- (1.) THE Tribunal, Allahabad, has referred the following question of law under s. 256(1) of the IT Act, 1961 (hereinafter referred to as the Act) for opinion to this Court : "Whether, on the facts and circumstances of the case, the Tribunal was legally correct in holding that the expression 'maintenance of agency' meant an act of continuing the relationship of principal and agent in terms of s. 35B(1)(b)(iv) of the IT Act, 1961 -
(2.) THE reference relates to asst. yr. 1981 -82. Briefly stated the facts giving rise to the present reference are as follows : The respondent -assessee is a manufacturer and exporter of hand -knotted carpets. With a view to maintain and increase its exports in Europe, it had entered into an agency agreement with M/s Ingeborg Unadcath of Hamburg. It will be necessary to quote the relevant provisions of this agreement as under : "It has been agreed between both the parties as follows : 1. The first party 'KC' are the manufacturers of Indian hand -knotted carpets who have agreed to appoint the second party as 'agents' export promotion sole selling agents in whole of Europe including the United Kingdom for a period of five years. 2. The 'agents' will secure orders for export of hand -knotted carpets from first class customers. 3. 'KC' will manufacture and export the orders submitted and confirmed. 4. It has been decided that a commission of 5 per cent will be paid to 'agents' at the same time when the documents are paid by the customers. 'KC' will give irrevocable instructions each time to their bankers to pay 5 per cent commission to the 'agents' from the proceeds. 5. 'Agents' will not charge any other expenses such as telegram, post, travelling, etc. and they are only entitled as mentioned above to the 5 per cent commission. Commission will be paid on the invoice value. 6. 'Agents' will guide 'KC' about the trend of the European market, from time to time give, new designs for developments. 7. 'KC' will ensure execution of the orders, maintain standard of the quality as per the contract and/or as per the samples approved by the customers. 8. This agreement will be extended automatically for further five years if not terminated by one year's notice earliest or The respondent -assessee paid a commission of Rs. 3,68,312 based on 5 per cent of the FOB invoice value of the orders actually procured by the agent and shipment made by the respondent -assessee on that basis. It claimed relief under s. 35B on this expenditure, which was allowed by the ITO. The deduction allowed on this account worked out to Rs. 1,22,771. The ITO had made some other disallowances also. Against this, the respondent -assessee appealed to the CIT(A). The CIT(A) also noticed that the ITO had allowed relief under s. 35B of the Act as mentioned above. He required the respondent -assessee to point out the relevant provisions in the Act under which it was entitled to the required relief. It was submitted before him that the relief had been claimed and allowed under s. 35B(1)(b)(iv) of the Act. This section reads as under : "Sec. 35B(1)(a) Where an assessee, being a domestic company or a person (other than a company) who is resident in association with any other person, any expenditure (not being in the nature of capital expenditure or personal expenses of the assessee) referred to in cl. (b), he shall, subject to the provisions of this section, be allowed a deduction of a sum equal to one and one -third times the amount of such expenditure incurred during the previous year : 1981, by a domestic company, being a company in which the public are substantially interested the provisions of this clause shall have effect as if for the words 'one and one -third times' had been substituted. (b) The expenditure referred to in cl. (a) is that incurred wholly and exclusively on (iv) maintenance outside India of a branch, office or agency for the promotion of the sale outside India of such goods, services or facilities." It was contended before the CIT(A) that the respondent -assessee had maintained an agency for the promotion of its sale of carpets outside India and, therefore, it was also entitled to relief on the expenditure incurred in such maintenance. The CIT(A) was of the view that respondent -assessee had actually not maintained any agency outside India. According to him, maintenance represented meeting the entire expenditure. To support his view, he gave the examples of maintenance of a car or an office or a garden. According to him, the respondent -assessee could not be said to have maintained any agency inasmuch as it was required to pay only a fixed sum on the FOB invoice value of orders booked by that agent and shipped by the respondent -assessee and it was not obliged to make additional reimbursement of any loss likely to be sustained by the agent or was also not entitled to the refund of any amount, if not so spent. He, therefore, held that the respondent -assessee had actually not maintained any agency and was, therefore, not entitled to deduction under s. 35B of the Act. After giving the respondent -assessee an opportunity of being heard, he enhanced the income by Rs. 1,22,771. Feeling aggrieved, the respondent -assessee preferred an appeal before the Tribunal. The Tribunal has decided the issue in the following words : "8. We have carefully considered the submissions placed before us. We are inclined to agree with the stand of the respondent -assessee. There is no doubt that the word 'agency' occurring in cl. (iv) of the section referred to above can only mean an agency as defined in the Contract Act. It is a relationship between the principal and an agent. An agent is a person employed to do any act for the principal or to represent the latter in dealings with third persons. As per s. 185 of the Contract Act, no consideration is necessary to create an agency. In the light of this interpretation, it cannot be denied that the German firm was the agent of the respondent -assessee. The second question which arises is what is the meaning of the word 'maintenance'. As shown above, the words 'maintain' and 'maintenance' have different connotations. However, in connection with an agency that only mean keeping the latter in working order or to carry it on. The expression 'maintenance of an agency', therefore, means an act of continuing the relationship of principal and this relationship had been maintained by the respondent -assessee with the German concern in the year under appeal also. As contended before us, the option was with the respondent -assessee either to maintain a branch outside India or to maintain an office outside India or to maintain an agency outside India. Obviously in the case of maintaining a branch or an office, the burden of meeting the entire expenditure would have been upon the respondent -assessee. The respondent -assessee, however, chose to maintain only an agency. In order to maintain an agency, his responsibility was not to meet its expenses, but to keep the relationship with the German firm intact or to carry it on. This is what the respondent -assessee has done. The respondent -assessee, therefore, has maintained an agency outside India in terms of cl. (iv) of the section. This view also finds support from the various decisions cited at the Bar. We do not agree with the view of the CIT(A) that the legal meaning of maintenance of an 'agency' can be compared with the use of the word 'maintenance' in common parlance as in connection with a garden or a car, etc. That concept is wholly outside the scope of cl. (iv) of s. 35B. 9. Under s. 35B, the respondent -assessee would be entitled to relief on the expenditure which, among others, is incurred wholly and exclusively on the maintenance of an agency. There is no doubt that the respondent -assessee has spent a sum of Rs. 3,68,312 on the maintenance of the agency. How that amount has been worked out is not relevant for the purpose. As stated above, it was worked at 5 per cent on the FOB invoice value of the orders booked by the agent and shipped by the respondent -assessee. The respondent -assessee is, therefore, clearly entitled to relief under s. 35B on the above amount as was allowed by the ITO."
(3.) WE have heard Shri R.K. Upadhyay for the Revenue and Shri Suyesh Agarwal holding brief of Shri R.R. Agarwal on behalf of the respondent -assessee. The learned standing counsel submitted that for claiming weighted deduction under s. 35B(1)(b)(iv) of the Act, the respondent -assessee ought to have maintained the agency outside India and as in the present case, it had only paid 5 per cent of the contract value as commission to M/s Ingeborg Unadcath of Hamburg, it cannot be said that it had maintained any agency outside India. Reliance has been placed upon a Division Bench of this Court in the case of (All) ??? - -Ed.] and also on Supreme Court decision in the case of Aravinda Paramila Works vs. CIT (1999) 153 CTR (SC) 205 : (1999) 237 ITR 284 (SC).;