1999 (3) TMI 14 - SC - Income Tax

Export of agarbathis - commission paid to agents outside India who had procured orders - Tribunal was justified in holding that the applicant was not entitled to the weighted deduction u/s 35B(1)(b)(iv), in respect of the commission payments made to agents outside India

Summary

Issues:
Interpretation of section 35B(1)(b)(iv) of the Income-tax Act, 1961 regarding the payment of commission to an agent abroad for maintaining an agency for sales promotion outside India.

Analysis:
The Supreme Court addressed the issue of whether payment of commission to an agent abroad constitutes maintenance of an agency within the meaning of section 35B(1)(b)(iv) of the Income-tax Act, 1961. The assessee had exported agarbathis and paid commission to agents outside India for procuring orders, seeking weighted deduction under section 35B(1)(b)(iv). The assessing authority disallowed the deduction, but the Commissioner of Income-tax (Appeals) allowed it. However, the Income-tax Appellate Tribunal held that the Commissioner was not justified in allowing the deduction, leading to the matter being referred to the High Court. The High Court, following its earlier decision, ruled in favor of the Revenue, prompting the assessee to appeal to the Supreme Court.

The interpretation of section 35B(1)(b)(iv) was crucial in determining whether the commission paid to agents outside India qualified as expenditure on the maintenance of an agency for sales promotion outside India. The High Court emphasized that for an agency to be considered maintained by the assessee, there must be evidence of establishment and maintenance by the assessee, which was lacking in this case. The Karnataka High Court's view was that the word "agency" should be interpreted in conjunction with "branch" and "office," requiring the agency to be maintained by the assessee for specific purposes outlined in the provision.

Contrasting views emerged from different High Courts, with the Calcutta High Court and Gauhati High Court diverging from the Karnataka High Court's interpretation. The Calcutta High Court held that having an agent abroad satisfied the requirement of maintaining an agency, emphasizing the independence of the agent in such arrangements. The Gujarat High Court also supported a broader interpretation, linking agency to legal relations between parties. However, the Kerala High Court aligned with the Calcutta High Court without detailed discussion due to previous practice.

The Supreme Court ultimately upheld the Karnataka High Court's interpretation, emphasizing the necessity for the assessee to maintain the agency outside India for sales promotion purposes. It clarified that commission payments for specific sales did not qualify as expenditure for general sales promotion as required by the provision. Even if the agency was established by a third party, the maintenance responsibility fell on the assessee. Therefore, the appeal was dismissed in favor of the Revenue, endorsing the Karnataka High Court's judgment on the matter.