M/S BROOKS LABORATORIES LTD vs. INCOME TAX OFFICER, PANCHKULA

आदेश/Order PER ANNAPURNA GUPTA, A.M. : The present appeal has been filed by the assessee against the order of the Commissioner of Income Tax (Appeals), Panchkula in short CIT (Appeals) dated 26.5.2016 passed u/s 250 (6) of the Income Tax At, 1961 (hereinafter referred to as ‘Act’) 2 The grounds raised by the assessee are as under:

Income from Other Sources which is highlyunjustified and uncalled for. 3. That on the basis of facts & circumstances of the case, the Ld. CIT (A) has erred in upholding addition of Rs. 72,523/- on account of Product Approval treating the same as Income from Other Sources which is highly unjustified and uncalled for. 4. That on the basis of facts & circumstances of the case, the Ld.CIT(A) has erred in not allowing deduction u/s. 80-IC on interest income, excise duty refund and Product Approval which is highly unjustified and uncalled for. 5. That the appellant craves leave for any addition, deletion or amendment in the grounds of appeal on or before the disposal of the same.”

action of the CIT(Appeals) in upholding the following

additions made by the Assessing Officer by treating them as

income from other source and thereby denying deduction

u/s 80IC on the same:

1) Interest Income Rs.8,24,841/-

2) Excise Duty Refund Rs.2,39,492/-

3) Product Approval Rs.72,523/-

treated the above income as exempt u/s 80IC of the Act. The

Assessing Officer denied the assessee’s claim holding that

such income earned was not from manufacturing activity but

constituted independent source of income beyond the first

degree nexus between profits and industrial undertaking.

He, therefore, treated the said incomes as taxable under the

head income from other source on which deduction u/s 80IC

of the Act was not allowable and made addition on the same

to the income of the assessee.

Ld.CIT(Appeals) where the assessee contended that the all

incomes were derived/related to the manufacturing activity

of the assessee and were thus eligible for deduction u/s

80IC. The contention of the assessee did not find favour with

the Ld.CIT(Appeals) who upheld the addition made by the

Assessing Officer.

contentions made before the CIT(Appeals). Taking first the

issue of interest income earned of Rs.8,24,841/-, Ld.

counsel for assessee submitted that the same was on

account of interest received from the bank on account of

margin money kept with the bank in the form of fixed deposit

as security at the time of sanction of various credit facilities

like Letter of Credit and Bank Guarantee. Our attention was

drawn in this regard to the Copy of Balance Sheet of the

assessee relating to the impugned year placed before us in

the Paper Book at pages 17 to 48. Drawing our attention to

the Schedule-VII of the Balance Sheet containing details of

Current Assets at page No.26, it was pointed out that the

said detail found mention of FDRs being margin money of

Rs.60 lacs and fixed deposit against bank guarantee of Rs.99

lacs. Our attention was also drawn to the Notes on Accounts

forming part of the Balance Sheet at page No.43 and to Point

No.6 of the Notes mentioning the fixed deposits being

pledged as margin money with bank. The said note reads as

under:

“Point No.6 Fixed deposits with bank of Rs.60,99,000.00. Previous Year Rs.78,42,256.00) as pledged as margin money with banks.”

not investment of surplus money but was a business

investment and, therefore, the interest earned thereon was

directly related to the manufacturing activities of the

assessee and thus taxable as business income eligible for

deduction u/s 80IC of the Act. Reliance was placed on the

following decisions in support of his above contentions:

1) CIT Vs. Jagdish Prasad M. Joshi, 318 ITR 420 (Bom) 2) CIT & Anr. Vs. Hajee Jaffar Shariff (2010) 40 DTR 81 3) CIT Vs. Nagpur Engg. Co. Ltd., 245 IUTR 806 4) DCIT Vs. Transpower Pvt. Ltd.,80 ITD 001 8. Alternatively, the assessee contended that the denial of

deduction u/s 80IC should in any case be restricted to the

net interest income earned after setting off interest expenses

incurred on account of the same. As far the claim of

deduction u/s 80IC on the excise duty refund of

Rs.2,39,493/-, Ld. counsel for assessee contended that the

issue now stood settled in favour of the assessee by the

decision of the Hon'ble Apex Court in the case of

CIT,Jammu & Anr vs M/s Shree Balaji Alloys in Civil Appeal

No.10061 of 2001 dt.19-04-2016 ,CIT vs M/s Meghalya

Steels 383 ITR 217 (SC) & the decision of the Hon’ble Delhi

High Court in the case of CIT vs Dharampal Premchand 317

ITR 353(Del) ,SLP against which filed by the department was

dismissed by the Supreme Court. It was pointed out that it

is now settled ,by virtue of the aforesaid decisions, that the

excise duty refund was a capital receipt not exigible to tax

and alternately was to be treated as profits derived from

business ,thus eligible for deduction u/s 80IB of the Act.

Regarding the claim of 80IC on the product approval fee of

Rs.72,523/- received by the assessee, Ld. counsel for

assessee contended that the assessee is engaged in the

manufacturing of pharmaceuticals and for every product

approval has to be obtained from Drug Authorities. It was

pointed that the impugned fees earned by the assessee

represented excess amount recovered from parties on

account of getting the product approved from Drug

Authorities. It was contended that product approval was a

regular requirement before the start of manufacturing of a

product and thus the fees earned was directly related to the

manufacturing activities carried out by the assessee and

thus eligible for deduction u/s 80IC of the Act.

CIT(Appeals). Drawing our attention to the finding of the

CIT(Appeals) leading to the disallowance of interest on the

interest income earned, it was pointed out that the assessee

had itself not claimed identical deduction in the preceding

assessment year i.e. 2010-11 and that interest income

earned was a step removed from the business of industrial

undertaking and thus could not said to be income “derived”

from industrial undertaking. Our attention was drawn to

para 6.2 of the CIT(Appeals)’ Order as under:

6.1 Regarding interest income of Rs.8,24,841/-, it is noted that such interest income has been earned on fixed deposits with the bank. Such interest income was excluded from claim of deduction by the appellant itself in the preceding assessment year 2010-11. However, during the year deduction u/s 80IC has been claimed on the interest income. The interest income is on account of fixed deposits with the bank which is a step removed from the business of the industrial undertaking as decided by Hon'ble Supreme Court in the case of Pandian Chemicals (supra). So, the interest earned on the fixed deposits made with the banks is not an income 'derived from' the industrial undertaking which is basically the profit 'attributable to' the industrial undertaking. So, the interest income of Rs.8,24,841/- earned on the fixed deposits is the income which is beyond the first degree of the manufacturing activity of the appellant. Therefore, the claim of deduction u/s 80IC on interest income of Rs.8,24,841/- is not allowed.” 10. As for the excise duty refund it was pointed that the

same was in the nature of incentives/rebate on purchases

and, therefore, was not in the nature of profit derived from

manufacturing activity of the industrial undertaking. Our

attention was drawn to the findings of the CIT(Appeals) to

para 6.3 and 6.4 of the order as under:

Regarding the excise duty refund of Rs.2,39.4937-, it is noted that the same is in the nature of refund of excise duty paid on purchase of raw material. This is in the nature of incentive/rebate on the purchases which cannot constitute as profit derived from the manufacturing activity of the industrial undertaking. I am in agreement with the AO's reliance on the judgment of Hon'ble Supreme Court in the case of Liberty India (supra) for exclusion of excise duty refund from the DEDUCTION U/S 80IC of the Act. In the case of Liberty India (supra), the Hon'ble Supreme Court found that the export related benefits in the form of duty drawn back receipts do not form part of the net profit of eligible industrial undertaking for the purposes of section 80I/80IA/80IB of the Act. Since, the provisions of section 80IC are similar to the provisions of section 80IA/80IB, therefore, the judgment of Hon'ble Supreme Court is applicable on excise duty refund as the same is not Income derived from the manufacturing activity of the industrial undertaking.

Regarding the appellant's reliance on the judgment of Hon'ble Gauwahti High Court in the case of CIT Vs. Meghalaya Steels Ltd. 356 ITR 235, it is noted that the decision of Hon'ble High Court was on subsidies received by the assessee on account of transport, interest, power and insurance which was in the nature of reimbursement to the assessee for element of cost relating to the manufacture and therefore, the Hon'ble High Court held that there was direct nexus between the profits of assessee’s business and reimbursement of such subsidies. However, the facts of instant case are distinguishable from the facts of aforesaid case as in the appellant’s case the excise duty refund is not in the nature of any reimbursement having direct nexus with the manufacturing. So, the appellant's reliance on the judgment in the case of Meghalaya Steels Ltd. (supra) is misplaced. Rather, I place reliance on the judgment of Hon'ble jurisdictional High Court of Punjab & Haryana in the case of CIT Vs. H.M. Steels Ltd. [2015] 62 taxmann.com 252 wherein the Hon'ble High Court held that assessee was not entitled to the benefit of section 80IC in respect of any rebate or incentive made available to it by Government. In this case, the Hon'ble High Court did not allow the claim of deduction u/s 80IC in respect of sales tax rebate obtained by it, Therefore, in view of the facts of the instant case and the judicial pronouncements of Hon'ble Supreme Court and Hon'ble Punjab & Haryana High Court, I am of the view that the appellant is not entitled for the benefit of section 80IC in respect of excise duty refund obtained from the Government. So, the claim of deduction u/s 80IC on excise duty refund of Rs.2,39,493/- is not allowed. Thus, the ground of appeal is partly allowed.” 11. Regarding the claim of deduction u/s 80IC on product

approval fees earned, it was pointed that the issue was

covered against the assessee by the order of the CIT(Appeals)

in the case of the assessee itself for the preceding

assessment year wherein the CIT(Appeals) had held such

income to not have any direct nexus in the production or

manufacture of the drugs. Our attention was drawn to the

relevant order of the CIT(Appeals) as reproduced in the

present order as under:

“Regarding the product approval fee, it is noted that the appellant applies to drug authorities for the nomenclature etc. of a product as per specific requirement of the customer. The expenses are incurred for such approval and afterward the amount is charged from the customer. Had there been charge of

same amount as expense incurred for such approval, the same would have been in the nature of reimbursement of expense incurred for obtaining approval from drug authorities. However, the appellant has received more amounts from customers and credited under the head 'product approval account'. Such gain does not have any direct nexus in the production or manufacture of the drugs. The production of drugs under generic name and profit derived would be same for all customers irrespective of any specific product name. So, the charge of product approval fee from customer is a step removed from the manufacturing business. Therefore, the gain under the head ‘product approval’ is not ‘profit derived from’ the business rather such gain is in the nature of ‘profit attributable to’ the business.”

of the authorities below and also considered the documents

referred to before us as also the case laws cited before us.

We find merit in the claim of the assessee of deduction u/s

80IC on the interest earned on fixed deposits and excise

duty refund. It is not disputed that the interest earned on

FDRs related to the FDRs kept as security for margin money.

Thus we agree with the ld counsel for the assessee that the

investment in the FDRs was not made on account of any

surplus of idle fund available with the assessee so as to

render the interest income earned from them as not relating

to or having any nexus with the business of the assessee.

The making of FDRs, being a business requirement having

been made to be kept as security for obtaining credit

facilities from banks for the purposes of its business, the

interest income earned thereon, therefore, is clearly directly

related to the business of the industrial undertaking and

thus eligible for deduction u/s 80IC of the Act. The reliance

placed by the ld. Counsel for the assessee in the case of

Jagdish Prasad (supra) is apt wherein it has been held that

interest earned on FDR’s was derived from the business of

industrial undertaking and thus eligible for deduction u/s

80IB of the Act.Since section 80IC is para materia to section

80IB ,both allowing deduction of profits derived from

eligible business of undertaking ,the said decision will apply

in the present case also.Following the same ,we hold that the

assessee is eligible for deduction of interest income earned

from FDR’s u/s 80IC of the Act,amounting to Rs.8,24,841/-

excise duty refund, as rightly pointed by the ld counsel for

the assessee, the issue now stands settled in favour of the

assessee in view of the decision of the Hon'ble Apex Court in

the case of Balaji Alloys(supra),Meghalaya Steels (supra)&

Dharampal Premchand (supra) wherein it has been

categorically held that excise duty refund should not be

excluded in arriving at the profit derived from business for

the purpose of claiming deduction u/s 80IB of the Act. In

view of the above, we hold that the assessee is entitled to

claim deduction u/s 80IC on interest on FDRs of

Rs.8,24,841/- and excise duty refund of Rs.2,39,493/-. The

order of the CIT(Appeals) viz-a-viz these two issues is,

therefore, set aside and ground No.1 and 2 raised by the

assessee are, therefore, allowed.

approval fees received, admittedly the said issues had been

decided against the asesseee by the CIT(Appeals) in the

preceding year. The Ld. counsel for assessee failed to demonstrate any infirmity in the findings of the CIT(Appeals) in the preceding year. As rightly noted by the CIT(Appeals), admittedly, the said amount represents surplus received from customers on account of product approval expenses incurred by the assessee and charged from the customers. The same clearly does not have any nexus with the production or manufacturing of drugs carried out by the assessee and we agree with the Ld.CIT(Appeals) that it is a step removed from the manufacturing business of the assessee. The denial of deduction u/s 80IC on product approval fees is, therefore upheld. Ground No.3 raised by the assessee is, therefore, dismissed.

Order pronounced in the Open Court.

Sd/- Sd/- संजय गग� अ�नपणा� ग�ता (ANNAPURNA GUPTA) (SANJAY GARG ) �याय�क सद�य/ Judicial Member लेखा सद�य/ Accountant Member �दनांक /Dated: 18th October, 2018 *रती* आदेश क� ��त�ल�प अ�े�षत/ Copy of the order forwarded to :

आदेशानसार / By order, सहायक पंजीकार/ Assistant Registrar