Section 80-IB of the Income-tax Act, 1961

IN THE ITAT DELHI BENCH ‘A’ Claas India Ltd. v. Assistant Commissioner of Income-tax; Circle 3(1), New Delhi and Deepak R. Shah, Accountant Member R. V. Easwar, Vice President IT Appeal No. 608 (Delhi) of 2006 [Assessment year 2001-02] February 22, 2008 I Section 80-IB of the Income-tax Act, 1961 - Deductions - Profits and gains from industrial undertakings other than infrastructure development undertakings - Assessment year 2001-02 - Whether for claiming deduction under section 80-IB it is not necessary that sale should be only of final product and not of intermediary product and that what all sub-section (3) of section 80-IB provides is that profit should be derived from industrial undertaking - Held, yes - Assessee claimed deduction under section 80-IB stating that it was engaged in manufacture and sale of harvester combines and its spare parts and components - For relevant assessment year, assessee had shown total sales in industrial undertaking aggregate to Rs.57.52 crores, which comprised of sale of harvester combines at Rs.45.80 crores and sale of spare parts at Rs.11.72 crores - Assessing Officer treated spare parts and components as traded goods and not manufactured goods by industrial undertaking of assessee and, accordingly, held that sale of spare parts amounting to Rs.11.72 crores was sale of traded goods - He, therefore, while computing deduction under section 80-IB did not take into consideration sale turnover of spare parts and components - Whether since material on record clearly established that sale of spare parts and components in question was of goods manufactured by assessee in its industrial undertaking and not of trading goods, Assessing Officer was wrong in not taking into consideration sale turnover of spares and components for purpose of computing deduction under section 80-IB - Held, yes II Section 80HHC of the Income-tax Act, 1961 - Deductions - Exporters - Assessment year 2001-02 - Assessee claimed deduction under section 80HHC stating that it was engaged in manufacture and sale of harvester combines and its spare parts and components - Assessing Officer while computing deduction under section 80HHC included warranty claims received by assessee and amount realized on sale of scrap as part of total turnover - He further excluded 90 per cent of provision written back and 90 per cent of interest income being received from customers on delayed payments from profits of business for purpose of computing deduction under section 80HHC - Whether since amount realized on sale of scrap and warranty claims received by assessee could not be considered as part of turnover of business carried on by assessee, amount realized on sale of scrap and warranty claims were not liable to be included in total turnover for purpose of computing deduction under section 80HHC - Held, yes - Whether since in section 80HHC expression 'profits of business' has been defined specifically, there is no need to artificially compute profits of business for purpose of computing deduction under section 80HHC - Held, yes - Whether, therefore, 90 per cent of interest income was rightly excluded from profits of business for purpose of computing deduction under section 80HHC - Held, yes - Whether provision written back merely reduces expenditure claimed and, hence, cannot be excluded while computing profits of business under clause (baa) of Explanation to section 80HHC - Held, yes - Whether, therefore, Assessing Officer was wrong in excluding 90 per cent of provision written back for purpose of computing profits of business in arrive at deduction under section 80HHC - Held, yes Words and phrase The word ’total turnover’ as appearing in section 80HHC (4C) of the Income-tax Act, 1961 FACTS I The assessee claimed deduction under section 80-IB stating that it was engaged in the manufacture and sale of harvester combines and its spare parts and components. Further for the relevant assessment year the assessee had shown the total sales in the industrial undertakings aggregate to Rs.57.52 crores, which comprised of sale of harvester combines of Rs.45.80 crores and sale of spare parts at Rs.11.72 crores. The Assessing Officer treated the spare parts and components as traded goods and not manufactured goods by the industrial undertaking of the assessee and, accordingly, held that sale of spare parts amounting to Rs.11.72 crores was sale of trading goods. The Assessing Officer, therefore, while computing the deduction under section 80-IB, did not take into consideration the sale turnover of spare parts and components as claimed by the assessee. On appeal, the Commissioner (Appeals) confirmed the action of the Assessing Officer. On second appeal: HELD I Sub section (2) of section 80IB provides certain conditions to be fulfilled by an industrial undertaking to claim deduction under section 80-IB. Admittedly, these conditions were fulfilled, as in respect of manufacture and sale of harvester combine, the deduction had been granted. Sub-section (3) of section 80-IB provides that amount of deduction in the case of an industrial undertaking shall be 25 per cent of the profits and gains derived from such industrial undertaking. Therefore, the question for consideration arose as to whether the sale of spare parts and the components was due to the same being manufactured by the assessee or was simply a trading transaction so as to be excluded from reckoning for computing deduction as profits derived from such industrial undertaking. The assessee had supplied list of 47 items comprising sale of almost Rs,9.55 crores to suggest as to in respect of sale of various items of these spare parts and components what further processes were being applied so as to finish the production process and to make it marketable. The assessee also had stated that though the details were supplied to the extent of 81.5 per cent of the total sales, the details in respect of all the items could be furnished. What were the various manufacturing processes, to be applied to the various outsourced material, were filed in the form of instruction sheet being given by the management to the shop floor workers. Similar instructions were issued in respect of various items of spares/ components sold. Thus, it was incorrect to hold that the sale of spares/components were merely of trading goods and not of the goods manufactured by the assessee. Though the assessee might be outsourcing some of the spare parts by getting them manufactured elsewhere, after receiving the same the assessee was applying further process so as to render them marketable as per the required standard. Thus, though various processes were being applied, the same was mistakenly treated as sale of trading goods and not of goods manufactured by the assessee. Further the lower authorities had explicitly accepted the position that the assessee was an Industrial undertaking and fulfilled the three conditions contained in section 80-IB(2) for deduction under section 80-IB. Once the lower authorities accepted the fact that the Industrial undertaking of the assessee company manufactured or produced harvester combines, there was no justification or rational basis for denying deduction for manufacture or production of intermediate products like spare parts, components or sub assemblies inasmuch as these spare parts were being produced by carrying out the various processes inside the factory or else these were caused to be produced on the basis of drawings, designs and specifications supplied by the undertaking to the outside fabricators and after receipt of such components, the undertaking carried out further processes like painting, welding, salt hardening, tempering etc. on such components. It is well settled that assessee needs not own or possess plant and machinery to be a manufacturer of goods to be treated as an industrial company for the purpose of claiming deduction. The manufacture may be either by assessee itself or by someone under assessee's supervisory control or direction. In the instant case, the assessee could not be considered as a ‘trader simpliciter’. A trader merely purchases the goods which have already been manufactured by others and then sells them as it is. No further manufacturing process is being applied if the assessee is merely a trader. However, in the instant case, after purchasing some of the parts from outside suppliers, the assessee applied its own further processes to finish the same and to make them marketable. Even the technology and specifications/ drawings were supplied by the assessee to the outside manufacturer of components. Therefore, the assessee as a manufacturer exercised complete control over the components manufactured outside and only after applying its own further processes sold the same. It is not necessary for claiming deduction under section 80IB that sale should be only of the final product and not of the intermediary product. What all sub-section (3) provides is that the profits should be derived from the industrial undertaking and there was no denying the fact that the entire sales in respect of main product as well as other spare parts were by the industrial undertaking itself. Therefore, the orders passed by the lower authorities on this issue were set aside and the Assessing Officer was directed to take into consideration the sale turnover of spares and components for the purpose of computing deduction under section 80-IB. [Para 7] FACTS II The assessee claimed deduction under section 80HHC stating that it was engaged in the manufacture and sale of harvester combines and its spare parts and components. The Assessing Officer while computing deduction under section 80HHC included warranty claims received by the assessee and the amount realized on sale of scrap as part of total turnover. He, further excluded 90 per cent of the provision written back and 90 per cent of the interest income being received from customers on delayed payments from the profits of business for the purpose of computing deduction under section 80HHC. On appeal, the Commissioner (Appeals) confirmed the action of the Assessing Officer. On second appeal: HELD II Clause (ba) of Explanation below sub-section (4C) of section 80HHC provides that ‘total turnover’ shall not include freight or insurance attributable to the transport of the goods beyond the custom station. The proviso to this definition provides that the expression ‘total turnover’ excludes various export benefits referred in clauses (iiia) to (iiie) of section 28. However, there is no provision which defines the word ‘total turnover’. The turnover means the value of goods purchased/sold in the course of carrying of business. The business of assessee was manufacture and sale of Harvester combine and its spares. The scrap generated during the manufacturing process was sold as such. The assessee was not engaged in the business of sale of scrap. Thus, the scrap, generated and which was sold, only reduced the cost of material consumed in the manufacturing process. Accordingly, the same could not be considered as part of turnover of the business carried on by the assessee. Therefore, the Assessing Officer was directed to exclude the amount realized on sale of scrap from the total turnover adopted for computing deduction under section 80HHC. [Para 12] The assessee received warranty claims due to provision of warrant available to it in respect of purchases made. Counter claim made by the customers of assessee were also paid. In a way, it was arising in the course of business but could not be considered as part of turnover. Therefore, the warranty claims were liable to be included in the total turnover for the purpose of computing deduction under section 80HHC. [Para 13] Deduction under section 80HHC(3) is to be computed on the basis of profits of business. Clause (baa) of Explanation below section 80HHC defines the expression 'profits of the business5 means the profits of business as computed under the head 'Profits and gains of business or profession' as reduced by 90 per cent of the export incentives referred in clause (iiia) to (iiid) of section 28 and any receipts by way of brokerage, commission, interest, rent charges or any other receipt of a similar nature included in such profits. Thus, though interest received from customers for delayed payment was to be treated as part of profits of the business, 90 per cent thereof had to be reduced in view of clause (baa) of Explanation to section 80HHC. The said clause do not have any exception in respect of interest whether received from banks or from customers. Further, in section 80HHC, the expression 'profits of business' has been defined specifically and hence, there is no need to artificially compute the profits of the business for the purpose of computing deduction under section 80HHC. Accordingly, 90 per cent of interest income was rightly excluded from the profits of the business for the purpose of computing deduction under section 80HHC. [Para 17] The provision written back is part of business income as per provisions of section 41(1). However, there is no specific mention of such sum to be reduced from profits of the business. Thus, the issue for consideration arose as to whether the provision written back can be considered as receipt by way of brokerage, commission, interest, rent, charges or any other receipt of a similar nature. Applying the principle of ejusden genris, the receipts in the nature of miscellaneous income or receipts not connected with the business of export is to be excluded while computing profit of the business. However, in respect of provisions written back, the same could not be considered of the nature like miscellaneous income or inter-connected with the business of the exports. Earlier when the assessee anticipated certain expenditure, the same was debited to profit and loss account and/claimed as business expenditure. Such provision written back merely reduces the expenditure claimed and, hence, cannot be excluded while computing profits of the business under clause (baa) of Explanation to section 80HHC. Therefore, the Assessing Officer was wrong in excluding 90 per cent of the provision written back for the purpose of computing profits of business in arrive at deduction under section 80HHC. [Para 18] EDITORS NOTE The assessee was entitled to consequential relief in respect of interest charged under section 234B. Since the assessee did not deny its liability to pay advance tax, interest under section 234B was to be charged from the assessee. CASE REVIEW Nirma Industries Ltd. v Dy. CIT [2006] 283 ITR 402/155 Taxman 230 (Guj.), and Sidheshwari Paper Udyog Ltd. v. CIT [2005] 94 ITD 187 (Delhi) (TM) - Distinguished. ITO v. Jagraon Exports [2002] 124 Taxman 220 (Chd.) - Followed.