Deduction u/s 35-B for service charge paid to STC for export of castor oil. - Income Tax - 1487/CBDT

INSTRUCTION NO. 1487/CBDT Dated: October 19, 1982 The Board has received a representation from the Indian Vegetable Oil Export Association, Bombay on behalf of its Associates for clarification on allowability of their claim for weighted deduction u/s 35-B of the Income-tax Act, (prior to the amendment made by Finance (No.2) Act, 1890 with effect from 1-4-1981) on the service charges paid by them to the State Trading Corporation of India in connection with the export of castor oil. 2. Consequent to the canalisation of exports of castor oil through STC vide, Govt, of India, Ministry of Foreign Trader Order "Export Control Order, 12th Amendment, 1971", the following procedure for supply of castor oil for exports was laid down. 3. Exporters of castor oil upto 25M/Tonnes were free to negotiate and finalise their commitments with foreign buyers directly. In regard to such exports, the condition was that 5 per cent service charges on FOB value should be paid to the STC by Demand Draft at the time of endorsement of shipping documents. All exports were to be A/c. STC and the documents were to be prepared accordingly. 4. In regard to exports between 5 to 25M/Tonnes, sellers were required to take approval of the sale price from STC before accepting any bid from the foreign buyers or sending any firm offer to the foreign buyers. However, in regard to bulk exports, i.e. exports exceeding 25M/Tonnes, direct negotiations between the foreign buyer and the exporter was thought to be not in the interest of smooth, orderly and disciplined growth of export trade in castor oil. Hence, a separate procedure for such bulk supply was stipulated which had to be compulsorily followed by all exporters. Under this procedure : (a) The STC enters into contract for bulk supply of castor oil with the foreign buyers at rates specified in the terms of contract. (b) The entire supply contract is, by a simultaneous contract, assigned to and allocated amongst the various export traders in India at a lesser rate. The difference in rates constitutes the service charges payable to the STC by the exporters. (c) The foreign buyer has to establish irrecoverable, confirmed , divisible, transferable letter of credit in favour of the STC. (d) In the simultaneous contract which STC enters into with the exporters, the letter of credit opened by the foreign buyer is assigned in favour of the exporter, to the extent of the portion of oil to be exported by the Exporter. (e) The contract entered into by the STC with the foreign buyer is specifically made an integral part of the contract which the STC enters into with the oil exporter. (f) One of the terms of the latter contract is that the exporter shall perform and observe all the obligations, convenants and agreements, required on the part of the STC to be performed and observed under the export contract, in so far as these obligations, convenants and agreements relate to the export of Castor oil allocated to the exporter. (g) The property in the goods does not pass to the STC till the goods have passed the Customs frontiers of India. (h) The exporter has to indemnify the STC against all claims, proceedings, damages, losses, costs and expenses, whatsoever, in respect of, or in connection with or in relation to or arising out of any matter under the contract. (i) All types of export incentive as may be available will be to the account of the exporter. 5. There is no dispute that the exporters who are exporting upto 25M/Tonnes of castor oil are entitled to a weighted deduction on service charges payable by them to the STC. A doubt has, however, arisen whether the exporters, like the case of the associates of this Association, who pay the rate difference to STC, are eligible for weighted deduction on the service charges payable to the STC. 6. Under Section 35B, as it stood prior to 1st April, 1981, excepting assessment years 1978-79 and 1979-80, domestic companies and also non-corporate tax-payers resident in India, who incur any expenditure, under specified heads after the 29th day of February, 1968, whether directly or in association with any other person, to promote sales outside India of any goods services or facilities dealt in or provided by them in the course of their business are entitled to an export market development allowance. The expenditure qualifying for this weighted deduction is that incurred by the tax-payer during the previous year wholly and exclusively on the activities as given in sub-clauses (i) to (ix) of clauses (b) of this Section as it stood then. 7. For the assembly years 1978-79 and 1979-80, Section 35B(IA) was introduced providing certain variations in the scheme of weighted deduction. No weighted deduction could be available in respect of expenditure incurred on or after 1-4-1978 unless the following conditions were fulfilled, namely:- (a) the eligible assessee was engaged in: (i) the business of export of goods and was either a small scale exporter (exporting goods manufactured in his own 'small scale industrial undertaking') or a holder of an Export House Certificate issued by the Chief Controller of Imports and Exports ; or (ii) the business of "provision of technical know-how" or the rendering of services in connection with the provision of technical know-how, to persons outside India; and (b) the expenditure in relation to which weighted deduction has been claimed is incurred by the assessee wholly and exclusively for the purposes of the business referred to in (a) above. These special provisions have been omitted for and from the assessment year 1980-81. 8. After a careful consideration of the matter, the Board are of the opinion that the difference in rates which constitute service charges to the STC is qualifying expenditure for purposes of Section 35B since:- (i) The actual supplier of goods is exporter. Though there seems to be no privity of contract, as such, between the foreign buyer and the exporter, the contract between the STC and the foreign buyer is wholly and exclusively for and on behalf of the exporter. Moreover, the letter of credit is opened in the name of the exporter; (ii) the F.O.B. value is the full amount of the consideration although the amount received by the assessee is the net amount; and (iii) the duty draw-back and incentives are calculated on the total amount of the bills and not on the net amount. (2) The STC renders services for which weighted deduction is admissible. It obtains for the exporters; (a) information regarding markets for castor oil outside India; (b) does advertisements and publicity outside India; (c) prepares and submits tenders for supply of castor oil; (d) furnishes samples and other technical information for the promotion of exports; and (e) maintains branches outside India and sends executive outside India for negotiating export contracts. 9. The above instructions may please be brought to the notice of all the field officers.