurred for such services. The mere fact that, under the terms of the contract, the assessee permitted the foreign buyer to make payment for the goods supplied on the arrival of the steamer would not show that the assessee had performed some services for the buyer outside India. It is as a result of the mode of payment of the price of the goods accepted by the assessee had performed some services for the buyer outside India. It is as a result of the mode of payment of the price of the goods accepted by the assessee under the terms of the contract that it incurred the expenditure of Rs. 2,26,093. In our opinion, ther4efore, as rightly held by the Tribunal and the authorities below, the expenditure in question does not fall under sub-clause (viii) of clause (b) of section 35B(1) of the Act which would entitle the assessee to claim export markets development allowance or, in other words, weighted deduction in respect of the said expenditure.
3. For the aforesaid reasons, we answer the question which has been referred to us in the affirmative and against the assessee. Reference answered accordingly with no order as to costs.