Delhi High Court

B.H.P. Engineers Ltd. vs Deputy Commissioner Of Income Tax on 27 November, 1997

Equivalent citations: (1998) 61 TTJ Del 503

ORDER

V. Dongzathang, V. P.

These cross appeals are directed against the order of Commissioner (Appeals). It is relevant for the assessment year 1992-93. The assessee is a company. Its previous year is the financial year ending 31-3-1992. It is engaged, inter alia, in the business of manufacture of equipments such as multi-duty bucket elevators, apron conveyors, belt conveyors elevators, and process equipment, etc. The assessee had an agreement for this purpose with Rexnord Inc., USA. The assessee carried out various projects in co-operation with the U.S. company. The assessee claimed deduction under section 80-I of the Act. While computing the said deduction under section 80-I of the Act, the assessing officer excluded the following items for working out the eligible profits :

Rs.

(i) Miscellaneous income

1,24,711

(ii) Interest from Banks

6,44,587

(iii) CCS

9,73,670

(iv) Engineering services

10,76,478

Aggrieved by the said disallowance, the assessee took up the matter in appeal before the Commissioner (Appealas) who allowed the claim in so far as income in regard to CCS and engineering services are concerned. The learned Commissioner (Appeals), however, did not allow the claim in so far as miscellaneous income and interest from bank are concerned.

2. The assessee has come up in appeal before us, contending that the learned Commissioner (Appeals) was not justified in excluding interest from bank and miscellaneous income from the computation of deduction under section 80-I of the Act. On the other hand, the revenue challenged the order of the Commissioner (Appeals) directing the assessing officer to allow deduction under section 80-I in respect of receipts comprising of CCS and engineering service fees.

3. Shri O.P. Vaish, learned counsel assisted by Rupesh Jain appeared for the assessee. It is submitted by him that the matter had not been properly appreciated by the revenue authorities. According to him, there is no income from interest as such which is assessable to tax. While preparing the accounts in terms of the Companies Act, the assessee was required to show debits and credits of interest without making adjustment. As per the Profit & Loss account the outgoing on account of interest included the financial expenses amounting to Rs. 12,86,762. The total debit under the financial expenses came to Rs. 18,91,759.30 consisting of the following items :

Rs.

(i) Bank charges

1,71,397.72

(ii) Interest on working capital

7,95,651.65

(iii) Interest on term loan

4,04,564.85

(iv) Interest on book debts

86,546.08

(v) Guarantee commission

4,33,599.00

On the income side, the interest from bank was shown at Rs. 6,44,587. There is, therefore, a net outflow of Rs. 6,42,175 on account of interest and, therefore, there is no income which can be excluded from the profit and gains of the business. O.P. Vaish further submitted that the interest is received on the margin provided to the bank for securing bid guarantees, performance guarantees, and advance guarantees from the bank provided to the customer: Since providing these guarantees is an integral part of the activities of the industrial undertaking, the interest on such margin money deposited. Forms part of the profit and gains of the business. In any event, the interest on margin money deposit allowed by the bank is at a rate lower than the interest charged on the short-term and long-term loans and bank overdrafts. It is fallacious to say that there is income from bank which is assessable to tax. It is also submitted that the various benches of the Tribunal held that such interest income arising from surplus funds not immediately required in the undertaking forms part of and is income derived from the industrial undertaking. Relying on decisions in the case of Pondicherry Distilleries Ltd. v. ITO (1984) 20 TTJ (Mad-Trib) 410 and in the case of Anand & Co. v. Asstt. CIT (1995) 54 ITD 82 (Cal-Trib), it is submitted that no disallowance is called for in this regard. It is also submitted that there has never been any disallowance on this account in the past and, therefore, the interest income should not be excluded while computing the profit and gains of the business for computation under section 80-I of the Act.

4. In so far as miscellaneous income is concerned, it is submitted that the assessee, while carrying out the project work has to handle various machineries and parts thereof being components and spares for the plants supplied by the assessee. The income arising from such activities form part of the income derived from the industrial undertaking and, therefore, the same cannot be excluded being integral part of the same activity.

5. On the other hand Digvijay Kumar, the learned Senior Departmental Representative vehemently supported the order of the Commissioner (Appeals). According to him each year of assessment is separate and distinct as held by the Hon'ble Supreme Court in the case of Joint Family of Udayan Chinubhai v. CIT (1967) 63 ITR 416 (SC). Therefore, the earlier orders of the assessing officer will not operate as res-judicata in respect of the matter to be decided during this year. in view of the findings given by the assessing officer and the Commissioner (Appeals), it is submitted that there is no infirmity in the order of the assessing officer in deviating from the earlier orders.

6. With regard to the merit of the case, it is submitted that interest income cannot be said to be profit derived from industrial undertaking. Relying on the decision in the case of CIT v. Cement Distributors Ltd. (1994) 208 ITR 355 (Del), and the earlier decision of the Hon'ble Supreme Court in the case of Cambay Electric Supply Industrial Co. Ltd. (1978) 113 ITR 84 (SC) and of the Hon'ble Bombay High Court in the case of Hindustan Lever Ltd. v. CIT (1980) 121 ITR 951 (Bom), it is submitted that the word `derived' has to be assigned a restricted meaning as compared to the words "attributable to" or "referable to" and, therefore, to avail the deduction under section 80-I, the assessee must establish that it has derived profits or gains from an industrial undertaking. Since the interest income stands on a different footing, it is submitted that the same has been rightly excluded while working out the deduction under section 80-I of the Act.

7. On careful consideration of the rival submissions, in the light of the material on record, we are of the view that on the facts of the case, there is no income from interest from bank as seen from the Profit & Loss account of the assessee. The assessee furnished the Profit & Loss account at page 70 of the paper-book in which `other income' was shown at Rs. 17,42,968 which consist of miscellaneous income of Rs. 1,24,711, interest from banks (gross) Rs. 6,44,587 and CCS received Rs. 9,73,670. Against this income, the expenditure on account of financial expenses have been shown at Rs. 18,91,759. (The details of which have been given at the earlier part of the order). On the basis of these facts, it is seen that there is no income as such from interest which can be assessed as interest income as there is debit balance on account of interest. The order of the assessing officer itself is a clear testimony in this regard as there is no income from interest assessed under the head "income from other sources". The assessment order begins with the profit as per Profit & Loss account Rs. 30,86,654.

After making various adjustments, the income before allowing deduction under section 80-I and section 80HHC comes to Rs. 82,34,868. Since there is no income from interest assessed to tax in view of the net outflow being in excess of the inflow of interest, there is no reasonable ground for deducting the interest income of Rs. 6,44,587 while working out the deduction under section 80-I of the Act.

8. The assessing officer is accordingly directed not to exclude this income of Rs. 6,44,587 as there is no income from interest from bank which is included in the total income of the assessee and assessable to tax.

9. In view of the above findings on facts, we do not consider it necessary to consider the legal issue whether the income from interest is income derived from the profits and gains of the industrial undertaking. We leave at that.

10. With regard to the miscellaneous income, it is seen that the assessee claims the said income to be forming the integral part of the business activities of the industrial undertaking the assessee undertook supply of plant and machinery to Indonesia in co-operation with the US Co. It is claimed that various expenses on account of transportation of equipments and supply of parts and components were shown under the head `miscellaneous income' though the same form integral part of the project. Since the assessing officer and the Commissioner (Appeals) did not verify this aspect of the matter, we consider it fair and reasonable to set aside the issue on this point with a direction that the claim should be decided in accordance with law, after giving full opportunity to the assessee to substantiate the claim.

11. While dealing with this issue, we may also consider the appeal of the revenue regarding the direction of the Commissioner (Appeals) to allow deduction under section 80-I in respect of receipts comprising of CCS and engineering service fee. It is the claim of the revenue that these receipts do not have any direct nexus with the activities of the industrial undertaking and, therefore, the same cannot be considered as profits derived from the industrial undertaking. In this regard, it will be worthwhile to reproduce the finding of the Commissioner (Appeals) on this point :

"2.7 Regarding the claim of deduction under section 80-I with regard to the engineering services of Rs. 10,76,478 I find that the decisions on the assessing officer is not justified. The assessee is rendering services to its foreign clients by preparing drawings to the specifications, design of the machineries supplied by them. The assessing officer has already held in respect of this receipt that the same is on account of export of goods and, therefore, he is not justified to deny exemption under section 80-I in respect of receipt on account of engineering services. Further, when the assessee prepares the detailed drawings of any machinery as per the design and specifications supplied by its foreign company, it produces or manufactures an article or thing which is sold by him to its foreign clients and earns foreign exchange on the same. In the current year, such receipt has been shown at Rs. 10,76,479. That being so, I will hold that the assessee will be entitled to deduction under section 80-I on the engineering service fee of Rs. 10,76,478 as the same is directly related to the manufacturing or producing activity of the industrial undertaking.

2.8 Regarding the claim of deduction under section 80-I on CCS, I will like to mention that CCS is paid by the government to the exporter to compensate for un-rebated indirect taxes paid by the exporter on input which enter into export production as well as to neutralise disadvantage suffered by the exporter on account of freight rates on its export in comparison to international market which may be discriminatory or higher. Therefore, the payment of CCS has a direct nexus to the production of the goods which are exported by an assessee and manufactured by the Industrial undertaking. In the case of Mentha & Allied Products (P) Ltd. (supra) the Third Member had examined various decisions on this point in details. It was mentioned by him that on this point, there were two views taken by the various High Courts. Therefore, following the decision of Supreme Court in the case of CIT v. Vegetable Products Ltd. (1973) 88 ITR 192 (SC), he had allowed the appeal in favour of the assessee preferring the view which was favourable to the assessee. Respectfully, following the Third Member's decision in the above case, I will, therefore, allow the claim of deduction under section 80-I on CCS on the amount of Rs. 9,73,670 holding that CCS was received by the appellant on the exports of goods which were manufactured or produced by the industrial undertaking and, therefore, the CCS had a direct nexus with the manufacturing or production activity of the appellant's industrial undertaking."

After hearing both the parties, we are of the view that the findings given by the leaned Commissioner (Appeals) on these points are well-founded and calls for no interference. It is accordingly upheld.

In the result, the appeal of the revenue fails.

12. The next ground is in regard to the disallowance of deduction under section 80-O of engineering fee of Rs. 10,76,478. As indicated earlier, the assessee is having technical collaboration with Rexnord Inc. USA. The U.S. company gave assignment to the assessee for preparing drawings and designs and allot engineering work in respect of their clients in other parts of the world. In that process the assessee exports its equipment and secure assignments for site visits and installation of equipments. The assessee, therefore, made a separate charge for provision on technical and professional services by way of preparation of revised and detailed designs and dates in respect of export orders assigned to it by the US company. A sum of US $ 37,950 equivalent to Rs. 10,76,478 was earned in foreign exchange on which the assessee claimed deduction under section 80-O of the Act. The assessing officer however, did not allow the claim on the ground that the engineering service fee is not for services rendered out of India and that the activity amounts to sale of drawings and designs.

Aggrieved by the said order, the assessee took up the matter in appeal before the Commissioner (Appeals) who, however, sustained the disallowance with the remark that the assessee will be allowed deduction under section 80HHC on this amount and not under section 80-O because the conditions laid down under section 80-O have not been fulfillled.

13. The assessee is still aggrieved and has come up in appeal before the Tribunal. O.P. Vaish, the learned counsel, submitted that section 80-O of the Act is made applicable to assessment year 1992-93 onwards in so far as income in consideration of technical or professional services rendered outside India in respect of which income is received in convertible foreign exchange in India. As per clause (iii) of the Explanation to section 80-O services rendered or to be rendered outside India includes services rendered from India but does not include services rendered in India. In preparing drawings and designs for the U.S. company and using them in connection with supply of equipment and personnel outside India, services by way of providing drawings and designs and technical and professional services rendered to the U.S. company from India, The assessee is, therefore, eligible for deduction under section 80-O of the Act. In this regard, O.P. Vaish drew our attention to the invoice copies of which are given at page 28 of the paper-book in which the details of various amounts charged from Rexnord Inc., USA were indicated totalling US dollars amounting to Rs. 37,950. Relying on the decision of the Tribunal Delhi Bench in the case of Capt. K.C. Saigal v. ITO (1995) 54 ITD 488 (Del-Trib), it is submitted that the assessee fully complied with the requirements of section 80-O and, therefore, the same had to be allowed being fees received on account of technical and engineering services provided outside India.

On the other hand Shri Digvijay Kumar, the learned Senior Departmental Representative submitted that there is no infirmity in the order of the learned Commissioner (Appeals) with regard to technical and engineering services claimed to have been rendered by the assessee. It is submitted that the drawings and designs are in the possession of the US company. The assessee has been merely selling these drawings and designs on behalf of the principal and, therefore, it cannot be said that there is provision of technical and engineering services rendered by the assessee in the form of drawings and designs supplied to foreign parties on behalf of the principal. It is also submitted that the learned Commissioner (Appeals) fully considered these claims and rejected the same on proper grounds, and, therefore, there is no need of interference in this regard.

14. On careful consideration of the rival submissions in the light of the material on record, we are of the view that the case of the assessee has not been considered in the right perspective. As indicated earlier, the assessee had a technical collaboration with US company Rexnord Inc., for supply of technical know-how for which the assessee was paying royalty. Over a period of time the assessee had experience in this line and could handle various projects as required by the developing countries. Though the technical know-how form the basis there is no denying the fact that revision of such designs and drawings is required to suit the requirements of the customers. For this purpose, the assessee rendered services to the principal Rexnord Inc., USA and the details of the fees charged on this account are listed out at page 28 of the paper-book. In such a case, it cannot be said that the assessee has been selling the technical know-how of the principal. If that is the case, the receipt would be in the nature of commission without any element of other technical services rendered by the assessee. Since the facts are quite different from selling activities, it has to be treated as receipt on account of technical and engineering services as rightly charged by the assessee. With regard to the objection that this engineering services fee was not for service rendered out of India, it is seen that this issue is directly covered by the decision of the Delhi Tribunal in the case of Capt. K.C. Saigal (supra). In that case, the assessee was liaisoning between ship owners/charters and Indian companies intending to send their cargo abroad. The assessee was signing agreements on behalf of foreign ship owners and had been supplying specialised information to both parties gathered from available sources and also by his own skill and was earning fixed brokerage of 1.25 per cent of freight paid by Indian companies to foreign ship-owners. Such brokerage was deducted by Indian companies from their payments to foreign ship-owners in foreign currency, and credited to assessee's bank account in Indian rupees. The assessee claimed deduction under section 80-O on the above brokerage fees received in foreign exchange. The claim was disallowed by the assessing officer and the Commissioner (Appeals). When it came up before the Tribunal, it was held that such services rendered by the assessee were technical and professional services in terms of section 80-O and the assessee was entitled to deduction on such brokerage. Since the facts of the assessee are similar to the facts before the Tribunal in the case of Capt. K.C. Saigal (supra) we are of the view that the assessee is entitled to deduction under section 80-O on the above amount. We hold accordingly and direct the assessing officer to allow the claim of deduction under section 80-O on this engineering service fee, subject to the fulfillment of other conditions.

15. With regard to ground No. 3, we are of the view that our findings in regard to ground No. 1 will be equally applicable for deduction under section 80HHC of the Act. The assessing officer is directed to consider the claim in the light of our findings in regard to the claim under section 80-I of the Act.

16. The last ground that remains for our consideration is in regard to the disallowance of claim of liquidated damages amounting to Rs. 19,02,272. The assessee in this case entered into agreement with Birla Jute & Ind. Ltd. for supply of equipment. According to the assessee, the terms of the contract provided that in the event of delay in supply of equipment beyond six months of the date of order, the damages would be payable @ 0.5 per cent of the contract price per week of delay subject to a maximum of 5 per cent of the contract price. The contract was claimed to be backed by the assessee's performance bank guarantee for 12.5 per cent of the contract price amounting to Rs. 41,85,000 plus Rs. 15,14,000. According to the assessee, there was an automatic accrual of liquidated damages which the customer had the right to recover from out of the bank guarantees provided to the customers. The assessee, therefore, made a provision for this liquidated damages in the account on the basis of the terms of the contract. The assessing officer however, did not allow the claim on the finding that there was no demand for payment of the damages from the customers and the assessee brought back the provision in the subsequent year.

On appeal, the learned Commissioner (Appeals) upheld the disallowance holding that the liquidated damages claimed by the assessee were only a contingent liability and was not the liability in prasenti. The assessee is still aggrieved and has come up in appeal before the Tribunal.

17. Shri O.P. Vaish the learned counsel submitted that the provision of liquidated damages made by the assessee in the account is not dependent on the claim to be made by the customers. It flows from the agreement and it accrues on the basis of the default of the assessee to supply the equipment to the customers in time.

In so far as the claim of the customer is concerned, it is submitted the the same was received only on 14-11-1994 and it could not be submitted and produced before the assessing officer. It is also submitted that there was no writing back of the provisions in the next year. In fact in the next year. provision for additional liability was made by way of fresh provision after reversing the earlier provision at the same time. It is, therefore, submitted that the claim of the assessee should be allowed in the light of the decision of the Special Bench of the Tribunal in the case of K.C. P. Ltd. v. ITO (1990) 34 ITD 50 (Hyd-Trib)(SB) and K.C. P. Ltd. v. ITO (1991) 30 ITD 15 (Hyd-Trib) (SB). Reliance is also placed on the decision in the case of Kaveri Engg. Industries Ltd. v. Dy. CIT (1992) 43 ITD 527 (Mad-Trib). The learned counsel also distinguished the decision of the Hon'ble Allahabad High Court in the case of CIT v. Laxman Das (1980) 124 ITR 411 (All), on which reliance was placed by the learned Commissioner (Appeals). It is submitted that the facts are totally different and the reliance is misplaced.

18. On the other hand, Digvijay Kumar, the learned Senior Departmental Representative supported the order of the Commissioner (Appeals). Keeping in view the findings of the assessing officer and the Commissioner (Appeals), it is clear that the liability is only a contingent liability on the basis of the contract entered into by the assessee with Birla Jute & Ind. Ltd. There is, therefore, no reason to interfere with the order of the Commissioner (Appeals) as the same is also fully supported by the decision of the Hon'ble Allahabad High Court in the case of CIT v. Laxman Das (supra).

19. On careful consideration of the rival submissions in the light of the material on record, we are of the view that this issue requires further enquiry and ascertainment of the facts. From the order of the assessing officer it is seen that the disallowance was made by him mainly on the ground that there was no claim made by the customer for payment of damages and also that the assessee wrote back the provision in a subsequent year. Form the details furnished by the assessee in the paper-book, at page 34 and page 35 it is seen that the assessee has been paying and also making provision for liquidated damages for the year ending 31-3-1990 and 31-3-1991. It is also seen that the provisions made thereon have been reversed in a number of cases. If in fact the liquidated damages flows automatically out of the agreement, there cannot be any question of reversing the provision made earlier. The assessee has to pay. If however, the same is negotiable and sometimes abandoned by the customer then it will assume the character of contingent liability. From the facts noted by the assessing officer it is seen that there has not been claim for such damages. The learned counsel however, submitted that the claim was received much later on 14-11-1994. The learned counsel also denied any writing back of the provision in the next year. Unless these facts are ascertained, it is not possible to adjudicate on this issue. We, therefore, consider it necessary to set aside the order of the Commissioner (Appeals) on this point and restore the matter to the file of the assessing officer with a direction that he will being on record all the relevant facts and decide the claim in accordance with law. In doing so, he shall give full opportunity to the assessee to substantiate the claim. The order on this point is accordingly set aside for fresh decision as indicated above.

20. In the result, the appeal of the assessee shall be treated as partly allowed.

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