Paramila Works Vs. Commissioner of Income Tax  INSC 117 (31 March 1999)
R.C Lahoti BHARUCHA, J.
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.
concerned with the Assessment Year 1981-82.
manufactured agarbathis. It had exported agarbathis during the year under
consideration. It had paid commission to agents outside India who had procured orders.
claimed weighted deduction under the afore-mentioned provision in respect of
such expenditure of Rs.13,23,225/-.
disallowed by the Assessing Authority. The Commissioner of Income Tax (Appeals)
took a contrary view.
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:
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.
Sales International Ltd. (195 ITR 457). The assessee is in appeal by special leave
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 agency for
the promotion of the sale outside India of such goods, services or facilities;
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.
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.
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.
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
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.
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.
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.
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.
result, we uphold the view taken by the Karnataka High Court in the judgment
and order under appeal and dismiss the appeal with costs.