High Court Of Bombay
KEC International Ltd. vs. CIT
Section 35B, 35B(1)(b)(viii), 32
Asst. Year 1980-81
F.I. Rebello & R.S. Mohite, JJ.
IT Ref. No. 250 of 1988
13th January, 2009
Counsel Appeared :
Nilesh Joshi with L.V. Boomer i/b S. Satpute & Co., for the Appellant : Suresh Kumar, for the Respondent
JUDGMENT
R.S. Mohite, J. :
By this reference the following two questions of law have been referred by the Tribunal for the opinion of this Court under s. 256(1) of the IT Act, 1961 :
“1. Whether on the facts and in the circumstances of the case and in law, the Tribunal was justified in holding that following items were not eligible for weighted deduction under s. 35B of the IT Act,1961 : (a) Insurance—Rs. 8,82,300 (b) Freight—Rs. 91,67,940 (c) Export inspection agency charges—Rs. 1,31,077.
2. Whether on the facts and in the circumstances of the case and in law the Tribunal was right in holding that the revised rates of depreciation as per the Income-tax (Fourth Amendment) Rules, 1983 inserted w.e.f. 2nd April, 1983 will not be applicable for asst. yr. 1980-81 ?”
2. A third question is also referred to us at the instance of the Department which is as follows :
“3. Whether on the facts and in the circumstances of the case and in law the Tribunal was justified in holding that the weighted deduction under s. 35B(1)(b)(viii) on interest paid on export packing credit loans amounting to Rs. 11,45,253 will be deductible if on the facts of the case and the nature of the loans are similar ?”
3. As regards the first question, in so far as it relates to insurance, freight and export inspection agency charges, the same has already been answered in the affirmative and in favour of the Revenue by various judgments of this Court. By a judgment of this Court in the case of M.H. Daryani vs. CIT (1993) 202 ITR 731 (Bom) this Court has held that expenditure on insurance and freight are not eligible for weighted deduction under s. 35B. By the judgment in the case of Dr. Beck & Co. (India) Ltd. vs. CIT (1994) 120 CTR (Bom) 117 : (1994) 206 ITR 311 (Bom) this Court has held that export inspection charges are not deductible under s. 35B. Following these judgments, we answer this question in the affirmative and against the assessee.
4. Both the counsel have further agreed that the second question is covered by a judgment in the case of CIT vs. Mirza Ataullaha Baig & Anr. (1993) 202 ITR 291 (Bom). In the said case, the question before this Court was as to whether an amendment raising the rate of depreciation w.e.f. 24th July, 1980 would apply for the asst. yr. 1980-81. Holding in the negative, this Court observed as follows :
“The IT Act, 1961, as it stands amended on the 1st day of April of any financial year, applies to the assessment of that year. Any amendment in the Act or the Rules which comes into force after the 1st day of April of a financial year would not apply to the assessment for that year, even if the assessment is actually made after the amendments come into force”. Following the aforesaid decision, we answer the question No. 2 in the affirmative and against the assessee.
5. As regards the question No. 3, counsel appearing for the Revenue brought to our notice a judgment of the Andhra Pradesh High Court in the case of CIT vs. Coromandel Agro Products Oil Ltd. (1998) 146 CTR (AP) 520 : (1998) 230 ITR 335 (AP) in which the Court took a view that interest paid to a bank on “packing credit loan” was not necessarily entitled to a weighted deduction under s. 35B(1)(b)(viii) and (ix) of the IT Act, 1961. A perusal of the judgment indicates that the Andhra Pradesh High Court dealt with an earlier decision of the Madhya Pradesh High Court in the case of CIT vs. Vippy Solvex Products (P) Ltd. (1985) 47 CTR (MP) 441 : (1986) 159 ITR 487 (MP) and disagreed with the view taken in the said case. While dealing with the question of deducting interest paid on a “packing credit loan” under s. 35B(1)(b)(viii), the Andhra Pradesh High Court observed as under :
“Since the deductibility of the expenditure is sought to be justified under sub-cl. (viii) of cl. (b) of sub-s. (1) of s. 35B extracted above, we would confine our discussion only to that clause. A reading of the above provision, leaving such portions as are not relevant for the present discussion, shows that where an assessee, being a domestic company or a person other than a company who is resident in India has incurred an expenditure, not being in the nature of capital expenditure or personal expenses of the assessee, wholly and exclusively, on performance of service outside India in connection with or incidental to the execution of any contract for the supply outside India of such goods, services or facilities (it shall be allowed a certain deduction). It may be noted here that the deduction allowed under s. 35B is in addition to the general deduction permissible under s. 37 of the Act. That being the scope of the allowability of the deduction under s. 35B of the Act, we shall now refer to the export credit scheme under which the assessee has availed of the benefit of the “packing credit loan” in respect of which the amount of interest in question has been paid. Under the scheme concessional rate of interest of six per cent is charged on such loans. For that purpose sub-s. (3A) of s. 17 of the RBI Act, 1934, inter alia, authorises the RBI to make over to any scheduled bank or State co-operative bank, loans and advances, against promissory notes of such bank, repayable on demand or on the expiry of fixed periods not exceeding one hundred and eighty days on fulfilment of the requirements mentioned therein. The borrowing bank has to furnish a declaration in writing, inter alia, to the effect that it has granted pre-shipment loan or advance to an exporter or any other person in India in order to enable him to export goods from India and that the amount of the loan or advance drawn and outstanding at any time is not less than the outstanding amount of the loan or advance obtained by the borrowing bank from the RBI. Under the scheme referred to above, an export credit ceiling on the rate of interest at six per cent has been imposed. Thus it follows that those who obtain loans under the said scheme will be entitled to avail of the benefit of the loan at lesser rate of six per cent. The expression ‘packing credit’ is defined in the Export Credit (Interest Subsidy) Scheme, 1968 to mean : ‘Any loan or advance granted or any other credit provided by an institution to an exporter for financing the purchase, processing or packing of goods, on the basis of letters of credit opened in his favour by an importer of the goods outside India, or a confirmed and irrevocable order for the export of goods from India or any other evidence of an order for export from India having been placed on the exporter unless lodgement of export orders or letters of credit with the institution has been waived by the Reserve Bank.’ The proviso appended to the definition clause enjoins that the maximum period for which any loan or advance may be granted, or any other credit facility may be provided, by way of ‘packing credit’ shall not exceed one hundred and eighty days or such extended period as the Reserve Bank may allow in terms of para (5)(i) of the Scheme. There can be no doubt that to encourage export, certain categories of exporters will be entitled to avail of the benefit of the scheme including ‘packing credit advance’ on fulfilment of the conditions enumerated therein. But that is entirely a different matter. Sec. 35B(1)(b)(viii) provides yet another benefit to the exporter. Sec. 35B is not intended to provide deduction of all expenses incurred including interest paid in connection with export of goods. It has already been noticed that the phraseology of the said provision is so designed as to permit deduction of an expenditure which is not in the nature of capital expenditure nor personal expenses of the assessee but is an expenditure incurred wholly and exclusively on the items enumerated in cl. (b) thereof including the expenditure incurred on the performance of service outside India in connection with or incidental to the execution of any contract for the supply outside India of such goods, services or facilities. These two benefits, viz. benefit of packing credit loan on concessional rate of interest under the scheme and the export markets development allowance, the benefit of deduction under s. 35B, are different and distinct. It may be that in some cases the assessee will be entitled to get both the benefits but availing of one benefit does not automatically entitle the assessee to avail of the other benefit. Indeed it appears to us that a domestic company or a person who has not availed of the ‘packing credit advance’ could still be entitled to the benefit of s. 35B. Similarly, a person who avails of the benefit of the scheme may not in given circumstances, be entitled to the benefit of export markets development allowance under s. 35B. Now, we shall refer to the judgment of the Bombay Bench in ITO vs. Aaydee Corporation (1983) 15 TTJ (Bom) 56 which has been adopted by the Tribunal in the order from which the above question has arisen. In that case the assessee carried on business in export of readymade garments and availed of ‘packing credit’. It paid interest on ‘packing credit’ amounting to Rs. 12,13,150 for the year 1977-78 and Rs. 16,37,667 for the year 1978-79. Its claim to have those amounts deducted for purposes of computation of profits under s. 35B was rejected by the ITO. He succeeded before the CIT(A) who held that the expenditure fell within the ambit of s. 35B(1)(b)(viii). The Revenue went in appeal before the said Tribunal. The Tribunal noted that the assessee being an exporter of readymade garments in the free market could not compete in the international price level unless the price level was reduced and it was in that connection that the bank was directed to advance funds on export contract. It took the view that the interest was expenditure incurred for enabling the export of the goods, because an exporter would reduce its cost price for competing in the international market, so such loss would be in the nature of expenditure as it arose in the course of performance of the contract for sale of goods outside India and would be an expenditure falling under cl. (viii). We are not persuaded to accept the reasoning and the approach of the Bombay Tribunal. We have already pointed out above that to enable the assessee to claim benefit of export markets development allowance under s. 35B, the expenditure should be incurred on performance of services outside India in connection with or incidental to the execution of any contract for supply outside India of such goods, services or facilities. On the facts of the case before the Bombay Bench, we are unable to see that there was any performance of service within the meaning of cl. (viii). Even assuming that the loss sustained by such an exporter could be treated as expenditure, in our view it does not satisfy the criteria of cl. (viii) and would not qualify under that clause.
The judgment of the Madhya Pradesh High Court in CIT vs. Vippy Solvex Products (P) Ltd. (1985) 47 CTR (MP)
44 : (1986) 159 ITR 487 (MP) was relied upon to show that the expenditure of the nature as in the present case was held to qualify for deduction under s. 35B(1)(b)(viii). There the assessee was exporting deoiled crakes. Among others he claimed interest of Rs. 3,65,875 paid to the bank on export packing credit as allowable deduction. The ITO allowed the deduction but in exercise of his power under s. 263 of the Act the CIT held that the order of the ITO was erroneous insofar as it was prejudicial to the interest of the Revenue and could not be sustained and thus revised the same. He directed recomputation of the income after withdrawing the weighted deduction. On appeal the Tribunal was of the opinion that the assessee was entitled to weighted deduction. On a reference the Division Bench of the Madhya Pradesh High Court took note of the finding of fact recorded by the Tribunal that the expenditure was incurred for promoting export sale and that the assessee furnished a certificate from the Bank of Maharashtra to the effect that the assessee had maintained with it an export packing credit loan account and that advances in that account were given only for the purchase of raw materials for manufacturing goods to be exported out of India. It may be noticed that the Madhya Pradesh High Court proceeded on the finding of fact recorded by the Tribunal that the certificate issued by the bank showed that all those credits were given for purchase of raw materials and that credit was only given when the contract for supply of goods to the foreign parties was shown and those findings of fact indicated that the expenditure was incurred in connection with the execution of the contract for supply of goods outside India and noted that even incidental expenditure would be covered under that clause, therefore, the expenditure was allowed. In our view s. 35B does not postulate allowing of expenditure incurred on purchase of raw material for purposes of export, so we are, with respect, unable to agree with the view taken by the learned Judges of the Madhya Pradesh High Court.” Ultimately from the facts before the Court, the Andhra Pradesh High Court held that interest paid by the assessee to a bank in respect of packing credit loan was not entitled to a weighted deduction under s. 35B(1)(b)(viii) of the IT Act, 1961.
The counsel for the Revenue also drew our attention to judgments of different High Courts which have also taken the same view as the Andhra Pradesh High Court. In Lucas TVS Ltd. vs. CIT (1996) 131 CTR (Mad) 238 : (1996) 217 ITR 382 (Mad), the Madras High Court took a view that interest paid on export packing credit paid to a bank was not entitled to a weighted deduction. In Testeels Ltd. vs. CIT (1993) 110 CTR (Guj) 320 : (1994) 205 ITR 230 (Guj), Gujarat High Court considered the question as to whether interest paid on a loan given to the assessee by the Central Bank of India for the purchase of raw material could be deducted under s. 35B(1)(b)(viii) and held such interest was not deductible. In taking this view, the Gujarat High Court dissented from the view taken by the Madhya Pradesh High Court in CIT vs. Vippy Solvex Products (P) Ltd. (supra). In Walchandnagar Industries Ltd. vs. CIT (1994) 116 CTR (Bom) 605 : (1994) 206 ITR 328 (Bom) this Court considered a question as to whether a deduction under s. 35B(1) could be given to the assessee in respect of the interest paid by it to the banks in India and shown in the accounts as “interest paid on post-shipment loans”. This Court took a view that a weighted deduction was not permissible on such loans.
Counsel appearing for the assessee relied upon a judgment of the Madhya Pradesh High Court in CIT vs. Vippy Solvex Products (P) Ltd. (supra). In the said case the Madhya Pradesh High Court held that interest on a packing credit loan was deductible as the certificate issued by the bank showed that the loan was utilised for the purpose of raw material and that the loan was given only after the contract of supply of goods to the foreign parties was shown and as the finding of fact indicated that the expenditure was incurred in connection with the execution of contract for supply of goods outside India. The Madhya Pradesh High Court held that even incidental expenditure would be covered under s. 35B(1)(b)(viii) and therefore, such expenditure on payment of interest was a deductible expenditure.
In our view, the views taken by the Andhra Pradesh High Court, Calcutta High Court, Madras High Court are correct. We concur with the view taken in Walchandnagar Industries Ltd. (supra). We are not in agreement with the reasoning given by the Madhya Pradesh High Court in the case of CIT vs. Vippy Solvex Products (P) Ltd. (supra). The very definition of the expression “packing credit” as advanced in the Export Credit (Interest Subsidy) Scheme, 1968, indicates that it is a loan or advance for the purpose of purchase, processing and packing of goods. The Reserve Bank requires the lending bank to furnish it a declaration in writing that the loan was granted for pre- shipment activities. That necessarily means that the activities for which the loan has been granted have to be carried out within India. Sec. 35B(1)(b)(viii) operates only when there is a performance of services outside India. Mere obtaining of a packing credit loan or payment of interest thereon in India cannot be said to entail the performance of any service outside India. The said expenditure would therefore, not be deductible. The question is therefore, answered in the negative and in favour of the Revenue.
In view of the answers hereinabove, the reference stands disposed of with no order as to costs.
[Citation : 322 ITR 465]
