Weighted deduction for export packing credit interest denied where the expenditure lacked the required nexus with services outside India.

Interest paid on packing credit finance under an export credit scheme was held not to qualify for weighted deduction under section 35B(1)(b)(viii) of the Income-tax Act, because the provision applies only to expenditure incurred wholly and exclusively on performance of services outside India in connection with, or incidental to, execution of an export contract. The court treated the export financing benefit and the section 35B deduction as distinct incentives and found no statutory nexus between the interest cost and the foreign services requirement. The claimed deduction was therefore disallowed.

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Issues: Whether interest paid on packing credit loan availed under the export credit scheme was deductible as weighted deduction under section 35B(1)(b)(viii) of the Income-tax Act, 1961.

Analysis: Section 35B allowed weighted deduction only for expenditure incurred wholly and exclusively on performance of services outside India in connection with or incidental to the execution of a contract for supply outside India of goods, services or facilities. The benefit of packing credit under the export credit scheme and the allowance under section 35B were distinct incentives. Interest paid on borrowing obtained on concessional terms for export financing was not expenditure on performance of services outside India, nor did it satisfy the statutory nexus required by clause (viii). The Court declined to follow the contrary view taken in some tribunal and high court decisions and held that the claimed interest did not fall within the scope of the provision.

Conclusion: The assessee was not entitled to weighted deduction under section 35B(1)(b)(viii) on interest paid on packing credit loan; the question was answered in the negative, in favour of the Revenue and against the assessee.

Ratio Decidendi: Interest on export packing credit loan is not deductible under section 35B(1)(b)(viii) unless the expenditure is incurred on performance of services outside India in connection with or incidental to execution of the export contract.

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