DELHI BENCH ASSISTANT CLAAS INDIA LTD. v. COMMISSIONER OF INCOME TAX February 22, 2008 JUDGMENT CLAAS INDIA LTD. vs. ASSISTANT COMMISSIONER OF INCOME TAX ORDER deepak r. shah, A.M.: This appeal by assessee is directed against order of learned CIT(A)- IV, New Delhi dt. 28th Nov., 2005. Though several grounds are raised, appellant is aggrieved by order of CIT(A) in relation to computation of deduction under s. 80-IB and s. 80HHC of IT Act, 1961. assessee company claimed deduction under s. 80-IB amounting to Rs. 38,120,284. During year under consideration, total sales shown in industrial undertaking aggregated to Rs. 57.52 crores which comprised of sale of harvester combines Rs. 45.80 crores and spare parts Rs. 11.72 crores. AO held that sale of spare parts amounting to Rs. 1,172.63 lacs represents trading activity. Accordingly he proceeded to exclude profits attributable to trading of spare parts estimated at Rs. 2,58,90,689. working of this figure has not been given in assessment order; however it appears that figure has been arrived at as under: Profits of industrial undertaking x sale of spare parts Total sales x 11.72 = Rs. 2,58,90,689 In appeal learned CIT(A) upheld action of AO on following ground: "It is clear that appellant is buying components from outside vendors and clearly its own plant and machinery is not being put to use for manufacture of these items. When some other units are manufacturing some items which appellant later buys appellant can hardly claim 80-IA on this activity." According to CIT(A) deduction under s. 80-IA cannot be allowed "on these products which are not manufactured by him." We have heard Shri T.N. Chopra, learned advocate on behalf of appellant and Shri Purushottam Tripuri, learned senior Departmental Representative on behalf of Revenue. Explaining background of appellant company, Shri Chopra submitted that Escorts Claas Ltd. (now Claas India Ltd.) was incorporated on 5th Dec., 1990 as joint venture company between Claas KGaA of Germany and Escorts Ltd. for manufacture and sale of Crop Tiger harvester combines track and wheel. manufacturing facility is located at Faridabad. It is ISO 9001 and 14000 accredited plant. On August, 2002 Claas KGaA, Germany acquired shares held by Escorts Ltd. and assessee company thus became 100 per cent subsidiary of German company. On 13th Dec., 2002 company received approval from RoC for change in name of company to Claas India Ltd. assessee company has entered into distribution agreement with Escorts Ltd. granting non exclusive sales right for all products of assessee company namely, harvester combines and its spare parts (CIL products) for sale in India and Nepal. Under this agreement Escorts Ltd. has responsibility to set up and maintain efficient after-sales service and also ensure proper and immediate spare parts supply for end users of CIL products. Explaining business model and manufacturing process Shri Chopra submitted that basic technology for harvester combine, being manufactured by assessee company, has been provided by parent German company and is most modern and sophisticated technology ideal for mechanized harvesting of crops of wheat and rice etc. imported technology has been modified by assessee company to suit locally available materials and manufacturing processes for optimum material cost, required performance and reliability/durability. assessee company owns licence, patent and brand name Claas for manufacture of Claas products. In harvester combine various operations for harvesting of crops like cutting, thrashing and winnowing are performed by machine. Since raw agricultural crops harvested from soil are quite abrasive and harvesting in Indian fields involve greater wear and tear, assessee company has suitably modified imported technology to suit local conditions. specially designed thrasher mechanism employing Tangential Axial Flow technique is used so as to reduce grain losses and deliver clean unbroken grain. assessee company has, in design and development department of its industrial undertaking, evolved special treatments and methods for imparting greater strength to machine and its parts like blades, table auger, feeder hosing, cutter bar, thrashing drum etc. Some typical methods used by industrial undertaking for enhancing efficacy and strength of its products are: (a) Flame hardening (b) Salt bath hardening and tempering. During above hardening processes, distortion of spare parts may occur and for that purpose design of spare parts has to be made so as to keep distortion within permissible limits. (c) Use of special anti-wear materials like Patra steel, Manganese steel and anti-wear steels etc. Explaining further Shri Chopra submitted that harvester combine manufactured by assessee comprises 2124 spares/components. These components are used in assembly of harvester combine . During course of proceedings before AO as well as learned CIT(A), assessee explained that since it is not commercially expedient and viable to carry out entire manufacturing processes inside factory, out sourcing of some manufacturing processes has to be done. Certain components may be got fabricated from outside parties as per drawings, designs, specifications and standards for such components as prepared and supplied by assessee to fabricator. outside parties would fabricate components in accordance with drawings and specifications furnished by assessee company and entire manufacturing process would be carried out by fabricator under direct supervision, direction and control of assessee company. Various steps taken right from conception stage for development of improved components of machine are briefly enumerated at p. 9 of paper book 1. Needless to say CIL products bear logo and brand name of Claas and assessee holds intellectual property rights over manufacture and sale of such products. Unless permitted by assessee company, CIL products including components and sub-assemblies used in Claas brand of harvester combine can neither be produced nor sold by any person in India. components got fabricated from outside parties on basis of designs, drawings, specifications and standards supplied by assessee company and under guidance, control and supervision of technical personnel of company, are again subjected to certain stages of manufacturing processes inside factory before these are dispatched to Escorts Ltd. for distribution in market. With regard to various processes which are carried on components, received from outside parties after fabrication or on components produced inside factory itself, further value addition by way of painting, welding, anti-rust treatment, flame hardening, salt bath hardening and tempering etc., has to be done inside factory. Such processes are carried out in various departments inside factory like painting department, assembly and welding department etc. Process Flow Chart placed at p. 96 of paper book 1 broadly indicates various operations carried out in different departments. Paint shop of assessee undertaking utilizes paints and varnishes of special technical specifications and composition as indicated in Works Standard CN 070337 placed at pp. 26 and 27 of paper book No. 1. Detailed instruction sheets have been issued to various departments and divisions of undertaking, detailing processes to be carried out on various components, spare parts and sub-assemblies, (placed in paper book no. 1 at pp. 40 to 96). details and information regarding manufacturing processes have been produced before AO and same have however been brushed aside while making assessment. Before learned CIT(A) assessee submitted 47 instruction sheets and requested vide letter dt. 18th February, 2005 same be admitted as additional evidence. However AO informed CIT(A) that submissions have already been considered by him. assessee company has sold harvester combine and various components/ sub-assemblies. In all 985 types of items were sold as spares/components/ sub-assemblies. total sale value of these items aggregates to Rs. 11.71 crores. Out of this invoice value of 47 items of spares works out to 9.55 crores which represents more than 80 per cent of value of sales of components as per details placed at p. 39 of paper book 1. Full details with regard to sale of components have been filed before AO. With regard to aforementioned 47 items of spares/sub-assemblies, assessee company has submitted chart before learned CIT(A) (vide its letter dt. 14th Feb., 2005) providing name of item, sale value and percentage of sale value vis-a-vis total sale of spares/components/sub-assemblies. Copies of instruction sheets detailing in house value additions made by assessee company were also furnished as indicated earlier (these are again placed in paper book No. 1 at pp. 40 to 96). Shri Chopra further explained that reference to aforementioned 47 items of sales of spares at p. 39 of paper book 1 would indicate that first item namely harvester track is major item in sales figure of component/spares/sub-assemblies. Harvester track is got fabricated from Japanese party namely, Bridgestone Japan on basis of design, drawings and specifications supplied by assessee company. With view to assure quality control of critical component, requiring great precision and accuracy, it is highly imperative that stringent controls and supervision over manufacturing of component is exercised by assessee company. Such control and supervision is in any case essential for component to be compatible with operation of machine. harvester tracks are received in container from fabricator. After receipt of tracks, these are required to be subjected to certain processes of manufacture by assembly department as indicated in instruction sheet (placed at p. 40 of paper book 1). instruction sheet details seven processes which are required to be carried out before component is ready for use and dispatch. After these processes are carried out, track is packed in specialized packing before dispatch to distributor. second item included in list of 47 items of sale is drive sprocket. This item is got fabricated from Ashoka Machine Tools, New Delhi. Process sheet has been furnished to fabricator along with drawing indicating design, specification as well as equipments and tools which may be used for carrying out various stages for production of component (placed at p. 95 of paper book No. 1). component is thus caused to be produced under direct supervision, control and guidance of assessee company. technical personnel of assessee personally inspect production of component and ensure quality control as per standards and specifications required by assessee company. As indicated earlier components of machine require considerable precision and accuracy so as to be compatible with operation of machine. After component is received from fabricator it is sent to paint shop for carrying out specialized process of painting. Instruction sheet placed in paper book No. 1 at p. 41 details processes carried out after receipt of component from fabricator. Similarly with regard to other components which are included in sale list, it is submitted that either these components are manufactured inside factory itself or else these are got fabricated from outside parties by supplying drawings, designs and specifications and under supervision, control and guidance of technical personnel of assessee company. In some cases after components are manufactured inside factory, certain processes may be got done on job work basis from outside parties. sum of Rs. 42.74 lacs has been debited to P&L a/c on such job work (schedule to P&L a/c placed at page No. 143 of paper book 1). Inviting reference to balance sheet of assessee company Shri Chopra stated that it would show fixed assets as on 1st April, 2000 valued at Rs. 14.18 cr which includes plant and machinery at Rs. 4.61 cr. Addition to plant and machinery during year amounts to Rs. 29.79 lakhs. machinery of industrial undertaking has admittedly been utilized for production of various components, sub- assemblies and assembly of harvester combine. Research and development activities for upgradation of imported technology have been carried out in industrial undertaking of assessee on ongoing basis. Various expenses connected with manufacturing operations like raw material, tools consumed, job work, testing charges etc., debited in books under head "Material, Manufacturing, and Operating" at Rs. 3,835.84 lacs (p. 143) provide further indication regarding extensive range of manufacturing operations carried out in industrial undertaking. undertaking of assessee company is thus not merely assembler of components for assembling harvester combines. entire gamut of manufacturing operations for manufacture of components, sub-assemblies, and assembly of harvester combine machines are carried out by undertaking of assessee. As per normal and usual practice in manufacturing sector, assessee has been outsourcing certain manufacturing operations and processes on account of constraints of resources as also considerations of business expediency and convenience. Shri Chopra submitted that aforementioned factual matrix of case, which projects factual perspective of activities and operations of industrial undertaking of assessee, has been set out in various letters filed during proceedings before learned AO as well as learned CIT(A). books of account including stock records as well as details of activities carried out by various departments of industrial undertaking of assessee like paint shop, assembly shop fabrication section as also instruction sheets and control sheets which formed basis of various stages of manufacture have been duly produced before Revenue authorities. factual matrix as set out above and duly put forth before Revenue authorities has not been disputed. only dispute raised by Revenue is regarding inclusion of sale of spare parts/components/sub-assemblies amounting to Rs. 11,72,63,188 for computation of relief under s. 80-IB and excluding certain items like scrap sale, provisions of warranty claims etc. for purposes of s. 80HHC. Assailing order of learned CIT(A) Shri Chopra submitted that same is factually and legally unsustainable. facts and materials placed on record, as referred hereinabove, amply demonstrate that components have been manufactured by industrial undertaking and mere fact that certain processes have been out sourced would not by itself exclude spare parts, components and sub-assemblies from domain of manufacturing activities of industrial undertaking. It is submitted that learned CIT(A) has clearly misdirected herself on facts and law in holding that no manufacturing activity has been carried out for components by industrial undertaking. This is factually incorrect and legally untenable. It is well settled by catena of decisions of Hon ble Supreme Court and various High Courts including jurisdictional High Court namely Delhi High Court that manufacturer need not possess any manufacturing plant or machinery and may get goods manufactured either personally or someone under his supervisory control or direction. What is material is overall control and management of manufacture of goods and not ownership of plant or machinery. Supreme Court has held in CST vs. Dr. Sukh Deo (1969) 23 STC 385 (SC) that manufacturer is person by whom or under whose direction or control goods are manufactured. Strong reliance was placed on judgment of Calcutta High Court in Addl. CIT vs. A. Mukherjee & Co. (P) Ltd. (1978) 113 ITR 718 (Cal). question there was whether assessee company which carried on business of publishing books could be said to be manufacturer. As aforesaid, it was publisher of books. assessee s job was to get manuscript for publication, hit upon suitable format for book, get it printed as per its requirements under its supervision, get book bound after suitable changes and then put out publication for sale. In all these activities assessee had to play active role by co-ordinating its activities in business like manner. All these activities dovetailed into one another and stage from acquisition of manuscript right upto publication was one integrated activity which tantamount to manufacturing or processing activity. It was held that aforesaid findings of Tribunal conclusively showed that assessee was engaged in activity of manufacturing and also of processing books which were goods. In that case, facts found further showed that assessee did not own printing press. It was observed that in order that publisher of books should be manufacturer of books, it was wholly unnecessary for him to be book binder himself. publisher may get books printed by any printer but printer is not manufacturer but mere contractor. This decision has been followed by another Division Bench of Calcutta High Court in Griffon Laboratories (P) Ltd. vs. CIT (1979) 119 ITR 145 (Cal), where it has been held that manufacturer may hire plant or machinery and employ hired labour and manufacture goods. But to earn benefit of concessional rate of tax as industrial company, company must mainly engage itself in manufacture or processing of goods as specified in s. 2(7) of Finance Act, 1966, either by itself or by someone under its supervisory control or direction. decision of Calcutta High Court in Addl. CIT vs. A. Mukherjee & Co. (P) Ltd. (supra), has been followed by Hon ble Delhi High Court in Orient Longman Ltd. vs. CIT (1981) 130 ITR 477 (Del). Referring to aforesaid decision of Calcutta High Court, their Lordships of Delhi High Court observed as under: "It appears that conclusion of Calcutta High Court would apply to present case. Although assessee in this case, as publisher, would not be doing more than getting manuscript and preparing same for printing and book binding, fact that printing and book binding is done by someone else does not imply that someone else is manufacturer. In fact, it is business of assessee to get books, manufactured by getting manuscript, designing nature of book, finishing anticipated product and then actually selling product after getting it made. definition of words industrial company given in s. 2(6)(c) of Finance Act, 1970, is as follows: Industrial company means company which is mainly engaged in business of generation or distribution of electricity or any other form of power or in construction of ships or in manufacture or processing of goods or in mining... only words which apply to present case are "manufacture or processing of goods". Books in manufactured state which are sold to customers are goods, and their manufacture or processing is, as in case of other goods, conversion of paper and manuscript written by author into book. This certainly involves either manufacture or processing, and there is no doubt that assessee was engaged in business of manufacturing or processing books." Shri Chopra submitted that similar view has been taken by Calcutta High Court in Farichem Laboratories (P) Ltd. vs. CIT (2006) 203 CTR (Cal) 377: (2005) 273 ITR 133 (Cal) and Bombay High Court in India Tyre & Rubber Co. (India) (P) Ltd. vs. CIT (1994) 116 CTR (Bom) 612: (1994) 210 ITR 409 (Bom). This view is now well settled by various decisions of other High Courts namely CIT vs. Rajamohan Cashews (P) Ltd. (1990) 185 ITR 472 (Ker); CWT vs. Mubarak Ali Khan (1980) 123 ITR 101 (All); CIT vs. Indian Resins & Polymers (1998) 148 CTR (Ker) 143: (1999) 235 ITR 5 (Ker); CWT vs. Smt. Premlatabai (1982) 31 CTR (MP) 188: (1982) 137 ITR 329 (MP); CIT vs. Talwar Khuller (P) Ltd. (1998) 149 CTR (All) 117: (1998) 235 ITR 70 (All) and CIT vs. Neo Pharma Private Ltd. (1982) 28 CTR (Bom) 223: (1982) 137 ITR 879 (Bom); CIT vs. Prabhudas Kishordas Tobacco Products (P) Ltd. (2006) 201 CTR (Guj) 312: (2006) 282 ITR 568 (Guj). Shri Chopra further strengthened his arguments by submitting that proposition enunciated in unending array of judgments by various High Courts and Hon ble Supreme Court, as referred above, has also been accepted by CBDT vide its Circular No. 347 dt. 7th July, 1982. This circular has been issued for explaining scope and ambit of expression "manufacture or processing of goods" as used in definition of industrial company for purposes of s. 104 of IT Act. circular says that Board has accepted view taken by Madras and Calcutta High Courts in cases of CIT vs. Commercial Laws of India (P) Ltd. (1977) 107 ITR 822 (Mad) and Addl. CIT vs. A. Mukherjee & Co. (P) Ltd. (1978) 113 ITR 718 (Cal). view accepted by Board is binding on Revenue authorities. For this proposition reliance has placed on judgment of Hon ble Supreme Court in case of CCE vs. Dhiren Chemical Industries (2002) 172 CTR (SC) 670: (2002) 254 ITR 554 (SC) wherein it has laid down proposition that circulars issued by Board are binding on tax authorities even if these are in conflict with statute. According to Supreme Court it is not open to Revenue to raise contention that is contrary to binding circular by Board. Revenue cannot be allowed to plead that view taken in circular is not valid nor that it is contrary to terms of statute. Thus reasoning adopted by learned CIT(A) for denying deduction under s. 80-IB runs contrary to Board Circular and has no merit. Shri Chopra submitted that having regard to aforesaid discussion basis adopted by learned CIT(A) for disallowing deduction under s. 80- IB is contrary to Board Circular as well as binding decisions of jurisdictional High Court and Hon ble Supreme Court and various other High Courts referred above. Since components have been manufactured inside factory or caused to be manufactured by outside fabricators under direction, control and supervision of assessee and further various processes of manufacture have also been carried out on such components inside factory, it is amply established that industrial undertaking has manufactured or produced components as integral and indivisible activity of manufacture of harvest combine and its components. Therefore deduction under s. 80-IB is liable to be allowed on sale of such components. Shri Chopra also submitted that s. 80-IB has been enacted by legislature with view to promote growth of industry by providing incentive to entrepreneurs to establish new industries. Such provision should be liberally construed so as to effectuate legislative intention engrafted in statute. rule of interpretation of incentive provision has been laid down by Hon ble Supreme Court in Union of India vs. Wood Papers Ltd. AIR 1991 SC 2049. Court observed: "Truly speaking liberal and strict constructions of exemption provision are to be invoked at different stages of interpreting it. When question is whether subject falls in notification or in exemption clause then it being in nature of exception is to be construed strictly and against subject but once ambiguity or doubt about applicability is lifted and subject falls in notification, then full play should be given to it and it calls for wider and liberal construction." Supreme Court reiterated same principle in CIT vs. Strawboard Manufacturing Co. Ltd. (1989) 77 CTR (SC) 75: (1989) 177 ITR 431 (SC) and Bajaj Tempo Ltd. vs. ITO (1992) 104 CTR (SC) 116: (1992) 196 ITR 188 (SC). Shri Chopra also submitted that fact that AO has treated spare parts and components as goods processed by undertaking is further evidenced by computation adopted for purposes of deduction under s. 80HHC. AO has invoked cl. (a) of sub-s. (3) of s. 80HHC which deals with situation where export is "of goods or merchandise manufactured or processed by assessee". Thus AO has clearly proceeded on basis that export of spare parts as well as harvester combines represents goods processed or manufactured by assessee. AO did not invoke cl. (b) or (c) in respect of export of spares presumably because spares had been manufactured by undertaking and were not traded goods. On this ground also it is submitted that consideration of consistency should prevail and spare parts of undertaking which have been treated as manufactured goods of undertaking for purposes of s. 80HHC be treated as manufactured goods and not traded goods for purposes of s. 80-IB. There is no earthly reason for AO to treat spare parts as manufactured by undertaking while computing deduction under s. 80-IB and adopt totally contrary position that spare parts are traded goods of assessee. stand of Revenue is inconsistent and ill-conceived and cannot be substained. assessee is entitled to deduction under s. 80-IB by including sale of spares/components as claimed by assessee. Shri Chopra accordingly pleaded that conclusion by AO and CIT(A) that sale of spare parts is sale of trading goods and not manufactured goods by industrial undertaking is misconceived and hence, deduction as claimed may be allowed. Learned Departmental Representative, on other hand, kly relied upon appellate order. He submitted that no evidence was filed by assessee to support contention that sale of spare parts was also subject to some manufacturing activity as are carried on in respect of main machine i.e. harvester combines manufacture. assessee is stated to have used German technology. However, this technology is not used in manufacture of spare parts. Various processes stated to have been carried out were also carried out in respect of certain outsourced material used and assembled in Harverster but assessee never filed details of profit accruing from sale of manufactured goods and that of trading goods. Accordingly, AO was justified in not allowing deduction in respect of sale of spare parts. He further submitted that circular issued by Board was with reference to interpretation of s. 104 of IT Act. Sec. 104 applies to industrial companies i.e. company engaged in manufacture as well as process of goods. However, deduction under s. 80-IB is available only where assessee is engaged in business of manufacture and production of article and thing and is not applicable to processor. In letter dt. 22nd Jan., 2004 addressed to AO, assessee had shown his inability to segregate purchases made which are used either for manufacture of machine or for sale of spare parts. Thus, AO had no option but to allocate proportionate profit in respect of sale of spare parts so as to deny deduction under s. 80-IB on such sale of spare parts. As regards beneficial provision, deduction is available provided assessee specifies condition and but for assessee satisfying condition by interpreting provisions liberally, deduction cannot be allowed if assessee do not fulfil basic condition for allowability of deduction. Reliance was placed on decision of Hon ble Supreme Court in case of IPCA Laboratory vs. Dy. CIT (2004) 187 CTR (SC) 513: (2004) 266 ITR 521 (SC) and Prakash Trading Co. vs. CIT (1996) 132 CTR (SC) 230: (1996) 220 ITR 1 (SC). He also submitted that all parts of relevant sections had to be read together and cannot be read in isolation. For this purpose, reliance was placed on decision of Hon ble Supreme Court in case of CIT vs. National Taj Traders (1980) 14 CTR (SC) 348: (1980) 121 ITR 535 (SC). Since admittedly, intermediary products were not manufactured by assessee but were manufactured elsewhere and which merely were sold as parts, proportionate deduction is not allowable. We have carefully considered relevant facts, arguments advanced and case law cited. Sec. 80-IB(1) provides as under: "80-IB(1): Where gross total income of assessee includes any profits and gains derived from any business referred to in sub-ss. (3) to (11), (11A) and (11B) such business being hereinafter referred to as eligible business, there shall, in accordance with and subject to provisions of this section, be allowed, in computing total income of assessee, deduction from such profits and gains of amount equal to such percentage and for such number of assessment years as specified in this section." Sub-s. (2) to s. 80-IB provides certain conditions to be fulfilled by industrial undertaking to claim deduction under s. 80-IB. Admittedly, these conditions are fulfilled as in respect of manufacture and sale of harvester combines, deduction has been granted. Sub-s. (3) of s. 80-IB provides that amount of deduction in case of industrial undertaking shall be 25 per cent of profits and gains derived from such industrial undertaking. issue to be decided is whether sale of spare parts and components are, due to same being manufactured by assessee or is simply trading transaction so as to be excluded from reckoning for computing deduction as profits derived from such industrial undertaking. It is not known as to how AO holds that sale of spare parts and components is trading of same. By trading, AO understands same as purchase and sale thereof directly without any process being carried on by assessee. However, assessee has supplied list of 47 items comprising sale of almost Rs. 9.55 crores to suggest as to in respect of sale of various items of these spare parts and components what further processes were being applied so as to finish production process and to make it marketable. assessee also has stated that though details are supplied to extent of 81.5 per cent of total sales, details in respect of all items can be furnished. What are various manufacturing processes, to be applied to various outsourced material were filed in form of instruction sheet being given by management to shop floor workers. As, for example, in respect of sale of spare parts, namely, "Harvester Track" which accounted for 57 per cent of total sale of spare parts, instruction sheet contained following process being applied: Coat Molybdenum Meta bi-sulphite on inner-outer surface of track. File burr in sprocket grooves. Remove flashes within sprocket grooves so that sprocket moves in groove. Mount spring and spring block on machine. Fix gear box on sprocket. Fix guide rollers. Apply track of machine and check track sagging. If sagging is within limits of 10-15 mm, track is okay or else control sagging by spring pressure as per need. Similar instructions are issued in respect of various items of spares components sold. Thus, it is incorrect to hold that sale of spares/components are merely trading goods and not goods manufactured by assessee. Though assessee may be outsourcing some of spare parts by getting them manufactured elsewhere, after receiving same assessee is applying further process so as to render them marketable as per required standard. Thus though various processes are being applied, same was mistakenly treated as sale of trading goods and not of goods manufactured by assessee. It is noteworthy in instant case that Revenue has explicitly accepted position that assessee company is industrial undertaking and fulfils three conditions contained in s. 80-IB(2) for deduction under s. 80-IB. Once Revenue accepts fact that industrial undertaking of assessee company manufactures or produces harvester combines, there is no justification or rational basis for denying exemption for manufacture or production of intermediate products like spare parts, components or sub-assemblies. Admittedly these spare parts are being produced by carrying out various processes inside factory or else these are caused to be produced on basis of drawings, designs and specifications supplied by undertaking to outside fabricators and after receipt of such components, undertaking carries out further processes like painting, welding, salt hardening, tempering etc. on such components. activity of manufacturing components is thus integral activity of industrial undertaking and there is no justification whatsoever to say that components are merely trading activity of assessee. Spares and components are unquestionably goods of undertaking. These are being manufactured on basis of imported technology which is capital asset of industrial undertaking. undertaking has adapted technology and modified designs and drawings so as to suit Indian conditions. drawings, designs and specifications, prepared by industrial undertaking, form very basis for production or manufacturing of components. These components are either produced inside factory or they are got fabricated from outside under supervision and control of industrial undertaking. Cost of such operations, debited in books of account of undertaking, has been duly loaded on cost of components which are either used for assembly of combine machine or sold as integral part of machine. It goes without saying that components, spares and sub- assemblies are goods of industrial undertaking. These are reflected in closing stock as goods under process. Even if these goods are treated as intermediate products in process of manufacture of final product that is harvester combines, sale of such intermediate products at market value as accounted for in books of undertaking would qualify for deduction under s. 80-IB. Various Courts have time and again held that assessee need not own or possess plant and machinery to be manufacturer of goods to be treated as industrial company for purpose of claiming deduction. manufacture may be either by assessee itself or by someone under assessee s supervisory control or direction. In present case, assessee cannot be considered as "trader simpliciter". trader merely purchases goods which have already been manufactured by others and then sells them as it is. No further manufacturing process is being applied if assessee is merely trader. However, in present case, it is seen that after purchasing some of parts from outside suppliers, assessee applies its own further processes to finish same and to make them marketable. Even technology and specifications/drawings are supplied by assessee to outside manufacturer of components. In way, it can be said that assessee as manufacturer exercises complete control over components manufactured outside and only after applying its own further processes sells same. It is not necessary for claiming deduction under s. 80-IB that sale should be only of final product and not of intermediary product. What all sub-s. (3) provides is that profits should be derived from industrial undertaking and there is no denying fact that entire sale in respect of main product as well as other spare parts were by industrial undertaking itself. Thus, assessee cannot be called trader simpliciter so as to deny deduction in respect of sale of only spare parts. manufacture of spare parts being undertaken along with manufacture of machine product, namely, harvester combines will entitle assessee to claim deduction under s. 80-IB. We accordingly direct AO to consider sale of spares and components for purpose of computing deduction under s. 80-IB. next ground of appeal is in respect of computation of deduction under s. 80HHC. AO while computing deduction under s. 80HHC included warranty claims and scrap sale as part of total turnover. same was confirmed by learned CIT(A). Learned counsel for assessee Shri Chopra submitted that scrap is generated during process of manufacture of products. This is essentially of nature of retrieval of cost of manufacture and cannot be treated as part of turnover. industrial undertaking of assessee carries on business of manufacture of spare parts and harvester combines. Turnover of business has relation with products manufactured by business which involve element of profit. word "total turnover" as used in s. 80HHC has been construed by Supreme Court in its latest decision in case of CIT vs. Lakshmi Machine Works (2007) 210 CTR (SC) 1: (2007) 290 ITR 667 (SC). Supreme Court upheld interpretation adopted by Mumbai High Court in CIT vs. Sudarshan Chemical Industries Ltd. (2000) 163 CTR (Bom) 596: (2000) 245 ITR 769 (Bom) and held that word "total turnover" has to be given schematic interpretation which accords with basic purpose of formula engrafted in statute by legislature so as to compute business profits derived from export. Now insofar as scrap is concerned it is generated in relation to production of goods and it would be illogical to include scrap sale with total turnover. No such scrap sale is included in numerator of quotient used in formula. scrap generated during process of manufacture is connected with entire production including export. To include entire scrap in total turnover would not only be violative of concept of turnover as adopted in commercial accounting, it would also lead to anomalous results by including scrap sale in total turnover when scrap is not subject-matter of turnover in manufacturing process. Hon ble Supreme Court has excluded sales-tax and excise duty from turnover since it does not occur in numerator of quotient. On similar basis scrap sale is not liable to be included in total turnover. Reliance is placed on decision of Tribunal in case of ITO v Jagraon Exports (2002) 124 TAXMAN 220 (Chd)(Mag) where it was held that sale of scrap could not be treated as turnover because assessee was not dealing in purchase and sale of scrap. As regards inclusion of warranty claims as part of turnover Shri Chopra submitted that warranty claims can never be construed as part of total turnover. very concept of warranty claim as turnover of business is alien to basic concepts of commercial accounting. In any case it may be pointed out that in P&L a/c amount of Rs. 63.14 lacs have been debited on account of warranty claims which have been ignored by AO while aggregating gross figure of such claims with total turnover. Learned Departmental Representative Shri Purushottam Tripuri, on other hand, relied upon appellate order. He submitted that scrap sale has been treated as part of its income. Thus, it should also form part of total turnover. As regards warranty claim, just as assessee has made claim, counter claim is received and hence, should be treated as part of turnover. We have considered rival submissions. issue is to be decided as to what is total turnover for purpose of computing deduction under s. 80HHC. Clause (ba) of Explanation below sub-s. (4C) of s. 80HHC provides that "total turnover" shall not include freight or insurance attributable to transport of goods beyond custom station. proviso to this definition provides that expression "total turnover" excludes various export benefits referred in cls. (iiia) to (iiie) of s. 28 of Act. However, there is no provision which defines word "total turnover". turnover means value of goods purchased/sold in course of carrying of business. business of assessee is manufacture and sale of harvester combine and its spares. scrap generated during manufacturing process is sold as such. assessee is not engaged in business of sale of scrap. Thus, scrap, generated and which is sold only goes to reduce cost of material consumed in manufacturing process. Accordingly, same cannot be considered as part of turnover of business carried on by assessee. Similar view has been adopted by Chandigarh Bench SMC in case of ITO vs. Jagraon Exports (supra). We, therefore, direct AO to exclude amount realized on sale of scrap from total turnover adopted for computing deduction under s. 80HHC. As regards warranty claim, same also cannot be considered as part of turnover. assessee receives warranty claims due to provision of warrant available to it in respect of purchases made. Counter-claim made by customers of assessee are also paid. In way, it is arising in course of business but cannot be considered as part of turnover. Following our reasonings stated above in earlier paragraphs, we hold that warranty claims are not to be included in computation of total turnover for purpose of computing deduction under s. 80HHC. AO excluded 90 per cent of miscellaneous income of Rs. 6,99,649 and 90 per cent of provision written back of Rs. 7,43,971, interest income of Rs. 5,10,978 being interest received from customers on delayed payments from profits of business for purpose of computing deduction under s. 80HHC. same was apparently reduced in view of cl. (baa) of Explanation below sub-s. (4C) of s. 80HHC. same was confirmed by learned CIT(A). Learned counsel for assessee submitted that interest received from customers for delayed payment of sale proceeds constitutes part of trading receipts as held by various High Courts as well as various Benches of Tribunal as under: (1) Nirma Industries Ltd. vs. Dy. CIT (2006) 202 CTR (Guj) 198: (2006) 283 ITR 402 (Guj); (2) Jt. CIT vs. Sidheshwari Paper Udyog Ltd. (2005) 95 TTJ (Del)(TM) 1: (2005) 94 ITD 187 (Del)(TM). He also submitted that provision written back does not fall in category of "any other receipt of similar nature". It doesn t have character of receipt like interest or rent etc. AO is therefore not justified in excluding amount from profits and gains of business. There were credits appearing in books on basis of purchase of items from various suppliers and suppliers were not paid. These credit balances were brought to P&L a/c and had emanated from business transactions only and are liable to be treated as connected with business. assessee is therefore entitled to benefit under s. 80HHC. Reliance is placed on decision of Madras High Court in case of CIT vs. Abdul Rahman Industries (2007) 293 ITR 475 (Mad). Their Lordships have relied upon decision of apex Court in CIT vs. T.V. Sundaram Iyengar & Sons Ltd. (1996) 136 CTR (SC) 444: (1996) 222 ITR 344 (SC). Learned Departmental Representative submitted that interest received from customers and provision written back cannot be considered as profit derived from export of goods and hence, 90 per cent thereof was rightly reduced from profits of business for purpose of computing deduction under s. 80HHC. We have considered rival submissions and case law cited. Deduction under s. 80HHC(3) is to be computed on basis of profits of business. Clause (baa) of Explanation below sub s. 80HHC defines expression profits of business means profits of business as computed under head Profits and gains of business or profession as reduced by 90 per cent of export incentives referred in cls. (iiia) to (iiid) of s. 28 and any receipts by way of brokerage, commission, interest, rent charges or any other receipt of similar nature included in such profits. Thus, though interest received from customers for delayed payment is to be treated as part of profits of business, 90 per cent thereof has to be reduced in view of cl. (baa) of Explanation to s. 80HHC. said clause do not have any exception in respect of interest whether received from banks or from customers. decision of Hon ble Gujarat High Court in case of Nirma Industries Ltd. and Siddheshwari Papers Udyog Ltd. (supra) is in respect of computation of deduction under s. 80-I/80-IA. Sec. 80- I do not define expression profit derived from industrial undertaking and hence, there is need to interpret expression profit derived from industrial undertaking for purpose of computing deduction under s. 80-I. However in s. 80HHC, expression profits of business has been defined specifically and hence, there is no need to artificially compute profits of business for purpose of computing deduction under s. 80HHC. Accordingly, 90 per cent of interest income was rightly excluded from profits of business for purpose of computing deduction under s. 80HHC. As regards provision written back, same is part of business income as per provisions of s. 41(1) of Act. However, there is no specific mention of such sum to be reduced from profits of business. Thus, issue to be considered is whether provision written back can be considered as receipt by way of brokerage, commission, interest, rent, charges or any other receipt of similar nature. Applying principle of ejusdem generis, receipts in nature of miscellaneous income or receipts not connected with business of export is to be excluded while computing profits of business. However, in respect of provisions written back, same cannot be considered of nature like miscellaneous income or interconnected with business of exports. Earlier when assessee anticipated certain expenditure, same were debited to P&L a/c and claimed as business expenditure. provision no longer required merely reduces expenditure and is not receipt or income simpliciter. Such provision written back merely reduces expenditure claimed and hence, cannot be excluded while computing profits of business under cl. (baa) of Explanation to s. 80HHC. We, therefore, direct AO not to exclude 90 per cent of provision written back for purpose of computing profits of business in arriving at deduction under s. 80HHC. As regards ground No. 3, same challenges levy of interest under s. 234B. Learned counsel for assessee submitted that consequential relief may be allowed in respect of interest charged under s. 234B. assessee does not deny its liability to pay advance tax. Thus, charging of interest under s. 234B is consequential in nature and may be charged as per law after giving effect to this order. In result, appeal is partly allowed. *** CLAAS INDIA LTD. v. ASSISTANT COMMISSIONER OF INCOME TAX