Colour Chem Limited v. Commissioner Of Income Tax

Dr. B.P. Saraf, J.

1. By this reference under s. 256(1) of the IT Act, 1961 ("Act") made at the instance of the assessee, the Tribunal, Bombay Bench, Bombay 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 s. 144B which were brought into statute on 1st Jan., 1976 were applicable for the asst. yr. 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 s. 35B

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 in holding that provisions of s. 40A(5) would be applicable in respect of the period of the employment of the employees outside India "

2. So far as question No. 1 is concerned, it is covered in favour of the Revenue by the decision of this Court in Carona Sahu Co. Ltd. vs . CIT : [1995]213ITR106(Bom) . Accordingly, following the same, we answer the above question in the negative and in favour of the Revenue.

3. So far as question No. 3 is concerned, this is also covered in favour of the Revenue by the decision of this Court in Lubrizol India Ltd. vs. CIT : (1991) 187 ITR 25. [LQ/BomHC/1990/148] Following the same, it is answered in the affirmative and in favour of the Revenue.

4. So far as question No. 5 is concerned, the counsel for the assessee submits that 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.

5. Only two questions are left for our consideration, i.e., questions No. 2 and 4. Question No. 2 pertains to the disallowance of the claim of the assessee for weighted deduction under s. 35B 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 facts pertaining to question No. 2 are as follows :

The assessee had received orders for export of certain chemicals from two West German companies viz., M/s Bayer A. G. and M/s Hoescht A. G. The contract for purchase showed that the purchasers were M/s Bayer A. G. or M/s Hoescht 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 9th Oct., 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 :



The total value is about Rs. 2,198,400. Kindly confirm that you will be able to pay an overriding commission of 6.5% on the fob value to us on this business.

Yours faithfully, Bayer AG Sd."

The assessee-company had received the sale proceeds in India. Thereafter, the assessee approached the Reserve Bank of India (RBI) for remitting 6.5% 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.

6. 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 s. 35B of the. The ITO 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 theO, was, therefore, not expenditure falling under s. 35B of the. The above finding of theO was confirmed by the CIT(A). The assessee appealed to the Tribunal. The Tribunal also decided against the assessee and dismissed the appeal. The Tribunal held that 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 the relationship of agent and principal. On 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 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 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 s. 35B of the. The Tribunal, therefore, rejected the claim of the assessee for weighted deduction under s. 35B of the in respect of the above amount.

7. 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 s. 35B(1)(b) except cl. (vii). Mr. Mistry further submits that the finding of the Tribunal that the relationship between the assessee and West Germany firm is that of buyer and seller is only on inference which should be examined by this Court.

8. We have carefully considered the above submission of the 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 s. 35B in respect of the amounts in question. As rightly held by the Tribunal, the relationship between the assessee and the West Germany firm, who was the recipient of the "overriding" commission, was clearly that of the vendor and buyer and the payment of the overriding commission to the purchaser had the effect of 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 cl. (b) of sub-s. (1) of s. 35B of the. In that view of the matter, we do not find any infirmity in the finding of the Tribunal.

9. We are of the clear opinion that the payment of the "overriding commission" to the purchaser was in fact rebate or a discount or reduction in the price of the goods supplied by the assessee and, hence, s. 35B is not attracted. It may be pertinent at this stage to mention that the 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 pay an overriding commission of 6.5% on f. o. b. value to us on this business" appearing in the letter of the West German firm dt. 9th Oct., 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 India 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 nature 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 such payment can be regarded as expenditure on advertisement, publicity, etc., or distribution or supply of goods. Otherwise also, such payment does not fall under any of the clauses of s. 35B of the. Sec. 35B, as it stood at the material time, is as follows :

"35B. (1) 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 Feb., 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 cl. (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 cl. (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;

(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 or expenditure (wherever incurred) on the carriage of such goods to their destination outside India or on the insurance of such goods while in transit;

(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..............

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-clauses of cl. (b) of sub-s. (1) of s. 35B of the.

10. In that view of the matter, we answer question No. 2 in the affirmative and in favour of the Revenue.

11. So far as question No. 4 is concerned, the facts are as follows :

In its assessment for the asst. yr. 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 following items was rejected by theO :



The ITO 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 CIT(A) and the Tribunal. Hence, this reference.

12. We have heard the learned counsel for the assessee. Appendix I Part I of the 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 10% 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."

The learned counsel for the assessee submits that the bar applies only to "wiring" of electrical light or fan installations and not to "wiring" of transformers and other stationary plant. In other words, according to the learned counsel, "wiring" referred to in the above item should be construed to mean "wiring of electric lights and fan installations" only.

13. 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 the 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 the items in question.

14. 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.