2012 (9) TMI 224 - AT - Income Tax

Appeal success: Some receipts qualify for tax deduction under section 80IB

The Tribunal partially allowed the appeal in the case regarding the eligibility of various receipts for deduction under section 80IB of the Income-tax ... Disallowance of deduction under section 80IB - DFRC sales, DFIA sales, Interest receipts & Conversion charges - Held that:- As decided in M/s Liberty India Versus Commissioner of Income Tax [2009 (8) TMI 63 - SUPREME COURT] duty drawback, rebate etc. should not be treated as adjustment (credited) to cost of purchase or manufacture of goods - They should be treated as separate items of revenue or income and accounted for accordingly - duty drawback, DEPB benefits, rebates etc. cannot be credited against the cost of manufacture of goods debited in the Profit & Loss account for purposes of Sections 80-IA/80-IB as such remissions (credits) would constitute independent - sales from DFRC and DFIA cannot be treated as profit from the eligible business of the industrial undertaking for computation of deduction u/s. 80IBsource of income beyond the first degree nexus between profits and the industrial undertaking - against assessee. The interest income also cannot form part of the profit derived from the eligible business of the industrial undertaking 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. Issues Involved:1. Eligibility of DFRC sales, DFIA sales, interest receipts, and conversion charges for deduction under section 80IB of the Income-tax Act, 1961.Detailed Analysis:DFRC Sales and DFIA Sales:The primary issue was whether the receipts from DFRC (Duty Free Replenishment Certificate) sales amounting to Rs. 1,27,91,007 and DFIA (Duty Free Import Authorization) sales amounting to Rs. 1,34,00,211 could be considered as income derived from the industrial undertaking for the purpose of deduction under section 80IB. The assessee argued that these receipts were directly linked to the manufacturing activity and thus should be eligible for deduction. However, the Assessing Officer and CIT(A) disagreed, stating that these receipts were not directly derived from the manufacturing activity but were in the nature of export incentives, similar to DEPB (Duty Entitlement Pass Book), which the Supreme Court in Liberty India vs. CIT (317 ITR 218) had ruled as not eligible for deduction under section 80IB. The Tribunal upheld this view, stating that DFRC and DFIA sales could not be treated as profits derived from the eligible business of the industrial undertaking as they are from an independent source beyond the first degree nexus between profits and the industrial undertaking.Interest Receipts:The interest receipts amounting to Rs. 1,64,593 were also contested. The assessee claimed that these should be included in the income eligible for deduction under section 80IB. The CIT(A) and the Tribunal, following the Supreme Court's decision in Tuticorin Alkali Chemicals & Fertilisers vs. CIT (227 ITR 172), held that interest receipts could not be considered as income derived from the industrial undertaking. The Tribunal reiterated that interest income does not have a direct nexus with the manufacturing activity and thus cannot be included for the purpose of section 80IB deduction.Conversion Charges:The most contentious issue was the conversion charges amounting to Rs. 5,30,06,031 received from ITC Ltd. The Assessing Officer and CIT(A) had treated these as other income, arguing that since the raw materials were supplied by ITC Ltd., the income from conversion charges did not derive directly from the industrial undertaking's manufacturing activities. However, the Tribunal disagreed with this view. It held that the conversion charges were indeed derived from the manufacturing process, as the assessee used its machinery and labor to carry out the job work. The Tribunal cited judgments from the Delhi High Court in CIT vs. Sadhu Forgings Ltd. (336 ITR 444) and the Madras High Court in CIT vs. Esquire Translam Industries (344 ITR 398) to support its decision. Therefore, the Tribunal concluded that the conversion charges should be included in the profit of the business for computing deduction under section 80IB.Conclusion:The Tribunal's order partially allowed the appeal:- DFRC and DFIA Sales: Not eligible for deduction under section 80IB.- Interest Receipts: Not eligible for deduction under section 80IB.- Conversion Charges: Eligible for deduction under section 80IB.The Assessing Officer was directed to recompute the deduction under section 80IB accordingly. The appeal was partly allowed.