2016 (10) TMI 702 - HC - Income Tax

Court denies weighted deduction under Section 35B of Income Tax Act for subcontractor.

The court upheld the decisions of the lower authorities, ruling that the assessee was not entitled to the weighted deduction under Section 35B of the ... Entitlement to claim weighted deduction under Section 35B denied - Held that:- As noted whatever may have been the position under Section 35B as it existed prior to 1-4-1978, with effect from that day and till subsection (1A) remained on the statute book, the requirement of law to claim this deduction was that the assessee must be an exporter of goods or provider of technical knowhow to a person outside India and the expenditure must be incurred for such export of goods or provision of knowhow to a person outside India. The Supreme Court, in case of Stepwell Industries Ltd (1997 (8) TMI 5 - SUPREME Court ), had no occasion to deal with the provisions of Subsection (1A) introduced in the Act. The judgment in the case of Stepwell Industries Ltd, thus, offers no assistance to the assessee in the present case. The assessee's case clearly falls within the Assessment Year 1979-80 and it is covered by the provisions of subsection (1A). In the premises, there is no infirmity in the orders of the authorities below. Question of law as framed by the Tribunal is, accordingly, answered in the affirmative, that is to say, in favour of the Revenue and against the Assessee. Issues Involved:1. Entitlement to Weighted Deduction under Section 35B of the Income Tax Act, 1961.2. Definition and Scope of 'Provision of Technical Knowhow' under Section 35B(1)(a) and Subsection (1A).3. Role and Impact of Subcontracting on Eligibility for Deduction.4. Interpretation of Relevant Legal Provisions and Precedents.Detailed Analysis:1. Entitlement to Weighted Deduction under Section 35B of the Income Tax Act, 1961:The primary issue is whether the assessee is entitled to claim a weighted deduction under Section 35B for the Assessment Year 1979-80. The assessee claimed a weighted deduction on expenditure amounting to Rs. 5,36,77,345 incurred on items enumerated in Section 35B of the Act. Section 35B provides for an export markets development allowance, allowing a weighted deduction equal to one and one-third times the amount of expenditure incurred for various export-related activities.2. Definition and Scope of 'Provision of Technical Knowhow' under Section 35B(1)(a) and Subsection (1A):The Tribunal had to determine whether the services rendered by the assessee amounted to the provision of technical knowhow as defined under Section 35B(1)(a) and Subsection (1A). The assessee subcontracted work from Bharat Heavy Electricals Ltd. (BHEL) for the Wadi Jizan Electrification Scheme. The assessee claimed that the expenditure incurred while executing this subcontract was eligible for a weighted deduction under Section 35B(1)(a) as it involved the provision of technical knowhow to a person outside India.3. Role and Impact of Subcontracting on Eligibility for Deduction:The Assessing Officer, Commissioner of Income Tax (Appeals), and the Tribunal rejected the assessee's claim on the grounds that the assessee acted only as a subcontractor to BHEL and did not directly provide technical knowhow to a person outside India. The Tribunal's decision was based on the interpretation that the assessee was responsible to BHEL and not directly to the Electricity Corporation of Saudi Arabia (ECSA), the foreign entity.4. Interpretation of Relevant Legal Provisions and Precedents:The court examined the relevant provisions of Section 35B, including Subsection (1A) introduced by the Finance Act, 1978. Subsection (1A) stipulates that for the deduction to be claimed, the assessee must be engaged in the business of exporting goods or providing technical knowhow to persons outside India, and the expenditure must be incurred wholly and exclusively for that purpose.The court noted that the agreement between the assessee and BHEL was a 'back to back agreement,' wherein BHEL was the main contractor responsible for providing services to ECSA. The assessee, as a subcontractor, provided services to BHEL, an Indian entity, and not directly to ECSA. Consequently, the court concluded that the assessee did not meet the criteria outlined in Subsection (1A) of Section 35B for claiming the deduction.Conclusion:The court upheld the decisions of the lower authorities, ruling that the assessee was not entitled to the weighted deduction under Section 35B. The question of law was answered in the affirmative, in favor of the Revenue and against the assessee. The reference was disposed of accordingly.