JUDGMENT
N.K. Agrawal, J.
1. The following identical question of law has been referred by the Income-tax Appellate Tribunal (for short, “the Tribunal”), in all the three references (Income-tax Reference No. 139 of 1982 and Nos. 67 and 68 of 1983), at the instance of the assessee for the assessment years 1976-77, 1977-78 and 1978-79 :
“Whether, in law and on the facts of the case, the Income-tax Appellate Tribunal was justified in holding that the assessee was not entitled to export markets development allowance under Section 35B of the Income-tax Act, 1961, on the following expenses:
(i) export expenses ;
(ii) export inspecting agency charges ; and
(iii) bank commission.”
2. The assessee derived income from the manufacture and sale of cast iron, soil pipes and pipe fittings. The products were mostly exported by the assessee to the Middle-East countries. The facts arising from the order of the Tribunal relating to the assessment year 1976-77 shall be discussed hereunder. The return of income, originally filed for the assessment year 1976-77, showed income of Rs. 41,670. However, in the revised return, the assessee declared a loss of Rs. 10,60,653. The assessee claimed, in the revised return, deduction at an enhanced amount under Section 35B of the Income-tax Act, 1961 (for short “the Act”). The Assessing Officer proposed additions exceeding Rs. 1,00,000 and he, therefore, forwarded a draft assessment order, to the assessee under Section 144B of the Act. The assessment was thereafter made making various additions and disallowances. The assessee had claimed weighted deduction under Section 35B of the Act in the original return on expenditure of Rs. 91,427 which represented one-third of the total expenditure amounting to Rs. 2,74,280. In the revised return, weighted deduction was claimed at Rs. 12,04,681 which was one-third of the expenses amounting to Rs. 36,14,065. The total expenditure this time included export expenses of Rs. 3,37,778 and bank commission of Rs. 13,033. The Assessing Officer allowed weighted deduction on commission paid to the foreign agents and on expenditure on foreign advertisements, foreign samples and foreign travelling only.
3. The assessee went in appeal before the Commissioner of Income-tax, claiming weighted deduction on various expenses including the three items of expenditure, namely, (1) export expenses (insurance premium, carriage, shipping port fees in connection with carriage of goods, packing materials, etc.) (ii) export inspection charges, and (iii) bank commission. The Commissioner also did not allow weighted deduction on the aforesaid expenditure though he allowed weighted deduction on certain other expenses. In further appeal by the assessee, the Tribunal also took the same view with regard to the three items of expenses.
4. The controversy raised by the assessee relates to identical items of expenses in all the three years as under :
Year
Sl. No.
Expenditures
1976-77
1977-78
1978-79
(1)
(2)
(3)
(4)
(5)
1.
Export expenses, namely,
freight insurance, shipping port fees, packing materials, etc.
30,49,616
68,15,393
43,83,546
2.
Export inspecting agency
charges.
84,716
1,44,330
79,992
3.
Bank commission
13,033
26,243
25,139
5. Section 35B of the Act was inserted by the Finance Act of 1968 with effect from April 1, 1968, to provide for the export markets development allowance in certain cases, It was omitted by the Direct Tax Laws (Amendment) Act, 1987, with effect from April 1, 1989. It granted allowance in respect of eligible expenditures incurred between March 1, 1968, and February 28, 1983, by the eligible assessees on fulfilment of certain conditions. Domestic companies and also non-corporate taxpayers resident in India were allowed an export allowance if they incurred any expenditure under the specified heads to promote the sale of goods to a foreign country. The allowance consisted of a weighted deduction in an amount equal to 1-1/3 times the amount of the qualifying expenditure. Weighted deduction was admissible with reference to the qualifying expenditure incurred by the taxpayer after February 29, 1968. Expenditure of a capital nature and personal expenses did not qualify for the same. The basic objective for the grant of a weighted deduction in respect of expenditure on the development of export markets was primarily to provide an incentive for promoting exports on a continuing basis. It was, therefore, necessary to give a liberal interpretation so that the purpose behind it could be properly achieved. The expenditure had first to be localised with reference to the sub-clauses of Section 35B(1)(b) of the Act and then it was to be determined whether the expenditure had been wholly and exclusively incurred for any of the purposes listed therein. Each sub-clause of Sub-section (1)(b) was to be read entirely. The condition specified in any of the sub-clauses had to be satisfied. Weighted deduction could be allowed only where it was specifically claimed by the assessee in his return. Though a direct nexus between expenditure and promotion of exports was necessary, the expenditure had to be incurred outside India except in the case of expenditure falling under Sub-clause (iii) of Clause (b). If no claim for allowance was made and there was no evidence as to qualifying expenditure, there was no question of granting allowance. The burden of proof was on the assessee. If there was no evidence to show that the assessee was entitled to the weighted’ deduction in respect of the entire expenditure incurred by him, the Tribunal would be justified in allowing this deduction proportionately.
6. Shri A.C. Jain, learned counsel for the assessee, has argued that the expenditures in question were allowable under Sub-clause (viii) of Clause (b) of Section 35B(1) of the Act. He has explained that the assessee had incurred the expenses for the development of export markets in the performance of services outside India in connection with the execution of the contract for the supply of goods to foreign countries. Shri Jain has contended that all the items of expenditure are covered under Sub-clause (viii) for the purpose of weighted deduction.
7. It would be necessary to read Sub-clauses (iii) and (viii) of Clause (b) of Section 35B(1) inasmuch as the question of eligibility of expenditure incurred on carriage and insurance shall depend on the interpretation of both the sub-clauses.
8. Sub-clauses (iii) and (viii) of Clause (b) of Section 35B(1) of the Act read as under :
“(iii) distribution, supply or provision outside India of such goods, services or facilities, not being expenditure incurred in India in connection therewith or expenditure (wherever incurred) on the carriage of such goods to their destination outside India or on the insurance of such goods while in transit, where such expenditure is incurred before the 1st day of April, 1978 ;
(viii) 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.”
9. From a reading of Sub-clause (iii), it would appear that expenditure on the carriage of goods to their destination outside India and on the insurance of such goods while in transit was ineligible for weighted deduction. These expenditures may be incurred in India or outside India. It is also apparent that an expenditure incurred on the distribution, supply or provision of goods, services or facilities outside India shall also be ineligible if such expenditures are incurred in India. Under Sub-clause (viii), expenditure on the performance of services in connection with the execution of a contract for the supply of goods to a foreign country shall be an eligible expenditure if such performance was done outside India.
10. The expenditures, on which the controversy has arisen, may be discussed as under :
(i) Freight and insurance.–As has been discussed above, expenditures on the carriage of goods to their destination outside India and on the insurance of those goods while in transit were specifically excluded from the purview of Sub-clause (iii). Any deduction on freight and insurance was thus not available under Sub-clause (iii) as there is a specific and clear bar against such expenditure in that sub-clause. The allowance under Sub-clause (iii) was withdrawn with effect from April 1, 1978, by the Finance Act, 1978. This sub-clause along with certain other sub-clauses were omitted from Clause (b) by the Finance (No. 2) Act, 1980.
The assessment years in the case of the assessee in hand are 1976-77, 1977-78 and 1978-79. Thus, the assessee is not entitled to seek weighted deduction under Sub-clause (iii) for the assessment year 1978-79.
Shri A.C. Jain, learned counsel for the assessee, has argued that expenditures on sea freight and marine insurance were eligible expenditures under Sub-clauses (viii) as held in CIT v. Roadmaster Industries of India Pvt. Ltd. [1993] 202 ITR 968 (P & H). In that decision, a Division Bench of this court drew a distinction between inland freight and inland insurance on the one hand and sea freight and marine insurance on the other. Though the expenditures on carriage of goods to their destination outside India and on the insurance of goods while in transit were specified in Sub-clause (in) for the purpose of excluding these two expenditures from the benefit of weighted deduction, it was held that, if in connection with the execution of a contract for the supply of goods outside India, an exporter incurred certain expenditure on the performance of certain services outside India by way of sea freight or marine insurance, that would attract Sub-clause (viii). That decision was followed by this court in CIT v. Indo Asian Switch-Gears (P.) Ltd. [1996] 222 ITR 772.
Shri B.S. Gupta, learned senior counsel for the Department, has opposed the plea of Shri Jain with the argument that the assessee failed to bring any material or evidence on record to show that any expenditure was incurred for the performance of any service outside India in connection with the execution of any contract for the supply of goods. It is argued that, unless there was a contract for the export of goods, there would not arise any benefit under Sub-clause (viii). The subsistence of a contract for the supply of goods outside India is an essential part of the conditions required to be fulfilled by an exporter. If an assessee has sent goods outside India, to its branch office or agency for the promotion of sale, that would not attract Sub-clause (viii) inasmuch as the supply of goods to a branch office or an agency would not be in connection with, or incidental to, the execution of a contract. Shri Gupta has argued that the distinction between a branch transfer or a consignment transfer and the export of goods to a foreign buyer under a contract of sale is vital and that would give rise to a distinction between the applicability of the two sub-clauses, namely, (iii) and (viii). Sea freight and marine insurance would fall under Sub-clause (viii) if the exporter could successfully prove that he had supplied goods outside India in connection with the execution of a contract.
It may be seen that the details of the expenditure on freight and insurance are not available. The claim for deduction on expenditure on the carriage of goods and on insurance, has been denied following the decisions of certain other High Courts in the light of the ban contained in Sub-clause (iii) and clause (b) of Section 35B(1). Shri A.C. Jain, learned counsel for the assessee, has urged this court to decide the question about allowing admissibility of expenditure on sea freight and marine insurance with a direction to the Tribunal to verify from the assessee if expenditure had been incurred on sea freight and marine insurance. If that was so, weighted deduction should be allowed on sea freight and marine insurance in the light of the decisions of this court.
Shri B.S. Gupta, learned senior counsel for the Department, has opposed the plea put forward on behalf of the assessee for the examination or verification of the nature of expenditure. Shri Gupta has argued that the onus lay on the assessee for claiming the export markets development allowance by placing necessary evidence in this behalf. If the assessee failed to discharge the onus, there was no need to direct the Tribunal to look into the nature of expenditure.
From the facts, it is not at all clear whether the assessee had claimed weighted deduction on sea freight and marine insurance and whether there was a subsisting contract between the assessee and the foreign buyer for the supply of goods. The question, whether the Tribunal may be required to verify the nature of expenditure, need not be decided against the assessee unless it is found that the assessee had deliberately withheld the necessary information. A similar matter once arose before the Calcutta High Court regarding a claim for weighted deduction in respect of staff welfare expenses and travelling expenses in India, in Birla Jute Manufacturing Co. Ltd, v. CIT [1986] 162 ITR 413 (Cal). Since the particulars had not been furnished by the assessee, the matter was remanded for verification. In another similar case regarding weighted deduction the matter was again remanded by the same High Court in CIT v. Dunlop India Ltd. [1992] 197 ITR 34 (Cal). That was a case where weighted deduction had been claimed on the emoluments to the employees in the export promotion department. The court found it appropriate to direct the Tribunal to look into the nature and the details of the expenditure as those had not been properly examined. The Kerala High Court in CIT v. Bakul Cashew Company [1992] 197 ITR 135, was also confronted with a problem about expenditure on salary and allowances of the staff engaged in export sales. It was noticed by the court that no reasons had been given by the Commissioner of Income-tax nor the Tribunal, while allowing 75 per cent. of the expenditures for the purposes of weighted deduction. The matter was, therefore, remanded.
Since the assessee before us is found to be entitled to claim weighted deduction on sea-freight and marine insurance for the supply of goods outside India in connection with the execution of a contract in that behalf, it would be just and proper to decide the matter on principle in favour of the assessee with a direction to the Tribunal to look into the matter so as to determine if the assessee had supplied the goods outside India in connection with, or incidental to, the execution of a contract with a foreign buyer. If that was so, expenditure on sea-freight and marine insurance shall be allowed.
(ii) Shipping port fee.–This is an expenditure incurred on the payment of port fee. A question was examined by the Calcutta High Court in Bharat General and Textile Industries Ltd. v. CIT [1985] 153 ITR 747, whether loading charges were eligible for weighted deduction under Sub-clause (iii). After examining Sub-clause (iii), it was held that expenditures on freight, loading charges and insurance, etc., in connection with export business, were not entitled to weighted deduction.
In K. Vensimal and Sons v. CIT [1986] 157 ITR 807 (Mad), a question regarding the admissibility of freight, insurance, packing and coolie charges incurred in India, was examined and it was held that none of the expenditures was an eligible expenditure within the meaning of Sub-clause (iii) because those had been incurred in connection with the carriage of goods to their destination outside India. Thus, coolie charges were also treated to be part of the expenditure on the carriage of goods. In M.H. Daryani v. CIT [1993] 202 ITR 731, the Bombay High Court disallowed expenditures on freight and forwarding charges under Sub-clause (iii) of Clause (b) of Section 35B(1) of the Act on the ground that these expenditures had been incurred on the carriage of goods.
The Gujarat High Court in Parshuram Pottery Works Co. Ltd. v. CIT [1993] 204 ITR 458, examined expenditures incurred on inspection fees, dock dues, transport and octroi, and held that these expenditures were part of transport expenses and the assessee was, therefore, not entitled to weighted deduction in respect of them.
Expenses on duty and clearing charges as well as delivery charges have been held to be ineligible under Sub-clause (iii) of Clause (b) of Section 35B(1) in Geoffrey Manners and Co. Ltd. v. CIT [1996] 221 ITR 695 (Bom).
Under Sub-clause (iii) of Clause (b) of Section 35B(1), expenditures other than freight charges and insurance premium are allowable as eligible expenditures if those were incurred outside India. In the case of the assessee in hand, shipping port fee was paid inside India in connection with the carriage of goods. There is no indication that port fees were paid in connection with the performance of any service outside India. In this situation, the expenditure incurred on the shipping the port fee would be covered under Sub-clause (iii) of Clause (b) for the purposes of its exclusion. Expenditure on shipping port fee would also not be permissible under Sub-clause (viii) unless it is shown that such fee was paid for the performance of any service outside India. The assessee had not shown if the fee was paid for any service rendered in a foreign port.
Expenditure on shipping port fee is, therefore, held to be ineligible for weighted deduction both under Sub-clauses (iii) and (viii).
(iii) Packing material–The assessee had incurred expenditure on packing materials.. It is not clear as to why this expenditure was not treated to be a part of the manufacturing expenses. Even if the goods meant for export were required to be secured in a container with appropriate packing material, that would not be eligible for weighted deduction unless it was specifically shown as to which sub-clause of Clause (b) of Section 35B(1) was attracted. Under Sub-clause (viii) of Clause (b), any expenditure on the performance of a service outside India has been made eligible. Since the expenditure was incurred on providing packing materials to the goods inside India, that would exclude such expenditure from the purview of Sub-clause (viii). If, on the other hand, expenditure on packing material is considered to be a part of manufacturing expenses, that would again not entitle the assessee to claim weighted deduction.
Explanation 2 below Clause (b) of Section 35B(1) of the Act was substituted by the Finance (No. 2) Act, 1980, with effect from April 1, 1981. After substitution, Explanation 2 reads as under ;
“Explanation 2.–For the removal of doubts, it is hereby declared that nothing in Clause (b) shall be construed to include any expenditure which is in the nature of purchasing and manufacturing expenses ordinarily debitable to the trading or manufacturing account and not to the profit and loss account.”
Though the above Explanation was inserted by way of substitution with effect from April 1, 1981, the effect of the Explanation appears to be clarificatory. The provision in Explanation 2 was incorporated “for the removal of doubts” in respect of expenditures which were in the nature of purchasing and manufacturing expenses. It would thus be apparent that Explanation 2 intended to remove doubts with regard to the inadmissibility of purchasing and manufacturing expenses. In this light, Explanation 2 shall be treated to be clarificatory and explanatory in nature and would thus be applicable with retrospective effect. The earlier Explanation related to certain expenditures incurred by an assessee engaged in the business of operation of any ship, vessel, aircraft or vehicle or carriage of passengers, livestock, mail or goods. The earlier Explanation went out of the section with effect from March 31, 1981, and was substituted by the new Explanation with effect from April 1, 1981, as reproduced above. It is, therefore, the Explanation substituted by the Finance (No. 2) Act, 1980, which is under consideration and, keeping in view the nature of the Explanation, any expenditure, which is in the nature of purchasing or manufacturing expenditure ordinarily debitable to the trading or manufacturing account and not to the profit and loss account, shall be ineligible for the purposes of deduction under Clause (b).
The question about weighted deduction in respect of expenditure on packing was examined by the Madras High Court in K. Vensimal and Sons’ case [1986] 157 ITR 807. It was held that the expenditure on packing was not eligible for weighted deduction.
A Division Bench of this High Court in H. M. M. Limited v. CIT [1990] 184 ITR 236, examined expenditure on inspection and supervision of export goods, bank charges, cost of excise, revenue stamps and hundi papers and miscellaneous expenditure. All those expenditures were held to be not allowable for the purposes of weighted deduction. These miscellaneous expenses have been declared to be ineligible.
The Gujarat High Court in Isabgul Export Corporation v. CIT [1994] 205 ITR 227, has disallowed weighted deduction in respect of expenditure on packing material.
The Rajasthan High Court in Associated Stone Industries Ltd. v. CIT [1994] 210 ITR 821, has not allowed weighted deduction on the amount spent on packing.
The case of the assessee is, therefore, found to be disallowable inasmuch as expenditure on packing material was, in the light of Explanation 2, part of manufacturing expenses.
(iv) Export inspecting agency charges.–Shri A.C. Jain, learned counsel for the assessee, has argued that inspecting agency charges were necessarily part of the export expenses in connection with the execution of the contract for the supply of goods to a foreign buyer. The argument is, however, not tenable inasmuch as Sub-clause (viii) permits deduction when an expenditure was incurred wholly and exclusively on the performance of any service outside India. There is no evidence to show that the inspecting agency did perform the service of inspection of the export items outside India.
In H. M. M. Limited’s case [1990] 184 ITR 236, this court has held that weighted deduction in respect of expenditure on inspection and supervision of export goods was not allowable. A similar view has been taken by the Bombay High Court in (i) Dr. Beck and Co. (India) Ltd. v. CIT [1994] 206 ITR 311 ; (ii) Forbes Forbes Campbell and Co. Ltd. v. CIT [1994] 206 ITR 495 ; and (iii) Mafatal Fine Spg. and Mfg. Co. Ltd. v. CIT [1994] 206 ITR 578.
Since the assessee incurred expenditure on payment of inspecting agency charges and the service was not performed outside India but inside the country, this expenditure does not attract Sub-clause (viii) of Clause (b) of Section 35B(1) and is, therefore, not eligible for weighted deduction.
(v) Bank commission.–Shri A.C. Jain, learned counsel for the assessee, has explained that the assessee paid bank commission in the execution of the contract for the supply of goods to foreign countries and thus Sub-clause (viii) was attracted. The argument does not carry any weight, as expenditure under Sub-clause (viii) is allowable in a situation where any service is performed outside India in connection with the execution of any contract for the supply of goods. In the absence of any evidence on record that the bank commission was paid for any service performed by the bank outside India, Clause (viii) is not attracted.
11. The Madhya Pradesh Court in CIT v. Vippy Solvex Product Pvt. Ltd. [1986] 159 ITR 487, has held that interest paid for the advances from export packing credit account was eligible for weighted deduction. Shri A.C. Jain, learned counsel for the assessee, has argued that, in the case of the present assessee also, interest was paid to the bank on the loan received for meeting manufacturing expenses and in connection with the execution of the contract for the supply of goods to the foreign buyers; In the aforesaid case, the High Court took the view that, since the loan was obtained from the bank for the purposes of execution of the contract for the supply of goods outside India, Sub-clause (viii) was attracted and, therefore, weighted deduction was allowable. However, there is no discussion if the bank had performed any service outside India. Therefore, in our view, the decision of the Madhya Pradesh High Court did not take into consideration the requirement laid down in Sub-clause (viii) that the service should be performed outside India.
12. In Isabgul Export Corporation’s case [1994] 206 ITR 227, the Gujarat High Court took the view that interest paid to the bank and bank charges were not entitled to weighted deduction. A similar view has been again taken by the same court in Testeels Ltd. v. CIT [1994] 205 ITR 230.
13. In Forbes Forbes Campbell’s case [1994] 206 ITR 495, the Bombay High Court has also taken the view that expenditure on bank charges was not eligible for weighted deduction.
14. Since the primary condition laid down in Sub-clause (viii) of Clause (b) is found to be not fulfilled, namely, performance of service outside India, the assessee is held, to be not entitled to claim weighted deduction on the bank commission. The assessee has to show that the bank had rendered certain service outside India in connection with the execution of a contract with the foreign buyer for the supply of goods, services or facilities. The bank commission is, therefore, held to be ineligible for weighted deduction.
15. The question of law stands answered in the above terms.