2012 (4) TMI 334 - HC - Income Tax

Standing charges not deductible under Section 80 IC for lack of manufacturing nexus. Appeal dismissed.

The court held that the standing charges received were not eligible for deduction under Section 80 IC of the Income Tax Act as they were deemed ... Whether the standing charges payable under the agreement dated 23rd June, 2004 qualify and are eligible for deduction under Section 80 IC of the Income Tax Act, 1961 - The expression “derived from” in taxation laws means something which has direct or immediate nexus with the specified activity, which in the present case means manufacture or production of article or thing - In the present case, in view of words “derived from”, we have to look at the immediate source which has generated or resulted in the said receipt/income - The final conversion charge shall be re-determined based on discussions related to financing cost of equipment, power costs, actual capital cost based on speed of the machine, import duties, etc - The Fixed Charges are the same as defined in Standing Charges in Clause 12 above but the Return of Equity will be considered as 100% instead of 50% - In the present case, the standing charges were payable because Hindustan Lever Limited did not place purchase orders for the normative production possible - The standing charges obviously do not form part of the supply made and are not treated as sale consideration or the price of the goods on which excise duty or the sales tax etc. would be or is payable - Decided against the assessee Issues Involved:1. Eligibility of 'standing charges' for deduction under Section 80 IC of the Income Tax Act, 1961.Detailed Analysis:1. Eligibility of 'standing charges' for deduction under Section 80 IC of the Income Tax Act, 1961Background:Pine Packaging Private Limited appealed against the order dated 14th January 2011 by the Income Tax Appellate Tribunal concerning the assessment year 2007-08. The primary dispute involved the inclusion of Rs.1,05,09,877/- received as 'standing charges' from Hindustan Lever Limited in the total receipts for deduction under Section 80 IC.Core Issue:The main question was whether the standing charges under the agreement dated 23rd June 2004 could be treated as sale consideration for products manufactured/produced by the assessee, making them eligible for deduction under Section 80 IC.Legal Framework:Section 80 IC provides deductions for profits and gains derived from manufacturing or production activities in specified states. The term 'derived from' was pivotal, requiring a direct and immediate nexus with the manufacturing activity.Tribunal's Findings:The Assessing Officer, CIT (Appeals), and the tribunal held that standing charges did not qualify for deduction under Section 80 IC. They were not considered income from manufacturing or production but as compensation for Hindustan Lever Limited's failure to place minimum stipulated purchase orders, resulting in idle machinery and non-production.Assessee's Contention:The assessee argued that the standing charges were essentially sale consideration from Hindustan Lever Limited, thus qualifying as profits derived from manufacturing or production activities.Court's Analysis:- The court examined the terms of the agreement dated 23rd June 2004, particularly Annexures 2 and 3, which detailed the pricing and standing charges.- Standing charges were payable when Hindustan Lever Limited did not place orders for the minimum stipulated quantity, leading to non-production.- The court emphasized that 'derived from' requires a direct nexus with manufacturing or production, which was absent in this case. The standing charges were for non-production, not for the sale of manufactured goods.Precedents Considered:- Pandian Chemicals vs. CIT and Liberty India vs. CIT: The court reiterated that 'derived from' implies a direct nexus with the specified activity.- CIT vs. Sportking India Limited and CIT vs. Dharam Pal Prem Chand Ltd.: Distinguished on facts as these involved compensation for goods destroyed by fire and refund of excise duty, respectively, both having a direct nexus with the manufacturing activity.- Commissioner of Income Tax vs. Meghalya Steels Ltd. and Commissioner of Income Tax vs. Arvind Construction Co. Ltd.: Distinguished as these cases involved refund of excise duty and income from bonds issued for construction work, respectively, which had a direct connection with the business activity.- Commissioner of Income Tax vs. Vidyut Corporation: The reimbursed discount charges were considered part of the sale price, directly linked to the sale of goods.Conclusion:The court concluded that the standing charges were not part of the sale price or cost price of the products but compensation for non-utilization of machinery due to lack of orders. Thus, they did not qualify for deduction under Section 80 IC. The question of law was answered in favor of the Revenue, and the appeal was dismissed without any order as to costs.