| SooperKanoon Citation | sooperkanoon.com/64499 |
| Court | Income Tax Appellate Tribunal ITAT Mumbai |
| Decided On | Jan-04-1991 |
| Judge | G Krishnamurthy, R Singhal, J Bengra |
| Reported in | (1991)36ITD51(Mum.) |
| Appellant | Vijay Tank and Vessels (P.) Ltd. |
| Respondent | income-tax Officer |
3. As against this, the learned Departmental Representative opened by saying that the error in the original assessment could be either on facts or on law. He elaborated that if some items were entitled to weighted deduction under Sub-clause (iii) of Section 35B(1)(b), the Income-tax Officer had not noticed that such expenditure incurred after 31-3-1978 was not eligible for weighted deduction. He emphasised that the Income-tax Officer did not mark that the assessee's previous year ended on 30th June, 1978 and there could be some expenses covered by Section 35B(1)(b)(ii) which would have been incurred from 1-4-1978 to 30-6-1978 and thereby would not have been entitled to be considered for weighted deduction. He emphasised that such an obvious thing was not taken note of by the Income-tax Officer and hence, there was certainly an error in the assessment order originally passed. In regard to the assessee's argument that the Commissioner in his order dated 14-1-1985 under Section 263 had not come to any firm conclusion, the Departmental Representative mentioned that though while summing-up in para 5, the Commissioner had not given detailed reasons but that was because it was merely a summing-up. He further elaborated that in the original assessment order, the Income-tax Officer had merely referred to Section 35B(1A)(a)(ii) while actually as per that provision, that assessee was not entitled to weighted deduction under Section 35B to the extent it was allowed.
4. We have considered the submissions and we have very carefully perused the order under Section 263. We find that in para 4 of the order under Section 263, the Commissioner had indicated how prima facie big items of purchase and the items of commission payments were not entitled to weighted deduction but the Income-tax Officer had accepted the assessee's claim without calling for necessary details. So, reading the order under Section 263 as a whole, it appears that the Commission came to tentative conclusion that on some of the items benefit of weighted deduction under Section 35B was not available to the assessee and the Income-tax Officer had allowed the same without examining the details or applying his mind properly. The decisions cited on behalf of the assessee, are clearly distinguishable in so far as in those cases even the tentative finding of error and prejudice to the interest of department was not recorded by the Commissioner of Income-tax. Further, in those cases it was also observed that the Income-tax Officer had looked into all relevant aspects and some of the aspects raised by the Commissioner in order under Section 263 were not all that relevant or necessary. This cannot be said about the order under Section 263 presently before us. As already mentioned, the Income-tax Officer had allowed huge claim without properly examining the details and claims.
The Commissioner recorded the observations showing his tentative thinking that the errors had been committed by the Income-tax Officer.
It is, therefore, to be held that the Commissioner's order under Section 263 was properly passed. For further processing after giving the assessee a reasonable opportunity of being heard and for precise quantification, the order was set aside. we may mention here that out of purchases and expenses etc. in Kuwait Branch Rs. 1,31,12,831, included a sum of Rs. 55,96,913 for imported instruments. In the course of hearing, on merits of the assessee's claim even before us, the learned counsel for the assessee did not forward any specific arguments about this item. This also indicates that to the extent of this sum of Rs. 55.97 lacs, the Income-tax Officer's decision was certainly wrong and hastily taken.
5. For all these reasons, we would dismiss the assessee's appeal against the order under Section 263.
6. Coming to assessee's appeal, on merits, let us first recall that in the fresh assessment order, the assessing officer had denied the benefit of weighted deduction in respect of the following two items:ruments, cement, concrete mix etc.
Rs. 1,30,82,011(ii) Commission Rs. 7,61,892 with the result that against the originally accepted claim of Rs. 2,20,80,218, he had allowed weighted deduction only in respect of Rs. 82,36,315. So, on merits, we have to consider the above mentioned two items of Rs. 1,30,82,011 for purchases and Rs. 7,61,892 for commission.
The learned counsel for the assessee drew our attention to the synopsis given about the activities of the assessec-company. The assessee is specialist in design and construction of large field erected floating roof tanks, cryogenic tanks, spheres etc. for refineries, pctro-chemicals and water works and power industry. It undertakes turnkey projects. Designing and engineering and fabrication is done in India and tank materials and physically exported but these materials arc assembled and erected at site. During the relevant period, company carried out project works totalling Rs. 219 lacs and over and above that effected physical exports from India totalling Rs. 266 lacs.
7. The learned counsel for the assessee, drew our attention to the details of items of purchases totalling Rs. 1,30,82,011 furnished item wise and country wise. In respect of Kuwait Branch, the amount is maximum i.e. totalling Rs. 1,04,65,644. This includes Rs. 55,96,913 for imported instruments. He argued that except for this item of imported instruments, all were such that they were needed for rendering services in connection with the execution of contracts and they were not to be regarded as the cost of items used per se. In regard to the cost of imported instruments of Rs. 55,96,913, he fairly and rightly stated that they could not be reasonably regarded as for services rendered. In respect of other items, he argued that they pertained to the cost of hardware, concrete mix, cement etc. and should be regarded as the expenditure incurred which is incidental to the execution of contracts rather than for the cost of materials as such. He drew our attention to para 3 of the order of the Commissioner (Appeals) and pointed out that the latter committed an obvious mistake by recording that Explanation 2 below Section 35B was introduced with effect from 1-4-1978. He submitted that the said Explanation was actually introduced with effect from 1-4-1981 and the Commissioner (Appeals) was, therefore, wrong in relying on the contents of that Explanation while dealing with the appeal for the assessment year 1979-80. As already indicated, he based his claim primarily on Sub-clause (viii) of Section 35B(1)(b) and argued that it was the expenditure incurred wholly and exclusively on the performance of services outside India in connection with the execution of contract for supply of goods, services facilities in the foreign countries. He further drew our attention to the contracts to indicate that the assessee was to erect the tanks etc. and further submitted that the price receivable by the assessee was also for such services. In particular, he claimed that lump sum payments were received for C & F value, maintenance of tanks etc. in Kuwaiti contract for total of Kuwaiti Dinars 283,395 -vide page 36 of the paper book.
Drawing our attention to the CBDT letter dated 29th January, 1981 in connection with the approval under Section 80-O, he submitted that a profit of Rs. 13,15,791 was admitted even by the Board for benefit under Section 80-O as representing the profit in the supply of technical know-how technical services. He drew our attention further to note 9 of the final accounts showing that earning in foreign exchange amounting to Rs. 1,25,14,028 and against expenditure in foreign exchange Rs. 40,43,884. On the basis of all these things, he submitted that but for the said sum of Rs. 55,96,913, all the items were entitled to the benefit of Section 35B for weighted deduction.
8. On the other hand, the learned Departmental Representative, first of all, referred to Section 35B(1A) and submitted that the assessee would not be entitled to weighted deduction and the provisions of Section 35B(1A)(a)(ii) would not be applicable. In this regard, he also referred to the definition for technical know-how given in Section 80MM and proceeded to argue that the assessee's case was not merely of rendering services but involved construction and erection of tanks etc.
He submitted that it was an activity more akin to the construction and erection rather than supply of technical know-how. He further submitted that even under Sub-clause (viii), the benefit was available for the expenditure on performance of services and not on the expenditure incurred in the execution of any contract. He distinguished between the services rendered in connection with the execution of the contract on one hand and the expenditure incurred on the execution of the contract per se on the other. He submitted that the Explanation 2 though inserted with effect from 1-4-1981 would not make any difference because the Commissioner (Appeals) had not really relied on that provision.
9. We have very carefully considered the submissions. As already indicated, out of a total sum of Rs. 1,30,82,011 on which the department has now rejected the assessee's claim a sum of Rs. 55,96,913 is certainly not entitled to this benefit.This is the amount of cost of imported instruments used in the Kuwaiti contract. Thus, out of a total expenditure of Rs. 104.66 lac on the Kuwaiti contract, the claim is now restricted by the assessee only to a sum of Rs. 48.69 lacs. Even out of this sum, we find that the cost of hardware is shown at Rs. 10,44,029 which is obviously more than 20% of the net claim now staked for Rs. 48.69 lacs. Similarly, cost of concrete mix is Rs. 14,79,870 which is obviously almost 30% of the said sum of Rs. 48.69 lacs Similarly for cement, the cost shown at Rs. 11,97,236 which is almost 24% of the said net claim for Rs. 48.69 lacs. For these three items, it cannot be said that it was wholly and exclusively for the performance of services in regard to the execution of the contract. Fair estimate has to be made as to what amount out of them should be regarded as merely, incidentally to the execution of the contract and hence, entitled to be regarded as expenditure on performance of services incidental to the execution of the contract and what amount should be regarded as cost of items which would be more justifiably required to be categorised as the cost of the execution of the contract itself, on the lines, the cost of imported instrument Rs. 55,96,913 is treated. In our opinion, it would be fair and reasonable to treat Rs. 8 lacs out of hardware and Rs. 121acs out of concrete mix and Rs. 10 lacs out of cement as being in the nature of cost of materials and hence attributable to the execution of the contract. For similar reasons out of a sum of Rs. 6,85,224 for hardware in the Kenya contract a sum of Rs. 4 lacs may be regarded as pertaining to the execution of the contract and hence not entitled to the benefit of Section 35B. We may further mention that in the Kenya contract, total expenditure shown at Rs. 24.54 lacs out of which for hardware alone it is shown at Rs. 6.85 lacs which is obviously excessive. There are two other items of gas and paints which are substantial but we would agree with the assessee that those items would be primarily for the services rather than for the execution of the contract. So, in addition to the cost of imported instruments, a total sum of Rs. 34 lacs (8 + 12+10 +4) would be such that it would not be entitled for the benefit of weighted deduction under Section 35B. So, the disallowance under Section 35B on the total sum of Rs. 89,96,913 is confirmed out of denial by the departmental authorities on a sum of Rs. 1,30,82,011.
10. This brings us to the dispute about the commission of Rs. 7,61,892.
The assessing officer rejected the assessee's claim on the whole sum of Rs. 7,61,892 but the Commissioner (Appeals) accepted the same and retained to the disallowance on a sum of Rs. 3,45,000 only. The assessee is in appeal against the retained sum of Rs. 3,45,000 and the department is in appeal against the Commissioner (Appeals) allowing in respect of balance of Rs. 4,16,081. The details are as follows:- The Commissioner (Appeals) held that the Commission payments were covered by Sub-clause (iii) of Section 35B(1)(b). At the relevant time, under that clause, that benefit was available only in respect of expenditure incurred before 1-4-1978. In respect of first two parties, in the chart above, he found that the amounts had been paid before 1-4-1978 and hence the assessee's claim was accepted. In respect of third party viz., Mitsui & Co., the Commissioner (A) held that the payment was made after 31-3-1978 and hence, the claim was not acceptable.
11. Assessee's contention in regard to the sum of Rs. 3,45,000 to M/s.
Mitsui & Co., was firstly that the claim was admissible not merely under Sub-clause (iii) but also under Sub-clauses (i) & (ii). The alternative contention is that even if it is considered under Sub-clause (iii), the expenditure should be regarded as incurred before 1-4-1978 because the approval of the IDBI dated 27-2-1978 had been received and permit for remittance was also received from the RBI vide their letter No. 080015 dated 13th Nov., 1976. Originally, the permit was valid up to 12th December, 1976. It was extended from time to time and ultimately the payment was made on 30th June, 1978. The plea taken was that in the mercantile system of accounting the expenditure had been incurred by the assessee before 1-4-1978 and merely disbursement was postponed up to 30-6-1978.
12. In respect of this item, for supporting its claim, the assessee has drawn our attention to pages 118,119,120 & 121 of its paper book. On the other hand, the learned Departmental Representative has supported the stand that the payment was covered by Sub-clause (iii) and it was not allowable because it was incurred after 31-3-1978.
13. On very careful consideration, we find that for supporting its claim that assessee submitted on page 118 of its paper book, the agreement dated June 29, 1979. Obviously, this cannot constitute basis for payments whose remittance have been allegedly authorised by the RBI on 13-11-1976 i.e., more than 21/2 years in advance. Similarly, it is not clear that the IDBI's approval dated 27-2-1978 would be relevant to the RBI's remittance permission dated 13-11-1976. Obviously, the documents relied on by the assessee cannot and do no support the assessee's case. May be, the assessee committed a mistake in putting at page 118 a different agreement and may be, there are other papers even in respect of IDBI's approval and RBI's permit. We further find that RBI's permit is for remittance to Lebanon while the payee indicated in the details given is M/s. Mitsui & Co., Japan. We do not rule out the possibility of genuine error on the part of the assessee in putting the agreement dated June 29, 1979 on page 118 of its paper book. Further, the assessee's claim of the commission payment being covered partly or wholly by other sub-clauses also needs to be examined in greater details by the assessing officer. Hence, taking totality of circumstances into account, we would restore to the file of the assessing officer, the point of weighted deduction under Section 35B on the commission payment of Rs. 3,45,000 to M/s. Mitsui & Co., Japan for fresh adjudication after giving the assessee a reasonable opportunity of being heard. To this extent, the direction of the Commissioner (Appeals) is modified.
14. Coming to the department's appeal, we find that the Commissioner (Appeals) is right in holding that the commission payment is certainly covered by Section 35B(1)(b)(iii). He has given dates to show that the payments had been made to the parties before 1 -4-1978. The Commissioner (Appeals) was justified in accepting the assessee's claim in respect of those two parties.
15. In effect, assessee's appeal against the order under Section 263 is dismissed. The departmental appeal is also dismissed but the assessee's appeal on merits, is treated as partly allowed.
16. I have had the benefit of going through the order of my learned brother. With respect, I have reservations to agree with it in full.
17. On the question of exercise of jurisdiction under Section 263 by the CIT., I endorse the finding given by learned brother given in paragraphs 1 to 5 of the order. It is a clear case of exercise of jurisdiction under Section 263.
18. I, however, find unable to persuade myself to agree with the finding given by my learned brother in paragraph 9 of the order. In original assessment, the Income-tax Officer allowed weighted deduction in respect of total sum of Rs. 2,20,80,218. The CIT initiated proceedings under Section 263 on the footing that the ITO has not properly applied his mind while allowing the above claim. Since I agree with the conclusion reached by my learned brother with regard to exercise of jurisdiction under Section 263, I do not intend to go into the details of the same.
19. As regards merits, the assessing officer had denied the benefit of weighted deduction in respect of the following two items :-ruments, cement, concrete mix. etc. Rs. 1,30,82,011(ii) Commission Rs. 7,61,892 Thus, as against the originally accepted claim of Rs. 2,20,80,218 for weighted deduction, the assessing officer allowed weighted deduction only in respect of Rs. 82,36,315, leaving the claim with regard to the above two items, namely, purchase of hardware, instruments, cement, concrete mix, etc. and comission.The business of the assessee is specialisation in design and construction of large field erected floating roof tanks, cryogenic tanks, spheres etc. for refineries, petrochemicals and water works and power industry.
It undertakes turnkey projects. Designing and engineering and fabrication is done in India and tank materials and physically exported but these materials are assembled and erected at site. The same is tested and finally commissioned.
20. Learned counsel for the assessee submitted that out of the details of items of purchases given at page 4 of the paper book itemwise and countrywise, the amount in respect of Kuwait Branch is Rs. 1,04,65,644 which includes Rs. 55,96,913 for imported instruments. He admitted that except for these items of imported instruments, all were needed for rendering services in connection with the execution of contracts and therefore they should not be regarded as cost of items used per se.
Regarding cost of imported items, his submission was that they could not be reasonably regarded is for services rendered. In regard to other items, it was argued that they pertained to cost of hardware, concrete mix., cement, etc. which should be treated as the expenditure which is incidental to the execution of contracts rather than for the cost of materials as such. Reference was also made to Explanation 2 below Section 35B and it was pointed out that this explanation was actually introduced with effect from 1-4-1981 whereas the CIT (A) wrongly mentioned the same as having been introduced with effect from 1-4-1978.
He submitted that the claim of assessee was based primarily on Sub-clause (viii) of Section 35B(1)(b), as the said expenditure was incurred wholly and exclusively for the purpose of business and in the performance of services outside India in connection with the execution of contract for supply of goods, services, facilities, etc., in the foreign countries. Therefore, according to him, keeping in view the business of the assessee, he was entitled to weighted deduction under Section 35B(1)(b). Continuing his arguments, he submitted that lump sum payments were received for C & F value, maintenance of tanks etc. in Kuwaiti contract. Our attention was also invited to the Board's circular dated 29th January, 1981, where the Board has given approval for relief under Section 80-O. He also invited our attention to Note-9 of Final accounts, which shows that earnings in foreign exchange was to the extent of Rs. 1,25,14,028 and expenditure in foreign exchange was to the tune of Rs. 40,43,884.
21. As against this, learned departmental representative submitted that we are concerned in this appeal with the Assessment Year 1979-80, when Sub-section (1A) of Section 35B was applicable. Therefore, in view of Section 35B(1A), assessee would not be entitled to weighted deduction, unless he fulfils conditions laid down in Sub-section (1A). He submitted that even under Sub-clause (viii), the benef it was available for expenditure on performance of services, but the same was not available on the expenditure incurred in the execution of any contract.
He distinguished between the services rendered in connection with the execution of the contract on one hand and the expenditure incurred on the actual execution of the contract per se on the other and pointed out that for granting weighted deduction, it is necessary that the assessee should be a small-scale exporter or a holder of export-house certificate or engaged in the business of providing technical know-how or the rendering of services in connection with the provision of technical know-how, to persons outside India. Besides this the expenditure referred to in that Sub-section be incurred wholly and exclusively for the purposes of business, referred to above. In this case, the assessee has not fulfilled these conditions, because, the assessee himself executes the contract and not merely provides technical know-how or renders services in connection with the provision of technical know-how and therefore, he is not entitled for weighted deduction, on this expenditure.
22. I have considered the rival submissions. Out of the assessee's claim for weighted deduction on Rs. 1,30,82,011 which was rejected by the Revenue authorities, as already pointed out above, Rs. 55,96,913 pertains to imported instruments and therefore, there is no question of considering this amount for weighted deduction. As regards the claim for weighted deduction in respect of other items and on the balance amount rejected by the Revenue, it may be pointed out at the outset that we are concerned in this appeal with the Assessment Year 1979-80, when Sub-section (1A) to Section 35B was operative. The said Sub-section (1A) is a non obstante Clause which provides as under :- (1A) Notwithstanding anything contained in Sub-section (1), no deduction under this section shall be allowed in relation to any expenditure incurred after the 31 st day of March, 1978, unless the following conditions are fulfilled, namely:- (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 purpose of the business referred to in Sub-clause (i) or, as the case may be, Sub-clause (ii) of Clause (a).
A plain reading of the above Sub-section makes it clear that in order to claim benefit under Sub-section (1 A) of Section 35B, the assessee should fulfil two conditions. Firstly, the assessee should be engaged in the business of export of goods and he either a small-scale exporter or a holder of Export House Certificate; or engaged in 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.
Secondly, the expenditure referred in that Sub-section should have been incurred by the assessee wholly and exclusively for the purposes of business referred to in Sub-clause (0 or, as the case may be, Sub-clause (ii) of Clause (a). Item (c) of Explanation below Sub-section (1A) mentions that 'provision of technical know-how' has the meaning assigned to it in Clause (2) of Section 80MM. Clause (2) of Section 80MM defines 'provision of technical know-how' as under - (2) For the purposes of this section 'provision of technical know-how' means- (i) the transfer of all or any rights (including the granting of licence) in respect of a patent, invention, model, design, secret formula or process or similar property; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention model, design, secret formula or process or similar property; (iii) the use of any patent, invention, model, design, secret formula or process or similar property; (iv) the imparting of any information concerning industrial, commercial or scientific knowledge experience or skill.
In this case, we find that the business of the assessee is as specialists in design and construction of large field erected floating roof tanks, cryogenic tanks, spheres etc. for Refineries, Petro-chemicals and Water Works and Power Industry. The assessee company undertakes turnkey projects and carries on design, engineering and fabrication in India and physically exports the tank materials for erection at site. After erection, the same is tested and finally commissioned. These works are carried out by the assessee under an agreement outside India. Therefore, the assessee is not providing technical know-how or rendering services in connection with provision of technical know-how. So the first condition for applicability of Sub-section (1A) of Section 35B that the business should be of providing technical know-how or rendering services in connection with provision of technical know-how is not complied with, because the assessee does not. provide the technical services or renders services in connection with the provision of technical know-how but it executes the erection work of the machinery and plant outside the country at site after carrying out its design, engineering and fabrication in India and exporting the materials to the site physically for assembling, erection and testing after commissioning. A distinction has to be drawn in providing technical know-how or rendering services for provision of technical know-how and in executing work itself outside the country. In view of the activities of the assessee, the first condition of Sub-section 35B(1A) relating to the nature of business of the assessee, is not fulfilled.
23. I would like to mention here that the definition of the term 'provision of technical know-how' excludes from the purview of the said term construction or erection business and it is rather limited to the transfer of all or any rights (including the granting of a licence in respect of or the imparting of any information concerning the working of, or the use of, or the use of any patent, invention, model, design, secret formula or process or similar property or the imparting of any information concerning, industrial, commercial or scientific knowledge, experience, skill.
24. The second condition necessary for claiming weighted deduction under this Sub-section is that the expenditure incurred by the assessee should be wholly and exclusively for the purpose of the business mentioned under Sub-clause (i) or (ii) of the Sub-section of Section 35B(1A) of the assessee. Here I find that my learned brother has concluded that the items on which this expenditure was incurred cannot be said to be wholly and exclusively for the purpose of business of rendering services in regard to execution of contract. I also feel that the said expenditure was not incurred wholly and exclusively for the performance of services envisaged in Sub-clause (i) or (ii) of Section 35B(1A) in regard to the execution of the contract and, therefore, the second condition laid down in Sub-section (1A) of Section 35B is also not fulfilled and there is no justification to allow weighted deduction even on the part amount.
25. It would be worthwhile to mention here that the approval granted by the Central Board of Direct Taxes for the benefit under Section 80-O of the Income-tax Act, 1961 does not improve the case of the assessee firstly because the letter of the Board has clearly mentioned that the grant of deduction from the gross total income will be subject to the assessee fulfilling the other conditions laid down in the Act in that behalf; and secondly because neither in Section 80MM nor in Section 80-O there is such conditions as prescribed in Sub-section (1A) of the Act and therefore the said letter of the Board makes no impact on the claim of assessee for weighted deduction. I am of the opinion that the assessee shall not be entitled to weighted deduction in respect of the first item, namely, purchase of hardware, instruments, cement, concrete mix. etc. As regards weighted deduction on the second item, namely, commission, I agree with the finding of my learned brother in paragraphs 10 to 14 of his order.
26. For the reasons spelt out above, I regret my inability to fall in line with the reasoning and conclusion recorded by my learned brother with regard to allow ability of weighted deduction on item(1) purchase of hardware etc. partly allowed by him.
27. In the result, appeals of the assessee against an order under Section 263 as also the departmental appeal are dismissed. The assessee's appeal is partly allowed for statistical purposes.
We, the members of the Bombay Bench 'A' have differed in our orders passed in ITA No. 1427/Bom/85, ITA No. 2398/Bom/88 and ITA No.2314/Bom/88, for the Assessment year 1979-80 in the matter of M/s.
Vijay Tank & Vessels (P.) Ltd., Bombay. The following questions on which we differed are referred to the Hon'ble President for resolution under Section 255(4) of the Act: 1. Whether the assessee does not fulfil the conditions mentioned in Sub-section (1 A) of Section 35B of the Act in order to claim weighted deduction? 2. Whether the assessee is entitled to weighted deduction in respect of purchase of hardware instruments, cement, concrete-mix, etc.
partly or fully? 1. This matter has come before me as a Third Member for my opinion under Section 255(4) of the Income-tax Act, 1961 on the following two points of difference of opinion: (1) Whether the assessee does not fulfil the conditions mentioned in Sub-section (1 A) of Section 35B of the Act in order to claim weighted deduction? (2) Whether the assessee is entitled to weighted deduction in respect of purchase of hardware instruments, cement, concrete-mix, etc. partly or fully? 2. The matter presented some difficulty in understanding the real controversy but with the aid and assistance of the learned counsel and the Departmental Representative, I was able to appreciate the controversy that arose in this case.
3. The assessee is a private limited company engaged in the manufacture of Oil Storage Tanks and Industrial Machinery. It also functioned as engineers and designers for the manufacture and erection of storage tanks, particularly abroad. The assessee also is specialist in design and construction of large field erected floating roof tanks, cryogenic tanks, spheres etc. for refineries, petro-chemicals and water works and power industry. It also undertook turnkey projects. For the turnkey projects that it undertook to perform abroad, it was designing and engineering and fabricating the entire tank materials in India and then physically exporting them for assembly and erection at the site. During the relevant period, the assessee company carried out project works totalling to Rs. 2.19 lacs over and above the physical exports from India of Rs. 266 lakhs. In the year under appeal, we are concerned with contracts undertaken for the erection of tanks with: (1) M/s Kenya Pipe Line Co. Ltd., Nairobi vide agreement dated 30-12-1977.
(2) M/s. Kenya Pipe Line Co. Ltd., Nairobi vide agreement dated 22-3-1978.
All these foreign contracts are approved by the Central Board of Direct Taxes, Delhi.
4. Among other things, the assessee claimed the weighted deduction allowable under Section 35B of the Income-tax Act on a total sum of Rs. 2,20,80,213. This claim was allowed by the Income-tax Officer by his order dated 15-1-1983. Thereafter the Commissioner of Income-tax, on the verification of the records found that the allowance of the claim was made in a hurry and without proper enquiry. He, therefore, after giving notice to the assessee cancelled the assessment under the powers vested in him under Section 263 of the Income-tax Act.
5. In the fresh assessment made, the ITO restricted the claim for allowance weighted deduction under Section 35B only to Rs. 82,36,315 and denied the benefit in respect of Rs. 1,38,43,903 made up of the following two items :cement, concrete mix etc.
Rs. 1,30,82,011(ii) Commission Rs. 7,61,892 Rs. 1,38,43,903 It was in respect of the disallowance of claim of these two sums that the matter had come before the Tribunal and the Learned Members differed on the point as to whether the weighted deduction under Section 35B was allowable in respect of first item namely purchase of hardware, instruments, cement, concrete mix. and agreed on the second item of commission. In view of that I will have to confine myself only to the first point.
6. With regard to this point, the claim of the department was that the assessee had not exported any goods or services or provided any goods or services in connection with the export of technical know-how and, therefore, no weighted deduction under Section 35B(1A) was admissible.
Whereas the assessee's contention was that out of this Rs. 1,30,82,011, there was a sum of Rs. 55,96,913 representing the purchase of imported instruments and on that purchase value, no deduction was admissible.
Only on the balance sum which comes to Rs. 74,85,098, weighted deduction was admissible. The details furnished for these items are to be found on page 4 of the paper book. It is in respect of Kuwait contract that imported instruments of Rs. 55,96,913 were purchased and Rs. 28,608 in respect of Kenya totalling to Rs. 56,25,521. Excluding this sum, on which even the assessee agreed that no weighted deduction under Section 35B was admissible and over which there was also no difference of opinion between the learned Members, the balance amount works out to Rs. 74,56,490. It was in respect of this sum that the differences arose. While the learned Judicial Member says that no part of it was admissible for weighted deduction, the learned Accountant Member was of a different opinion. Included in this sum of Rs. 74,56,490 were items spent under the following heads in the execution of Kuwait contract: This was outofa total sum of Rs. 1,04,65,644 spent in Kuwait. There were also sums incurred under the head Hardware in Libya (Rs. 12,106) in Dubai (Rs. 31,891), Srilanka (Rs. 27); Concrete Mix only in Libya Rs. 2,810 but these sums were not taken by the learned Accountant Member either into consideration or in his calculations. He was of the opinion that these sums spent in Kuwait could not be taken as wholly and exclusively incurred for the performance of services in regard to the execution of the contract. He was also of the opinion that a part of it could be related to expenditure incurred incidental to the execution of the contract and, therefore, on the performance of services and that sum should have to be estimated in giving benefit of weighted deduction. He estimated Rs. 2.4 lakhs in hardware, Rs. 2.79 lakhs in concrete mix and at Rs. 1.97 lakhs in cement as incidental to the performance of services and allowed deduction in respect of that sum anddisallowed the allowance on the balance which together worked out to Rs. 30 lakhs i.e Rs. 8 lakhs on hardware, Rs. l2 lakhs on concrete mix and Rs. 10 lakhs on cement.
7. In regard to Kenya contract, there was a sum of Rs. 6.85 lakhs incurred under the head hardware out of which he allowed weighted deduction on Rs. 2.85 lakhs on similar lines as in Kuwait and disallowed the benefit on the balance of Rs. 4 lakhs. There was also a sum of Rs. 34,720 incurred under the head 'cement' in Kenya over which he allowed the benefit in full. Thus the further disallowance suggested by the learned Accountant Member comes to Rs. 30 lakhs in Kuwait and Rs. 4 lakhs in Kenya aggregating to Rs. 34 lakhs.
8. Out of Rs. 1,30,82,011 he disallowed weighted deduction on a total sum of Rs. 89,96,913 made up of the cost of purchase of imported materials and the other items mentioned above and allowed weighted deduction on the balance which worked out to Rs. 40,85,098. His reasoning as seen from the order was that this expenditure was wholly and exclusively in the performance of the services in connection with the export contracts and, therefore, weighted deduction was admissible in respect of those items. As I have mentioned earlier, the learned Judicial Member was of the opinion that even in respect of this sum, no allowance was admissible. That was how the above differences of opinion arose.
9. Now let me deal with the first point of difference whether the assessee was at all entitled to the weighted deduction under Section 35B(1A). Section 35B(1A) at the material time was in the following terms : (1A) Notwithstanding anything contained in Sub-section (1), no deduction under this section shall be allowed in relation to any expenditure incurred after the 31 st day of March, 1978, unless the following conditions are fulfilled, namely :- (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 purpose of the business referred to in Sub-clause (i) or, as the case may be, Sub-clause (ii) of Clause (a).
It says that no deduction under Section 35B is admissible in relation to any expenditure incurred after 1-4-1978 unless the conditions mentioned therein were satisfied namely that theassessee must be engaged in the business of export of goods and at the same time, he should be a small-scale exporter or a holder of an Export House Certificate, or in the alternative, the assessee must be engaged in 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 the expenditure referred to must be incurred wholly and exclusively for the purpose of business either for export of goods as small scale exporter or a holder of an Export House Certificate or in 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. In my opinion 35B(1A)(1)(a)(i) does not apply to the facts of this case because the assessee did not export any goods as a small scale exporter or a holder of an Export House Certificate. In any case that material is not before me and what was more there is no reference to it in the orders and it appears an admitted fact that the assessee was not an exporter of goods as a small scale exporter or as a holder of an Export House Certificate.
Necessarily, we have therefore, to follow back on (ii) to see whether the assessee was engaged in the business of provision of technical know-how or rendering of services in connection therewith. Item (c) of the Explanation below Sub-section (1A) mentions that 'provision of technical know-how' will have the same meaning as assigned to it in Clause (2) of Section 80MM. Section 80MM defines provision of technical know-how as under: 80MM (1) Where the gross total income of an assessee, being an Indian company includes any income by way of royalty, commission, fees or any other payment (not being income chargeable under the head 'capital gains'), received by (the assessee) from any person carrying on a business in India in consideration for - (i) the provision of technical know-how which is likely to assist in the manufacture or processing of goods or materials, or in the installation or erection of machinery or plant for such manufacture or processing, or in the working of a mine, oil-well or other source of mineral deposits, or in the search for, or discovery or testing of, mineral deposits or the winning of access to them, or in carrying out any operation relating to agriculture, animal husbandry, dairy or poultry fanning, forestry or fishing, or (ii) rendering services in connection with the provision of such technical know-how.
Clause (2) of Section 80MM defines 'provision of technical know-how' as under: (2) For the purposes of this section 'provision of technical know-how means - (i) the transfer of all or any rights (including the granting of licence) in respect of a patent, invention, model, design, secret formula or process or similar property; (ii) the imparting of any information concerning the working of, or the use of, a patent, invention, model, design, secret formula or process or similar property; (iii) the use of any patent, invention, model, design, secret formula or process or similar property; (iv) the imparting of any information concerning industrial, commercial or scientific knowledge, experience or skill.
The learned Judicial Member after referring to Sub-section (2) of Section 80MM and 35B(1A)came to the conclusion, as I mentioned earlier, that since the business of the assessee was as specialists in design and construction of large field erected floating roof tanks, cryogenic tanks, spheres etc. for Refineries, Petro-chemicals and Water works and Power Industry and since the assessee was undertaking turnkey projects and carries on design, engineering and fabrication in India and exporting physically the tank materials for erection at site, the assessee could not be said to be providing any technical know-how or rendering of any service in connection with the provision of technical know-how. He, therefore, denied the benefit of weighted deduction in respect of the amount. There was no discussion in the order of the learned Accountant Member about this aspect. But I am of the opinion that the view taken by the learned Judicial Member is too narrow and deprives the assessee the benefit conferred by the Legislature.
It is no doubt true that the assessee company was undertaking turnkey projects and carried on the designing, engineering and fabrication work in India and physically exporting the tank materials for erection at site for eventual testing and commissioning but if the documents of tender, the agreements etc. were perused as I have done in this case, which were made part of the paper book, they do prove that there was imparting of information concerning the working of the tanks etc.
erected there. Clause (iv) of Sub-section (2) of Section 80MM refers to imparting of information concerning industrial, commercial or scientific knowledge, experience or skill and includes it in the provision of technical know-how. After the tanks were erected, certain obligations were undertaken by the assessee and those obligations are in the nature of imparting of information concerning the Industrial knowledge. It is because of the experience and skill that the assessee possessed that these contracts were awarded to it by the foreign Governments. The erection of a tank is of a very intricate and complex engineering work. There are several risks involved in the erection of tank. Several provisions were made in the agreements to ensure that there were proper foundations, that there were proper roofing, proper diameter all-round the tank and each tank the local engineer has to be satisfied and trained in methods of preserving the tanks and also to ensure their satisfactory work. It cannot be said having regard to the nature of the work carried out by the assessee and with regard to the provisions of contract that successful performance of the contract is possible without imparting of information concerning industrial or scientific knowledge, experience and skill to the contractees. There may not be a transfer of any rights in respect of patent, invention, model, design, secret formula or process or similar property, but there was imparting of information concerning industrial knowledge, experience and skills acquired by the assessee over a period of years by executing repeatedly these contracts. In fact before tendering the works and even during the tendering of works and thereafter, references were given to the satisfactory works completed abroad. I am not referring to the clauses of agreements which deal with the imparting of information concerning the industrial knowledge, experience or skill.
It is not enough if the tanks are erected in India, exported outside India to the work site, be it in Kenya, Kuwait or elsewhere, erect them test them and commission them. The intricacies involved, the engineering designs etc. involved must be explained to the local engineers as they have to run these tanks afterwards. Therefore, to say that there was no provision of technical know-how in a contract of this intricate nature is very difficult to comprehend. As I said earlier, the agreements do refer to these aspects. As there was imparting of information concerning industrial knowledge, technical skills, I am of the opinion that there was provision of technical know-how within the meaning of Section 35B(1A)(ii) and it does apply to the facts of this case and the assessee is, therefore, entitled to the benefit of weighted deduction under Section 35B if the subsequent requirement of law namely that the expenditure incurred was wholly and exclusively for the purpose of that business was fulfilled.
10. The learned Accountant Member in this context held that out of the total claim of Rs. 1,30,82,011 only Rs. 40,85,098 is eligible for weighted deduction. Now if I turn to the items involved as given at page 4 of the paper book, they relate to a part of the hardware, a part of the concrete mix, a part of the cement, gas, electrodes, paints, structural steel, steel plates, sand & metal, tools, pipes & fittings, electrical goods, valves & fittings, timber wood. A reference to the agreement entered into between the assessee and Kenya Pipe Line Co. and the other do indicate that the assessee has to undertake these works in India and erect them by carrying out these things to abroad and again repaint it there. It is in this process that the other services are definitely needed. It cannot be said that the erection work abroad of a contract of such a magnitude and intricacy could be done without provision of these essentials. It is well to remember that Section 35B(1A)(1)(b) refers to only expenditure incurred by the assessee wholly and exclusively for the purpose of the business referred to in Clause (ii) namely provision of technical know-how or rendering of services in connection with the provision of technical know-how to persons outside India and it does not say that those items which were provided have to be purchased in India and exported outside. It did not put any prohibition that those items should not be purchased outside India. The whole purpose of Section 35B(1A) is to encourage the export of goods and also encourage the export of technical know-how to persons outside India. In the process of provision of technical know-how, rendering of services also becomes necessary. Therefore, the section provided that not only a provision of technical know-how but also the rendering of services in connection with the provision of technical know-how would be entitled to weighted deduction. In rendering of services in connection with the provision of technical know-how assessee has to incur expenditure. In order to eliminate the expenditure which was not relatable to the rendering of services in connection with the provision of technical know-how that stipulation was inserted that the expenditure must be wholly and exclusively for the purpose of the business of rendering of services in connection with the provision of technical know-how. Understanding of the principal objective behind Section 35B(1A), it cannot be said that the other expenditure which I have listed above is not expenditure rendered in connection with the services for the provision of technical know-how wholly and exclusively for that purpose. In a business of this kind where the expenditure is indirectly mixed up with other expenditure, certain amount of estimate has to be made and that was approved by the Special Bench of the Income-tax Appellate Tribunal in the case of J.Hemchand & Co. Therefore, nothing can be found fault with if an estimate was resorted to arrive at the expenditure which could be said to have been wholly and exclusively incurred for the purpose of the business of rendering of services in connection with the provision of technical know-how to persons outside India. The expenditure detailed at page 4 do in my opinion satisfy this requirement. I am, therefore, of the opinion that the benefit of weighted deduction under Section 35B is admissible in respect of that portion of the expenditure which the learned Accountant Member had estimated. On a careful analysis of the Section and the work done by the assessee, it cannot be said that even though the assessee was executing the erection work of the machinery and plant outside the country at site after carrying out its design, engineering and fabrication in India and exporting the materials to the site, no services were rendered in the provision of technical know-how.
It is difficult to envisage a situation where in the execution of a contract of this highly complex nature, technical know-how was not involved at all and no services were rendered if the contract is to be fully implemented to the satisfaction of the customer.
I, therefore, find myself unable to agree with the view expressed by the learned Judicial Member.
11. Here I may also mention that the learned Judicial Member had expressed his agreement with that view of the learned Accountant Member whereby he said that certain expenditure disqualify for the benefit of Section 35B. Therefore, there is an agreement between the two Members in respect of allowing weighted deduction on a portion of the expenditure. The dispute, therefore, boil down to the allowance of weighted deduction only on the balance. In respect of the balance, for the reasons given above, I am of the opinion that weighted deduction under Section 35B is admissible. Since the Members have expressed an agreement on disallowance of a part of the expenditure, I do not understand the implication of using the word "fully" in the difference of opinion framed by them as if a discretion is available or given to me to allow even fully the expenditure. As a Third Member, I have to confine myself only to the point of difference of opinion that arose between the Members. Since the point of difference of opinion was only with regard to the balance of expenditure, I confined myself only to that aspect and expressed my opinion in favour of the view expressed by the learned Accountant Member.
12. The matter will now go before the regular Bench to pass order as per majority opinion.