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TMI Blog1981 (9) TMI 180X X X X Extracts X X X X X X X X Extracts X X X X ..... harnagar). The Revenue placed reliance on the Special Bench order of the Tribunal in ITA Nos. 3255 and 3330 (Bom)/1976-77 in the case of M/s. J. Hemchand Co., Bombay vs. The 2nd ITO, B-II Ward, Bombay and vice versa and contended that in view of the Special Bench order weighted deduction u/s 35B was not admissible particularly on expenditure of Rs. 1,71,976 on packing and Rs. 2,93,477 on transit insurance. On behalf of the assessee it was submitted that the assessee was in the business of manufacture and export of public address system, e.g. loud speakers, amplifiers and other accessories and for the export of these goods expenditure on special packing was necessary and the question of allowance of weighted deduction on special packing was not at issue before the Special Bench. The question of allowance of weight deduction u/s 35B on the expenditure on special packing was considered by the Delhi Bench "C" in ITA No, 3119 (Del)/1977-78 dt.30th April,1979and was decided in favour of the assessee. Regarding the question of allowance of weighted deduction on the expenditure of Rs. 2,93,477 reliance was placed on an order of the Chandigarh Bench in ITA No. 463/1977-78 dt.24th December ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all the details here. Out of this expenditure the assessee had claimed weighted deduction on : Rs. (1) 856 on account of entertainment of foreign customers (2) 14,000 interest and bank charges; (3) 1,71,976 on account of specialised packing for export products; (4) 2,93,477 being expenditure on carriage of such goods to their destination outsideIndiaand on the insurance of such goods while in transit; (5) 85,309 being clearing agent s charges for executing foreign orders The ITO did not allow weighted deduction on the aforesaid items of expenditure. While disallowing the assessee s claim for weighted deduction u/s 35B the ITO observed that the claim in respect of the last four items of expenditure was not admissible in view of the provisions of s. 35B(1)(b)(iii). 4. Aggrieved, the assessee filed an appeal to the CIT (Appeals). The CIT (Appeals) allowed weighted deduction on the sum of Rs. 856 by observing that this amount which was spent for the entertainment of the foreign customers would qualify for weighted deduction u/s 35B even if it was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the order of the CIT (Appeals). He submitted that the controversy was in respect of the expenditure on the carriage of goods to their destination outsideIndiaand insurance of such goods while in transit. He, therefore, submitted that the ground may be permitted to be amended and the expenditure of Rs. 2,93,477 should not be considered as expenditure only on transit insurance. The amended ground of appeal, as pleaded, is permitted. 6. Shri S.D. Kapila, the ld. Deptl. Rep. took us through the order of the Chandigarh Bench dt. 24th Dec., 1979 in ITA No. 463 of 1977-78 in the case of The ABC Industries Pvt. Ltd. which was relied on by the ld. Counsel for the assessee and which came up for hearing before the Division Bench. After pointing out that in the aforesaid order, weighted deduction u/s 35B was allowed on freight, carriage and insurance, he submitted that the Chandigarh Bench went wrong in allowing the weighted deduction on such expenditure. The Special Bench in the case of J. Hemchand Co.,Bombayitself had considered this claim and had rejected the claim for weighted deduction on the expenditure of carriage, handling and forwarding charges, mukadami, bardana and packing mate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed before the Chandigarh Bench. According to him, the words "distribution: and "supply" used in the Monopolies Restrictive Trade Practices Act, 1969 are for a different subject matter and the definition given there cannot be applied for the words used in the IT Act. For the meaning of the word distribute , he referred to The Law Lexicon , Second Edition (Volume 1) page 495, Stroud s Judicial Dictionary , 4th Edition (Volume 2) pages 812 to 813, page 182 of Eric L. Kohler s "A Dictionary for Accountants" (1st Edition). For the meaning of the word supply he referred to "The Law Lexicon", 2nd Edition Vol. II, page 581, Stroud s Judicial Dictionary page 2689 and page 462 of Eric L. Kohler s "A Dictionary for Accountants" (1st Edition). For the definition of the word provision , he referred to page 385 of Eric L. Kohler s " A Dictionary For Accountant s", (1st Edition). For the definition of the word "freight", he referred to page 222 of Eric L. Kohler s "A Dictionary for Accountants", (1st Edition). He also submitted that the judgment in Punjab Distilling Industries Ltd. vs. CIT (1965) 57 ITR 1 at p. 9 (SC) was of no assistance to the assessee for the purpose of weighted deduction ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by way of export development allowance, it expressly did so by specifically mentioning such exclusion as in sub-cl. (iii) of s. 35B(1)(b). He also referred to the judgment in CIT, Kerala I vs. Cochin Co. P. Ltd. (1979) 119 ITR 157 (Ker), wherein it has been held that the Tribunal should legalise the expenditure with specific reference to the sub-clauses in cl. (b) of s. 35B (1) and proceed to determine whether the expenditure had been wholly and exclusively incurred for any of the purposes listed therein. He thus made a submission that the entire expenditure of Rs. 2,93,477 on carriage and insurance should not be admitted for weighted deduction u/s 35B. He further submitted that the expenditure of Rs. 85,309, (Rs. 38,663 on account of handling, Rs. 10,248 Octroi and Rs. 36,398 Bombay Port charges) were not entitled to weighted deduction u/s 35B(1)(b). For this submission he relied on paras. 33 to 35 of the Special Bench order in the case of M/s. J. Hemchand Co.,Bombay. 8. After Shri S.D. Kapiala had argued that the assessee was not entitled to weighted deduction on the expenditure of Rs. 2,93,477 and Rs. 85,039, Shri C.V. Gupte, the ld. Deptl. Rep. argued that the assessee was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he ld. Counsel for the assessee first read the provisions of s. 35B(1)(b)(iii) and submitted that the assessee s claim for weighted deduction u/s 35B on different items of expenditure could not be denied by referring to this provision. He then referred to pages 51 to 60 of the Paper Book and pointed out that the contracts in this case were either of c f contracts. At page 51 of the Paper Book is an invoice for a c.i.f. contract for 140 for supply of Battery Eliminators and payment was to be made by an irrevocable Letter of Credit to be established in favour of Bank of India, Chandni Chowk, Delhi; at page 54 of the Paper Book is an invoice for 107-75 for supply of Mega PA Equipment on c.i.f. Malta basis, at page 56 is an invoice for DM 16,000 for supply of Paging Speaker on c.i.f. Rotterdam basis and at page 58 is an invoice for 1,150 for supply of Hypex paging speakers on c f Khorramshahr basis. He explained that the transactions in this case were vendor s transactions and not a middleman s transactions. He explained that in each case the transaction of sale takes place outsideIndia. For the proposition as to where the sale of goods takes place, he referred to the judgeme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e then submitted that the unreported judgment of the Kerala High Court in K. D. Kesavan Co. vs. CIT. ITR No. 71 of 1972 was not relevant. According to him, the question of law in that case was worded in such a manner that the Court held that the expenses incurred in respect of carriage of goods from the part of destination to the ultimate place of sale would not qualify for weighted deduction u/s 35B(1)(b)(iii). He submitted that in CIT vs. Kasturi Palayacat Co. (1979) 120 ITR 827 (Mad) the question referred was limited question and the issued involved in this case was not decided. He did not dispute the proposition of law laid down in the judgment in CIT vs. Cochin Co. (P) Ltd. (1979) 119 ITR 157 (Kar). While replying to the points made by Shri C.V. Gupta, the ld. Deptl. Rep., Shri R. Ganesan, the ld. Counsel for the assessee submitted that the judgment in Corcorandum Co. vs. CIT (1977) CTR (SC) 209 : (1977) 108 ITR 335 (SC) was the Judgement under s. 4(1 42(1) and 42 (3) and was not relevant similarly was submitted that the judgements in CIT Kaasturi Palayacat Co. (1979) 120 ITR 827 (Mad) and CIT vs. L. G. Ramamurthi And Others (1077) 110 ITR 453 (Mad) were not relevant. The r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eparation and submission of tenders. He also submitted that the Expln. 2 to s. 35B inserted by the Finance (No.2) Act, 1980 was to be read in respect of those clauses were left in the statute book and that explanation could not relate to the clauses which were deleted. 12. We have carefully considered the rival submissions. In the Special Bench order in the case of J. Hemchand Co., Bombay the provisions of s. 35B have been examined very carefully and the special Bench has summed up the entire legal position in para 22, in the following words : "22. To sum up, we consider the general but indelible features implicit in the provisions of s. 35B. (i) The benefit of the section is available only to an assessee who is either a domestic company or a person (other than a company) who is resident inIndia. (ii) The benefit available is only in respect of expenditure incurred after29th Feb., 1968. (iii) Such expenditure must have been incurred wholly and exclusively on activities referred to in sub-cls. (i) to (viii) of cl. (b) of sub-s. (1) of the section. (iv) Sub-clause (ix) so long as it remains not activated by the Rule making authority must be considered as inert and lifel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Bench order the Tribunal also considered the allowability of weighted deduction in respect of interest and bank charges and held as under in paragraph 36 of its order: "36. Bank Commission paid by the assessee and for which weighted deduction claimed is what is charged by its bank for the discounting facilities afforded. We do not find any way to bring such expenditure within any one of the sub-clauses in sec. 35B(1)(b). The expenditure incurred by the assessee is in that sense not on any activity directly connected with the exports but for the early realisation of the price of the goods exported or for the services rendered b y the Bank in connection therewith. A faint attempt was made before us to suggest that what the Bank charged by way of commission was for the services it rendered outsideIndiain collecting the price of the goods from the foreign buyer and therefore the expenditure must be taken as coming within sub-clause (viii). Even assuming that the commission paid was for such services, the argument overlooks the fundamental act that the services referred to in that sub-clause in connection with, or incidental to the execution of any contract for the supply of goods, se ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e (wherever incurred) on the carriage of such goods to their destination outside India or on the insurance of such goods while in transit; (iv) x x x x x (v) preparation and submission of tenders for the supply or provision outsideIndiaof such goods, services or facilities, and activities incidental thereto; (vi) x x x x x (vii) x x x x x (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". We may immediately point out that the question of the allowance of weighted deduction on; carriage of the goods to their nation outsideIndiaand on the insurance of such goods while in transit is not res integra. This question has been decided by the Kerala High Court in K.E. Kesavan Co. vs. CIT, ITR No. 71 of 1972, dt.12th Nov., 1973. The question of law referred in that case was as under: "whether, on the facts and in the circumstances of the case, the Tribunal is justified in holding that expenditure incurred in respect of carri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... where they were sold or delivered, also qualify for weighted deduction. We agree with the Tribunal that this claim is unsustainable. Goods are admittedly sold only as the assessee s goods on consignment basis by the assessee s foreign agents. When such goods are carried for the port of destination to her places where they are ultimately sold and delivered, it would still be carriage of the assessee s goods to the destination outsideIndia; and therefore, expenses incurred would not qualify for weighted deduction. The expression destination in sub-clause (iii) of clause of sub-section (1) of section 35B cannot mean the port of destination mentioned in the bills of landing. It would include the ultimate place or places where the goods are taken and sold. In this view, the expenses incurred under the above items would be expenses incurred in respect of distribution of goods outsideIndiawhich would not qualify for weighted deduction. The result is that we answer the question in the affirmative i.e. for the Department and against the assessee". A similar view has been expressed by the Madras High Court in CIT vs. Kasturi Palayacat Co. (1979) 120 ITR 827 (Mad) wherein it has been held ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng words "not being", leaving the impression that what followed was nature of a proviso and an exception. The question could well be asked why if expenditure (whatever incurred) on the carriage of goods to their destination outside India and on the insurance of such goods while in transit was intended to be added to the allowable class of expenditure, they were not brought in under a separate additional sub-clause or why they were not brought in with the aid of sub-clause (ix). As the assessee have hazarded a speculation on intention of the Legislature in bringing about this amendment, we may well look into the Notes on Clauses in Finance Bill 1970; to this particular amendment. This is what is stated there: "Clause B seeks to amend section 35B of the Income-tax Act (relating to the grant of export markets development allowance) retrospectively fromthe 1st April, 1968, i.e. the date from which that Section was introduced in the IT Act. The amendment make it clear that expenditure on the distribution, supply or provision outside India of the good services is facilities dealt in or provided by the tax-payer in the course of his (which is one of the heads of expenditure specified in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... incurred) on the carriage of such goods to their destination outside India and to the expenditure on the insurance of such goods while in transit, it save these two heads of expenditure from that exclusion, the clear answer is that to make out such an exception to an exception the various heads of expenditure would not then have clubbed together in the manner soon done and that too with the opening words "not being" to govern them all. Apparently the phrase "wherever incurred" applies to expenditure incurred both on the carriage of goods outsideIndiaas also on the insurance of the goods while in transit. This contrasting phrase placed in adjacent proximity to the excluding expression "incurred in India based with reference to expenditure in connection with distribution, supply or provision outside India of goods, services of facilities, can only be understood as intending thereby even a wider net of exclusion for the latter two heads than laid for the former. 18. We are also not able to find any substance in the other argument advanced on the side of the assessee that Explanation 2 to sub-s. (1) of the section brings out an intention on the part of the Legislature to bring withi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 27 ITR 128 (SC) and Seth Pushlal Mansinghka (p) Ltd. vs. CIT (1967) 66 ITR 159 (SC) deal with the question as to where the property in the goods passed to the purchasers. This question becomes relevant for ascertaining as to where the sales are effected. That question then determines the place where the income accrues or arises to the assessee. These judgements are not relevant because for the purpose of s. 35B, it is not relevant as to where the sale takes place and where the income accrues or arises. The export markets development allowance u/s 35B is allowed on expenditure wholly and exclusively on the activities mentioned in different sub-cl. 35B(1)(b). The judgments in Singlair Murray And Co. P. Ltd. vs. CIT 1974CTR (SC) 281 : (1974) 97 ITR 615 (SC) and Chowringhe Sales Bureau P. Ltd. vs. CIT 1973 CTR (SC) 44 : (1973) 87 ITR 542 (SC) are also not relevant because neither the sale price of the goods exported nor the components of the sales price of the goods exported is required to be determined Sec. 35B(1)(b) uses the word "expenditure " which has been explained in Indian Molasses Co. (Private) Ltd. vs. CIT (1959) 37 ITR 66 (SC). In this judgment, it has been held that "spend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fore the Chandigarh Bench was that sub-cl. (iii) of s. 35B(1)(b) did not cover "performance of services" connected with the supply outsideIndiaof goods services or facilities, which was covered by sub-cl. (viii) of s. 35B(1)(b). The ld. Deptl. Rep., Shri Kapila had submitted that the words "distribution", "supply" or "provision" should not be considered only as relating to the words "goods", "services" or "facilities" but were respectively interchangeable. He adverted to the definition of the term "distribute" in different text books. In "The Law Lexicon" 2nd Edition(Vol. 1) page 495: "Distribute- The ordinary and general meaning of the word "distribute" is sufficient to convey spreading of the goods any where by whatever means that may be employed. Drugs Act, 1940 Sec. 18(A)- State vs. Nathumal, Damumal, AIR 1962 Bom. 21 at 23; 63 Bom. LR 362 : 1961 Nag. LJ 271 : 1962 (1) Cr. L.J. 16 : ILR 1961 Bom. 735". In "Stroud s Judicial Dictionary" Distribute. (1) "The word distribute connotes the delivery of something to several persons "pur Doiron J.R. vs. McNiven (1944) 1 WWR 127". In Eric L. Kohler s "A. Dictionary for Accountants" :- "Distribute" 1. "Disposal of a product b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 4(3) 52A(4)(ii)(d) and s. 104. On the reasoning advanced before the Chandigarh Bench he had supported his claim for weighted deduction u/s 35B(1)(b)(viii) on the expenditure on freight and insurance. In our opinion there is no warrant for applying to the word "distribution limited meaning in the sense that it would apply only to a case where the assessee itself had the distribution agency and would not apply to a case where the assessee distributes or sells goods to a party outsideIndia. We also find it difficult to accept the arguments that the words "the distribution, supply or provision" should be used respectively in relation to the words "goods, services or facilities". As the meaning of the word supply given in different texts would suggest that it includes sales also. Thus the expenditure on freight and insurance connected with the sale of goods outside India would fall within the ambit of s. 35B(1)(b)(iii) and in view of the latter part of s. 35B(1)(b)(iii) the expenditure on carriage of the goods to their destination outside India and on the insurance of such goods while in transit cannot be allowed. The definition of the term "distribution" given in different sections o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acilities. This sub-clause will not take within its ambit the distribution, supply or provision of goods, services or facilities will only arise after the tender had been submitted and it had been accepted by the foreign buyers. The words "activities incidental to thereto" will also cover activities incidental to preparation and submission of tenders for the supply or provision outsideIndiaof goods services or facilities. The words "activities incidental thereto" cannot be separated from the purpose for preparation and submission of tenders. Thus, we do not accept the submissions made by the ld. counsel for the assessee that weighted deduction u/s 35B(1)(b)in respect of the expenditure on carriage of goods to their destination outside India or on the insurance of such goods while in transit will be available u/sub cl. (v) of s. 35B (1) (b). The reference to the Notes on Clauses of Finance (No.2) Bill, 1980 reported in (1980) 123 ITR 122 (Statutes) and to the budget speech of the Finance Minister 1981-82 reported in (1981) 128 ITR (Statutes) does not help the assessee in any manner. On the contrary they support the conclusion which we have reached on an interpretation of the various ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... curred inIndia. It must follow that the claim in respect of these is, as rightly decided by the Appellate Assistant Commissioner, clearly unsustainable". We respectfully agree with the view expressed above. We do not consider it necessary to refer to the authorities referred to by Shri C.V. Gupte, the ld. Deptl. Rep. We thus reverse the order of the CIT (appeals) and hold that weighted deduction is not admissible u/s 358(1)(b) (iii) in respect of the expenditure on packing. The packing may be ordinary packing or special type of packing depending upon the nature of goods exparte, but such expenditure will not be entitled to weighted deduction. 27. We may now take up the question of weighted deduction on the expenditure of Rs. 85,309 on account of octroi, handling charges etc. This expenditure includes: (1) Rs. 36,663 on handling; (2) Rs. 10,248 on octroi; and (3) Rs. 36,398 onBombayport charges. The CIT (Appeals) has held that weighted deduction on the expenditure of Rs. 85,309 is admissible u/s 358(1)(b)(iii). While dealing with the expenditure on packing, we have already pointed out that such expenditure is not covered by the second limb of s. 358(1)(iii). This expendi ..... X X X X Extracts X X X X X X X X Extracts X X X X
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