Vikas Awasthy, Judicial Member
The three appeals- ITA No. 1326/Mds/2012 for the Assessment Year 2007-08, ITA No. 1327/Mds/2012 for the Assessment Year 2008-09 and ITA No. 917/Mds/2013 for the Assessment Year 2009-10 have been filed by the Revenue impugning the order of Commissioner of Income Tax(Appeals)-III, Chennai for the respective Assessment Years.
2. Since the issue involved in all the three appeals is same, all the three appeals are taken up for adjudication together. At the request of the ld. DR, the facts are taken from ITA No. 1327/Mds/2012 relevant to the AY. 2008-09 as the assessment order for the AY. 2008-09 is detailed. The ld. AR of the assessee has not raised any objection to this request of the ld. DR.
3. The facts in brief are; the assessee is a company registered under the provisions of Companies Act, 1956 and is engaged in the business of manufacturing PY seals for dry batteries and torch lights. The assessee is manufacturing torch lights for M/s. Nippo Batteris Co. Ltd. The assessee is having two units one at Chennai and another at Dehradun (Uttarakhand). The Dehrarun unit of the assessee is entitled for exemption u/s. 80IC of the Income Tax Act, 1961 (herein after referred to as 'the Act'). The assessee filed its return of income for the AYs 2007-08, 2008-09 and 2009-10 claiming deduction u/s. 80IC for the goods manufactured at Dehrarun unit. The Assessing Officer after examining the records concluded that the assessee is not entitled to claim deduction u/s. 80IC as, in the first instance, the assessee is not carrying out any manufacturing activity; and secondly, even if the activity carried on by the assessee is held to be 'Manufacturing', the same is not done in Dehrarun. Aggrieved against the assessment order, the assessee filed appeals before the CIT(Appeals), Chennai for all the three afore mentioned AYs. The CIT(Appeals) vide order dated 16-03-2012 for the AY. 2007-08, order dated 22-03-2012 for the AY. 2008-09 and order dated 18-01-2013 for the AY. 2009-10 held that the assessee is entitled to claim deduction u/s. 80IC. However, while allowing the deduction, the CIT(Appeals) directed the Assessing Officer to allocate certain expenditure to Dehrarun unit. Aggrieved against the order of CIT(Appeals) for the three AYs, the Revenue has come in appeal before the Tribunal. The Revenue has raised primarily two issues in the appeal:
i) No manufacturing activity is being carried out by the assessee;
ii) Even if it is presumed that assessee is carrying out any manufacturing activity, the same is being carried out at Chennai unit and not at Dehrarun (Uttarakhand) unit.
4. Shri Shaji P. Jacob, appearing on behalf of the Revenue submitted that the assessee is not carrying any manufacturing activity. The ld. DR referred to the detailed process given in Page No. 3 of the assessment order and submitted that the assessee is only doing fitting and is not carrying out any manufacturing as envisaged in the provisions of Section 80IC of the Act. The ld. DR further contended that without prejudice to his submissions on the activities being carried out by the assessee termed as manufacturing, the assessee is not entitled to claim deduction u/s. 80IC as whatever activities the assessee is carrying they are done at Chennai and not at Dehradun. The ld. DR referred to detailed chart given in the assessment order at Page Nos. 1 and 2. The chart gives the break-up of sales and expenses of the assessee at Chennai and Dehradun units. Referring to the chart, the DR submitted that the sale at Chennai unit is to the tune of Rs. 1,03,66,381/- and the cost of production is Rs. 1,12,64,953/-. The DR highlighted that the cost of production is higher than the sales. The assessee has Plant and Machinery worth Rs. 1,71,52,060/- and has Moulds to the tune of Rs. 2,47,51,348/- at Chennai. On the other hand, the sale at Dehradun unit is to the tune of Rs. 7,42,43,567/-, whereas the cost of production for the same is Rs. 5,22,79,354/-, value of Machineries at Dehradun is Rs. 3,12,739/- and the Moulds are to the tune of Rs. 9,828/- only. The ld. DR further pointed out that although there is higher amount of sales at Dehradun, however, the power consumption and the maintenance cost of Dehradun unit is far less than the power consumption and repairs and maintenance at Chennai unit. There is no plausible reason for such disparity in the quantum of sales and power consumption and repairs and maintenance, even the value of Machinery installed at Dehradun unit is far less than the Machinery and Moulds at Chennai. The assessee has not been able to explain as to how with higher salaries, power consumption and Machinery, the Chennai unit is having less volume of sales, whereas Dehradun unit has been able to record more than seven times sales with less salaries and wages, repairs and maintenance, power consumption and less value of Machinery and Moulds. These all facts clearly show that the assessee is transferring finished goods from Chennai to Dehradun only to claim deduction under the provisions of Section 80IC. The ld. DR vehemently prayed for setting aside the impugned order of CIT(Appeals).
5. On the other hand, Shri R. Badhreenath, appearing on behalf of the assessee submitted that the term 'Manufacture' has been defined in Section 2(29BA) of the Act. The activity being carried out by the assessee very much falls within the definition of manufacture as defined under the Act. The ld. AR strongly supporting the order of the CIT(Appeals) submitted that, at Chennai unit only dry cells are made for M/s. Nippo Batteris Co. Ltd., the remaining manufacturing activity relating to the production of torch lights is carried out at Dehradun unit. The ld. AR further submitted that the entire administration of both the units are controlled from Chennai. In Dehradun it is more of labour work and less of administration, therefore, the administration cost is higher at Chennain than at Dehradun. As regards less power consumption, the ld. AR submitted that the electricity meter at Dehradun was faulty, therefore, the unit was charged less for power.
6. We have heard the submissions made by the representatives of both the sides and perused the orders of the authorities below. The first question which has to be answered is: Whether the assessee is carrying on any manufacturing activity or not? The term 'Manufacture' has been defined in sub-section (29BA) of Section 2 of the Act. The same is re-produced here in below: (29BA) "manufacture", with its grammatical variations, means a change in a non-living physical object or article or thing,--
(a) resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or
(b) bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure;]
The definition of 'Manufacture' has been introduced in the Act w.e.f. 01-04-2009, prior to that, the term 'Manufacture' has been explained in various judgments of the Hon'ble Supreme Court of India as well as various High Courts. The Hon'ble Apex Court in the case of Aspinwall and Co., Vs. CIT reported as 251 ITR 323 while explaining the term 'Manufacture' has relied on another decision of the Hon'ble Supreme Court in the case of Deputy CST v. Pio Food Packers and held as under:
This court while determining as to what would amount to a manufacturing activity held in Deputy CST v. Pio Food Packers [1980] 46 STC 63 ; [1980] Supp. SCC 174 : that the test for determination whether manufacture can be said to have taken place is whether the commodity which is subjected to the process of manufacture can no longer be regarded as the original commodity, but is recognized in the trade as a new and distinct commodity. It was observed (page 65) :
"Commonly, manufacture is the end result of one or more processes through which the original commodity is made to pass. The nature and extent of processing may vary from one case to another, and indeed there may be several stages of processing and perhaps a different kind of pro- cessing at each stage. With each process suffered, the original commodity experiences a change. But it is only when the change, or a series of changes, take the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognised as a new and distinct article that a manufacture can be said to take place."
The Hon'ble Supreme Court of India has in several judgments; viz India Cine Agencies V. CIT reported as 308 ITR 98(SC); Kores India Ltd., V. CCE, 2005 (1) SCC 385; CIT V. Oracle Software India Ltd., reported as 320 ITR 546 has explained the term 'Manufacture'. In the present case, the assessee is assembling various components to make a product known as 'Torch Light'. The process of assembling has been detailed in the assessment order as well as the impugned order of the CIT(Appeals). The same is re-produced herein below: a. There are three process lines.
In the First Process Line, following activities are undertaken:
i. Plastic Barrel of Torch is firstly fitted with Lead Plate with spring and Switch Spring by Riveting Process undertaken with the help of Hand Operated Riveting Press.
ii. Thereafter a contact plat is fitted by riveting process undertaken with the help of Hand Operated Riveting Press.
iii. Plastic Torch Barrel is printed with the Buyer's Logo and product name by using a Pad Printing Machine.
iv. Thereafter the barrel is fitted with a Plastic Switch on the surface by using Hand Operated Press.
b. In the second process line, following activities are undertaken:
i. L.E.D. is fitted on to a pre designed printed circuit board (PCB) by the process of soldering.
ii. Thereafter the PCB undergoes a process to ascertain suitable resistance depending upon the forward voltage of the L.E.D.
iii. The PCB again undergoes a process with a Brass Contact which serves as the Positive Connector for the Batteries.
iv. PCB is then fitted on to the Plastic Reflector using the process of heat sealing undertaken with the aid of Hand Operated Press.
v. The reflector/PCB is then fitted with a metal negative contact using two metal screws fitted with the help of pneumatic hand held crew drivers.
vi. This reflector/PCB is then fitted into a plastic head along with a Lens.
c. In the third process line, following process are undertaken resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use:
i. The torch heads are tested for focus and minimum lux output. ii. The battery case from first Process Line is fitted with head from Second Process Line and thereafter both are tested for fitting and current flow.
iii. The battery case is inserted with a set of batteries and tested for operating and switch efficiency.
iv. Thereafter a support rope is installed mechanically to the bottom of the Torch Barrel for additional hand support. v. The torch is subjected to drop test and hammer test and retested for all operational efficiency.
vi. The torch along with a set of batteries is packed in to a Retail Display Packing.
vii. The torch display packing is punched using a pneumatic press for easy display exhibition.
viii. The display packing is then packed into a whole pack and shipper boxes."
The assessee has detailed the procedure followed to bring into existence the final product. After going through the assembly process, we are of the opinion that the process being carried out by the assessee in assembling of 'Torch Light' amounts to manufacturing activity. A new and distinct product comes into existence after integration of various small components into one product having distinct name, character and use. Thus, we hold that the assessee is carrying out manufacturing activity.
7. The second issue which arises for determination is; Whether the assessee is carrying on substantial manufacturing activity at Chennai or Dehradun unit? The Assessing Officer has given break up of expenses incurred and sale made from Chennai unit as well as Dehradun unit. The same is re-produced herein below:
âTableâ
A perusal of the table shows that the assessee is having sale to the tune of Rs. 1,03,66,381/- from Chennai unit where as the cost of production at Chennai unit is Rs. 1,12,64,953/-. On the other hand, the sales from Dehradun unit is to the tune of Rs. 7,42,43,567/- against cost of production of Rs. 5,22,79,354/-. It is clearly evident from the break-up that the cost of production at Chennai unit is higher than the sales. Whereas the cost of production at Dehradun is less viz -a- viz sales. The ld. AR of the assessee has not been able to convincingly explain disparity in cost of production and volume of sales in Chennai unit and Dehradun unit. A further perusal of the chart shows that the written down value of Machinery and Moulds in Chennai is much more than the written down value of Machinery and Moulds at Dehradun, still the volume of sales from Dehradun is higher than Chennai unit. The ld. AR has tried to put forth an argument that since Dehradun is labour intensive unit, therefore, not much machinery is installed at Dehradun. However, we do not find much force in this argument of the ld. AR. The expenditure on salaries and wages are higher in Chennai than in Dehradun. As regards power consumption, the power consumption in Dehradun is only Rs. 6,432/- where as expenditure on power consumption in Chennai is Rs. 29,13,563/-. Similarly, for Repairs and Maintenance, the expenditure incurred at Dehradun unit is Rs. 3,419/- whereas expenditure on Repairs and Maintenance at Chennai is Rs. 18,66,797/-. The ld. AR has not been able to give any plausible reason for such drastic variations in the expenditures at two different units. The ld. AR has not been able to validly explain the reasons for higher sales with less of expenditure at Dehradun.
The assessee in order to claim benefit u/s. 80IC of the Act, has either invoiced finished goods manufactured at Chennai from Dehradun or has debited the expenses relating to Dehradun unit to Chennai unit. As has been pointed out by the ld. CIT(Appeals), there are some expenses which are not either debited to the account of Dehradun units or they are very low. The ld. CIT(Appeals) has also pointed out that there are two units at Chennai and one unit at Dehradun. Despite the fact that there are two units at Chennai, the volume of sales from Dehradun unit is seven times more than the combined sale of units at Chennai.
8. The facts and circumstances clearly indicate that the assessee is misusing the benevolent provisions of law at the cost of Government exchequer. The deduction u/s. 80IC is being granted to the units set up in certain specified areas which are industrially backward. The section was inserted in the Act by the Finance Act, 2003 with effect from 01-04-2004. The Union Cabinet had announced a package of fiscal and non-fiscal concessions for the special category states of Himachal Pradesh, Uttarakhand, Sikkim and N.E. States in order to give boost to the economy of those states. The benefits granted under such provisions should not be allowed to be exploited. The assessee in order to claim deduction u/s. 80IC has set up an unit in Dehradun (Uttarakhand) which is specified in Thirteenth Schedule to the Act. It is evident from the details of the expenditure that the assessee is manufacturing only small quantity of goods at Dehradun. The facts and circumstances show that the assessee is invoicing majority of finished goods from Dehradun whereas that substantial production is carried out at Chennai. The assessee has adopted colourable devise to take undue advantage of benevolent provisions of the Act. We are of the considered opinion that the assessee is not entitled to claim deduction u/s. 80IC of the Act.
Accordingly, the impugned orders of CIT(Appeals) are set aside and all the three appeals of the Revenue are allowed.