M/S SARASWATI DYNAMICS,ROORKEE vs. ADDL. CIT, HARIDWAR

3.1 The Assessing Officer called for the details from the assessee and confronted the assessee to explain as to how it is entitled for deduction u/s 80IC since such service charges are not derived from the eligible business. Rejecting the various explanations given by the assessee, the Assessing Officer rejected the claim of 80IC deduction on such AMC charges.

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“1.9 If the assessee’s contentions were accepted, the dividing line between the terms ‘derived from’ and ‘attributable to’ would get wide out. Since these are two different terms with clearly distinguishable connotations, it is held that the profit eligible for the deduction in question is only that which arises directly from the manufacturing operations of the assessee and not from secondary activities (such as servicing) or from application of income derived from manufacturing activity (such as interest income) or other income which is incidental to the operation of business (such as insurance claim) or income which has nothing to do with the business (such as gains on sale of land).

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1.10 Having held that the profit from service charges is taxable, the next step would be to look at its quantification. The assessee has not maintained any distinction in its accounts between the direct expenditure incurred on free services and that incurred on paid service. Similarly, there is no such distinction in respect of the indirect expenses also. Hence, the profit from servicing has to be estimated. The AO ignored expenditure on parts and on travelling outright and allowed expenditure on salary, wages and rent fully while estimating such profit. In my considered opinion, this approach is not correct. The assessee has to incur expenditure on parts and travelling in connection with paid servicing just as it has to incur expenditure on salary and wages and rent in connection with free servicing. Hence, appropriate allocation of these expenses has to be made between these two components. In the absence of the relevant information (which could be provided by the assessee only), I would apply the thumb rule and allocate the entire quantum of expenditure relating to service equally between the chargeable part and free part of servicing. By this logic, the deductible direct expenditure works out to Rs.12,87,585/-. As regards indirect expenditure, the profit and loss account of the assessee shows the following indirect expenses.

Administrative and other expenses 12285253 Selling and distribution expenses 5962532 Financial charges 3040479 Depreciation 3349558 Total 24637822

Considering that service charges constituted 5.70% of sales, the same percentage of the indirect expenses may be taken as incurred towards income by way of service charges. This amount comes to Rs.2,43,245/-. Thus, the income by way of service charges may be recomputed as below :

Receipt of service charges 4267468 Less Direct expenses 1287585 Indirect expenses 243245 1530830 Profit from servicing 2736638

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The assessee thus gets relief of Rs.6,82,022/- in computation of profit from servicing of equipment. The other items of income taken by the AO remain unchanged. The AO will recompute the taxable income and tax payable accordingly.”

Aggrieved by such order of learned CIT(A), the assessee is in appeal before us.

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“52. The assessee has furnished on record communication with certain customers to whom it had supplied the cooling and condensing systems and Annual Maintenance Contract (AMC) of the said systems were to be 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 and condensing systems, which were manufactured by it and supplied to the customers as the systems provided by the assessee were client 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 year were Rs.37,75,423/-. We find that the Hon’ble Himachal Pradesh High Court in assessee’s own case in of 2006 vide decision 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 ‘attributable to’. It was further laid down that The Industrial Undertaking 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 undertaking. The income should be derived from the operational profits of the business and the source of income should be business itself. The 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 Act on MODVAT credit and also erection and commissioning charges, 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 assessee is engaged in the business of manufacture, the work ‘manufacture’ cannot be read so narrowly so as to limit the amount only to the price of the goods sold. If the manufacturer is required by the customer to erect and commission the machinery the amount received by it on this count is income derived from the business itself and therefore eligible for deduction under Section 80-IB.

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“Question No.6 :

“6. Whether, on the facts and in the circumstances of the case, and in law and without prejudice to the above, the assessee is not entitled to deduction under section 80-I on merits as the assessee’s income from service charges, maintenance revenue and lease rent cannot be treated as income derived from industrial undertaking within the meaning of section 80-I?”

Under section 80-I(1), special deduction is given in respect of profits and gains derived from industrial undertaking. According to the Assessing Officer, receipts by way of service and maintenance charges have been included in profits derived from manufacturing operations. That these receipts cannot form part of profits derived from industrial undertaking. Therefore, the Assessing Officer excluded receipt of service charges and maintenance charges from the eligible profits. In this case, the assessee is engaged in the business of manufacture and sale of data processing cards, ribbons and mini micro-based systems. It is also a dealer in computer software and computer hardware. This finding is also recorded by the Tribunal in its orders for the earlier years. The assessee derives income as it renders service and maintenance facility to its clients for which it charges service and maintenance charges. Therefore, there is a direct nexus between the impugned receipts and the main business activity of the assessee. 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 question in the affirmative, i.e., in favour of the assessee and against the Department.”

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ITA No.4376/Del/2011 (AY : 2007 (AY : 2007-08) 08) :- ITA No.4376/Del/2011 ITA No.4376/Del/2011 (AY : 2007 (AY : 2007 08) 08) 12. After hearing both sides, we find the grounds raised by the assessee in this appeal are identical to the grounds raised by it in 2006-07. We have already decided the issue by holding that the assessee is entitled to claim deduction u/s 80IC of the Act on the AMC charges received by it. Following the same reasoning, the grounds raised by the assessee in this appeal are also allowed.