COMMISSIONER OF INCOME-TAX v. SOUTHERN SULPHATES & CHEMICALS (P) LTD.
HIGH
COURT OF MADRAS
S. V. Subramanian, for the Applicant
None, for the Respondent
JUDGMENT
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 section 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 'maintenance' of agency outside
India ?".
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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 section 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 'maintain' in section 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 section 35B of the Act.
3. 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 'goods,
services of facilities marketed or provided by the assessee. The term
'maintenance' in the context refers to a continuing presence, and not
an one time effort or visit to the places outside India. The term 'agency'
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 assessee's 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.
4. 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 section 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 section
35B (1)(b)(iv) of the Act.
5. The question referred to us is, therefore, answered in favour of the Revenue, and
against the assessee.
