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TMI Blog1998 (3) TMI 40X X X X Extracts X X X X X X X X Extracts X X X X ..... s and realising sale proceeds of exports outside India against delivery of sale documents is not eligible for weighted deduction under section 35B of the Income-tax Act, 1961? Tax Case No. 572 of 1986 (assessment year 1978-79): "On the facts and circumstances of the case, was the Income-tax Appellate Tribunal right in holding that the sum of Rs. 37,710 incurred in negotiating export sale documents and realising sale proceeds of exports outside India against delivery of sale documents is not eligible for weighted deduction under section 35B of the Income tax Act, 1961 ?" The assessment years involved in the batch of tax cases are 1974-75 to 1976-77, 1977-78 and 1978-79, and the common question that arises in the batch of cases is with reference to the claim of the assessee under section 35B of the Income-tax Act, 1961 (hereinafter to be referred to as "the Act"), for export markets development allowance on the collection charges paid to the bank on export bills for various assessment years. It is not necessary to set out the figures for each assessment year but the assessee's claim for the various assessment years is that the assessee is entitled to weighted deduction on the expe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nts to the buyer, and even assuming that it was done in India, the activities done by the bank were done in pursuance of the export outside India. He submitted that the delivery of the goods covered by the bill would be completed when the buyer takes delivery on realisation of money. He, therefore, submitted that the services rendered by the bank extended up to the delivery of the goods and, therefore, the bank rendered services outside India. He strongly placed reliance on the observation made by the Appellate Tribunal that the expenditure was incurred for negotiating the sale documents of the goods exported outside India. He submitted that the Tribunal was manifestly in error in holding that the services rendered by the bank were only for the sellers. He submitted that in export, the bank played a crucial role in delivering the documents and the Tribunal committed an error in curtailing the role played by the bank in negotiating export sale documents. He submitted that the bank was responsible for the transfer of title and since the bank was associated with the assessee for delivery of documents outside India, the expenditure incurred would come within the four corners of section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee is entitled to claim the weighted deduction and it is a facet of the question raised by the assessee and, therefore, the assessee is entitled to claim weighted deduction under section 35B(1)(b)(viii) of the Act. We have carefully considered the submissions of learned counsel for the parties. Let us consider the case law cited by learned counsel to appreciate the points that arise in the tax cases. In Ellerman and Bucknall Steamship Co. Ltd. v. Sha Bhagajee Sonmull [1961] AIR 1961 Mad 442, a Bench of this court considered the duties of the seller and buyer and the liability of the banker on the issue of letter of credit. Ramachandra Iyer J. (as his Lordship then was) speaking for the Bench considered the system of payment of buyer to seller by means of letter of credit and after considering Cheshire and Fifoot's Law of Contracts (1956 edition) and after evaluating the main features of the letter of credit held that a letter of credit involves a mandate by the constituent (buyer) and an undertaking by a banker to meet drafts drawn under the credit by the beneficiary of the credit (example, the seller) in accordance with the conditions laid down therein, and the credit is de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... respondent will (if they are drawn on him) accept or honour drafts drawn for the price of the goods, provided that the documents of title and other documents specified in the credit are simultaneously presented to the banker. On receipt of the credit the seller ships the goods and insures them, obtaining a bill of lading normally made out to his order but perhaps to that of the banker, and also a policy of marine insurance. He then draws for the price of the goods and with the documents, i.e., the bill of lading, policy and invoice specified in the credit presents the draft for acceptance, payment and negotiation. In this way the exporter gains the advantage of receiving payment for his goods without delay. The documents are then sent by the banker to the buyer's bank and on the bill of exchange being accepted by him by payment of the price the bill of lading and the invoice is delivered to him : see Halsbury, volume 2, page 213, and Gutteridge and Megrah on The Law of Commercial Credits (1968 edition)." In Halsbury's Laws of England (fourth edition, volume 3) after considering the nature of commercial letters of credit, types of credit and the exact relationship between the banke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uthor described the legal relationship between the intermediary banker and the beneficiary as under : "The promise of the banker issuing the credit to the seller beneficiary is supported by good consideration. If there is delay in making payment the issuing banker may be liable for any loss suffered by the beneficiary thereby. Where there is a direct relationship between the two it is that of principal and principal ; but usually there is an intermediary bank who may himself be a principal in his own right vis-a-vis the beneficiary, as where he confirms the credit. Where confirmation is given on the credit of the issuing banker the beneficiary, having the undertaking of both issuing and intermediary bankers, may sue either or both. If, instead, the intermediary banker issues his own credit, there is probably no privity between the issuing banker and the beneficiary, and the intermediary banker alone is responsible to the beneficiary, for the original credit may be said to be merged in that of the intermediary banker, whose responsibility for payment the beneficiary accepts in lieu. He may well have demanded confirmation in his contract with the buyer. The contract between the inte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... can succeed in its claim for deduction under section 35B of the Act only if the assessee establishes that the expenditure was incurred for the performance of service outside India. We have seen the mode of operation of letters of credit and it is perfectly open to the seller's bank to tender documents to the intermediary bank or the buyer's bank in India and demand payment for the seller and when it tenders documents to the issuing bank, it is not necessary that the tendering of documents should also always take place outside India. The assessee has also not established that the expenditure incurred in negotiating the sale documents for the goods exported outside India was incurred for the performance of the services outside India. The assessee has also not established whether such performance by the bank was in connection with or incidental to any contract for supply of goods outside India. The wide range of activities undertaken by the bank, the different types of commercial credits and the role the bank plays at the time of tender of the documents make it clear that unless the assessee establishes that the bank has rendered certain services outside India in connection with the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... We are in respectful agreement with the views expressed by the Gujarat, Bombay and Calcutta High Courts and hold that unless the assessee establishes that it had itself or in association with some third party, performed certain services outside India for the supply of goods exported, the assessee is not entitled to claim weighted deduction in respect of the expenditure incurred for such services. It is, no doubt, true that the banks play an important role in the matter of export of goods to foreign countries and for the performance rendered by the bank, the assessee has necessarily to pay charges to the bank. But, the mere fact of payment to the bank would not enable the assessee to claim the weighted deduction. The assessee can succeed in its claim only if the assessee establishes that the expenditure was incurred in connection with the export sale and the expenditure incurred falls within any one of the sub-clauses of section 35B(1)(b) of the Act. In so far as the expenditure under section 35B(1)(b)(viii) is concerned, the expenditure must be incurred on "performance of services outside India in connection with, or incidental to, the execution of any contract for the supply of ..... X X X X Extracts X X X X X X X X Extracts X X X X
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