TMI Blog2008 (2) TMI 451X X X X Extracts X X X X X X X X Extracts X X X X ..... em marketable. Even the technology and specifications/drawings are supplied by the assessee to the outside manufacturer of components. In a way, it can be said that the assessee as a manufacturer exercises complete control over the components manufactured outside and only after applying its own further processes sells the same. It is not necessary for claiming deduction under s. 80-IB that sale should be only of the final product and not of the intermediary product. What all sub-s. (3) provides is that the profits should be derived from the industrial undertaking and there is no denying fact that the entire sale in respect of main product as well as other spare parts were by the industrial undertaking itself. Thus, the assessee cannot be called a trader simpliciter so as to deny deduction in respect of sale of only spare parts. The manufacture of spare parts being undertaken along with the manufacture of machine product, namely, 'harvester combines' will entitle the assessee to claim deduction under s. 80-IB. We accordingly direct the AO to consider the sale of spares and components for the purpose of computing deduction under s. 80-IB. Computation of deduction under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iness in arriving at deduction under s. 80HHC. Levy of interest under s. 234B - The assessee does not deny its liability to pay advance tax. Thus, charging of interest under s. 234B is consequential in nature and may be charged as per law after giving effect to this order. In the result, the appeal is partly allowed. - Member(s) : R. V. EASWAR., DEEPAK R. SHAH. ORDER-DEEPAK R. SHAH, A.M.: This appeal by assessee is directed against the order of learned CIT(A)-IV,New Delhidt.28th Nov., 2005. 2. Though several grounds are raised. the appellant is aggrieved by the order of CIT(A) in relation to computation of deduction under s. 80-IB and s. 80HHC of the IT Act, 1961. The assessee company claimed deduction under s. 80-IB amounting to Rs. 38,120,284. During the year under consideration, the total sales shown in the industrial undertaking aggregated to Rs. 57.52 crores which comprised of sale of harvester combines Rs. 45.80 crores and spare parts Rs. 11.72 crores. The AO held that sale of spare parts amounting to Rs. 1,172.63 lacs represents trading activity. Accordingly he proceeded to exclude profits attributable to trading of spare parts estimated at Rs. 2,58,9 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and manufacturing process Shri Chopra submitted that the basic technology for the harvester combine, being manufactured by the assessee company, has been provided by the parent German company and is the most modern and sophisticated technology ideal for mechanized harvesting of crops of wheat and rice etc. The imported technology has been modified by the assessee company to suit locally available materials and manufacturing processes for optimum material cost, required performance and reliability/durability. The assessee company owns the licence, patent and brand name 'Claas' for manufacture of Claas products. In 'harvester combine' various operations for harvesting of crops like cutting, thrashing and winnowing are performed by the machine. Since raw agricultural crops harvested from soil are quite abrasive and the harvesting in the Indian fields involve greater wear and tear, the assessee company has suitably modified the imported technology to suit local conditions. A specially designed thrasher mechanism employing Tangential Axial Flow technique is used so as to reduce grain losses and deliver clean unbroken grain. The assessee company has, in the design and development depart ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hnical personnel of the company, are again subjected to certain stages of manufacturing processes inside the factory before these are dispatched to Escorts Ltd. for distribution in the market. With regard to the various processes which are carried on the components, received from the outside parties after fabrication or on the components produced inside the factory itself, further value addition by way of painting, welding, anti-rust treatment, flame hardening, salt bath hardening and tempering etc., has to be done inside the factory. Such processes are carried out in the various departments inside the factory like the painting department, assembly and welding department etc. Process Flow Chart placed at p. 96 of paper book 1 broadly indicates various operations carried out in the different departments. Paint shop of the assessee undertaking utilizes paints and varnishes of special technical specifications and composition as indicated in Works Standard CN 070337 placed at pp. 26 and 27 of the paper book No. 1. Detailed instruction sheets have been issued to the various departments and divisions of the undertaking, detailing the processes to be carried out on the various components, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s indicated in the instruction sheet. The instruction sheet details seven processes which are required to be carried out before the component is ready for use and dispatch. After these processes are carried out, the track is packed in a specialized packing before dispatch to the distributor. The second item included in the list of 47 items of sale is the drive sprocket. This item is got fabricated from Ashoka Machine Tools,New Delhi. Process sheet has been furnished to the fabricator along with the drawing indicating the design, specification as well as the equipments and tools which may be used for carrying out the various stages for production of the component. The component is thus caused to be produced under the direct supervision, control and guidance of the assessee company. The technical personnel of the assessee personally inspect the production of the component and ensure quality control as per the standards and specifications required by the assessee company. As indicated earlier the components of the machine require considerable precision and accuracy so as to be compatible with the operation of the machine. After the component is received from the fabricator it is sent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... enience. Shri Chopra submitted that the aforementioned factual matrix of the case, which projects a factual perspective of the activities and operations of the industrial undertaking of the assessee, has been set out in the various letters filed during proceedings before the learned AO as well as the learned CIT(A). The books of account including stock records as well as details of activities carried out by the various departments of the industrial undertaking of the assessee like paint shop, assembly shop fabrication section as also instruction sheets and control sheets which formed the basis of various stages of manufacture have been duly produced before the Revenue authorities. The factual matrix as set out above and duly put forth before the Revenue authorities has not been disputed. The only dispute raised by the Revenue is regarding the inclusion of sale of spare parts/components/sub-assemblies amounting to Rs. 11,72,63,188 for computation of relief under s. 80-IB and excluding certain items like scrap sale, provisions of warranty claims etc. for the purposes of s. 80HHC. Assailing the order of learned CIT(A) Shri Chopra submitted that the same is factually and legally unsust ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... her showed that the assessee did not own a printing press. It was observed that in order that a publisher of books should be a manufacturer of books, it was wholly unnecessary for him to be a book binder himself. A publisher may get the books printed by any printer but the printer is not the manufacturer but a mere contractor. This decision has been followed by another Division Bench of the Calcutta High Court in Griffon Laboratories (P) Ltd. vs. CIT (1979) 119 ITR 145 (Cal) , where it has been held that a manufacturer may hire a plant or machinery and employ hired labour and manufacture the goods. But to earn the benefit of the concessional rate of tax as an industrial company, the company must mainly engage itself in the manufacture or processing of goods as specified in s. 2(7) of the Finance Act, 1966, either by itself or by someone under its supervisory control or direction. The decision of the Calcutta High Court in Addl. CIT vs. A. Mukherjee Co. (P) Ltd., has been followed by Hon'ble Delhi High Court in Orient Longman Ltd. vs. CIT (1981) 130 ITR 477 (Del). Referring to the aforesaid decision of Calcutta High Court, their Lordships of the Delhi High Court observed as under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his arguments by submitting that the proposition enunciated in an unending array of judgments by various High Courts and Hon'ble Supreme Court, as referred above, has also been accepted by the CBDT vide its Circular No. 347 dt.7th July, 1982. This circular has been issued for explaining the scope and the ambit of the expression "manufacture or processing of goods" as used in the definition of industrial company for the purposes of s. 104 of the IT Act. The circular says that the Board has accepted the view taken by Madras and Calcutta High Courts in the cases of CIT vs. Commercial Laws of India (P) Ltd. (1977) 107 ITR 822 (Mad) and Addl. CIT vs. A. Mukherjee Co. (P) Ltd. (1978) 113 ITR 718 (Cal). The view accepted by the Board is binding on the Revenue authorities. For this proposition reliance has placed on the judgment of Hon'ble Supreme Court in the case of CCE vs. Dhiren Chemical Industries (2002) 172 CTR (SC) 670 : (2002) 254 ITR 554 (SC) wherein it has laid down the proposition that circulars issued by the Board are binding on the tax authorities even if these are in conflict with the statute. According to the Supreme Court it is not open to the Revenue to raise a contenti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (SC) 116 : (1992) 196 ITR 188 (SC). Shri Chopra also submitted that the fact that the AO has treated the spare parts and components as goods processed by the undertaking is further evidenced by the computation adopted for the purposes of deduction under s. 80HHC. The AO has invoked cl. (a) of sub-s. (3) of s. 80HHC which deals with a situation where the export is "of goods or merchandise manufactured or processed by the assessee". Thus the AO has clearly proceeded on the basis that the export of spare parts as well as harvester combines represents goods processed or manufactured by the assessee. The AO did not invoke cl. (b) or (c) in respect of export of spares presumably because the spares had been manufactured by the undertaking and were not traded goods. On this ground also it is submitted that the consideration of consistency should prevail and spare parts of the undertaking which have been treated as manufactured goods of the undertaking for the purposes of s. 80HHC be treated as manufactured goods and not traded goods for the purposes of s. 80-IB. There is no earthly reason for the AO to treat the spare parts as manufactured by the undertaking while computing deduction under ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... assessee do not fulfil the basic condition for allowability of deduction. Reliance was placed on the decision of Hon'ble Supreme Court in the case of IPCA Laboratory vs. Dy. CIT (2004) 187 CTR (SC) 513 : (2004) 266 ITR 521 (SC) and Prakash Trading Co. vs. CIT (l996) 132 CTR (SC) 230 : (l996) 220 ITR 1 (SC). He also submitted that all the parts of the relevant sections had to be read together and cannot be read in isolation. For this purpose, reliance was placed on the decision of Hon'ble Supreme Court in the case of CIT vs. National Taj Traders (l9S0) 14 CTR (SC) 348 : (l9S0) 121 ITR 535 (SC). Since admittedly, the intermediary products were not manufactured by the assessee but were manufactured elsewhere and which merely were sold as parts, proportionate deduction is not allowable. 7. We have carefully considered relevant facts, arguments advanced and the case law cited. Sec. 80-IB(1) provides as under: "80-IB(1): Where the gross total income of an assessee includes any profits and gains derived from any business referred to in sub-ss. (3) to (11), (11A) and (11B) such business being hereinafter referred to as the eligible business, there shall, in accordance with and subject ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y track of machine and check track sagging. If sagging is within limits of 10-15 mm, the track is okay or else control the sagging by spring pressure as per need. Similar instructions are issued in respect of various items of spares components sold. Thus, it is incorrect to hold that the sale of spares/components are merely trading goods and not the goods manufactured by the assessee. Though the assessee may be outsourcing some of the spare parts by getting them manufactured elsewhere, after receiving the same the assessee is applying further process so as to render them marketable as per the required standard. Thus though various processes are being applied, the same was mistakenly treated as sale of trading goods and not of goods manufactured by the assessee. It is noteworthy in the instant case that the Revenue has explicitly accepted the position that the assessee company is an industrial undertaking and fulfils the three conditions contained in s. 80-IB(2) for deduction under s. 80-IB. Once the Revenue accepts the fact that the industrial undertaking of the assessee company manufactures or produces harvester combines, there is no justification or rational basis for denying exe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee cannot 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 present case, it is seen that after purchasing some of the parts from outside suppliers, the assessee applies its own further processes to finish the same and to make them marketable. Even the technology and specifications/drawings are supplied by the assessee to the outside manufacturer of components. In a way, it can be said that the assessee as a manufacturer exercises complete control over the components manufactured outside and only after applying its own further processes sells the same. It is not necessary for claiming deduction under s. 80-IB that sale should be only of the final product and not of the intermediary product. What all sub-s. (3) provides is that the profits should be derived from the industrial undertaking and there is no denying fact that the entire sale in respect of main product as well as other spare parts were by the industrial undertaking itself. Thus, the assessee cannot be called a trader s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Supreme Court has excluded sales-tax and excise duty from the turnover since it does not occur in the numerator of the quotient. On similar basis scrap sale is not liable to be included in the total turnover. Reliance is placed on the decision of the Tribunal in the case of ITO vs. Jagraon Exports (2002) 124 Taxman 220 (Chd)(Mag) where it was held that the sale of scrap could not be treated as turnover because the assessee was not dealing in purchase and sale of scrap. 10. As regards inclusion of warranty claims as part of turnover Shri Chopra submitted that warranty claims can never be construed as part of total turnover. The very concept of warranty claim as turnover of business is alien to the basic concepts of commercial accounting. In any case it may be pointed out that in the P L a/c an amount of Rs. 63.14 lacs have been debited on account of warranty claims which have been ignored by the AO while aggregating the gross figure of such claims with the total turnover. 11. Learned Departmental Representative Shri Purushottam Tripuri, on the other hand, relied upon appellate order. He submitted that the scrap sale has been treated as part of its income. Thus, it should also f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction under s. 80HHC. The same was apparently reduced in view of cl. (baa) of Explanation below sub-s. (4C) of s. 80HHC. The same was confirmed by learned CIT(A). 15. Learned counsel for assessee submitted that interest received from customers for delayed payment of sale proceeds constitutes part of trading receipts as held by various High Courts as well as various Benches of Tribunal as under: (1) Nirma Industries Ltd. vs. Dy. CIT (2006) 202 CTR (Guj) 198 : (2006) 283 ITR 402 (Guj); (2) Jt. CIT vs. Sidheshwari Paper Udyog Ltd. (2005) 95 TTJ (Del)(TM) 1 : (2005) 94 ITD 187 (Del)(TM). He also submitted that the provision written back does not fall in the category of "any other receipt of similar nature". It doesn't have the character of a receipt like interest or rent etc. The AO is therefore not justified in excluding the amount from profits and gains of business. There were credits appearing in the books on the basis of purchase of items from various suppliers and the suppliers were not paid. These credit balances were brought to the P L a/c and had emanated from business transactions only and are liable to be treated as connected with the business. The assessee is th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part of business income as per provisions of s. 41(1) of the Act. However, there is no specific mention of such sum to be reduced from profits of the business. Thus, the issue to be considered is 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 ejusdem generis, the receipts in the nature of miscellaneous income or receipts not connected with the business of export is to be excluded while computing profits of the business. However, in respect of provisions written back, the same cannot be considered of the nature like miscellaneous income or interconnected with the business of the exports. Earlier when the assessee anticipated certain expenditure, the same were debited to P L a/c and claimed as business expenditure. The provision no longer required merely reduces the expenditure and is not a receipt or income simpliciter. Such provision written back merely reduces the expenditure claimed and hence, cannot be excluded while computing profits of the business under cl. (baa) of Explanation to s. 80HHC. We, therefore, direct the AO not to exclude 90 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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