V.V. Kamat, J.
1. We have heard counsel for the parties in these references and in all these references the question with regard to the deduction under Section 35B of the Income-tax Act, 1961, is common, whereas in Income-tax References Nos. 227 and 228 additionally three questions are referred for our answer. Thus, this judgment would consider all these questions for the sake of convenience. The questions in Income-tax References Nos. 227 and 228 are as follows :
'1. Whether, on the facts and circumstances of the case, the Tribunal is justified in holding that the assessee would be entitled to the deduction under Section 35B in respect of interest on packing credits and shipping lien ?
2. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in allowing the assessee's claim of Rs. 73,415 as retirement compensation and gratuity proportionately from October 1, 1975, to September 30, 1976, by holding that these payments were for the purpose of the business of the assessee-company ?
3. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in directing the Income-tax Officer not to deduct the subsidy from the cost for-the purpose of depreciation ?
4. Whether, on the facts and in the circumstances of the case, the Appellate Tribunal is right in law in directing the Income-tax Officer to grant weighted deduction under Section 35B on the Export Credit Guarantee Corporation Premium ?'
2. Whereas the sole question in Income-tax References Nos. 89 and 90 is as follows :
'Whether the assessee is entitled to weighted deduction under Section 35B on interest on packing credit and shipping Hen ?'
3. Apart therefrom the Income-tax Appellate Tribunal in all these references has remanded the matters.
4. At the outset it would be convenient to deal with questions Nos. 3 and 4 in Income-tax References Nos. 227 and 228 of 1987. Question No. 3 relates to the direction to the Income-tax Officer not to deduct the subsidy from the cost for the purpose of depreciation. In view of the decision in CIT v. P. J. Chemicals Ltd. : [1994]210ITR830(SC) , delivered by the apex court that the expression 'actual cost' needs to be interpreted liberally and, consequently, the amount of subsidy is not to be deducted from the 'actual cost' for the purpose of calculation. The question will have to be answered in the affirmative, against the Revenue and in favour of the assessee. The decision was brought to our notice by learned senior standing counsel for taxes.
5. Similarly, with regard to question No. 4 as to whether the Tribunal is right in law in directing the Income-tax Officer to grant weighted deduction under Section 35B on E. C. G. C. premium, which means the Export Credit Guarantee Corporation Premium, learned counsel brought to our notice a decision of this court in CIT v. Alleppey Co. Ltd. : [1994]207ITR598(Ker) . Observations in the said judgment especially at page 605 thereof to the effect that the premium through the Export Credit Guarantee Corporation paid to them (sic) is certainly eligible for weighted deduction under Sub-clause (ii) of Section 35B (1)(b) of the Income-tax Act would be eligible with the consequent answer in the affirmative, i.e., against the Revenue and in favour of the assessee.
6. With regard to question No. 2 as to whether the Tribunal is right in law in allowing the assessee's claim for Rs. 73,415 as retirement compensation and gratuity proportionately from October 1, 1975, up to September 30, 1976, holding that the said payments were for the purpose of the assessee-company, certain factual matrix is necessary.
7. The assessee is a public limited company carrying on business in export of coir yarn and coir products. It would be seen that since the turnover of the company exceeded Rs. 1 crore, by virtue of the provisions of Section 43A of the Companies Act, the said company automatically came to be understood as a public limited company. This was with effect from October 1, 1975. The consequence was that the company required the approval of the Company Law Board for the remuneration to be paid to the two managing directors--Shri N.C.J. John and Shri N.J. Chandi. It has already come on the record that under Section 269 and Section 198/309 of the Companies Act, the company applied for approval in regard to the remuneration by a communication dated July 12, 1976. The Company Law Board declined the approval by the communication dated August 28, 1976. It is to be noted that the Company Law Board found that these two directors were also directors in other companies and it is on this ground that the approval to their directorship as well as consequent payment of remuneration proposed to be paid by the assessee-company was declined.
8. Additionally, it has also come on record that the two directors--N.C.J. John and N.J. Chandy -- are found to be the husbands of the directors of the company. Particulars in regard thereto show that Shri N.J. Chandy is the husband of Smt. Annakutty Chandy and Shri N.C.J. John is also the husband of Smt. Kunjamary and both these ladies are the directors of the company. It further appears that the management board passed a resolution on December 27, 1977, in its extraordinary general meeting. The resolutions are to the following effect :
'1. Resolved that Shri N.J. Chandy, the former managing director be paid a sum of Rs. 51,029.25 as compensation in lieu of remuneration for the period from October 1, 1975, to July 31, 1977.
2. Resolved that Shri N.C.J. John, the former managing director be paid a sum of Rs. 22,385.75 as compensation in lieu of remuneration for the period from October 1, 1975, to December 31, 1976.'
9. In pursuance of the resolutions, the amount of Rs. 73,415 was shown to have been debited in the books of account on the basis of which deduction is sought to be claimed under the assessment year in question.
10. Thus, the first factor that is revealed from the record is that in spite of the disapproval by the Company Law Board for reasons stated hereinbefore, the management board brought the matter at an extraordinary general meeting. It is further seen that in pursuance of the resolution the books of account showed debit with the expenses in regard to the amount in question of Rs. 73,415. It is also to be noted that the Income-tax Officer has taken these aspects into consideration and has ordered that the assessee-company is not entitled to deduction. The first appellate authority in this connection took into consideration that the amounts in question were already drawn earlier by these two persons and that too in the hope that their appointments as managing directors would be approved by the Company Law Board. It is an undisputed position that as far as these two managing directors are concerned there was no contract for payments of gratuity or any other sum to them. This was found by the first appellate authority in view of the contentions in regard thereto. The first appellate authority also concurred with the Income-tax Officer that this deduction would not be permissible, The Income-tax Appellate Tribunal considered the matter. The Tribunal considered that the Company Law Board declined to grant approval by the communication dated August 28, 1976, and, therefore, has inferred that this must have been received by the assessee some time in the month of September, 1976, in pursuance of which the two managing directors should have vacated their offices. The Tribunal in this situation inferred that they must have rendered services to the assessee-company during the period from October 1, 1975, up to the dates they were paid the amounts by the resolutions in question. It is to be seen that in this connection the Tribunal has observed that the liability is in pursuance of the resolution dated December 27, 1977. The reasoning of the Tribunal, based on the reference to the contents of the resolutions, shows that the payments were in the nature of compensation in lieu of remuneration paid to them. The Tribunal has also recorded that the assessee's counsel was unable to explain why compensation was paid for the period even after the month of September, 1976, when the order of the Government was received. The Tribunal has also observed that how the amount was computed is also not explained. In spite of these observations, the Tribunal has proceeded on the situation arrived at by inference that the two managing directors rendered services to the assessee-company expecting the approval of the Government of India and, therefore, they should not be deprived of their dues for their services from October 1, 1975, till September, 1976, because their services were for the purpose of the business of the assessee-company.
11. From the material on record, in our judgment, the Tribunal has ignored that the two fact-finding authorities has considered the situation concurrently. The Tribunal has also not considered the reason for which the Company Law Board declined to grant approval, stating that the two managing directors were also in the similar position elsewhere. The Tribunal has also not considered the situation of conduct that the managing board resorted to a remedy of bringing the matter at an extraordinary general meeting of the shareholders who were not knowing the background of the situation of disapproval and the circumstances in regard thereto. The conduct has also to be understood and appreciated in the context of the circumstances in which the resolutions came to be brought and passed at an extraordinary general meeting and that too was in a situation when there is no dispute that on and from September 30, 1976, the services admittedly came to an end. The material on record also shows that the inference of the Tribunal that the two directors perform services is also an inductive inference. The position in law is more than established that there cannot be any payment styled as compensation in lieu of remuneration for services rendered when the factual situation that services rendered is only a matter of inference. In our judgment, the totality of circumstances reproduced hereinbefore would clearly establish that the assessee-company ignored the statutory disapproval by the Company Law Board and the reasons in regard thereto and in spite thereof rushed in an undue haste to pass the resolutions styling the payment as compensation in lieu of remuneration which is not permissible. In view of the above situation, the conclusion that follows is that question No. 2 with regard to the payment of Rs. 73,415 is answered in the negative in favour of the Revenue and against the assessee.
12. In the above situation, this leaves us for consideration of the common question with regard to deduction under Section 35B of the Income-tax Act in respect of interest on packing credit and shipping Hen.
13. As stated at the outset the assessee is a public limited company engaged in export of coir yarn and coir products. Normally and generally but not as a rule, the assessee-public limited company would have to be understood as an exporter or seller in common parlance, the commodity being coir yarn or coir products. The buyer in the context would have to be understood as the buyer in the foreign country. Normally, they do not have personal contact and the orders are received through the export houses although situations of individual contracts are not unknown in practice. Whatever may be the situation, it is the export order that requires the exporter firstly to get the goods ready. In that connection, the exporter has to take steps in seeing that the goods covered by the export order were made and prepared if necessary and invariably by purchase of the export articles in the market. It is not unknown that for this banks are approached for meeting the expenses which are normally known as expenses for the purchase of raw materials with regard to making the goods covered by the export order. Rate in accordance with the terms and conditions relating to the goods in question.
14. After this situation is over he has to take steps with regard to the execution of the export order, in regard to which steps are required to be taken and such steps are normally in regard to the transportation of the goods to be exported by transport facilities in accordance with the terms and conditions of the contract. Depending on the volume of the goods to be exported, the exporter is again required to approach the bank for financial assistance. This is in regard to the transportation activity relating to the execution of the contract whereby the exporter takes steps in relation to or incidental to the transportation of goods so as to reach the buyer in the foreign countries. Difficulties both with regard to the place of transportation in this country as well as the place of destination in the foreign country are only to be imagined and experienced. However, the situational occasions create financial liabilities in the context of transportation of the export articles in pursuance of the export order. The exporter has to approach the bank with reference to the liabilities, of course, financial liabilities both at the point of starting and the point of destination. Illustratively if the goods are to be transported by sea, they are to be taken to the port of shipment, situational difficulties are of warehousing, arrival of steamer for shipment, the time taken for the steamer to get a berth in the port and the ultimate shipment of the goods to be exported. All these many times create financial liabilities and likewise the financial liabilities also are to be understood in the context of the port of destination, all up to the stage of the buyer getting the ultimate delivery of the goods in the contract. The buyer getting the delivery of the goods covered by the contract gets it only after all the formalities of the transportation are over. The liabilities are necessarily in regard to the execution of the contract having connection in regard thereto or also incidental in regard thereto.
15. In the context of the question to be answered, the provisions of Section 35B of the Income-tax Act, 1961, as in force during the period of the assessment years (1978-79 and 1979-80). In regard to these, reference is placed before us in a typed out situation. The said provisions as is available is reproduced hereinbelow for convenience :
'35B. Export markets development allowance.--(1)(a) Where an assessee, being a domestic company or a person (other than a company) who is resident in India, has incurred after the 29th day of February, 1968, whether directly or in association with any other person, any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) referred to in Clause (b), he shall, subject to the provisions of this section, be allowed a deduction of a sum equal to one and one-third times the amount of such expenditure incurred during the previous year ;
Provided that in respect of the expenditure incurred after the 28th day of February 1973 but before the 1st day of April, 1978, by a domestic company, being a company in which the public are substantially interested, the provisions of this clause shall have effect as if for the words 'one and one-third times', the words 'one and one-half times' had been substituted.
(b) The expenditure referred to in Clause (a) is that incurred wholly and exclusively on-
(i) advertisement or publicity outside India in respect of the goods, services or facilities which the assessee deals in or provides in the course of his business, where such expenditure is incurred before the 1st day of April, 1978 ;
(ii) obtaining information regarding markets outside India for such goods, services or facilities ;
(iii) distribution, supply or provision outside India of such goods, services or facilities, not being expenditure incurred in India in connection therewith of expenditure (wherever incurred) on the carriage of such goods to their destination outside India or on the insurance of such goods while in transit, where such expenditure is incurred before the 1st day of April, 1978 ;
(iv) maintenance outside India of a branch, office or agency for the promotion of the sale outside India of such goods, services or facilities ;
(v) preparation and submission of tenders for the supply or provision outside India of such goods, services or facilities, and activities incidental thereto ;
(vi) furnishing to a person outside India samples or technical information for the promotion of the sale of such goods, services or facilities;
(vii) travelling outside India for the promotion of the sale outside India of such goods, services or facilities, including travelling outward from, and return to, India ;
(viii) performance of services outside India in connection with, or incidental to, the execution of any contract for the supply outside India of such goods, services or facilities ;
(ix) such other activities for the promotion of the sale outside India of such goods, services or facilities as may be prescribed.
Explanation 1--In this section, 'domestic company' shall have the meaning assigned to it in Clause (2) of Section 80B.
Explanation 2.--For the purposes of Sub-clause (iii) and Sub-Clause (viii) of Clause (b), expenditure incurred by an assessee engaged in the business of-
(i) operation of any ship or other vessel, aircraft or vehicle, or
(ii) carriage of, or making arrangements for carriage of, passengers, livestock, mail or goods, on or in relation to such operation or carriage or arrangements for carriage (including in each case expenditure incurred on the provision of any benefit, amenity or facility to the crew, passengers or livestock) shall not be regarded as expenditure incurred by the assessee on the supply outside India of services or facilities.
(1A) Notwithstanding anything contained in Sub-section (1), no deduction under this section shall be allowed in relation to any expenditure incurred after the 31st day of March, 1978, unless the following conditions are fulfilled, namely :--
(a) the assessee referred to in that sub-section is engaged in-
(i) the business of export of goods and is either a small scale exporter or a holder of an Export House Certificate ; or
(ii) the business of provision of technical know-how, or the rendering of services in connection with the provision of technical know-how, to persons outside India ; and
(b) the expenditure referred to in that sub-section is incurred by the assessee wholly and exclusively for the purposes of the business referred to in Sub-clause (i) or, as the case may be, Sub-clause (ii) of Clause (a).
Explanation. -- For the purposes of this sub-section, --
(a) 'small-scale exporter' means a person who exports goods manufactured or produced in any small-scale industrial undertaking or undertakings owned by him :
Provided that such person does not own any industrial undertaking which is not a small-scale industrial undertaking ;
(b) 'Export House Certificate' means a valid Export House Certificate issued by the Chief Controller of Imports and Exports, Government of India ;
(c) 'provision of technical know-how' has the meaning assigned to it in Sub-section (2) of Section 80MM ;
(d) 'small-scale industrial undertaking' has the meaning assigned to it in Clause (2) of the Explanation below Sub-section (2) of Section 32A ;
(2) Where a deduction under this section is claimed and allowed for any assessment year in respect of any expenditure referred to in subsection (1), deduction shall not be allowed in respect of such expenditure under any other provision of this Act for the same or any other assessment year.'
16. Hearing learned counsel for the parties it will have to be stated that the said provision has come on the statute at a period when exports were considered to be encouraged as a policy and as such this encouragement of export is at the back of the legislative intent in regard thereto. The intrinsic material also would show that by the provision certain items of expenditure incurred by a domestic company or a person who is resident in India are legislated for allowance as deduction with specified preparations in regard thereto, if such expenditure is shown to have been incurred during the previous year. This is the obvious statutory content of Section 55B(1)(a) of the Act and, consequently, the items of expenditure which are legislatively permitted for deduction are specified in Section 35B(1)(b) of the text above. Although we are directly concerned with Section 35B(1)(b)(viii), a perusal of that sub-clause from (i) to (vii) and (ix) would show and amplify the legislative intent to encourage export during the period in question. In the context it needs to be stated that the clause under consideration--35B(1)(b)(viii)--was in force up to April 1, 1981.
17. The said clause referred to situations such as advertisement or publicity outside India in respect of the goods, services or facilities; expenditure relating to obtaining information regarding markets outside India; distribution, supply or provision outside India of such goods; maintenance of a branch office or agency outside India; preparation and submission of tenders for the supply or provision outside India of such goods, services or facilities ; furnishing to a person outside India samples or technical information for the promotion of the sale of such goods ; travelling outside India, for the promotion of the sale of such goods, services or facilities and such other activities for the promotion of sale outside India of such goods. It is to be noted that the clause to be considered--35B(1)(b)(viii)--is in this category. The said clause is reproduced hereunder :
' Performance of services outside India in connection with, or incidental to, the execution of any contract for the supply outside India of such goods, services or facilities.'
18. A bare reading of the said clause would show that it relates to the performance of services outside India. Services are to be understood as being in connection with or incidental to the execution of any contract for the supply outside India of such goods, services or facilities. In other words, the section can be understood in three-fold dissection. Services have to be understood with reference to the performance thereof as given outside India. The services will have to be understood as being in connection with or incidental to the execution of any contract. The contract has to be for the supply of goods, services or facilities outside India. Therefore, the three facets which are to be understood together deal with execution of any contract for the supply of goods outside India. Goods include services and facilities. In this context, steps which are to be understood as the execution of any such contract will have to be understood as all activities in the nature of services relating to the process of transportation and certainly the activities would get snapped with reference to them in relation to anything that is done by the exporter to collect the goods and make them ready for export. In other words, performance of services in connection with or incidental to the execution of any contract will have to be understood as connecting with the transportation activity of the goods to be exported so that the foreign buyer may get delivery of the goods. It is needless to state that the provisions will have to be understood in the context of other cognate provisions contained in the clause discussed hereinbefore. Reading of the clause would reveal that what is considered as an expenditure in regard to which deduction can be granted, would have to be understood as relating to what has taken place outside India as could be seen from various other clauses. In the clause under consideration the services that are understood are services to be performed outside India although in connection with the execution of any contract.
19. The said provision has come up for consideration first in point of time before the Madhya Pradesh High Court in CIT v. Vippy Solvex Product Pvt. Ltd, : [1986]159ITR487(MP) . The factual matrix therein shows in abundance that the assessee had paid commission and brokerage amounting to Rs. 81,476 to various parties at different places, namely, Poland, Germany, London, etc., in connection with the export of its product and it was on account of this fact that the assessee was able to make export sales to the extent of Rs. 1,12,54,223. The assessee had also paid interest in the export packing credit account of the bank and this expenditure was also incurred for promoting export sales. It is further seen from the factual matrix that the assessee had furnished a certificate from the bank specifically stating that the assessee had maintained with it an export packing credit loan account and advances from this account were given only for the purchase of raw materials for manufacturing goods to be exported out of India and these advances were made available only when the party submitted a copy of the contract entered into with the foreign party. It is precisely found in the factual matrix that this was quite different from the normal cash credit account and the rate of interest was also different. It is in this connection with this factual matrix the Madhya Pradesh High Court relying on the bank certificate clearly showing that the credits in the account were given for the purchase of raw materials and credit was given when the contract for supply of goods to the foreign parties was shown. In the circumstances of a situation before the Madhya Pradesh High Court, at page 493 of the report the above clause is understood of talking of performance of services outside India in connection with, or incidental to, the execution of any contract for the supply outside India of such goods, services or facilities, The court further proceeded that this contemplates that the expenditure incurred in connection with the services rendered outside India or the expenditure incurred in connection with or incidental to the execution of any contract for the supply outside India of such goods will have to be understood as being covered under this section. The court observed that even though the bank certificate issued by the bank showed that all these credits in this account were given for the purchase of raw materials it was given in relation to the contract for the supply of goods to the foreign parties and, therefore, the expenditure was in connection with the execution of any contract for the supply outside India. The Madhya Pradesh High Court emphasised that even incidental expenditure will have to be understood to be covered under this clause as the language speaks of expenditure both in connection with or incidental to the execution of the contract. Thus the decision has given emphasis on the phrase 'in connection with or incidental to the execution of the contract with the foreign parties.' The above decision was considered by the Calcutta High Court in Brooke Bond India Ltd. v. CIT : [1992]193ITR390(Cal) . The Calcutta High Court took the view that unless it is established that the expenditure was incurred on performance of services outside India no weighted deduction can be allowed. The emphasis was on performance of services outside India and not on the phrase 'services in connection with or incidental to the execution of any contract for the supply of goods, services or facilities outside India'. In other words, the Calcutta High Court emphasised the situation that performance of services have to he understood as services outside India and left aside anything even though it is done in connection with or incidental to the execution of any contract for export.
20. In considering the decision of the Madhya Pradesh High Court in CIT v. Vippy Solvex Products P. Ltd. : [1986]159ITR487(MP) , it is observed that the decision was really decided on the basis of findings of fact arrived at by the Tribunal and further that with reference to the aspect of territoriality in regard to the services in question. It is to be noted that at page 396 (of 193 ITR) of the report it is specifically stated as follows :
'No argument was advanced before the Madhya Pradesh High Court about the question whether it was necessary to establish that the expenditure must be on performance of services outside India.'
21. The factual matrix as we have enumerated hereinbefore clearly shows that the expenditure claimed before the Madhya Pradesh High Court related to commission and brokerage amounting to Rs. 81,476 to various parties at different places, namely, Poland, Germany, London, etc., in connection with the export of its products. In such a situation before the Madhya Pradesh High Court no such argument could have been advanced on the factual matrix. Be that as it may, the Calcutta High Court has emphasised the aspect of territoriality and has ruled that whatever that can be related to the expenditure in regard to which deduction is sought to be claimed would have to undergo the test of satisfaction of this aspect of territoriality in the context.
22. The factual matrix before the Calcutta High Court clearly shows that the interest payable on account of loans allowed at concessional rate of interest related to loan taken for the purpose of meeting the expenses prior to the shipment of goods. Thus, the factual situation before the Calcutta High Court clearly shows that factually it was snapped in the process of relationship in regard to the execution of contract relating to its transport for delivery to the foreign buyer. Deduction that was claimed related specifically with regard to the interest in regard to the expenses which may be understood as pre-shipment expenses.
23. The statutory provision has again come up for consideration before the Gujarat High Court in two decisions in Isabgul Export Corporation v. CIT [1994] 205 ITR 227, and Testeels Ltd. v. CIT : [1994]205ITR230(Guj) . Here again the emphasis is on the aspect of territoriality. In the case of Isabgul Export Corporation [1994] 205 ITR 227, the factual matrix was more than clear that the expenditure in regard to which deduction was claimed was incurred before the goods were exported and, therefore, on inference, the said expenditure must have been incurred in India and such expenditure incurred in India would not be admissible for weighted deduction under Section 35B(1)(b)(iii). A bare perusal of Sub-clause (iii) would show the presence of an injunctive clause 'not being expenditure incurred in India in connection therewith'. Therefore, in the above case, the Gujarat High Court was considering the provisions of Sub-clause (iii) where the above injunctive clause is conspicuous by its presence in the discussion. In Testeels Ltd.'s, case : [1994]205ITR230(Guj) , again the Gujarat High Court was also considering the scope of Section 35B(1)(b)(iii) in a situation relating to expenditure on fabrication incurred outside India.
24. It is necessary to emphasise certain observations of the Gujarat High Court in this decision. The observations are that the provision is in the nature of an incentive for export. Even otherwise the period under consideration would exhibit a situation necessitating impetus to the export activity. This was the period where the balance of payments situation of our country had become so much adverse with reference to various aspects in regard thereto, exports had to be encouraged as a matter of policy and it is in pursuance thereof statutory amendments and introduction in the context, many statutory provisions would be seen from similar situations. The provision of Section 35B of the Act is only illustrative of the situation in the nature of an incentive or encouragement in the matter of exports. The factual matrix that is available in Testeels Ltd's case : [1994]205ITR230(Guj) would show that the items of expenditure in regard to which deduction was sought for, which are reproduced in the decision at page 232 ad verbatim, related to advertisement (local), 1/2 of salary to the local employee, bank guarantee charges, etc., on the basis of which the Gujarat High Court recorded a factual conclusion that the situation would have to be understood on the proper emphasis to the aspect of territoriality. The court has pinpointed the findings of fact arrived at by the Tribunal and that too on the basis of certificate issued by the bank in regard thereto clearly showing that all credits in the account were given for the purchase of raw material and this credit is only given on the strength of the contract for supply of goods to foreign countries. The court on the basis thereof found that the expenditure was incurred in connection with the execution of the contract.
25. Incidentally, the decision of the Madhya Pradesh High Court in CIT v. Vippy Solvex Product P. Ltd. : [1986]159ITR487(MP) also was considered by the Gujarat High Court in Testeels' case : [1994]205ITR230(Guj) . It is observed that the correct position is that Sub-clause (viii) contemplated that expenditure incurred in connection with performance of services rendered outside India has to b.e kept in the forefront in the mind. It is observed that it is only those services rendered outside India in connection with or incidental to the execution of any contract for the supply of goods outside India of goods, services and facilities that would be covered by Sub-clause (viii).
26. It is in this background we will have to consider the situation and the scope of application of Sub-clause (viii) under consideration. In the process there has to be a reference to the situation that the Appellate Tribunal has-remanded all these matters and, therefore, the references could have been easily disposed of recording a conclusion that in a situation of an order of remand any answer to the question would be only an academic exercise. However, learned senior standing counsel for taxes submitted that in view of the situation that was the result of the decision cited above and in view also of the position that the Tribunal proceeding on its own earlier decision added to the effect that the matter was argued in detail by counsel for the parties, we felt it necessary to act on the submission of learned senior standing counsel for taxes to record our own reasoning which, according to learned counsel, would be a guidance to the authorities in the matter of an order of remand. Submissions were also made with regard to the expectations from the certificates of the banks on the basis of which the exporters claim deductions under Section 35B of the Act. Learned counsel also submitted that this would be necessary in view of the situation that the income-tax authorities treat the bank certificate as the basis of further inferences in regard thereto to arrive at a factual position as to whether expenditure sought to be claimed has to be given benefit of deduction under the provision under consideration. Learned counsel also submitted that with regard to this packaging credit and shipping lien and interest in regard thereto, export procedure and documentation also needs to be placed on record by way of a guidance in the situation to enable the authorities to pinpoint what is really necessary for the direction of consideration of claims relating to deductions under Section 35B. Learned counsel also submitted that the banks also know precisely as to how the certificate in relation to the satisfaction of the provisions of Section 35B of the Act has to be issued keeping in mind that, only that expenditure as is understood in terms of the provisions of Sub-clause (viii) would have to be considered as relevant in the matter of deduction under consideration. It is in this view of the situation and also in view of the decisions cited before us, we hereafter propose to consider the various facets. In the situation, in the first instance, it could be necessary to note what is 'packing credit and shipping lien' and naturally interest in regard thereto with regard to the claim for deduction under Section 35B of the Act. We have been assisted in this context by learned counsel for the parties by placing for our consideration a book 'A Guide on Export Procedure and Documentation--IV edition by M. I. Mahajan. It is stated by them that Chapter 'Export Finance' would give an idea as to what would be packing credit. With the help sought from the said book, exporters can get pre-shipment credit which is otherwise known as packing credit as well as post-shipment credit from the Indian and foreign commercial banks. Post-shipment credit is on different payment terms from commercial banks as well as from the Export-Import Bank of India. The said chapter conveys what is pre-shipment credit (packing credit) as well as post-shipment credit both short term as well as long-term. Packing credit is available to all types of exporters, export houses and manufacturers exporters and even to manufacturers of goods supplying to export houses. The packing credit amount is decided on the basis of the export order. For obtaining packing credit finance an application is necessary giving details of credit requirements to be made to the bank certain documents are required in regard thereto, to be submitted by the applicant. The documents are specified illustratively. Similar is the position with regard to post-shipment credit. It is necessary to note that post-shipment credit is given after the goods have been shipped and the export documents are submitted by the exporters to the concerned bank for negotiation and collection. Its price is up to the date of realisation of the export proceeds, i.e., the goods to be exported which is not more than 180 days mentioned on the relative export bill. It is necessary to note that before sanctioning the post-shipment credit the bank will liquidate the pre-shipment credit by charging the applicable interest for the period for which the pre-shipment credit was availed of by the exporter. The position is more or less similar with regard to short-term credit, medium term or long-term credit. The rates' of interest are to be fixed by the bank. It is also seen that the entire procedure is for export incentive and the banks shall make advance to the exporters by getting a power of attorney executed in their favour which is sent to the concerned department for registration with a request to prepare the cheques in their name and forward the same to them directly. Thus as far as credit is concerned, it is pre-shipment credit as well as post-shipment credit. It then necessarily follows that post-shipment credit is given after the goods have been shipped and the export documents are submitted by the exporters to the bank.
27. In this connection, the book also speaks of quality control and pre-shipment inspection in the matter of exports and in regard thereto, there are procedures relating to the types of inspection. Ultimately, the essence of the transaction results in the confirmation of the export order which is available in the shape of landing slip and the shipping bill. There are necessary checks and verifications.
28. Ultimately, for the purpose of the application of the provisions of Section 35B of the Act the basic document is the certificate in regard thereto from the financing bank. We have already analysed the provisions of the section and in regard thereto we have already emphasized on the basis of reference to other sub-clauses of Section 35B(1)(b) of the Act, that what is there in the nature of an incentive is as regards what takes place outside India. Sub-clause (viii) under consideration also emphasizes performance of services outside India and the further requirement is that it should be understood as being in connection with, or incidental to, the execution of the contract under consideration. The contract has to be for the supply outside India of such goods, services or facilities. It, therefore, becomes absolutely necessary for the bank authorities to bear in mind in the process of calculation the above statutory requirements. The certificate is expected to contain specific calculation with regard to the services and financial liabilities arising therefrom confining it to those outside India in connection with the execution of the contract. It is in this connection even in the decisions considered by us hereinbefore, the observations are seen to have been made on the basis of findings recorded in regard thereto by the Appellate Tribunal. These findings are naturally based on the bank certificate. Therefore, the bank certificate has to be specific in character in regard to the statutory requirements relating thereto which would not only enable the assessee to claim benefit of deduction under the clause under consideration but it would also be a facility to the tax authorities to pinpoint the amount calculated in accordance with the provisions of the clause under consideration. Naturally, then the certificate is expected to be precise with regard to the figures relating to pre-shipment position as against the post-shipment credit. This is in view of the statutory requirements that the assessee would get benefit with regard to the claim under consideration in accordance with the requirements of the clause only with regard to post-shipment credit and the interest in regard thereto. The bank certificate has to be in accordance with the above statutory requirements.
29. We have already observed that the statutory provision of Section 35B has been introduced on the statute by way of an incentive to encourage export activity. Therefore, the provision will have to be meaningfully understood in the process of interpretation in regard thereto. In the decision of the Madhya Pradesh High Court, from the factual matrix, as we have stated hereinbefore even though the assessee had paid commission and brokerage to various parties at different places, namely, Poland, Germany, London, etc., in connection with the export of its products, it is also seen that on the basis of the certificate therein issued by the concerned bank the credits appeared to have been given in the accounts for purchase of raw materials and the credit was given in regard to contract of supply of goods to the foreign parties. The factual matrix does not give a clear picture with regard to the exactness of the claim under Section 35B of the Act. The court has held that the assessee was entitled to weighted deduction under Section 35B(1)(b)(viii) of the Act. It is the factual matrix that requires definite and sufficient clarity in view of the position that the deduction by sub-clause under consideration is more than specific that the claim in regard thereto would be referable to services outside India in the matter of execution of contract therein. In the decision before the Calcutta High Court, the situation is firstly available, again on the basis of the findings of the Tribunal that the bank certificate related to pre-shipment credit in relation to the purchase of raw materials, and it is so observed in specific words that the loan was taken for the purpose of meeting expenses prior to the shipment of goods. It is in this context, as stated above, it was held that the assessee was not entitled to claim weighted deduction as claimed by the assessee therein. Even in the two decisions of the Gujarat High Court, the situation is not in any way different. In the case of Isabgul Export Corporation [1994] 205 ITR 227, therefore, the court had to reach a conclusion that it did not fall in any of the sub-clauses of Section 35B(1)(b) because it was expenditure on packing materials before the export of goods and was not in connection with what is known as packing credit. Even in Testeels' case : [1994]205ITR230(Guj) , the situation was identical because the claim was in regard to expenditure incurred in paying interest to its bank on the advances and loans given for purchase of raw materials. Reading the two judgments, we are tempted to observe that packing material was considered to be synonymous with packing credit when the factual situation by itself took the goods far away from the provisions of Section 35B.
30. What is really required to emphasise is the serious requirement of the provisions of Section 35B of the Act by the bank at the time of issuance of the required certificate. It must be known to the bank that the certificate is required by the assessee for a specified purpose of claiming weighted deduction under the provisions of Section 35B of the Act. It must further be known to the bank precisely as to under which of the clauses of Section 35B of the Act the certificate asked for is required. The bank should issue the certificates specifying the exact calculation of the amount separating the amount of interest in regard thereto specifically in accordance with the provisions of the statutory requirements. These observances are really necessary because in all these proceedings of taxation, the bank certificate is the basic document. We have found that legal submissions are enthusiastically made leaving these occasional gaps spelling out a situation of ignorance in regard thereto. This is more necessary because the statutory provision has come on the statute book by way of an incentive and thereby the tax authorities are expected to have an understanding approach in regard thereto which would be possible only when the bank certificate requiring a suitable guidance to the tax authorities in regard thereto is placed on record. We have been persuaded to make all these observations and detailed considerations of the legal situation by learned senior standing counsel for taxes so that in these proceedings which are already remanded by the Tribunal, the authorities would proceed in a systematic manner. The authorities also are directed to examine the bank certificate in the light of the above observations to find out as to whether on the strength of the bank certificate it is possible to apply the statutory provisions for the purpose of weighted deduction in regard thereto.
31. In the light of the above observations with regard to questions relating to weighted deduction under Section 35B of the Act the only proper course is that in view of the requirements of the factual matrix, the question is not required to be answered and the Tribunal is directed to remand the proceedings to the tax authorities for dealing with the situation in the light of the above observations.
32. In conclusion, to repeat: Income-tax Reference Nos. 227 and 228 of 1987 ; question No. 1 is declined to be answered. Question No. 2 is answered in the negative, in favour of the Revenue and against the assessee. Question No. 3 is decided in the affirmative, in favour of the assessee and against the Revenue. Question No. 4 is answered in the affirmative, in favour of the assessee and against the Revenue. Income-tax Reference Nos. 89 and 90 of 1987--question is declined to be answered.
33. A copy of the judgment under the seal of this court and the signature of the Registrar shall he sent to the Income-tax Appellate Tribunal, Cochin Bench, for passing consequential orders.