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TMI Blog2009 (11) TMI 921X X X X Extracts X X X X X X X X Extracts X X X X ..... It is also paid certain remuneration for installation and erection of the plant and machinery manufactured and sold by it to the customers. The first question is whether the income which accrues to the appellant from erection and commission of such plant and machinery can be termed as being derived from the industrial undertaking. The appellant Company is entitled to obtain MODVAT credit for the inputs it purchases for manufacture of the machinery. It uses this MODVAT credit against the excise payable on the final products. At the end of the accounting year in question it had some MODVAT credit lying with it. This was reflected as the income of the Company. The question is whether such income is derived from the business of the Company or not. Section 80IB which provides for deduction in respect of profits and gains from certain industrial undertakings in so far as it is relevant for our purpose reads as follows: "80IB.(1)Where the gross total income of an assessee includes any profits and gains derived from any business referred to in sub-sections (3) to (11), 11(A) and 11(B) (such business being hereinafter referred to as the eligible business), there shall, in accordance wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0IB the word 'derived' has been used, the MODVAT credit and income from erection and commissioning of machinery cannot be said to be derived from the business of the industrial undertakings. A Division Bench of the Calcutta High Court dealt with a similar question in Merinoply and Chemicals ltd. vs. Commissioner of Income-tax, (1994) 209 ITR 508. One of the questions before the Calcutta High Court was whether transport subsidies were inseparably connected with the business carried on by the assessee or not. In that case 50% of the transportation cost of raw material and finished goods was paid to the new Units set up in the backward areas. The Court held as follows: "All in all, the payment of transport subsidies are meant to augment the profit and make the industry viable economically. We do not find any perversity in the Tribunal's finding that the scheme of transport subsidies is inseparably connected with the business carried on by the assessee. It is a fact that the assessee was a manufacturer of plywood, it is also a fact that the assessee has its unit in a backward area and is entitled to the benefit of the scheme. Further is the fact that transport expenditure is an in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing." The Madras High Court had placed reliance on the judgment of the Karnataka High Court in Sterling Foods vs. CIT, (1984) 150 ITR 292. The judgment of the Karnataka High Court was upheld by the Apex Court in Commissioner of Income-Tax vs. Sterling Foods, (1999)237 ITR 579. In this case the assessee had sold the import entitlements and had thus derived profit. The question which arose was whether the receipts from the sale of import entitlements were eligible for relief under Section 80HH. The assessee was engaged in the business of processing prawns and other sea food which it exported. Due to export of items of its products it earned some import entitlements granted by the Central Government under the Export Promotion Scheme. The assessee was entitled to use the import entitlements itself or sell the same to others. The assessee sold the import entitlements. The question before the Apex court was whether the amount received for sale of import entitlement was income derived from business. The Apex Court held as follows: "We do not think that the source of the import entitlements can be said to be the industrial undertaking of the assessee. The source of the import entitlemen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction 80HH. Subsidy or transport subsidy is not the immediate source or have direct nexus with the activity of the industrial undertaking. It is an aid by the Government under the Scheme. Though it is incidental to the activities of the assessee, the source is the Government. Any aid or assistance by the Government to a particular type of industry cannot be treated as profit derived from the industrial undertaking." As far as MODVAT credit is concerned a Division Bench of the Madras High Court in Commissioner of Income-Tax vs. Madras Motors Ltd./M.M. Forgings Ltd. (2002) 257 ITR 60, in respect of MODVAT credit held as follows: "That takes us to the amounts received by the assessee under Modvat credits and International Price Rationalization. In respect of both these payments, it will have to be found that they are directly relatable to the industrial undertaking alone and to no other activity other than the business activity of the assessee as regards the forgings. Truly speaking, the amount received by way of Modvat credits could not have been received by the assessee had the assessee not purchased the raw materials for running its industry of manufacturing the forgings. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lves as they contain both substantive as well as procedural provisions. Therefore, we need to examine what these provisions prescribe for "computation of profits of the eligible business". It is evident that Section 80IB provides for allowing of deduction in respect of profits and gains derived from the eligible business. The words "derived from" is narrower in connotation as compared to the words "attributable to". In other words, by using the expression "derived from", Parliament intended to cover sources not beyond the first degree. In the present batch of cases, the controversy which arises for determination is: whether the DEPB credit/ Duty drawback receipt comes within the first degree sources? According to the assessee(s), DEPB credit/duty drawback receipt reduces the value of purchases (cost neutralization), hence, it comes within first degree source as it increases the net profit proportionately. On the other hand, according to the Department, DEPB credit/duty drawback receipt do not come within first degree source as the said incentives flow from Incentive Schemes enacted by the Government of India or from Section 75 of the Customs Act, 1962. Hence, according to the Depar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nerated by the business i.e. operational profits which are entitled to the benefit under Section 80-1A. In Sterling Food the Apex Court has also laid down a test as to what is the source of income. In view of the law laid down by the Apex Court it is apparent that the words "derived from" are much narrower in connotation as compared to the words "attributable to". The Industrial Undertaking would be entitled to claim deductions under Section 80IB only if it shows that the profit is derived from the business of such Industrial Undertaking. The income should be derived from the operational profits of the business and the source of income should be business itself. Keeping in view the aforesaid principles, we first take up the question relating to MODVAT credit. MODVAT credit is available to the assessee because it purchases raw material for manufacture of the machinery. This is an integral part of the business of the Company. It gets MODVAT credit on the excise paid on such inputs. This is adjusted against the excise payable on the final product. At the end of the year some MODVAT credit was lying in the name of the assessee. This is its income derived from the business itself. If ..... X X X X Extracts X X X X X X X X Extracts X X X X
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