M/s Smartlink Network System Ltd., Panaji V. Asst. Commissioner of Income tax Cir. 1(1), Panaji

CO 8/PAN/2014

• Counselvise Citation: [2014] 122 COUNSELVISE.COM (IT) 9753 (ITAT-PANAJI)
• Duration Of Justice: 4 month(s) 15 day(s)
• Appeal Type: Cross Objection
• Pronouncement Date: 06-06-2014
• Appeal Filed By: Assessee
• Order Result: Allowed
• Bench Allotted: DB
• Assessment Year: 2007-2008
• Appeal Filed On: 21-01-2014
• Result in Favour of: Assessee
• Court: TRIBUNAL
• Keywords: Business expenditure; Commercial expediency
• Section: 80IB

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PANAJI BENCH, PANAJI BEFORE SHRI P. K. BANSAL, HONBLE ACCOUNTANT MEMBER AND SHRI D.T. GARASIA, HONBLE JUDICIAL MEMBER ITA NO. 409/PNJ/2013 (A SSESSMENT YEAR - 2007 - 08 ) THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE - 1(1), PANAJI, GOA (APPELLANT) VS. M/S. SMARTLINK NETWORK SYSTEM LTD. [M/S. D - LINK (INDIA) LTD.], L - 5/L - 7, VERNA ELECTRONIC CITY, VERNA PLATEAU GOA. PAN:AA ACD5159L (RESPONDENT) C.O. NO. 08 [C /PNJ/2014 OUT OF ITA NO.409/PNJ/2013 (ASSESSMENT YEAR - 2007 - 08 ) M/S. SMARTLINK NETWORK SYSTEM LTD. [M/S. D - LINK (INDIA) LTD.], L - 5/L - 7, VERNA ELECTRONIC CITY, VERNA PLATEAU GOA. PAN:AAACD5159 (OBJECTOR) VS. THE ASSISTANT COMMISSIONER OF INCOME TAX, CIRCLE - 1(1), PANAJI, GOA (RESPONDENT) APPELLANT BY : SHRI NISHANT K, LD. DR. RESPONDENT B Y : SHRI SANDIP BHANDARE , CA. DATE OF HEARING : 06/05 /2014 DA TE OF PRONOUNCEMENT : 06 /06 /2014 O R D E R PER: D.T. GARASIA THIS APPEAL HAS BEEN FILED BY THE DEPARTMENT AGAINST THE ORDER OF CIT(A) - PANAJI, DATED 26.09.2013 AND C.O HAS BEEN FILED BY THE ASSES SEE FOR THE ASSESSMENT YEAR 2007 - 08 . 2 . ITA NO. 409/PNJ/2013(A.Y 2007 - 08) ACIT VS. M/S. SMARTLINK NETWORK SYSTEM LTD. 2. THE GROUNDS ARE RAISED IN THIS APPEAL WHICH READ AS UNDER: 1. THE ORDER OF THE LD CIT(A) IS OPPOSED TO LAW AND FACTS OF THE CASE. 2. THE LD CIT(A) HAS ERRED IN DELETING THE ADDITIONS OF RS. 1,90,251/ - I.E. 30% OF SALES TAX INCENTIVE R ECEIVED BY ASSESSEE TAKEN AS INCOME WHILE CALCULATING U/S. 80IB WHICH IN FACT IS ANCILLARY PROFITS NOT QUALIFYING INCOME FOR CALCULATING 80IB DEDUCTION. 3. THE LD. CIT(A) HAS ERRED IN DELETING THE ADDITION OF RS. 10,50,017/ - ON ACCOUNT OF JOB WORK DONE TO A THIRD PARTY IS ACTUALLY LABOUR CONTRACT AND NOT MANUFACTURING ACTIVITY FOR CLAIMING DEDUCTION U/S. 80IB. 4. THE LD. CIT(A) HAS ERRED IN DELETING UP TO 70% OF THE ADDITIONS OF RS. 3,39,949/ - MADE ON ACCOUNT OF COMMUNITY DEVELOPMENT EXPENSES TOWARDS RENO VATION OF SCHOOL WHEN THERE IS NO PROXIMATE NEXUS BETWEEN THE BUSINESS OF THE ASSESSEE AND EXPENDITURE INCURRED. 5. THE LD CIT(A) HAS ERRED REWORKING THE TOTAL INCOME OF THE ASSESSEE AND ARRIVED AT TOTAL TAXABLE INCOME OF RS.15,06,99,102/ - INSTEAD OF RS . 15,19,35,502/ - . 3. GROUND NO. 1 IS GENERAL. 4 . GROUND NO. 2 : - THE ASSESSEE IS A PUBLIC LIMITED COMPANY CARRYING ON THE BUSINESS OF MANUFACTURING OF COMPUTER NETWORKING PRODUCTS AND DEVELOPMENT OF SOFTWARE , WHICH QUALIFY FOR DEDUCTION U/S. 80IB. THE ASSESSEE HAS KEPT SEPARATE BOOKS OF ACCOUNTS IN RESPECT OF THESE INDUSTRIAL UNDERTAKINGS. THE INDUSTRIAL UNDERTAKIN GS QUALIFY FOR DEDUCTION U/S. 80IB (4), DIVISION B IS ENTITLED TO DEDUCTION OF PROFITS U/S 80IB (4) @ 30% AND DIVISION D IS ENTITLED TO DEDUCTION OF PROFITS U/S 80IB (4) @ 100/ - . THE ASSESSEE IS ELIGIBLE FOR THE VALUE ADDED TAX (VAT) SCHEME FRAMED BY GOVERNMENT OF GOA. THE SCHEME IS CALLED GOA VALUE ADDED TAX DEFERMENT CUM NAV SCHEME. AS PER THE SCH EME THE ASSESSEE CAN CHARGE THE CUSTOMERS THE SALES VALUE AND THE SALES TAX/ VAT . AT THE TIME OF MAKING PAYMENT OF SALES TAX/VAT TO THE GOVT. THE ASSESSEE HAS TO PAY ONLY 25% OF THE SALES TAX/VAT COLLECTED AND ON PAYMENT OF 25% , BALANCE 75% DEEMED TO HAVE BEEN PAID. THE ENTIRE AMOUNT OF RECEIPTS CONSISTING OF THE SALES AS WELL AS THE SALES TAX IS COLLECTED FROM THE CUSTOMERS AND NOT FORM ANY THIRD PARTY. WHILE MAKING SALES TAX PAYMENT ONLY PART OF SALES TAX IS PAID AND ONLY SUCH PAYMENT IS CLAIMED AS DEDUCT ION OF STATUTORY DUES. THE 3 . ITA NO. 409/PNJ/2013(A.Y 2007 - 08) ACIT VS. M/S. SMARTLINK NETWORK SYSTEM LTD. BALANCE AMOUNT IS SPLIT INTO SALES AND NPV DEFERMENT SCHEME ONLY FOR THE PURPOSE OF ACCOUNTING. AS PER THE AMOUNT IS COLLECTED DIRECTLY FROM THE CUSTOMERS AS A SALES RECEIPT AND IN INEXTRICABLY LINKED WITH THE BUSINESS OF THE INDUSTRIAL UNDERTAKING THE INCOME QUALIFIES FOR DEDUCTION UNDER SECTION 80IB. IN VIEW OF THIS 80IB DEDUCTION BE GIVEN TOWARDS AMOUNT OF RS. 6,34,170/ - APPEARING AS NVP DEFERMENT SCHEME. T HE AO WAS OF THE VIEW THAT AS PER THE SECTION 80IB ALLOWS THE DEDUCTION OF PROFIT AND LOSS ACCOUNT DERIVED FROM THE ELIGIBLE BUSINESS . THIS MEANS THAT A DIRECT CONNECTION HAS TO EXIT BETWEEN THE PAYMENTS RECEIVED VIS - A - VIS THE PROCESS OF MANUFACTURE OR PRO DUCTION BEFORE THE SAME CAN QUALIFY FOR THE DEDUCTION U/S. 80IB. NO SUCH DIRECT CONNECTION EXITS IN THIS CASE SINCE THE PAYMENT IS RECEIVED BY THE ASSESSEE FROM THE STATE GOVERNMENT IN THE FORM OF REFUND OF PART OF THE SALES TAX COLLECTED BY THE ASSESSEE. NPV INCOME IS AN INCENTIVE. THE OBJECT BEHIND IT IS TO REDUCE THE INCIDENCE OF SALES TAX PAYMENT ON THE SALES MADE BY THE ASSESSEE. THIS FACILITY IS A GAINST THE SALES, THEREFORE, THIS INCENTIVE IS NOT A NATURE OF PROFITS DERIVED FROM ELIGIBLE BUSINESS U/S. 80IB. AS PER THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF LIBERTY INDIA VS. CIT, 317 ITR 218 THE ASSESSEE IS NOT ENTITLED FOR DEDUCTION UNDER 80IB HENCE, IT WAS ALLOWED. 4.1 . THE MATTER CARRIED TO CIT(A) AND CIT(A) HAS ALLOWED THE CLAIM BY OBSERV ING AS UNDER: 4.4. I HAVE GONE THROUGH THE ORDER OF THE A.O. AND THE SUBMISSION OF THE APPELLANT. THE LEARNED COUNSEL OF THE ASSESSEE STRESSED THAT THE DECISION OF HONBLE ITAT MUMBAI IN THE CASE OF DIAMOND TOOL INDUSTRIES COVERS THE CASE OF ASSESSEE DIR ECTLY AND THEREFORE RELIEF SHOULD BE GRANTED TO THE APPELLANT AS PER THE RATIO LAID DOWN IN THE ABOVE REFERRED CASE. ON GOING THROUGH THE FACTS AND THE SUBMISSIONS BY THE APPELLANT IT CAN BE OBSERVED THAT THE COMPANY HAS NOT RECEIVED ANY MONEY FROM THE ST ATE GOVERNMENT WITH REGARDS TO NET PRESENT VALUE. THE APPELLANT HAD COLLECTED THE ENTIRE AMOUNT FROM CUSTOMERS IN RESPECT OF SALE OF GOODS MANUFACTURED FROM 8OIB UNIT. SINCE THE ENTIRE AMOUNT HAS BEEN COLLECTED THE AMOUNT SHOULD BE CONSIDERED AS TRADING RE CEIPT AND THE FULL AMOUNT SHOULD BE INCLUDED IN THE INCOME U/S 801B UNIT. I HAVE GONE THROUGH THE JUDGMENT QUOTED BY THE APPELLANT IN THE CASE OF CHOWRINGHEE SALES BUREAU PVT. LTD. V. COMMISSIONER OF INCOME TAX, WEST BENGAL WHEREIN THE HONBLE SUPREME COU RT HAS HELD THAT THE AMOUNT RECEIVED AND COLLECTED FROM CUSTOMERS BY 4 . ITA NO. 409/PNJ/2013(A.Y 2007 - 08) ACIT VS. M/S. SMARTLINK NETWORK SYSTEM LTD. WAY OF SALES TAX/VAT SHOULD BE CONSIDERED AS TRADING RECEIPT AND INCLUDED IN THE TOTAL INCOME OF THE ASSESSEE. I HAVE GONE THROUGH THE ORDER OF THE HONBLE ITAT, D BENCH MUMBAI. IN THIS CASE THE ASSESSEE FIRM WAS ENGAGED IN THE BUSINESS OF MANUFACTURING OF ALL TYPES OF STONE CUTTING TOOL AND CLAIMED DEDUCTION U/S 801B, IN ITS RETURN OF INCOME. DURING THE COURSE OF ASSESSMENT PROCEEDINGS, THE A.O. NOTED THAT THE ASSESSEE HAS RECE IVED SALE TAX INCENTIVES OF RS. 16,05,903/ - . THE A.O. AFTER CONSIDERING THE REPLY OF THE ASSESSEE AND DECISION OF THE HONO U RABLE SUPREME COURT IN CIT VS. STERLING FOODS (1999) 237 ITR 579 AND THE DECISION IN PANDIAN CHEMICALS LTD. VS. CIT (2003) 262 ITR 278 HELD THAT THE INTEREST RECEIVED AND SALES TAX INCENTIVE ARE NOT DERIVED FROM THE BUSINESS FOR THE PURPOSE OF DEDUCTION U/S 801B OF THE ACT, ON APPEAL, THE LEARNED CIT (A) WHILE AGREEING WITH THE VIEWS OF THE A.O AND FOLLOWING THE DECISIONS OF THE HONBLE SUPRE ME COURT IN THE CASE OF LIBERTY INDIA VS. CIT 317 ITR 218 (SC). UPHELD THE DISALLOWANCE MADE BY THE A.O. ON THE BASIS OF ABOVE FACTUAL AND LEGAL POSITION, THE HONBLE ITAT, DELHI BENCH, MUMBAI, DECIDED AS UNDER: WE HAVE CONSIDERED THE RIVAL ARGUMENTS MAD E BY BOTH SIDES, PERUSED THE ORDER OF THE ASSESSING OFFICER AND THE CIT (A) AND THE PAPER BOOK FILED ON BEHALF OF THE ASSESSEE. WE FIND THAT THE HONBLE GUAH.ATI HIGH COURT IN THE CASE OF MEGHALAYA STEELS LTD. (SUPRA) AFTER CONSIDERING THE DECISION OF HON BLE SUPREME COURT IN THE CASE OF LIBERTY INDIA (SUPRA) HAS HELD THAT CENTRAL EXCISE DUTY HAS A DIRECT NEXUS WITH THE MANUFACTURING ACTIVITY AND SIMILARLY THE REFUND OF CENTRAL EXCISE DUTY ALSO HAD A DIRECT NEXUS WITH THE MANUFACTURING ACTIVITY. THE ISSUE O F PAYMENT OF CENTRAL EXCISE DUTY WOULD NOT ARISE IN THE ABSENCE OF ANY INDUSTRIAL ACTIVITY. IT WAS ACCORDINGLY, HELD THAT THE REFUND OF EXCISE DUTY HAS TO BE TAKEN IN TO ACCOUNT FOR PURPOSE OF SEC 801B. FOLLOWING THE RATIO OF SAID DECISION WE ARE OF THE C ONSIDERED OPINION, THAT THERE IS AN INEXTRICABLE LINK THE MANUFACTURING ACTIVITY, THE PAYMENT OF SALES TAX ACTIVITY, THE PAYMENT OF SALES TAX AND THE SALES TAX INCENTIVES. THEREFORE, IN OUR OPINION SUCH SALES TAX INCENTIVE WHICH HAS BEEN RETAINED BY THE AS SESSEE FROM THE SALES TAX COLLECTED HAS TO BE HELD AS DERIVED FROM THE INDUSTRIAL UNDERTAKING AND CONSEQUENTLY IS ELIGIBLE FOR DEDUCTION U/S 801B OF THE ACT. IN VIEW OF THE MATTER, THE ORDER OF THE LEARNED CIT (A) IS SET ASIDE AND THE A.O. IS DIRECTED NOT TO EXCLUDE THE SALES TAX INCENTIVE FROM THE PROFITS WHILE CALCULATING DEDUCTION U/S 8OIB. AFTER CONSIDERING THE ASSESSMENT ORDER AND JUDICIAL PRONOUNCEMENTS RELIED BY THE LEARNED COUNSEL OF THE APPELLANT. I FIND NO DIFFERENCE IN THE FACTS OF THE INSTANT C ASE AND THE CASE OF DIAMOND TOOL INDUSTRIES VS. DCIT. THE HONBLE D BENCH HAS CONSIDERED THE DECISION OF THE HONBLE SUPREME COURT IN THE CASE OF LIBERTY INDIA AND THEN ONLY HAS REACHED THE CONCLUSION ON THE BASIS OF DISCUSSION ABOVE. IN ABSENCE OF ANY OTHER FEATURE OR ARGUMENTS BROUGHT ON RECORD BY THE A.O. RESPECTFULLY FOLLOWING THE ORDER OF THE HONBLE ITAT, MUMBAI IN THE ABOVE MENTIONED CASE, THE A.O. IS DIRECTED TO CONSIDER SALES TAX INCENTIVE RETAINED BY THE APPELLANT BY INCLUDING THE SAME IN THE S ALES TURNOVER FOR THE PURPOSE OF CALCULATING THE CLAIM OF DEDUCTION U/S 8OIB. THIS GROUND OF APPEAL OF THE APPELLANT IS ALLOWED ACCORDINGLY. [ 4.2 . THE LD DR SUBMITTED BEFORE US THAT THE ASSESSEE IS ENJOYING THE SCHEME DECLARED BY GOVT. OF GOA, TO GIVE INCENTIVE TO THE INDUSTRIES IN GOA OFFERED A GOA VAT DEFERMENT CUM NPV SCHEME TO THE NEWLY ESTABLISHMENT INDUSTRIAL UNITS IN THE STATE OF GOA. AS PER THAT SAID SCHEME THE ASSESSEE ARE CHAR GING SALES 5 . ITA NO. 409/PNJ/2013(A.Y 2007 - 08) ACIT VS. M/S. SMARTLINK NETWORK SYSTEM LTD. TAX FROM CUSTOMERS OUT OF THAT SALES TAX. THE ASSESSEE HA S TO PAY 25% OF THE SALES TAX/VAT TO THE GOVERNMENT AND BALANCE 75% DEEMED TO HAVE BEEN PAID. THE ASSESSEE IS GIVEN EXEMPTION AND BENEFIT OF THAT AMOUNT TOWARDS LIABILITY BUT THIS PAYMENT IS NOT DI RECT CONNECTION WITH THE PROCESS OF MANUFACTURING AND PRODU CTION. THE AFORESAID INCENTIVE IS IN THE NATURE OF PAY BACK BY THE STATE GOVERNMENT TO THE ELIGIBLE ASSESSEE OF A PART OF THE SALES TAX IN LIEU OF EXEMPTION AVAILABLE EARLIER. AS PER SECTION 80IB A DEDUCTION OF PROFITS AND GAINS DERIVED FROM THE ELIGIBLE B USINESS. THIS MEANS THAT A DIRECT CONNECTION HA S TO EXIT BETWEEN THE PAYMENTS RECEIVED VIS - A - VIS THE PROCESS OF MANUFACTURE OR PRODUCTION BEFORE THE SAME CAN QUALIFY FOR THE DEDUCTION U/S 80IB. IN THIS CASE NO SUCH DIRECT CONNECTION EXISTS, THE ASSESSEE RE CEIVED THIS AMOUNT IN FORM OF REFUND OF A PART OF THE SALES TAX COLLECTED BY THE ASSESSEE. THIS DED UCTION IS PROVIDED FOR BY CREDIT TO SALES TAX PAYABLE BY THE ASSESSEE AGAINST THE SALES MADE. THEREFORE, THE ASSESSEE IS NOT ELIGIBLE BUSINESS U/S 80IB AS PE R THE DECISION OF HONBLE SUPREME COURT IN THE CASE OF INDIA LIBERTY VS. CIT 317 ITR 218(SUPRA) . 4.3 . THE LEARNED A R RELIED UPON THE DECISION OF HONBLE DELHI HIGH COU RT IN THE CASE OF CIT VS. DHARAMPAL PREMCHAND LTD. 317 ITR 353(DELHI) WHEREIN HONBLE DELHI HIGH COURT HAS HELD THAT THE REFUND OF EXCISE DUTY IS ELIGIBLE FOR DEDUCTION U/S 80IB AS THE SAME IS PIVOTED ON THE MANUFACTURING ACTIVITY CARRIED ON BY THE ASSESSEE. IN THE CASE OF THE ASSESSEE THE ELIGIBILITY TO RETAIN THE AMOUNT OF SALES TAX IS ALSO PIVOTED UPON THE MANUFACTURING ACTIVITY. IT IS ONLY THE UNITS WHICH ARE MANUFACTURING GOODS AND NOT THE UNITS WHICH ARE TRADING ARE ELIGIBLE TO RETAIN THE VAT/SALES TAX. THE HONBLE SUPREME COURT HAS DISMISSED THE SLP AGAINST THIS JUDGEMENT. THE HONB LE SUPREME COURT HAS ALSO CONSIDERED THE VARIOUS DECISIONS AND THE NIRMA INDUSTRIES LIMITED VS. DEPUTY COMMISSIONER OF INCOME TAX (283 ITR 402 (GUJ)) WHEREIN IT HAS HELD THAT THE INTEREST RECEIVED FROM THE DEBTORS HAS A FIRST DEGREE NEXUS WITH THE INDUSTRI AL UNDERTAKING FOR THE 6 . ITA NO. 409/PNJ/2013(A.Y 2007 - 08) ACIT VS. M/S. SMARTLINK NETWORK SYSTEM LTD. PURPOSE OF COMPUTATION OF PROFIT U/S 80IB. SIMILARLY THE CASE OF CIT VS. MEGHALAYA STEELL LTD. 332 ITR 91 (GAU), THE HONBLE GAUHATI HIGH COURT HAS HELD THAT TRANSPORT AND OTHER SUBSIDIES REDUCE THE COST PRODUCTION AND THEREFORE CONTR IBUTE TO THE PROFIT THEREFORE, IT IS ELIGIBLE FOR DEDUCTION UNDER 80IB. 4 . 4. WE HAVE HEARD THE RIVAL CONTENTION OF BOTH THE PARTIES. LOOKING TO THE FACTS AND CIRCUMSTANCES OF THE CASE, W E FIND THAT ASSESSEE HAS RECEIVED NET PRESENT VALUE (NP V ) INCOME OF RS. 6 , 34 , 170/ - . THIS AMOUNT IS ACTUAL IN THE NATURE OF AN INCENTIVE WHICH THE ASSESSEE HAS RECEIVED FROM THE STATE GOVT. AS PER THE N OTIFICATION NO. 4/5/2005 AND FINANCE (R & C)(13) , THE SCHEME OF THE GOA V ALUE ADDED T AX D EFERMENT - COME - N ET P RESENT V ALUE C OMPULSORY P AYMENT S CHEME , 2005 IS IN LIEU OF EXEMPTION EARLIER AVAILABLE AND GIVES THE BENEFIT OF AN AMOUNT EQUALLY TO THE TAX LIABILITY DURING THE PERIOD OF ENTITLEMENT AS REDUCED BY N PV WHEREAS EQUALLY TO 25% OF THE TAX LIABILITY DURING THE PERIOD OF DIF FERENT ENTITLEMENT. THE RELEVANT PORTION OF THE AFORESAID SCHEME WHICH IS REPRODUCED IN ASSESSMENT ORDER WHICH READ AS UNDER: SCOPE OF SCHEME. - THIS SCHEME IS IN LIEU OF EXEMPTION AVAILABLE AND AVAILED ON THE APPOINTMENT DAY UNDER THE SAID ENTRY AND/OR T HE GOVERNMENT ORDER, AS THE CASE MAY BE UNDER THE EARLIER LAW. IN RESPECT OF GOVERNMENT NOTIFICATION ISSUED UNDER SUB SECTION (5) OF SECTION 8 OF THE CENTRAL SALES TAX ACT, 1956 THE ELIGIBLE UNIT MAY EXERCISE OPTION EITHER TO CONTINUE THE EXEMPTION SUBJECT TO CONDITION SPECIFIED IN THE SAID NOTIFICATION INCLUDING PRODUCTION OF FORM C/D OR TO OPT FOR THE BENEFIT UNDER THIS SCHEME. THE OPTION ONCE AVAILED IS IRREVOCABLE. ELIGIBILITY. - THE INDUSTRIAL UNITS WHICH ARE ENTITLED FOR AVAILING THE BENEFIT OF THE SAID ENTRY AND/OR SAID NOTIFICATION OR UNDER THE GOVERNMENT ORDER EXTEND ING THE BENEFIT SHALL BE ELIGIBLE FOR THE BENEFIT OF THIS SCHEME FROM THE DATE OF FILING OF DECLARATION IF SUCH DECLARATION IS FILED WITHIN 30 DAYS FROM THE APPOINTMENT DAY AN D THAT IT WILL TAKE EFFECT FROM THE SAID DATE I.E. APPOINTED DAY. THE DECLARATION SHALL BE IN THE FORM I SPECIFIED HERETO WITH SUPPORTING DOCUMENTS . AN ACKNOWLEDGEMENT IN FORM II AS SPECIFIED HERETO SHALL BE ISSUED BY THE OFFICER AUTHORISED FOR THE PURPOSE BY THE COMMISSIONER. IN CASES OF GOVERNMENT ORDER EXTENDING THE SAID BENEFIT, EL IGIBILITY OF SUCH UNIT SHALL BE SUBJECT TO THE CONDITIONS SPECIFIED IN THE SAID ORDER. 7 . ITA NO. 409/PNJ/2013(A.Y 2007 - 08) ACIT VS. M/S. SMARTLINK NETWORK SYSTEM LTD. THOSE UNITS WHICH ARE ALREADY AVAILING THE BENEFIT UNDER THE EARLIER SCHEME MAY EXERCISE OPTION WITHIN 30 DAYS FROM THE APPOINTED DAY WHETHER THEY WOULD LIKE TO CONTINUE IN THE SCHEME IN RELATION TO INTER - STATE SALES OR WOULD LIKE TO AVAIL EXEMPTION UNDER SUB - SECTION (5) OF SECTION 8 OF THE CENTRAL SALES ACT, 1956. IN CASE SUCH UNIT OPT FOR THE EXEMPTION THEN SUCH EXEMPTION WILL BE AVAILABLE FOR BALANCE UNEXPIRED PERIOD R EDUCED BY ADDITIONAL 15% ALLOWED UNDER THE EARLIER SCHEME. IN CASE THEY OPT TO BE IN THE SCHEME, THE TERMS O THE EARLIER SCHEME SHALL BE APPLICABLE INCLUDING PERIOD OF BENEFIT. A PERUSAL OF PROVISIONS SHOWS THAT THE AFORESAID INCENTIVE DOES NOT HAVE A D IRECT CONNECTION WITH THE PROCESS OF MANUFACTURING AND PRODUCTION. THE AFORESAID INCENTIVE IS IN THE NATURE OF PAY BACK BY THE STATE GOVERNMENT TO THE ELIGIBLE ASSESSEE OF A PART OF THE SALES TAX IN LIEU OF EXEMPTION AVAILABLE EARLIER. SECTION 80IB ALLOWS DEDUCTION OF PROFITS AND GAINS DERIVED FROM THE ELIGIBLE BUSINESS. THIS MEANS THAT A DIRECT CONNECTION HAS TO EXIST BETWEEN THE PAYMENTS RECEIVED VIS - A - VIS THE PROCESS OF MANUFACTURE OR PRODUCTION BEFORE THE SAME CAN QUALIFY FOR THE DEDUCTION U/S 80IB. NO SUCH DIRECT CONNECTION EXISTS IN THIS CASE SINCE THE PAYMENT IS RECEIVED BY THE ASSESSEE FROM THE STATE GOVERNMENT IN THE FORM OF REFUND OF A PART OF SALES TAX COLLECTED BY THE ASSESSEE. THE NPV INCOME IS AN INCENTIVE. THE OBJECT BEHIND IT IS TO REDUCE THE INCIDENCE OF SALES TAX PAYMENT ON THE SALES MADE BY THE ASSESSEE. THIS REDUCTION IS PROVIDED FOR BY CREDIT TO SALES TAX PAYABLE BY THE ASSESSEE AGAINST THE SALES TAX MADE. THIS THEREFORE IS IN THE NATURE OF AN INCENTIVE WHICH FLOWS FROM THE SCHEME FRAMED BY STATE GOVERNMENT. HENCE, THIS INCENTIVE IS NOT IN THE NATURE OF PROFITS DERIVED FROM THE ELIGIBLE BUSINESS UNDER SECTION 80 - IB . THEREFORE, WE ARE OF THE VIEW THAT CIT(A) IS NOT JUSTIFIED IN HIS ACTION AND ALLOWING THE DEDUCTION U/S. 80 - IB. THEREFORE, WE REVERSE THE FINDING OF THE CIT(A). W E FIND THAT IN THE CASE LIBERTY INDIA VS. CIT 317 ITR 218 (SC) WHEREIN IT IS HELD THAT THE I.T. ACT 1961 BROADLY PROVIDES FOR TWO TYPES OF TAX INCENTIVES, NAMELY, INVESTMENT - LINKED INCENTIVES AND PROFIT - LIN KED INCENTIVES. CHAPTER VI - A WHICH PROVIDES FOR INCENTIVES IN THE FORM OF TAX DEDUCTIONS ESSENTIALLY BELONG TO THE CATEGORY OF PROFIT - LINKED INCENTIVES. THEREFORE, WHEN S. 80 - IA/80 - IB REFERS TO PROFITS 8 . ITA NO. 409/PNJ/2013(A.Y 2007 - 08) ACIT VS. M/S. SMARTLINK NETWORK SYSTEM LTD. DERIVED FROM ELIGIBLE BUSINESS, IT IS NOT THE OWNERS HIP OF THAT BUSINESS WHICH ATTRACTS THE INCENTIVES. WHAT ATTRACTS THE INCENTIVES U/S.80 - IA/80 - IB IS THE GENERATION OF PROFITS . SECTION 80 IB PROVIDES FOR ALLOWING OF DEDUCTION IN RESPECT OF PROFITS AND GAINS DERIVED FROM T HE ELIGIBLE BUSINESS. THE WORDS 'DE RIVED FROM' IS NARROWER IN CONNOTATION AS COMPARED TO THE WORDS 'ATTRIBUTABLE TO'. IN OTHER WORDS, BY USING THE EXPRESSION 'DERIVED FROM', PARLIAMENT INTENDED TO COVER SOURCES NOT BEYOND THE FIRST DEGREE. WE FIND THAT THE ASSESSEE IN THIS CAS E HAS NOT RECEIVED ANY SUBSID Y FROM THE GOVT. BUT THE ASSESSEE WAS GRANTED INCENTIVE CALLED GOA VALUE ADDED TAX DEFERMENT - CUM - NET PRESENT VALUE COMPULSORY PAYMENT S CHEME , 2005 (SCHEME) . THE ASSESSEE WAS NOT GIVEN ANY DIRECT BENEFIT BUT THE ASSESSEE WAS GIVEN CONCE SSION. THE ASSESSEE HAS RECEIVED INCENTIVE AND AS PER THE DECISION IN LIBERTY INDIA 317 ITR 218 (SC ) THIS INCENTIVES HAS NO DIRECT NEXUS WITH PROFIT AND GAINS OF BUSINESS AND THIS BENEFIT IS ANCILLARY TO ITS INDUSTRIAL ACTIVITIES, THEREFORE, ASSESSEE IS NO T ENTITLED FOR DEDUCTION . THE ASSESSEE HAS RELIED UPON THE DECISION CIT VS. DHARMPAL PREMCHAND LTD. 317 ITR 353(DELHI) WHEREIN THE DELHI HIGH COURT HAS HELD THAT REFUND OF EXCISE DUTY IS ELIGIBLE FOR DEDUCTION U/S. 80IB AS THE SAME IS PIVOTED ON THE MANUFA CTURING ACTIVITY CARRIED ON BY THE ASSESSEE. THE HONBLE SUPREME COURT HAS DISMISSED AN SLP AGAINST THIS JUDGEMENT ON 22.02.2010, THEREFORE, THIS JUDGEMENT BECAME FINAL. WE ARE OF THE VIEW THAT THE FACTS OF THIS CASE IS DIFFERENT. WHEREIN THE ASSESSEE IN T HAT CASE THE ASSESSEE HAS ALREADY PAID TAX EXCISE DUTY OUT OF HIS PROFIT THEREFORE, HONBLE COURT HAS HELD THAT EXCISE DUTY I S THE PART OF PROFIT, WHEREIN IN THIS CASE THE ASSESSEE HAS NOT PAID ANY DUE BUT ASSESSEE HAS RETAINED 25% OF VAT/SALES TAX, COLLECTED FROM THE CUSTOMER. THEREFORE, THIS FACT IS ENTIRELY DIFFERENT, THEREFORE, THIS JUDGEMENT IS NOT APPLICABLE TO THE FACTS OF THE CASE OF THE ASSESSEE. MOREOVER, WE FIND THAT THE GAUHA TI HIGH IN THE CASE OF CIT VS. M EGHALAYA STEEL LTD. 332 ITR 91(GA U) THE HONBLE GAUHATI HIGH COURT HAS HELD THAT TRANSPORT AND OTHER SUBSIDIES R EDUCE THE COST OF PRODUCTION, THEREFORE, CONTRIBUTE TO THE PROFIT AND HENCE ELIGIBLE FOR 9 . ITA NO. 409/PNJ/2013(A.Y 2007 - 08) ACIT VS. M/S. SMARTLINK NETWORK SYSTEM LTD. DEDUCTION U/S 80IB. IN THE INSTANT CASE THE ASSESSEE HAS NOT RECEIVED ANY SUBSIDIARY BUT HE HAS RETAIN 25% OF THE SALE TAX, THEREFORE, IT IS NOT ELIGIBLE FOR DEDUCTION U/S. 80 - IB. THEREFORE, THIS JUDGEMENT IS NOT HELPFUL TO THE ASSESSEE. WE RESPECTFULLY FOLLOWING THE DECISION OF LIBERTY INDIA VS. CIT 317 ITR 218 (SC) , WE ALLOW THE DEPARTMENT APPEAL. IN THE RESULT, APPEAL OF THE DEPARTMENT IS ALLOWED ON THIS GROUND. 5 . GROUND NO.3 : - DURING THE COURSE OF ASSESSMENT PROCEEDINGS, IT WAS NOTICED THAT THE ASSESSEE HAS INC LUDED CONVERSION CHARGES OF RS. 10,50,017/ - FOR PURPOSES OF COMPUTING DEDUC TION U/S 80IB. THE CONVERSION CHARGES WERE RECEIVED BY THE ASSESSEE COMPANY FOR PERFORMING WORK FOR OTHER PARTY (M/S GIGABYTE TECHNOLOGY (INDIA) PVT. LTD.) WHEREIN T HAT PARTY MADE AVAILABLE THE RAW MATERIALS AND THE ASSESSEE COMPANY PERFORMED SOME WORK ON THE AFORESAID RAW MATERIALS AS PER THE SPECIFICATIONS OF THE OTHER PARTY AND RECEIVED SOME CONSIDERATION FOR THE SAME. THE AFORESAID RECEIPTS SHOWN AS CONVERSION CHARGES WERE THEREFORE IN THE NATUR E OF LABOUR CHARGES RECEIVED BY THE ASSESSEE COMP ANY. THE ASSESSEE TREATED AS MANUFACTURING OR PRODUCES ANY ARTICLES OR THINGS AS PER SECTION 80IB(2)(III). THE ASSESSING OFFICER WAS OF THE VIEW THAT THE ASSESSEE DID NOT PRODUCE ANY ARTICLE OR THING. THE AS SESSEE DID NOT MANUFACTURE OR PRODUCE THE SPECIFIED ARTICLE OR THINGS. THE ASSESSEE RECEIVED THE PAYMENT FOR PERFORMING AN ACTIVITY WHERE THE ASSESSEE IS GIVEN RAW MATERIAL BY THIRD PARTIES AND THE ASSESSEE PERFORMS CERTAIN FUNCTIONS SPECIFIED BY SUCH THIR D PARTIES ON SUCH RAW MATERIALS AND DELIVERS THE FINISHED PRODUCTS TO THE THIRD PARTIES TANTAMOUNT TO MANUFACTURING OR PRODUCTION. THEREFORE, AO DISALLOWED THE SAME. 5 . 1 . THE MATTER CARRIED TO CIT(A) AND CIT(A) HAS ALLOWED THE CLAIM BY OBSERVING AS UNDER: 5.4 I HAVE GONE THROUGH THE ORDER OF THE A.O. AND THE SUBMISSION OF THE APPELLANT. 10 . ITA NO. 409/PNJ/2013(A.Y 2007 - 08) ACIT VS. M/S. SMARTLINK NETWORK SYSTEM LTD. THERE IS NO DISPUTE THAT THE ASSESSEE HAS RECEIVED JOB WORK CHARGES TOWARDS MANUFACTURE /PRODUCTION OF ARTICLES AND SUCH ACTIVITY IS DIRECTLY RELATED TO PRODUCTION. THE LEARNED AO HAS ERRED IN APPLYING THE CASE OF TEGA INDIA LTD. V COMMISSIONER OF CENTRAL EXCISE, (2004), 135 STC 219, 224 (SC) AS THE FACTS OF THIS CASE ARE ENTIRELY DIFFERENT FROM THE CASE CITED ABOVE. BASED ON THE ABOVE I AM OF THE OPINION THAT THE AO HAS NOT CORRECTLY APPRECIATED THE FACTS AND THE LEGAL PRECEDENTS. I THEREFORE HOLD THAT THE SUM OF RS. 10,50,017 SHALL BE INCLUDED IN COMPUTING THE TOTAL INCOME FROM 80 1B UNIT. FURTHER THE APPELLANT HAS ALSO POINTED OUT THAT WHILE MAKING THE ADDITION THE A,O. HAD ADDED THE ENTIRE AMOUNT OF JOB WORK CHARGES AS AN ADDITION TO THE INCOME THOUGH THE DEDUCTION U/S 80I B WA S CLAIMED ONLY @ 30% AND THEREFORE THE ADDITION, IF ANY , SHOULD HAVE BEEN ONLY RESTRICTED TO 30%. HOWEVER, SINCE I HAVE DECIDED THAT JOB WORK CHARGES RECEIVED ARE ELIGIBLE FOR DEDUCTION U/S. 801B, THERE IS NO NECESSITY FOR ANY FURTHER ARITHMETICAL CALCULATION. THIS GROUND OF APPEAL OF THE A P P ELLANT IS ALLOWED. 5 .2 . WE HAVE HEARD THE RIVAL CONTENTION OF BOTH THE PARTIES. LOOKING TO THE FACTS AND CIRCUMSTANCES OF THE CASE, WE FIND THAT THE ASSESSEE COMPANY IS CARRYING ON BUSINESS OF MANUFACTURING OF COMPUTER NETWORK PRODUCTS. THE ASSESSEE OWNS AN INDUSTRIAL UN DERTAKING IN THE STATE OF GOA AND IS ELIGIBLE FOR CLAIMING DEDUCTION U/S 80IB (4) OF THE INCOME TAX ACT. THE INITIAL YEAR OF DEDUCTION WAS A.Y. 2000 - 01 AND THE CURRENT YE A R IS THE 8 TH YEAR OF DEDUCTION. THE ASSESSEE IS ENTITLED TO CLAIM 30% OF THE ELIGIBLE PROFITS AS DEDUCTION U/S 80IB FOR A.Y. 2007 - 08. THE ASSESSEE HAS RECEIVED AMOUNT OF RS. 10,50,017/ - TOWARDS JOB WORK FROM THE CUSTOMERS TOWARDS CONTRACT MANUFACTURING. THIS AMOUNT HAS BEEN CONSIDERED AS INCOME AND INCLUDED ON THE PROFIT & LOSS ACCOUNT. SINCE THE AMOUNT IS RECEIVED TOWARDS MANUFACTURE OF NETWORKING PRODUCTS , THE AMOUNT WAS ALSO INCLUDED IN THE COMPUTATION OF ELIGIBLE PROFITS FOR THE PURPOSE OF DETERMINING DEDUCTION U/S 80IB. THE ASSESSEE IS IN MANUFACTURING SECTION. THE ASSESSEE CARRYING OUT OF THESE PROCESS AND HE HAS PROCESSED THE GOODS AND CHANGING THE NATURE OF THE PRODUCT AND IT IS A MANUFACTURING ACTIVITIES. WE FIND THAT THE ISSUE IS COVERED BY THE DECISION OF HON BLE DELHI HIGH COURT IN THE CASE OF CIT VS. SADHU FORGING LTD 336 ITR 11 . ITA NO. 409/PNJ/2013(A.Y 2007 - 08) ACIT VS. M/S. SMARTLINK NETWORK SYSTEM LTD. 444 (DELHI). WE RESPECTFULLY FOLLOWING THE SAME WE DISMISS THE DEPARTMENTS APPEAL. IN THE RESULT, THE DEPARTMENTS APPEAL IS DISMISSED ON THIS GROUND. 6 . GROUND NO. 4 IS INFRUCTUOUS . 7 . GROUND NO. 5 AND 6 ARE GENERAL IN NATURE. C.O. NO. 08/PNJ/2014 FOR A.Y. 2007 - 08 8. THE FOLLOWING GROUND RAISED IN THE CROSS OBJECTION AS UNDER: THE LEARNED A.O./ CIT(APPEALS) HAS ERRED IN DISALLOWING AN AMOUNT OF RS. 339949/ - SPENT BY THE APPELLANT TOWARDS COMMUNITY DEVELOPMENT EXPENDITURE IGNORING THE FACT THAT THIS EXPENDITURE WAS NECESSARY & ESSENTIAL TO THE RUNNING OF BUSINESS AND THE EXPENDITURE WAS INCURRED OUT OF COMMERCIAL EXPEDIENCY. 8.1. T HE ASSESSE E HAS INCURRED AN AMOUNT OF RS. 3,39,949/ - TOWARDS THE COMMUNITY DEVELOPMENT EXPENSES CONSISTING OF RENOVATION OF S CHOOL PREMISES NEAR THE FACTORY AREA OF THE ASSESSEE . THE ASSESSEE S FACTORY IS SITUATED IN THE INDUSTRIAL UNDERTAKING WHICH WAS FORMED BY THE GOVERNMENT BY ACQUIRING LAND FROM VILLAGERS AND THERE IS CONTINUOUS ANTAGONISM FROM THE VILLAGERS THAT THE USE BY THE INDUSTRY OF THE ELECTRICITY AND WATER HAS AFFECTED THE AVAILABILITY OF THESE RESOURCES FOR THE VILLAGERS. THEREFORE, ASSESSEE HAS INCURRED THE EXPENDITURE FOR REN OVATION OF SCHOOL PREMISES FOR SMOOTH RUNNING OF THE FACTORY BY CREATING POSITIVE ATMOSPHERE. THE AO HAS DISALLOWED THE AMOUNT OF RS.3,39,949/ - AND HAS ADDED THE SAME TO THE INCOME. 8 .2 . THE MATTER CARRIED TO CIT(A) AND CIT(A) HAS RECTIFIED THE ORDER BY OBSERVING AS UNDER: 6.4. I HAVE GONE THROUGH THE ORDER OF THE A.O. AND SUBMISSION OF THE APPELLANT. I HAVE ALSO PERUSED THE JUDICIAL PRONOUNCEMENTS RELIED UPON BY THE A.O. AND THE LEARNED COUNSEL OF THE APPELLANT. THE APPELLANT HAS CLAIMED COMMUNITY DEVELOPMENT EXPENSES AMOUNTING TO RS.3,39,949/. - AS ITS BUSINESS EXPENDITURE. FOR CLAIMING BUSINESS EXPENDITURE, THE EXPENDITURE HAS TO BE INCURRED WHOLLY AND NECESSARILY FO R THE BUSINESS OF THE ASSESSEE. I N THE INSTEAD CASE, THE EXPENDITURE HAS BEEN INCUR RED ON RENOVATION OF A SCHOOL BUILDING, WHICH HAPPENS TO BE IN THE SAME LOCALITY, WHERE THE ASSESSEE HAS ITS FACTORY. THIS RENOVATION OF SCHOOL BUILDING MAY BE LANDED AS SOCIAL WORK, BUT CANNOT BE HELD AS BUSINESS EXPENDITURE. FROM THE SUBMISSION OF THE 12 . ITA NO. 409/PNJ/2013(A.Y 2007 - 08) ACIT VS. M/S. SMARTLINK NETWORK SYSTEM LTD. AP PELLANT ALSO, IT IS NOT CLEAR AS TO HOW RENOVATION OF A SCHOOL BUILDING HAS HELPED THE APPELLANT IN ITS BUSINESS. THE RENOVATION OF THE SCHOOL BUILDING IS A VOLUNTARY ACT, NOT CONNECTED WITH THE BUSINESS OF THE APPELLANT AND THEREFORE NOT ALLOWABLE AS BUSI NESS EXPENDITURE. HOWEVER, THE APPELLANT POINTED OUT THAT THE A.O. HAD MADE ADDITION OF ENTIRE AMOUNT TO THE INCOME RETURNED WITHOUT TAKING INTO CONSIDERATION THE CLAIM OF DEDUCTION U/S 801B, CLAIMED @ 30% OF TOTAL INCOME. THEREFORE TAXABLE INCOME SHALL INCREASE BY 70% OF THE DISALLOWED AMOUNT. THE A.O. H AS MADE THIS ARITHMETICAL ERROR 70% OF RS.3,39,349/ - WORKS OUT TO RS.2,37,544/ - . IN VIEW OF THE ABOVE, ADDITION AMOUNTING TO RS.2,37,544/ - IS SUSTAINED AND BALANCE IS DELETED. THIS GROUND OF APPEAL OF THE APPELLANT IS PARTLY ALLOWED. 8 .3 . WE HAVE HEARD THE RIVAL CONTENTION OF BOTH THE PARTIES. LOOKING TO THE FACTS AND CIRCUMS TANCES OF THE CASE, WE HAVE GONE THROUGH THE ORDER OF CIT(A) AND CIT(A) HAS NOT ALLOWED ANY DEDUCTION TOWARDS DEVELOPMENT OF COMMUNI TY EXPENDITURE BUT CIT(A) HAS RECTIFIED THE MISTAKE COMMITTED BY THE AO WHEREIN THE ASSESSING OFFICER HAS ADDED THE ENTIRE AMOUNT BUT THE ASSESSEE IS ALLOWED FOR DEDUCTION U/S. 80IB, THEREFORE, INSTEAD OF DISALLOWANCE THE AMOUNT OF RS.3,39,949/ - , HE SHOULD HAVE DISALLOWED RS. 2,37,964 / - THAT MISTAKE COMMITTED BY THE AO WAS RECTIFIED BY CIT(A). THE CIT(A) HAS NOT GRANTED ANY DEDUCTION THEREFORE, IN OUR OPINION, THE DEPARTMENTS APPEAL BECAME INFRUCTUOUS BUT WE FIND THAT AS PER THE DECISION OF MADRAS HIGH COURT WHEREIN IT IS HELD THAT THE CONCEPT OF EXPENDITU RE ON WELFARE OF LOCAL RESIDENTS , GOODWILL OF THE LOCAL COMMUNITY, AS ALSO WITH THE REGULATORY AGENCIES AND THE SOCIETY AT LARGE, THEREBY CREATING AN ATMOSPHERE IN WHICH THE BUSINESS CAN SUCCEED I N A GREATER MEASURE WITH THE AID OF SUCH GOOD WILL. MONIES SPENT FOR PROVIDING DRINKING WATER AS ALSO FOR ESTABLISHING OR IMPROVING THE SCHOOL MEANT FOR THE RESIDENTS OF THE LOCALITY IN WHICH THE BUSINESS IS SITUATED CANNOT BE REGARDED AS BEING WHOLLY OUTSI DE THE AMBIT OF THE BUSINESS CONCERNS OF THE ASSESSEE, ESPECIALLY WHERE THE UNDERTAKING OWNED BY THE ASSESSEE IS ONE WHICH IS TO SOME EXTENT A POLLUTING INDUSTRY. THE ENTIRE AMOUNT IS TO BE ALLOWED AS BUSINESS EXPENDITURE. WE RESPECTFULLY FOLLOWING THE D ECISION OF MADRAS HIGH COURT WE FIND THAT ASSESSEE HAS INCURRED EXPENDITURE TOWARDS COMMUNITY DEVELOPMEN T 13 . ITA NO. 409/PNJ/2013(A.Y 2007 - 08) ACIT VS. M/S. SMARTLINK NETWORK SYSTEM LTD. EXPENSES CONSISTING OF RENOVATION OF SCHOOL PREMISES NEAR THE FACTORY AREA OF THE ASSESSEE. THE ASSESSEE FACTORY IS SITUATED IN THE INDUSTRIAL UNDERTA KING WHICH WAS FORMED BY THE GOVERNMENT BY ACQUIRING LAND FROM VILLAGERS THAT USED BY THE INDUSTRY OF THE ELECTRICITY AND WATER HAS AFFECTED THE AVAILABILITY OF THESE RESOURCES FOR THE VILLAGERS. THEREFORE, ASSESSEE HAS INCURRED THE EXPENDITURE FOR RENOVAT ION OF SCHOOL PREMISES WHERE THE CH ILDREN FROM THE VILLAGE STUDY WILL HELP THE ASSESSEE I N THE SMOOTH RUNNING OF THE FACTORY BY CREATING POSITIVE ATMOSPHERE. THEREFORE, WE ALLOW THE SAME. 9 . IN THE R ESULT, APPEAL FILED BY THE REVENUE IS PARTLY ALLOWED AND C.O FILED BY THE ASSESSEE IS ALLOWED. ORDER PRONOUNCED IN THE OPEN COURT ON 6 .6 .2014. SD/ - SD/ - ( P.K. BANSAL) (D.T. GARASIA) ACCOUNTANT MEMBER JUDICIAL MEMBER PLACE : PANAJI / GOA DATED : 6 .6 .2014 P.S. - *PK* COPY TO : ( 1 ) APPELLANT ( 2 ) RESPONDENT ( 3 ) CIT CONCERNED ( 4 ) CIT(A) CONCERNED ( 5 ) D.R ( 6 ) GUARD FILE TRUE COPY, BY ORDER