Whether in case manufacturing activity is performed by a third party, assessee can claim deduction u/s 80I in respect of such manufactured items: HC

THE issues before the Bench are - Whether service charges received from Department of Atomic Energy can be considered as profit derived from the industrial undertaking to qualify for deduction u/s 80I; Whether crane hire charges would also be covered under equipment hire charges; Whether transportation activities can be a part of manufacturing process, hence eligible for deduction u/s 80I and Whether in case manufacturing activity is performed by a third party, assessee can claim deduction u/s 80I in respect of such manufactured items also. And the answers to all the questions go against the Revenue.

Facts of the case

A) Assessee is a cooperative society. An order dated 6th September, 2011 recorded that in an earlier decision dated 15th November, 2006 in the case of appellant, reported as (2008) 300 ITR 92 (Delhi), service charges, equipment hire charges and interest on loans to employees, it was held would not be entitled to special deduction u/s 80-I. On appeal filed by assessee, SC remanded the case to tribunal in respect of service charges. The order dated 6th September, 2011 records; whether earlier decision reported in (2008) 300 ITR 92 (Delhi) would be applicable or not, was a question, which would be examined at the time of final arguments.

B) Ammonia tanker hire charges were also covered by decision of HC in the case of the assessee in ITA No. 955/2008 = (2012-TIOL-346-HC-DEL-IT) and other connected appeals, which were disposed of on 23rd April, 2012. In the said decision, we have referred to the concept of “derived from” and it was held that income earned from tanker hire charges were not covered by the term “profits and gains derived from an industrial undertaking”. Counsel for the appellant had submitted that a wrong factual statement was made by the appellant that the carriage wagons were owned by the Railways. It was submitted that carriage wagons were owned by the appellant and ammonia had to be transported to the consumer/customer in the specialized container wagons. Ammonia had to be transported in highly compressed and liquefied form.

Held that,

A) ++ we feel that the aforesaid decision in case of the assessee, which pertains to AY 1994-95, squarely applies as far as equipment hire charges and interest on loan to employees are concerned. It has been held in the said decision reported in (2008) 300 ITR 92 (Delhi) that the two amounts do not constitute profits and gains “derived from” industrial undertaking as mentioned in sub-section (1). The said decision of the Division Bench is binding on us and the issue raised is squarely covered. The same question/issue raised was considered and the claim/contention of assessee was rejected. We accordingly following the said judgment reject the said claim. We also record that crane hire charges would be also covered by the aforesaid decision, which refers to equipment hire charges;

B) ++ words “derived from” are much narrower and restrictive than the words “attributable to”. Income is said to be derived from an industrial undertaking only if it is directly related to the running of the industrial undertaking itself. It would not include income or gains from any other commercial activity undertaken by the assessee. Under section 80I, emphasis is on the profits and gains of industrial undertaking, which manufactures or produces an article or thing as specified. Transportation of ammonia, as in case of other products, may require specialized container vessels or wagons/transport vehicles, but the income derived would be earned from transportation. Transport charges were specifically and separately paid, would not be income or profits derived from an industrial undertaking, which manufactured or produced articles or things. Transportation even in specialised vehicles or wagons, was/is a separate commercial activity. The said activity could be undertaken by a third person, other than the appellant. The third party transporters could/can have specialised vehicles or wagons for transportation of ammonia. The aforesaid activity of transportation was post-manufacture and relates to activities outside the four walls of the industrial complex or undertaking where manufacture or production took/takes place. The SC in Liberty India versus CIT, (2009-TIOL-100-SC-IT) had examined the question whether duty drawbacks etc. payable could be treated as profits and gains derived by an industrial undertaking u/s 80-I, 80(IA) and 80(IB). It has been held that the said amounts received do not qualify and cannot be treated as profits and gains derived from an industrial undertaking. Referring to sub-Section (5) of Section 80(IA) it was observed that for computation of profits of eligible undertaking, we have to only look at the source of income of the assessee relating to the eligible undertaking and exclude any other income arising from other commercial activities indulged in by the said assessee;

++ to examine whether the income was derived from an industrial undertaking, it is imperative to trace the source of profit or income to manufacture/production. Transportation, as noted above, is post-manufacture and takes place after the goods or articles have been manufactured in the industrial undertaking. They relate to activity of transportation of the said articles or goods from the factory to the place of the consumer/customer. It is a service and does not partake character and is not a part of manufacture. Question No. 2(ii) in respect of ammonia tanker hire charges is, therefore, to be decided against the appellant-assessee. Question No. (1) and item No. (ii) of question No. (2) are inter-connected. The said issue is covered in favour of assessee and against the revenue vide judgment dated 24th July, 2013 in ITA No. 1248/2010 = (2013-TIOL-582-HC-DEL-IT) titled Krishak Bharti Cooperative Limited versus DCIT and Another. In the said judgment after examining the nature and character of the service charges, the agreement between the appellant and Heavy Water Board, Department of Atomic Energy, Government of India, a Division Bench has opined that the assessee would be entitled to benefit under Section 80-I in respect of service charges received and the same were profits and gains derived from an industrial undertaking. Question Nos. (1) and (2)(ii) are accordingly answered in favour of the assessee and against the Revenue.