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TMI Blog2012 (4) TMI 334X X X X Extracts X X X X X X X X Extracts X X X X ..... ed as "standing charges" from Hindustan Lever Limited. The aforesaid amount was included by the assessee as a part of on the total receipts of Rs.9,81,75,513/- on which deduction under Section 80IC was permissible. 3. The Assessing Officer, CIT (Appeals) and the tribunal have concurrently held that standing charges do not qualify for deduction under Section 80 IC as the said payment was not income or profit/gain derived from manufacturing or production of articles and things but payment made on account of failure of Hindustan Lever Limited to place purchase orders for the minimum stipulated/agreed quantity. The standing charges, it has been held, therefore, constituted compensation for remaining idle or reimbursement of certain expenses for the said reason. It was not a part of the sale price. 4. The contention of the assessee is that the standing charges are nothing, but the sale consideration received from Hindustan Lever Limited and therefore, are profits/income derived from manufacture or production of articles or things. 5. The core issue, which requires adjudication and decision is whether the standing charges payable to the assessee by Hindustan Lever Limited under the ag ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Uttaranchal ; or (iii) on the 24th day of December, 1997 and ending before the 1st day of April, 2007, in any Export Processing Zone or Integrated Infrastructure Development Centre or Industrial Growth Centre or Industrial Estate or Industrial Park or Software Technology Park or Industrial Area or Theme Park, as notified by the Board in accordance with the scheme framed and notified by the Central Government in this regard, in any of the North-Eastern States ; (b) which has begun or begins to manufacture or produce any article or thing, specified in the Fourteenth Schedule or commences any operation specified in that Schedule, or which manufactures or produces any article or thing, specified in the Fourteenth Schedule or commences any operation specified in that Schedule and undertakes substantial expansion during the period beginning- (i) on the 23rd day of December, 2002 and ending before the 1st day of April, 2012, in the State of Sikkim ; or (ii) on the 7th day of January, 2003 and ending before the 1st day of April, 2012, in the State of Himachal Pradesh or the State of Uttaranchal ; or (iii) on the 24th day of December, 1997 and ending before the 1st day of April, 2007, in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A shall, so far as may be, apply to the eligible undertaking or enterprise under this section. (8) For the purposes of this section,- (i) "Industrial Area" means such areas, which the Board, may, by notification in the Official Gazette, specify in accordance with the scheme framed and notified by the Central Government ; (ii) "Industrial Estate" means such estates, which the Board, may, by notification in the Official Gazette, specify in accordance with the scheme framed and notified by the Central Government ; (iii) "Industrial Growth Centre" means such centres, which the Board, may, by notification in the Official Gazette, specify in accordance with the scheme framed and notified by the Central Government ; (iv) "Industrial Park" means such parks, which the Board, may, by notification in the Official Gazette, specify in accordance with the scheme framed and notified by the Central Government ; (v) "Initial assessment year" means the assessment year relevant to the previous year in which the undertaking or the enterprise begins to manufacture or produce articles or things, or commences operation or completes substantial expansion ; (vi) "Integrated Infrastructure Developmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ms and conditions of the agreement dated 23rd June, 2004 to decipher whether the standing charges payable under the said agreement had the first degree and direct nexus as receipts/income earned from manufacture or production of articles and things as specified. The relevant clauses of the agreement, relied before us, read as under:- "5. PRICE 1. The Purchase Price of the Products manufactured and/or processed and packed and sold under the Contract shall be agreed upon from time to time on the basis of the costing terms specified in Annexure "3" to this Agreement. 2. The Company or its nominated appointees shall be allowed an interest free credit period of 15 days from the date of its supply. 3. In the event that the Company or its nominated associates does not provide firm plans and/or the Purchase Order (s) for the Normative production possible as defined in Annexure "2", the company shall pay to the Seller standing charges calculated, subject to some limits and covenants, as given in Annexure "3". Once a quarter, both the parties shall agree on a cumulative basis (since the beginning of the year) the extent of shortfall in demand from the Seller or its nominated associates af ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of each product and on the configuration of the mould as well as further discussions between the parties. The losses include any recycling wastage of the plastic runner generated from each mould, which would be specified in the specifications given by the Company. 3. Conversion cost includes depreciation, interest on term loans, profits, power cost, labour cost & overheads etc. and is agreed mutually between the Company & the Seller as conversion cost per day for each Machine. 4. Debt to Equity Ratio is taken at 67:33. On debt, actual rate of interest rate will be given and on equity, 18% Return on Equity will be given. 5. Plant and Machinery- Basis of working out Net Book Value 6. Power Norms for each machine will be specified after detailed study. 7. Labour cost is Rs.2964/- per machine per day. This has been estimated and will be firmed in the first 6 months when all the required machines are installed in the first phase. 8. Overheads will be as follows: Repairs & Maintenance 2% of GBV General Overheads 2% of GBV Insurance 1% of GBV 9. Working Capital Charge will be @ 12% for 60 days (30 days on account of RM, 15 days on account of PG & 15 days on account of Debtor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... esented below are only an example to demonstrate the principle) Machine Cost per day Rs.100 Equity Rs.40 Standing Charges Rs.25 Charges Rs.35 Idle Time, total standing charges of RS.45 (50% of ROE+100% of Other charges) will be paid. But if the production exceeds Normative for that excess production, total charges will be 40% of Rs.65 (100% of ROE & Other Standing Charges)+Variable Charges. So the total charges for that extra production will be @ 61 per day." 13. Annexure 3 prescribes the costing schedule and estimates the selling price, with reference to raw material, wastage, conversion cost, debt to equity ratio, plant and machinery, power norms, labour cost, over heads etc. It is on the basis of these clauses 1 to 11 that the assessee receives payment/cost on the supply/sale of products. There is no dispute that the price of the products supplied was calculated on the basis of clauses 1 to 11. 14. Clause 12 onwards of Annexure 3 to the agreement deal with the standing charges. Standing Charges are payable where the Hindustan Lever Limited does not place orders for the minimum quantity as stipulated, i.e., the normative production possible. Standing charges are also payable wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the sales tax etc. would be or is payable. Keeping in view the nature and character of the standing charges, evidence and finding regarding nature and character of the manufacturing activity undertaken, it cannot be said that the said charges were paid for or towards sale consideration of the goods supplied. This is not a case where goods were produced but not purchased or supplied etc. The factual matrix as found does not support the claim of the appellant under Section 80IC of the Act. We add by way of caveat that in a given case, and depending upon the factual matrix/ evidence, charges similar to standing charges may represent cost/sale price or price for failure to purchase produced/ manufactured goods. 18. Learned counsel for the petitioner had submitted that this Court in CIT versus Sportking India Limited, (2010) 324 ITR 283 (Del.) has held that payments received from insurance company was compensation for the goods destroyed by fire and therefore, is income derived from an industrial undertaking. The facts and ratio is different as the goods were manufactured and later on were destroyed in fire. The insurance company had made payment for the goods produced. Similarly, i ..... X X X X Extracts X X X X X X X X Extracts X X X X
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