TMI Blog2012 (4) TMI 334X X X X Extracts X X X X X X X X Extracts X X X X ..... form part of the supply made and are not treated as sale consideration or the price of the goods on which excise duty or the sales tax etc. would be or is payable - Decided against the assessee - INCOME TAX APPEAL NO. 656/2011 - - - Dated:- 29-3-2012 - MR. JUSTICE SANJIV KHANNA, MR. JUSTICE R.V. EASWAR, JJ. For Appellant: Dr. Rakesh Gupta, Mr. Ashwani Taneja Ms. Rani Kiyala, Advocates. For Respondent: Mr. Anupam Tripathi, Sr. Standing Counsel Ms. Anusha Singh, Advocate. SANJIV KHANNA, J.: Pine Packaging Private Limited has filed the present appeal impugning the order dated 14th January, 2011 passed by the Income Tax Appellate Tribunal (tribunal, for short) in ITA No. 4084/Del/2010. The appeal pertains to assessment year 2007-08. In the return of income, the assessee had shown turnover of Rs.9,81,75,513/- and net profit of Rs.86,95,402/-. After adjustment of brought forward unabsorbed depreciation of Rs.45,24,020/-, the balance income was set off/reduced from the deduction claimed under Section 80 IC of the Income Tax Act, 1961 (Act, for short). 2. The dispute in the present appeal pertains to claim for deduction under Section 80 IC of the Act on Rs.1, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s begun or begins to manufacture or produce any article or thing, not being any article or thing specified in the Thirteenth Schedule, or which manufactures or produces any article or thing, not being any article or thing specified in the Thirteenth Schedule and undertakes substantial expansion during the period beginning (i) on the 23rd day of December, 2002 and ending before the 1st day of April, 2012, in any Export Processing Zone or Integrated Infrastructure Development Centre or Industrial Growth Centre or Industrial Estate or Industrial Park or Software Technology Park or Industrial Area or Theme Park, as notified by the Board in accordance with the scheme framed and notified by the Central Government in this regard, in the State of Sikkim ; or (ii) on the 7th day of January, 2003 and ending before the 1st day of April, 2012, in any Export Processing Zone or Integrated Infrastructure Development Centre or Industrial Growth Centre or Industrial Estate or Industrial Park or Software Technology Park or Industrial Area or Theme Park, as notified by the Board in accordance with the scheme framed and notified by the Central Government in this regard, in the State of Himachal P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section ; (ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose. Explanation. The provisions of Explanations 1 and 2 to sub-section (3) of section 80-IA shall apply for the purposes of clause (ii) of this sub-section as they apply for the purposes of clause (ii) of that sub-section. (5) Notwithstanding anything contained in any other provision of this Act, in computing the total income of the assessee, no deduction shall be allowed under any other section contained in Chapter VIA or in section 10A or section 10B, in relation to the profits and gains of the undertaking or enterprise. (6) Notwithstanding anything contained in this Act, no deduction shall be allowed to any undertaking or enterprise under this section, where the total period of deduction inclusive of the period of deduction under this section, or under the second proviso to sub-section (4) of section 80-IB or under section 10C, as the case may be, exceeds ten assessment years. (7) The provisions contained in sub-section (5) and sub-sections (7) t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... thing, which is eligible for deduction. 9. The expression derived from in taxation laws means something which has direct or immediate nexus with the specified activity, which in the present case means manufacture or production of article or thing. Manufacture or production of article or thing should be the direct and proximate cause of the said receipt and not the indirect causation and reason for the said income. Mere second/third connection is not sufficient; the manufacture/production should be the causa causaus. The expression derived from is a narrower expression than the words attributable to which includes direct as well as indirect receipts which may not have immediate or direct nexus with the specified activity. In the present case, in view of words derived from , we have to look at the immediate source which has generated or resulted in the said receipt/income. The immediate source will be the first degree source and not the second or the third degree source, which is a step removed from the specified activity (see Pandian Chemicals versus CIT, (2003) 262 ITR 278 (SC) and Liberty India versus CIT, (2009) 317 ITR 218 (SC). 10. In view of the said legal position, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 315 Output from a machine based on cavitation cycle time of mould assigned respectively to each machine. Normative Production = (3600/Cycle Time) *No of Cavities * No of Hours * No of days 4) For the above capacity of machines, the tentative project cost is about Rs.1050 million. The agreement is for 75 million pieces per annum. The nos. may change later on, with mutual consent, depending upon the actual no. of machines. Note: Standard capacity and normative production possible would change for each type of machines. 12. The relevant portion of Annexure 3 reads as under:- Estimation of Selling Price: The key features of the pricing of PRODUCT are enunciated as given below. For other elements of costing, the Company and the Seller shall refer to the Cost Model attached with this letter. Where the features are specifically elaborated below the basis shall be as per this. 1. Raw material prices of polymers of different grades will be taken as per the Price List prevailing on 7th of the previous month. In the event of any upward or downward revision in cost, price shall be adjusted appropriately, as per the Cost Model. The Company shall guide the Seller on the rates. 2. W ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sed on 5 years repayment basis for the loans). However, the Equity shall be at the minimum equal to initial Equity brought in by the Seller and shall remain at that level so long as the Asset continues in service either within 0 years or after that and where only a part of the asset is in service, a proportionate amount out of initial Equity to the extent of asset in service alone shall be considered. The IOE will be calculated based on average of opening Equity and Closing Equity. 11. Conversion and cost shall undergo change based on need subject to the mutual satisfaction of both the parties. 12. Standing Charges: Standing Charges shall be equal to Salaries and Wages, Depreciation, Interest on Term Loans, 50% of Return, on Equity, Fixed Portions of Repairs and Maintenance, Insurance, Rent if any. 13. Where the Actual Production exceeds Normative Production, the conversion cost shall be rewarded as if on the excess production only 40% of Fixed Charges shall be considered. The fixed charges are the same as defined in Standing Charges in Clause 12 above. The Fixed Charges are the same as defined in Standing Charges in Clause 12 above but the Return of Equity will be consider ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... but on account of the fact that Hindustan Lever Limited did not place the prescribed or the stipulated purchase orders for supply of products/articles. This had resulted in non-production and the charges which have been paid were to compensate the assessee for failure to produce and then market its products. This becomes clear when we examine Annexure 3 to the agreement. 16. The aforesaid formula for computation of sale price stipulates that the cost or the selling price was computed under clauses 1 to 11. However, as Hindustan Lever Limited was unable to place purchase orders in respect of the normative fixed stipulated number, they were liable to pay and have paid the standing charges. These are not charges payable for the supplies made or towards price of the products sold but for non/under utilization or idle plant/machinery etc. due to lack of orders. The payment was for non-production/ manufacture. 17. The products or the articles supplied are goods. Excise duty, if not exempt, is payable in many cases on ad valorem basis. Similarly, sales tax, if not exempt, is also payable. The standing charges obviously do not form part of the supply made and are not treated as sale c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of formalities because the exemption notification had stipulated that the excise duty should be first paid by the manufacturer and then the refund could be claimed. In Commissioner of Income Tax versus Arvind Construction Co. Ltd. [2009] 317 ITR 276 (Del), the assessee had carried out construction work as a sub- contractor in Iraq. Consequent upon an agreement between the Governments of India and Iraq after the outbreak of war, bonds were issued as consideration for the construction work. Principal amount/interest income of the bonds were treated as income derived from business of an industrial undertaking under Section 80HHB of the Act. The said decision is based on peculiar facts and is hardly relevant to the factual matrix in question. Income paid on late payment received from customers has been considered as profit and gains derived by an industrial development undertaking as it partakes and is sale consideration. In Commissioner of Income Tax versus Vidyut Corporation [2010] 324 ITR 221 (Bom.), the assessee had discounted the promissory note drawn by the purchaser with its bankers. The discount charges deducted by the banks were subsequently reimbursed to the assessee by the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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