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2008 (2) TMI 451 - AT - Income TaxDeduction u/s 80IB - sale of only spare parts and components - Computation of deduction under s. 80HHC - Total turnover - warranty claims expression 'profit derived from the industrial undertaking' - Provision written back - Principle of ejusdem generis - Levy of interest under s. 234B - Deduction u/s 80IB - sale of only spare parts and components - manufacture of spare parts being undertaken along with the manufacture of machine product, namely, 'harvester combines' - HELD THAT - A trader merely purchases the goods which have already been manufactured by others and then sells them as it is. No further manufacturing process is being applied if the assessee is merely a trader. However, in the present case, it is seen that after purchasing some of the parts from outside suppliers, the assessee applies its own further processes to finish the same and to make them marketable. Even the technology and specifications/drawings are supplied by the assessee to the outside manufacturer of components. In a way, it can be said that the assessee as a manufacturer exercises complete control over the components manufactured outside and only after applying its own further processes sells the same. It is not necessary for claiming deduction under s. 80-IB that sale should be only of the final product and not of the intermediary product. What all sub-s. (3) provides is that the profits should be derived from the industrial undertaking and there is no denying fact that the entire sale in respect of main product as well as other spare parts were by the industrial undertaking itself. Thus, the assessee cannot be called a trader simpliciter so as to deny deduction in respect of sale of only spare parts. The manufacture of spare parts being undertaken along with the manufacture of machine product, namely, 'harvester combines' will entitle the assessee to claim deduction under s. 80-IB. We accordingly direct the AO to consider the sale of spares and components for the purpose of computing deduction under s. 80-IB. Computation of deduction under s. 80HHC - Total turnover - warranty claims and scrap sale as part of total turnover - The turnover means the value of goods purchased/sold in the course of carrying of business. The business of assessee is manufacture and sale of harvester combine and its spares. The scrap generated during the manufacturing process is sold as such. The assessee is not engaged in the business of sale of scrap. Thus, the scrap, generated and which is sold only goes to reduce the cost of material consumed in the manufacturing process. Accordingly, the same cannot be considered as part of turnover of the business carried on by the assessee. We, therefore, direct the AO to exclude the amount realized on sale of scrap from the total turnover adopted for computing deduction under s. 80HHC. Warranty claim - Sec. 80-I do not define the expression 'profit derived from the industrial undertaking' and hence, there is need to interpret the expression 'profit derived from industrial undertaking for the purpose of computing deduction under s. 80-I. However in s. 80HHC, the expression 'profits of business' has been defined specifically and hence, there is no need to artificially compute the profits of the business for the purpose of computing deduction under s. 80HHC. Accordingly, 90 per cent of interest income was rightly excluded from the profits of the business for the purpose of computing deduction under s. 80HHC. Provision written back - Applying the principle of ejusdem generis , the receipts in the nature of miscellaneous income or receipts not connected with the business of export is to be excluded while computing profits of the business. However, in respect of provisions written back, the same cannot be considered of the nature like miscellaneous income or interconnected with the business of the exports. Earlier when the assessee anticipated certain expenditure, the same were debited to P L a/c and claimed as business expenditure. The provision no longer required merely reduces the expenditure and is not a receipt or income simpliciter. Such provision written back merely reduces the expenditure claimed and hence, cannot be excluded while computing profits of the business under cl. (baa) of Explanation to s. 80HHC. We, therefore, direct the AO not to exclude 90 per cent of the provision written back for the purpose of computing profits of business in arriving at deduction under s. 80HHC. Levy of interest under s. 234B - The assessee does not deny its liability to pay advance tax. Thus, charging of interest under s. 234B is consequential in nature and may be charged as per law after giving effect to this order. In the result, the appeal is partly allowed.
Issues Involved:
1. Computation of deduction under Section 80-IB. 2. Computation of deduction under Section 80HHC. 3. Inclusion of warranty claims and scrap sale in total turnover. 4. Exclusion of miscellaneous income, provision written back, and interest income for computing deduction under Section 80HHC. 5. Levy of interest under Section 234B. Issue-wise Detailed Analysis: 1. Computation of Deduction under Section 80-IB: The assessee company claimed a deduction under Section 80-IB amounting to Rs. 38,120,284. The AO excluded profits attributable to trading of spare parts, estimating it at Rs. 2,58,90,689, arguing that these sales represent trading activity. The CIT(A) upheld this view, stating that deduction under Section 80-IA cannot be allowed on products not manufactured by the appellant. The Tribunal, however, disagreed, emphasizing that the assessee's business model involved significant manufacturing processes, including outsourcing certain components under strict supervision and control. The Tribunal cited various judicial precedents, including the Supreme Court's ruling in CST vs. Dr. Sukh Deo and Calcutta High Court's decision in Addl. CIT vs. A. Mukherjee & Co. (P) Ltd., which established that a manufacturer need not own the plant or machinery but can get goods manufactured under its supervision. The Tribunal concluded that the assessee's activities constituted manufacturing and directed the AO to consider the sale of spares and components for computing deduction under Section 80-IB. 2. Computation of Deduction under Section 80HHC: The AO included warranty claims and scrap sale as part of total turnover, which was upheld by the CIT(A). The Tribunal, however, found that scrap generated during manufacturing is essentially cost retrieval and not part of turnover. It cited the Supreme Court's decision in CIT vs. Lakshmi Machine Works, which excluded sales-tax and excise duty from turnover. Following this logic, the Tribunal directed the AO to exclude scrap sale from total turnover. Regarding warranty claims, the Tribunal held that these could not be construed as part of turnover, as they arise from business operations but do not represent sales. Thus, warranty claims were also excluded from total turnover for computing deduction under Section 80HHC. 3. Inclusion of Warranty Claims and Scrap Sale in Total Turnover: The Tribunal ruled that scrap sale and warranty claims should not be included in total turnover. Scrap sale is not part of the business turnover but a cost retrieval, and warranty claims are not sales transactions. This interpretation aligns with the Supreme Court's decision in CIT vs. Lakshmi Machine Works, which emphasized a schematic interpretation of "total turnover." 4. Exclusion of Miscellaneous Income, Provision Written Back, and Interest Income for Computing Deduction under Section 80HHC: The AO excluded 90% of miscellaneous income, provision written back, and interest income from profits of business for computing deduction under Section 80HHC, as per clause (baa) of the Explanation below sub-section (4C) of Section 80HHC. The Tribunal upheld the exclusion of interest income, citing the specific definition of "profits of business" in Section 80HHC, which mandates exclusion of interest income. However, the Tribunal ruled that provision written back should not be excluded, as it merely reduces expenditure and is not a receipt or income. It directed the AO not to exclude 90% of the provision written back for computing profits of business. 5. Levy of Interest under Section 234B: The assessee did not deny its liability to pay advance tax, and the Tribunal held that charging interest under Section 234B is consequential and should be computed as per law after giving effect to the Tribunal's order. Conclusion: The appeal was partly allowed, with significant directions to the AO for recomputation of deductions under Sections 80-IB and 80HHC, excluding certain items from total turnover and profits of business, and adjusting the interest charged under Section 234B accordingly.
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