While upholding the decision of the Appellate Tribunal, the division bench of the Bombay High Court recently ruled that,a subcontractor, who did not provide any technical know how to a person outside India is not entitled to claim any deduction under Section 35B of the Income Tax Act, 1961.
Section 35B of the Act provides for export markets development allowance, allowing weighted deduction in a sum equal to one and one third times the amount of expenditure incurred for various export related activities enumerated in clause (1)(a) of the said section during the previous year by a domestic company.
Coming to the facts of the case, Electricity Corporation of Saudi Arabia (“ECSA”) and
Bharat Heavy Electricals Ltd. (“BHEL”) were entered into an agreement as per which, the latter agreed to provide, deliver at site, erect, set up, work, test, hand over and maintain a turn key project for an electrification scheme. The said scheme was named as Wadi Jizan Electrification Scheme.Subsequently, the BHEL entered into a sub-contract with the assessee through which a portion of the work was sub-contracted to the latter. The assessee claimed that they are eligible for weighted deduction on expenditure incurred by it in respect of its business of provision of technical know how or rendering services in connection with provision of technical know how to a person outside India as enumerated in Section 35B of the Income Tax Act. However, the claim was rejected by the assessing officer on ground that the assessee is a sub-contractor. On appeal, both the appellate authorities confirmed the same. Aggrieved with the above order, the assesse approached the High Court for relief.
While analyzing the provisions of section 35B(1)(a), the bench comprising of Justice M S Sanklecha and Justice S C Gupte found that the assessee for claiming deduction under Section 35B has to be an exporter of goods or technical know how and the expenditure should have been incurred by him in connection with that business.
The Court concurred with the findings of the Appellate tribunal and held that “what emerges from the record is that the exporter of know how in the present case was BHEL, who provided know how to a person outside India, namely, ECSA. It is BHEL, who, as such exporter incurred expenses for the purpose of provision of technical know how to a person outside India. The assessee as a subcontractor of BHEL, did not provide any technical know how to a person outside India and was not entitled to claim any deduction under Section 35B, as it was then applicable. All authorities below, namely, the Assessing Officer, the Commissioner of Income Tax (Appeals) and the Tribunal, came to a concurrent conclusion that the assessee was not an exporter of any goods or know how and was merely a sub-contractor of BHEL, who provided these services to BHEL and not to the person outside India, namely, ECSA. As held by the Tribunal in its order dated 18 November 1991, the agreement was entered into between BHEL and the foreign party and it was the duty of former to provide whatever services were contracted to the later. As to how these services were to be provided to the foreign party was in the exclusive domain of BHEL. It alone was responsible to the foreign party for the provision of these services. In the premises, the Tribunal was right in coming to the conclusion that whatever was provided to the foreign party was clearly by BHEL and not the assessee concerned. The Tribunal rightly concluded that what was done by the assessee-company, however technically specialized job it may be, it was done only for BHEL as a subcontractor and not for a person outside India and that, accordingly, it did not entitle the assessee to any deduction under Section 35B of the Income Tax Act.”
Read the full text of the Judgment below.
