(a) whether expenditure incurred on purchase of raw materials and payment of wages will qualify for weighted deduction within the meaning of section 35B; and (b) whether drafting of labour for execution of such a contract locally or abroad would make any difference in the claim for weighted deduction. - Income Tax - 874/CBDT

INSTRUCTION NO. 874/CBDT Dated : September 4, 1975 Section(s) Referred: 35B ,35B(1)(b) Statute: Income - Tax Act, 1961 The Finance Act, 1968 has inserted section 35B in the Income-tax Act, 1961 with effect from 1st April, 1968. Under this section, domestic companies as well as non-corporate taxpayers resident in India, who have incurred any expenditure under the specified heads to promote the scale outside India, of any goods, services or facilities, dealt with or provided by them, in the course of their business, are entitled to a weighted deduction in the shape of Export Market Development Allowance. Under sub-section (1)(b)(viii) of Section 35B any expenditure incurred in the performance of services outside India in connection with or incidental to the execution of any contract for the supply outside India as such goods, services or facilities, will qualify. 2 Recently the Board had an occasion to consider whether weighted deduction would be available u/s 35B in regard to expenditure incurred in the execution of contract involving supply of material and labour outside India. The following question were referred to the Ministry of Law their advice: (a) whether expenditure incurred on purchase of raw materials and payment of wages will qualify for weighted deduction within the meaning of section 35B; and (b) whether drafting of labour for execution of such a contract locally or abroad would make any difference in the claim for weighted deduction. 3. The Board has been advised that clause (viii) of section 35B allows deduction in respect of expenditure incurred on 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. Therefore, under this clause an allowance will be admissible only in respect of an expenditure incurred in the performance of services in connection with or incidental to the execution of any contract for outside India of such goods, services or facilities. Expenses incurred in supply of labour for executing such contract drafted either locally or abroad would appear to qualify for such deduction. Since clause (viii) deals with the performance outside India, the cost of raw material for fulfilling the contract does not appear to qualify for such deduction. It may be added that no general rule can be laid down in this regard. Much depends on the nature of the contract and each case has to be decided in the light of its own facts. The drafting of labour either locally or from abroad for the execution of a contract will not make any difference for weighted deduction under section 35B. 4. The above clarification may please be brought to the notice of all the officers working in your charge for their information and guidance.