Full Judgment Text
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PETITIONER:
ARAVINDAPARAMILA WORKS
Vs.
RESPONDENT:
COMMISSIONER OF INCOME TAX
DATE OF JUDGMENT: 31/03/1999
BENCH:
S.P.Bharucha, R.C.Lahoti
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(l)(b)(iv) of the Income
Tax Act, 1961. The High Courts have taken divergent views.
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.l3,23,225/-.
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 tlie circumstances of
the case. the Tribunal was justified in holding that the
applicant was not entitled to the weighted deduction under
S.35B (l)(b)(iv) of the Act. in respect of the commission
payments made to agents outside India?"
The High Court answered tlie question in the
affirmative and in favour of the Revenue, following its
earlier decision in Chief Commissioner of Income Tax vs.
Mysore Sales International Ltd. (195 ITR 457). The
assessee is in appeal by special leave .
Section 35B states that where an assessee. who is
reasident 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 reterred to in clause (a) is that
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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;
The question, therefore, is whether the commission
that the assessee had paid to agents outside India who had
procured orders was expenditure on the maintenance outside
India of agencies for the promotion of the sale outside
India of its agarbathis.
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 betore the Tribunal or any of the
authorities concerned for claiming that an agency had been
maintained by the assessee.
In Chief Commissioner of Income tax vs. Mysore Sales
Intemational Ltd. (195 ITR 457) the Karnataka High Court
took the view that the word ’agency’ in the aforesaid
provision bad 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 sale promotional purposes alone was covered
by the relevant words of sub-clause (iv) and such
expenditure should be entirely incurred for that purpose.
In the case before the High Court, the commission had
included remuneration for the agent
for procuring a particular sale and. it was
therefore, held to fell outside the ambit of Section 35B.
The High Court of Calcutta in C.I.T. vs. Usha
Telehoist Ltd. (212 ITR 177) dissented from the view taken
by the Kamataka High Court in the case afore-mentioned. It
observed that the principle of ejusdem generis applied only
where the mention of specific items of the same genus was
followed by an expression of residuary nature pertaining to
the same genus. In its view. ’agency’ was an expression of
which the content had nothing to do with the preceding
words, ’office’ or "branch". If the assessee had an agency
abroad "that agency cannot refer to any independent
establishment of the assessee being maintained abroad
because agency always connotes the independence of the
agent." The requirement of the provision was sufficiently
satisfied "if there is an agent outside who promotes the
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sales of the assessee’s exports."
The High Court at Gauhati in Commissioner of Income
Tax vs. Assam Frontier Tea Ltd. (224 ITR 398) has followed
the Calcutta High Court without assigning any independent
reasons.
The Kerala High Court in Commissioner of Income Tax
vs. Pooppally Foods (161 ITR 729) has taken the same view
as the Calcutta High Court, but there is no discussion of
the provision. apparently because the Revenue had never
before chosen to raise the point that the expenditure there
concerned would not tail within the ambit of the clauses in
Section 35.
The Gujarat High Court in Commissioner of Income Tax
vs. Cadila Laboratories (P) Ltd. (221 ITR 35) referred to
the meaning of the word ’agency’ as found in Hasibury’s Laws
of England. It is there stated that "the terms ’agency’ and
’agent’ have in popular use a number of different meanings,
but in law the word ’agency’ is used to connote the relation
which exists when one person has an authority or capacity to
create legal relations between a person occupying the
position of principal and third parties." In the case before
the Gujarat High Court, the expenditure had been incurred
for payment of commission to agents in foreign countries for
the purpose of promotion of sale outside India and, in the
High Court’s view, that would "certainly be the amount of
expenditure incurred wholly and
exclusively for tile promotional sales outside India
on maintenance of agency outside India."
What is required is an analysis of the provisions of
Section 35B (l)(b)(iv). The expenditure that is referred to
therein lias to be incurred on the maintenance outside India
of a branchy office or agency for the promotion of sales
outside India of the assessee’s goods, services or
facilities. Therefore, what is requisite is that the
assessee sliould 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 of the assessee’s goods, services or
facilities. When payment is made, as here, by an assessee
of commission to agents outside India wh had procured
orders, the requirements of clause (iv) are far from
satisfied. There is, in the first place, no maintenance by
the assessee of tlie 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.
While we think that there is some merit in the
observation of the Karnataka High Court that 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 anv 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.
In the result, we uphold the view taken by the
Karnataka High Court in the judgment and order under appeal
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and dismiss the appeal with costs.