2012 (7) TMI 119 - HC - Income Tax

Deduction under Section 80-IA - Manufacturing activity - preparing of designs and drawings - number of workers employed - Section 80-IA(2)(V) of the Act - Held that - Activities of the assessee involves various activities as per the requirement of their clients - Activities fall in the category of preparing engineering drawings, designs and other technical know how - what is transferred to the client is not the intellectual property, the consideration of which is for supply of drawings and design. Instructions given for preparing the equipment according to the drawings and also its installation when it is installed - Activity of the assessee falls within the meaning of the word manufacture or produce used in Section 80-IA - assessee has employed nearly about 400 persons as work force to carry out its activities - Tribunal was justified in extending the benefit of Section 80-IA to the assessee - In favour of the assessee Whether assessee would be entitled to claim 80-O deduction - Services rendered or agreed to be rendered was utilized by the foreign company in India Held that - Assessee was rendering service from India, which service was being made use of by the foreign enterprise outside the country. Therefore, it is not a case of service being rendered inside India - Assessee has not rendered any service in India in connection with the entire project - Service is rendered from India to a foreign enterprise and therefore, Section 80-O is attracted and the Tribunal rightly extended the said benefit - In favour of the assessee Whether the Tribunal was correct in proceeding to hold that Section 80-IA and 80-O deduction operate under two different spears and the assessee would be entitled to claim both the deduction on the same income of project Held that - Section 80-IA and Section 80-O both fall under the heading deductions in respect of certain incomes both are independent of each other - assessee is entitled to claim deduction under both the Sections - overall claim under both Sections has to be restricted to the total profits and gains of eligible accounts from the total profits and gains - provision 9A to Section 80-IA was inserted by Finance Act No.2, 1988, which came into effect from 1.4.1998 that limitation was not there for the earlier assessment years - In favour of the assesses Whether the Appellate Tribunal was right in not apportioning the financial cost and operating expenses which had to be allocated to the export income before working out the deduction under Section 80-HHB of the Act Held that - no allocation of overheads in computing, the deduction is necessary - there is no error committed by the Tribunal on this issue of deduction under Section 80-HHB Whether the Tribunal was justified in the facts of the case in holding that Section 80-O deduction shall not be allowable on gross amount of foreign exchange brought into India and further, it should also not be allowed on net foreign exchange brought into India i.e., foreign exchange received minus foreign exchange expended Held that - Expenses in India currency cannot be taken into consideration - assessee is entitled to benefit only on the net income - claim of the assessee for deduction on the gross receipts rejected Against assessee

Issues Involved:
1. Deduction under Section 80-IA of the Income Tax Act, 1961.
2. Deduction under Section 80-O of the Income Tax Act, 1961.
3. Simultaneous deduction under Sections 80-IA and 80-O.
4. Allocation of financial cost and operating expenses under Section 80-HHB.
5. Deduction under Section 80-O on gross or net foreign exchange brought into India.

Detailed Analysis:

Re Substantial Question of Law No.1:
The issue pertains to whether the assessee's activities qualify for deduction under Section 80-IA. The court analyzed the nature of the assessee's business, which involves preparing engineering drawings, designs, and other technical know-how. The Tribunal had held that these activities fall within the scope of "manufacture" or "production" as per Section 80-IA, and that the assessee employed more than ten workers. The court upheld this view, stating that the activities indeed constitute manufacturing or production, and the assessee met the worker requirement. The court referenced the Supreme Court's interpretation of "manufacture" and "plant" to support its decision.

Re Substantial Question of Law No.2:
This issue revolves around the interpretation of Section 80-O, which allows deductions for income from royalties, fees, or similar payments received from foreign enterprises for services rendered outside India. The court clarified that services rendered from India but utilized by foreign enterprises outside India qualify for this deduction. The court found that the assessee provided services from India that were used by foreign enterprises abroad, thus meeting the criteria for Section 80-O. The Tribunal's reliance on a Board circular supporting this interpretation was deemed appropriate.

Re Substantial Question of Law No.3:
The court addressed whether deductions under Sections 80-IA and 80-O can be claimed simultaneously. It referenced a previous ruling that Sections under Chapter VI-A, which includes both 80-IA and 80-O, are independent of each other. Therefore, the assessee is entitled to claim deductions under both sections, provided the total deductions do not exceed the gross total income. The court upheld the Tribunal's decision allowing simultaneous deductions under both sections.

Re Substantial Question of Law No.4:
This issue concerned the allocation of financial costs and operating expenses before calculating the deduction under Section 80-HHB. The Tribunal had decided that additional allocation of general overheads and business costs was unnecessary, relying on a precedent case. The court found no error in the Tribunal's decision and declined to answer the substantial question of law, effectively upholding the Tribunal's ruling.

Re Substantial Question of Law No.5:
The final issue was whether the deduction under Section 80-O should be on the gross or net foreign exchange brought into India. The court referenced a prior decision that deductions should be allowed only on the net income, not the gross income. It clarified that taxable income, not gross total income, is relevant for deductions, and expenses incurred in both foreign exchange and Indian currency must be deducted to arrive at the net income. The court upheld the Tribunal's decision that the assessee's entitlement to deductions under Section 80-O should be based on net income.

Conclusion:
The court upheld the Tribunal's order, dismissing all seven appeals filed by the revenue and the three cross-objections filed by the assessee. The decisions on all substantial questions of law were in favor of the assessee, except for the fifth question, which was answered in favor of the revenue.

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