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TMI Blog1996 (6) TMI 47X X X X Extracts X X X X X X X X Extracts X X X X ..... m of Rs. 73,415 as retirement compensation and gratuity proportionately from October 1, 1975, to September 30, 1976, by holding that these payments were for the purpose of the business of the assessee-company ? 3. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in directing the Income-tax Officer not to deduct the subsidy from the cost for the purpose of depreciation ? 4. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in directing the Income-tax Officer to grant weighted deduction under section 35B on the Export Credit Guarantee Corporation Premium ? Whereas the sole question in Income-tax References Nos. 89 and 90 is as follows : " Whether the assessee is entitled to weighted deduction under section 35B on interest on packing credit and shipping lien ? " Apart therefrom the Income-tax Appellate Tribunal in all these references has remanded the matters. At the outset it would be convenient to deal with questions Nos. 3 and 4 in Income-tax References Nos. 227 and 228 of 1987. Question No. 3 relates to the direction to the Income-tax, Officer not to deduct the subsidy fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mpany Law Board declined the approval by the communication dated August 28, 1976. It is to be noted that the Company Law Board found that these two directors were also directors in other companies and it is on this ground that the approval to their directorship as well as consequent payment of remuneration proposed to be paid by the assessee-company was declined. Additionally, it has also come on record that the two directors--N. C. J. John and N. J. Chandy--are found to be the husbands of the directors of the company. Particulars in regard thereto show that Shri N. J. Chandy is the husband of Smt. Annakutty Chandy and Shri N. C. J. John is also the husband of Smt. Kunjamary and both these ladies are the directors of the company. It further appears that the management board passed a resolution on December 27, 1977, in its extraordinary general meeting. The resolutions are to the following effect : " 1. Resolved that Shri N. J. Chandy, the former managing director be paid a sum of Rs. 51,029.25 as compensation in lieu of remuneration for the period from October 1, 1975, to July 31, 1977. 2. Resolved that Shri N. C. J. John, the former managing director be paid a sum of Rs. 22, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion in lieu of remuneration paid to them. The Tribunal has also recorded that the assessee's counsel was unable to explain why compensation was paid for the period even after the month of September, 1976, when the order of the Government was received. The Tribunal has also observed that how the amount was computed is also not explained. In spite of these observations, the Tribunal has proceeded on the situation arrived at by inference that the two managing directors rendered services to the assessee-company expecting the approval of the Government of India and, therefore, they should not be deprived of their dues for their services from October 1, 1975, till September, 1976, because their services were for the purpose of the business of the assessee-company. From the material on record, in our judgment, the Tribunal has ignored that the two fact-finding authorities has considered the situation concurrently. The Tribunal has also not considered the reason for which the Company Law Board declined to grant approval, stating that the two managing directors were also in the similar position elsewhere. The Tribunal has also not considered the situation of conduct that the managing boar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to take steps in seeing that the goods covered by the export order were made and prepared if necessary and invariably by purchase of the export articles in the market. It is not unknown that for this banks are approached for meeting the expenses which are normally known as expenses for the purchase of raw materials with regard to making the goods covered by the export order. Rate in accordance with the terms and conditions relating to the goods in question. After this situation is over he has to take steps with regard to the execution of the export order, in regard to which steps are required to be taken and such steps are normally in regard to the transportation of the goods to be exported by transport facilities in accordance with the terms and conditions of the contract. Depending on the volume of the goods to be exported, the exporter is again required to approach the bank for financial assistance. This is in regard to the transportation activity relating to the execution of the contract whereby the exporter takes steps in relation to or incidental to the transportation of goods so as to reach the buyer in the foreign countries. Difficulties both with regard to the place of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e substantially interested, the provisions of this clause shall have effect as if for the words 'one and one-third times', the words 'one and one-half times' had been substituted. (b) The expenditure referred to in clause (a) is that incurred wholly and exclusively on-- (i) advertisement or publicity outside India in respect of the goods, services or facilities which the assessee deals in or provides in the course of his business, where such expenditure is incurred before the 1st day of April, 1978 ; (ii) obtaining information regarding markets outside India for such goods, services or facilities ; (iii) distribution, supply or provision outside India of such goods, services or facilities, not being expenditure incurred in India in connection therewith or expenditure (wherever incurred) on the carriage of such goods to their destination outside India or on the insurance of such goods while in transit, where such expenditure is incurred before the 1st day of April, 1978 ; (iv) maintenance outside India of a branch, office or agency for the promotion of the sale outside India of such goods, services or facilities ; (v) preparation and submission of tenders for the supply ..... 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(a) 'small-scale exporter' means a person who exports goods manufactured or produced in any small-scale industrial undertaking or undertakings owned by him : Provided that such person does not own any industrial undertaking which is not a small-scale industrial undertaking ; (b) 'Export House Certificate' means a valid Export House Certificate issued by the Chief Controller of Imports and Exports, Government of India (c) 'provision of technical know-how' has the meaning assigned to it in sub-section (2) of section 80MM ; (d) 'small-scale industrial undertaking' has the meaning assigned to it in clause (2) of the Explanation below sub-section (2) of section 32A ; (2) Where a deduction under this section is claimed and allowed for any assessment year in respect of any expenditure referred to in sub-section (1), deduction shall not be allowed in respect of such expenditure under any other provision of this Act for the same or any other assessment year. " Hearing learned counsel for the parties it will have to be stated that the said provision has come on the statute at a period when exports were considered to be encouraged as a policy and as such this encouragement of exp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rence to the performance thereof as given outside India. The services will have to be understood as being in connection with or incidental to the execution of any contract. The contract has to be for the supply of goods, services or facilities outside India. Therefore, the three facets which are to be understood together deal with execution of any contract for the supply of goods outside India. Goods include services and facilities. In this context, steps which are to be understood as the execution of any such contract will have to be understood as all activities in the nature of services relating to the process of transportation and certainly the activities would get snapped with reference to them in relation to anything that is done by the exporter to collect the goods and make them ready for export. In other words, performance of services in connection with or incidental to the execution of any contract will have to be understood as connecting with the transportation activity of the goods to be exported so that the foreign buyer may get delivery of the goods. It is needless to state that the provisions will have to be understood in the context of other cognate provisions contain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ceeded that this contemplates that the expenditure incurred in connection with the services rendered outside India or the expenditure incurred in connection with or incidental to the execution of any contract for the supply outside India of such goods will have to be understood as being covered under this section. The court observed that even though the bank certificate issued by the bank showed that all these credits in this account were given for the purchase of raw materials it was given in relation to the contract for the supply of goods to the foreign parties and, therefore, the expenditure was in connection with the execution of any contract for the supply outside India. The Madhya Pradesh High Court emphasised that even incidental expenditure will have to be understood to be covered under this clause as the language speaks of expenditure both in connection with or incidental to the execution of the contract. Thus the decision has given emphasis on the phrase "in connection with or incidental to the execution of the contract with the foreign parties." The above decision was considered by the Calcutta High Court in Brooke Bond India Ltd. v. CIT [1992] 193 ITR 390. The Calcutta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of relationship in regard to the execution of contract relating to its transport for delivery to the foreign buyer. Deduction that was claimed related specifically with regard to the interest in regard to the expenses which may be understood as pre-shipment expenses. The statutory provision has again come up for consideration before the Gujarat High Court in two decisions in Isabgul Export Corporation v. CIT [1994] 205 ITR 227, and Testeels Ltd. v. CIT [1994] 205 ITR 230. Here again the emphasis is on the aspect of territoriality. In the case of Isabgul Export Corporation [1994] 205 ITR 227 (Guj), the factual matrix was more than clear that the expenditure in regard to which deduction was claimed was incurred before the goods were exported and, therefore, on inference, the said expenditure must have been incurred in India and such expenditure incurred in India would not be admissible for weighted deduction under section 35B(1)(b)(iii). A bare perusal of sub-clause (iii) would show the presence of an injunctive clause "not being expenditure incurred in India in connection therewith". Therefore, in the above case, the Gujarat High Court was considering the provisions of sub-claus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... connection with performance of services rendered outside India has to be kept in the forefront in the mind. It is observed that it is only those services rendered outside India in connection with or incidental to the execution of any contract for the supply of goods outside India of goods, services and facilities that would be covered by sub-clause (viii). It is in this background we will have to consider the situation and the scope of application of sub-clause (viii) under consideration. In the process there has to be a reference to the situation that the Appellate Tribunal has remanded all these matters and, therefore, the references could have been easily disposed of recording a conclusion that in a situation of an order of remand any answer to the question would be only an academic exercise. However, learned senior standing counsel for taxes submitted that in view of the situation that was the result of the decision cited above and-in view also of the position that the Tribunal proceeding on its own earlier decision added to the effect that the matter was argued in detail by counsel for the parties, we felt it necessary to act on the submission of learned senior standing cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Export-Import Bank of India. The said chapter conveys what is pre-shipment credit (packing credit) as well as post-shipment credit both short term as well as long-term. Packing credit is available to all types of exporters, export houses and manufacturers exporters and even to manufacturers of goods supplying to export houses. The packing credit amount is decided on the basis of the export order. For obtaining packing credit finance an application is necessary giving details of credit requirements to be made to the bank certain documents are required in regard thereto, to be submitted by the applicant. The documents are specified illustratively. Similar is the position with regard to post-shipment credit. It is necessary to note that post-shipment credit is given after the goods have been shipped and the export documents are submitted by the exporters to the concerned bank for negotiation and collection. Its price is up to the date of realisation of the export proceeds, i.e., the goods to be exported which is not more than 180 days mentioned on the relative export bill. It is necessary to note that before sanctioning the post-shipment credit the bank will liquidate the pre-shipme ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e execution of the contract. It is in this connection even in the decisions considered by us hereinbefore, the observations are seen to have been made on the basis of findings recorded in regard thereto by the Appellate Tribunal. These findings are naturally based on the bank certificate. Therefore, the bank certificate has to be specific in character in regard to the statutory requirements relating thereto which would not only enable the assessee to claim benefit of deduction under the clause under consideration but it would also be a facility to the tax authorities to pinpoint the amount calculated in accordance with the provisions of the clause under consideration. Naturally, then the certificate is expected to be precise with regard to the figures relating to pre-shipment position as against the post-shipment credit. This is in view of the statutory requirements that the assessee would get benefit with regard to the claim under consideration in accordance with the requirements of the clause only with regard to post-shipment credit and the interest in regard thereto. The bank certificate has to be in accordance with the above statutory requirements. We have already observed th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in paying interest to its bank on the advances and loans given for purchase of raw materials. Reading the two judgments, we are tempted to observe that packing material was considered to be synonymous with packing credit when the factual situation by itself took the goods far away from the provisions of section 35B. What is really required to emphasise is the serious requirement of the provisions of section 35B of the Act by the bank at the time of issuance of the required certificate. It must be known to the bank that the certificate is required by the assessee for specified purpose of claiming weighted deduction under the provisions of section 35B of the Act. It must further be known to the bank precisely as to under which of the clauses of section 35B of the Act the certificate asked for is required. The bank should issue the certificates specifying the exact calculation of the amount separating the amount of interest in regard thereto specifically in accordance with the provisions of the statutory requirements. These observances are really necessary because in all these proceedings of taxation, the bank certificate is the basic document. We have found that legal submissions a ..... X X X X Extracts X X X X X X X X Extracts X X X X
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