Commissioner of Income Tax vs Dey''s Medical Stores Manufacturing P. Ltd.

Manoj Kumar Gupta, J.—The above two references u/s 256(1) of the income tax Act, 1961, are by the Commissioner income tax, Allahabad, referring identical questions for opinion of this court. Since the assessee-respondent is the same and the facts are common except that Income Tax Reference No. 44 of 1987 is for the assessment year 1980-81 and Income Tax Reference No. 45 of 1987 is for the assessment year 1979-80 and, therefore, both of these are being decided by the common judgment. Income Tax Reference No. 44 of 1987 is being treated as leading case. The questions of law which have been referred for the opinion of this court are as follows:

(1) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was legally correct in holding that incurring of expenditure through M/s. Dey''s Medical Stores Manufacturing Pvt. Ltd., Calcutta, amounted to the maintenance of any office for the purpose of advertisement, publicity and sales promotion within the meaning of section 37(3B)(iv) of the income tax Act, 1961?

(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was legally correct in holding that the expenditure of Rs. 23,60,574 was incurred on the maintenance of any office for the purposes of advertisement, publicity, sales promotion within the meaning of section 37(3B)(iv) of the income tax Act, 1961?

(3) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was legally correct in holding that no part of the expenditure of Rs. 23,60,574 could be disallowed u/s 37(2A) as the amount of this expenditure qualified for exemption in terms of clause (iv) of section 37(3B) of the income tax Act. 1961?

We have heard Sri Shambhu Chopra, learned counsel for the applicant and Sri V.K. Upadhyay, senior counsel along with Sri Ritvik Upadhyay for the assessee.

The assessee, M/s. Dey''s Medical Stores Manufacturing Pvt. Ltd., Allahabad, is a private limited company engaged in manufacture of drugs and medicines. On July 3, 1971, it had entered into an agreement with Dey''s Medical Stores (Manufacturing) P. Ltd. of Calcutta (hereinafter referred to as "the Calcutta company"). By this agreement, the assessee was authorized to manufacture some of the products manufactured by the Calcutta company on terms and conditions contained in the aforesaid agreement. Clause 7 of this agreement reads as under:

The company, shall, in addition to the supply of the formula, description and know-how of its products to the licensee be responsible for sales promotion of such products along with their own products and for this service of sales promotion the licensee shall pay 8 per cent, of the net sales (wholesale) price less the distributors'' commission, if any of the products manufactured by the licensee under this agreement.

There was an amendment to the above agreement by a supplementary agreement dated June 29, 1978. Paragraph 3 of the preamble as well as clause 2 of this supplementary agreement reads as under:

Whereas the company undertook the responsibility of sales promotion of the products to be manufactured by the licensee of 8 per cent, of its sales realization towards reimbursement of the increased sales promotion expenses of the company as provided in clause 7 of the said agreement.

That the payment of 8 per cent, as provided in clause 7 of the original agreement dated July 3, 1971, is in respect of contribution of the licensee towards sales promotion expenses of the company on account of cost of maintenance of sales promotion offices, sales promotion staff and printing, publication and distribution of catalogues and other literature necessary for sales promotion which are expected to increase because of the company taking responsibility for sales promotion for the products which the licensee manufactures also.

It was claimed before the authorities that the Calcutta company had been carrying on the sales promotion activities since a long time and, therefore, it was considered expedient that even such activities on behalf of the assessee be also continued to be carried on by this company. The asses-see had agreed to reimburse the Calcutta company for the expenses incurred by them in proportion of its own sales.

The assessee debited an expenditure of Rs. 23,60,574 towards sales promotion expenses. It appears that this amount was paid to the Calcutta company. The Inspecting Assistant Commissioner was of the opinion that 15 per cent, of the above expenditure required to be disallowed in terms of section 37(3A)(iii) of the income tax Act, 1961, as it stood at the relevant time. This section states that where the aggregate expenditure incurred by an assessee on advertisement publicity and sales promotion in India exceeds a certain sum, a percentage of such expenditure shall not be allowed as a deduction. There was no dispute before the Tribunal about the percentage to be disallowed. The claim of the assessee, however, was that its case fell within the exception laid down in section 37(3B)(iv). This section states that nothing contained in sub-section (3A) of section 37 shall apply in relation to any expenditure incurred by an assessee on the maintenance of any office for the purposes of advertisement, publicity or sales promotion. It was submitted before the Inspecting Assistant Commissioner of income tax that although the assessee itself did not maintain any office for the above purpose, but that such an office was maintained by the Calcutta company, whose expenses were reimbursed by the assessee. It was further contended that section 37(3B)(iv) did not say that the maintenance of the office must be by the assessee, itself; emphasis, in this connection, was placed on the word "any" appearing in clause (iv) of section 37(3B). It was submitted that the office could be maintained by anybody and the only criteria was that the expenditure should have been incurred by the assessee.

The Inspecting Assistant Commissioner did not accept the above explanations. He was of the view that for claiming exemption u/s 37(3B)(iv) of the above section, it was necessary that the office, for the purposes of advertisement, publicity or sales promotion, should have been maintained by the assessee itself. According to him, therefore, the provisions of section 37(3A)(iii) were applicable to the case. He, therefore, disallowed 15 per cent, of the expenditure of Rs. 23,60,574.

The assessee appealed to the Commissioner of income tax (Appeals). The Commissioner of income tax (Appeals) agreed with the submission of the learned counsel for the assessee that it was not necessary for the assessee itself to maintain any office so long as it continued to reimburse the expenses for such maintenance. He, however, held that in the year under appeal, the assessee''s share came to only 7.4 per cent, of the total expenses incurred by the Calcutta company and, therefore, a disallowance of Rs. 25,740 was called for. He restricted the disallowance to this amount and allowed the balance.

In appeal, the Tribunal held that the assessee earned exemption in terms of clause (iv) of section 37(3B) of the Act. The Tribunal agreed with the findings of the Commissioner of income tax (Appeals) that it was not necessary for the assessee to maintain the office, itself, for claiming exemption.

Thereafter, the Commissioner of income tax, Allahabad, has referred the abovementioned questions for the opinion of this court.

Sri Shambhu Chopra, learned counsel for the Revenue, vehemently urged that the view taken by the Appellate Tribunal is not legally sustainable. According to him, unless the office is maintained by the assessee itself, it cannot claim exemption under sub-section (3B) of section 37 of the Act. Elucidating his argument, he submitted that the word "any" appearing in clause (iv) of section 37(3B) is only referable to the office maintained by the assessee in ordinary course of its business. It cannot take within its ambit the expenditure incurred in maintaining the office through another person or agency.

On the other hand, Sri V.K. Upadhyay, learned senior counsel appearing for the assessee, contended that there is no such restriction for maintenance of the office by the assessee itself u/s 37(3B) of the Act. According to him, the phrase "any office" is wide enough to include office maintained by the assessee-company through other agency or person or company. He further contended that merely because the assessee-company has agreed to reimburse the licensor company to the extent of 8 per cent, of the sale value of the goods, it does not change the nature of the payment made and it continues to be the business expenditure coming within the purview of section 37 of the Act.

Sub-sections (3A) and (3B) to section 37 were inserted by the Finance Act, 1978, with effect from April 1, 1979, and were omitted by the Finance (No. 2) Act, 1980, with effect from April 1, 1981. This sub-section remained on the statute book only for two years for which the instant cases relate, viz., the assessment years 1979-80 and 1980-81. Learned counsel for the parties could not place before this court any authoritative pronouncement on the interpretation of the phrase "any office" used in clause (iv) of subsection (3B) of section 37 of the Act. According to Black''s Law Dictionary, fifth edition, the word "any" has a diversity of meaning and may be employed to indicate "all" or "every" as well as "some" or "one" and its meaning in a given statute depends upon the context and the subject matter of the statute. It is often synonymous with "either", "every" or "all". Its generality may be restricted by the context. The word "any", according to the dictionary meaning, indicates "all" or "every" as well as "some" or "one" depending upon the context and the subject matter of the statute.

Thus, the word "any" has several connotation. However, its actual meaning has to be judged in the context in which it has been used and for which purpose, the entire provision has to be looked into.

Section 37 of the Act is the residuary section extending the allowance to items of business expenditure, not covered by the preceding sections. "Expenditure" primarily denote the idea of spending or "paying out or away"; it is something which is gone irretrievably. There would have been no difficulty in allowing the expenditure in case the assessee-company would have spent the same in maintenance of office itself. However, in the instant case, the problem arises because the same is being done through the Calcutta company.

Thus, the main question which arises for consideration is whether payment of 8 per cent, of the sales realization, to the Calcutta company, to reimburse it for expenditure incurred by it on behalf of the assessee in maintaining the sales promotion office and other infrastructure for advertising its product is allowable expenditure u/s 37 of the Act.

In the instant case, after findings of facts recorded by the Commissioner of income tax (Appeals) and the Tribunal, it is no more in dispute that the expenditure allowed to the assessee-company in respect of advertisements and sales promotion is the sum actually paid by it to the Calcutta company.

The question which crops up for consideration is that what is the nature of these payments. Are these payments which are computed in relation to the sale value, a mere device for division of profits with the Calcutta company or an item of expenditure, the amount of which is ascertained by reference to the sale proceeds.

In BRITISH SUGAR MANUFACTURERS, LTD. Vs. HARRIS (INSPECTOR OF TAXES)., , the assessee-company agreed with two other companies to pay them a specified percentage of its net profit to be computed upon a conventional basis, in consideration of their extending technical support and financial knowledge to the assessee-company. In that case, it was held that it is not a joint venture or sharing of profit simpliciter but the payment represented remuneration for service rendered is a revenue expenditure and, thus, an allowable expenditure.

In Travancore Sugars and Chemicals Ltd. Vs. Commissioner of Income Tax, Kerala, , the apex court laid down the test to determine the nature of transaction by holding that (page 571): "The court has to look not only into the documents but also at the surrounding circumstances so as to arrive at a decision as to what was the real nature of the transaction from the commercial point of view. No single test of universal application can be discovered for a solution of the question. The name which the parties may give to the transaction which is the source of the receipt and the characterization of the receipt by them are of little consequences. The court has to ascertain the true nature and character of the transaction from the covenants of the agreement tested in the light of surrounding circumstances".

Learned counsel for the respondent-assessee placed reliance on a decision of the apex court in the case of Lakshmiji Sugar Mills Co. P. Ltd. Vs. Commissioner of Income Tax, New Delhi, . After going through the facts of the said case, it transpires that it is not of much help to the respondent-assessee except for the wider proposition of law laid therein that for judging the nature of expenditure, it is not very material whether the same has been incurred by the assessee itself or through some third party or agency, till such expenditure has been made for efficient and convenient running of the business of the assessee.

The expenses of advertisement were once upon a time sought to be disallowed on the ground that it improves the value of the goodwill and are of enduring nature and thus partakes of the nature of capital expenditure. However, with the growth of law through the judicial process, such argument was held to be untenable. It appears that because of the said reason, sub-sections (3A) and (3B) were omitted by the Finance (No. 2) Act, 1980, with effect from April 1, 1981. Although slightly different provision was once again re-introduced by the Finance Act, 1983, with effect from April 1, 1984, but again it was omitted by the Finance Act, 1985, with effect from April 1, 1986, and since thereafter it had ceased to be on the statute book. Now, there is no such prohibition relating to disallowance in expenses incurred on the advertisement, publicity and sales promotion except when such expenses had been made on advertisement in any souvenir, brochure, pamphlet or like published by a political party.

In the past, when the aforesaid provisions were on the statute book and during the assessment years in question, the idea for introducing sub-section (3A) of section 37 was to restrict the colossal expenditure by the taxpayer on advertisement, publicity and sales promotion. The intention of the Legislature was to place a curb on extravagance and wasteful expenditure on advertisement, publicity and sales promotion at the cost of the exchequer. With this object in mind, sub-sections (3A), (3B), (3C) and (3D) were inserted by the Finance Act, 1978. Various instances were provided under sub-section (3B) which are by way of exception and where disallowance is not to be made. The legislative intent is clear and specific. The law permit the total allowance on business expenditure incurred by way of advertisement, publicity and sales promotion, if it is within a reasonable limit and are necessary for successful running of the business as compared to extravagance and wasteful expenditure made in this regard.

In the instant case, the assessee-company instead of maintaining the office for the purposes of advertisement, publicity and sales promotion itself had agreed to such activity being done on its behalf by the Calcutta company. The question is whether such expenditure is necessary and directly connected and attributable to the ordinary course of its business and is thus indispensable or will amount to expenditure which is ostentatious in nature and amounts to extravagance.

With the advancement of trade and commerce, new and novel method are being devised to reduce the wasteful expenditure and thus improve the efficiency of an organization and its profit. One of such modes which has now come to be known as "outsourcing" involves passing of some function of the organization to some outside agency. This becomes important because of business expediency.

New research indicates that companies providing IT products and services will continue to increase their use of outsourcing agreements in order to lower overhead expenses. According to the second Norton Rose survey of outsourcing practice, Outsourcing in a Brave New World, 87 per cent, of user businesses and 86 per cent, of suppliers believe that cost cutting is still the main driver for outsourcing. Robert Morgan, director at sourcing broker Burnt-Oak Partners, said cost cutting is the reason most people outsource. "Everything else is an extra," he said, "For example, customers will expect to get innovation as part of any outsourcing deal that is about cutting costs". Maintaining an infrastructure can be an extra burden for some businesses, which outsourcing can remove. Outsourcing your business requirements to a trusted vendor can help save on the capital expenditure, time, and extra efforts of your personnel. Additionally, one is no longer committed to invest on employee training, or purchasing expensive software, or investing in latest technologies. All this add up to higher returns in the longer run.

In the instant case, it seems that 8 per cent, of the sales realization was agreed to be paid to the Calcutta company at Calcutta in view of it maintaining office and infrastructure for advertising the products of the asses-see-company. It is a tool employed by the assessee-company to have the advantage of using infrastructure maintained by the Calcutta company for advertising its own goods without taking upon itself the burden to bear the entire expenditure in case separate office in this regard is maintained by itself. This, according to the assessee has resulted in curbing the actual expenditure which might have been much more in case a separate office, staff, etc., is maintained by itself.

Thus, the disallowance of expenditure and thereby compelling the assessee to maintain such infrastructure itself will only result in wasteful expenditure which is sought to be curbed by inserting sub-sections (3A) and (3B) by the Finance Act, 1978. Any contrary interpretation will be against the legislative intent.

The problem can be viewed from another angle. Sub-section (3B) does not mention that the office for purposes of advertisement, publicity and sales promotion should be maintained by the assessee itself. On the contrary, the use of the words "any office" in clause (iv) of sub-section (3B) of section 37, without it being circumscribed by the words like "itself" or "of it''s own" leads to irresistible conclusion that the expenditure can be made by the assessee-company itself or by employing some person or agency on its behalf and in both cases, such expenditure qualifies for total exemption without any disallowance under clause (iii) of sub-section (3A) of section 37 of the Act.

Needless to say that "A taxing statute must be interpreted in the light of what is clearly expressed. It is not permissible to import provisions in a taxing statute so as to supply any assumed deficiency. In support of the same we may refer to the decision of this court in Commissioner of Sales Tax, Uttar Pradesh Vs. The Modi Sugar Mills Ltd., wherein this court at paragraph 10 has observed as follows (page 190 of 12 STC):

In interpreting a taxing statute, equitable considerations are entirely out of place. Nor can taxing statutes be interpreted on any presumptions or assumptions. The court must look squarely at the words of the statute and interpret them. It must interpret a taxing statute in the light of what is clearly expressed: it cannot imply anything which is not expressed; it cannot import provisions in the statutes so as to supply any assumed deficiency.

(vide the apex court decision in Union of India (UOI) and Others Vs. Ind-Swift Laboratories Ltd., ).

Any contrary interpretation will amount to inserting words not contemplated by the Legislature.

In view of the discussion made above, this court answers question No. 1 in the affirmative and in favour of the assessee and against the Revenue. The court is of the further opinion that questions Nos. 2 and 3 are covered by the answer given to question No. 1 and which are, therefore, also answered in the affirmative. Both the references are answered accordingly.