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1999 Supreme(SC) 408
1999(3) Supreme 443
Supreme Court of India
(From Karnataka High Court)
S.P. Bharucha & R.C. Lahoti, JJ.
Aravinda Paramila Works -Appellant
versus
Commissioner of Income Tax -Respondent
Civil Appeal No. 11366 of 1995
Decided on 31-3-1999
Counsel for the Parties :
For the Appellant : G. Sarangan, Sr. Advocate, P.R. Rmasesh, Advocate
For the Respondent : B.P. Ahuja, Sr. Advocate, Mrs. Neera Gupta, S.K. Dwivedi, Advocates.
Important Point
Payment of commission to an agent abroad is not maintenance of an agency within meaning of Section 35B(1)(b)(iv) of the Income Tax Act.
Headnote:Income Tax Act, 1961-Section 35B(1)(b)(iv)-Export Market allowance - Weighted deduction-Payment of Commission to an agent abroad is not maintenance of an agency within meaning of Section 35B(1)(b)(iv)-Commission paid to agent outside India does not qualify for weighted deduction.
Held : 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, servives 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 or the assessee’s goods, services of facilities. When payment is made, as here, by an assessee of commission to agents outside India who had procured orders, the requirements of clause (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. (Para 11)
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. (Para 12)
Judgment
Bharucha, J.-The question in this appeal is whether payment of commission to an agent abroad is maintenance of an agency within the meaning of Section 35B(1)(b)(iv) of the Income Tax Act, 1961. The High Courts have taken divergent views.
2. We are concerned with the Assessment Year 1981-82. The assessee manufactured agarbathis. It had exported agarbathis during the year under consideration. It had paid commission to agents outside India who had procured orders. It claimed weighted deduction under the afore-mentioned provision in respect of such expenditure of Rs. 13,23,225/-. It was disallowed by the Assessing Authority. The Commissioner of Income Tax (Appeals) took a contrary view. The Income Tax Appellate Tribunal held that the Commissioner (Appeals) was not justified in allowing the said weighted deduction. From out of the judgment and order of the Tribunal, the following question was referred to the High Court for its considerations:
“Whether on the facts and in the circumstances of the case, the Tribunal was juStified in holding that the applicant was not entitled to the weighted deduction under Section 35B(1)(b)(iv) of the Act, in respect of the commission payments made to agents outside India?”
The High Court answered the question in the affirmative and in favour of the Revenue, following its earlier decision in Chief Commissioner of Income Tax v. Mysore Sales International Ltd.1. The assessee is in appeal by special leave.
3. Section 35-B states that where an assessee, who is resident in India, has incurred, directly or in association with any other person, any expenditure referred to in clause (b) thereof, he would be allowed a deduction of a sum equal to be one and one-third times the amount of such expenditure incurred during the previous year. So far as is relevant, clause (b) reads:
“the expenditure referred to in clause (a) is that incurred wholly and exclusively on-
(i) .........
(ii) .........
(iii) ........ and
(iv) maintenance outside India of a branch, office or agency for the promotion of the sale outside India of such goods, services or facilities;
................”
4. The question, therefore, is whether the commission that the assessee had paid to agents outside India who had procured ordes was expenditure on the maintenance outside India of agencies for the promotion of the sale outside India of its agarbathis.
5. The High Court noted the contention on behalf of the assessee that the expression ‘agency’ would include even a single agent and observed that this would have been relevant if it was shown that the establishment of the agency outside the country had been maintained by the assessee, but there was no material placed before the Tribunal or any of the authorities concerned for claiming that an agency had been maintained by the assessee.
6. In Chief Commissioner of Income-tax v. Mysore Sales International Ltd. (supra) the Karnataka High Court took the view that the word ‘agency’ in the aforesaid provision had to be read ejusdem generis with the expression ‘branch’ and ‘office’ used in the said provision. The meaning attributable to ‘agency’ would, therefore, have to be something which had some flavour resembling that of a branch or office. That apart, the assessee had to maintain such agency for it was only such expenditure which could fall within the ambit of the said clause. The word ‘maintenance’ could not be equated with the concept of payments made depending on the actual work turned out. It indicated that, irrespective of the work turned out, the agency was maintained for its upkeep or preservation or sustenance; this alone could be termed as maintenance of an agency. Emphasis was also placed upon the opening words which required that the expenditure should be incurred wholly and exclusively on the activities mentioned in the sub-clauses. Therefore, it was held that the maintenance of the agency for s
