COLOUR CHEM LTD. VS COMMISSIONER OF INCOME-TAX
1999 P T D 224
[225 1 T R 164]
[Bombay High Court (India)]
Before Dr. B. P. Saraf and M. G. Dudhat, JJ
COLOUR CHEM LTD.
Versus
COMMISSIONER OF INCOME-TAX
Income-tax Reference No.216 of 1983, decided on 03/11/1995.
(a) Income-tax---
----Export markets development allowance---Weighted deduction-- Commission---Facts showing that amount paid as commission was in reality a rebate on goods supplied---Weighted deduction was not allowable in respect of such payment---Indian Income Tax Act, 1961, S.35-B.
(b) Income-tax---
----Depreciation---Extra-shift allowance---Exclusion from extra-shift allowance---Electrical machinery---Meaning of "wiring" ---"Wiring" includes wiring for purposes of articles mentioned in the list---Indian Income Tax Act, 1961---Indian Income Tax Rules, 1962, Appex. I, Part 1.
(c) Income-tax---
----Assessment---Law applicable to assessment---Section 144-B inserted w.e.f. 1-1-1976 is applicable for assessment year 1975-76---Indian Income Tax Act, 1961, S.144-B.
(d) Income-tax---
----Business expenditure---Surtax is not deductible---Indian Income Tax Act, 1961.
The provisions of section 144-B of the Income Tax Act, 1961, which were brought into the statute on January 1, 1976, were applicable for the assessment year 1975-76.
(e) Words and phrases---
...... Wiring"---Meaning.
Carona Sahu Co. Ltd. v. CIT (1995) 213 ITR 106 (Bom.) fol.
Surtax payable by the assessee is not deductible in arriving at the total income.
Lubrizol India Ltd. v. CIT (1991) 187 ITR 25 (Bom.) fol.
Part 1 of Appendix 1 to the income Tax Rules, 1962, contains the Table of rates at which depreciation is admissible. Item III (iv) thereof deals with extra-shift allowance. It provides, inter alia, that extra-shift allowance shall not be allowed in respect of the items of machinery or plant specified therein to which the general rate of depreciation of ten per cent. applies. Item (1) thereof reads as follows at the material time: (1) Electrical machinery-switchgear and instruments, transformers and other stationary plant and wiring and fittings of electric light and fan installations. Item (1) has two parts. The first part refers to "electrical machinery -switchgear and instruments, transformers and other stationary plant and wiring" and the other part refers to "fittings of electrical light and fan installations". In that view of the matter,. "wiring" referred to in Item (1) would mean and include "wiring for the purposes of items mentioned therein which precede it, It cannot be construed to mean wiring for electric light and fan installations.
Held, accordingly, that the Tribunal was justified in disallowing the extra-shift allowance on the plant in question.
The assessee had received orders for export of certain chemicals from two West German companies. The assessee-company had received the sale proceeds in India. Thereafter, the assessee approached the Reserve Bank of India for remitting 6.5 per cent. of the f.o.b. value of the goods back to the purchasers. This was in accordance with the direction of the purchaser companies. The Reserve Bank permitted the assessee-company to remit the amount. The amounts remitted in respect of the sales made to the two organisations who were making purchases from the assessee, were Rs.7,11,612. The assessee claimed that this amount was paid as commission to the party concerned in West Germany for securing business and, therefore, it was entitled to weighted deduction in respect thereof under section 35-B of the Act. The Income-tax Officer refused to allow the deduction as the details of the commission showed that the goods had been sold by the assessee to the very same party to whom the commission had been paid. The above finding of the Income-tax Officer was confirmed by the Commissioner of Income-tax (Appeals). The Tribunal also arrived at a categorical finding that the overriding commission paid by the assessee to its purchasers in West Germany was, in fact and reality, in the nature of a rebate or discount on the value of the goods supplied to them by the assessee. The Tribunal, therefore, held that such a deduction or discount could not be termed an expenditure of the nature falling under section 35-B of the Act. The Tribunal, therefore, rejected the claim of the assessee for weighted deduction under section 35-B of the Act in respect of the above amount. On a reference:
Held, that the description or nomenclature given to a particular payment by .the parties to the contract cannot be regarded as conclusive. In view of the clear facts of the case and the finding arrived at by the Tribunal which was correct in law, it was clear that the true nature of the "overriding commission" in. this case was a reduction in the price of goods supplied by the assessee at the request of the purchaser in view of the volume of the transactions. Obviously, the reduction or rebate allowed on the price of the goods sold by the assessee to the purchaser in view of the quantity of goods purchased by him did not meet the description of the expenditure specified in any of the sub-clause of clause (b) of subsection (1) of section 35-B. The assessee was not entitled to weighted deduction in respect of the payment of Rs.7,11;612.
J.D. Mistry for the Assessee,
Dr. V. Balasubramaniam with P.S. Jetley for the Commissioner.
JUDGMENT
Dr. B.P. SARAF, J.---By this reference under section 256(1) of the Income Tax Act, 1961 ("the Act"), made at the instance of the assessee, the Income-tax Appellate Tribunal, Bombay Bench, has referred the following questions of law to this Court for opinion
"(1) Whether, on the facts and in the circumstances of the case, the Tribunal erred in holding that the provisions of section 144-B which were brought into the statute on January 1, 1976, were applicable for the assessment year 1975-76 ?
(2) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the payment of Rs.7,11,612 to the foreign parties was not expenditure for the purpose of section 35-B ?
(3) Whether, on the facts and in the circumstances of the case, the Tribunal was justified in holding that the surtax payable by the assessee is not deductible in arriving at the total income ?
(4) Whether, on the facts and in the circumstances of the case, the Tribunal erred in law in holding that extra-shift allowance of Rs.3,66,496 was not allowable in respect of the plant in question ?
(5) Whether, on the facts and in the circumstances of the case, the Tribunal erred in law holding that provisions of section 40-A(5) would be applicable in respect of the period of the employment of the employees outside India ?"
So far as question No. l is concerned, it is covered in favour of the Revenue by the decision of this Court in Carona Sahu Co. Ltd. v. CIT (1995) 213 ITR 106. Accordingly, following the same, we answer the above question in the negative and in favour of the Revenue.
So far as question No.3 is concerned, it is covered in favour of the Revenue by the decision of this Court in Lubrizol India Ltd. v. CIT (1991) 187 ITR 25. Following the same, it is answered in the affirmative and in favour of the Revenue.
So far as question No.5 is concerned, counsel for the assessee submits the having regard to the paucity of facts, he is not in a position to pursue the same. He, therefore, does not want to press the same. The said question is, therefore, returned unanswered.
Only two questions are left for out consideration, i.e., questions Nos.2 and 4. Question No.2 pertains to the disallowance of the claim of the assessee for weighted deduction under section 35-B in respect of overriding commission granted to a foreign buyer. Question No.4 pertains to disallowance of the claim of the assessee for extra-shift allowance on some items of electrical wiring, etc. We shall, therefore, set out only those facts which are relevant for deciding the above two questions. The fact pertaining to question No.2 are as follows:
The assessee had received orders for export of certain chemicals from two West German Companies, viz., Bayer A.G. and Hoechst A.G. The contract for purchase showed that the purchasers were Bayer A.G. or Hoechst A.G. as the case may be, and the seller was the assessee-company. The purchaser had agreed that the goods would be cleared by them. The contract shows that insurance from works to works was to be covered by the purchaser. Payment was to be net cash against documents on first presentation. Accordingly, the assessee-company prepared the invoices and sent the goods as per instructions of the purchaser. The invoices did not show any deduction from the sale price. After the goods had been sent, Bayer A.G. had written a letter to the assessee-company on October 9, 1974. The letter read as follows:
"Dear Sirs,
Ceding of Export business
We have pleasure in informing you that we are prepared to cede the following export business to you:
| B-57/74 Colour-Chem Golden Yelow FRM ex. conc. 2.000 lbs B-58/74 Colour-Chem Black FPV for shipment to Canada 2.000 lbs B-60/74 Phthalocyanine Green GN Pdr. for shipment to Spain.2.000 kgs B-62/74 Benzidine Yellow GG for shipment to U.K 1.000 kg B-64/74 Colour-Chem Golden Yellow GPRR ex. conc60.000 Ibs B-65/74 Colour-Chem Golden Yellow FRM ex. conc5.000 kgs B-66/74 Benzidine Yellow GG for shipment to U.K1.000 kgs B-67/74 Phthaloyanine Green GN Pdr. for shipment to10,000 kgs West Germany The total value is about Rs.2,198,400 |
Kindly confirm that you will be able to pay an overriding commission of 6.5 per cent on the f.o.b. value to us on this business.
Your faithfully,
Bayer A.G.
(Sd.). "
The assessee-company had received the sale proceeds in India. Thereafter, the assessee approached the Reserve Bank of India for remittings 6.5 per cent. of the f.o.b. value of the goods back to the purchasers. This was in accordance with the direction of the purchaser companies as could be seen in their letter quoted above. The Reserve Bank permitted the assessee company to remit the amount. The amounts remitted in sales made to the two organisations, who were making purchases from the assessee, were Rs.7,11,612.
The assessee claimed that this amount was paid as commission to the party concerned in West Germany for securing business and, therefore, it was entitled to weighted deduction in respect thereof under section 35-B of the Act. The Income-tax Officer refused to allow the deduction as the details of the commission showed that the goods had been sold by the assessee to the very same party to whom the commission had been paid. This amount, according to the Income-tax Officer, was, therefore, not expenditure falling under section 35-B of the Act. The above finding of the Income-tax Officer was confirmed by the Commissioner of Income-tax (Appeals). The assessee appealed to the Income-tax Appellate Tribunal ("the Tribunal"). The Tribunal also decided against the assessee and dismissed the appeal. The Tribunal held that the amount of Rs.7,11,612 remitted by the assessee back to the purchaser did not represent any expenditure. The Tribunal did not accept the contention of the assessee that the purchaser to whom the overriding commission had been given on the value of the goods supplied to them was acting as undisclosed principal for some other parties. The Tribunal observed that there was no written agreement between the purchaser and the assessee which could show that relationship of agent and principal. On a perusal of the purchase contracts and the invoices, the Tribunal held that these two documents unmistakably showed that the sales had been made by the assessee directly to those purchasers to whom the commission had been paid. The Tribunal also arrived at a categorical finding that the overriding commission paid by the assessee to its purchasers in West Germany was, in fact and reality, in the nature of a rebate or discount on the value of the goods supplied to them by the assessee. The Tribunal, therefore, held that such a deduction or discount cannot be termed as an expenditure of the nature falling under section 35-B of the Act. The Tribunal, therefore, rejected the claim of the assessee for weighted deduction under section 35-B of the Act in respect of the above amount.
We have heard at length Mr. J.D. Mistry, learned counsel for the assessee, who submits that the relationship between the assessee and the purchaser in West Germany was that of principal and agent. According to Mr. Mistry, those two parties had done everything for the assessee as its agent right from advertising its goods, procuring orders, supplying and distributing the same and in that view of the matter, the overriding commission allowed by the assessee is an expenditure which would fall under all the clauses of section 35-B(1)(b) except clause (Vii). Mr. Mistry further submits that the finding of the Tribunal that the relationship between the assessee and the West German firm is that of buyer and seller is only an inference which should be examined by this Court.
We have carefully considered the above submission of learned counsel for the assessee. However, in view of the clear facts of the case and the finding arrived at by the Tribunal which, in our opinion, is absolutely correct in law, we find it difficult to hold that the assessee is entitled to weighted deduction under section 35-B in respect of the amounts in question. As rightly held by the Tribunal, the relationship between the assessee and the West German firm, who was the recipient of the "overriding" commission, was clearly that of vendor and buyer and the payment of the overriding commission to the purchaser had the effect of the reducing the sale price of the goods supplied to it by the assessee. It cannot be termed as an expenditure falling under any of the sub-clauses of clauses (b) of subsection (1) of section 35-B of the Act. In that view of the matter, we do not find any infirmity in the finding of the Tribunal.
We are of the clear opinion that the payment of the "overriding commission" to the purchaser was in fact a rebate or discount for reduction in the price of the goods supplied by the assessee and hence section 35-B-is not attracted. It may be pertinent at this stage to mention that learned counsel for the assessee laid great emphasis on the expressions "we are prepared to cede the following export business to you" and "Kindly confirm that you will be able to an overriding commission of 6.5 per cent. on f.o.b. value to us on this business" appearing in the letter of the West German firm, dated October 9, 1994, which has been set out above, and submitted that the above expressions clearly indicate that the payment of "overriding commission" was for advertisement or publicity outside Indian in respect of the goods of the assessee and/or distribution, supply, etc., of such goods outside India. We find it extremely difficult to accept this submission. It is now well-settled that the description or nomenclature given to a particular payment by the parties to the contract cannot be regarded as conclusive. What is necessary to be considered is the true nature of the payment. The true of the "overriding commission" in this case is, a reduction in the price of goods supplied by the assessee on the request of the purchaser in view of the volume of the transactions. By no stretch of imagination can such payment be regarded as expenditure on advertisement, publicity, etc., or distribution or supply of goods. Otherwise also, such payment does not all under any of the clauses of section 35-B of the Act. Section 35-B, as it stood at the material time, is as follows:
"35-B. Export marmets 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:
(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, service or facilities which the assessee deals in or provides in the course of his business; (emphasis supplied)
(ii) obtaining information regarding markets outside India for such goods, service or facilities;
(iii) distribution, supply or provision outside India of such goods, services or facilities, not being expenditure incurred in India in connection therewith or expenditure (wherever incurred) on the carriage of such goods to their destination outside India or on insurance of such goods while in transit;
(iv) maintenance outside India of a branch office of 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 provisions 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 o1 such goods, services or facilities, including travelling outward from, and return to, India ;
(vii) 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."
Obviously reduction or rebate allowed on the price of the goods sold by the assessee to the purchaser in view of the quantity of goods purchased by him does not meet the description of the expenditure specified in any of the sub-clause of clause (b) of subsection (1) of section 35-B of the Act.
In that view of the matter, we answer question No.2 in the affirmative and in favour of the Revenue.
So far as question No.4 is concerned, the facts are as follows:
In its assessment for the assessment year 1975-76, the assessee claimed extra-shift allowance on certain items of machinery and plant. The claim of the assessee for extra-shift allowance in respect of the following items was rejected by the Income-tax Officer.
| | Rs |
| Erection, installation and commissioning of Electrical equipment for refrigeration plant. | 84,818 |
| Tarpaulin, insulation and cable laying jobs. | 55,612 |
| Fabricating and installing main type panel board. | 1,28,844 |
| Armoured cables. | 2,78,202 |
| Cable trays, cables, switch-boards H.T. and L.T. cables, cable glands, copper earthing, electric connection, painting, etc. | 3,50,212 |
The Income-tax Officer rejected the claim of the assessee as he was of the opinion that these items did fall in the list of items, which were not eligible for extra-shift allowance. The disallowance was confirmed by the Commissioner (Appeals) and the Tribunal. Hence, this reference.
We have there learned counsel for the assessee. Appendix 1, Part I of the Income Tax Rules, 1962, contains the Table of rates at which depreciation is admissible. Item 111(iv) thereof deals with extra-shift allowance. It provides, inter alia, that extra-shift allowance not be allowed in respect of the items of machinery or plant specified therein to which the general rate of depreciation of ten per cent. Applies. We are concerned in this case with item (1) thereof which, at the material time, read as follows:
"(1) Electrical machinery---Switchgear and instruments, transformers and other stationary plant and wiring and fittings of electric light and fan installations." (emphasis supplied).
Learned counsel for the assessee submits that the bar applies only to "wiring" of electrical light or fan installations and not to "wiring" of transformer and other stationary plant. In other words, according to learned counsel, "wiring" referred to in the above item should be construed to mean "wiring of electric lights and fan installations" only.
We have carefully considered the above submission. However, on a perusal of the above entry, we find it difficult to accept the construction suggested by counsel for the assessee. Item (1) has two parts. The first part refers to "electrical machinery ---Switchgear and instruments, transformers and other stationary plant and wiring " and the other part refers to "fittings of electrical light and fan installations". In that view of the matter, "wiring" referred to in item (1) would mean and include "wiring" for the purposes of items mentioned therein which precede it. It cannot be construed to mean wiring for electric light and fan installations. In that view of the matter, we do not find that the assessee is entitled to extra-shift allowance in respect of the disputed items. The Tribunal was, therefore, justified in disallowing the extra-shift allowance on he items in question.
In view of the above, question No.4 is answered in the negative and in favour of the Revenue. This reference is answered accordingly.
In the facts and circumstances of the case we make no order as to costs.
M.B.A./1668/FC Reference answered