High Court Of Allahabad
Mobarak Ali Khan & Sons vs. CIT
Section 35B(1)(b)(iv)
Asst. Year 1981-82
R.K. Agrawal & Rajes Kumar, JJ.
IT Ref. No. 28 of 1993
5th August, 2005
Counsel Appeared
Ashok Bhatnagar for S.B.L. Srivastava, for the Assessee : A.N. Mahajan, for the Revenue
JUDGMENT
Rajes Kumar, J. :
At the instance of the assessee, the Tribunal, Allahabad has referred the following question of law under s. 256(1) of the IT Act, 1961, hereinafter referred to as “the Act” for opinion to this Court for the asst. yr. 1981-82 :
“Whether on the facts and in the circumstances of the case the Tribunal was justified in holding that the commission payments made to the Handicrafts & Handloom Export Corporation of India (HHEC) are not entitled to weighed deduction under sub-cls. (i) and (iv) of s. 35B(1)(b) of the IT Act ?”
2. The brief facts of the case are as follows : The assessee was a manufacturer and exporter of hand knotted carpets. The assessee had paid commission to the Handicrafts and Handlooms Export Corporation of India Ltd. (in short “HHEC”) and claimed weighted deduction under s. 35B(1)(a) and (b) of the Act. HHEC is alleged to be a subsidiary of the State Trading Corporation of India Ltd (in short “STC”) under the administrative control of Ministry of Textiles (Government of India). The said HHEC is alleged to be playing a role in developing exports of Persian design hand knotted carpets from India. It was also maintaining warehouse and depot at Hamburg in West Germany. In the said case deductions under s. 35B of the Act were denied by the AO on the ground that the assessee was not maintaining any agency outside India and thus, the claim admissible under s. 35B(1)(a) and (b) of the Act was not admissible to the assessee. The said order was confirmed by the CIT(A) in first appeal filed by the assessee. The Tribunal also confirmed the said appeal. The Tribunal held as follows : “We have heard the parties at length and also perused the entire papers on record. It is not in dispute that HHEC had acted as an agent of the assessee and had procured orders from the said firms. It is also not in dispute that HHEC, a subsidiary of STC maintains a warehousing depot at Hamburg.
The only thing would be seen is as to whether the maintenance of a warehousing depot at Hamburg can amount to maintenance of an agency by the assessee. HHEC on enquiry by the Dy. CIT (Asst.), Special Range, Varanasi had reported vide its letter dt. 20th Dec., 1988 copy of which is at p. 33 of the compilation which runs as under : ‘1. HHEC is a wholly-owned subsidiary of STC under administrative control of Ministry of Textiles, Government of India. HHEC has been taking various steps for developments of exports of handicrafts and handlooms besides gold jewellery from the country. Steps taken for developing exports of hand knotted woollen carpets relate to : Product development HHEC has played a pioneering role in developing exports of Persian design hand knotted carpets from India. Special attention is being paid to adoptation of new designs or introduction of new ones to suit the requirements of buyers from abroad. The Corporation is a pace-setter in the field of product development. For boosting exports of hand knotted woollen carpets from India, HHEC’s carpets warehousing depot at Hamburg set up in 1965 has been doing a great deal of work for promoting the Indian carpets through regular participation in Heimtextile (Frankfurt) every year. Special publicity campaign have been organized for giving contin publicity to Indian carpets besides organizing live demonstration by carpet weavers in the art of carpet making at important fairs and department stores. All such activities undertaken by the corporation are in the overall interest of carpet trade from India. HHEC through its carpet warehousing depot at Hamburg and other offices abroad helps Indian exporters in establishing contracts with overseas buyers for supply of carpets besides providing technical information to the trade. The above facilities are provided by HHEC at a nominal service charge.’
A little careful scrutiny of the report will show that HHEC is not doing anything especially for the assessee. It is a corporation, which is meant for promotion of export of various items like handicrafts, handlooms, gold jewellery and also exports of hand knotted woollen carpets. It has nowhere stated in its report given above that any special efforts for publicity or promotion of assessee’s carpets especially when it had been doing was for the general promotion of hand knotted carpets. It had been helping of the Indian exporters and not specially assessee. Here in this case in the absence of any agreement filed by the assessee entered into between the assessee and HHEC, it is difficult to conclude as to what were the conditions agreed upon between them. It is necessary that the assessee must establish that it was maintaining an agency outside India. The mere payment to an agent to procure foreign orders, in our opinion, is not enough to bring the said payments within the purview of sub-cl. (iv) of s. 35B(1)(b).”
3. Heard Sri Ashok Bhatnagar, advocate holding brief of Sri S.B.L. Srivastava, learned counsel for the assessee and Sri A.N. Mahajan, learned standing counsel appearing on behalf of the Revenue. “Sec. 35B(1)(a) Where an assessee, being a domestic company or a person (other than a company) who is resident in India, has incurred, after the 29th day of February, 1968, whether directly or in association with any other person, any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) referred to in cl. (b), he shall, subject to the provisions of this section be allowed a deduction of a sum equal to one and one-third times the amount of such expenditure incurred during the previous year : Provided that in respect of the expenditure incurred after the 28th day of February, 1973 (but before the 1st day of April, 1978), by a domestic company, being a company in which the public are 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 cl. (a) is that incurred wholly and exclusively on— (iv) maintenance outside India of a branch, office or agent for the promotion of the sale outside India of such goods, services or facilities.”
4. The aforesaid clause came up for consideration before the apex Court in the case of Aravinda Paramila Works vs. CIT (1999) 153 CTR (SC) 205 : (1999) 237 ITR 284 (SC). In that case also the applicant had engaged an agent for procuring the orders for the assessee and the commission was paid to the agent outside India who had procured the orders. The question for consideration before the Court was whether, commission paid by the assessee to its agent outside India who had procured orders was expenditure on the maintenance outside India for agency for the promotion of sale outside India of its agarbathis. The apex Court held as follows : “What is required is an analysis of the provisions of s. 35B(1)(b)(iv). The expenditure that is referred to therein has to be incurred on the maintenance outside India of a branch, office or agency for the promotion of sales outside India of the assessee’s goods, services or facilities. Therefore, what is requisite is that the assessee should have maintained the branch, office or agency outside India. It is also requisite that such branch, office or agency should be for the promotion of sales outside India of the assessee’s goods, services or facilities. When payment is made, as here, by an assessee of commission to agents outside India who had procured orders, the requirements of cl. (iv) are far from satisfied. There is, in the first place, no maintenance by the assessee of the agency. Secondly, the expenditure has to be incurred on the promotion of sales of the assessee’s goods outside India. When expenditure is incurred by way of payment of commission on particular sales, that is not expenditure on the promotion of the assessee’s sales in general. While we think that there is some merit in the observation of the Karnataka High Court that the words ‘branch, office or agency’ in the clause draw colour from each other and that the word ‘agency’ should therefore, be interpreted in the light of the words ‘branch’ and ‘office’, it is, in any event, very clear that even if the agency is an agency established not by the assessee but by a third party, the agency must be maintained by the assessee.” The apex Court held that cl. (iv) required that the assessee should have maintained the branch, office or agency for the promotion of sales outside India of assessee’s goods, services or facilities. Apex Court further held that expenditure incurred by way of payment of commission on particular sales is not expenditure on the promotion of assessee’s sales in general. In the present case, the Tribunal found that the HHEC was not doing anything special for the assessee. It was a corporation, which was meant for promotion of export of various items like handicrafts, handlooms, gold jewellery and also exports of hand knotted woollen carpets. It had been helping the Indian exporters and not specially assessee. It was further found that the payment was made to procure foreign orders and the assessee had not established any branch or agency outside India. Therefore, respectfully following the decision of the apex Court in the case of Aravinda Paramila Works vs. CIT (supra), it is held that such expenditure towards commission to the agent was not qualified for deduction under s. 35B of the Act. The order of the Tribunal is, accordingly, upheld. In the result, we answer the question referred to us in the affirmative i.e. in favour of the Revenue and against the assessee. However, there shall be no order as to costs.
[Citation : 291 ITR 67]
