Weighted deduction for export-related services depends on performance outside India, with sea freight and marine insurance qualifying but inland railway freight excluded.

Weighted deduction under section 35B(1)(b)(viii) applied to expenditure on services performed outside India in connection with export contracts, so sea freight and marine insurance qualified because they were treated as services directly linked to execution of the export contracts. The exclusion in another sub-clause could not be imported into clause (viii). Railway freight for inland carriage from the manufacturing centre to the port did not qualify because it was not expenditure on services performed outside India, even though it was connected with the export contract. The result was allowance for marine insurance and sea freight, but not for railway freight.

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Issues: (i) Whether freight and marine insurance incurred in connection with export contracts qualified for weighted deduction under section 35B(1)(b)(viii) of the Income-tax Act, 1961; (ii) Whether railway freight incurred for carriage of goods from the manufacturing centre to the port qualified for weighted deduction under section 35B(1)(b)(viii) of the Income-tax Act, 1961.

Issue (i): Whether freight and marine insurance incurred in connection with export contracts qualified for weighted deduction under section 35B(1)(b)(viii) of the Income-tax Act, 1961.

Analysis: The provision covers expenditure on performance of services outside India in connection with, or incidental to, the execution of contracts for supply outside India. Sea freight and marine insurance were treated as services rendered outside India and as directly connected with execution of the export contracts. The exclusion of carriage and insurance found in clause (iii) was held not to control clause (viii), because each sub-clause must be read on its own wording.

Conclusion: In favour of the assessee. Weighted deduction was allowable on marine insurance and sea freight under section 35B(1)(b)(viii).

Issue (ii): Whether railway freight incurred for carriage of goods from the manufacturing centre to the port qualified for weighted deduction under section 35B(1)(b)(viii) of the Income-tax Act, 1961.

Analysis: Railway freight for inland carriage did not constitute services performed outside India. Although such expenditure was connected with execution of the export contract, it failed the essential statutory requirement that the services be performed outside India. The duty under section 39 of the Sale of Goods Act, 1930, did not alter this statutory limitation.

Conclusion: Against the assessee. Weighted deduction was not allowable on railway freight under section 35B(1)(b)(viii).

Final Conclusion: The reference was answered by sustaining weighted deduction only for marine insurance and sea freight, while denying it for railway freight, resulting in a partial success for the assessee.

Ratio Decidendi: For weighted deduction under section 35B(1)(b)(viii), the expenditure must be on services performed outside India and connected with or incidental to execution of the export contract, and the exclusion attached to another sub-clause cannot be imported into it.

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