TaxTMI 
TaxTMI 
2013 (8) TMI 636
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....consultancy was given by its directors/ employees without involving any usage of the industrial undertaking and the company was eligible for royalty for that as per the agreement entered into by it?" The brief facts of the case are that the assessee company is engaged in the manufacturing of wide range of products like industrial perfumes, chewing tobacco, synthetic essential oil etc. The assessee has entered into an agreement with Hindustan Lever Ltd. (for short, 'HLL') whereby assessee as the licensor had licensed the formula developed through its research and gave exclusive right to HLL to use the said formula in their products specially in liril soap. In addition to the consideration, the assessee has also received the royalty/consultancy charges from HLL under the heading for further research work. It is the claim of the assessee that along with its manufacturing activity, the assessee carried out the research and development activity side by side making use of the entire paraphernalia of the industrial undertaking. The assessee has claimed the exemption of the amount received as royalty/consultancy charges under Section 80HH and Section 80-I of the Act. The Assessing Of....
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....me-tax, [2009] 318 ITR 309 (Del). It is also a submission of the learned counsel for the Department that the Tribunal has not appreciated the facts in the correct perspective and wrongly interpreted the position of law, so it is liable to be quashed. On the other hand, Sri Abhinav Mehrotra, learned counsel for the assessee has justified the impugned order passed by the Tribunal. He submits that the heading may be given as consultancy charges or royalty to the consideration, which was received by the assessee in its right perspective. He also submits that the assessee carries out two types of activities. One activity is by which it manufactures perfumery products generally which has an open market and which are sold to any consumer. These products are not tailor-made for specific consumer. Another activity carried out by the assessee is to manufacture specific products meant for specific consumer. The specific products which are meant for specific consumption being to be research and developed and these are not sold in the open market. In the instant case, the consultancy provided was not from the mind of any person, but it was through the continuous activity of research an....
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....ose formulation of perfumes in all cases. The manner and mode of following either of these two options would be mutually discussed and agreed upon from time to time in case of every submission of Khattri which is accepted by HLL for incorporation in its "products". Similarly, the quantum of royalty payable to Khattri if the formulae are disclosed or the price and delivery schedules when it is a supply contract will be agreed from time to time." Lastly, he made a request for dismissal of all the appeals. After hearing both the parties and on perusal of the record, it appears that the assessee is engaged in the manufacturing of various types of perfumes including the perfumes as per the terms of the agreement entered into with HLL for which the assessee has received consideration. In addition, the assessee has received consultancy charges for continuous activity for research. The assessee has claimed that the consultancy charges are to be allowed as deduction under Section 80-HH & 80-I of the Act. In order to adjudicate the question raised before us, it is appropriate to reproduce the provisions of Section 80-HH & 80-I of the Act read as under:- 80HH.-Deduction in respect....
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....el is not formed by the splitting up, or the reconstruction, of a business already in existence; (iii) the hotel is for the time being approved for the purposes of this sub- section by the Central Government. (4) The deduction specified in sub-section (1) shall be allowed in computing the total income in respect of each of the ten assessment years beginning with the assessment year relevant to the previous year in which the industrial undertaking begins to manufacture or produce articles or the business of the hotel starts functioning: Provided that,- (i) in the case of an industrial undertaking which has begun to manufacture or produce articles, and (ii) in the case of the business of a hotel which has started functioning, after the 31st day of December, 1970 , but before the 1st day of April, 1973 , this sub-section shall have effect as if the reference to ten assessment years were a reference to ten assessment years as reduced by the number of assessment years which expired before the 1st day of April, 1974 . (5) Where the assessee is a person other than a company or a co-operative society, the deduction under sub-section (1) shall not be admissible unless the ....
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....der this section, take the amount of profits as may be reasonably deemed to have been derived therefrom. (8) * * * (9) In a case where the assessee is entitled also to the deduction under [section 80-I or] section 80J in relation to the profits and gains of an industrial undertaking or the business of a hotel to which this section applies, effect shall first be given to the provisions of this section. [(9A) Where a deduction in relation to the profits and gains of a small- scale industrial undertaking to which section 80HHA applies is claimed and allowed under that section for any assessment year, deduction in relation to such profits and gains shall not be allowed under this section for the same or any other assessment year.] (10) Nothing contained in this section shall apply in relation to any undertaking engaged in mining. [11 For the purposes of this section," backward area" means such area as the Central Government may, having regard to the stage of development of that area, by notification 3 in the Official Gazette, specify in this behalf: Provided that any notification under this sub- section may be issued so as to have retrospective effect to a date not ea....
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....ion at hand. In other words, there is no greater significance in the word 'from' following the word 'derived' other than the fact that it is the usual linguistic practice...." Further, Hon'ble Apex Court in the case of National Organic Chemical Industries Ltd. (supra), observed in Paras-10 & 11, that - "10. The dictionaries states that the words 'derive' is usually followed by the word 'from', and it means : get or trace from a source; arise from, originate in; show the origin or formation of. 11. The use of the words 'derived from' in item 11-AA(2) suggests that the original source of the product has to be found. Thus, as a matter of plain English, when it is said that one word is derived from another, often in another language, what is meant is that the source of that word is another word, often in another language. As an illustration, the word 'democracy' is derived from the Greek word 'demos' the people, and most dictionaries will so state. That is the ordinary meaning of the words 'derived from' and there is no reason to depart from that ordinary meaning here." The Hon'ble Apex Court in the case of Commissioner of Income Tax vs. Sterling Foods (supra), while answer....
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.... which are claimed to qualify for deduction, has an immediate and direct nexus to the essential activity of the industrial undertaking." Emphasis Added As stated hereinabove, there should be a direct nexus between the profits and gains and the industrial undertaking whereas in the instant case, the income derived from consultancy/profit so accrued from consultancy has no direct nexus but only an incidental and as such the Tribunal has erred in law in extending the benefit of the provisions of Section 80HH & 80-I of the Act to the profits and gains from consultancy business. The rulings laid down by the learned counsel for the respondent has no application in the facts and circumstances of the case. It is undisputed that that the industry was established in the backward area and the appellant was enjoying the deduction under Section 80HH & 80-I of the Act. From the record, it appears that Section 80HH of the Act defines that the income of an assessee includes any profit and gains derived from industrial undertaking from the business. Undoubtedly, the assessee was running the business in the manufacturing of the perfumes. As per the agreement between the assessee and HLL,....