ORDER
Per Shri M. C. Agarwal, J. M. – This is an assesseds second appeal arising out of its assessment for Asst. year 1983-84.
2. We have heard the learned counsel for the assessed and the learned Departmental Representative and have perused the material placed before us.
3. Ground Nos. 1 & 2 in this appeal relate to the assesseds claim of weighted deduction u/s 35B of the Income-tax Act, 1961 read with Rule 6AA (c) of the Income-tax Rules in respect of an expenditure of Rs. 59,794 in respect of salaries of the staff employed in quality control and inspection. The assessed is a manufacturer and exporter of shoe uppers. In the year consideration the assessed claimed to have paid a sum of Rs. 65,230 as salary to the staff connected with quality control and inspection and claimed weighted deduction on a sum of Rs. 59,794 representing 11 months salary. The total salary bill of the assessed as reflected in the trading account/profit and loss account was of Rs. 13,72,128.05 debited to the trading account was of Rs. 2,11,851 debited as salaries of the profit and loss account. The assessed claimed that the aforesaid amount of Rs. 59,000 was eligible for weighted deduction in terms of sub-clause (c) of Rule 6AA which relates to expenditure on maintenance of a laboratory or other facility for quality control or inspection of such goods. The ITO declined to grant weighted deduction observing that assessed was not maintaining any laboratory for quality control. On appeal, the learned CIT (A) upheld the disallowance by observing as under :
“The obvious intention is that the in-house means or facilities maintained by the appellant for Quality Control or Inspection would not count as the prescribed activity. It is only other facilities other than maintained by the assessed, like facilities provided by Export Inspection Agency of the Govt. of India etc., that would be covered under clause (c) of Rule 6 AA.”
He, therefore, held that the assessed cannot be allowed weighted deduction in respect of salaries paid to staff for quality control and inspection. In the earlier year the ITO himself had allowed weighted deduction of 25 per cent of the expenditure under this head but that did not influence the CIT (A).
4. At the hearing before us the learned counsel for the assessed contended that the learned CIT (A) was wrong in taking the view that in-house means or facilities maintained by the appellant would not count as prescribed activities. We have already mentioned that under sub-clause (c) of Rule 6 AA, expenditure on maintenance of laboratory or other facilities for quality control or inspection of goods is eligible for weighted deduction. Rule 6 AA prescribes activities for the promotion of the sale outside India of goods, services or facilities which the assessed deals in or provides. Therefore, reading the initial part of Rule 6 AA and sub-clause (c) together, it is clear the maintenance of a laboratory or other facility for quality control should be directly related to the promotion of the sale of the goods outside India. The result would, therefore, be that ordinary expenditure incurred in the production of goods even though it may relate to quality control or inspection would not be eligible for weighted deduction. It is only that extra expenditure which an exporter may have to incur to ensure that the goods are of the prescribed exportable quality that would be entitled to weighted deduction. This appears to be the thinking of the learned CIT (A) as well though stated in different words. If we give unrestricted meaning to sub-clause (c) of rule 6 AA then the entire expenditure in the manufacture or production of goods could be related to quality control because in any manufacturing unit all processes and all persons involved in the manufacture are in some way or the other related to quality control to improve the quality of the goods produced. For example, even a purchase manager, who selects raw material for the manufacturer can be said to be engaged in quality control because if the raw material is inferior, the quality of the goods produced is bound to be inferior. Expenditure on proper lighting in a factory may also be related to quality control because if there is no proper light, the quality of workmanship is bound to go down. Therefore, we have to interpret sub-clause (c) is an appropriate manner so that its scope is not unduly extended. The words other facilities are preceded by the word ; laboratory and therefore, other should be specialised facilities like that of a laboratory and should be outside and in addition to the normal manufacturing expenditure. In the case us there is nothing show that the expenditure incurred by the assessed in appointing some super-uppers ordinarily and the assessed had to appoint such persons only to ensure that the goods answered the description ordered by the foreign buyers (sic). No such material has been placed before the authorities below or before us (sic). We are, therefore, of the view that the expenditure on salary referred to above was not entitled to weighted deduction. The CIT (A)s order on this point is accordingly confirmed.
5. The next ground (No. 3) raised by the assessed in this appeal is about the rejection of its claim to weighted deduction on 50 per cent of the expenditure in respect of payment of service charges to the State Trading Corporation. The learned CIT (A) has held that this expenditure does not come under any clauses of section 35B (1) (b) or of Rule 6 AA. This view does not appear to be correct. As already stated the assessed is an exporter of shoe uppers. The procedure adopted is that the State Trading Corporation of India them it foreign buyers and having entered into contracts with them it assigns those contracts to local manufacturers, like the present assessed, who actually exports the goods. For the services rendered by the STC certain amounts are paid to it by the local exporters as service charges. A similar situation had come before this Tribunal in the case of ITO v. Bharath Skin Corpn. [1983] 6 ITD 320 (Mad). (SB) and the Special Bench held that the State Trading Corporation rendered services by way of information about foreign markets and fixing the prospective buyers. Under sub-clause (1) of section 35B (1) (b) expenditure on advertisement or publicity of goods outside India and under sub-clause (vi) expenditure on maintenance outside India of a branch office or agency for the promotion of sale outside India of such goods and under clause (vii) traveling outside India for similar purpose are entitled to weighted deduction. The State Trading Corporation undertakes all the activities mentioned clauses (i), (vi) and (vii) of section 35B (1) (b) and therefore, when the assessed makes a payment for service charges it makes payments to the STC, inter alia, in respect of the activities aforesaid. Therefore, 50 per cent of such expenditure would come under the aforesaid clauses and was entitled to weighted deduction under section 35B. We, therefore, accept this ground of appeal and direct the ITO to allow weighted deduction on 50 per cent of the service charges paid to the State Trading Corporation.
6. The next contention raised in clauses, 4, 5 and 6 of the grounds of appeal relates to assesseds claim under section 80 HHC of the Income-tax Act, 1961 under which an assessed is entitled to a deduction from its income equivalent to 1 per cent of its export turnover. Export turnover has been defined to mean the sale proceeds of any goods or merchandise exported out of India but does not include freight insurance attributed to the transport of the goods beyond the customs station. In determining the turnover of the assessed the ITO reduced the turnover by the following amounts :
Rs.
A. Foreign Buyers Agents Commission
5,95,018
B. 1 per cent rebate to foreign buyers for hidden defects
1,19,015
C. Foreign buyers inspection charges
4,07,694
The learned counsel for the assessed contended that this could not be done. According to him, the aforesaid amounts form part of the price realised by the assessed from the foreign buyer and therefore, these amounts are included in the assesseds turnover.
7. In order to appreciate the assesseds contention and the ITOs reasoning we have to keep in mind the manner in which the assessed effects export of its goods. As already stated the assessed is a manufacturer and it is exporting goods in collaboration with the State Trading Corporation of India. It is the State Trading Corporation of India that procures orders from foreign customers and assigns the same to Indian manufacturers for actual performance by exporting the goods. At pages 18 to 21 of the paper book the assessed has placed before us a copy of letter dated 29-4-1982 from the STC to the assessed whereby it entrusted to the assessed the performance of one of such contracts. Clause 1(a) of the agreement provides that the property in the goods shall pass to the STC only after the goods have actually crossed the customs frontiers of India. This means that from the assessed the goods are not directly sold to the foreign buyer and in between the property in the goods passes to the STC. In other words, vis-a-vis the foreign customers it is the STC which is the seller of the goods. Clause 7 of the aforesaid letter relates to the price payable to the assessed. According to this clause the price payable to the assessed was the price indicated in the foreign contract as reduced by 13.4 per cent for the following :
(1) 4 per cent on FOB value as STCs consideration.
(2) 5 per cent on FOB value as foreign buyers agents commission.
(3) 3.4 per cent on FOB value towards inspection costs.
(4) 1 per cent on FOB value to be retained by the foreign buyer on account of hidden defects.
8. It would be seen that three items of alleged expenditure which are in dispute are those covered by items 2, 4 and 3 respectively of clause 7 of the aforesaid letter or agreement, clause 13 of this letters says that the price shall be payable to the manufacturers only after the STC has realised the sale price from the foreign buyer deduction shall be made on account of the variation mentioned in clause 7. The aforesaid clauses would show that 13.4 per cent of the billed price does not belong to the assessed and even though the assessed may be billing the foreign buyer in respect of the various items mentioned in clause 7, the amount really would pay it towards various expenses. As regards 1 per cent of the FOB value to be retained by the foreign buyer on account of hidden defects it is virtually a discount and reduces the turnover directly. This amount does not even come to the STC as it has to be retained by the foreign buyer. Foreign buyers agent commission and inspection costs are expenses which STC incurs on behalf of the foreign buyers and pays to the agents concerned. The assesseds turnover, in our view, would be only the net amount which is received by the assessed in terms of clause 13 of the aforesaid letter/agreement. In view, therefore, the authorities below were right in excluding the aforesaid amounts while determining the assesseds turnover for the purposes of section 80HHC. We up hold their findings.
9. Ground Nos. 7 & 8 were not pressed before us and are, therefore, rejected.
10. No other point was raised before us.
11. In the result, the appeal is dismissed.