2013 (8) TMI 636 - HC - Income Tax

Exemption of the amount received as royalty/consultancy charges under Section 80HH and Section 80-I of the Act - Assessee company is engaged in the manufacturing of wide range of products like industrial perfumes, chewing tobacco, synthetic essential oil etc. The assessee has entered into an agreement with Hindustan Lever Ltd. (for short, HLL ) whereby assessee as the licensor had licensed the formula developed through its research and gave exclusive right to HLL to use the said formula in their products specially in liril soap - It is the claim of the assessee that along with its manufacturing activity, the assessee carried out the research and development activity side by side making use of the entire paraphernalia of the industrial undertaking Held that - In the instant case, the consultancy has no nexus with the objects as mentioned in Section 80HH & 80-I of the Act. The case laws relied by the assessee are in the context of old Section of 80E/80I, in which the words were profit attributable to as distinct from the word profit derived from in the present Section of 80HH and 80-I of the Act. Reliance is placed upon the judgment in the case of Honda SIEL Power Products Ltd. vs. Commissioner of Income-tax 2007 (10) TMI 298 - DELHI HIGH COURT , wherein observation made is Both sections 80HH and 80-I of the Income-tax Act, 1961, use the expression profit and gains derived from an industrial undertaking . The Supreme Court has drawn a distinction between the expression derived from and attributable to in Combay Electric Supply Industrial Co. Ltd., vs. CIT, 1978 113 ITR 84. Only such business profits that have a direct nexus to the essential business activity of the assessee can qualify for deduction under Section 80HH of the Act. Inasmuch as both Sections 80HH and 80-I use the expression profits and gains derived from an industrial undertaking , the burden is on the assessee to show that the income earned from an activity, the profits from which are claimed to qualify for deduction, has an immediate and direct nexus to the essential activity of the industrial undertaking. In the instant case, the consultancy charges received from the HLL is a receipt. So, it is subject to tax and cannot be allowed for deduction under Section 80HH & 80-I of the Act. For the purpose of this section, the profit and gains of the new undertaking is not commercial profit but only such profit as are computed in the manner land down under the Act in pursuance of Section 80AB, as if each undertaking was a separate assessee - By considering the totality of the facts and circumstances of the case, the consultancy charges are not exempted under Section 80HH & 80-I of the Act Decided in favor of Revenue.

Summary

Issues Involved:
1. Eligibility for deduction under Section 80HH and 80-I of the Income Tax Act, 1961.
2. Nexus between consultancy charges and industrial undertaking profits.
3. Interpretation of "derived from" in the context of Section 80HH and 80-I.

Issue-wise Detailed Analysis:

1. Eligibility for Deduction under Section 80HH and 80-I:
The primary issue was whether the consultancy charges received by the assessee were eligible for deductions under Section 80HH and 80-I of the Income Tax Act, 1961. The assessee claimed that these charges were derived from the industrial undertaking and should be eligible for the deductions. The Assessing Officer (AO) and the Commissioner of Income Tax (Appeals) [CIT(A)] disagreed, stating that consultancy charges were not profits derived from the industrial undertaking. The Tribunal, however, allowed the claim, leading to the Department's appeal.

2. Nexus Between Consultancy Charges and Industrial Undertaking Profits:
The court examined whether the consultancy charges had a direct nexus with the industrial undertaking's profits. The assessee argued that the consultancy was provided through continuous research and development activities using the same labor and machinery as the manufacturing process, thus having a direct nexus. The Department contended that the consultancy charges were for services provided by the directors/employees and had no direct connection with the industrial undertaking. The court concluded that the consultancy charges were incidental and not directly derived from the industrial undertaking.

3. Interpretation of "Derived From" in the Context of Section 80HH and 80-I:
The court referred to various precedents to interpret the term "derived from." It emphasized that for profits to be considered "derived from" an industrial undertaking, there must be a direct and immediate nexus with the industrial activity. The court cited cases like CIT vs. Sterling Foods and National Organic Chemical Industries Ltd. to support this interpretation. The court found that the consultancy charges did not meet this criterion as they were not directly derived from the manufacturing activities of the industrial undertaking.

Conclusion:
The court held that the consultancy charges received by the assessee were not eligible for deductions under Section 80HH and 80-I of the Income Tax Act, 1961, as they lacked a direct nexus with the industrial undertaking's profits. The Tribunal's decision was set aside, and the AO's order was restored. The appeals filed by the Department were allowed, and the substantial question of law was answered in favor of the revenue and against the assessee.