TMI Blog2017 (5) TMI 1307X X X X Extracts X X X X X X X X Extracts X X X X ..... e, these were heard together and are being disposed of by this common order. 2. The only issue raised by the assessee in the grounds of appeal of both the appeals relates to denial of deduction under Section 80IC of the Income-tax Act, 1961 on the income on account of service charges. ITA No.1563/Del/2011 (AY : 2006-07) :- 3. The facts of the case in brief are that the assessee is a company engaged in the business of production of electronic system/machines and equipments as per customers varying specifications. It filed its return of income on 30th November, 2006 declaring nil income. During the course of assessment proceedings, the Assessing Officer observed that the assessee company has received an amount of ₹ 42,67,468/- as service charges on which deduction u/s 80IC has been claimed. On being questioned by the Assessing Officer, it was explained by the assessee that the service charges are related to services related to AMC of the products and for the services provided after the warranty period is over. It was submitted that the earning of service charge is in consequence and subsequent to the manufacturing of the equipment having been sold by the company ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... deduction in question is only that which arises directly from the manufacturing operations of the assessee and not from secondary activities (such as servicing) or from application of income derived from manufacturing activity (such as interest income) or other income which is incidental to the operation of business (such as insurance claim) or income which has nothing to do with the business (such as gains on sale of land). 1.10 Having held that the profit from service charges is taxable, the next step would be to look at its quantification. The assessee has not maintained any distinction in its accounts between the direct expenditure incurred on free services and that incurred on paid service. Similarly, there is no such distinction in respect of the indirect expenses also. Hence, the profit from servicing has to be estimated. The AO ignored expenditure on parts and on travelling outright and allowed expenditure on salary, wages and rent fully while estimating such profit. In my considered opinion, this approach is not correct. The assessee has to incur expenditure on parts and travelling in connection with paid servicing just as it has to incur expenditure on salary and wages an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... latable to the business carried on by the assessee of manufacturing, commissioning and erection of cooling system and consequently, the assessee is eligible for claim of deduction u/s 80IB/80IC of the Act. Referring to the decision of Hon ble Bombay High Court in the case of CIT Vs. International Data Management Ltd. [2003] 261 ITR 177, he submitted that Hon ble Bombay High Court in the said decision has held that where the assessee derived income as it rendered service and maintenance facility to its clients for which it charged service and maintenance charges, there was a direct nexus between the receipts from rendering services and maintenance facility to its clients and lease rent and the main business activity of the assessee. Therefore, the assessee was entitled to deduction u/s 80I in respect of that income. He, accordingly, submitted that in view of the above two decisions, the AMC charges received by the assessee are eligible for deduction u/s 80IC of the Act. 7. Learned DR, on the other hand, heavily relied on the order of the learned CIT(A). He submitted that since annual maintenance charges are not derived from the eligible business of the assessee, therefore, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rower in connotation as compared to the words attributable to . It was further laid down that The Industrial Undertaking would be entitled to claim deductions under Section 80-IB only if it shows that the profit is derived from the business of such industrial undertaking. The income should be derived from the operational profits of the business and the source of income should be business itself. The Hon ble High Court after laying down the above said principles held that the assessee was entitled to claim deduction under section 80IB of the Act on MODVAT credit and also erection and commissioning charges, being directly relatable to the business and the source of the income being business itself. The Hon ble High Court further held that when the assessee is engaged in the business of manufacture, the work manufacture cannot be read so narrowly so as to limit the amount only to the price of the goods sold. If the manufacturer is required by the customer to erect and commission the machinery the amount received by it on this count is income derived from the business itself and therefore eligible for deduction under Section 80-IB. 53. Following the above said parity of reason ..... X X X X Extracts X X X X X X X X Extracts X X X X
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