1. This appeal of the assessee is directed against the order dated 15-1-1998 recorded by CIT(A) XIV, New Delhi, deciding the appeal of assessee for assessment year 1994-95.
2. Grounds No. 1 to 11 relate to common issue about deduction claimed by assessee under section 80-IA of IT Act, 1961 (hereinafter referred to as the Act). Facts giving rise to this issue are that facts as available on record are that assessee-company was granted industrial licence by Ministry of Industry, Department of Industrial Development, Govt. of India vide No. SIA/EIR/915(90) dated 16-10-1990 for manufacture of coated metal electrodes (anodes and cathodes) at Kundain Industrial Area, North Goa, Goa State. It is also the case of the assessee that the assessee-company obtained necessary registration certificate from Excise Department vide letter No. M/PNJ/3/93 dated 23-6-1993 and entered into an agreement dated 26-2-1993 with U.H.D.E.India Ltd. for coating of titanium sub-strates numbering 1212 and started production w.e.f. 1-8-1993. For assessment year 1994-95, the year under consideration, the assessee filed return at a loss of Rs. 1,28,71,873. Assessing Officer noted that assessee had claimed deduction under section 80-IA amounting to Rs. 2,62,20,966 against total income computed at Rs. 1,33,49,093. He called upon the assessee to show cause as to how the claim of the assessee for deduction under section 80-IA was allowable. The assessee vide their letters dated 28-2-1997 and 7-3-1997 submitted that as per agreement dated 26-2-1993 in between assessee-company and U.H.D.E., the assessee was to be supplied titanium substrates as free issue material by said UHDE and assessee shall be coating chemicals on the said titanium substrates.
The product so manufactured by the assessee shall be called 'Coated Titanium Metal Anodes' which was to be complete in all respects as per the scope described in the agreement. The product was to meet the various technical requirements as per different clauses of the agreement. The assessee-company had incurred expenditure of Rs. 1,67,80,525 on the raw material consumed for coating the titanium substrates for their conversion into coated Titanium Metal Anodes (hereinafter referred to as C.T.M.A.). The product was an absolutely different commercial product for which the assessee-company levied charges. It was also submitted that new product was subjected to the excise duty and assessee-company billed UHDE with the excise duty so paid. The plea was that assessee was engaged in manufacturing and producing new article/thing and entitled for deduction under section 80-IA. Reliance was placed on the decision of Hon'ble Supreme Court in the case of Ujagar Prints v. Union of India [1989] 179 ITR 317 in which their Lordships have opined that prevalent and generally accepted test to ascertain whether there is manufacture, is to find whether change or series of changes brought by the application of processes take the commodity to the point where commercially it can no longer be regarded as the original commodity, but, is instead, recognised as a distinct and new article that has emerged as a result of the process. According to assessee, the procedure adopted by the assessee was to bring a new commodity in existence which was commercially different to the original commodity. Reliance was also placed on the provisions of section 80-IA(12)(b) in which industrial undertaking was defined to the extent that it shall be having meaning assigned to it in the explanation to section 33B. The plea was that industrial undertaking defined in that explanation includes not only manufacturing but processing of the goods also and case of the assessee was fully covered. It appears that Assessing Officer considered all the facts and after re-producing the provisions of section SO-IA(b), he rioted that assessee was engaged in the processing of titanium substrates by using certain chemicals and after that these are called C.T.M.A. but basic function and purpose of both the articles remains the same as being used as electrodes. The coating was applied by the assessee on titanium substrates which does not change its shape except to provide longevity and better performance but without any material difference in the composition. He opined further that said coating carried out by assessee cannot amount to production or manufacture of a commercially new product as activities carried out by the assessee were processing only. He also noted that assessee has not claimed any depreciation in respect of assets at Kundain, Goa, as per IT Rules and that also indicate that no production or manufacturing operations were performed so as to bring into existence commercially new product. Assessing Officer also relied upon this decision of Bombay High Court in the case of CIT v. Sterling Foods [1995] 213 ITR 851/79 Taxman 381 in which their Lordships have defined the scope of expression 'manufacture' or produced articles used in section 80HH of the Act in the light of expression 'new material or processing of goods' appearing in explanation of section 33B of the Act and section 2(8)(c) of Finance Act, 1975 and noted that Legislature has specifically used the expression 'processing' in juxtaposition to 'manufacture' wherever it was intended to extent the benefit to an industrial undertaking which is engaged in the processing of goods or articles and avoided using the expression in cases where it intended to confine the .benefit to industrial undertaking only engaged in the 'manufacture' or 'Production'of goods or article. Their Lordships further opined that three expressions 'processing', 'manufacture', and 'production' used in various taxing statutes are not inter-changeable expressions, though often used in juxtaposition, they convey different concepts and refer to different activities. Process is a much wider concept. The nature and extent of processing may vary from case to case. Every process does not tantamount to manufacture. Similarly, production is wider than manufacture. The Assessing Officer relied upon these observations from the case law referred to above and concluded that assessee was not manufacturing or producing an article but was engaged in the process and particularly doing a job work. Processing of goods cannot be equated with manufacture or production of articles for the purpose of section 80-IA and thus, he rejected the claim of the assessee.
3. The assessee came in appeal before CIT(A) and took up the same pleas as were taken before the Assessing Officer. According to the assessee, the Assessing Officer was not justified in not reading the ratio of Hon'ble Bombay High Court in the case of Sterling Foods (supra) properly and applying the same to the facts of the case because ratio of that case was applicable to the facts. Giving out the series of activities being carried out by the assessee for manufacturing of C.T.M.A., the assessee gave out the various processes involved in the manufacturing of coating solution and he further gave out the flow chart of process of chemical activities of basic material as were submitted before the Assessing Officer. On the basis of these activities, it was pointed out that these activities were completely changing the basic raw material i.e., Titanium Substrates of C.T.M.A.which was being used for chlorine and caustic soda production in an electrolytic cell and was very much different to Titanium Substrates.
It was commercially different article and it was wrong on the part of Assessing Officer to treat both Titanium Substrates and C.T.M.A. as one and the same thing even though there was lot of differences in the shape, nature and composition. Reliance was placed on the ratio of the cases in CIT v. Trinity Hospital [1997] 225 ITR 178/87 Taxman 127 (Raj.), CIT v. Prasad Film Laboratories P. Ltd. [1997] 225 ITR 348/100 Taxman 99 Empire Industries Ltd. v. Union of India, 3 SCC 314(sic) and that of Ujagar Prints (supra). The plea was that assessee was engaged in the manufacturing and production of article and his claim should be allowed. The ld. CIT(A) considered all the facts and did not find favour with the submissions of the assessee. According to him, the assessee was to satisfy different tests so as to be eligible for deduction under section 80-IA. He proved to be an industrial undertaking but he failed to prove that it was manufacturing or producing articles which is the fundamental requirement for claim under section 80-I. The assessee was found engaged in the job work of coating and after placing reliance on the reasoning of their Lordships in the case of CIT v. N. C. Buddharaja & Co. [1993] 204 ITR 412/70 Taxman 312 (SC) the CIT(A) concluded that assessee was processing the goods and not engaged in the production and manufacturing of these and the ground was rejected against which the assessee is in appeal before US.4. The ld. counsel for the assessee pointed out that authorities below were not able to understand the factual position that is why mistake crept in the order of Assessing Officer as well as that of CIT(A).
According to him, the Assessing Officer had wrongly noted in the assessment order that basis function and purpose of both 'Titanium Substrates' and 'C.T.M.A.' are the same i.e. to be used as electrodes and they have the same features. He further wrongly observed that Titanium Substrates are themselves a commercially and physically viable articles capable of being used as electrodes. According to ld. counsel, Titanium Substrates is only a metallic support with no utilisation in electrochemistry for industrial chlorine and caustic soda production.
Our attention was invited to the certificate issued by Dr. (Mrs.) A.Gadgil and Dr. M. K. Sarkar, both Professors of IIT, Delhi which is appearing at pages 12-14 of Paper Book in which both of them have certified that bare titanium metal is not an Anode and cannot be used as a Metal Anode for caustic soda-chlorine manufacture by electrolytic process whereas mixed metal oxide C.T.M.A. provides excellent conductivity, resistance to corrosion and dimential stability necessary for manufacture of caustic soda and chlorine by electrolytic process.
Ld. counsel also submitted that Titanium Substrates has transformed into a new product called 'C.T.M.A.' after the process of manufacturing adopted by the assessee. For this, the ld. counsel invited our attention to the fact that initially coating solution is prepared by the assessee and for that the following process is adopted :- After preparation of the above solution, the manufacturing procedure for chemical activation of Titanium Substrates is carried on as given in flow chart of process appearing at page 27 :- 8. Chemical Activation (Thermic Electrostatic Nobel Metal Deposition) On the basis of this, the contention of the ld. counsel was that after activation, Titanium Substrates changes completely, chemically and physically and it is transformed into C.T.M.A. which is used for chlorine and caustic soda and it is new commercial commodity separate to the Titanium Substrates which is merely a junk prior to its activation carried out by assessee from the above process.
5. The ld. counsel had placed reliance on the decision of Hon'ble Supreme Court in the case of Empire Industries Ltd. v. Union of India [1986] 162 ITR 846 in which their Lordships have observed that the taxable event under excise law is manufacture. The moment there is transformation into a new commodity commercially-known as a distinct and separate commodity having its own character, use and name, whether it be the result of one process or several processes, manufacture takes place. In that context, their Lordships concluded that process of bleaching, dye and printing means manufacturing process. The test laid down by their Lordships to find out as to whether a particular activity amounts to 'manufacture' or not was : Does a new and different goods emerge having distinctive use and character. The ld. counsel submitted that said ratio is fully applicable to the facts as after different processes adopted by the assessee, a new commodity commercially known as distinct and having its own character, use and name emerges and that amounts to manufacture. Their Lordships have also laid down that said transformation may be done by human labour and skill, making it fit for human consumption or otherwise and in the process adopted by the assessee, more than Rs. 1.60 crores have been spent by the assessee for purchase of raw material used for making solution.
6. Ld. counsel again pointed out that Assessing Officer has not understood the business of manufacture of the assessee in the correct legal perspective laid down in the above referred to ratio of Apex Court. It was further submitted that after huge consumption of coating material amounting to Rs. 1.60 crores, the assessee had charged the amount of Rs. 7.5 crores through bills and that was showing that it was manufacturing and not involved in the processing only.
7. The ld. counsel contended that Assessing Officer has wrongly applied the ratio of Sterling Foods, Goa (supra). Assessee was not given the opportunity to explain the distinction between Titanium Substrates and C.T.M.A. Assessing Officer did not examine the agreement in between assessee and U.H.D.E. India Ltd. nor could examine the expenses incurred by the assessee for consumption of chemicals or receipt of charges. He further relied upon the decision of their Lordships of Supreme Court in the case of D.C.S.T. (Law) v. Pio Food Packers [1980] SCC 174 in which their Lordships have laid down the scope of manufacture on the same lines as in the case of Empire Industries Ltd. (supra). Relevant portion relied by the ld. counsel is as under : "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 processing at each stage. With each process suffered, the original commodity experiences a change. But it is only when the change or series of changes, take the commodity to the point where commercially it can no longer be regarded as new and distinct article that a manufacture can be said to take place. Where there is no essential difference in identity between the original commodity and the processed article it is not possible to say that one commodity has been consumed in the manufacture of another. Although, it has undergone a degree of processing, it must be regarded as a still retaining its original identity." 8. Ld. counsel again took to the same reasoning that by coating Titanium Substrate, a new thing came into existence which is commercially a different commodity and thus, the reasoning of their Lordships is fully applicable. Reliance was also placed on the decision of Hon'ble Supreme Court in the case of N. C. Buddharaja & Co. (supra) and that of ITAT Special Bench decision in the case of ACIT v. Soni Photo Films (P.) Ltd. [1998] 67 ITD 81 in which all the case laws on the points were discussed by the Special Bench and concluded that assessee's case was that of manufacture. According to ld. counsel, the same is the fact in hand and processing of coating produces a new thing and that amounts to production and manufacture of an article and assessee should have been held entitled for deduction under section 80-IA.9. The last plea was that section 80-IA applies to industrial undertaking and definition of industrial undertaking is adopted as given in Explanation to section 33B of the Act where it has been laid down that an undertaking which is mainly engaged in the business of generation of electricity etc. or construction of ships or in the manufacture or processing of goods. The submission of the ld. counsel is that assessee is carrying on the process even in the worst interpretation of his activities and still that process is resulting in the manufacture and production of goods and thus, his claim is allowable.
10. Giving out the intention of section 80-IA, it was submitted that provisions of that section were intended to promote industrial growth backward area. In such circumstances, the provisions of this section are to be liberally construed as laid down by Apex Court in the case of Bajaj Tempo Ltd. v. CIT [1992] 196 ITR 188/62 Taxman 480 (SC). On this basis the plea is that assessee's case is fully covered under the case laws referred to above and Assessing Officer should have allowed his claim for deduction under section 80-IA.11. As against it, the ld. D.R. placed reliance on the order of authorities below which were said to be quite exhaustive and duly supported by the case law. It was first plea from ld. DR that assessee is seeking deduction and interpretation of statute has to be construed strictly to find out as to whether his case is covered under the said provision or not as laid down by their lordships of Apex Court in case of Novoban India Ltd. v. CCE & C [1994] 73 ELT 769. Ld. DR pointed out that perusal of activities being carried out by the assessee shall reveal that assessee was being supplied Titanium Substrates by UHDE India Limited through IPCA and assessee was preparing a solution of different chemicals and coating the said Titanium Substrate. The assessee is simply weaving a net of words by taking the original receipt of raw material at Titanium Substrates and after coating it is said to be CTMA. While both the things are same and this is borne out from the record. Our attention was drawn to the agreement entered in between assessee and UHDE India Ltd. which is appealing at pages 34 to 72 of Paper Book in which the scope of work undertaken by assessee is that of coating of Titanium Substrates but the word Titanium Substrates is misnomer as wrongly used here. The ld. DR pointed out that this is Titanium Metal Anodes as is evident from copy of invoices, delivery challan and excise gate pass which have been filed by assessee and appearing from the pages 73 to 92 of the paper book in which assessee has given the description of the goods on which he has charged and the same reads as under : "'Charges for coating of 270 Titanium Metal Anodes' - The ld. DR pointed out that before coating, the articles being received by assessee was Titanium Metal Anodes and he is simply coating the same with chemical solutions and that activity will amount to processing only and nothing more." 12. Ld. DR placed reliance on the reasoning of Calcutta High Court in the case of CIT v. Hindustan Metal Refining Works (P.) Ltd. [1981] 128 ITR 472 in which identical facts were involved. Assessee was galvanising and coating iron or steel with zink to make it rust proof and their Lordships concluded that such an activity undertaken by the assessee will not involve manufacture or production of any article u/s 84 of the Act and words of that section were identical to the facts before us.
13. Ld. DR placed reliance on the decision of Bombay High Court in the case of Sterling Foods (supra) and submitted that said reasoning is fully applicable to the facts. Again, ld. DR placed reliance on the decision of Kerala High Court, in the case of CIT v. Aspinwall & Co.
Ltd. [1997] 227 ITR 916/93 Taxman 331 in which the activities carried out by the assessee were identical to the activities of present assessee. Assessee was receiving coffee from the estate and drying the same. Later on, hulling/pealing/polishing were being carried out, then grading of coffee was done and colour sorting, garbling and manual grading was done. Their lordships concluded that such activities may amount to processing but the same was not manufacturing and investment allowance not allowed. The DR contended that the same ratio is applicable here.
14. Ld. DR also pointed out that assessee was at the 'most manufacturing solution which was not saleable as such and even if it is saleable, it was incidental activity to the main work and main work is that or processing and thus, earlier activities will not turn the processing work to manufacturing activities as laid down by Madras High Court in the case of CIT v. Ganeshan [1999] 235 ITR 426. On the basis of all these facts, it was the plea of the ld. DR that activities carried out by the assessee were that of processing but that is not resulting into manufacturing or production of article and his claim for deduction under section 80-IA was lightly rejected.
15. The ld. counsel in rejoinder pointed out that invoices, challans and excise gate pass are to be read in view of the agreements in which word Titanium Substrates is used and if office has used wrong description in invoices, challans etc., it cannot lead to the conclusion that assessee was receiving Titanium Metal Andoes vide certificate of HT Professors which clearly stipulates that Titanium Substrates is not Metal Anode. He further pointed out that CTMA is a different article and not the same as received in raw form by the assessee. He again invited our attention to the certificate issued by excise authorities in which assessee had been given licence for manufacturing purposes and description of the article is that of C.T.M.A. According to ld. counsel, the registration certificate of excise authorities and that of Government of India clearly indicate that assessee was allowed to manufacture the above referred to items and not merely for processing and that registration certificate and permission of the Government fairly go to show that assessee was given permission for manufacturing and not for processing. He again mentioned that ratio of the case laws cited go to show that assessee was entitled for the claim of deduction under section 80-IA.16. We have considered the submission of the ld. representatives of both the parties and also gone through the material to which our attention was drawn and also carefully looked into the citations of different case laws.
17. To appreciate the submissions of ld. representatives of parties, it will be in the fitness of things to point out that provisions of section 80-1A were brought to statute by Finance Act, 1991 w.e.f 1-4-1991 and a perusal thereof shall show that these have been made applicable to industrial undertakings and we are producing the relevant provisions of section 80IA(2) which reads as under :- "80-IA(2) : This section applies to any industrial undertaking which fulfils all the following conditions, namely :- (iii) It manufactures or produces article or thing, not being any article or thing specified in the list in the 11th Schedule .... It is also relevant to point that sub-section of this section gives out that definition of industrial undertaking to the effect that it shall have the meaning assigned to it in the explanation to section 33B of the Act. Explanation to 33B provides as under :- In this section 'industrial undertaking' means any undertaking which is mainly engaged in the business of generation or distribution of electricity or any other form of power in the construction of ships or in the manufacture or processing of goods or in mining." It is an undisputed fact that assessee is treated as 'industrial undertaking' by authorities below. The only point which requires scrutiny is whether assessee is engaged in manufacturing or producing any article or thing. In this connection, we have to see as to what had been the legal position as the word 'Manufacture', 'produce' and 'processing' had been subject matter of interpretation before Apex Court and different High Courts.
18. At the outset, we may point out that Hon'ble Supreme Court in the case of Pio Food Packers (supra) had an occasion to interpret the word 'manufacture' in reference to Kerala General Sales Tax Act, 1963 and their Lordships have laid down as under :- "The generally prevalent test is whether the article produced is regarded in the trade, by those who deal in it, as distinct in identity from the commodity involved in its manufacture. Commonly manufacture is the end result of one 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 processing 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. Where there is no essential different in identity between the original commodity and the processed article, it is not possible to say that one commodity has been consumed in the manufacture of another. Although it has undergone a degree of processing, it must be regarded as still regaining its original identity." Their lordships of Apex Court, while interpreting the word 'manufacture' or produce an article as required under section 32A of Income-tax Act which has used the identical words as in section 80-IA were again interpreting these words in the case of N. C. Buddharaj & Co. (supra) and their lordships have followed the ratio of the case of Pio Food Packers (supra) with approval and further laid down as under :- "The word 'production' has a wider connotation than the word 'manufacture'. While every manufacture can be characterised as production, every production need not amount to manufacture. The word 'production' or 'Produce' when used in juxtaposition with the word 'manufacture', takes in bringing into existence new goods by a process which may or may not amount to manufacture. It also takes in all the by-products, intermediate products and residual products which emerge in the course of manufacture of goods." As pointed out above, the requirement of section 32A for allowing the deduction are identical to the requirement of section 80-IA(2) reproduced above and undisputedly, the same reasoning has to be applied here.
19. Further, Hon'ble Bombay High Court in the case of Sterling Food (supra) had further discussed the words 'processing', 'manufacture' and 'production' and laid down as under after discussing the ratio of Apex Court in the case of N. C. Buddharaja & Co. (supra) and relevant observations are as under :- "The three expressions 'processing', 'manufacture' and 'production' used in various taxing statutes, are not interchangeable expressions. Though often used in juxtaposition, they convey different concepts and refer to different activities. 'Processing' is a much wider concept. The nature and extent or processing may vary from case to case. Every process does not tantamount to 'manufacture'. It is only when the 'process' results in the emergence of a new and different article having a distinctive name, character or use, that 'manufacture' can be said to have taken place. Similarly, 'production' is wider than 'manufacture'. As a result, every production need not amount to manufacture though every manufacture can be characterised as 'production'. On a careful reading of section 80HH of the Income-tax Act, 1961, in the light of the scheme thereof and other provisions of the Act, it is clear that the Legislature intended to extend the benefit of deduction under section 8OHH only to the industrial undertakings which manufacture or produce articles. This section was not intended to be applied to industrial undertakings which are engaged in 'processing of goods' not amounting to manufacture or production of articles." It is again relevant to point out that their lordships of Bombay High Court were interpreting these three words in context of section 80HH which again had used the identical words for allowing the deduction as are used in section 80-IA with context to the interpretation of word 'industrial undertaking'and their lordships have opined that no doubt, the assessee may be an industrial undertaking involved in the processing of an article but what is more required is that such processing should bring into existence a new and distinct article or a thing, then only such industrial undertaking shall be allowed the deduction and conclusion is that every processing will not be tantamount to manufacture or production of an article but criteria remains that end-product of such process should be a new and distinct article where commercially it can no longer be regarded as the original commodity but instead it is recognised as a new and distinct article, then only manufacture can be said to have taken place.
20. Their lordships of Kerala High Court in the case of Aspinwall & Co.
Ltd. (supra) again have the occasion to interpret the word 'manufacture' in context of claim for deduction under section 32A and their lordships after following the reasoning of Hon'ble Supreme Court in the case of Pio Food Packers (supra), N. C. Buddharaja & Co. (supra) and that of Sterling Food v. State of Karnataka 63 STC 239 have again reiterated the same reasoning by observing that there may be different stages involved in the processing but the only thing required is whether after such processing of different stages, any commercially different article was available or not and in case answer is in affirmative, then only it can be said that assessee was manufacturing or producing an article.
21. On the basis of these facts, we have to examine the case of the present assessee and find out as to whether the different processes being adopted by the assessee new commercial commodity dinstinct from the original one in coming into existence or not.
22. In this connection, at the very beginning, we have to start with the certificate of HT given by Prof. (Retd.) N. K. Sarkar and Dr. K.Gadgil, copy of which is appearing at pages 12-14 of the paper book and relied upon by the assessee. These two Professors have given their opinion on the basis of encyclopaedia of Chemical Technology by Kirk and Othmer Vol. 15 and have also filed the relevant pages relating to metal anodes as appearing at pages 172 to 183 which is also made part of the said certificate. We have looked into the same and relevant portion relating to metal anodes is appearing at page 173 of that book and at page 16 of the Paper Book. We are reproducing it as under :- "In response to the needs of the aerospace industry, an important technological breakthrough in the development of metal anodes took place in the 1950s when titanium became commercially available in large quantities. The excellent corrosion resistance of titanium in a variety of solutions and its self-oxidizing, Valve-metal Characteristics quickly were recognised to be of value of electrochemical systems. Titanium as an anode does not pass current satisfactorily because of the build-up of non-corrodible oxide coatings on the surface, but with the addition of a non-corrodible metal coating, a useful anode can be produced. Extensive research work culminated in the filing of patents in 1957 in the Netherlands and the U.K. (5-6) in 1958, which led to a group of patents (7-9) where oxides of noble metals are used in the coating of titanium, in particular, rethenium oxide in combination with other metals and oxides. These precious metal oxide coatings have received worldwide acceptance in the chlor-alkali industry and have resulted in considerable power savings in the production of chlorine. By optimizing the characteristics of these anodes, new cell designs and technology for the production of chlorine have been developed." A bare reading of the said extractor the book by Kirk and Othmer shall show that titanium as an anode does not pass current satisfactorily because of the build up of non-corrodible oxide getting on the surface but with the addition of non-corrodible metal coating, a useful anode can be produced. Accordingly, coating of Titanium anode with oxides of noble metals, particularly ruthenium oxide makes that Titanium anodes more useful and Professors of HT, Delhi, have also certified that after coating, Titanium Metal anode provides excellent conductivity, resistance to corrosion and dimential stability necessary for manufacture of caustic soda and chlorine by electrolytic process. The result of the above discussion is that coating is providing excellent conductivity of resistance to corrosion and dimential stability to titanium metal anode. The original commodity is titanium metal anode and after the above process of coating, it still remains titanium metal anode but, the word 'coated' is added to it.
23. The contention of the assessee is that initially the article is Titanium Substrates and after coating, it becomes C.T.M.A. and it becomes a new commercial commodity. This is based on the copy of agreement executed in between assessee and M/s. UHDE India Limited in which the word used by these parties is Titanium Substrates and after coating, it becomes C.T.M.A. This description is a misnomer in view of the description of Titanium anode in the book by Kirk & Othmer as it is only titanium anode which is being used for variety of solutions but it was later on established that if it is coated with oxides of noble metals, then it gives proper results. However, the fact remains that it is titanium anode in the very beginning and it remains titanium anode even after coating and that fact is corroborated by other relevant material on record. It is submitted that assessee is getting alleged titanium substrates from M/s. UHDE India Ltd. through I.P.C.L. and Bench asked the assessee to file relevant documents through which receipt of raw material was received and assessee filed before us the copy of good receipt note dated 10-1-1993 by which it received 408 Nos.
of raw material and a perusal thereof shall show that it had received 408 Nos. of 'uncoated electrodes'. A copy of bill of entry was also filed showing receipt of 191 pieces of 'Punched Uncoated Titanium Electrodes' which were sent by Italy concern to M/s. IPCL and later on to assessee. These two documents show that assessee had received 'uncoated Titanium Electrodes' and these are nothing but titanium electrodes. The assessee had despatched the coated titanium anodes after job work and processing of coating work to the places as required under the agreement and copy of invoices, challans and excise gate pass have also been filed by the assessee which are appearing from pages 73 to 92 of the paper book. In different invoices, the assessee had given the description of articles as under :- Charges for coating of 270 titanium metal anodes. It again goes to show that assessee had claimed charges for coating of titanium metal anodes. It clarifies that what assessee was receiving was 'titanium metal anodes' and it was carrying on the process of coating these titanium metal anodes.
24. From the above discussion, facts emerging out are that assesee was receiving titanium metal anodes and after coating, it was returning the same coated titanium metal anodes and the words used in agreement that it was receiving titanium substrates prove to be a misnomer and not giving the correct picture as assessee was receiving Titanium electrodes which are nothing but titanium metal anodes and doing coating work. Result of all the processes is the same i.e., itanium metal anodes except that it becomes coated one while previously it was uncoated. The test laid down by their lordships of Apex Court and different High Courts is to find out whether the end result of the processes turns out initial commodity into different, dinstinct commercial commodity is not satisfied in the case in hand as metal anodes can be used for electrolytic process as such and after coating with noble metal, its utility and longevity increases as noted by authors Kirk & Othmer. But fact remains that initial article remains the same.
25. It is also relevant to point out that even after coating, the said coated CTMA cannot be used as such but it requires further processing work and for this we have again to look at the agreement of assessee and M/s. UHDE India Ltd. and particularly to the clause XV appearing at page 43 of the Paper Book and that requires that coating titanium metal anodes should be despatched by the assessee to M/s. Alpha to undertake further fabrication work to manufacture membrane cell elements as per requirement. It shows that CTMA again requires further fabrication work and it is not that after coating carried out by the assessee, said CTMA can be so useful or it is different commercial commodity but it still requires further processing. The conclusion shall be that it was another process which was required to be carried out by different concerns and the processing work carried out by the assessee was not going to give final shape to an article.
26. It has also not been brought on record by assessee that titanium metal anodes after coating carried out by the assessee becomes saleable article as such or becomes different commodity. What had been done by assessee by coating work is to increase its longevity and its utility by making that article as resistant to corrosion and provided excellent conductivity and dimential stability but the article remains the same.
27. It has been settled preposition of law that ratio of that particular case can be applied if facts of that case are identical to the facts before the Court. The case law cited by assessee involve different facts and ratio of that case shall be applicable only if facts involved are identical. In the case of M/s. Pio Food Packers, N.C. Buddharaja & Co., Empire Industries Ltd. and that of Soni Photo Films Ltd., the facts were quite different. But we are having case cited by ld. DR which had identical facts before us. In the case of Hindustan Metal Refining Works (P.) Ltd. (supra) the facts are identical. In that case, the assesee was found engaged in the business of manufacturing and sale of metals and also in galvanising work for outsiders. That assessee claimed exemption of tax under section 84 in respect of business of manufacturing and sale of metal and its galvanising work. The ITO was of the view that business of galvanising for outsiders did not involve manufacture or production of any article as contemplated under section 84(2)(iii) of the Act as it stood in assessment year 1965-66. AAC confirmed the action of Assessing Officer.
The Tribunal allowed the claim of the assessee and matter came to High Court. Their lordships discussed the definition of 'galvanising' which was found to be as such 'galvanised iron' - iron or steel coated with zinc to protect it from rust. After discussing the decision referred to by respective parties, their lordships concluded that galvanising is a process of coating to protect from rust. This does not bring into existence different article or an article known to the people differently who deal with it before it was galvanised. This work of galvanization may or may not be processing but expression 'process' was different from the expression manufacturing and appeal of the Revenue was allowed. The facts of the case as noted above are identical to the facts before us. Assessee was receiving electrodes or Titanium anodes and he was engaged in coating the same with oxide and that coating provides excellent conductivity, resistance to corrosion and dimential stability necessary for manufacture of caustic soda and chlorine and thus, no different article or thing came into existence by this above process of coating and the same cannot be treated as 'manufacturing' or producing of an article.
28. The result of the above discussion is that assessee cannot be treated as manufacturing or producing an article which is the fundamental requirement for claim for deduction under section 80-IA of the Act and we confirm the finding of authorities below.
29. Grounds No. 12 to 14 were argued together by ld. counsel and are being decided together. Facts are that assessee-company was incorporated on 7-6-1989. Assessee-company purchased metal anodes division situated at Rampur from M/s. Wimco Ltd. under agreement dated 30-11-1989. The purchase consideration was Rs. 6,10,02,641 which was an admitted fact. The assessee-company arrived at cost of depreciable assets at Rs. 6,10,02,641 and details thereof are appearing at page 174 of the Paper Book. It transpires that assessee claimed depreciation on this amount for the first time in assessment year 1990-91 but Assessing Officer allowed the claim of the assessee for depreciation purposes at Rs. 3,51,66,272. Appeal was preferred and by that time assessment order for assessment year 1991-92 was finalised on same figure of depreciable assets without taking into consideration the plea of the assessee that M/s. Mehta & Padamsee Pvt. Ltd. had given out the price of assets which was totally different from the cost of the assets as in cost, in addition to the price, various other elements are included and report of M/s. Mehta & Padamsee should have not been made the basis for arriving at the cost of assets for depreciation. It appears that CIT (Appeals) while deciding the appeal for assessment year 1990-91 took the value of depreciable assets as valued by M/s. Mehta & Padamsee Pvt.
Ltd. without looking into the cost of depreciable assets. Appeal for assessment year 1990-91 was restored to Assessing Officer to follow the finding of CIT (Appeals) for assessment year 1991-92. It is to be seen that in the year under consideration the same were the facts and AO following the order of CIT(A) for 91-92 had adopted the same value of depreciable assets as in assessment year 1990-91 and which was adopted in subsequent assessment year upto 1993-94. Assessee is in appeal. CIT (Appeals) had confirmed the finding of Assessing Officer after placing reliance on the order of CIT(Appeals) for 1990-91.
30. The other point involved is that assessee had taken over the business of M/s. Wimco as a going on concern and said M/s. Wimco had entered into an agreement on 20-9-1983 with National Research Development Corporation (hereinafter referred to as N.R.D.C.) for acquiring a licence on 20-9-1983 to use the invention and the process and manufacture of Titanium Substrates metal anodes and other know how of the process for which M/s. Wimco was to pay Rs. 15 lakhs as premium and further royalty running into Rs. 1.20, crores in a period of 10 years. Rs. 19.43 lakhs were paid by M/s. Wimco to NRDC upto 31-3-1986 and thereafter payment was stopped after coming to know that main patent covered licence had expired. There was dispute between M/s.
Wimco & NRDC and a claim of Rs. 1.24 crores approximately was made and in between assessee acquired business of M/s. Wimco. Assessee settled the matter with NRDC vide agreement dated 13-9-1990 and assessee was to pay a lump sum amount of Rs. 75 lakhs from payable in instalment of Rs. 15 lakhs from 1-10-1990 onwards. The assessee was advised to capitalise this amount but that claim was not allowed. In alternative assessee claimed Rs. 15 lakhs as revenue expenditure paid in the year under consideration and also made alternative claim under section 35AB of the Act. If it was not allowable under section 28 or 37 of the Act. It appears that Assessing Officer while framing the assessment did not enter into this controversy and did not deal with this issue and CIT(Appeals) after hearing the ld. counsel restored the matter to Assessing Officer to find out the true facts since appeal for assessment year 1990-91 was pending and to decide the controversy afresh keeping in view the finding of CIT(Appeals) in the earlier years. The assessee is in appeal before us.
31. The ld. counsel for the assessee had reiteratd the submissions as taken up before the CIT(Appeals). In respect of value of depreciable assets, the ld. counsel had raised the same points that authorities below had wrongly placed reliance on the report of M/s. Mehta & Padamsey Pvt. Ltd. who had simply given the price of assets without giving out the actual cost of the assets while price of asset and cost of the asset are two different concepts. Cost includes the pirce, interest, administrative and establishment expenses, cost of trained manpower and even royalty amount payable to M/s. National Research Development Corporation at Rs. 75 lakhs. The CIT (Appeals) had not looked into these aspects and order is not substainable.
On the point of royalty, it was submitted that amount of royalty paid by the assessee is allowable under section 35AB if not u/s 28 or 37 of the Act but the same have not been discussed at all by Assessing Officer and by CIT(Appeals). The ld. DR placed reliance on the orders of authorities below.
32. We have considered the submissions. During the course of healing, we asked the ld. representative of assessee to give out the W.D.V. of the assets of M/s. Wimco as appearing in their books but those details were not filed. It has also not been brought on record as to what happened to the order of CIT(Appeals) for assessment year 1990-91 and other orders of Assessing Officer and CIT (Appeals) for subsequent years. The basic year for deciding this controversy was assessment year 1990-91 and it has not been brought on record as to whether assessee had challenged the correctness of order of CIT(Appeals) in which value of depreciable assets as taken by Assessing Officer at Rs. 3,50,37,238 as against Rs. 6,10,02,641 claimed by the assessee had been accepted by the assessee or challenged before Tribunal. Nothing has also been brought on record about the fate of subsequent years. We are dealing with assessment year 1994-95 and upto that assessment year about four assessment years are involved in which the same controversy is there.
We have to observe that if assessee had accepted those orders for earlier years, naturally that point cannot be agitated in this relevant year and if the matter is subjudice before Tribunal, then naturally Assessing Officer should abide by result of second appeal in respect of assessment year 1990-91 or 1991-92 as the case may be and thus, we are restoring the matter to the file of Assessing Officer with the direction to abide by the judgment of second appeal, if any, preferred by the assessee in respect of assessment year 1990-91 or 1991-92 as the case may be and if there is no appeal then stand of the Revenue as taken in assessment year 1990-91 onwards shall remain final.
33. About the question of royalty nothing had been discussed by the Assessing Officer but CIT(Appeals) had noted that the amount of royalty was included in the assessee's claim in the cost of depreciable assets taken over from M/s. Wimco at Rs. 6,10,02,641 and after considering that fact, the Assessing Officer has taken the cost of the asset at Rs. 3,50,37,238 but he had not considered the claim separately. In the year under consideration, there is no discussion by Assessing Officer on this point. We are restoring back the ground relating to payment of royalty to N.R.D.C. by the assessee with the direction to decide the controversy afresh keeping the claim of the assessee and to decide as to whether the claim was allowable under section 28 or 37 or in alternative under section 35AB of the Act and for that he will also consider as to whether amount of royalty was subject matter in the cost of depreciable asset taken over from M/s. Wimco or not.