Andhra Pradesh H.C : Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that the assessee was maintaining the Branch office at Baghdad for promotion of sale outside India of services is perverse ?

High Court Of Andhra Pradesh

CIT vs. K. Pattabhirama Reddy

Section 35B(1)(b)(iv)

Asst. Year 1981-82

Bilal Nazki & S. Ananda Reddy, JJ.

Case Refd. No. 130 of 1991

31st March, 2001

Counsel Appeared

S.R. Ashok, for the Applicant : Y. Ratnakar & M.J. Swamy, for the Respondent

JUDGMENT

S. ANANDA REDDY, J. :

At the instance of the Revenue, the Tribunal, Hyderabad Bench ‘B’, referred the following questions under s. 256(2) of the IT Act, 1961 (‘the Act’) said to arise out of its order in IT Appeal No. 518 (Hyd.) of 1985, dt. 15th Feb., 1988, for the asst. yr. 1981-82 for the opinion of this Court :

“1. Whether, on the facts and in the circumstances of the case, the finding of the Tribunal that the assessee was maintaining the Branch office at Baghdad for promotion of sale outside India of services is perverse ?

2. Whether, on the facts and in circumstances of the case and in law, the Tribunal is correct in holding that the assessee is entitled to weighted deduction in respect of the expenses of the branch office at Baghdad under s. 35B(1)(iv) of the IT Act, 1961.”

2. The facts of the case are as under : The assessee is an individual. The assessment year in question in 1981-82 for which the previous year was the calender year 1980. The assessee entered into an agreement of sub-contract with Engineering Products (India) Ltd. Delhi (the ‘main contractor’) on 5th March, 1980, to provide labour force required for carrying on construction work in Iraq by the main contractor. For this purpose the assessee had maintained a branch office at Baghdad. The branch office at Baghdad incurred a total expenditure of Rs. 81,88,102 during the previous year relevant to the assessment year in question. The said expenditure represented not only wages paid to the labourers who were engaged in the construction work but also the salaries of the supervising staff and other expenses at Baghdad which were Rs. 13,73,791. The assessee claimed deduction under s. 35B of the Act on the total expenditure incurred at Baghdad relying on sub-cls. (i), (iv), (vii) and (ix) of s. 35B(1)(b). The AO found that the provisions of s. 35B have been substantially amended w.e.f. 1st April, 1981. The AO rejected the claim of the assessee with regard to the expenditure debitable to trading account relying on Expln. 2 to s. 35B(1)(b). With regard to the balance of expenses debitable to the P&L a/c, the AO took note of the nature of the assessee’s business. According to the AO, the expenditure does not fall under any of the clauses mentioned under s. 35B(1)(b). The AO dealing with the clauses under which the assessee claimed, observed that the assessee’s contention that the very fact that it could successfully execute the contract outside the country would amount to publicity of the assessee’s capacity to undertake large contracts, does not bring its case within sub-cl. (i) as expenditure incurred on advertisement and publicity outside India. According to the AO, what can be allowed under this clause is actual expenditure incurred on advertisement or publicity outside India and not the successful completion of a project which might go to help the assessee in promoting his business outside the country. The AO was also of the opinion that the assessee is only a sub-contractor, who executed part of the work relating to the project, which was undertaken by Engineering Projects (India) Ltd.—the main contractor. With reference to sub-cl. (iv), according to the AO, the requirement is that the expenditure incurred on maintenance of a branch outside India would be allowed if the branch is maintained for the promotion of the sale outside India of the goods dealt in or services or facilities provided by the assessee. Mere incurring expenditure on a branch outside India does not entitle the assessee to claim the benefit of weighted deduction under this sub-clause. With reference to sub-cl. (vii), the AO was of the opinion that the expenditure on travelling outside India was incurred by the assessee not for the sale outside India of the goods dealt in by the assessee or services or facilities provided by the assessee, but for completion of the sub-contract work undertaken by the assessee from the main contractor. Therefore, the claim would not come under this sub-clause. The AO also considered the claim of the assessee with reference to cl. (c) of r. 6AA of the IT Rules, 1962, and held that the same is not acceptable, as admittedly the assessee did not maintain laboratory or facilities for quality control or inspection of such goods dealt in by the assessee. Therefore, the AO negatived the claim of the assessee.

3. The assessee carried the matter in appeal to the CIT(A). The CIT(A) after considering the contentions, concurred with the view of the AO. The assessee, therefore, carried the matter in second appeal before the Tribunal. The Tribunal considered the rival contentions elaborately and also the decisions cited before it and finally allowed the claim of the assessee to the extent of expenditure incurred on the branch office, which is as under : “After considering the rival contentions, we are of the opinion that the assessee is entitled to weighted deduction on the expenses incurred by it for maintenance of branch and incidental expenses incurred for branch office at Baghdad. Weighted deduction over such expenses is clearly permissible, according to us, under s. 35B(1)(b)(iv). We have seen the original assessment record. In the P&L a/c prepared for the branch office at Baghdad 94.155 dinars were incurred for advertisements. We cannot contemplate any other advertisement than offering the labour supply by the Baghdad branch office of the assessee. Therefore, the presumption of the ITO that there is no evidence that the branch did not publicise about goods and services available with the assessee at Baghdad falls to the ground. We also held that the assessee is not entitled to weighted deduction over labour wages, travelling expenses from India to Baghdad for conveying labour, the amenities and other things provided to labour were not entitled to weighted deduction as per the Special Bench decision in J. Hemchand & Co.’s case as well as the Third Member decision in 2 SOT 183. We have already stated in prior paras the expenses incurred for maintaining branch office at Baghdad and we agree that all those expenses are entitled to weighted deduction under s. 35B(1) (b)(iv).”

Aggrieved by the said order, the Revenue is before this Court in the present reference. The learned senior counsel for the Revenue contended that the Tribunal was not justified in allowing the claim of the assessee that it is entitled for weighted deduction in respect of the expenditure incurred on a branch office at Baghdad. According to the learned counsel, the assessee was only a sub-contractor for supply of labour or for execution of a part of the work. The branch office was maintained only in connection with either to supply labour to the main contractor or for supervising the execution of part of the work for which the assessee had entered into an agreement. Therefore, the branch office was maintained only for successful completion of the contract entered into by the assessee with the main contractor and not for the purpose of either promoting the sale of the goods or services of the assessee outside India. Therefore, the assessee is not entitled for the benefit of weighted deduction under s. 35B. The learned counsel also contended that prior to the omission of sub-cl. (viii) of s. 35B(1)(b) perhaps the assessee might have been entitled for the benefit, but the said sub-clause was omitted by the Finance (No. 2) Act, 1980 w.e.f. 1st April, 1981. Therefore, the expenditure incurred by the assessee for the purpose 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 is not available for the assessment year in question. Therefore, the assessee is not entitled to the benefit claimed. It is also stated that the AO gave a categorical finding that the branch office existed only with a view to supervise the execution of the contract work undertaken by the assessee and not for any other purpose. Though it was contended by the assessee before the Tribunal that the said contention is only a figment of imagination and the AO did not elicit from the assessee as to what were the functions undertaken by the branch office, but the assessee did not even before the Tribunal explained the functions that were undertaken by the branch office. In the absence of any evidence that the branch office was maintained by the assessee for the purpose of promotion of sale outside India of such goods, services or facilities, the assessee is not entitled to the benefit of the relief sought for. The learned counsel also contended that r. 6AA has no application to the present case as the said rule was intended to prescribe the services that would come under sub-cl. (ix) of s. 35B(1)(b) an d the said rule was not framed with reference to any of the other clauses. Apart from that, the said r. 6AA(c) was also inserted w.e.f. 1st Aug., 1981, and the same would not apply as the law on the first day of the assessment year alone is appreciable. Therefore, it was contended that the order of the Tribunal is not based on any material facts and, therefore, is not in accordance with law.

The learned counsel, Shri Y. Ratnakar appearing for the assessee, contended that the assessee’s claim would fall under sub-cl. (iv) of s. 35(1)(b). According to him, the branch office was maintained by the assessee for the promotion of the sale outside India of such services which the assessee was providing to the main contractor. It is contended by the learned counsel that the assessee was supplying labour, both skilled and unskilled, for the purpose of execution of the work by the main contractor. In the process of executing the contract, which was entered into by the assessee with the main contractor, it maintained a branch office at Baghdad, outside India and it is intended only for the purpose of providing services to the main contractor. Further, the execution of the work would itself amount to publicity outside India as to the capacity of the assessee in execution of similar works as well as to the quality of the work executed by the assessee. Therefore, the Tribunal has rightly accepted the claim of the assessee to the extent of the expenditure incurred on the branch office outside India and held that the assessee is entitled for weighted deduction. The learned counsel also contended that the AO failed to notice that the assessee had incurred certain expenditure on advertisement also, which was pointed out by the Tribunal. Therefore, the view of the AO as well as the CIT(A) is not based on the facts available on record and the Tribunal was justified in modifying the orders of the AO as well as the CIT(A) and granting weighted deduction to the extent of the expenditure incurred on the branch office at Baghdad. The learned counsel for the assessee relied upon the judgment of the Supreme Court in the case of Vanguard Rolling Shutters & Steel Works vs. CST AIR 1977 SC 1505. In that case the Supreme Court while considering whether a particular transaction is a works contract or a contract for sale of goods, as the supply of materials is to be fixed by making the necessary recoveries and fabrications and, therefore, it was held that it is indivisible contract comprising of labour and services executed for a lump sum and, therefore, it is a works contract and not a mere sale of material. The learned counsel also relied upon a decision of the apex Court in the case of CIT vs. Gwalior Rayon Silk Mfg. Co. Ltd. (1992) 104 CTR (SC) 243 : (1992) 196 ITR 149 (SC) : TC 68R.165. The learned counsel relied upon the observations of the apex Court as to the interpretation of statutes where the apex Court held that it is settled law that the expressions used in a taxing statute would ordinarily be understood in the sense in which it is harmonious with the object of the statute to effectuate the legislative intention. It is equally settled law that, if the language is plain and unambiguous, one can only look fairly at the language used and interpret it to give effect to the legislative intention. Nevertheless, tax laws have to be interpreted reasonably and in consonance with justice adopting a purposive approach. The contextual meaning has to be ascertained and given effect to. A provision for deduction, exemption or relief should be constructed reasonably and in favour of the assessee.

6. The facts are not in dispute that the assessee is a sub-contractor having entered into an agreement with the main contractor for supply of labour for execution of part of the work. For fulfilment of the terms of the agreement entered into by the assessee, it had established an office at Baghdad having supervisory staff. The assessee had incurred expenditure on the maintenance of the office at Baghdad as well as on the supervisory staff and other miscellaneous expenditure. In respect of that expenditure, the assessee claimed weighted deduction on the ground that the said branch office was maintained for the purpose of promotion of the services that are being provided by the assessee outside India. This claim was rejected by the Departmental authorities though accepted by the Tribunal. Though the claim was made under sub-cls. (i), (iv), (vii) and (ix) of s. 35B(1)(b), the relief was granted by the Tribunal under s. 35B(1)/(b)(iv). The learned counsel for the assessee also has confined his claim to sub-cl. (iv) only. The relevant provision is as under : “35B. Export markets development allowance.—(1)(a) Whether an assessee, being a domestic company or a person (other than a company) who is resident in India, has incurred after the 29th Feb., 1968 (but before the 1st March, 1983), 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 Feb., 1973, but before the 1st 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— (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; (ii) and (iii) *** *** (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) and (vi) *** *** (vii) travelling outside India for the promotion of the sale outside India of such goods, services or facilities, including travelling outward from, and return to, India;” The expenditure incurred to in cl. (a) which is incurred wholly and exclusively for maintenance outside India of a branch, office or agency for the promotion of the sale outside India of such goods, services or facilities would fall under sub-cl. (iv).

7. From the above provision, it is clear that in order to claim the benefit of weighted deduction the assessee has to prove that the expenditure in respect of which it is claiming weighted deduction, was incurred wholly and exclusively on the maintenance outside India of a branch for the promotion of the sale outside India of such goods, services or facilities. According to the assessee, it was providing services outside India and, therefore, the expenses incurred on the branch office at Baghdad are to be allowed as claimed by the assessee. The said claim was rejected by the Departmental authorities on the ground that the assessee had maintained its branch office not for the purpose of promotion of the sale outside India of the services which are provided by the assessee. The assessee maintained its branch office at Baghdad only in connection with the execution of the sub-contract which it had entered with the main contractor. It is not in dispute that the assessee had entered into an agreement for the execution of a part of the work by supplying the labourers. It was the contention of the assessee that by execution of the work entrusted to the assessee by the main contractor, the execution of the work itself amounts to advertisement as to the capability of the assessee to execute such nature of work and also the quality of the work that was executed and, therefore, it amounts to advertisement which was not accepted. In order to prove that the assessee is entitled for weighted deduction under sub-cl. (iv) of s. 35(1)(b), the assessee has to prove that it had its branch office outside India for the purpose of promotion of the sale outside India of such services with which the assessee was dealing. There is absolutely no evidence showing that the assessee had its branch office for the purpose of promotion of the sale of its services outside India. The AO gave a categorical finding that the assessee maintained branch office not for the purpose of promoting the business interests of the assessee but to enable it to complete the sub-contract undertaken by it with the main contractor. Though the assessee contended before the Tribunal that the observation of the AO that the branch existing only with a view to supervise the execution of contract work undertaken, was only a figment of imagination and the AO did not elicit from the assessee as to what were the functions undertaken by the branch office of the assessee at Baghdad; even before the Tribunal when the assessee had disputed that observation of the AO, the assessee did not enumerate the functions by producing any evidence, if at all, undertaken by the branch office except stating that the branch was maintaining supervisory staff for the successful completion of the contract work entered into by the assessee with the main contractor. The Tribunal referred only an item of expenditure on advertisement in an amount of 94,155 dinars. Except that there was no other finding that any other expenditure was incurred either for advertisement or for any purpose in connection with the promotion of the sale of the services which according to the petitioner it was dealing with. Even with reference to the said advertisement, there is absolutely no explanation what was the nature of the advertisement that was given except referring that the said expenditure was incurred for advertisement. The nature of the expenses incurred at the branch office which were referred to by the Tribunal in its order at p. 21 of the material papers also shows that the expenditure was incurred for staff salaries, amenities to the staff, office expenses, office rent, miscellaneous expenses and even it appears that even the depreciation was also made part of it. We are unable to appreciate how even depreciation could be considered as an item of expenditure incurred for the purpose of promotion of sale of services rendered by the assessee. At the most, the assessee may be entitled for weighted deduction in respect of the expenditure incurred on advertisement and the other item of expenditure is on export credit guarantee corporations charges, beyond that the assessee is not entitled for weighted deduction in respect of the other expenditure incurred on the maintenance of the branch office at Baghdad. The material on record also shows that it is not the case of the assessee that it was dealing in supply of services and the branch was established in connection with the said business for promotion of sale of such services. The evidence clearly shows that the branch office was established for the execution of the contract as per the agreement entered into with the main contractor by the assessee and in fact the contention of the assessee was that successful execution of the contract work itself amounts to advertisement and, therefore, it is entitled for weighted deduction on that count. The said contention itself shows that the branch office is not intended for promotion of sale of the services with which the petitioner was dealing and under the above circumstances, we are unable to accept the assessee’s contention that the branch office at Baghdad was established for the purpose of promotion of the sale of services.

Accordingly, we answer the question in the affirmative against the assessee and in favour of the Revenue and, consequently, the assessee is not entitled for any weighted deduction. The reference is, accordingly, answered.

[Citation : 250 ITR 423 ]

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