Income Tax Appellate Tribunal - Delhi
Asstt. Cit vs Woodword Governors India (P) Ltd. on 20 April, 2007
ORDER
R.C. Sharma, A.M.
1. This is an appeal filed by the revenue against the order of CIT (Appeals) dated 24-9 2004 for the assessment year 2001-02, in the matter of order passed under Section 143(3) of the Income Tax Act, 1961 wherein following grounds of appeal have been raised:
1. CIT (Appeals) erred in deleting the disallowance by wrongly interpreting the provisions of Section 80-IB and allowed deduction more than statutorily mandated.
2. Assessing officer allowed deduction on profits and gains "derived" from business and not on incidental activities attributable to the said business.
3. For the reasons given above it is prayed that order of the CIT (Appeals) should be set aside and the order of the assessing officer on the point of Section 80-IB be restored.
2. Rival contentions have been heard and record perused. Brief facts in this case are that the assessee-company is in the business of manufacturing and trading of specialized governors and controls to be used in diesel engine power generating sets and allied industrial equipments. It was also engaged in repair work of such governors and controls. During the year under consideration, the assessee has claimed deduction under Section 80-IB computed at 30% of business income. Deduction under Section 80-IB has been calculated as follows :
Gross total income (before any deductions under chapter VI-A (Rs.) 66,86,479 Less :
Interest on fixed deposits with banks 39,45,607 Scrap Sales 13,000 39,58,607 (Rs.) Balance 5,19,08,872 Deduction under Section 80-IB [@ 30% on the balance as shown above] 1,33,72,662
3. The assessing officer observed that from the working of deduction under Section 80-IB above, it is clear that the assessee-company has only reduced non-business related receipts i.e. interest on fixed deposits and scrap sales from the gross total income before computing deduction under Section 80-IB. The assessee-company has claimed deduction under Section 80-IB not only on profits derived from sale of manufactured goods but also on profits derived from sale of traded goods and on income from services such as training commission of sales, after sale service and repair of governors and controls. The assessee-company is partly supplying controls and governors, which it is manufacturing itself and partly such equipment as it purchased from manufacturers abroad. Nevertheless, profits on trade of controls and governors purchased from manufacturers abroad cannot be said to be profits derived from industrial undertaking.
4. Accordingly, the assessing officer concluded that assessee is not eligible for deduction under Section 80-IB in respect of profits derived from such services and repair as well as trading of items imported.
5. By the impugned order, CIT (Appeals) held that assessee was entitled to deduction under Section 80-IB not only on the goods manufactured by it but also on the profits from import and sale of products as well as services rendered by the assessee-company.
6. Aggrieved by the above order of the CIT (Appeals), the revenue is in further appeal before us.
7. It was argued by Sr. Departmental Representative Shri Ashok Mittar that deduction under Section 80-IB is available to the specified industries with respect to the profits derived by them from its activities of manufacture and production. So far as assessee was selling the goods imported and carrying out services of repairing etc., the profit earned therefrom cannot be said to be profit "derived" from the industrial activities.
8. On the other hand, learned authorised representative Shri Pawan Kumar submitted that the products in which the assessee deals are essential electronic controls, mechanical-hydraulic governors and actuators, power management systems, steam turbine control systems and engine control systems (including gas engine control systems). These are used particularly for industrial applications and, as such, involve significant customisation due to varied specifications and parameters for manufacture and production. The control/governors are used to monitor and regulate the moving parts and thus their requirement may vary in different industrial applications. The necessity to make the controls/governors compatible to the requirements of the particular kind of movement of the energy control device poses a situation where a slight change in specifications due to varied application results in a large range of control and governors. Further, as customers for all requirements of controls and governors seek to contract with the assessee, it becomes imperative that the assessee supplies the entire range of controls/governors, the manufacturing whereof, the assessee is implementing in a. phase manner. In the meantime, when such a situation arises the assessee takes specifications from its customers and gets these controls/governors manufactured from overseas for supplying to the customers. The manufacture and sale of such high-tech equipment necessitates a good service and repair facility also. In the course of providing such services, the assessee also replaces certain components/parts of such governors to make them conducive to local requirements. The Governors/Controls supplied by the assessee are proprietary items, which only assessee-company, is best equipped to install and alter in terms of the customer's requirements. The customer is charged for parts as well as labour for customizing such products in items of their applicability.
9. We have considered the rival contentions gone through the orders of the authorities below and also deliberated on the case laws referred by the authorities below in their respective orders as well as cited by the learned authorised representative and Departmental Representative during the course of hearing before, in the context of factual matrix of the case. In the instant case, the assessee-company was engaged in manufacture, sale and servicing of industrial application electronic controls etc. On the profit earned by the industrial undertaking, the assessee claimed deduction under Section 80-IB of the Act. As per provisions of Section 80-IB, assessee is entitled to deduction in respect of profits and gains from certain industrial undertakings as referred to in Sub-sections (3) to (11) of the Act. The deduction is computed with respect to profits and gains derived from such industrial undertaking for a certain period as specified in the Act. The profit on which the assessee is entitled to claim deduction should be arising out of manufacture or production of the article or things specified in the Act. In the instant case, the assessee-company was basically engaged in manufacturing of its products. There is no dispute with regard to the claim of deduction on the profits derived from such manufactured goods. In addition to it, the assessee-company was also providing training to employees of its customers for the use of the products sold to them and also providing after sales services and repairing of the products sold to its customers. The activities which are related to activity of manufacture and sale of products are that of F provision of training of the customers' employees for being able to use the products and after sale service and repairs. The profit from these activities are indeed "derived" from industrial undertaking and formed part of manufacturing products. As the assessee is engaged in the business of manufacture and sale of high precision governors and other control devices. Given the high technical precision it is incumbent upon the assessee to not only adequately train the customers' employees to be able to use such products but as and when the need arises provide after sales service and repair such products for their continued efficient use. Admittedly, all these activities are carried out by the undertaking itself and only supplement the manufacturing activity being carried out by the undertaking. Thus, the essential ingredient of nexus between the profit and the undertaking gets established.
10. In view of the above discussion, we do not find any infirmity in the order of the CIT (Appeals) for allowing deduction under Section 80-IB even in respect of profits derived from training of customers' employees and after sales services and repairs.
11. With regard to the profits derived from sale of goods imported by the assessee, the CIT(Appeals) observed that the order of the assessing officer is silent about the sale of the components imported by the assessee. The CIT(Appeals) observed that assessee was assembling different components together and was processing them which resulted into new products, such activity would result into the purview of the manufacture. We also found that assessee was not only importing the components but was undertaking certain machining work in its industrial undertaking and thereby making value addition in respect of governors/controls devices which were imported. The activity of combining the imported products with other products so as to meet the customers' specific requirements necessarily result in an activity which tantamount to manufacture.
12. In view of the above, we do not find any infirmity in the order of the CIT (Appeals) for directing the assessing officer to allow claim of deduction under Section 80-IB in respect of profits derived from the industrial undertaking.
13. In the result, the appeal of the revenue is dismissed.