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PETITIONER: ARAVINDA PARAMILA WORKS

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX

DATE OF JUDGMENT:       31/03/1999

BENCH: S.P.Bhurucha, R.C Lahoti

JUDGMENT:

BHARUCHA, J.

     The  question  in  this appeal is whether  payment  of commission  to  an agent abroad is maintenance of an  agency within  the  meaning of Section 35B(1)(b)(iv) of the  Income Tax Act, 1961.  The High Courts have taken divergent views.

     We  are  concerned with the Assessment  Year  1981-82. The  assessee  manufactured  agarbathis.   It  had  exported agarbathis during the year under consideration.  It had paid commission  to agents outside India who had procured orders. It  claimed  weighted  deduction under  the  afore-mentioned provision  in respect of such expenditure of Rs.13,23,225/-. It   was  disallowed  by   the  Assessing  Authority.    The Commissioner  of Income Tax (Appeals) took a contrary  view. The Income Tax Appellate Tribunal held that the Commissioner (Appeals)  was  not justified in allowing the said  weighted deduction.   From  out  of  the judgment and  order  of  the Tribunal,  the  following question was referred to the  High Court for its considerations:

     Whether  on the facts and in the circumstances of the case,  the  Tribunal  was  justified  in  holding  that  the applicant  was not entitled to the weighted deduction  under S.35B  (1)(b)(iv)  of the Act, in respect of the  commission payments made to agents outside India?

     The   High   Court  answered   the  question  in   the affirmative  and  in  favour of the Revenue,  following  its earlier  decision  in Chief Commissioner of Income  Tax  vs. Mysore  Sales  International  Ltd.    (195  ITR  457).   The assessee is in appeal by special leave .

     Section  35B  states  that where an assessee,  who  is reasident in India, has incurred, directly or in association with any other person, any expenditure referred to in clause (b)  thereof, he would be allowed a deduction of a sum equal to be one and one-third times the amount of such expenditure incurred  during the previous year.  So far as is  relevant, clause  (b)  reads:  the expenditure referred to in  clause (a)  is  that  incurred  wholly  and  exclusively  on--  (i) .................     (ii)       .................     (iii) ................;  and

     (iv)  maintenance outside India of a branch, office or

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agency  for the promotion of the sale outside India of  such goods, services or facilities;

     ................

     The  question,  therefore, is whether  the  commission that  the assessee had paid to agents outside India who  had procured  orders was expenditure on the maintenance  outside India  of  agencies  for the promotion of the  sale  outside India of its agarbathis.

     The  High Court noted the contention on behalf of  the assessee  that the expression agency would include even  a single agent and observed that this would have been relevant if it was shown that the establishment of the agency outside the  country had been maintained by the assessee, but  there was  no  material placed before the Tribunal or any  of  the authorities  concerned for claiming that an agency had  been maintained by the assessee.  In Chief Commissioner of Income tax  vs.  Mysore Sales International Ltd.  (195 ITR 457) the Karnataka High Court took the view that the word agency in the  aforesaid provision had to be read ejusdem generis with the  expression  branch  and  office used  in  the  said provision.   The  meaning  attributable to  agency  would, therefore,  have  to  be something which  had  some  flavour resembling  that  of  a branch or office.  That  apart,  the assessee  had  to maintain such agency for it was only  such expenditure  which  could fall within the ambit of the  said clause.   The  word maintenance could not be equated  with the  concept  of payments made depending on the actual  work turned  out.   It indicated that, irrespective of  the  work turned  out,  the  agency was maintained for its  upkeep  or preservation  or sustenance;  this alone could be termed  as maintenance of an agency.  Emphasis was also placed upon the opening  words which required that the expenditure should be incurred  wholly and exclusively on the activities mentioned in  the  sub-clauses.   Therefore,  it  was  held  that  the maintenance  of  the  agency for sale  promotional  purposes alone  was covered by the relevant words of sub-clause  (iv) and  such  expenditure should be entirely incurred for  that purpose.   In the case before the High Court, the commission had  included  remuneration  for the agent for  procuring  a particular  sale and, it was therefore, held to fell outside the ambit of Section 35B.

     The  High  Court  of  Calcutta in  C.I.T.   vs.   Usha Telehoist  Ltd.  (212 ITR 177) dissented from the view taken by the Karnataka High Court in the case afore-mentioned.  It observed  that the principle of ejusdem generis applied only where  the  mention of specific items of the same genus  was followed  by an expression of residuary nature pertaining to the  same genus.  In its view, agency was an expression of which  the  content  had nothing to do  with  the  preceding words,  office or branch.  If the assessee had an agency abroad   that  agency  cannot   refer  to  any  independent establishment  of  the  assessee   being  maintained  abroad because  agency  always  connotes the  independence  of  the agent.  The  requirement of the provision was  sufficiently satisfied  if  there is an agent outside who  promotes  the sales of the assessees exports.

     The  High  Court at Gauhati in Commissioner of  Income Tax vs.  Assam Frontier Tea Ltd.  (224 ITR 398) has followed the  Calcutta  High Court without assigning any  independent reasons.

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     The  Kerala  High Court in Commissioner of Income  Tax vs.   Pooppally Foods (161 ITR 729) has taken the same  view as  the  Calcutta High Court, but there is no discussion  of the  provision,  apparently  because the Revenue  had  never before  chosen to raise the point that the expenditure there concerned  would not fall within the ambit of the clauses in Section 35.

     The  Gujarat High Court in Commissioner of Income  Tax vs.   Cadila Laboratories (P) Ltd.  (221 ITR 35) referred to the meaning of the word agency as found in Haslburys Laws of England.  It is there stated that the terms agency and agent  have in popular use a number of different meanings, but in law the word agency is used to connote the relation which exists when one person has an authority or capacity to create  legal  relations  between  a  person  occupying  the position of principal and third parties. In the case before the  Gujarat  High Court, the expenditure had been  incurred for payment of commission to agents in foreign countries for the  purpose of promotion of sale outside India and, in  the High  Courts  view, that would certainly be the amount  of expenditure   incurred  wholly  and   exclusively  for   the promotional  sales  outside India on maintenance  of  agency outside India.

     What  is required is an analysis of the provisions  of Section 35B (1)(b)(iv).  The expenditure that is referred to therein  has to be incurred on the maintenance outside India of  a  branch, office or agency for the promotion  of  sales outside   India  of  the   assessees  goods,  services   or facilities.   Therefore,  what  is  requisite  is  that  the assessee should have maintained the branch, office or agency outside  India.   It  is also requisite  that  such  branch, office  or  agency  should  be for the  promotion  of  sales outside   India  of  the   assessees  goods,  services   or facilities.   When payment is made, as here, by an  assessee of  commission  to  agents outside India  who  had  procured orders,  the  requirements  of  clause  (iv)  are  far  from satisfied.   There is, in the first place, no maintenance by the  assessee of the agency.  Secondly, the expenditure  has to  be incurred on the promotion of sales of the  assessees goods outside India.  When expenditure is incurred by way of payment  of  commission  on particular sales,  that  is  not expenditure  on  the  promotion of the assessees  sales  in general.

     While  we  think  that  there is  some  merit  in  the observation  of  the  Karnataka High Court  that  the  words branch,  office  or agency in the clause draw colour  from each  other and that the word agency should, therefore, be interpreted in the light of the words branch and office, it  is, in any event, very clear that even if the agency  is an  agency  established not by the assessee but by  a  third party, the agency must be maintained by the assessee.

     In  the  result,  we  uphold the  view  taken  by  the Karnataka  High Court in the judgment and order under appeal and dismiss the appeal with costs.