M/S. ASHOK LEYLAND LTD.,CHENNAI vs. DCIT, NCC-8(1), LTU-II,, CHENNAI

4.1 The facts as discernible from record The facts as discernible from records is that, the assessee had s is that, the assessee had incurred scientific research expenditure, both revenue & capital, at their incurred scientific research expenditure, both revenue & capital, at their incurred scientific research expenditure, both revenue & capital, at their approved in-house R&D facility. The assessee had accordingly claimed house R&D facility. The assessee had accordingly claimed house R&D facility. The assessee had accordingly claimed weighted deduction of Rs.769,77,45,394/ weighted deduction of Rs.769,77,45,394/- being 200% of the expenditure being 200% of the expenditure u/s 35(2AB) of the Act, in terms of Form 3CLA issued by the auditor. The f the Act, in terms of Form 3CLA issued by the auditor. The f the Act, in terms of Form 3CLA issued by the auditor. The AO, in the course of assessment, required the assessee to file Form 3CL AO, in the course of assessment, required the assessee to file Form 3CL AO, in the course of assessment, required the assessee to file Form 3CL issued by the DSIR for the relevant AY 2017 issued by the DSIR for the relevant AY 2017-18, which the assessee failed 18, which the assessee failed to provide as the DSIR, at that material time, had to provide as the DSIR, at that material time, had not yet issued the said not yet issued the said Form. The AO accordingly, in absence of Form 3CL, denied the claim for Form. The AO accordingly, in absence of Form 3CL, denied the claim for Form. The AO accordingly, in absence of Form 3CL, denied the claim for weighted deduction u/s 35(2AB) of the Act, but at the same time, allowed weighted deduction u/s 35(2AB) of the Act, but at the same time, allowed weighted deduction u/s 35(2AB) of the Act, but at the same time, allowed normal deduction @ 100% in terms of Section 35 of the Act. Hence, out normal deduction @ 100% in terms of Section 35 of the Act. Hence, out normal deduction @ 100% in terms of Section 35 of the Act. Hence, out of the total deduction claimed by the assessee of Rs.769,77,45,394/ ction claimed by the assessee of Rs.769,77,45,394/ ction claimed by the assessee of Rs.769,77,45,394/-, the AO allowed normal 100% deduction to the extent of Rs.386,88,72,661/ AO allowed normal 100% deduction to the extent of Rs.386,88,72,661/ AO allowed normal 100% deduction to the extent of Rs.386,88,72,661/- and denied weighted component of 100% of Rs.3,86,88,72,661/ and denied weighted component of 100% of Rs.3,86,88,72,661/ and denied weighted component of 100% of Rs.3,86,88,72,661/-. Being aggrieved by the order of the AO, the assessee carried the mat aggrieved by the order of the AO, the assessee carried the mat aggrieved by the order of the AO, the assessee carried the matter in appeal before the Ld. CIT(A). appeal before the Ld. CIT(A).

4.2 Before the Ld. CIT(A), the assessee firstly brought to his notice that Before the Ld. CIT(A), the assessee firstly brought to his notice that Before the Ld. CIT(A), the assessee firstly brought to his notice that the AO had made certain calculation errors in computing the disallowance the AO had made certain calculation errors in computing the disallowance the AO had made certain calculation errors in computing the disallowance which resulted in higher disallowance of Rs.1,99,99,964/ which resulted in higher disallowance of Rs.1,99,99,964/ which resulted in higher disallowance of Rs.1,99,99,964/-. Further, the assessee furnished the Form 3CL, which was issued by the DSIR, wherein assessee furnished the Form 3CL, which was issued by the DSIR, wherein assessee furnished the Form 3CL, which was issued by the DSIR, wherein the revenue and capital expenditure approved for weighted deduction was the revenue and capital expenditure approved for weighted deduction was the revenue and capital expenditure approved for weighted deduction was quantified at Rs.318,82,79,000/ quantified at Rs.318,82,79,000/- and Rs.42,99,54,000/- respectively. The respectively. The assessee accordingly prayed that atleas assessee accordingly prayed that atleast the weighted component for the t the weighted component for the aforesaid certified amount ought to be allowed u/s 35(2AB) of the Act. aforesaid certified amount ought to be allowed u/s 35(2AB) of the Act. aforesaid certified amount ought to be allowed u/s 35(2AB) of the Act.

After verifying the contents of Form 3CL as well as the calculations, the After verifying the contents of Form 3CL as well as the calculations, the After verifying the contents of Form 3CL as well as the calculations, the Ld. CIT(A) agreed with the assessee that there was a calculation error in Ld. CIT(A) agreed with the assessee that there was a calculation error in Ld. CIT(A) agreed with the assessee that there was a calculation error in AO’s computation of disallowance and therefore directed deletion to the computation of disallowance and therefore directed deletion to the computation of disallowance and therefore directed deletion to the extent of Rs.1,99,99,964/ extent of Rs.1,99,99,964/-. The Ld. CIT(A), further noted that, apart from . The Ld. CIT(A), further noted that, apart from expenditure aggregating to Rs.23,14,39,967/ expenditure aggregating to Rs.23,14,39,967/-, other expenses had been , other expenses had been certified by DSIR in Form 3CL. Accordingly, certified by DSIR in Form 3CL. Accordingly, the Ld. CIT(A) allowed the the Ld. CIT(A) allowed the weighted deduction u/s 35(2AB) for the amount certified in Form 3CL and weighted deduction u/s 35(2AB) for the amount certified in Form 3CL and weighted deduction u/s 35(2AB) for the amount certified in Form 3CL and restricted the denial of weighted component of deduction to the extent of restricted the denial of weighted component of deduction to the extent of restricted the denial of weighted component of deduction to the extent of expenses not approved by DSIR being Rs.23,14,39,967/ expenses not approved by DSIR being Rs.23,14,39,967/ expenses not approved by DSIR being Rs.23,14,39,967/-. Being aggrieved by the disallowance retained by the Ld. CIT(A), the assessee is llowance retained by the Ld. CIT(A), the assessee is llowance retained by the Ld. CIT(A), the assessee is now in appeal before us. now in appeal before us.

4.3 Having considered the submissions of the Having considered the submissions of the assessee, in light of the , in light of the findings of the lower authorities, we note that, of the lower authorities, we note that, Section 35(2AB) of the Section 35(2AB) of the Act, provides that, an assessee sh provides that, an assessee shall be allowed weighted deduction in all be allowed weighted deduction in relation to expenditure incurred on the in expenditure incurred on the in-house R&D facility as approved house R&D facility as approved by the prescribed authority, i.e. DSIR. Sub authority, i.e. DSIR. Sub-clause (4) of Clause (2AB) of clause (4) of Clause (2AB) of Section 35 provides that, the Section 35 provides that, the prescribed authority, i.e. DSIR shall sub prescribed authority, i.e. DSIR shall submit its report in relation to the approval of the its report in relation to the approval of the research facility in such form research facility in such form as prescribed. Rule 6(7A)(b) of the Income as prescribed. Rule 6(7A)(b) of the Income-tax Rules,1962 as amended tax Rules,1962 as amended by the IT(10th Amendment) Rules, 2016 applicable with effect by the IT(10th Amendment) Rules, 2016 applicable with effect by the IT(10th Amendment) Rules, 2016 applicable with effect from01.07.2016 provides that from01.07.2016 provides that, the approval of expenditure under expenditure under 35(2AB) of the Act shall 35(2AB) of the Act shall be subject to the condition that, the prescribed be subject to the condition that, the prescribed authority, i.e. DSIR, shall submit itsreport in Form 3CL to the PCCIT or authority, i.e. DSIR, shall submit itsreport in Form 3CL to the PCCIT or authority, i.e. DSIR, shall submit itsreport in Form 3CL to the PCCIT or CCIT. The relevant Rule is reproducedhereunder: CCIT. The relevant Rule is reproducedhereunder:

“(7A) Approval of expenditure incurred on (7A) Approval of expenditure incurred on in-house research and house research and development facility by a company under sub development facility by a company under sub-section (2AB) of section section (2AB) of section 35 shall be subject to the following conditions, namely : 35 shall be subject to the following conditions, namely :—

(a) The facility should not relate purely to market research, sales The facility should not relate purely to market research, sales The facility should not relate purely to market research, sales promotion, quality control, testing, c promotion, quality control, testing, commercial production, style ommercial production, style changes, routine data collection or activities of a like nature; changes, routine data collection or activities of a like nature; changes, routine data collection or activities of a like nature;

(b)The prescribed authority shall furnish electronically its report, The prescribed authority shall furnish electronically its report, The prescribed authority shall furnish electronically its report,—

(i) in relation to the approval of in in relation to the approval of in-house research and development house research and development facility in Part A of Fo facility in Part A of Form No. 3CL;

(ii) quantifying the expenditure incurred on in quantifying the expenditure incurred on in-house research and house research and development facility by the company during the previous year and development facility by the company during the previous year and development facility by the company during the previous year and eligible for weighted deduction under sub eligible for weighted deduction under sub-section (2AB) of section 35 of section (2AB) of section 35 of the Act in Part B of Form No. 3CL; the Act in Part B of Form No. 3CL;

(ba) The report in Form No. 3CL referred to in clause (b) shall be The report in Form No. 3CL referred to in clause (b) shall be The report in Form No. 3CL referred to in clause (b) shall be furnished electronically by the prescribed authority to the Principal Chief furnished electronically by the prescribed authority to the Principal Chief furnished electronically by the prescribed authority to the Principal Chief Commissioner of Income Commissioner of Income-tax or Chief Commissioner of Income tax or Chief Commissioner of Income-tax or Principal Director General of Income Principal Director General of Income-tax or Director General of Income Director General of Income- tax having jurisdiction over such company within one hundred and tax having jurisdiction over such company within one hundred and tax having jurisdiction over such company within one hundred and twenty days,—

(i) of the grant of the approval, in a case referred to in sub of the grant of the approval, in a case referred to in sub of the grant of the approval, in a case referred to in sub-clause (i) of clause (b);

(ii) of the submission of the audit report, in a case referre of the submission of the audit report, in a case referre of the submission of the audit report, in a case referred to in sub- clause (ii) of clause (b); f clause (b);

(c) The company shall maintain a separate account for each approved The company shall maintain a separate account for each approved The company shall maintain a separate account for each approved facility; which shall be audited annually and hall be audited annually and a report of audit in Form a report of audit in Form No. 3CLA shall be furnished electronically to the Secretary, Department No. 3CLA shall be furnished electronically to the Secretary, Department No. 3CLA shall be furnished electronically to the Secretary, Department of Scientific and Industrial Research on or before the due date specified ientific and Industrial Research on or before the due date specified ientific and Industrial Research on or before the due date specified in Explanation 2 to sub in Explanation 2 to sub-section (1) of section 139 of the Act for section (1) of section 139 of the Act for furnishing the return of i furnishing the return of income, for each succeeding year.”

4.4 In light of the above Rule, as introduced by the IT(10t In light of the above Rule, as introduced by the IT(10t In light of the above Rule, as introduced by the IT(10th Amendment) Rules,2016 applicable with effect from 01.07.2016, the Amendment) Rules,2016 applicable with effect from 01.07.2016, the Amendment) Rules,2016 applicable with effect from 01.07.2016, the position of law as prevailing in AY position of law as prevailing in AY 2017-18 is that, furnishing of Form 3CL is that, furnishing of Form 3CL by DSIR is a pre-requisite to claim requisite to claim the weighted component of the weighted component of deduction u/s 35(2AB) of the Act. u/s 35(2AB) of the Act. The reliance placed by the assessee on the ced by the assessee on the decisions rendered by this Tribunal in their own case in earlier AY 2011 rendered by this Tribunal in their own case in earlier AY 2011 rendered by this Tribunal in their own case in earlier AY 2011- 12 is found to be distinguishable as the AY e distinguishable as the AY involved was was prior tothe insertion of the aforementioned Rule. insertion of the aforementioned Rule. Accordingly, due to the change in Accordingly, due to the change in position of law, the aforesaid decision is no longer applicable in the , the aforesaid decision is no longer applicable in the , the aforesaid decision is no longer applicable in the relevant AY 2017-18. For the aforesaid reasons therefore, since the 18. For the aforesaid reasons therefore, since the 18. For the aforesaid reasons therefore, since the expenses to the tune of Rs.23,14,39,697/ expenses to the tune of Rs.23,14,39,697/- was not approved by DSIR in was not approved by DSIR in Form 3CL, in light of the restriction set out in Rule Form 3CL, in light of the restriction set out in Rule 6(7A)(b) 6(7A)(b) of the Income-tax Rules,1962 tax Rules,1962, the Ld. CIT(A) had rightly denied , the Ld. CIT(A) had rightly denied weighted deduction u/s 35(2AB) deduction u/s 35(2AB) to the extent of Rs.23,14,39,967/- -. We therefore see no reason to interfere with the order of Ld. CIT(A) on this aspect and see no reason to interfere with the order of Ld. CIT(A) on this aspect and see no reason to interfere with the order of Ld. CIT(A) on this aspect and hence confirm the same. This ground hence confirm the same. This ground therefore stands dismissed. therefore stands dismissed.

5.1 The facts as noted are that, the assessee had claimed deduction of The facts as noted are that, the assessee had claimed deduction of The facts as noted are that, the assessee had claimed deduction of Rs.235,18,59,051/- u/s 80 u/s 80-IC of the Act, in respect of the profits derived e Act, in respect of the profits derived by its eligible unit at Pantnagar. Upon examination of the stand by its eligible unit at Pantnagar. Upon examination of the stand by its eligible unit at Pantnagar. Upon examination of the stand-alone accounts of the assessee, the AO noted that the assessee had inter alia accounts of the assessee, the AO noted that the assessee had accounts of the assessee, the AO noted that the assessee had apportioned and credited revenue from spare parts and Annual apportioned and credited revenue from spare parts and Annual apportioned and credited revenue from spare parts and Annual Maintenance Charges (‘AMC’) revenue including interest and other income Charges (‘AMC’) revenue including interest and other income Charges (‘AMC’) revenue including interest and other income aggregating to Rs.229.85 crores to the eligible unit and claimed deduction aggregating to Rs.229.85 crores to the eligible unit and claimed deduction aggregating to Rs.229.85 crores to the eligible unit and claimed deduction u/s 80-IC in relation thereto. According to the AO, these items of IC in relation thereto. According to the AO, these items of IC in relation thereto. According to the AO, these items of revenues could not be said to have been derived from revenues could not be said to have been derived from the operations of the operations of the eligible undertaking and therefore held that they were not eligible for the eligible undertaking and therefore held that they were not eligible for the eligible undertaking and therefore held that they were not eligible for deduction u/s 80-IC of the Act. The AO, accordingly, re IC of the Act. The AO, accordingly, re IC of the Act. The AO, accordingly, re-calculated the eligible turnover of Pantnagar Unit (after excluding the aforesaid eligible turnover of Pantnagar Unit (after excluding the aforesaid eligible turnover of Pantnagar Unit (after excluding the aforesaid revenues) and worked out revenues) and worked out the eligible deduction u/s 80- -IC at 9.5% of turnover at Rs.211,19,52,600/ turnover at Rs.211,19,52,600/-. Hence, the AO disallowed the deduction . Hence, the AO disallowed the deduction u/s 80-IC of the Act to the extent of Rs.23,89,06,451/ IC of the Act to the extent of Rs.23,89,06,451/-. On appeal, the . On appeal, the Ld. CIT(A) upheld the order of the AO. Now the assessee is in appeal Ld. CIT(A) upheld the order of the AO. Now the assessee is in appeal Ld. CIT(A) upheld the order of the AO. Now the assessee is in appeal before us.

5.2 We have heard both the parties and perused the material placed We have heard both the parties and perused the material placed We have heard both the parties and perused the material placed before us. From the order of the lower authorities, it is noted that the before us. From the order of the lower authorities, it is noted that the before us. From the order of the lower authorities, it is noted that the following items of income were excluded by the AO while computing the following items of income were excluded by the AO while computing the following items of income were excluded by the AO while computing the turnover/income of the eligible u turnover/income of the eligible unit and accordingly, the eligible deduction nit and accordingly, the eligible deduction u/s 80-IC of the Act was correspondingly reduced. IC of the Act was correspondingly reduced.

(i) Revenue from sale of spare parts Revenue from sale of spare parts Rs.126.49 crores Rs.126.49 crores (ii) AMC Charges Rs.35 crores Rs.35 crores (iii) Scrap sales Rs.18.5 crores Rs.18.5 crores (iv) Freight recovery Rs.49.8 crores crores (v) Interest income from investments Interest income from investments Rs.8.13 crores Rs.8.13 crores (vi) Other income (Marketing) Other income (Marketing) Rs.12.47 crores Rs.12.47 crores Total Rs.229.85 crores Rs.229.85 crores 5.3 We shall deal with each of the above items of revenue separately. We shall deal with each of the above items of revenue separately. We shall deal with each of the above items of revenue separately.

From the facts available before us, it is noted that the assessee is an From the facts available before us, it is noted that the assessee is an From the facts available before us, it is noted that the assessee is an automotive manufacturer. It had set up a chassis manufacturing unit at automotive manufacturer. It had set up a chassis manufacturing unit at automotive manufacturer. It had set up a chassis manufacturing unit at Pantnagar. It was brought to our notice that al Pantnagar. It was brought to our notice that all the sales of the vehicles l the sales of the vehicles manufactured in various units are identifiable by their chassis numbers, manufactured in various units are identifiable by their chassis numbers, manufactured in various units are identifiable by their chassis numbers, which contains an identification of the manufacturing unit. The assessee which contains an identification of the manufacturing unit. The assessee which contains an identification of the manufacturing unit. The assessee being a manufacturer of commercial vehicles, is therefore required to being a manufacturer of commercial vehicles, is therefore required to being a manufacturer of commercial vehicles, is therefore required to provide parts and spares for smooth functioning of the vehicles sold, for s and spares for smooth functioning of the vehicles sold, for s and spares for smooth functioning of the vehicles sold, for their maintenance and upkeep. These spare parts supplied are quality their maintenance and upkeep. These spare parts supplied are quality their maintenance and upkeep. These spare parts supplied are quality checked and approved for usage in the vehicles, which comprises of checked and approved for usage in the vehicles, which comprises of checked and approved for usage in the vehicles, which comprises of bought out components and also certain manufactured in bought out components and also certain manufactured in bought out components and also certain manufactured in-house components. The Ld. AR for the assessee pointed out that the sale of components. The Ld. AR for the assessee pointed out that the sale of components. The Ld. AR for the assessee pointed out that the sale of these spare parts to their customers is necessary and intrinsically linked these spare parts to their customers is necessary and intrinsically linked these spare parts to their customers is necessary and intrinsically linked with the sales as the assessee being a manufacturer is required to ensure with the sales as the assessee being a manufacturer is required to ensure with the sales as the assessee being a manufacturer is required to ensure that their products remain defect f that their products remain defect free during their period of warranty and ree during their period of warranty and also to facilitate the replacement or removal of the defects through also to facilitate the replacement or removal of the defects through also to facilitate the replacement or removal of the defects through genuine spare parts to be made available during the lifetime of the genuine spare parts to be made available during the lifetime of the genuine spare parts to be made available during the lifetime of the vehicle. It was submitted that any inappropriate or spurious spare parts vehicle. It was submitted that any inappropriate or spurious spare parts vehicle. It was submitted that any inappropriate or spurious spare parts would result in damage of the vehicle parts or compromise the vehicle result in damage of the vehicle parts or compromise the vehicle result in damage of the vehicle parts or compromise the vehicle quality, which would resultantly cause consumer dissatisfaction, breach of quality, which would resultantly cause consumer dissatisfaction, breach of quality, which would resultantly cause consumer dissatisfaction, breach of warranty as well as consumer litigation. It was therefore contended warranty as well as consumer litigation. It was therefore contended warranty as well as consumer litigation. It was therefore contended before us that the supply and sale of these spare before us that the supply and sale of these spare before us that the supply and sale of these spare parts, both manufactured as well as bought out components, were intrinsically linked manufactured as well as bought out components, were intrinsically linked manufactured as well as bought out components, were intrinsically linked to the manufacture and sale of its commercial vehicles and therefore, the to the manufacture and sale of its commercial vehicles and therefore, the to the manufacture and sale of its commercial vehicles and therefore, the same was rightly apportioned in the ratio of the total turnover and same was rightly apportioned in the ratio of the total turnover and same was rightly apportioned in the ratio of the total turnover and credited in the stand-alone alone accounts of the eligible unit. The assessee has accounts of the eligible unit. The assessee has therefore urged that the lower authorities were unjustified in not therefore urged that the lower authorities were unjustified in not therefore urged that the lower authorities were unjustified in not considering the aforesaid revenues as a part of the turnover of the eligible considering the aforesaid revenues as a part of the turnover of the eligible considering the aforesaid revenues as a part of the turnover of the eligible unit. The Ld. CIT, DR on the other hand supported the order of t unit. The Ld. CIT, DR on the other hand supported the order of t unit. The Ld. CIT, DR on the other hand supported the order of the lower authorities.

5.4 Having considered the facts relating to this issue, it is an undisputed Having considered the facts relating to this issue, it is an undisputed Having considered the facts relating to this issue, it is an undisputed fact that the assessee is engaged in the business of manufacture and fact that the assessee is engaged in the business of manufacture and fact that the assessee is engaged in the business of manufacture and supply of commercial vehicles. During the year, the assessee had supply of commercial vehicles. During the year, the assessee had supply of commercial vehicles. During the year, the assessee had manufactured and sold 4 manufactured and sold 46181 number of vehicles from its eligible 6181 number of vehicles from its eligible Pantnagar Unit, which yielded revenue of Rs.7410.36 crores. Having Pantnagar Unit, which yielded revenue of Rs.7410.36 crores. Having Pantnagar Unit, which yielded revenue of Rs.7410.36 crores. Having regard to the nature of the product supplied, it is necessitated for the regard to the nature of the product supplied, it is necessitated for the regard to the nature of the product supplied, it is necessitated for the assessee to supply spare parts to the customers for the upkeep and assessee to supply spare parts to the customers for the upkeep and assessee to supply spare parts to the customers for the upkeep and maintenance of these vehicles. This supply is not only required to be ance of these vehicles. This supply is not only required to be ance of these vehicles. This supply is not only required to be made during the period of warranty but it is also required to be ensured made during the period of warranty but it is also required to be ensured made during the period of warranty but it is also required to be ensured by the assessee that these spare parts are readily available for their by the assessee that these spare parts are readily available for their by the assessee that these spare parts are readily available for their customers even post completion of the warranty pe customers even post completion of the warranty period. Reason being, riod. Reason being, unless and until the customers are ensured that the necessary genuine unless and until the customers are ensured that the necessary genuine unless and until the customers are ensured that the necessary genuine spare parts are available, which are inextricably linked to their use of the spare parts are available, which are inextricably linked to their use of the spare parts are available, which are inextricably linked to their use of the commercial vehicles, the sale of these vehicles would indeed be severely commercial vehicles, the sale of these vehicles would indeed be severely commercial vehicles, the sale of these vehicles would indeed be severely hampered. We are therefore in agreement with the assessee that they are therefore in agreement with the assessee that they are therefore in agreement with the assessee that they are required to manufacture these parts and also obtain and supply certain required to manufacture these parts and also obtain and supply certain required to manufacture these parts and also obtain and supply certain bought out components from genuine suppliers (which cannot be bought out components from genuine suppliers (which cannot be bought out components from genuine suppliers (which cannot be manufactured by them) in relation to these commercial vehicles manufactured by them) in relation to these commercial vehicles manufactured by them) in relation to these commercial vehicles manufactured and sold by them. In our considered view factured and sold by them. In our considered view factured and sold by them. In our considered view therefore, the revenue derived from the sale of spare parts and bought out components revenue derived from the sale of spare parts and bought out components revenue derived from the sale of spare parts and bought out components in relation to the commercial vehicles sold by the eligible unit, indeed was in relation to the commercial vehicles sold by the eligible unit, indeed was in relation to the commercial vehicles sold by the eligible unit, indeed was intrinsically linked to the operations of t intrinsically linked to the operations of the eligible industrial undertaking he eligible industrial undertaking and was therefore eligible for deduction u/s 80 and was therefore eligible for deduction u/s 80-IC of the Act. IC of the Act.

5.5 We find that somewhat similar issue was involved in the decision We find that somewhat similar issue was involved in the decision We find that somewhat similar issue was involved in the decision rendered by the Mumbai Bench of this Tribunal in the case of rendered by the Mumbai Bench of this Tribunal in the case of rendered by the Mumbai Bench of this Tribunal in the case of Mihir Engineers Limited vs J Engineers Limited vs JCIT (112 TTJ 940), wherein the revenues wherein the revenues derived from sale of bought out components, which were integral to the derived from sale of bought out components, which were integral to the derived from sale of bought out components, which were integral to the products manufactured by the assessee, was held to be eligible for products manufactured by the assessee, was held to be eligible for products manufactured by the assessee, was held to be eligible for deduction u/s 80-IC of the Act. The findings rendered in this decision, IC of the Act. The findings rendered in this decision, IC of the Act. The findings rendered in this decision, which are found to be relevant to the present case is as follows: are found to be relevant to the present case is as follows: are found to be relevant to the present case is as follows:

“27. The issue of purchasing different components, different equipments 27. The issue of purchasing different components, different equipments 27. The issue of purchasing different components, different equipments and spare parts from various concerns and their assembly, fabrication and spare parts from various concerns and their assembly, fabrication and spare parts from various concerns and their assembly, fabrication and erection into plant known as ETP was considered at and erection into plant known as ETP was considered at length by Delhi length by Delhi Bench of Tribunal in Degremont India Ltd. v. Dy. CIT [1996] 59 ITD 423 Bench of Tribunal in Degremont India Ltd. v. Dy. CIT [1996] 59 ITD 423 Bench of Tribunal in Degremont India Ltd. v. Dy. CIT [1996] 59 ITD 423 and after deliberation at length on the facts, decision of Apex Court in and after deliberation at length on the facts, decision of Apex Court in and after deliberation at length on the facts, decision of Apex Court in CIT v. N.C. Budharaja & Co. [1993] 204 ITR 4121 and various other CIT v. N.C. Budharaja & Co. [1993] 204 ITR 4121 and various other CIT v. N.C. Budharaja & Co. [1993] 204 ITR 4121 and various other judicial pronouncements of va judicial pronouncements of various courts, it was held that the assessee rious courts, it was held that the assessee was covered within the definition of manufacturing of an article or thing. was covered within the definition of manufacturing of an article or thing. was covered within the definition of manufacturing of an article or thing.

….

It was further held as under : It was further held as under :

"In the instant case, the assessee was purchasing different components, "In the instant case, the assessee was purchasing different components, "In the instant case, the assessee was purchasing different components, different equipments and spare different equipments and spare parts from various other parties and parts from various other parties and were assembling those components, equipments and accessories and were assembling those components, equipments and accessories and were assembling those components, equipments and accessories and thereby they were preparing fabricating and erecting a plant which was thereby they were preparing fabricating and erecting a plant which was thereby they were preparing fabricating and erecting a plant which was known as ETP. The ultimate end product which was prepared as a result known as ETP. The ultimate end product which was prepared as a result known as ETP. The ultimate end product which was prepared as a result of assembling of various components with the constant application of of various components with the constant application of of various components with the constant application of technical know-how was the ETP. The ETP was obvi how was the ETP. The ETP was obvi-ously distinct and ously distinct and different plant than the various components, equip different plant than the various components, equip- ments, purchased or ments, purchased or got manufactured according to the tailor made requirement fr got manufactured according to the tailor made requirement fr got manufactured according to the tailor made requirement from the different suppliers. The activities carried out by the assessee were, different suppliers. The activities carried out by the assessee were, different suppliers. The activities carried out by the assessee were, therefore, clearly covered within the definition of manufacture of an therefore, clearly covered within the definition of manufacture of an therefore, clearly covered within the definition of manufacture of an article or thing.

…

31.…….The situs of assembly of end The situs of assembly of end-product being client’s premises does product being client’s premises does not disentitle the assessee from its claim of deduction under section 80 the assessee from its claim of deduction under section 80 the assessee from its claim of deduction under section 80- IA of the Act in respect of bought out components utilized for the IA of the Act in respect of bought out components utilized for the IA of the Act in respect of bought out components utilized for the erection of the said cooling towers. There is no merit in the contention of erection of the said cooling towers. There is no merit in the contention of erection of the said cooling towers. There is no merit in the contention of the learned DR that excise duty is paid only on manufac the learned DR that excise duty is paid only on manufactured items. The tured items. The levy of Excise Duty is governed by Excise Laws. There is no merit in levy of Excise Duty is governed by Excise Laws. There is no merit in levy of Excise Duty is governed by Excise Laws. There is no merit in denial of exemption under section 80 denial of exemption under section 80-IA of the IT Act on bought out IA of the IT Act on bought out items as the same are not subjected to Excise Duty. The assessee items as the same are not subjected to Excise Duty. The assessee items as the same are not subjected to Excise Duty. The assessee prepares two different bills, one for prepares two different bills, one for excisable manufactures items and excisable manufactures items and other for bought out components, both of which are utilized for the other for bought out components, both of which are utilized for the other for bought out components, both of which are utilized for the erection of cooling tower. The assessee raises separate bills for erection of cooling tower. The assessee raises separate bills for erection of cooling tower. The assessee raises separate bills for transportation, erection and service charges. The profits on sale of the transportation, erection and service charges. The profits on sale of the transportation, erection and service charges. The profits on sale of the manufactured items and bought out components are eligible for ems and bought out components are eligible for ems and bought out components are eligible for deduction under section 80 deduction under section 80-IA of the Act.

5.6 Likewise, we find that similar view has bee Likewise, we find that similar view has been expressed by this n expressed by this Tribunal at Chandigarh in the case of Tribunal at Chandigarh in the case of BNAL Prefab vs Addln. CIT (ITA BNAL Prefab vs Addln. CIT (ITA No. No. 1273/Chd/2010) 1273/Chd/2010) dated dated 27.06.2012 27.06.2012 and and M/s Spray Engineering Devices Ltd. vs Addln. CIT (ITA No. 1130/Chd/2012) Engineering Devices Ltd. vs Addln. CIT (ITA No. 1130/Chd/2012) Engineering Devices Ltd. vs Addln. CIT (ITA No. 1130/Chd/2012) dated 11.06.2013, wherein on similar facts, it was hel , wherein on similar facts, it was hel , wherein on similar facts, it was held that the revenues derived from sale of spares and bought out components was revenues derived from sale of spares and bought out components was revenues derived from sale of spares and bought out components was eligible for deduction u/s 80 eligible for deduction u/s 80-IC of the Act. For the foregoing reasons IC of the Act. For the foregoing reasons therefore, we hold that, in the present case also, the revenue from spares therefore, we hold that, in the present case also, the revenue from spares therefore, we hold that, in the present case also, the revenue from spares parts of Rs.126.49 crores was in parts of Rs.126.49 crores was inextricably linked with the sale of extricably linked with the sale of manufactured vehicles and hence is held to be eligible for deduction u/s manufactured vehicles and hence is held to be eligible for deduction u/s manufactured vehicles and hence is held to be eligible for deduction u/s 80-IC of the Act.

5.7 The next item of revenue is the revenue derived from service/AMC The next item of revenue is the revenue derived from service/AMC The next item of revenue is the revenue derived from service/AMC charges amounting to Rs.35 crores. It is the case of the asse charges amounting to Rs.35 crores. It is the case of the asse charges amounting to Rs.35 crores. It is the case of the assessee that such AMC charges are directly relatable to the business carried on by the such AMC charges are directly relatable to the business carried on by the such AMC charges are directly relatable to the business carried on by the assessee of manufacturing commercial vehicles in order to ensure that assessee of manufacturing commercial vehicles in order to ensure that assessee of manufacturing commercial vehicles in order to ensure that the vehicles supplied remain defect free and function not only for the the vehicles supplied remain defect free and function not only for the the vehicles supplied remain defect free and function not only for the committed warranty but also dur committed warranty but also during the lifetime of the product. The ing the lifetime of the product. The Revenue however has contended that such service charges cannot be said Revenue however has contended that such service charges cannot be said Revenue however has contended that such service charges cannot be said to be derived from the eligible business. Having considered the impugned to be derived from the eligible business. Having considered the impugned to be derived from the eligible business. Having considered the impugned issue, we find that this identical claim had come up before the Chandigarh issue, we find that this identical claim had come up before the Chandigarh issue, we find that this identical claim had come up before the Chandigarh Bench of this Tribunal in the case of Bench of this Tribunal in the case of Spray Engineering Devices Spray Engineering Devices Limited (supra) wherein, this Tribunal, following the decision of the wherein, this Tribunal, following the decision of the wherein, this Tribunal, following the decision of the Hon’ble Himachal Pradesh High Court, in the assessee’s own case has Hon’ble Himachal Pradesh High Court, in the assessee’s own case has Hon’ble Himachal Pradesh High Court, in the assessee’s own case has allowed the deduction u/s 80 allowed the deduction u/s 80-IC on AMC charges receive IC on AMC charges received by the assessee. The relevant observations of the Tribunal reads as under: assessee. The relevant observations of the Tribunal reads as under: assessee. The relevant observations of the Tribunal reads as under:-

“52. The assessee has furnished on record communication with certain 52. The assessee has furnished on record communication with certain 52. The assessee has furnished on record communication with certain customers to whom it had supplied the cooling and condensing systems customers to whom it had supplied the cooling and condensing systems customers to whom it had supplied the cooling and condensing systems and Annual Maintenance Contract (AMC) of and Annual Maintenance Contract (AMC) of the said systems were to be the said systems were to be carried out by the assessee at negotiated terms and conditions. The carried out by the assessee at negotiated terms and conditions. The carried out by the assessee at negotiated terms and conditions. The claim of the assessee was that it was providing AMC to only such cooling claim of the assessee was that it was providing AMC to only such cooling claim of the assessee was that it was providing AMC to only such cooling and condensing systems, which were manufactured by it and supplied to and condensing systems, which were manufactured by it and supplied to and condensing systems, which were manufactured by it and supplied to the customers as the customers as the systems provided by the assessee were client the systems provided by the assessee were client based, depending on the size of the sugar mill and type of the existing based, depending on the size of the sugar mill and type of the existing based, depending on the size of the sugar mill and type of the existing sugar mill. The total AMC charges received by the assessee during the sugar mill. The total AMC charges received by the assessee during the sugar mill. The total AMC charges received by the assessee during the year were Rs.37,75,423/ year were Rs.37,75,423/-. We find that the Hon'ble Himachal Prad . We find that the Hon'ble Himachal Pradesh High Court in assessee's own case in of 2006 vide decision High Court in assessee's own case in of 2006 vide decision High Court in assessee's own case in ITA No.39 of 2006 vide decision dated 7.11.2009 had held that the words 'derived from' in section 80IB dated 7.11.2009 had held that the words 'derived from' in section 80IB dated 7.11.2009 had held that the words 'derived from' in section 80IB of the Act were much narrower in connotation as compared to the words of the Act were much narrower in connotation as compared to the words of the Act were much narrower in connotation as compared to the words 'attributable to'. It was further laid dow 'attributable to'. It was further laid down that The Industrial Undertaking n that The Industrial Undertaking would be entitled to claim deductions under Section 80 would be entitled to claim deductions under Section 80- -IB only if it shows that the profit is derived from the business of such Industrial shows that the profit is derived from the business of such Industrial shows that the profit is derived from the business of such Industrial Undertaking. The income should be derived from the operational profits Undertaking. The income should be derived from the operational profits Undertaking. The income should be derived from the operational profits of the business and the source of income should be business itself. The ess and the source of income should be business itself. The ess and the source of income should be business itself. The Hon'ble High Court after laying down the above said principles held that Hon'ble High Court after laying down the above said principles held that Hon'ble High Court after laying down the above said principles held that the assessee was entitled to claim deduction under section 80IB of the the assessee was entitled to claim deduction under section 80IB of the the assessee was entitled to claim deduction under section 80IB of the Act on MODVAT credit and also erection and commissio Act on MODVAT credit and also erection and commissioning charges, ning charges, being directly relatable to the business and the source of the income being directly relatable to the business and the source of the income being directly relatable to the business and the source of the income being business itself. The Hon'ble High Court further held that When the being business itself. The Hon'ble High Court further held that When the being business itself. The Hon'ble High Court further held that When the assessee is engaged in the business of manufacture, the work assessee is engaged in the business of manufacture, the work assessee is engaged in the business of manufacture, the work 'manufacture' cannot be read so narrow 'manufacture' cannot be read so narrowly so as to limit the amount only ly so as to limit the amount only to the price of the goods sold. If the manufacturer is required by the to the price of the goods sold. If the manufacturer is required by the to the price of the goods sold. If the manufacturer is required by the customer to erect and commission the machinery the amount received customer to erect and commission the machinery the amount received customer to erect and commission the machinery the amount received by it on this count is income derived from the business itself and by it on this count is income derived from the business itself and by it on this count is income derived from the business itself and therefore eligible for deduction under Section 80 e for deduction under Section 80-IB.

5.8 We further note that, the Hon’b We further note that, the Hon’ble Bombay High Court in the case of le Bombay High Court in the case of CIT vs International Data Management Limited (261 ITR CIT vs International Data Management Limited (261 ITR CIT vs International Data Management Limited (261 ITR 177) has also held that, where the assessee derives income from rendering service also held that, where the assessee derives income from rendering service also held that, where the assessee derives income from rendering service and maintenance facilities to its clients in relation to the product supplied, and maintenance facilities to its clients in relation to the product supplied, and maintenance facilities to its clients in relation to the product supplied, then such service charges are entitled to deduction u/s 80 such service charges are entitled to deduction u/s 80 such service charges are entitled to deduction u/s 80-I of the Act.

The relevant observations of the Hon’ble High Court, taken note of by us, The relevant observations of the Hon’ble High Court, taken note of by us, The relevant observations of the Hon’ble High Court, taken note of by us, is as follows:-

“According to the Assessing Officer, receipts by way of service and According to the Assessing Officer, receipts by way of service and According to the Assessing Officer, receipts by way of service and maintenance charges have been maintenance charges have been included in profits derived from included in profits derived from manufacturing operations. That these receipts cannot form part of manufacturing operations. That these receipts cannot form part of manufacturing operations. That these receipts cannot form part of profits derived from industrial undertaking. Therefore, the Assessing profits derived from industrial undertaking. Therefore, the Assessing profits derived from industrial undertaking. Therefore, the Assessing Officer excluded receipt of service charges and maintenance charges Officer excluded receipt of service charges and maintenance charges Officer excluded receipt of service charges and maintenance charges from the eligible p from the eligible profits. In this case, the assessee is engaged in the rofits. In this case, the assessee is engaged in the business of manufacture and sale of business of manufacture and sale of data processing cards, ribbons and processing cards, ribbons and mini micro-based systems. It is also a dealer in computer software and based systems. It is also a dealer in computer software and based systems. It is also a dealer in computer software and computer hardware. This finding is also recorded by the Tribu computer hardware. This finding is also recorded by the Tribu computer hardware. This finding is also recorded by the Tribunal in its orders for the earlier years. The assessee derives income as it renders orders for the earlier years. The assessee derives income as it renders orders for the earlier years. The assessee derives income as it renders service and maintenance facility to its clients for which it charges service service and maintenance facility to its clients for which it charges service service and maintenance facility to its clients for which it charges service and maintenance charges. Therefore, there is a direct nexus between and maintenance charges. Therefore, there is a direct nexus between and maintenance charges. Therefore, there is a direct nexus between the impugned receipts and th the impugned receipts and the main business activity of the assessee. e main business activity of the assessee. This is a finding of fact also recorded by the Tribunal. We do not see any This is a finding of fact also recorded by the Tribunal. We do not see any This is a finding of fact also recorded by the Tribunal. We do not see any reason to interfere with this finding of fact. Accordingly, we answer the reason to interfere with this finding of fact. Accordingly, we answer the reason to interfere with this finding of fact. Accordingly, we answer the question in the affirmative, i.e., in favour of the assessee and question in the affirmative, ., in favour of the assessee and against the Department.” ”

5.9 Likewise, we find that the Hon’ble Gauhati High Court also in the Likewise, we find that the Hon’ble Gauhati High Court also in the Likewise, we find that the Hon’ble Gauhati High Court also in the case of Torsa Machines Ltd. vs CIT (389 ITR 377) Torsa Machines Ltd. vs CIT (389 ITR 377), has held that the , has held that the revenue from service charges is derived from the manufacturing activities revenue from service charges is derived from the manufacturing activities revenue from service charges is derived from the manufacturing activities of the eligible unit and thus was entitled for deduction u/s 80 t and thus was entitled for deduction u/s 80 t and thus was entitled for deduction u/s 80-IC of the Act. Respectfully following the decisions cited (supra), Respectfully following the decisions cited (supra), we hold that the we hold that the assessee is entitled to deduction u/s 80 assessee is entitled to deduction u/s 80-IC on the AMC charges. IC on the AMC charges.

5.10 In relation to the revenue of Rs.18.50 crores derived from In relation to the revenue of Rs.18.50 crores derived from In relation to the revenue of Rs.18.50 crores derived from sale of scrap, it was brought to our notice that the scrap, it was brought to our notice that the foregoing receipts were foregoing receipts were generated from the operations of the generated from the operations of the eligible industrial undertaking industrial undertaking.

Understandably, in any manufacturing operation, particularly that of Understandably, in any manufacturing operation, particularly that of Understandably, in any manufacturing operation, particularly that of vehicles in the present case, certain scrap materials are generated, which vehicles in the present case, certain scrap materials are generated, which vehicles in the present case, certain scrap materials are generated, which have saleable value. According to us, it would be improper to say that have saleable value. According to us, it would be improper to say that have saleable value. According to us, it would be improper to say that such scrap has no direct link or nexus such scrap has no direct link or nexus with the manufacturing operations with the manufacturing operations of the eligible business. of the eligible business. According to us therefore, revenue derived from According to us therefore, revenue derived from sale of scrap materials is sale of scrap materials is includible while working out the profits of the includible while working out the profits of the eligible unit. Our view finds support from the decision of eligible unit. Our view finds support from the decision of eligible unit. Our view finds support from the decision of the Hon'ble Calcutta High Court in the case of lcutta High Court in the case of Reckitt Benckiser India Ltd Vs ACIT Reckitt Benckiser India Ltd Vs ACIT (231 Taxman 585) and and Hon'ble Delhi High Court in the case of Hon'ble Delhi High Court in the case of CIT Vs Sadhu Forgings Ltd (11 taxmann.com 322) Sadhu Forgings Ltd (11 taxmann.com 322). Gainful reference may . Gainful reference may also be made to the the following findings rendered by following findings rendered by the Hon'ble jurisdictional Madras High Court in the case of Madras High Court in the case of Fenner India Ltd Vs Fenner India Ltd Vs ACIT (125 Taxman 386) ACIT (125 Taxman 386), which are as follows:-

"13. As already stated, in the industrial undertaking in the manufacture "13. As already stated, in the industrial undertaking in the manufacture "13. As already stated, in the industrial undertaking in the manufacture of V-Belts, oil seals, O Belts, oil seals, O-Rings and rubber moulded products, ce Rings and rubber moulded products, certain scrap materials resulted in, which has a saleable value. To say that the scrap materials resulted in, which has a saleable value. To say that the scrap materials resulted in, which has a saleable value. To say that the scrap materials has no direct link or nexus with the industrial undertaking materials has no direct link or nexus with the industrial undertaking materials has no direct link or nexus with the industrial undertaking cannot be at all be expected or commend acceptance, especially, on the cannot be at all be expected or commend acceptance, especially, on the cannot be at all be expected or commend acceptance, especially, on the facts and in the circumstances facts and in the circumstances of the case. For the sake of emphasis, we of the case. For the sake of emphasis, we may say that the scrap materials come within the manufacturing process may say that the scrap materials come within the manufacturing process may say that the scrap materials come within the manufacturing process of the industrial undertaking in the manufacture of certain products such of the industrial undertaking in the manufacture of certain products such of the industrial undertaking in the manufacture of certain products such as V-Belts, oil seals, O Belts, oil seals, O-Rings and certain rubber moulded products, Rings and certain rubber moulded products, etc. In this view of the matter, we are of the view that profits and gains from In this view of the matter, we are of the view that profits and gains from In this view of the matter, we are of the view that profits and gains from the sale of scrap materials is eligible to deduction in an amount equal to the sale of scrap materials is eligible to deduction in an amount equal to the sale of scrap materials is eligible to deduction in an amount equal to twenty per cent under S. 80HH, inasmuch as such gains or profits are twenty per cent under S. 80HH, inasmuch as such gains or profits are twenty per cent under S. 80HH, inasmuch as such gains or profits are derived from the industrial unde derived from the industrial undertaking and includible in the gross total rtaking and includible in the gross total income of the assessee and the question relatable to the profit on the income of the assessee and the question relatable to the profit on the income of the assessee and the question relatable to the profit on the sale of scrap is thus answered in favour of the assessee." sale of scrap is thus answered in favour of the assessee."

5.11 In view of the above therefore, the AO is directed to include the In view of the above therefore, the AO is directed to include the In view of the above therefore, the AO is directed to include the revenues derived from sale of scrap of Rs.18.50 crores while working out ved from sale of scrap of Rs.18.50 crores while working out ved from sale of scrap of Rs.18.50 crores while working out the deduction of the eligible Pantnagar Unit u/s 80 the deduction of the eligible Pantnagar Unit u/s 80-IC of the Act. IC of the Act.

5.12 The next item of revenue is the recovery of the freight charges from The next item of revenue is the recovery of the freight charges from The next item of revenue is the recovery of the freight charges from the customers which was incurred on their behalf amounting to Rs. 49.8 the customers which was incurred on their behalf amounting to Rs. 49.8 the customers which was incurred on their behalf amounting to Rs. 49.8 crores. It was brought to our notice that, the assessee incurs freight cost crores. It was brought to our notice that, the assessee incurs freight cost crores. It was brought to our notice that, the assessee incurs freight cost in the course of manufacture and sale of in the course of manufacture and sale of its commercial vehicles, which is its commercial vehicles, which is recovered from the customers. The Ld. AR showed us that the freight recovered from the customers. The Ld. AR showed us that the freight recovered from the customers. The Ld. AR showed us that the freight costs was debited in the standalone accounts of the eligible unit at costs was debited in the standalone accounts of the eligible unit at costs was debited in the standalone accounts of the eligible unit at Pantnagar and therefore, the recovery of such freight cost from the Pantnagar and therefore, the recovery of such freight cost from the Pantnagar and therefore, the recovery of such freight cost from the customers which was shown by way of separate credit in the standalone was shown by way of separate credit in the standalone was shown by way of separate credit in the standalone accounts, effectively went on to reduce the overall freight cost of the accounts, effectively went on to reduce the overall freight cost of the accounts, effectively went on to reduce the overall freight cost of the eligible unit. According to the Ld. AR, only because the freight recoveries eligible unit. According to the Ld. AR, only because the freight recoveries eligible unit. According to the Ld. AR, only because the freight recoveries have been shown on the credit side of the standalone a have been shown on the credit side of the standalone accounts, cannot be ccounts, cannot be reason to hold that it was not intrinsically linked to the eligible business. reason to hold that it was not intrinsically linked to the eligible business. reason to hold that it was not intrinsically linked to the eligible business.

On the other hand, the Ld. CIT, DR argued that the recoveries of freight On the other hand, the Ld. CIT, DR argued that the recoveries of freight On the other hand, the Ld. CIT, DR argued that the recoveries of freight cost did not arise from the manufacturing operations of the eligible unit cost did not arise from the manufacturing operations of the eligible unit cost did not arise from the manufacturing operations of the eligible unit and therefore cannot be said to be ‘derived’ from the eligible business. e cannot be said to be ‘derived’ from the eligible business. e cannot be said to be ‘derived’ from the eligible business.

5.13 Having considered the rival submissions, we are in agreement with Having considered the rival submissions, we are in agreement with Having considered the rival submissions, we are in agreement with the Ld. AR that the freight recovered by the assessee was towards the the Ld. AR that the freight recovered by the assessee was towards the the Ld. AR that the freight recovered by the assessee was towards the freight cost incurred in the course of manufacture an freight cost incurred in the course of manufacture an freight cost incurred in the course of manufacture and supply of commercial vehicles, which had already been debited to the standalone commercial vehicles, which had already been debited to the standalone commercial vehicles, which had already been debited to the standalone accounts of the eligible unit. Accordingly, the freight recoveries in a way accounts of the eligible unit. Accordingly, the freight recoveries in a way accounts of the eligible unit. Accordingly, the freight recoveries in a way has reduced its overall burden of freight cost. Hence, in that view of the has reduced its overall burden of freight cost. Hence, in that view of the has reduced its overall burden of freight cost. Hence, in that view of the matter, it would be imp matter, it would be imprudent to hold that the freight cost is relatable to rudent to hold that the freight cost is relatable to the operations of the eligible business and is therefore required to be the operations of the eligible business and is therefore required to be the operations of the eligible business and is therefore required to be deducted while computing the eligible profits, but at the same time, the deducted while computing the eligible profits, but at the same time, the deducted while computing the eligible profits, but at the same time, the freight recoveries cannot be treated as part of the same e freight recoveries cannot be treated as part of the same eligible business. ligible business.

In this regard, we find that the decision of this Tribunal at Chandigarh in In this regard, we find that the decision of this Tribunal at Chandigarh in In this regard, we find that the decision of this Tribunal at Chandigarh in the case of ACIT vs Nalagarh Steel Rolling Mill Pvt. Ltd. (ITA No. ACIT vs Nalagarh Steel Rolling Mill Pvt. Ltd. (ITA No. ACIT vs Nalagarh Steel Rolling Mill Pvt. Ltd. (ITA No. 93/Chd/2013) dated 02.08.2013 93/Chd/2013) dated 02.08.2013 to be squarely applicable to the facts to be squarely applicable to the facts of the present case wherei of the present case wherein, the recovery of freight cost was held to be n, the recovery of freight cost was held to be relatable to the eligible business and therefore considered for the relatable to the eligible business and therefore considered for the relatable to the eligible business and therefore considered for the purposes of computing deduction u/s 80 purposes of computing deduction u/s 80-IC of the Act. The relevant IC of the Act. The relevant findings of this Tribunal read as under: findings of this Tribunal read as under:-

“7. After considering the rival 7. After considering the rival submissions, we find that this issue has submissions, we find that this issue has been adjudicated by Ld. CIT(A) in para 3.2, which is as under: been adjudicated by Ld. CIT(A) in para 3.2, which is as under: been adjudicated by Ld. CIT(A) in para 3.2, which is as under:-

3.2 I have considered the submission of the Ld. Counsel. The freight 3.2 I have considered the submission of the Ld. Counsel. The freight 3.2 I have considered the submission of the Ld. Counsel. The freight charges shown by the appellant as income are, in fact, freight charges shown by the appellant as income are, in fact, freight charges shown by the appellant as income are, in fact, freight reimbursement again reimbursement against which expenses have been debited to the st which expenses have been debited to the profit and loss account. Freights are in relation to the purchase of profit and loss account. Freights are in relation to the purchase of profit and loss account. Freights are in relation to the purchase of raw materials and sale of finished goods and it is seen the fright raw materials and sale of finished goods and it is seen the fright raw materials and sale of finished goods and it is seen the fright charges charges charges are are are included included included in in in the the the sale sale sale bill. bill. bill. Only Only Only because because because the the the reimbursement have be reimbursement have been shown on the credit side of the profit and en shown on the credit side of the profit and loss account, it does not alter the nature of transactions. The net loss account, it does not alter the nature of transactions. The net loss account, it does not alter the nature of transactions. The net effect of freight charges being expenditure, disallowance u/s 80IC of effect of freight charges being expenditure, disallowance u/s 80IC of effect of freight charges being expenditure, disallowance u/s 80IC of the Act should not have been made. Hence, the disallowance of the Act should not have been made. Hence, the disallowance of the Act should not have been made. Hence, the disallowance of deduction u/s 80IC of the Act on freight charges is deleted. u/s 80IC of the Act on freight charges is deleted. u/s 80IC of the Act on freight charges is deleted.

5.14 Gainful reference in this regard may also be made to the decision of Gainful reference in this regard may also be made to the decision of Gainful reference in this regard may also be made to the decision of the Hon’ble Supreme Court in the case of the Hon’ble Supreme Court in the case of CIT vs Meghalaya Steels CIT vs Meghalaya Steels Limited (238 taxman 559) Limited (238 taxman 559)wherein, the freight subsidy received from wherein, the freight subsidy received from the Government, which were essentially reimbursements t the Government, which were essentially reimbursements t the Government, which were essentially reimbursements towards the freight costs incurred at the industrially backward districts, was held to be freight costs incurred at the industrially backward districts, was held to be freight costs incurred at the industrially backward districts, was held to be directly linked to the eligible business and hence allowed as deduction u/s directly linked to the eligible business and hence allowed as deduction u/s directly linked to the eligible business and hence allowed as deduction u/s 80-IC of the Act. In our considered view, the ratio decidendi laid down in IC of the Act. In our considered view, the ratio decidendi laid down in IC of the Act. In our considered view, the ratio decidendi laid down in this judgment qua the freight subsidy would apply with equal force to the a the freight subsidy would apply with equal force to the a the freight subsidy would apply with equal force to the recovery of freight costs by the assessee from its customers, in the recovery of freight costs by the assessee from its customers, in the recovery of freight costs by the assessee from its customers, in the present case. Accordingly, the AO is directed to consider the freight cost present case. Accordingly, the AO is directed to consider the freight cost present case. Accordingly, the AO is directed to consider the freight cost recoveries of Rs.49.80 crores for the purposes of comp recoveries of Rs.49.80 crores for the purposes of computing deduction u/s uting deduction u/s 80-IC of the Act.

5.15 Now on the issue as to whether the interest income of Rs.8.13 Now on the issue as to whether the interest income of Rs.8.13 Now on the issue as to whether the interest income of Rs.8.13 crores is includable or not for computing deduction u/s 80 crores is includable or not for computing deduction u/s 80 crores is includable or not for computing deduction u/s 80-IC of the Act, we find that the action of lower authorities is squarely supported by the we find that the action of lower authorities is squarely supported by the we find that the action of lower authorities is squarely supported by the decision of the Hon'ble he Hon'ble jurisdictional Madras High Court in the case of Court in the case of Fenner (India) Ltd (supra) Fenner (India) Ltd (supra) wherein it was held as under: held as under:

"14. The other part of the question is relatable to the interest earned by "14. The other part of the question is relatable to the interest earned by "14. The other part of the question is relatable to the interest earned by the industrial undertaking. This sort of a question ar the industrial undertaking. This sort of a question ar the industrial undertaking. This sort of a question arose for consideration in the case of CIT v. Pandian Chemicals Ltd. [1998] 147 consideration in the case of CIT v. Pandian Chemicals Ltd. [1998] 147 consideration in the case of CIT v. Pandian Chemicals Ltd. [1998] 147 CTR (Mad) 5: (1996) 10 MTCR 531 : TC S25.2556. The question CTR (Mad) 5: (1996) 10 MTCR 531 : TC S25.2556. The question CTR (Mad) 5: (1996) 10 MTCR 531 : TC S25.2556. The question relatable to the interest raised therein figured as question no. 3 and it relatable to the interest raised therein figured as question no. 3 and it relatable to the interest raised therein figured as question no. 3 and it runs as under: Whether, on the facts and in Whether, on the facts and in the circumstances of the case, the Tribunal the circumstances of the case, the Tribunal was right in holding that the interest on deposit with the Tamil Nadu was right in holding that the interest on deposit with the Tamil Nadu was right in holding that the interest on deposit with the Tamil Nadu

Electricity Board should be treated as income derived from an industrial Electricity Board should be treated as income derived from an industrial Electricity Board should be treated as income derived from an industrial undertaking for the purpose of relief under s. 80HH? undertaking for the purpose of relief under s. 80HH?

5.16 Following the above, we find Following the above, we find no infirmity in the order of the learned no infirmity in the order of the learned CIT(A) confirming the AO’s action of excluding the interest confirming the AO’s action of excluding the interest confirming the AO’s action of excluding the interest income of Rs.8.13 crores, while computing the deduction u/s 80 Rs.8.13 crores, while computing the deduction u/s 80-IC of the Act IC of the Act.

5.17 With regard to other income of Rs.12.47 crores, the Ld. AR for the With regard to other income of Rs.12.47 crores, the Ld. AR for the With regard to other income of Rs.12.47 crores, the Ld. AR for the assessee submitted that this comprised of income earned from marketing assessee submitted that this comprised of income earned from marketing assessee submitted that this comprised of income earned from marketing which was apportioned, similar to which was apportioned, similar to marketing costs debited in the stand marketing costs debited in the stand- alone accounts, on the basis of matching concept of accounting. However, alone accounts, on the basis of matching concept of accounting. However, alone accounts, on the basis of matching concept of accounting. However, no specific details in this regard demonstrating as to how this income was no specific details in this regard demonstrating as to how this income was no specific details in this regard demonstrating as to how this income was intrinsically connected with the operations of eligible unit was brough intrinsically connected with the operations of eligible unit was brough intrinsically connected with the operations of eligible unit was brought before us or that it had a direct bearing on the marketing costs incurred before us or that it had a direct bearing on the marketing costs incurred before us or that it had a direct bearing on the marketing costs incurred by the eligible unit. In our considered view, this particular stream of by the eligible unit. In our considered view, this particular stream of by the eligible unit. In our considered view, this particular stream of marketing income was an marketing income was an independent source of income beyond the independent source of income beyond the first- degree nexus between profits and the i nexus between profits and the industrial undertaking ndustrial undertaking and therefore, the AO had rightly excluded the same while working out the therefore, the AO had rightly excluded the same while working out the therefore, the AO had rightly excluded the same while working out the eligible deduction u/s 80IC of the Act. eligible deduction u/s 80IC of the Act.

5.18 In light of the above findings therefore, the AO is accordingly In light of the above findings therefore, the AO is accordingly In light of the above findings therefore, the AO is accordingly directed to re-compute the turnover of the eligi compute the turnover of the eligible unit for working out ble unit for working out the deduction u/s 80-IC after including the revenues derived from sale of IC after including the revenues derived from sale of IC after including the revenues derived from sale of spares of Rs.126.49 crores, AMC charges of Rs.35 crores, sale of scrap of spares of Rs.126.49 crores, AMC charges of Rs.35 crores, sale of scrap of spares of Rs.126.49 crores, AMC charges of Rs.35 crores, sale of scrap of Rs.18.5 and freight recovery of Rs.49.8 crores. The other items of income Rs.18.5 and freight recovery of Rs.49.8 crores. The other items of income Rs.18.5 and freight recovery of Rs.49.8 crores. The other items of income viz., interest income of Rs.8.13 crores and other marketing income of erest income of Rs.8.13 crores and other marketing income of erest income of Rs.8.13 crores and other marketing income of Rs.12.47 crores shall not be considered for the purposes of Section 80 Rs.12.47 crores shall not be considered for the purposes of Section 80 Rs.12.47 crores shall not be considered for the purposes of Section 80-IC.

With these directions, the AO is directed to accordingly re With these directions, the AO is directed to accordingly re- -work and allow the deduction u/s 80-IC of the Act. Needless IC of the Act. Needless to say, the AO shall afford an to say, the AO shall afford an opportunity of hearing to the assessee before finalizing the computation opportunity of hearing to the assessee before finalizing the computation opportunity of hearing to the assessee before finalizing the computation of deduction u/s 80-IC and shall pass a speaking order in this regard. IC and shall pass a speaking order in this regard. IC and shall pass a speaking order in this regard.

Hence, this ground stands partly allowed. Hence, this ground stands partly allowed.

Order pronounced on the 12th day of February, 2025, in Chennai. Order pronounced on the , in Chennai.