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PETITIONER: ARAVINDAPARAMILA WORKS

       Vs.

RESPONDENT: COMMISSIONER OF INCOME TAX

DATE OF JUDGMENT:       31/03/1999

BENCH: S.P.Bharucha, 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(l)(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.l3,23,225/-. 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 tlie circumstances  of the  case.   the Tribunal was justified in holding that  the applicant  was not entitled to the weighted deduction  under S.35B  (l)(b)(iv) of the Act.  in respect of the  commission payments made to agents outside India?"

     The   High  Court  answered   tlie  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  reterred to in clause (a) is  that

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incurred  wholly  and exclusively on- (i)  ................. (ii) .................  (iii) ................;  and

     (iv)  maintenance outside India of a branch, office or 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 betore 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 Intemational  Ltd.   (195 ITR 457) the Karnataka High  Court took  the  view  that  the word ’agency’  in  the  aforesaid provision bad 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 Kamataka 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

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sales of the assessee’s 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.

     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 tail 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 Hasibury’s 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  Court’s  view, that would "certainly be the amount  of expenditure incurred wholly and

     exclusively  for tile promotional sales outside  India on maintenance of agency outside India."

     What  is required is an analysis of the provisions  of Section 35B (l)(b)(iv).  The expenditure that is referred to therein lias to be incurred on the maintenance outside India of  a  branchy office or agency for the promotion  of  sales outside   India  of  the   assessee’s  goods,  services   or facilities.   Therefore,  what  is  requisite  is  that  the assessee  sliould  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 assessee’s goods,  services  or facilities.   When payment is made, as here, by an  assessee of  commission  to  agents  outside India  wh  had  procured orders,  the  requirements  of  clause  (iv)  are  far  from satisfied.   There is, in the first place, no maintenance by the  assessee of tlie agency.  Secondly, the expenditure has to  be incurred on the promotion of sales of the  assessee’s 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 assessee’s  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 anv 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

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and dismiss the appeal with costs.