1999 (11) TMI 19 - HC - Income Tax

Interest on packing credit not eligible for tax deduction under Income-tax Act

Commissioner Of Income-Tax Versus Aspinwall Co. (Travancore) Ltd.

Commissioner Of Income-Tax Versus Aspinwall Co. (Travancore) Ltd. - [2000] 245 ITR 33, 161 CTR 287, 132 TAXMANN 939 Issues:1. Entitlement to weighted deduction under section 35B(1)(b)(viii) of the Income-tax Act for interest on packing credit.2. Applicability of circular/instruction dated December 28, 1981, to the claim/facts of the case.Analysis:Issue 1: Entitlement to Weighted DeductionThe case involved determining whether the assessee, engaged in exporting coir products, was entitled to weighted deduction under section 35B(1)(b)(viii) of the Income-tax Act for interest on packing credit. The assessee claimed deduction for interest amounting to Rs. 1,61,385, but the Assessing Officer and the CIT (A) did not allow the claim. The Tribunal, however, allowed the claim based on a decision of the Madhya Pradesh High Court. The key contention was whether the interest paid on packing credit was directly related to the manufacture of articles to be exported, thereby qualifying for deduction. The Revenue argued that the Tribunal did not correctly interpret the provisions of section 35B(1)(b)(viii), emphasizing that the expenditure must be incurred wholly and exclusively on services outside India in connection with the execution of a contract for supply outside India.Issue 1 (continued): Interpretation of Section 35B(1)(b)(viii)Section 35B(1)(b)(viii) of the Income-tax Act provides for the allowance of deductions for specific expenditures related to services performed outside India in connection with the execution of contracts for supply outside India. The Tribunal's decision was challenged on the grounds that the interest on packing credit, although incurred for purchasing raw materials for manufacturing coir products for export, did not fulfill the criteria of being directly connected to services performed outside India for the execution of a supply contract. The Tribunal's interpretation of the provision was questioned, highlighting the necessity for the expenditure to be exclusively related to services outside India.Issue 1 (continued): Distinction between Manufacturing and SupplyThe court examined the nature of the expenditure, emphasizing the distinction between expenses related to manufacturing and those related to supply. It was clarified that the interest on packing credit, although linked to the purchase of raw materials for manufacturing goods for export, did not directly pertain to services performed outside India for the execution of a supply contract. The assessee's argument that all expenditures related to the supply of goods should qualify for deduction was rejected, as the legislative intent was to specify eligible expenditures under section 35B(1)(b)(viii). The court concluded that the interest on packing credit did not meet the criteria for weighted deduction under the provision.Issue 1 (continued): Decision and ConclusionIn light of the analysis, the court ruled against the assessee, stating that the interest on packing credit did not qualify for weighted deduction under section 35B(1)(b)(viii). The judgment favored the Revenue, emphasizing that the expenditure must be directly connected to services outside India in connection with the execution of a supply contract. Consequently, the first question posed by the Tribunal was answered in the negative, in favor of the Revenue and against the assessee. As a result, it was deemed unnecessary to address the second question, given the outcome of the first question.Conclusion:The High Court of Kerala, in its judgment delivered by Arijit Pasayat C.J., analyzed the entitlement to weighted deduction under section 35B(1)(b)(viii) of the Income-tax Act for interest on packing credit. The court concluded that the interest paid on packing credit, although related to the purchase of raw materials for manufacturing goods for export, did not meet the criteria of being exclusively connected to services performed outside India for the execution of a supply contract. Therefore, the assessee was not entitled to the claimed deduction, and the judgment favored the Revenue in this regard.