2009 (11) TMI 921 - HC - Income Tax

Deduction u/s 80IB - Scope of words derived from - whether MODVAT credit and income from erection and commissioning of machinery derived from the business of the industrial undertakings? - HELD THAT - Apex Court in M/S LIBERTY INDIA VERSUS COMMISSIONER OF INCOME TAX 2009 (8) TMI 63 - SUPREME COURT held that the duty draw backs could not be deemed to be profits derived from business. It is apparent that the Apex court held that it is only the profits generated by the business i.e. operational profits which are entitled to the benefit under Section 80IA. In Sterling Food 1999 (4) TMI 1 - SUPREME COURT has also laid down a test as to what is the source of income. In view of the law laid down by the Apex Court it is apparent that the words derived from are much narrower in connotation as compared to the words attributable to . The Industrial Undertaking would be entitled to claim deductions under Section 80IB 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. MODVAT credit - MODVAT credit is available to the assessee because it purchases raw material for manufacture of the machinery. This is an integral part of the business of the Company. It gets MODVAT credit on the excise paid on such inputs. This is adjusted against the excise payable on the final product. At the end of the year some MODVAT credit was lying in the name of the assessee. This is its income derived from the business itself. If it was not manufacturing the machinery it could not have obtained the MODVAT credit. It is not entitled to sell the MODVAT credit. It can only adjust it against the final product sold. Therefore, if there is a credit of MODVAT at the end of the year this would be income derived from the business of the Company. Hence, the assessee is entitled to claim deduction under Section 80IB. Amount received by the assessee as erection and commissioning charges - This is also an integral part of the business. When a customer buys plant and machinery, he may ask the manufacturer to erect and commission the machinery. When the manufacturer erects and installs the machinery at the request of the customer the amount received by him is derived from the business. It is directly relatable to the business and the source of income is the business itself. When the assessee is engaged in the business of manufacture, the word 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 u/s 80IB. Decided in favour of assessee.

Summary

Issues Involved:
1. Whether the income from erection and commissioning charges can be termed as derived from an industrial undertaking.
2. Whether the income from erection and commissioning charges is eligible for deduction under Section 80IB of the Income Tax Act, 1961.
3. Whether MODVAT credit is eligible for deduction under Section 80IB of the Income Tax Act, 1961.

Detailed Analysis:

Issue 1: Income from Erection and Commissioning Charges
The court examined whether the income from erection and commissioning charges could be considered as derived from the industrial undertaking. The appellant argued that this income was directly related to its business of manufacturing energy-saving devices. The court referred to the precedent set in Cambay Electric Supply Industrial Co. Ltd. vs. Commissioner of Income-Tax, which distinguished between the terms "attributable to" and "derived from." The court concluded that since the term "derived from" was used in Section 80IB, the income must have a direct nexus with the business.

Issue 2: Eligibility for Deduction under Section 80IB
The court analyzed whether the income from erection and commissioning charges was eligible for deduction under Section 80IB. It referred to various cases, including Ashok Leyland Ltd. vs. Commissioner of Income-Tax and Commissioner of Income-Tax vs. Pandian Chemicals Ltd., to understand the scope of "derived from." The court noted that the income must be directly linked to the operational profits of the business. It concluded that since the erection and commissioning charges were integral to the business, they were eligible for deduction under Section 80IB.

Issue 3: MODVAT Credit Eligibility for Deduction
The court examined whether MODVAT credit could be considered as income derived from the business. It referred to the judgment in Commissioner of Income-Tax vs. Madras Motors Ltd./M.M. Forgings Ltd., which held that MODVAT credits were directly relatable to the industrial undertaking. The court concluded that since MODVAT credit was obtained due to the purchase of raw materials for manufacturing, it was an integral part of the business. Therefore, the MODVAT credit was eligible for deduction under Section 80IB.

Conclusion
The court held that both the income from erection and commissioning charges and the MODVAT credit were derived from the business of the industrial undertaking. Therefore, they were eligible for deduction under Section 80IB. The appeal was allowed in favor of the assessee, with no order as to costs.