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TMI Blog2012 (9) TMI 224X X X X Extracts X X X X X X X X Extracts X X X X ..... for claiming deduction u/s. 80IB - against assessee. Conversion charges - Held that:- As the eligible business of the assessee is manufacturing of biscuits and the assessee has received the conversion charges by carrying out the manufacturing process on behalf of ITC Ltd and as the word 'manufacture' is of much wider connotation it would include any process as a result of which a different commodity having distinct name, use and character emerges from the raw material - the conversion charges received is in course of manufacturing activity by using the same machinery and labour which were used for manufacturing assessee's own product has a direct nexus with the eligible business of the assessee and the profit derived from conversion charges has to be included in the profit of the business for computing deduction u/s. 80IB - in favour of assessee. - ITA No. 1656/Hyd/2011 - - - Dated:- 22-6-2012 - SHRI CHANDRA POOJARI, AND SHRI SAKTIJIT DEY, JJ. Appellant by: Shri K.C. Devdas Respondent by: Shri K. Viswanatham O R D E R PER SAKTIJIT DEY, JM: This appeal of the assessee is directed against the order dated 22.7.2011 passed by the CIT(A)-II, Hyderabad in I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion scheme basically enables duty import of inputs required for export production. The assessee referring to clause 4.2.4 of the duty remission scheme submitted that DFRC is issued for import of inputs as per SION as indicated in the shipping bills. DFRC and or the materials imported against it shall be freely transferable against the scheme. The assessee referring to clause 4.201 of the duty free import authorisation submitted that DFIA is issued to allow duty free import of inputs, fuel, oil, energy sources, catalyst which are required for production of export product. Referring to clause 4.2.6, the assessee submitted that once export obligation was fulfilled request for transfer of authorisation or inputs imported against it can be made before the concerned registering authority. Once transferability is endorsed the authorisation holder may transfer the DFIA or duty free inputs except fuel or any other item notified by the DGFT. The assessee submitted that the perusal of different clauses of the scheme is suggestive of the fact that amounts received consequent upon availment of schemes were derived from the source of manufacture. The assessee submitted that the language cont ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ponents of income arising out of export incentives on which the claim for deduction was made have nexus with the business of the industrial undertaking. The CIT(A) after considering the contentions raised on behalf of the assessee and analysing the judgement of the Hon ble Supreme Court in the case of Liberty India (supra) came to a conclusion that the assessee's contention that the duty exemption scheme DFRC and DFIA reduces the cost of purchases of manufactured goods and thereby reduces cost of manufacturing and increases the profit and, therefore, they have to be treated as derived from the business of the industrial undertaking cannot be accepted. The CIT(A) also held that the interest receipts of Rs. 1,64,593 also cannot be treated as income derived from the industrial undertaking by following the decision in the case of Tuticorin Alkali Chemicals Fertilisers vs. CIT (227 ITR 172). So far as the conversion charges of Rs. 5,30,06,031 is concerned the CIT(A) came to a conclusion that where the cost of raw material is borne by the assessee in its own account forming the sale value as total turnover the inference can be different but if the entire raw material is supplied by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... towards DFRC and DFIA sale, interest receipt, conversion charges by their nature itself cannot be treated as income derived from the industrial undertaking for the purpose of calculating deduction u/s. 80IB. The learned DR contended that the income so derived falls within the category of ancillary income and in fact it has been shown as other income by the assessee itself. The learned DR submitted that in view of the judgement of the Hon ble Supreme Court in the case of Liberty India (supra) the receipts cannot be treated as income derived from industrial undertaking for the purpose of calculating deduction u/s. 80IB of the Act. 11. We have heard rival contentions and perused the material on record. There is no dispute to the fact that while computing deduction u/s. 80IB the assessee has included in its total income the profits derived from DFRC and DFIA sale, interest received and conversion charges. The issue for consideration is whether such receipts can be treated as income derived from the eligible business of the industrial undertaking. At this stage it will be relevant to examine the provisions contained u/s. 80IB of the Act. Subsection (1) of section 80IB provides that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ds (IAS) by the Institute of Chartered Accountants of India (ICAI)." 12. As can be seen from the aforesaid observation of the Hon ble Supreme Court that the incentive envisaged u/s. 80IB is a profit linked incentive. Therefore, the incentive u/s. 80IA and 80IB is linked to operational profit. The Hon ble Supreme Court further observed that deduction is, therefore, confined to the profit derived from eligible business mentioned in subsection (3) to section 11A of section 80IB. Each of the eligible business in the aforesaid subsection constitute a standalone item in the matter of computation of profit. Interpreting the language of the provision contained in section 80IA and 80IB the Hon ble Supreme Court had held that the words 'derived from' are narrower in connotation as comparable to the words "attributable to". The Hon ble Supreme Court held that by using the expression 'derived from' the Parliament has intended to cover the sources not beyond the first degree. The Hon ble Supreme Court referring to the provisions contained under subsection (5) to section 80IA which is also applicable to the eligible business u/s. 80IB held that the profit from the eligible business is to be co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... so cannot form part of the profit derived from the eligible business of the industrial undertaking for claiming deduction u/s. 80IB. 15. So far as the conversion charges of Rs. 5,30,06,031 is concerned, it is seen from the orders of the Revenue authorities that the claim of the assessee had been rejected only on the consideration that the raw material was supplied by the ITC Ltd. and the assessee has carried out the job work. Therefore, it is in the nature of miscellaneous receipt. There is no dispute to the fact that the eligible business of the assessee is manufacturing of biscuits and the assessee has received the conversion charges by carrying out the manufacturing process on behalf of ITC Ltd. The word 'manufacture' is of much wider connotation and would include any process as a result of which a different commodity having distinct name, use and character emerges from the raw material. It is, therefore, cannot be denied that the assessee received conversion charges from manufacturing process through which a new product has emerged from the raw material supplied by ITC Ltd. It is not relevant at all that the raw material was not on assessee's own account but supplied by ITC L ..... X X X X Extracts X X X X X X X X Extracts X X X X
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