By TIOL News Service:

MUMBAI, OCT 25, 2016: THE issue is - Whether the services rendered by assessee in the capacity of a sub contractor, can be considered as export of services rendered in the form of a technical knowhow to a entity based outside India, so as to claim deduction u/s 35B. NO IS THE VERDICT.

Facts of the case:

The assessee for the subject assessment year, had claimed weighted deduction on expenditure amounting to Rs.5,36,77,345/ incurred by it on items enumerated in Section 35B. The case of the assessee was that by an agreement dated 18 June 1977, entered into between Electricity Corporation of Saudi Arabia ("ECSA") and Bharat Heavy Electricals Ltd. ("BHEL"), 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 known as Wadi Jizan Electrification Scheme ("Main agreement"). BHEL, in turn, entered into agreement dated 24 August 1977 with the assessee, subcontracting a portion of the work to the latter ("subcontract"). The subcontract related to laying out of transmission lines, overhead lines and distribution lines. Under this agreement, the assessee agreed to discharge and fulfill all the duties, obligations and covenants of BHEL under the main agreement entered into between BHEL and ECSA insofar as it related to the work under the subcontract. The assessee claimed to have incurred expenditure, whilst executing this subcontract, in respect of its business of provision of technical knowhow or rendering services in connection with provision of technical knowhow to a person outside India and accordingly become eligible for weighted deduction u/s 35B(1)(a). AO rejected the assessee's claim mainly on the ground that the assesee acted only as a subcontractor of BHEL and thus was not entitled to any deduction u/s 35B(1)(a).

On appeal, the High Court held that,

++ the exporter of knowhow in the present case was BHEL, who provided knowhow to a person outside India, namely, ECSA. It is BHEL, who, as such exporter, incurred expenses for the purpose of provision of technical knowhow to a person outside India. The assessee as a subcontractor of BHEL, did not provide any technical knowhow to a person outside India and was not entitled to claim any deduction u/s 35B, as it was then applicable. All authorities below, namely, the AO, CIT(A) and the Tribunal, held that the assessee was not an exporter of any goods or knowhow and was merely a subcontractor 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 latter. 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. As we have noted above, whatever may have been the position u/s 35B as it existed prior to 141978, 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 SC, in case of Stepwell Industries Ltd, 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 AY 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. The question of law as framed by the Tribunal is, accordingly, answered in the affirmative.

(See 2016-TIOL-2589-HC-MUM-IT)