1. The appellant private limited company mainly engaged in the business of export of fish objects to the order of the Commissioner (Appeals) relating to its assessment for the assessment year 1980-81 (account year ending on 31-12-1979) in the following terms : The learned Commissioner (Appeals)-XI has erred in disallowing the weighted deduction under Section 35B of the Income-tax Act, 1961 in respect of expenditure incurred in its business of export of fish, for the charter expenses paid.
2. Relevant facts leading to the controversy have been stated in detail in the orders of the IAC (Assessment) and the Commissioner (Appeals).
We may also briefly notice them before stating and thereafter adjudicating upon the rival points of view canvassed before us by Shri S.N. Nanda, the learned authorised counsel of the assessee and Shri R.S. Adhlakha, the learned departmental representative.
3. Till the end of the accounting year relevant to the assessment year 1979-80, the appellant company had not commenced any business. In January 1979, however, the appellant company started its business of deep sea fishing, and export of fish. A charter agreement duly approved by the Government of India witnessing the terms and conditions was entered into between a Thai company, viz., Seawest Co. Ltd. of Bangkok on the one hand and the assessee on the other on 30-12-1978. The duration of the agreement was initially for a period of one year but it was renewable for a period of three years by mutual agreement of the parties and subject to the approval by the Government of India. As per stipulations agreed upon Seawest Co. Ltd. was to provide to and place at the disposal of the assessee 20 Deep Sea Fishing Trawlers. These fishing vessels were to proceed outside Indian territorial waters and carry on fishing operations within 200 miles of the Indian Exclusive Economic Zone. All the catch netted by the trawlers was to be brought to the operational port, i.e., Port Blair (Andman and Nicobar Islands) from where the assessee-company supervised and managed its business of export of fish. After the assessee-company had taken stock of the catch, the trawlers were to proceed to Thai ports in order to transport and market the catch in Thailand or any other international market. All the expenditure on the vessels during the fishing operations and on their journeys to Port Blair and then to Thai ports and back to India was to be met by the Seawest Co. Ltd. and the assessee-company was to pay the charter hire charges by adjustment of 80 per cent of the sale price of fish realised. In other words, the sale price of fish was to be appropriated as charter hire charges of the Thai company to the extent of 80 per cent of the sale and the balance 20 per cent was to go to the assessee as its revenue. In the previous year ending on 31-12-1979 relating to the assessment year 1980-81, the assessee's accounts stood debited by expenses of Rs. 60,51,040 on deep sea fishing operations. These included Rs. 49,50,016 paid as charter hire charges to'the Seawest Co. Ltd. The assessee claimed that the entire expenditure of Rs. 60,51,040 was eligible for grant of export markets development allowance under Section 35B of the Income-tax Act, 1961 ('the Act'). The IAC held that some of the expenses were eligible for grant of weighted deduction but as far as the claim of Rs. 49,50,016 paid as charter hire charges was concerned, the IAC rejected it by holding that the expenditure was of trading nature and did not fall within any one of the clauses of Section 35B. The assessee felt aggrieved of the order of the IAC and, therefore, an appeal was preferred before the Commissioner (Appeals) objecting to the non-allowance of Section 35B deduction on charter hire charges of Rs. 49,50,016. It was claimed before him that the abovementioned expenditure was eligible for weighted deduction under Section 35B(1)(b)(viii) which provides for deduction of those expenses which may be incurred by an assessee on performance of services outside India in connection with incidental to the execution of any contract or contracts for the supply of goods, services or facilities in which the assessee dealt. The Commissioner (Appeals) referred to a letter dated 9-12-1983 addressed to him by the assessee appellant and then stated that the only services which could be said to have been rendered by the Thai company to the assessee-company were as per Clauses 2 and 15 of the agreement dated 30-12-1978. After perusing these clauses the Commissioner (Appeals) found that the expenditure in question was incurred only for the purposes of the deep sea fishing activity and for bringing the fish to Port Blair and thereafter for taking it for sale abroad. According to him, the expenditure thus incurred was clearly for the purpose of bringing into existence the commodity which was to be exported and which did not fall for allowance within the scope of Section 35B. Thereafter, the Commissioner (Appeals) referred to the decision of the Special Bench of the Tribunal in the case of J.H. & Co.
v. Second ITO [1982] 1 SOT 150 (Bom.) and said that the view taken by him was in accordance with that decision. The Commissioner (Appeals) also relied on the decision of the Hon'ble Delhi High Court in the case of Handicrafts & Handloom Export Corpn. of India v. CIT [1983] 140 ITR 532 and held that the onus of proving that the expenditure incurred fell within any one of the activities prescribed under Section 35B having not been discharged by the assessee, its claim must inevitably fail. The Commissioner (Appeals) also referred to the decision of the Hon'ble Supreme Court in the case of Lakshmiratan Cotton Mills Co. Ltd. v. CIT [1969] 73 ITR 634 and held that mere mention of certain services to be rendered in the agreement was not enough and that the assessee, in order to succeed, ought to have process produced evidence to show that in fact certain services which fell within the scope of Section 35B had been rendered by Seawest Co. Ltd. Since, according to him, no evidence was forthcoming to show that any eligible services had been rendered by Seawest Co. Ltd., the charter hire charges of Rs. 49,50,016 were not entitled to weighted deduction. In the end, the Commissioner (Appeals) referred to the case of TOMCO which had also entered into a similar collaboration for deep sea fishing and export of fish and said that in that case no claim of weighted deduction under Section 35B had been made or allowed, in respect of charter hire charges and that for that reason also the assessee's claim was not tenable.
4. The above findings of the Commissioner (Appeals) are challenged by the assessee. It is contended by Shri S.N. Nanda, the learned authorised counsel of the assessee that the Exclusive Economic Zone did not form part of the territory of India and that payment for the services performed by Seawest Co. Ltd. in that zone for the purposes of supply of fish to foreign customers fell within the provisions of Section 35B(1)(b)(vm). Enlarging the claim of the assessee which was confined to Sub-clause (viii) of Section 35B(1)(b) till the first appellate stage, the learned authorised counsel submits that the weighted deduction on the expenditure of Rs. 49,50,016 was also allowable under the provisions of Section 35B(1)(b)(ii) and 35B(1)(b)(iv) also. It is further submitted by the learned authorised counsel that the above expenditure had not been incurred on bringing into existence or procuring the commodity sold but for the varied services which had been rendered to the assessee by Seawest Co. Ltd. It is also the claim of the assessee that it was merely exploiting natural resources and that the activity of gaining fish did not amount to trading operations and, therefore, the expenditure of Rs. 49,50,016 could not be disallowed on the ground that it was a trading expenditure. According to Shri Nanda, the Thai company was not only carrying on the activity of gaining fish on behalf of the appellant but also doing publicity and advertisement for the assessee in the foreign markets and acting as its agent for promotion of sale of fish abroad.
Shri Nanda refers to us the paper book consisting of 30 pages and in particular takes us through the terms of agreement with the Thai company dated 30-12-1978 and the letters of confirmation and other correspondence with the assessee Seawest Co. Ltd., Shri Nanda has also submitted that the decision of the Tribunal in the case of J.H. & Co.
(supra), in fact supports the case of the assessee and that the Commissioner (Appeals) was wrong in holding that this decision went against the assessee's claim. A copy of the expert opinion of Shri N.K.P. Salve, Chartered Accountant has also been furnished by the learned authorised counsel in support of the assessee's claim.
5. We have given our very careful consideration to the rival standpoints of view. The orders of the authorities below have been equally carefully perused and the paper book submitted on the side of the assessee has also been gone into. We have in particular gone through the agreement dated 30-12-1978 entered into between the Seawest Co. Ltd. and the assessee under which the sum in question of Rs. 49,50,016 was paid by the assessee-company. There are 22 headings/clauses of the agreement and out of these, Clauses 2, 5 and 15 may be relevantly reproduced as under : Agreement to Charter Fishing Vessels from Seawest Co. Ltd., Thailand.
That Seawest agrees to charter said fishing vessels including all their equipment (as described in Annexure I) and crew and other facilities to Universal. Seawest shall deliver all the aforesaid vessels as soon as practicable after the signing of this agreement and the formalization of all necessary documents as per the approval of Government of India dated 22-12-1978 to start fishing operations.
Subject to the above, Seawest will deliver the fully-equipped fishing vessels to Universal at the port of Vishakhapatnam (Andhra Pradesh) each for a period of 365 days from the date of arrival at Indian port, the first vessel to be delivered approximately 15-1-1979. The times of delivery will be mutually agreed upon. The main port of charter operation will be in and around Port Blair (Andman and Nicobar Islands). For the purpose of export of fresh catch and customs formalities, Port Blair will also be the port of exist. The fishing vessels shall conduct fishing operations day and night after allowing for periods of rest and allowing for bad weather conditions during which fishing cannot be conducted.
The charterage for each vessel for the first year as basic hire and for goods and services described in Clause 5 will be US $ 242,700 (Two hundred forty-two thousand and seven hundred only), second year US $ 225,000 (Two hundred twenty-five thousand only), and for the third year US $ 200,000 (Two hundred thousand only). Provided, that the total expenses paid or required to be paid by Universal under Clauses 2, 6, 7 and 12 of this agreement shall not exceed 80 per cent of the sales value of the catch of each vessel during the period of this agreement, The charterage fee shall be payable to Seawest by Universal in accordance with a mutually agreed arrangement in Thailand upon completion of each voyage and after the realisation of the sale proceeds of the catch from within Indian waters from each voyage.
In case of default of any payment due hereunder Seawest shall have the right of withdrawing the fishing vessel from the service of Universal, without noting any protest and without interference by any Court or any other formalities whatsoever and without prejudice to any claim that Seawest may otherwise have on Universal under this agreement.
Seawest agrees that in case of loss or damage or non-availability or inaction or any or all of these vessels during the charter period, Seawest shall immediately replace the vessels with others of the same class and equipment. No charterage will be paid for periods when vessels are not in operation due to the fault of Sea west.** ** ** Seawest shall maintain each vessel in good operational condition for deep sea fishing and shall maintain necessary supplies of spares and equipment.
Seawest shall provide the vessels with the required officers and crew skilled in the purpose for which said vessels are to be used in the charter fishing operations. Universal may complement the crew with its local personnel at the start of the fishing operations to the extent of 20 per cent of the total crew within the first year of this agreement, and increasing gradually during the renewal periods.
Seawest shall pay for the running and maintenance of vessels and bear the salaries and wages of the crew (excluding the complementary local crew which shall be entitled to all such benefits as the regular crew members receive on the vessel). The local crew and technicians shall be given instructions and training in deep sea fishing operations, the use of fishing equipment being used in the vessels, and marketing of catches.
That Seawest shall be responsible for delay in delivery of the fishing vessels or for any delay during the period of the charter and for loss or damage to goods on board, if such delay or loss has been caused for want of due diligence on the part of the crew of Seawest or their manager in making the said fishing vessel seaworthy and fitted for the voyage or any other personal act or omission or default of the crew or their manager. No charterage will be payable for any such period during which the vessel is not in operation due to any reason within the control of Seawest.
Pursuant to the provisions of its license/sanction dated 22-12-1978 to engage in deep sea fishing, Universal hereby authorises Seawest who undertakes to export and sell under Universal's representative's supervision at the prevailing international prices on behalf of Universal the entire 100 per cent of all exportable marine products from Indian waters to Thailand or any other foreign countries according to the prevailing market conditions. Non-exportable items shall be disposed of by Universal in the Indian upcountry market.
Seawest shall also make available to Universal its expertise and know-how for both deep sea fishing operations and marketing of the catch in international areas.
A scrutiny of the above clauses immediately shows that the payment in question had been made for charterage of the vessels in gaining fish which were exported. There is nothing in the agreement as might show that the expenditure was incurred for obtaining information regarding markets outside India and, therefore, Sub-clause (ii) of Section 35B(1)(b) did not apply. There is also nothing in the agreement as would show that the assessee incurred the expenditure in question on maintenance of a branch office or agency outside India for the promotion of sales outside India. In fact, the papers furnished as a part of the assessee's paper book show that the assessee was actually trying to establish a branch office abroad, but that branch had not been established during the relevant accounting period of the assessment year 1980-81 though the permission to establish it had been given by the Government. In these circumstances, the provisions of Section 35B(1)(b)(iv) did not apply. Furthermore, the agreement does not indicate that the expenditure of Rs. 49,50,016 was incurred by the assessee for performance of services outside India in connection with or incidental to the execution of any contracts for supply of fish outside India. In fact, no evidence has been furnished before us to show that any contracts were existing between the assessee and foreign buyers of fish in the relevant accounting period. In these facts and circumstances, the provisions of Sub-clause (viii) of Section 35B(1)(b) did not apply.
There is also nothing to show that the payment of Rs. 49,50,016 has anything to do with the publicity or advertisement of the fish exported and, therefore, the provisions of Sub-clause (i) of Section 35B(1)(b) did not apply. In other words, the assessee has failed to establish that its claim of weighted deduction in respect of charter hire charges of Rs. 49.50,016 fell within any one of the clauses of Section 35B(1)(b) as pleaded by the learned authorised counsel of the assessee.
Even the 'confirmation' issued by the Thai company, which though not relevant to the accounting vear of the assessment year under appeal inasmuch as it was obtained by the assessee on 28-1-1981, does not show that the expenditure of Rs. 49,50.016 was incurred for any one of the services/activities specified in Sub-clauses (i), (ii), (iv) and (viii) of Section 35B(1)(b). Other papers filed in the paper book do not relate to the accounting year of assessment year 1980-81 and in any case they do not show that in fact the Thai company had in fact rendered any services specified in Sub-clauses (i), (ii), (iv) and (viii) of Section 35B(1)(b). On facts therefore, the case of the assessee fails altogether. On the other hand, it is quite clear, as held by the departmental authorities that the expenditure in question was incurred for procuring of fish or was an expenditure on acquisition of stock-in-trade in which the assessee dealt. The Special Bench decision of the Tribunal in paragraph 23 of its order in the case of J.H. & Co. (supra) has clearly held that the expenditure on the purchase or acquisition or procurement of goods in which the assessee dealt was not eligible for weighted deduction under Section 35B. We would, therefore, approve the various findings given by the Commissioner (Appeals) and hold that the assessee was not entitled to weighted deduction on expenses of Rs. 49,50,016 which was nothing but an expenditure on hire charges of the trawlers employed for gaining fish which was stock-in-trade of the assessee. Whatever expenditure was eligible for weighted deduction had already been allowed as such by the IAC and we find that apart from the agitation against the disallowance of Rs. 49,50,016, the assessee had not raised any objection to the disallowance out of rest of the expenses. In other words, whatever allowance under Section 35B had been made by the IAC alone was justified and that the assessee had no case for grant of export markets development allowance on expenses of Rs. 49,50,016. Before deciding the issue as above against the assessee and in favour of the revenue, we had carefully gone through the expert's opinion of Shri N.K.P. Salve, Chartered Accountant. For the reasons given by us as above, we have not been able to subscribe to the opinion of Shri N.K.P. Salve which was made the main plank of arguments by the learned authorised counsel of the assessee.