Commissioner of Income Tax vs Sivanandha Steels Ltd.

R. Jayasimha Babu, J.—The assessee entered into an agreement with H.M.T. (International) Ltd., Australia, which is the wholly owned

subsidiary of H. M. T. Limited, Bangalore, for the territory of Australia for the products manufactured by the assessee, namely, steel castings of all

descriptions. The agent during the currency of the agreement was required to use its best endeavours to promote the sale of the products of the

assessee by securing orders for the purpose from the parties in Australia at such prices and on such terms as to delivery, warranty, etc., as mutually

agreed upon from time to time. The agent was also required to endeavour his best to market, in the territory to Australia the products offered by

the assessee for mutual benefit. Both parties were to advise each other over the market situation, competitors, development, improvement, priority

in execution of orders booked, etc.

The agent maintained an office in Australia and it has been stated in the agreement that the agent has an adequate organisation to secure orders

for the castings manufactured by the assessee. The agent was to be paid a commission of five per cent. on f. o. b. value of the orders received

through the agent or directly by the assessee on account of the agent''s efforts from the agency territory of Australia and accepted by the assessee.

The commission was payable upon the actual realisation made by the assessee. The commission was payable in Australian dollars. The assessee

had reserved liberty to appoint other agents for the same territory. The period of agency was to be from April 1, 1979, for a period of three years.

The commission paid by the assessee to the agent under that agreement in the sum of Rs. 2,10,240 was regarded by the assessee as an amount

paid for maintaining an agency abroad for the purpose of promotion and marketing of its products. It, therefore, made a claim u/s 35B(1)(b) of the

Act for weighted deduction. That claim was negatived by the Income Tax Officer, but was allowed by the Commissioner (Appeals) who held that

the commission payment would be covered by Sub-clause (iv). The Tribunal agreed with the Commissioner. The Revenue has now come before

us contending that the Tribunal was in error in upholding the assessee''s claim for weighted deduction.

Counsel for the Revenue submitted that the words ""branch, office or agency"" found in Section 35B(1)(b)(iv) have to be read and understood by

applying the principle of ""ejusdem generis"" and as the agency here was not an agency wholly owned and maintained by assessee, the expenditure

would not qualify for weighted deduction. Counsel relied on the decision of the Karnataka High Court in the case of Chief Commissioner of

Income Tax Vs. Mysore Sales International Ltd., .

Counsel for the assessee, on the other hand, submitted"" that all other High Courts which had occasion to consider similar claims have upheld the

claim. Reference was made to the decision of the Calcutta High Court in the case of Commissioner of Income Tax Vs. Usha Telehoist Ltd., , that

of the Gauhati High Court in the case of Commissioner of Income Tax Vs. Assam Frontier Tea Ltd., , and of the Kerala High Court in the case of

Srivilas Cashew Co. Vs. Commissioner of Income Tax, , wherein it was held that the commission paid to an agent abroad for effecting sales of the

assessee''s products abroad would amount to expenditure on maintaining an agency thereby qualifying for weighted deduction u/s 35B(1)(b)(iv).

We are unable to agree with the Revenue''s contention that the words ""branch, office or agency"" are to be read, applying the ""ejusdem generis

rule"". The disjunctive ""or"" used after ""branch, office"", would indicate that agency referred to therein is different from a branch or office. Agency

here is not used as a synonym for branch or office. A branch or an office is clearly different from an agency. A branch or an office can be regarded

as an extension of the principal''s own business premises under his own direct control while an agency necessarily involves a relationship with

another, that other being the agent. An agent may simultaneously function as agent of more than one principal even as a principal may have many

agents. The agency referred to in this provision cannot be equated to a branch or an office of the principal. The office maintained by the agent is

that of the agent. His office cannot be regarded as the office of the principal for all purposes.

The expenditure qualifying for weighted deduction u/s 35B(1)(b)(iv) is the expenditure incurred wholly and exclusively outside India on a branch

or office of the assessee, or on maintaining"" an agency for the promotion of the sale outside India of such goods, services o.r facilities. All the

payments required to be made to the agent under the agreement cannot be regarded as payments made for maintaining the agency, especially

where the payments made are by way of commission on the sales effected. Such commission necessarily includes the profits realised by the agent

from having functioned as the agent. Such profit realised by the agent cannot be regarded as forming part of the expenditure incurred by the

assessee on the promotion of the sale of its products by maintaining the agency. A mere commission paid on sales effected cannot be regarded as

expenditure on promotion of marketing the product. It is necessary that the agent maintains an office abroad and the promotion of sales of the

assessee''s products is made through that office of the agent. It is the expenditure incurred by the assessee on maintaining such office of the agent

that qualifies for deduction.

Where the agreement between the assessee and the agent does not bifurcate the payments made towards the costs of maintaining the agent''s

office, and the profitability of the agent on the sales concluded with its assistance, it is the duty of the assessee to make such allocation on a rational

basis and if such allocation is found to be acceptable by the Assessing Officer, the claim to the extent allowable would have to be considered u/s

35B(1)(b)(iv) of the Act. ''

As the Tribunal and the authorities below have failed to examine the matter in that manner, we remit the matter to the Assessing Officer with a

direction to give an opportunity to assessee to place the relevant material before him and thereafter to decide the extent to which the assessee is

entitled to the benefit of weighted deduction u/s 35B(1)(b)(iv) of the Act. The answer to the questions referred to us, namely :--

(1) Whether, on the facts and in the circumstances of the case and having regard to the provision u/s 35B(1)(b), the Appellate Tribunal is right in

law in holding that the assessee-company must be considered to have been maintaining an agency in Australia for the purpose of promoting sales of

its products ?

(2) Whether, on the facts and in the circumstances of the case, the Appellate Tribunal was right in law in holding that the assessee is entitled for the

weighted deduction on the commission payment of Rs. 2,10,240 ?

is that the assessee''s agent''s office in Australia can be said to have been maintained in part by the assessee to the extent of the payments made by

it for that purpose. The extent of the payments made for maintaining that office is to be established by the assessee before the assessing authority.

The assessing authority shall give an opportunity to the assessee to place all relevant materials before him and thereafter decide the extent to

which weighted deduction is to be allowed u/s 35B(1)(b)(iv) of the Act.

Parties to bear their respective costs.