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TMI Blog2008 (2) TMI 451X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 tu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... x. 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. X X X X Extracts X X X X X X X X Extracts X X X X ..... d manufacturing processes for optimum material cost, required performance and reliability/durability. The assessee company owns the licence, patent and brand name 'Claas' for manufacture of Claas products. In 'harvester combine' various operations for harvesting of crops like cutting, thrashing and winnowing are performed by the machine. Since raw agricultural crops harvested from soil are quite abrasive and the harvesting in the Indian fields involve greater wear and tear, the assessee company has suitably modified the imported technology to suit local conditions. A specially designed thrasher mechanism employing Tangential Axial Flow technique is used so as to reduce grain losses and deliver clean unbroken grain. The assessee company has, in the design and development department of its industrial undertaking, evolved special treatments and methods for imparting greater strength to the machine and its parts like blades, table auger, feeder hosing, cutter bar, thrashing drum etc. Some typical methods used by the industrial undertaking for enhancing the efficacy and strength of its products are: (a) Flame hardening (b) Salt bath hardening and tempering. During the above hardening ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... welding, anti-rust treatment, flame hardening, salt bath hardening and tempering etc., has to be done inside the factory. Such processes are carried out in the various departments inside the factory like the painting department, assembly and welding department etc. Process Flow Chart placed at p. 96 of paper book 1 broadly indicates various operations carried out in the different departments. Paint shop of the assessee undertaking utilizes paints and varnishes of special technical specifications and composition as indicated in Works Standard CN 070337 placed at pp. 26 and 27 of the paper book No. 1. Detailed instruction sheets have been issued to the various departments and divisions of the undertaking, detailing the processes to be carried out on the various components, spare parts and sub-assemblies. The details and information regarding manufacturing processes have been produced before the AO and the same have however been brushed aside while making the assessment. Before the learned CIT(A) the assessee submitted 47 instruction sheets and requested vide letter dt.18th February, 2005the same be admitted as additional evidence. However the AO informed the CIT(A) that the submissio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Tools,New Delhi. Process sheet has been furnished to the fabricator along with the drawing indicating the design, specification as well as the equipments and tools which may be used for carrying out the various stages for production of the component. The component is thus caused to be produced under the direct supervision, control and guidance of the assessee company. The technical personnel of the assessee personally inspect the production of the component and ensure quality control as per the standards and specifications required by the assessee company. As indicated earlier the components of the machine require considerable precision and accuracy so as to be compatible with the operation of the machine. After the component is received from the fabricator it is sent to the paint shop for carrying out the specialized process of painting. Instruction sheet placed in the paper book No. 1 at p. 41 details the processes carried out after receipt of the component from the fabricator. Similarly with regard to the other components which are included in the sale list, it is submitted that either these components are manufactured inside the factory itself or else these are got fabricated ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ous departments of the industrial undertaking of the assessee like paint shop, assembly shop fabrication section as also instruction sheets and control sheets which formed the basis of various stages of manufacture have been duly produced before the Revenue authorities. The factual matrix as set out above and duly put forth before the Revenue authorities has not been disputed. The only dispute raised by the Revenue is regarding the inclusion of sale of spare parts/components/sub-assemblies amounting to Rs. 11,72,63,188 for computation of relief under s. 80-IB and excluding certain items like scrap sale, provisions of warranty claims etc. for the purposes of s. 80HHC. Assailing the order of learned CIT(A) Shri Chopra submitted that the same is factually and legally unsustainable. The facts and materials placed on record, as referred hereinabove, amply demonstrate that components have been manufactured by the industrial undertaking and the mere fact that certain processes have been out sourced would not by itself exclude the spare parts, components and sub-assemblies from the domain of manufacturing activities of the industrial undertaking. It is submitted that the learned CIT(A) has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iffon Laboratories (P) Ltd. vs. CIT (1979) 119 ITR 145 (Cal) , where it has been held that a manufacturer may hire a plant or machinery and employ hired labour and manufacture the goods. But to earn the benefit of the concessional rate of tax as an industrial company, the company must mainly engage itself in the manufacture or processing of goods as specified in s. 2(7) of the Finance Act, 1966, either by itself or by someone under its supervisory control or direction. The decision of the Calcutta High Court in Addl. CIT vs. A. Mukherjee & Co. (P) Ltd., has been followed by Hon'ble Delhi High Court in Orient Longman Ltd. vs. CIT (1981) 130 ITR 477 (Del). Referring to the aforesaid decision of Calcutta High Court, their Lordships of the Delhi High Court observed as under: "It appears that the conclusion of the Calcutta High Court would apply to the present case. Although the assessee in this case, as a publisher, would not be doing more than getting the manuscript and preparing the same for printing and book binding, the fact that printing and book binding is done by someone else does not imply that someone else is the manufacturer. In fact, it is the business of the assessee to ge ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... purposes of s. 104 of the IT Act. The circular says that the Board has accepted the view taken by Madras and Calcutta High Courts in the cases of CIT vs. Commercial Laws of India (P) Ltd. (1977) 107 ITR 822 (Mad) and Addl. CIT vs. A. Mukherjee & Co. (P) Ltd. (1978) 113 ITR 718 (Cal). The view accepted by the Board is binding on the Revenue authorities. For this proposition reliance has placed on the judgment of Hon'ble Supreme Court in the case of CCE vs. Dhiren Chemical Industries (2002) 172 CTR (SC) 670 : (2002) 254 ITR 554 (SC) wherein it has laid down the proposition that circulars issued by the Board are binding on the tax authorities even if these are in conflict with the statute. According to the Supreme Court it is not open to the Revenue to raise a contention that is contrary to a binding circular by the Board. The Revenue cannot be allowed to plead that the view taken in the circular is not valid nor that it is contrary to the terms of the statute. Thus the reasoning adopted by the learned CIT(A) for denying deduction under s. 80-IB runs contrary to the Board Circular and has no merit. Shri Chopra submitted that having regard to the aforesaid discussion the basis adopted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ssessee". Thus the AO has clearly proceeded on the basis that the export of spare parts as well as harvester combines represents goods processed or manufactured by the assessee. The AO did not invoke cl. (b) or (c) in respect of export of spares presumably because the spares had been manufactured by the undertaking and were not traded goods. On this ground also it is submitted that the consideration of consistency should prevail and spare parts of the undertaking which have been treated as manufactured goods of the undertaking for the purposes of s. 80HHC be treated as manufactured goods and not traded goods for the purposes of s. 80-IB. There is no earthly reason for the AO to treat the spare parts as manufactured by the undertaking while computing deduction under s. 80-IB and adopt a totally contrary position that spare parts are traded goods of the assessee. The stand of the Revenue is inconsistent and ill-conceived and cannot be substained. The assessee is entitled to deduction under s. 80-IB by including sale of spares/components as claimed by the assessee. Shri Chopra accordingly pleaded that the conclusion by AO and CIT(A) that the sale of spare parts is sale of trading good ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . For this purpose, reliance was placed on the decision of Hon'ble Supreme Court in the case of CIT vs. National Taj Traders (l9S0) 14 CTR (SC) 348 : (l9S0) 121 ITR 535 (SC). Since admittedly, the intermediary products were not manufactured by the assessee but were manufactured elsewhere and which merely were sold as parts, proportionate deduction is not allowable. 7. We have carefully considered relevant facts, arguments advanced and the case law cited. Sec. 80-IB(1) provides as under: "80-IB(1): Where the gross total income of an assessee includes any profits and gains derived from any business referred to in sub-ss. (3) to (11), (11A) and (11B) such business being hereinafter referred to as the eligible business, there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains of an amount equal to such percentage and for such number of assessment years as specified in this section." Sub-s. (2) to s. 80-IB provides certain conditions to be fulfilled by an industrial undertaking to claim deduction under s. 80-IB. Admittedly, these conditions are fulfilled as in resp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he spare parts by getting them manufactured elsewhere, after receiving the same the assessee is applying further process so as to render them marketable as per the required standard. Thus though various processes are being applied, the same was mistakenly treated as sale of trading goods and not of goods manufactured by the assessee. It is noteworthy in the instant case that the Revenue has explicitly accepted the position that the assessee company is an industrial undertaking and fulfils the three conditions contained in s. 80-IB(2) for deduction under s. 80-IB. Once the Revenue accepts the fact that the industrial undertaking of the assessee company manufactures or produces harvester combines, there is no justification or rational basis for denying exemption for manufacture or production of intermediate products like spare parts, components or sub-assemblies. Admittedly these spare parts are being produced by carrying out the various processes inside the factory or else these are caused to be produced on the basis of drawings, designs and specifications supplied by the undertaking to the outside fabricators and after receipt of such components, the undertaking carries out further ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m 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. 8. The next ground of appeal is in respect of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aling in purchase and sale of scrap. 10. As regards inclusion of warranty claims as part of turnover Shri Chopra submitted that warranty claims can never be construed as part of total turnover. The very concept of warranty claim as turnover of business is alien to the basic concepts of commercial accounting. In any case it may be pointed out that in the P&L a/c an amount of Rs. 63.14 lacs have been debited on account of warranty claims which have been ignored by the AO while aggregating the gross figure of such claims with the total turnover. 11. Learned Departmental Representative Shri Purushottam Tripuri, on the other hand, relied upon appellate order. He submitted that the scrap sale has been treated as part of its income. Thus, it should also form part of total turnover. As regards warranty claim, just as the assessee has made a claim, the counter claim is received and hence, should be treated as part of turnover. 12. We have considered rival submissions. The issue is to be decided as to what is the total turnover for the purpose of computing deduction under s. 80HHC. Clause (ba) of Explanation below sub-s. (4C) of s. 80HHC provides that "total turnover" shall not include fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (2006) 202 CTR (Guj) 198 : (2006) 283 ITR 402 (Guj); (2) Jt. CIT vs. Sidheshwari Paper Udyog Ltd. (2005) 95 TTJ (Del)(TM) 1 : (2005) 94 ITD 187 (Del)(TM). He also submitted that the provision written back does not fall in the category of "any other receipt of similar nature". It doesn't have the character of a receipt like interest or rent etc. The AO is therefore not justified in excluding the amount from profits and gains of business. There were credits appearing in the books on the basis of purchase of items from various suppliers and the suppliers were not paid. These credit balances were brought to the P&L a/c and had emanated from business transactions only and are liable to be treated as connected with the business. The assessee is therefore entitled to benefit under s. 80HHC. Reliance is placed on the decision of the Madras High Court in the case of CIT vs. Abdul Rahman Industries (2007) 293 ITR 475 (Mad). Their Lordships have relied upon the decision of apex Court in CIT vs. T.V. Sundaram Iyengar & Sons Ltd. (l996) 136 CTR (SC) 444 : (l996) 222 ITR 344 (SC). 16. Learned Departmental Representative submitted that the interest received from customers and provision written ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me 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. 19. As regards ground No. 3, the same challenges the levy of interest under s. 234B. Learned counsel for assessee submitted that consequential relief may be allowed in respect of interest charged under s. 234B. 20. The assessee does not deny its liability to pay advance tax. Thus, charging of interest under s. 234B i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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