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TMI Blog1991 (1) TMI 190X X X X Extracts X X X X X X X X Extracts X X X X ..... in principle, mentioned the expenditure of Rs. 1,31,12,831 in respect of purchases and expenses in Kuwait Branch and also specifically mentioned commission paid which amounted to Rs. 7,61,892. The learned Chartered Accountant for the assessee, Shri G.B. Doshi, drew our attention to para 5 of the Commissioner's order under section 263 and argued that the Commissioner had merely set aside the assessment without coming to firm conclusion that there was many error in the original assessment which was prejudicial to the interest of the revenue. He further argued that in reality, the Income-tax Officer had analysed the assessee's claim in his order dated 15-1-1983 and it was not a case of absence of application of mind by the Income-tax Officer. He went to the extent of saying that it might or might not be a case of mis-application of the provisions but it was certainly not a case of absence of application of mind of the Income-tax Officer. He drew our attention in this regard to the Tribunal's decisions in Transactional Analytic Centre For Education Research Trng. v. ITO [1988] 24 ITD 400 (Delhi) and also in ITO v. Golecha Grinding Mills [1988] 41 Taxman (Trib.) 63 (Jp.). 3. As agai ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ded by the Commissioner of Income-tax. Further, in those cases it was also observed that the Income-tax Officer had looked into all relevant aspects and some of the aspects raised by the Commissioner in order under section 263 were not all that relevant or necessary. This cannot be said about the order under section 263 presently before us. As already mentioned, the Income-tax Officer had allowed huge claim without properly examining the details and claims. The Commissioner recorded. the observations showing his tentative thinking that the errors had been committed by the Income-tax Officer. It is, therefore, to be held that the Commissioner's order under section 263 was properly passed. For further processing after giving the assessee a reasonable opportunity of being heard and for precise quantification, the order was set aside. we may mention here that out of purchases and expenses etc. in Kuwait Branch Rs. 1,31,12,831, included a sum of Rs. 55,96,913 for imported instruments. In the course of hearing, on merits of the assessee's claim even before us, the learned counsel for the assessee did not forward any specific arguments about this item. This also indicates that to the exte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... than for the cost of materials as such. He drew our attention to para 3 of the order of the Commissioner (Appeals) and pointed out that the latter committed an obvious mistake by recording that Explanation 2 below section 35B was introduced with effect from 14-1978. He submitted that the said Explanation was actually introduced with effect from 1-4-1981 and the Commissioner (Appeals) was, therefore, wrong in relying on the contents of that Explanation while dealing with the appeal for the assessment year 1979-80. As already indicated, he based his claim primarily on sub-clause (viii) of section 35B(1)(b) and argued that it was the expenditure incurred wholly and exclusively on the performance of services outside India in connection with the execution of contract for supply of goods, services facilities in the foreign countries. He further drew our attention to the contracts to indicate that the assessee was to erect the tanks etc. and further submitted that the price receivable by the assessee was also for such services. In particular, he claimed that lump sum payments were received for C F value, maintenance of tanks etc. in Kuwaiti contract for total of Kuwaiti Dinars 283,395 - ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the cost of hardware is shown at Rs. 10,44,029 which is obviously more than 20% of the net claim now staked for Rs. 48.69 lacs. Similarly, cost of concrete mix is Rs. 14,79,870 which is obviously almost 30% of the said sum of Rs. 48.69 lacs Similarly for cement, the cost shown at Rs. 11,97,236 which is almost 24% of the said net claim for Rs. 48.69 lacs. For these three items, it cannot be said that it was wholly and exclusively for the performance of services in regard to the execution of the contract. Fair estimate has to be made as to what amount out of them should be regarded as merely, incidentally to the execution of the contract and hence, entitled to be regarded as expenditure on performance of services incidental to the execution of the contract and what amount should be regarded as cost of items which would be more justifiably required to be categorised as the cost of the execution of the contract itself, on the lines, the cost of imported instrument Rs. 55,96,913 is treated. In our opinion, it would be fair and reasonable to treat Rs. 8 lacs out of hardware and Rs. 12 lacs out of concrete mix and Rs. 10 lacs out of cement as being in the nature of cost of materials and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ely under sub-clause (iii) but also under sub-clauses (i) (ii). The alternative contention is that even if it is considered under sub-clause (iii), the expenditure should be regarded as incurred before 1-4-1978 because the approval of the IDBI dated 27-2-1978 had been received and permit for remittance was also received from the RBI vide their letter No. 080015 dated 13th Nov., 1976. Originally, the permit was valid up to 12th December, 1976. It was extended from time to time and ultimately the payment was made on 30th June, 1978. The plea taken was that in the mercantile system of accounting the expenditure had been incurred by the assessee before 1-4-1978, and merely disbursement was postponed up to 30-6-1978. 12. In respect of this item, for supporting its claim, the assessee has drawn our attention to pages 118, 119, 120 121 of its paper book. On the other hand, the learned Departmental Representative has supported the stand that the payment was covered by sub-clause (iii) and it was not allowable because it was incurred after 31-3-1978. 13. On very careful consideration, we find that for supporting its claim that assessee submitted on page 118 of its paper book, the ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... case of exercise of jurisdiction under section 263. 18. I, however, find unable to persuade myself to agree with the finding given by my learned brother in paragraph 9 of the order. In original assessment, the Income-tax Officer allowed weighted deduction in respect of total sum of Rs. 2,20,80,218. The CIT initiated proceedings under section 263 on the footing that the ITO has not properly applied his mind while allowing the above claim. Since I agree with the conclusion reached by my learned brother with regard to exercise of jurisdiction under section 263, I do not intend to go into the details of the same. 19. As regards merits, the assessing officer had denied the benefit of weighted deduction in respect of the following two items (i) Purchase of hardware, instruments, cement, concrete mix. etc. Rs. 1,30,82,011 (ii) Commission Rs. 7,61,892 Thus, as against the originally accepted claim of Rs. 2,20,80,218 for weighted deduction, the assessing officer allowed weighted deduction only in respect of Rs. 82,36,315, leaving the claim with regard to the above two items, namely, purchase of hardware, instruments, cement, concrete mix, etc. and commission. The business of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ws that earnings in foreign exchange was to the extent of Rs. 1,25,14,028 and expenditure in foreign exchange was to the tune of Rs. 40,43,884. 21. As against this, learned departmental representative submitted that we are concerned in this appeal with the Assessment Year 1979-80, when sub-section (1A) of section 35B was applicable. Therefore, in view of section 35B(1A), assessee would not be entitled to weighted deduction, unless he fulfils conditions laid down in sub-section (1A). He submitted that even under sub-clause (viii), the benefit was available for expenditure on performance of services, but the same was not available on the expenditure incurred in the execution of any contract. He distinguished between the services rendered in connection with the execution of the contract on one hand and the expenditure incurred on the actual execution of the contract per se on the other and pointed out that for granting weighted deduction, it is necessary that the assessee should be a small-scale exporter or a holder of export house certificate or engaged in the business of providing technical know-how or the rendering of services in connection with the provision of technical know-ho ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of services in connection with the provision of technical know-how, to persons outside India. Secondly, the expenditure referred in that sub-section should have been incurred by the assessee wholly and exclusively for the purposes of business referred to in sub-clause (i) or, as the case may be, sub-clause (ii) of clause (a). Item (c) of Explanation below sub-section (1A) mentions that 'provision of technical know-how' has the meaning assigned to it in clause (2) of section 80MM. Clause (2) of section 80MM defines 'provision of technical know-how' as under- "(2) For the purposes of this section 'provision of technical know-how' means- (i) the transfer of all or any rights (including the granting of licence) in respect of a patent, invention, model, design, secret formula or process or similar property; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention model, design, secret formula or process or similar property; (iii) the use of any patent, invention, model, design, secret formula or process or similar property; (iv) the imparting of any information concerning industrial, commercial or scientific knowledge experience o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and exclusively for the purpose of the business mentioned under sub-clause (i) or (ii) of the sub-section of section 35B(1A) of the assessee. Here I find that my learned brother has concluded that the items on which this expenditure was incurred cannot be said to be wholly and exclusively for the purpose of business of rendering services in regard to execution of contract. I also feel that the said expenditure was not incurred wholly and exclusively for the performance of services envisaged in sub-clause (i) or (ii) of section 35B(1A) in regard to the execution of the contract and, therefore, the second condition laid down in sub-section (1A) of section 35B is also not fulfilled, and there is no justification to allow weighted deduction even on the on amount. 25. It would be worthwhile to mention here that the approval granted by the Central Board of Direct Taxes for the benefit under section 80-O of the Income-tax Act, 1961 does not improve the case of the assessee firstly because the letter of the Board has clearly mentioned that the grant of deduction from the gross total income will be subject to the assessee fulfilling the other conditions laid down in the Act in that behal ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... el and the Departmental Representative, I was able to appreciate the controversy that arose in this case. 3. The assessee is a private limited company engaged in the manufacture of Oil Storage Tanks and Industrial Machinery. It also functioned as engineers and designers for the manufacture and erection of storage tanks, particularly abroad. The assessee also is specialist in design and construction of large field erected floating roof tanks, cryogenic tanks, spheres etc. for refineries, petrochemicals and water works and power industry. It also undertook turnkey projects. For the turnkey projects that it undertook to perform abroad, it was designing and engineering and fabricating the entire tank materials in India and then physically exporting them for assembly and erection at the site. During the relevant period, the assessee company carried out project works totalling to Rs. 2.19 lacs over and above the physical exports from India of Rs. 266 lakhs. In the year under appeal, we are concerned with contracts undertaken for the erection of tanks with: (1) M/s Kenya Pipe Line Co. Ltd., Nairobi vide agreement dated 30-12-1977. (2) M/s. Kenya Pipe Line Co. Ltd., Nairobi vide agre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ect of Kenya totalling to Rs. 56,25,521. Excluding this sum, on which even the assessee agreed that no weighted deduction under section 35B was admissible and over which there was also no difference of opinion between the learned Members, the balance amount works out to Rs. 74,56,490. It was in respect of this sum that the differences arose. While the learned Judicial Member says that no part of it was admissible for weighted deduction, the learned Accountant Member was of a different opinion. Included in this sum of Rs. 74,56,490 were items spent under the following heads in the execution of Kuwait contract: (1) Hardware: Rs. 10,44,029 (2) Concrete mix: Rs. 14,79,870 (3) Cement: Rs. 11,97,236 ------------------ Rs. 37,21,135 ------------------ This was out of a total sum of Rs. 1,04,65,644 spent in Kuwait. There were also sums incurred under the head Hardware in Libya (Rs. 12,106) in Dubai (Rs. 31,891), Srilanka (Rs. 27); Concrete Mix only in Libya Rs. 2,810 but these sums were not taken by the learned Accountant Member either into consideration or in his calculations. He was of the opinion that these sums spent in Kuwait could not be taken as wholly and exclusively incurr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee referred to in that sub-section is engaged in: (i) the business of export of goods and is either a small-scale exporter or a holder of an Export House Certificate; 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 referred to in that sub-section is incurred by the assessee wholly and exclusively for the purpose of the business referred to in sub-clause (i) or, as the case may be, sub-clause (ii) of clause (a)." It says that no deduction under section 35B is admissible in relation to any expenditure incurred after 1-4-1978 unless the conditions mentioned therein were satisfied namely that the assessee must be engaged in the business of export of goods and at the same time, he should be a small-scale exporter or a holder of an Export House Certificate, or in the alternative, the assessee must be engaged in 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 the expenditure referred to must be incurred wholly and exclusively fo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or similar property; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or similar property; (iii) the use of any patent, invention, model, design, secret formula or process or similar property; (iv) the imparting of any information concerning industrial, commercial or scientific knowledge, experience or skill." The learned Judicial Member after referring to sub-section (2) of Section 80MM and 35B(1A) came to the conclusion, as I mentioned earlier, that since the business of the assessee was as specialists in design and construction of large field erected floating roof tanks, cryogenic tanks, spheres etc. for Refineries, Petro-chemicals and Water works and Power Industry and since the assessee was undertaking turnkey projects and carries on design, engineering and fabrication in India and exporting physically the tank materials for erection at site, the assessee could not be said to be providing any technical know-how or rendering of any service in connection with the provision of technical know-how. He, therefore, denied the benefit of weighted deduction in respect of the amount. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the tendering of works and thereafter, references were given to the satisfactory works completed abroad. I am not referring to the clauses of agreements which deal with the imparting of information concerning the industrial knowledge, experience or skill. It is not enough if the tanks are erected in India, exported outside India to the work site, be it in Kenya, Kuwait or elsewhere, erect them test them and commission them. The intricacies involved, the engineering designs etc. involved must be explained to the local engineers as they have to run these tanks afterwards. Therefore, to say that there was no provision of technical know-how in a contract of this intricate nature is very difficult to comprehend. As I said earlier, the agreements do refer to these aspects. As there was imparting of information concerning industrial knowledge, technical skills, I am of the opinion that there was provision of technical know-how within the meaning of section 35B(1A)(ii) and it does apply to the facts of this case and the assessee is, therefore, entitled to the benefit of weighted deduction under section 35B if the subsequent requirement of law namely that the expenditure incurred was wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on with the provision of technical know-how. Understanding of the principal objective behind Section 35B(1A), it cannot be said that the other expenditure which I have listed above is not expenditure rendered in connection with the services for the provision of technical know-how wholly and exclusively for that purpose. In a business of this kind where the expenditure is indirectly mixed up with other expenditure, certain amount of estimate has to be made and that was approved by the Special Bench of the Income-tax Appellate Tribunal in the case of J.Hemchand Co. Therefore, nothing can be found fault with if an estimate was resorted to arrive at the expenditure which could be said to have been wholly and exclusively incurred for the purpose of the business of rendering of services in connection with the provision of technical know-how to persons outside India. The expenditure detailed at page 4 do in my opinion satisfy this requirement. I am, therefore, of the opinion that the benefit of weighted deduction under section 35B is admissible in respect of that portion of the expenditure which the learned Accountant Member had estimated. On a careful analysis of the Section and the wo ..... X X X X Extracts X X X X X X X X Extracts X X X X
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