2004 (8) TMI 720 - AT - Income Tax

Summary

Issues:
1. Eligibility of service charges for deduction under section 80-IA.
2. Interpretation of service charges in connection with manufacturing activity.
3. Comparison with relevant case law for determining eligibility.
4. Determination of the direct nexus between service charges and main business activity.
5. Consideration of service charges as an integral part of sales price.

Analysis:
1. The primary issue in this case revolves around the eligibility of service charges for deduction under section 80-IA. The Department contested the inclusion of service charges in the deduction, arguing that they were not part of the manufacturing activity.

2. The assessee, engaged in manufacturing engineering goods, included service charges in its total sales. The Assessing Officer disallowed a portion of these charges, stating they were not related to the manufacturing activity but to project evaluation and technical planning, hence ineligible for deduction under section 80-IA.

3. The decision of the Hon'ble Bombay High Court in CIT v. International Data Management Ltd. [2003] 261 ITR 177 was cited, where the Court allowed deduction under section 80-I for service and maintenance charges directly linked to the main business activity. In contrast, the direct nexus between service charges and manufacturing activity was not established in the present case.

4. Section 80-IA allows deduction for profits derived from an industrial undertaking if specific conditions are met. The service charges in question were considered integral to the sales price of equipment, as evidenced by the company ledger combining sales and service. These charges were not subject to sales tax or excise duty, indicating their inseparability from manufacturing.

5. The Tribunal upheld the decision of the CIT(A), reasoning that the service charges were inextricably linked to the manufacturing process, requiring technical expertise for evaluation, feasibility, and installation. As such, the service charges could not be excluded from the benefit of section 80-IA, as they formed an essential part of the manufacturing activity.

6. Consequently, the appeal was dismissed, affirming the inclusion of service charges for deduction under section 80-IA.