High Court Of Madras
CIT vs. Southern Sulphates & Chemicals (P) Ltd.
Asst. Year 1982-83
R. Jayasimha Babu & Mrs. A. Subbulakshmy, JJ.
Tax Case No. 601 of 1989
25th March, 1999
S.V. Subramanian, for the Applicant : None, for the Respondent
R. JAYASIMHA BABU, J. :
The question referred to us at the instance of the Revenue is :
“Whether, on the facts and in the circumstances of the case, the Tribunal was right in law in holding that the assessee is entitled for weighted deduction under s. 35B(1)(b)(iv) of the Act in the respect of the expenditure on payment of commission outside India treating the expenditure as one on âmaintenanceâ of agency outside India ?”.
2. The assessee carries on business of export of leather garments to foreign countries. It had paid commission to its agents at Denmark, U.K. and other countries and claimed a sum of Rs. 1,26,640 as deduction eligible for weightage under s. 35B of the IT Act for the asst. yr. 1982-83. It was not the case of the assessee that any office was being maintained for it by the agent, or that the agent was maintaining any office for which the assessee was meeting the expenditure in whole or in part. The record showed that the assessee had paid commission on specific sales, which had been effected through those agents. It was also found that the agent had no authority to enter into any contract on behalf of the assessee. The Tribunal, in the order made by it on the appeal preferred by the assessee, who had earlier unsuccessfully appealed to the CIT(A) against the order of the ITO, who had rejected the claim, has held that the word âmaintainâ in s. 35B of the Act does not require the payment of any consideration, but refers only to the continuance of the relationship between principal and agent, and since the assessee had paid monies to those agents, it would suffice to meet the requirements of s. 35B of the Act. Sec. 35B of the Act provides for weighted deduction on expenditure incurred by the assessee in connection with the matters enumerated in that section. Sub-cl. (iv) thereof refers to “maintenance outside India of a branch, office or agency for the promotion of the sale outside India of such goods, services or facilities”. The expenditure incurred, therefore, must be on the maintenance of an agency or the maintenance of a branch or the maintenance of an office outside India for the promotion of the sale of the âgoods, services of facilities marketed or provided by the assessee. The term âmaintenanceâ in the context refers to a continuing presence, and not an one time effort or visit to the places outside India. The term âagencyâ refers to the representative presence of the assessee outside India through another. Such presence again being on continuing basis, and not merely for a single action or a single transaction. The fact that the assessee had an agent outside, and had paid commission on the sales affected through that agent does not render the payment of that commission into expenditure incurred by the assessee on the maintenance of an agency. There must be something more than the mere conclusion of a contract through an agent and the payment of commission on such contract, which had been concluded through the assistance of an agent. No material had been produced by the assessee before the AO to show that the agency was on a continuing basis, and that for the purpose of maintaining that relationship for the benefit of the assesseeâs business, any part of the expenditure, which the agent had to incur for maintaining the representative presence outside India was met or was required to be met by the assessee.
The terms “office, agency and branch” even when construed without applying the rule of ejusdum genesis would still require a proof that the branch, office or agency was maintained outside India. The maintenance referred to in this case is maintenance, for which, expenditure was required and not merely a willingness on the part of the assessee to transact business with that agent outside India or more than one occasion. The whole object of s. 35B is to provide a weighted deduction on expenditure incurred. If the mere continuation of a relationship of principal and agent does not require any expenditure, no deduction can be claimed under this provision. The reasons given by the Tribunal for holding that the assessee is eligible for the weighted deduction are untenable. In the absence of any proof that the assessee had maintained an agency outside India and incurred an expenditure therefor, the commissions paid to the agent abroad or contracts concluded through the assistance of that agent cannot be treated as amount spent on the maintenance of an agency for the purposes of s. 35B(1)(b)(iv) of the Act.
The question referred to us is, therefore, answered in favour of the Revenue, and against the assessee.
[Citation : 240 ITR 710]