1. The assessee, Bharath Skin Corporation, is engaged in export of tanned skins and leather. Export of this commodity to foreign countries has, it is common ground, to be routed or canalised through the State Trading Corporation ('STC'), who have necessarily to obtain information of markets abroad for the products, contact the buyers, ascertain their requirements and pass on their orders to the Indian exporters for effecting the sales to such foreign buyers either in respect of contracts entered into between the STC and foreign buyers, or to be entered into between the Indian exporters and foreign buyers, as the case may be. For services rendered by the STC in this connection, it is paid a commission. It is the eligibility of such commission or the extent thereof to weighted deduction under Section 35B of the Income-tax Act, 1961 ('the Act') that has come up for consideration by the Special Bench. 2. According to a note submitted by the assessee before the Commissioner (Appeals) in the proceedings before him, the services rendered by the STC in this connection are : 1. The State Trading Corporation sends foreign buyers to our tannery and also sends technicians of the foreign country to guide us to improve our quality of finishing. By this the State Trading Corporation makes publicity of our skins to the foreign market and also helps us to improve our quality to the taste of the foreign buyers.
2. The State Trading Corporation is having branches throughout the world. Whenever we have to get any information from outside India, we can get the same from State Trading Corporation situated in the respective countries. Thus, the State Trading Corporation obtains information regarding the market outside India for our goods.
3. The State Trading Corporation by their foreign branches helps us to distribute and supply our goods to the foreign buyers by giving us all information.
4. The State Trading Corporation sends foreign technicians to our factory to inspect the standard of our manufacturing and thus gives us suggestions for improvement in the manufacturing. Thus, the State Trading Corporation provides us technical information.
5. The El tanned skins exports are canalised through the State Trading Corporation in India who are the export business associates for El tanned leather. Accordingly all the contracts regarding the El tanned skins are to be registered with the State Trading Corporation before export and passed for export when the documents are filed.
6. Similarly, the State Trading Corporation also enters contracts directly with the foreign buyers which are passed on to us for execution. Thus, the State Trading Corporation helps us in execution of contracts for supply of our El tanned skins and makes possible the export of El tanned skins.
We have been furnished with the copy of a proforma agreement generally entered into with STC in such cases and in patricular in this case, according to which the STC offer services under the following heads : Provision of testing facilities at STC's laboratory against nominal charges.
Subject to separate and specific mutual agreement, importation and sale of requisite inputs like finishing chemicals/tanning extracts and machinery imports.
The commission is calculated at a percentage of the f.o.b. value of the goods.
3. When the appeals came up before a regular Bench, it considered that the matter has to be decided in the light of the ratio of the latest judgment of the Madras High Court in the case of CIT v. Southern Sea Foods (P.) Ltd. [1983] 140 ITR 855 as to what, if any, would be the expenditure on weighted deduction which could be allowed, and since the issue is likely to arise in a large number of cases it was felt by the Bench that a Special Bench should consider and decide the matter. That is how the matter has come up before the Special Bench.
4. The appeals are by the department. They relate to the assessment years 1974-75 to 1976-77, each of which involves common ground relating to the claim for weighted deduction in respect of commission paid to the STC.5. The learned departmental representative referred us to the order of the ITO on this point disallowing the assessee's claim, according to which the expenditure is not eligible for weighted deduction mainly because the Government is controlling and regulating the market through STC, the goods dealt in by the assessee had no local market and was being exported only to foreign buyers and as such there is nothing new about the trade in foreign market and, consequently, no new information was obtained by the assessee, that the expenditure is incurred in India and the payment is not covered by any of the clauses in Section 35B.The point sought to be made by the learned departmental representative with reference to the order of the ITO is that there is no development of export market as such involved in the assessee's trade because the type of goods dealt in by the assessee were already being exported since past several years. According to him, the provisions of Section 35B are intended to develop export markets, i.e., to find markets abroad for the goods which were hitherto locally sold in India.
However, at the time of hearing of these appeals, he also fairly brought to our attention the instruction of the CBDT dealing with the question of weighted deduction under Section 35B in respect of service charges paid to STC for export of vegetable oil on the representation made to it from the Indian Vegetable Oil Export Association, Bombay, on behalf of its associates for clarification on allowability of their claim for weighted deduction under Section 35B on the service charges paid by them to the STC. It is seen that according to the circular, the Board after taking into account the nature of services rendered by the STC, which, it is common ground, are identical in all cases, where the exports are routed through the STC, has agreed that 'the service charges paid to the STC would qualify for purpose of- Section 35B for the following reasons : 1. The actual supplier of goods is the exporter. Though there seems to be no privity of contract, as such, between the foreign buyers and the exporter, the contract between the STC and the foreign buyer is wholly and exclusively for and on behalf of the exporter.
Moreover, (i) the letter of credit is opened in the name of the exporter ; (ii) the f.o.b. value is the full amount of the consideration although the amount received by the assessee is the net amount ; and (Hi) the duty drawback and incentives are calculated on the total amount of the bills and not on the net amount.
2. The STC readers services for which weighted deduction is admissible. It obtains for the exporters (a) information regarding markets for castor oil outside India ; (b) does advertisement and publicity outside India ; (c) prepares and submits tenders for supply of castor oil; (d) furnishes samples and other technical information for the promotion of exports ; and (e) maintains branches outside India and sends executives outside India for negotiating export contracts.
It has been found by the Tribunal and it is conceded by the learned departmental representative that in all such similar cases of exporters engaged in export of different types of commodities including that of the assessee and where such exports are necessarily to be routed or canalised through STC, the nature of services rendered by the STC to the exporters is identical. It would, therefore, appear that according to the Board's instructions mentioned above, the assessee would be equally eligible for weighted deduction on the payment made to the STC.The learned departmental representative, however, submitted that the benefit of the instructions of the Board should be confined only to the vegetable oil exporters and not to other exporters not dealing with the said commodity. It was also further urged that none of the services indicated in the proforma contract listed above would come under any of the eligible clauses for allowance of weighted deduction. It is argued that what the STC does is to procure orders for the exporter and it is borne out in the preamble to the agreement as follows : Whereas STC with the object of developing exports of... (hereinafter called the 'goods') to overseas markets are interested in procuring export orders from overseas buyers for exports on the terms and conditions as may be mutually agreed with such buyers : And whereas STC are willing to enlist suppliers for entrusting obligation for manufacture and shipment of the finished leather against a part or whole of the order(s) that may be obtained by STC for export of the finished leather.
It is, therefore, argued with reference to the decision of the Madras High Court in Southern Sea Foods (P.) Ltd.'s case {supra) that STC merely procures orders, and payment of commission for procuring orders is not eligible for weighted deduction. The learned counsel for the assessee, on the other hand, contended that the Madras High Court decision will have no bearing on the issue before us in this case because the facts are distinguishable. It was clearly found in the case of Southern Sea Foods (P.) Ltd. (supra) considered by the Madras High Court that the payment was to the assessee's agents in India for procuring orders. The present case before us has to be considered in the light of the fact that the exports have to be canalised through the STC, who are required to render various services including finding the markets abroad, advertisement and publicity outside, maintenance of the branches, etc., as found in the Board's circular. The services rendered by the STC, it is pointed out, do not consist merely of procuring orders, but involves various other duties, all of which are found to fall within the eligible clauses of Section 35B as stated in the Board's circular. We were also referred to a certificate of the Leather Export Promotion Council dated 19-8-1983 setting out the procedure in this connection which shows that various services are rendered by the STC, such as getting information from various sources outside India about the needs of the foreign buyers, the quality and quantity of the specific goods required, passing on such information to the Indian exporters, publicity, and advertisement of such export goods outside India, the partaking of the STC in Leather Fairs held in foreign countries, providing facilities for such exporters to exhibit their products through STC, etc. It is further argued that the proforma agreement has to be considered as a whole to ascertain the exact nature and extent of services rendered by the STC which cannot be ascertained merely by confining oneself to services stated under the short headings in a summary form. When so read as a whole, it is submitted, it provides for the assessee associating itself with the STC for the purpose of incurring the various items of expenditure falling under the eligible clauses of Section 35B(I)(b), which are contemplated by the said section. It is further argued that the contention of the learned departmental representative that the relief under Section 35B is confined only to promote exports of goods is not correct or justified as it has been held that even actual export of goods is not necessary for availing of the weighted deduction, in the cases of India Hotels referred to in Chaturvedi's Commentary on Income-tax, Vol. I, page 1098. In the submission of the learned counsel for the assessee, the benefit of the Board's instructions extended to the Vegetable Oil Exporters Association should equally be applied to the assessee's case also as the considerations stated therein for extending the benefit are equally present in the assessee's case. It is further submitted, with reference to the contention of the departmental representative, that in order to be eligible for the relief under Section 35B the assessee's case must come within the clear terms of the provisions and such relief cannot be extended on a liberal interpretation of the provision, the assessee's case falls within the clear terms of the provisions and the assessee does not seek a liberal interpretation of the provisions of Section 35B.6. On the consideration of. the facts and the contentions of the parties, we are satisfied that the assessee is clearly entitled to the deduction under Section 35B in respect of the commission paid to the STC. As already stated, it is common ground that the nature of services rendered by the STC in respect of the export of goods which are necessarily to be canalised or routed through it are identical and the evidence brought on record including the Board's instructions in the case of Vegetable Oil Export Association clearly shows that STC renders services for which weighted deduction is admissible, such as obtaining information regarding markets for the assessee's products outside India, advertisement and publicity outside India for the products, preparation and submission of tenders for supply of the products, furnishing sample and technical information for promotion of the export and maintaining branches outside India and sending executives there for negotiating contracts, etc. The proforma agreement, as pointed out by the learned counsel for the assessee, envisages the assessee associating itself with STC for the purpose of exports of its goods abroad, involving ascertainment of markets for the assessee's goods outside India, maintenance of agency outside India, preparation and submission of tenders for supply of its goods to parties abroad and various other activities falling within the several clauses of Section 35B(1)(b). Section 35B does not confine itself to expenditure incurred only by the assessee on the various activities falling under the clauses of Section 35B(1)(b), but also extends its benefit to such expenditure incurred by an assessee in association with any other person, in this case the STC. There is no merit in the departmental representative's contention that the benefit of the circular is to be confined to the Vegetable Oil Exporters' case because although the instruction has been issued in that case on the representation made by the Indian Vegetable Oil Exporters Association, the Board has examined in detail the nature of the services rendered by the STC and finds that the services rendered by the STC are such as would be eligible to weighted deduction under one or more clauses of Section 35B and it is not a case of mere procurement of the orders. The decision in Southern Sea Foods (P.) Ltd.'s case (supra), as pointed out by the learned counsel for the assessee, was rendered on totally different facts and the ratio thereof does not, in our view, apply to the facts in this case. In that case, as pointed out by the learned counsel for the assessee, the commission was paid by the assessee to its agents in India for procuring orders and it was held that such procuring order is not incidental to the execution of any contract outside India. We have already seen how the nature of services rendered by the STC are varied and different and fall within the several clauses of Section 35B, as considered in the Board's instructions. Although as we have already stated, the Board's instruction was rendered in the context of representation by Vegetable Oil Exporters Association, the contents thereof show that the nature of the services rendered by the STC was examined and such services were found to be eligible for weighted deduction under Section 35B. The services in the present case also being identical, we do not see how a different treatment can be meted out to the assessee.