JUDGMENT
Ajit K. Sengupta, J.
1. In this reference under Section 256(2) of the Income-tax Act, 1961, for the assessment years 1978-79 and 1980-81, the following question of law has been referred to this court :
“Whether, on the facts and in the circumstances of the case, and having regard to the fact that the brokerage expenses on export sales amounting to Rs. 2,61,827 in the assessment year 1978-79 and Rs. 3,65,768 in the assessment year 1980-81 were paid in rupees to parties in India, the Appellate Tribunal was correct in law in holding that the assessee was entitled to weighted deduction under Section 35B of the Income-tax Act, 1961, in respect of the said payment of brokerage ?”
2. The facts leading to this reference are that the assessee, a limited company, derives income from the manufacture and sale of jute and jute articles, chemicals and from export. The assessee claimed relief under Section 35B of the Act on the brokerage paid on export sales at Rs. 2,61,027 and Rs. 3,85,763 for the assessment years 1978-79 and 1980-81, respectively. The Income-tax Officer allowed relief under Section 35B on 50 per cent. of the said amounts and while allowing the relief he took into consideration the Special Bench decision in the case of J. Hemchand and Co. (1 SOT 150).
3. When the matter came up in appeal, the Commissioner of Income-tax (Appeals), after considering the facts and circumstances of the case, directed the Income-tax Officer to examine the question of allowability in the light of the decision in CIT v. Southern Sea Foods (P.) Ltd. .
4. The assessee took the matter to the Tribunal. The assessee contended that the Commissioner of Income-tax (Appeals) was not justified in directing the Income-tax Officer to examine the question of allowability afresh, but he should have upheld the allowance made by the Income-tax Officer. The Departmental representative supported the order of the Commissioner of Income-tax (Appeals).
5. The Tribunal found that the relief was allowed by the Income-tax Officer following the Special Bench decision of the Tribunal in the case of J. Hemchand and Co. (1 SOT 150). Consequently, the Tribunal allowed the claim of the assessee.
6. At the hearing, Mr. A. C. Moitra, learned counsel appearing for the Revenue, contended that in this case the assessee is not entitled to any deduction as none of the conditions of any of the clauses of Section 35B(1)(b) have been satisfied. According to learned counsel, the commission was paid in India and as such the assessee cannot claim weighted deduction under Section 35B. He has relied on several decisions in support of his contention.
7. Our attention has been drawn by Mr. Moitra to the decision of the Madras High Court in CIT v. Southern Sea Foods (P.) Ltd. [1983] 140 ITR 855. In that case, the assessee is a domestic company carrying on business in the export of prawns and shrimps to foreign countries. For procuring orders from foreign buyers, the assessee engaged the services of a company called Messrs. B. C. Mody Export Pvt Ltd., Bombay. In consideration of this company having secured export orders for the assessee of the
aggregate value of Rs. 58,94,800, the assessee paid Rs. 14,737 by way of commission to this company. The question in the relevant assessment was whether the assessee was entitled only to an allowance of the actual expenditure by way of payment of commission in the sum of Rs. 14,737 or whether the assessee was entitled to a weighted allowance as provided in Section 35B of the Act in the sum of Rs. 19,649 (Rs. 14,737 plus one-third thereof). There the Madras High Court observed as follows (at page 857) :
“Section 35B of the Act refers to several items of expenditure. With reference to each one of the items of expenditure, there are conditions attached which have to be fulfilled by an assessee before he could successfully claim the weighted allowance granted under the section. According to the Tribunal, the assessee was entitled to have the weighted allowance either under Sub-clause (ii) or under Sub-clause (iv) or under Sub-clause (viii) of Section 55B(1)(b) of the Act.
Sub-clause (ii) says that the expenditure, in order to be eligible for weighted allowance, must be expenditure incurred wholly and exclusively for ‘obtaining information regarding markets outside India for such goods, services or facilities’. In the present case, the Tribunal has clearly narrated the facts as advanced by the assessee in regard to the payment of commission. According to the assessee, the commission was paid to Messrs. Mody Export Pvt. Ltd. in consideration of their having secured export orders. The question is whether this is expenditure covered by Clause (ii). In our judgment, it does not. Clause (ii) does not deal with obtaining of export orders ; it relates to obtaining of information regarding markets outside India. Information about markets outside India, international market intelligence, world market surveys and the like, are matters of general nature. In contrast, the securing of export orders is a matter having particular reference to the particular commodity in question with which the foreign buyer was concerned, the price to be agreed, the quality and the quantity, the mode, of carriage, delivery and other particulars. It would be a gross understatement, if not a mis-statement, to say that procuring orders is merely procuring information concerning the export markets. Sub-clause (ii) would not, therefore, apply to this case. The Tribunal was in error in thinking otherwise.
Sub-clause (iv) refers to expenditure incurred wholly and exclusively on ‘maintenance outside India of a branch office or agency for the promotion of the sale outside India of such goods, services or facilities’. In the present case, there is no whisper in the contentions put forward
before the Tribunal and no finding by the Tribunal either that the assessee had been maintaining outside India a branch or an office or even an agency for sales promotion of prawns or shrimps. Besides, the particular payment for which the weighted allowance is asked for in the present case, viz., Rs. 14,737, is not an expenditure incurred wholly and exclusively for maintenance of any branch, office or agency in any foreign country. On the contrary, the amount was paid as commission for securing export orders. Clause (iv), therefore, is not applicable. The Tribunal was in error in thinking that it applied.
Clause (viii), relied on by the Tribunal, refers to expenditure incurred by the assessee wholly and exclusively in regard to ‘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’. This clause, in brief, refers to expenditure incurred in the execution of a contract for the supply of goods abroad. Mr. Mani, learned counsel for the assessee, submitted that the commission paid to Mody Export Pvt. Ltd. can well be brought within the ambit of this sub-clause. We cannot accept this submission as tenable for, as we earlier mentioned, the commission to Mody Export Pvt. Ltd. was avowedly paid, not for the execution of a contract, but for procuring firm orders. In the sequence of acts connected with any contract, formation of the contract comes first, the execution of that contract comes afterwards. Procuring orders comes at a stage even anterior to the formation of a contract. What was paid to Mody Export Pvt. Ltd. was only in connection with the procuring of orders, and it had nothing to do with the formation of any contract. It cannot, therefore, be regarded as a payment made for services connected with the execution of the contract.”
8. Reliance has been placed on another decision of the Madras High Court in V. D. Swami and Co. Pvt. Ltd. v. CIT [1984] 146 ITR 425. In that case, the claim of the assessee-company engaged in the business of supplying iron and steel goods outside India for grant of weighted deduction under Section 35B(1)(b)(iii) of the Act in respect of certain expenses incurred by it in India was negatived by the Income-tax Officer and the Tribunal.
9. On a reference it was held by the High Court that the assessee would not be eligible for weighted deduction as the expenses were incurred in India.
10. In arriving at the said decision, the Madras High Court observed that the weighted deduction under Section 35B(1)(b)(iii) of the Income-tax Act,
1961, will be available only in respect of expenses incurred outside India and not in respect of expenses incurred in India if the distribution of the goods is outside India. To maintain that weighted deduction will be available even where expenditure is incurred in India would go against the teeth of the specific exclusionary provision. A look at the other sub-clauses of Section 35B(1)(b) also shows the insistence of Parliament that the weighted deduction cannot be exigible unless the expenditure under the different heads are incurred outside India.
11. Learned counsel for the Revenue further relied on the decision of the Kerala High Court in CIT v. C. Tharian and Sons [1987] 166 ITR 607, where following the decision of the above two Madras High Court decisions, the Kerala High Court held at page 609 of the Reports :
“The expenditure referred to in Clause (a) of Section 35B(1) must have been incurred wholly and exclusively for such activities as are specified under Clause (b) thereof and performed abroad. We are fortified in this construction by the view expressed by the Madras High Court in CIT v. Southern Sea Foods (P) Ltd. [1983] 140 ITR 855 and V. D. Swami and Co. Pvt. Ltd. v. CIT [1984] 146 ITR 425.”
12. But eventually the Kerala High Court in CIT v. Kerala Nut Food Co. [1991] 192 ITR 585, held that the observation of the Kerala High Court in the case of C. Tharian [1987] 166 ITR 607 is “per incuriam”.
13. But later the Kerala High Court in CIT v. Orion Coir Mats and Matting Manufacturers (P.) Ltd. [1987] 166 ITR 616, at page 618, followed the ratio in C. Tharian’s case and held :
“In the absence of any evidence to show that the recipient of the money acted for and on behalf of the assessee as an agent in canvassing business abroad and has sold the goods to parties abroad as an agent, a deduction in the sale price of goods sold to him does not amount to payment of commission.”
14. Learned counsel appearing for the assessee, at the outset, pointed, out that both the Income-tax Officer and the Commissioner of Income-tax (Appeals) did not disallow any part of the said expense on the basis that it was paid in India. The Commissioner of Income-tax (Appeals), on the other hand, categorically held that the deduction was sought to be withdrawn not on the ground that it was incurred in India but that it did not come within the purview of Section 35B. He held that brokerage paid in India for obtaining information was allowable but would not be allowable with reference to procuring of orders for export as that was
outside Section 35B. The Department did not prefer any appeal. Therefore, it is not open to the Department to raise any contention that the expense was incurred in India and, therefore, not allowable under Section 35B. It is not in dispute that the brokerage was paid in respect of export sales. It is an admitted fact that brokerage was paid in relation to exports and obtaining export orders.
15. On these contentions, in point of fact, reliance is placed on the decision of this court in CIT v. Bata India Ltd. [1989] 178 ITR 669, where it has been held, inter alia, that only Sub-clause (iii) of Section 35B(1)(b) provided that the expenditure that qualified for weighted deduction will not include expenses incurred in India. Expenses under other sub-clauses qualify for weighted deduction under Section 35B of the Act notwithstanding that the expenses were incurred in India.
16. The decisions of the Delhi High Court in CIT v. Jay Engineering Works [1984] 149 ITR 297, and the Bombay High Court in CIT v. Eldee Wire Ropes Ltd. [1978] 114 ITR 485 and CIT v. Prahash Cotton Mills P. Ltd, [1991] 188 ITR 713, are cited for the same proposition.
17. In both the decisions of the Madras High Court the expenses were held not eligible under Sub-clause (iii) of Section 35B(1)(b) of the said Act as they were incurred in India. But it is not the case of the assessee in this reference that the said brokerage fell within Sub-clause (iii) of Section 35B(1)(b) of the Act. Hence the said decisions of the Madras High Court are not applicable.
18. So far as brokerage paid for obtaining export orders is concerned, reference has been made to the decisions of the various High Courts including this court that weighted deduction on such brokerage is allowable under Section 35B of the said Act.
19. In CIT v. G. E. C. of India Ltd. [1991] 192 ITR 559, this court held that there was nothing in Section 35B to indicate that a person to be entitled to weighted deduction must export the goods himself or that he must be an exporter. Even if the assessee exports the goods through another agency, the weighted deduction cannot be denied if the expense is incurred under the specified heads by the assessee.
20. In CIT v. Kerala Nut Food Co. [1991] 192 ITR 585, the Kerala High Court in this regard specifically referred to the Circular of the Central Board of Direct Taxes dated December 28, 1981, at page 592 of the Reports, and at page 594 held that : “commission payment made to parties to bring about export sales will be entitled to weighed deduction irrespective of
the fact whether the same is incurred in India or outside India.” The court took the view that such commission fell within Sub-clauses (i) and (ii) of Clause (b) of Section 35B(1) of the Act (at page 595).
21. In CIT v. Godrej and Boyce Manufacturing Co. P. Ltd. [1984] 149 ITR 594, the Bombay High Court held that the commission is paid to the broker to obtain export order because the broker canvasses the product of the assessee outside and, therefore, it fell within Section 35B(1)(b)(ii) of the Act.
22. In CIT v. Orion Coir Mats and Matting Manufacturers (P.) Ltd. [1987]
166 ITR 616, the Kerala High Court held that if the agent promoted the
sale of the assessee’s goods the commission paid for that qualified for
deduction under Section 35B of the Act.
23. In CIT v. Sahney Steel and Press Works (P.) Ltd. [1989] 177 ITR 354, the Bombay High Court found that the exports were made by the assessee through Pritam Singh Bedi of Bombay and claimed weighted deduction on commission payment to Sri Pritam Singh Bedi. Sri Pritam Singh Bedi booked orders and also made contacts with foreign buyers furthering the assessee’s business. The court, therefore, held that the commission paid to Sri Bedi qualified for weighted deduction under Section 35B and did not fall within Sub-clauses (iii) of Section 35B(1)(b) of the said Act.
24. In CIT v. Steel Tubes of India Ltd. [1990] 181 ITR 90, the Madhya Pradesh High Court held that the Tribunal was justified in allowing weighted deduction under Section 35B of the Act on commission paid by the assessee to its Indian agents.
25. In reply, counsel for the Revenue submitted that Circular No. 1441-XXVII/1/93 regarding J. Hemchand and Co. stated that where a particular claim made by the assessee falls under any one or more of the activities specified in these sub-clauses, it can at best be judged only with reference to the facts of the particular case and the nature of the claim. It was also pointed out that the Full Bench decision of the Tribunal with regard to admissibility of weighted deduction has not been accepted to be correct inasmuch as a special leave petition had been filed in the Supreme Court in the case of CIT v. Orient Co. (P.) Ltd. (F. No. 270/155/80-ITJ).
26. It has been held by this High Court in the case of Birla Jute Manufacturing Co. Ltd. v. CIT [1986] 162 ITR 413, that in order to be eligible for weighted deduction by way of export markets development allowance, it is required to be established by the assessee that the expenditure for
which such deduction was being claimed had been incurred wholly and exclusively for the specified purposes.
27. In the instant case, no evidence was produced as to what services were rendered for which the commission was paid on export sales.
28. We have considered the rival contentions. The last strand in the Revenue’s argument as to the nexus of the expenditure with the export trade is a contention that does not arise from the orders of the lower authorities before whom the bone of contention has been whether payment of brokerage for procuring export orders has a place in any of the clauses of Section 35B. The entire issue proceeds from the fact that the brokerage was paid for services rendered in procuring export trade. That factum is not in question. The judicial proclamations in the matter are divergent and hence confounding. We have before us the decision of this court which makes matters somewhat easy. In CIT v. G. E. C. of India Ltd. [1991] 192 ITR 559, this court held that even where the manufacturer of the export goods exports through a commission agent to buyers abroad on a fixed commission payable to the said agent, the manufacturer is entitled to weighted allowance on such commission paid. The decision is remarkable for its flexibility of approach that the weightage is available even where the manufacturer is not a direct exporter but an exporter through an export agent to whose foreign customers he supplies his goods manufactured. We are not concerned with this part of the ratio of that case. What concerns us is the acceptance that a third person, a go-between bringing foreign clients, shall earn commission or brokerage, the nomenclature being immaterial and such brokerage or commission is eligible for weighted deduction.
29. In view of this decision, we find the assessee’s claim quite valid. The payment though made in India is for procuring export market. Such commission can find place in Clauses (i) and (ii) of Section 35B(1).
30. We, therefore, answer the question in the affirmative and against the Revenue.
31. There will be no order as to costs.
Shyamal Kumar Sen, J.
32. I agree.