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TMI Blog2008 (3) TMI 365X X X X Extracts X X X X X X X X Extracts X X X X ..... ana High Court also, the assessee exported goods manufactured by third parties and, therefore, it was held that there was no nexus between the profit and the industrial undertaking. In this case, the assessee manufactured and processed raw material supplied by third parties in its own undertaking by utilising the same machinery and labour. Therefore, there was direct nexus. Therefore, we do not find any infirmity in the order of the lower authority. Accordingly, we confirm the same. Profit on sale of scrap for the purpose of deduction under s. 80-IB - scrap generated during the course of manufacturing activity - The profit on sale of the scrap material has a direct nexus with the manufacturing activity of the assessee and receipt of income. In other words, unless the assessee manufactured the goods, the scrap would not have been generated at all. Therefore, in our opinion, the income on sale of scrap is derived from the industrial undertaking and eligible for deduction under s. 80-IB. As we have discussed, the income received from sale of scrap may not have any relation with export of goods and it may not be eligible for deduction u/s 80HHC. However, it has a direct nexus w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roducts of other concerns could not be held to be profits and gains derived from the industrial undertaking. 3. On the contrary, Shri C.N. Prasad, learned counsel for the assessee, submitted that the assessee, in the course of its manufacturing activity, undertakes contract manufacturing by using its own machinery and other facilities with the raw material supplied by third parties. Therefore, according to the learned counsel, the assessee undertook manufacturing activity by utilising the material supplied by third parties and derived income in the process of manufacturing activity. Therefore, according to the learned counsel, the income was derived from the industrial undertaking which is eligible for deduction under s. 80-IB of the IT Act. When a query was raised whether the job work charges are to be considered an independent source of income in view of the judgment of the apex Court in the case of CIT vs. K. Ravindranathan Nair (2007) 213 CTR (SC) 227 : (2007) 295 ITR 228 (SC), the learned counsel clarified that in the case of K. Ravindranathan Nair, though it was a business income, the apex Court held that the processing charges are not derived from exports. According to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndertook contract manufacture by using its own machinery and other facilities. The CIT(A), after referring to the judgment of the Madras High Court in the case of Rane (Madras) Ltd., the Bombay High Court in the case of CIT vs. Bangalore Clothing Co. (2003) 180 CTR (Bom) 127 : (2003) 260 ITR 371 (Bom), and the Gujarat High Court in the case of Harjivandas Juthabhai Zaveri Anr., found that the conversion charges received by the assessee were derived from the industrial undertaking and, therefore, eligible for deduction under s. 80-IB. 5. The question that requires to be considered is whether the amount received by the assessee on conversion was derived from the industrial undertaking or not. We have carefully gone through the judgment of the apex Court in the case of Sterling Foods. The apex Court, after examining the provisions of law, found that there must be a direct nexus between the profits and gains of the industrial undertaking and the import entitlement. In the case before the apex Court, the import entitlement was granted on the. basis of Export Promotion Scheme of Government of India and, therefore, the source of receipt was the scheme of Government of India and not th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the receipts which do not have any nexus with the exports have to be considered as miscellaneous income and 90 per cent of the same has to be reduced from the business profit in view of Expln. (baa) to s. 80HHC. Sec. 80HHC provides for deduction in respect of income derived from export of goods or merchandise. Since the processing charges do not have any nexus with export activity, the apex Court held that it constitutes an independent source of income. From the above judgment of the apex Court in the case of K. Ravindranathan Nair, it is obvious that the income shall be derived from export of goods and merchandise for the purpose of claiming deduction under s. 80HHC. However, for the purpose of claiming deduction under s. 80-IA/80-IB, the income has to be derived from the industrial undertaking, as held by the apex Court in the case of Sterling Foods and the Punjab Haryana High Court in the case of Liberty Shoes Ltd. Therefore, if there is nexus between the receipt of income and the industrial undertaking, it has to be treated as income derived from the industrial undertaking. In this case, the immediate source of job charges received is the industrial undertaking itself. Ther ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inly on the judgment of the Madras High Court in the case of Shiva Distilleries Ltd. We have carefully gone through the judgment of the Madras High Court in the case of Shiva Distilleries Ltd. The issue that arose for consideration before the Madras High Court is regarding deduction under s. 80HHC. The Madras High Court found that scrap and waste material generated during the course of manufacturing activity cannot form part of the total turnover for the purpose of computing deduction under s. 80HHC. The Madras High Court placed reliance on the earlier judgment in the case of CIT vs. Madras Motors Ltd. (2002) 174 CTR (Mad) 221 : (2002) 257 ITR 60 (Mad). For the purpose of deduction under s. 80HHC, the goods which are exported alone have to be considered for the purpose of total turnover. The judgment of the Madras High Court was rendered in the context of s. 80HHC. Therefore, the judgment of the Madras High Court may not be applicable to the facts of this case. It is not in dispute in the case before us that the scrap was generated during the course of manufacturing activity. Therefore, the profit on sale of the scrap material has a direct nexus with the manufacturing activity of t ..... X X X X Extracts X X X X X X X X Extracts X X X X
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