1983 (9) TMI 171 - AT - Income Tax

Issues Involved:
1. Eligibility of commission paid to State Trading Corporation (STC) for weighted deduction under Section 35B of the Income Tax Act.
2. Nature of services rendered by STC and their qualification for weighted deduction.
3. Applicability of the CBDT circular regarding service charges paid to STC.
4. Relevance of the Madras High Court decision in CIT vs. Southern Sea Foods (P) Ltd.

Detailed Analysis:

1. Eligibility of Commission Paid to STC for Weighted Deduction under Section 35B:
The primary issue in this case is whether the commission paid by the assessee to the STC qualifies for a weighted deduction under Section 35B of the Income Tax Act. The assessee, M/s Bharath Skin Corporation, engaged in the export of tanned skins and leather, routed its exports through STC, which provided various services for which it charged a commission. The eligibility of this commission for weighted deduction was contested by the department.

2. Nature of Services Rendered by STC and Their Qualification for Weighted Deduction:
The services rendered by STC, as outlined by the assessee, included:
- Publicity of skins to foreign markets.
- Obtaining market information from STC branches worldwide.
- Assistance in distributing and supplying goods to foreign buyers.
- Sending foreign technicians for quality inspection and improvement.
- Registering contracts and facilitating exports.
- Directly entering contracts with foreign buyers and passing them on for execution.

The proforma agreement with STC specified services such as product development, assistance in sampling and costing, quality control, testing facilities, sales and after-sales service, and importation of requisite inputs. The commission was calculated as a percentage of the FOB value of goods.

3. Applicability of the CBDT Circular Regarding Service Charges Paid to STC:
The department's representative referred to an ITO order disallowing the claim, arguing that the expenditure did not qualify for weighted deduction because the market was already established and the services did not provide new information. However, the CBDT circular clarified that service charges paid to STC for export of vegetable oil qualified for weighted deduction due to services like obtaining market information, advertisement, submission of tenders, furnishing samples, and maintaining foreign branches. The Tribunal found that the nature of services rendered by STC was identical across different commodities, including the assessee's case, making the assessee eligible for weighted deduction.

4. Relevance of the Madras High Court Decision in CIT vs. Southern Sea Foods (P) Ltd:
The department argued that the decision in Southern Sea Foods (P) Ltd. indicated that procuring orders did not qualify for weighted deduction. However, the Tribunal noted that the facts in the present case were distinguishable. The services rendered by STC involved more than just procuring orders; they included various activities falling within the eligible clauses of Section 35B(1)(b). The Tribunal concluded that the decision in Southern Sea Foods (P) Ltd. did not apply to the present case due to the different nature of services rendered by STC.

Conclusion:
The Tribunal concluded that the assessee was entitled to the deduction under Section 35B for the commission paid to STC. The services rendered by STC, including obtaining market information, advertisement, submission of tenders, furnishing samples, and maintaining foreign branches, qualified for weighted deduction. The departmental appeals were dismissed, affirming the eligibility of the commission paid to STC for weighted deduction under Section 35B.

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