CIT Vs. Meghalaya Steels Ltd. (2011) 332 ITR 91 (Gauhati High Court)
The Supreme Court, in Liberty India Vs. CIT  317 ITR 218, observed that section 80-IB provides for deduction in respect of profits and gains “derived from the business” of the assessee and accordingly, the Parliament intended to cover sources of profits and gains not beyond the first degree. There should be a direct nexus between the generation of profits and gains and the source of profits and gains, the latter being directly relatable to the business of the assessee. Any other source, not falling within the first degree, can only be considered as ancillary to the business of the assessee.
In this case, the High Court observed that the transport and interest subsidies were revenue receipts which were granted after setting up of the new industries and after commencement of production. The transport subsidy would have the effect of reducing the inward and outward transport costs for the purposes of determining the cost of production as well as for sales. However, the subsidy had no direct nexus with the profits or gains derived by the assessee from its industrial activity and the benefit to the assessee was only ancillary to its industrial activity. The subsidies were not directly relatable to the industrial activity of the assessee, and hence they did not fall within the first degree contemplated by the Act. Therefore, the subsidies could not be taken into account for purposes of deduction under section 80-IB.
However, the payment of Central excise duty had a direct nexus with the manufacturing activity and similarly, the refund of the Central excise duty also had a direct nexus with the manufacturing activity, being a profit-linked incentive, since payment of the Central excise duty would not arise in the absence of any industrial activity. Therefore, the refund of excise duty had to be taken into account for purposes of section 80-IB.
Note: Similar ruling was pronounced by the Himachal Pradesh High Court in CIT v. Gheria Oil Gramudyog Workers Welfare Association (2011) 330 ITR 117, wherein it was held that interest subsidy received from the State Government cannot be treated as “profit derived from industrial undertaking” and hence was not eligible for deduction under section 80-IB.