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Income Tax Appellate Tribunal, IN THE INCOME TAX APPELLATE TRIBUNAL
Before: SHRI BEFORE SHRI R.K. PANDAR.K. PANDAR.K. PANDA & R.K. PANDA & AND & MS. SUCHITRA KAMBLE
PER R.K. PANDA, AM PER R.K. PANDA, AM :- PER R.K. PANDA, AM PER R.K. PANDA, AM
The above two appeals filed by the assessee are directed against the separate orders dated 13th December, 2010 and 1st July, 2011 of learned CIT(A)-1, Dehradun relating to assessment year 2006-07 and 2007-08 respectively. Since identical issues are involved in both these appeals, therefore, these were heard together and are being disposed of by this common order.
The only issue raised by the assessee in the grounds of appeal of both the appeals relates to denial of deduction under Section 80IC of the Income-tax Act, 1961 on the income on account of service charges.
2 ITA-1563 & 4376/D/2011 ITA No.1563/Del/2011 (AY : 2006 ITA No.1563/Del/2011 (AY : 2006 (AY : 2006-07) (AY : 2006 07) 07) :- 07)
The facts of the case in brief are that the assessee is a company engaged in the business of production of electronic system/machines and equipments as per customers’ varying specifications. It filed its return of income on 30th November, 2006 declaring nil income. During the course of assessment proceedings, the Assessing Officer observed that the assessee company has received an amount of `42,67,468/- as service charges on which deduction u/s 80IC has been claimed. On being questioned by the Assessing Officer, it was explained by the assessee that the service charges are related to services related to AMC of the products and for the services provided after the warranty period is over. It was submitted that the earning of service charge is in consequence and subsequent to the manufacturing of the equipment having been sold by the company during the course of business and received from the customers who do not opt for AMC and should the equipments sold required maintenance or repair of fault, for which, as a provision for after sales service AMC. Therefore, earning of the service charges is the direct result of the manufacture and its subsequent sale of equipment by the company and, therefore, cannot be bifurcated for the limited purpose of not allowing as revenue qualified for the purpose of claim u/s 80IC of the Act.
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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Before learned CIT(A), the assessee, relying on various decisions, submitted that it is entitled to deduction u/s 80IC on such AMC charges. It was argued that for claiming such deduction u/s 80IC of the Act, the profits and gains should be derived by the industrial undertaking. It is not necessary that the income should be derived from the manufacturing activity alone. It was further argued that servicing is just an extension and part and parcel of its manufacturing activity. The assessee manufactures equipments for its customers and sells the same to the latter. Under the contract of sales, the assessee gives a year’s warranty which means that if the equipment has any manufacturing defect or malfunctions, it is incumbent upon the assessee to remove such defect at its own cost. Therefore, the servicing or repair and maintenance of the equipments done during the warranty period can be taken as part and parcel of the contract for sale. It was accordingly argued that the assessee is entitled to deduction u/s 80IC of the Act on account of AMC charges.
However, learned CIT(A) was also not satisfied with the arguments advanced by the assessee and upheld the action of the Assessing Officer with minor relief to the assessee, by observing as under :-
“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.
Learned counsel for the assessee, referring to the decision of Chandigarh Bench of the Tribunal in the case of ACIT Vs. Spray Engineering Devices Ltd. – [2012] 53 SOT 0070, submitted that identical issue had come up before the Tribunal and, the Tribunal, relying on various decisions in paragraph 53 of the order, has held that AMC charges received by the assessee are directly relatable to the business carried on by the assessee of manufacturing, commissioning and erection of cooling system and consequently, the assessee is eligible for claim of deduction u/s 80IB/80IC of the Act. Referring to the decision of Hon’ble Bombay High Court in the case of CIT Vs. International Data Management Ltd. – [2003] 261 ITR 177, he submitted that Hon’ble Bombay High Court in the said decision has held that where the assessee derived income as it rendered service and maintenance facility to its clients for which it charged service and maintenance charges, there was a direct nexus between the receipts from rendering services and maintenance facility to its clients and lease rent and the main business activity of the assessee. Therefore, the assessee was entitled to deduction u/s 80I in respect of that income. He, accordingly, submitted that in view of the above two decisions, the AMC charges received by the assessee are eligible for deduction u/s 80IC of the Act.
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Learned DR, on the other hand, heavily relied on the order of the learned CIT(A). He submitted that since annual maintenance charges are not derived from the eligible business of the assessee, therefore, the Assessing Officer was fully justified in denying the benefit of deduction u/s 80IC of the Act.
We have considered the rival arguments made by both the sides, perused the orders of the Assessing Officer and learned CIT(A) and the paper book filed on behalf of the assessee. We have also considered the various decisions cited before us. We find that the only issue to be decided in the impugned appeal is regarding the eligibility of the assessee to claim deduction u/s 80IC on account of the AMC charges. It is the case of the Revenue that such service charges are not derived from the eligible business and, therefore, the assessee is not entitled to deduction u/s 80IC. It is the case of the assessee that such AMC charges are directly relatable to the business carried on by the assessee of manufacturing, commissioning and erection of electronic systems, machines and equipments as per customers’ varying specifications and, therefore, such AMC charges are directly relatable to the business carried on by the assessee.
We find merit in the above argument of the learned counsel for the assessee. We find identical issue had come up before Chandigarh Bench of the Tribunal in the case of Spray Engineering Devices Ltd. (supra). We find the Tribunal, following the decision of Hon’ble Himachal Pradesh High Court in assessee’s own case, has allowed the claim of deduction u/s 80IC on annual maintenance charges received by the assessee. The relevant observation of the Tribunal at paragraph Nos.52 & 53 reads as under :-
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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.
Following the above said parity of reasoning and in view of the factual aspect brought on record by the assessee, we hold that AMC charges received by the assessee are directly relatable to the business carried on by the assessee of manufacturing, commissioning and erection of cooling system and consequently the assessee is eligible to the claim of deduction u/s 80IB/80IC of the Act. Ground No.3 raised by the assessee is allowed.”
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We find the Hon’ble Bombay High court in the case of International Data Management Ltd. (supra) has held that the assessee is entitled to deduction u/s 80I on its income from service charges, maintenance revenue and lease rent. The relevant observation of Hon’ble High Court at page 184 reads as under :-
“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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Respectfully following the decisions cited supra, we hold that the assessee is entitled to deduction u/s 80IC on the AMC charges. The grounds of appeal raised by the assessee are accordingly allowed.
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.
In the result, both the appeals of the assessee are allowed. Decision pronounced in the open Court on 26.05.2017.