1. This appeal by the department relates to the assessment year 1974-75. The assessment, which is the subject-matter of the present appeal, had been subject-matter of an earlier appeal before the Tribunal as IT Appeal No. 1148 (Bom.) of 1978-79, which was disposed of by the Tribunal by its order dated 21-4-1979. All the matters relating to the assessment year were disposed of by the above order excepting the claim of the assessee for weighted deduction under Section 35B of the Income-tax Act, 1961, with regard to what may conveniently be referred to as the indirect exports. The claim of the assessee for weighted deduction was over the commission paid to selling agents and the salary of the staff engaged in export. This claim was dealt with by the Tribunal as follows : Coming now to the commission paid to selling agents, we find, prima facie, that the AAC's action is justified. However, the AAC has not gone into the details and brought on record particular or express conditions under which the sales were made to certain parties with a condition to export by them. The claim in respect of the salary to the export staff is also linked up with this issue. We, therefore, set aside the finding of the AAC in regard to both the issues and direct the AAC to bring sufficient materials on record, hear both the parties to the dispute, make necessary enquiries, take into account the relevant decision of the Tribunal and then redecide the issues.
2. The matter was decided by the Commissioner (Appeals) after gathering the necessary particulars. The particulars as gathered by him have been set out in his order thus : It may be mentioned in this connection that the assessee apart from directly undertaking export of goods also effects indirect exports.
The Cotton Textile Export Promotion Council negotiates the price and the commodity to be exported to various countries. Thereafter, the council allots quota to various local parties who are required to purchase such goods from the mills and export them in the foreign markets. The assessee produced before me a copy of the standard contract prescribed by the council.
Clause 21 of the contract specifically enjoins on the buyer to export the goods purchased by him in terms of allotment received by him from the Cotton Textile Export Promotion Council. Clause 26 of the contract prohibits such buyer from diverting goods or any portion of goods to local markets within India. During the accounting year relevant to the assessment year 1974-75, the form of contract was slightly different. The obligation on the part of buyer to export goods and not to divert it to the local market was embodied on the first page of the contract. It was emphasised by Shri Rathi, Financial Controller, that it was the assessee who was instrumental in exporting the goods and that the intervention of the local parties does not make any difference to the nature of the transaction. The benefit of export incentives or import entitlements flowing from export performance accrues to the assessee and not to the party through whom the goods are exported.
The brokers who operate in the market have the knowledge about the local parties who are allotted quota by the Cotton Textile Export Promotion Council. They bring about the manufacturer of goods and the local parties, having the quota allotment, together. They are paid brokerage at the rate of 1/2 per cent for the services rendered by them. It is claimed that payment of such commission becomes necessary in view of services rendered by brokers who introduce to the assessee the parties having allotments for export.
3. The total amount of the commission paid by the assessee to the selling agents comes to Rs. 69,305. The total amount of salary paid to the members of the export division of the assessee comes to Rs. 79,542.
These are the amounts involved in the present appeal. The Commissioner (Appeals) accepted the contention of the assessee that the relief under Section 35B covers not only direct sales effected by the assessee but also the sales effected in association with others and that indirect exports effected through local parties rank with the direct exports in the matter of weighted deduction under Section 35B. He, therefore, allowed the claim of the assessee, both with regard to the commission paid to the selling agents and also with regard to the salary of the export division, as the Tribunal had pointed out earlier that both are inter-related. In allowing the claim, the Commissioner (Appeals) also relied upon the circumstance that the department has allowed the claim for the subsequent year.
4. There is no dispute about the fact that the assessee is entitled to weighted deduction with regard to the expenditure incurred by the assessee in goods directly exported by the assessee. The dispute now relates to what is called "indirect exports". Indirect exports are made by the assessee by first selling the goods to persons who have been allotted export quota by the Export Promotion Council and then ensuring that the goods are actually exported by them.
5. Section 35B, so far as it is relevant for the present purpose, provides that where an assessee has incurred, whether directly or in association with any other person, any expenditure referred to in Clause (b) of the section and which is not of the nature of capital expenditure or personal expenses, he shall be allowed weighted deduction on the expenditure as provided in the section. The contention of the department is that the export in the present case is not by the assessee but by local parties to whom the assessee has sold the goods.
According to the department, the expression "in association with any other person" means a joint venture and it will not cover a case where the assessee first sells the goods to local parties and they then export the goods.
6. It may be stated at the outset that if the issue has to be decided solely with reference to the ownership of the goods at the time of the export, then the claim of the assessee has to fail. The assessee has produced the copy of the standard contract prescribed by the Promotion Council and also the copy of a sample export contract. In this contract, the assessee is described as the seller while the local party, who purchases the goods from the assessee and exported them, is described as the buyer. Clause 16 of the standard contract makes it very clear that there is a sale of goods by the assessee to the buyer and that the title to the goods will pass to the buyer. It was because of this that we stated that if the matter has to be decided solely on the basis of the title to the goods, then the assessee has to fail. But the matter has to be decided on a true interpretation of the words "in association with any other person" occurring in Section 35B. It has been held by the Gujarat High Court in CIT v. Satellite Engg. Ltd. [1978] 113 ITR 208 that it is a recognised rule of interpretation of statute that the expression used therein should ordinarily be understood in a sense in which they best harmonise with the object of the statute and which effectuates the object of the Legislature. This principle has to be kept in mind while considering the scope of the expression referred to above. The purpose of Section 35B is obviously to increase export by giving inducements for the same. The assessee is a mill, producing textiles. Although it appears that it can export directly a portion of the goods produced by it, for further export it has to depend upon the persons who have been allotted quota for export by the Export Promotion Council. If these persons purchase goods from the assessee in the normal course of business and then subsequently export the same, it is clear that the assessee cannot claim any credit for such exports. But, the position in the present case is quite different. The assessee, while being permitted to produce the goods, is required to see that they are exported and that they are not utilised for internal consumption. As the export quotas are held by other persons, the assessee can export the goods only by transferring the goods to the persons holding the export quotas. The terms and conditions of the contract make it very clear that the sale to the quotaholders is not an ordinary commercial sale or a sale in the course of normal business. It is made a definite condition of the contract that the sale is for the purpose of export. Clause 21 of the standard contract provides that the buyer is purchasing the goods for the purpose of exporting the same either in (sic.) one of the schemes of the Export Promotion Council in terms of an allotment received by the buyer or a central buying agency. Clause 26 provides that the buyer shall not divert the goods or any portion thereof to the local market, except in some special circumstances and only with the permission of the seller and the Textile Commissioner. Under Clause 29, the buyer is bound to indemnify the seller for any damage or loss that may be caused to the latter on account of the failure of the former to export the goods. The specimen of the export standard contract with the buyer also shows that the sale is not an ordinary local sale, because the latter is not free to deal with the goods as he chooses. Clause 20 of the standard contract provides for the seller (the assessee) to claim its portion of the benefits arising from the export of the goods. If it was a case of the ordinary sale of the goods to a local person, there is no question of seller claiming the benefits arising from the export. Thus, considering the provisions of the standard contract and the circumstances and conditions under which the sale is effected by the assessee to the local person, it is very clear that the exercise is for the export of the goods. Although there is a passing of the title of the goods from the assessee to the local person before the actual export, it is only incidental to the larger scheme of the export of the goods to which both the assessee and the local person are equally committed. The export is possible only by an association of the two because the goods are held by the assessee, while the export quota is held by the local person. It is, therefore, a case of the two persons associating themselves for the export of the goods within the meaning of the expression occurring in Section 35B. The commission paid by the assessee is for securing the persons holding export quotas and it is, therefore, a legitimate business expenditure for ensuring the export of the goods. Salary of the staff of five assessee engaged in this part of the work also falls under this category. It is also found that in the assessment order for the subsequent year, a copy of which has been produced by the assessee, commission paid by the assessee on indirect export has been taken into consideration in working out the weighted deduction under Section 35B. Thus, on a consideration of the matter on all its aspects, we hold that the assessee is entitled to weighted deduction on the items of expenditure mentioned above and that the Commissioner (Appeals) was fully justified in allowing the claim.