Whether services like repair and maintenance constitute an integral part of manufacturing of Industrial Undertaking as per Sec 80IB - NO, rules ITAT SB
KOLKATA, AUG 18, 2011: THE issues before the Special Bench are - Whether services like repair and maintenance constitute an integral part of manufacturing of industrial undertaking - Whether any income derived from such jobwork of repair and maintenance is also eligible for Sec 80IB benefits and whether such income has any direct nexus with the main activity of the industrial activity. And the verdict has gone against the assessee.
Facts of the case
Assessee is a manufacturer of moulds for ball pen and mould parts. Revenue issued notices u/s 143(2) and 142(1). Assessee stated that it was a manufacturing unit and claimed deduction u/s. 80-IB of the Act but it failed to produce details due to fire break-out in the office premises of M/s Today's Writing Product Ltd and all the records were destroyed. Assessee HUF through Karta Shri `R' was one of the promoters/directors of `TWPL'. AO made assessment u/s 144 stating that assessee was selling as well as providing services to `TWPL' and another group concern `PWP' by way of repair and maintenance of moulds sold to them. Deduction claimed u/s 80IB in respect of repair and maintenance was disallowed stating that it provided only services for repairing and maintenance of moulds which did not constitute manufacturing activity and no new article or thing came into existence. CIT (A) allowed the appeal of the assessee following the order of the ITAT in preceding years.
In appeal, the Revenue contended that the repair and maintenance was not an ancillary activity of the assessee and once assessee did not file details and did not produce books of account, it was not possible to know the exact nature of `job work charges' on which assessee claimed deduction u/s 80IB. It was further contended that the Tribunal heavily relied upon erroneous interpretation of "job work charges". In the preceding year also nature of "job work charges" remained vague, unclear and liable to be misinterpreted by CIT(A) as well as Tribunal. The job work was nothing but repairing and maintenance of the mould which had been sold by the assessee earlier. Due to repairs and maintenance of old moulds, their life might be renewed and they might become useful for further use. But, the activity of repairing and maintenance brings no new article or thing, therefore, assessee was not eligible for deduction U/s 80IB of the Act on such job charges. Reliance was placed on the judgement of Apex Court in the case of Liberty India v CIT (2009-TIOL-100-SC-IT), wherein it was held that the words "derived from" are narrower in connotation as compared to the words "attributable to" and that by using the expression "derived from" the Parliament intended to cover sources not beyond the first degree and also that the source of receipts must be manufacture and production of an article. Deduction U/s.801B of the Act will be available to assessee only if a new article comes into existence as a result of manufacture or production but in the present case, assessee was doing only repairs and maintenance of old moulds which were sold by him earlier in the garb of so-called job charges. As a result of repairs and maintenance, no new articles came into existence. Accordingly, it was urged that the order of CIT(A) be reversed and that of the AO be restored.
On the order hand, the assessee contended that it was a manufacturer of moulds for ball pen and mould parts and these moulds were hollow design of ball pen parts which were manufactured with the help of Injection moulding machines. Mould manufactured consisted of the parts punches, pin point, guide pins, guide/degree bush, hanging pin/link rode, ejector bush and cavities which were also manufactured by the assessee itself. Manufacture of these parts with its own material as well as steel supplied by customers and sale of moulds as well as supply of mould parts manufactured qualifies for deduction u/s 80-IB of the Act, whether manufactured on its own material or on job work basis. It was further contended that supplying of manufactured parts in the course of after sales service s very much manufacturing activity. Assessee provided after sales service to its valued customers, which was essential for selling moulds. After sales service was an exclusive service to its own customers and it was not that assessee carried on the business of doing repair. It was an indispensable part of manufacturing, almost universally, undertaken by manufacturers to maintain confidence and dependence of the users and to retain market of manufactured items.
It was further contended by the assessee that until recently nowhere in Section 80 IA or 80 IB of the Act, no definition of the word `manufacture' was available. The absence of definition of the word was not by chance but by design to leave the word to its widest amplitude possible consonant with incentive nature of benefits of deduction/exemption under various sections hinging on manufacture as the central condition precedent. Under Export Import Policy 2002 to 2007, the word `Manufacture' is defined as "Manufacture means to make, produce, fabricate, assemble, process or drawing into existence by machine, a new product having a distinctive name, character or use and shall include processes such as refrigeration, polishing, blending, reconditioning, repair, refurbishing, testing calibration, reengineering. "Manufacture" for the purpose of this policy shall also include agriculture, aquaculture, animal husbandry, floriculture, pisci-culture, poultry, sericulture, viti-culture and mining." which is inserted in Explanation 1 below sub section 9 of section 10AA by insertion of clause (c) of Schedule of the SEZ Act where the said definition is lifted. The work relating to "repair" finds place in definition of "manufacture" as adopted for the purpose of Section 10AA of the Act and it is for the first time that a definition of the word "manufacture" is available in the Act. Logic for calling into aid the definition in section 10AA of the Act is straightforward and forthright and provisions of deduction in Section 80-IB of the Act are undisputedly meant to encourage entrepreneurs to set up manufacturing undertakings in identified backward areas. This section gives entrepreneurs reward for undergoing hardihood in venturing out in such areas and contributing towards nation's strife for even growth of the industry nationwide. So, it is essentially an incentive provision and a relief provision as well. This needs a purposive approach while giving the word "manufacture" its connotation. It was further contended that since definition of "manufacture" in Section 10AA of the Act includes repair as one of the parameters of the expression "manufacture", it is only fair, reasonable and irresistible that repair should also be taken as a parameter of "manufacture" for the purpose of Section 80-IB of the Act. There is nothing in the object of Section 80-IB of the Act, which can be said to be repugnant to the object of Section 10AA of the Act. Both provisions stand on equation in regard to the basic nature of the objects, i.e., growth of industry - one, for the purpose of export development and the other for the purpose of removing the pockets of industrial backwardness of the national economy. Further in case of doubts the construction most beneficial or favourable to assessee should be adopted even if it results in his obtaining a double advantage and if it is a case of considering respective hardships or inconveniences of revenue and assessee, the court should lean in favour of assessee.
After hearing both the parties, the Special Bench, ITAT held that,
++ the expression used in section 80-IB of the Act is "where the gross total income of an assessee includes any profits and gains derived from any eligible business in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains….", it means that the purpose for providing deduction from business profits u/s. 80-IB of the Act was to encourage industrial activity in India and it is inconceivable that deductions should be made available in respect to profits and gains which are not derived from an activity having a direct nexus to the industrial activity as contemplated in this section. The entire section has to be read as a whole and interpretation placed thereon has to fit the overall scheme of the provision, which is to encourage industrial activity in India and if the interpretation sought to be placed by the assessee is accepted, then it might possibly lead to a situation where profits from repairs and maintenance apart from job work for which industrial undertaking has been set up for manufacturing may undertake very little manufacturing in an assessment year but assessee yet claimed deduction from the profits and gains of business including repairs and maintenance;
++ service and maintenance is not an integral part of manufacturing activity of industrial undertaking and as is clear from the opening word of section 80-IB of the Act that deduction in respect of profits and gains from certain industrial undertaking is to be allowed under the provisions of section 80-IB of the Act while computing taxable income in respect of profits derived from an industrial undertaking and not from any other activity which has no immediate or direct nexus to the essential activity of the industrial undertaking. Section 80-IB of the Act uses the opening word that where the gross total income of assessee includes any profits and gains derived from any business and the deduction under this provision be allowed in computing the total income of the assessee from such profits and gains of an amount equal to such percentage and for such number of assessment years as specified in this section. The Apex Court has also drawn a distinction between the expression `derived from' and `attributable to' in the case of Cambay Electric Supply Co. Ltd Vs. CIT (2002-TIOL-76-SC-IT), wherein it is held that the expression `attributable to' was wider in import than the expression `derived from'. But in the present case, the assessee's source of income is from repairs and maintenance i.e. after sale services and it may have commercial connection between the profits earned and the industrial undertaking but industrial undertaking itself is not the source of this profit. This profit from repair and maintenance earned by assessee is not a direct yield from industrial undertaking as the word used in section 80-IB of the Act of profits and gains derived from;
++ the provisions of section 10AA(9) and explanation (1) below section 10AA(9) of the Act is for the purpose of this section only and it cannot be enlarged to other chapters of this Act as section 10AA is a code in itself and it gives complete exemption to the income earned by units in SEZs. The income earned from units in SEZs do not form part of total income u/s. 10AA of the Act, whereas u/s. 80-IB of the Act the deduction is to be allowed where gross total income of assessee includes any profits and gains derived from business profits of industrial undertaking while computing the total income of the assessee. Inclusion of the definition of `manufacture' as assigned in clause (r) of section 2 of the SEZ Act, 2005 in section 10AA of the Act, will not apply to other provisions of the Act, particularly section 80-IB of the Act in view of specific mention in Explanation (1) that these definitions are for the purposes of this section i.e. sec. 10AA of the Act. There is marked difference between the provisions of section 10AA of the Act that is meant for exemption of income from the total income of the Assessee, whereas section 80-IB of the Act grants deduction to the assessee from the profits and gains derived from its industrial undertaking and that also from the business of the industrial undertaking that had directly yielded that profit;
++ there is no quarrel over the proposition and in case the assessee is selling moulds manufactured by it and spare parts of moulds also sold for doing repairs and maintenance, qua sale of moulds and spare parts of moulds assessee is entitled for deduction u/s. 80-IB of the Act. But in respect to repair of moulds, it charges two types of receipts i.e. receipt on account of sale of spare parts as well as repairs and maintenance charges, in case of sale of spare parts assessee is entitled for deduction u/s. 80-IB of the Act but in respect to repairs and maintenance charges it is not entitled for deduction in view of clear provisions of section 80-IB of the Act, because that receipt has no immediate or direct nexus with the industrial undertaking and that is not the source of profit of industrial undertaking. Since there was a major fire broke out and as such entire record of the assessee was destroyed and it would not be possible to furnish books of account and other documents to AO instead of restoring the matter to AO and with a view to finally decide the issue it will be reasonable to consider 50% of the receipt as job work charges on which assessee will be entitled to get deduction u/s. 80-IB of the Act and the balance 50% is the receipt on account of repair and maintenance charges on which the assessee will not be entitled to get deduction u/s. 80-IB of the act.
KOLKATA, AUG 18, 2011: THE issues before the Special Bench are - Whether services like repair and maintenance constitute an integral part of manufacturing of industrial undertaking - Whether any income derived from such jobwork of repair and maintenance is also eligible for Sec 80IB benefits and whether such income has any direct nexus with the main activity of the industrial activity. And the verdict has gone against the assessee.
Facts of the case
Assessee is a manufacturer of moulds for ball pen and mould parts. Revenue issued notices u/s 143(2) and 142(1). Assessee stated that it was a manufacturing unit and claimed deduction u/s. 80-IB of the Act but it failed to produce details due to fire break-out in the office premises of M/s Today's Writing Product Ltd and all the records were destroyed. Assessee HUF through Karta Shri `R' was one of the promoters/directors of `TWPL'. AO made assessment u/s 144 stating that assessee was selling as well as providing services to `TWPL' and another group concern `PWP' by way of repair and maintenance of moulds sold to them. Deduction claimed u/s 80IB in respect of repair and maintenance was disallowed stating that it provided only services for repairing and maintenance of moulds which did not constitute manufacturing activity and no new article or thing came into existence. CIT (A) allowed the appeal of the assessee following the order of the ITAT in preceding years.
In appeal, the Revenue contended that the repair and maintenance was not an ancillary activity of the assessee and once assessee did not file details and did not produce books of account, it was not possible to know the exact nature of `job work charges' on which assessee claimed deduction u/s 80IB. It was further contended that the Tribunal heavily relied upon erroneous interpretation of "job work charges". In the preceding year also nature of "job work charges" remained vague, unclear and liable to be misinterpreted by CIT(A) as well as Tribunal. The job work was nothing but repairing and maintenance of the mould which had been sold by the assessee earlier. Due to repairs and maintenance of old moulds, their life might be renewed and they might become useful for further use. But, the activity of repairing and maintenance brings no new article or thing, therefore, assessee was not eligible for deduction U/s 80IB of the Act on such job charges. Reliance was placed on the judgement of Apex Court in the case of Liberty India v CIT (2009-TIOL-100-SC-IT), wherein it was held that the words "derived from" are narrower in connotation as compared to the words "attributable to" and that by using the expression "derived from" the Parliament intended to cover sources not beyond the first degree and also that the source of receipts must be manufacture and production of an article. Deduction U/s.801B of the Act will be available to assessee only if a new article comes into existence as a result of manufacture or production but in the present case, assessee was doing only repairs and maintenance of old moulds which were sold by him earlier in the garb of so-called job charges. As a result of repairs and maintenance, no new articles came into existence. Accordingly, it was urged that the order of CIT(A) be reversed and that of the AO be restored.
On the order hand, the assessee contended that it was a manufacturer of moulds for ball pen and mould parts and these moulds were hollow design of ball pen parts which were manufactured with the help of Injection moulding machines. Mould manufactured consisted of the parts punches, pin point, guide pins, guide/degree bush, hanging pin/link rode, ejector bush and cavities which were also manufactured by the assessee itself. Manufacture of these parts with its own material as well as steel supplied by customers and sale of moulds as well as supply of mould parts manufactured qualifies for deduction u/s 80-IB of the Act, whether manufactured on its own material or on job work basis. It was further contended that supplying of manufactured parts in the course of after sales service s very much manufacturing activity. Assessee provided after sales service to its valued customers, which was essential for selling moulds. After sales service was an exclusive service to its own customers and it was not that assessee carried on the business of doing repair. It was an indispensable part of manufacturing, almost universally, undertaken by manufacturers to maintain confidence and dependence of the users and to retain market of manufactured items.
It was further contended by the assessee that until recently nowhere in Section 80 IA or 80 IB of the Act, no definition of the word `manufacture' was available. The absence of definition of the word was not by chance but by design to leave the word to its widest amplitude possible consonant with incentive nature of benefits of deduction/exemption under various sections hinging on manufacture as the central condition precedent. Under Export Import Policy 2002 to 2007, the word `Manufacture' is defined as "Manufacture means to make, produce, fabricate, assemble, process or drawing into existence by machine, a new product having a distinctive name, character or use and shall include processes such as refrigeration, polishing, blending, reconditioning, repair, refurbishing, testing calibration, reengineering. "Manufacture" for the purpose of this policy shall also include agriculture, aquaculture, animal husbandry, floriculture, pisci-culture, poultry, sericulture, viti-culture and mining." which is inserted in Explanation 1 below sub section 9 of section 10AA by insertion of clause (c) of Schedule of the SEZ Act where the said definition is lifted. The work relating to "repair" finds place in definition of "manufacture" as adopted for the purpose of Section 10AA of the Act and it is for the first time that a definition of the word "manufacture" is available in the Act. Logic for calling into aid the definition in section 10AA of the Act is straightforward and forthright and provisions of deduction in Section 80-IB of the Act are undisputedly meant to encourage entrepreneurs to set up manufacturing undertakings in identified backward areas. This section gives entrepreneurs reward for undergoing hardihood in venturing out in such areas and contributing towards nation's strife for even growth of the industry nationwide. So, it is essentially an incentive provision and a relief provision as well. This needs a purposive approach while giving the word "manufacture" its connotation. It was further contended that since definition of "manufacture" in Section 10AA of the Act includes repair as one of the parameters of the expression "manufacture", it is only fair, reasonable and irresistible that repair should also be taken as a parameter of "manufacture" for the purpose of Section 80-IB of the Act. There is nothing in the object of Section 80-IB of the Act, which can be said to be repugnant to the object of Section 10AA of the Act. Both provisions stand on equation in regard to the basic nature of the objects, i.e., growth of industry - one, for the purpose of export development and the other for the purpose of removing the pockets of industrial backwardness of the national economy. Further in case of doubts the construction most beneficial or favourable to assessee should be adopted even if it results in his obtaining a double advantage and if it is a case of considering respective hardships or inconveniences of revenue and assessee, the court should lean in favour of assessee.
After hearing both the parties, the Special Bench, ITAT held that,
++ the expression used in section 80-IB of the Act is "where the gross total income of an assessee includes any profits and gains derived from any eligible business in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains….", it means that the purpose for providing deduction from business profits u/s. 80-IB of the Act was to encourage industrial activity in India and it is inconceivable that deductions should be made available in respect to profits and gains which are not derived from an activity having a direct nexus to the industrial activity as contemplated in this section. The entire section has to be read as a whole and interpretation placed thereon has to fit the overall scheme of the provision, which is to encourage industrial activity in India and if the interpretation sought to be placed by the assessee is accepted, then it might possibly lead to a situation where profits from repairs and maintenance apart from job work for which industrial undertaking has been set up for manufacturing may undertake very little manufacturing in an assessment year but assessee yet claimed deduction from the profits and gains of business including repairs and maintenance;
++ service and maintenance is not an integral part of manufacturing activity of industrial undertaking and as is clear from the opening word of section 80-IB of the Act that deduction in respect of profits and gains from certain industrial undertaking is to be allowed under the provisions of section 80-IB of the Act while computing taxable income in respect of profits derived from an industrial undertaking and not from any other activity which has no immediate or direct nexus to the essential activity of the industrial undertaking. Section 80-IB of the Act uses the opening word that where the gross total income of assessee includes any profits and gains derived from any business and the deduction under this provision be allowed in computing the total income of the assessee from such profits and gains of an amount equal to such percentage and for such number of assessment years as specified in this section. The Apex Court has also drawn a distinction between the expression `derived from' and `attributable to' in the case of Cambay Electric Supply Co. Ltd Vs. CIT (2002-TIOL-76-SC-IT), wherein it is held that the expression `attributable to' was wider in import than the expression `derived from'. But in the present case, the assessee's source of income is from repairs and maintenance i.e. after sale services and it may have commercial connection between the profits earned and the industrial undertaking but industrial undertaking itself is not the source of this profit. This profit from repair and maintenance earned by assessee is not a direct yield from industrial undertaking as the word used in section 80-IB of the Act of profits and gains derived from;
++ the provisions of section 10AA(9) and explanation (1) below section 10AA(9) of the Act is for the purpose of this section only and it cannot be enlarged to other chapters of this Act as section 10AA is a code in itself and it gives complete exemption to the income earned by units in SEZs. The income earned from units in SEZs do not form part of total income u/s. 10AA of the Act, whereas u/s. 80-IB of the Act the deduction is to be allowed where gross total income of assessee includes any profits and gains derived from business profits of industrial undertaking while computing the total income of the assessee. Inclusion of the definition of `manufacture' as assigned in clause (r) of section 2 of the SEZ Act, 2005 in section 10AA of the Act, will not apply to other provisions of the Act, particularly section 80-IB of the Act in view of specific mention in Explanation (1) that these definitions are for the purposes of this section i.e. sec. 10AA of the Act. There is marked difference between the provisions of section 10AA of the Act that is meant for exemption of income from the total income of the Assessee, whereas section 80-IB of the Act grants deduction to the assessee from the profits and gains derived from its industrial undertaking and that also from the business of the industrial undertaking that had directly yielded that profit;
++ there is no quarrel over the proposition and in case the assessee is selling moulds manufactured by it and spare parts of moulds also sold for doing repairs and maintenance, qua sale of moulds and spare parts of moulds assessee is entitled for deduction u/s. 80-IB of the Act. But in respect to repair of moulds, it charges two types of receipts i.e. receipt on account of sale of spare parts as well as repairs and maintenance charges, in case of sale of spare parts assessee is entitled for deduction u/s. 80-IB of the Act but in respect to repairs and maintenance charges it is not entitled for deduction in view of clear provisions of section 80-IB of the Act, because that receipt has no immediate or direct nexus with the industrial undertaking and that is not the source of profit of industrial undertaking. Since there was a major fire broke out and as such entire record of the assessee was destroyed and it would not be possible to furnish books of account and other documents to AO instead of restoring the matter to AO and with a view to finally decide the issue it will be reasonable to consider 50% of the receipt as job work charges on which assessee will be entitled to get deduction u/s. 80-IB of the Act and the balance 50% is the receipt on account of repair and maintenance charges on which the assessee will not be entitled to get deduction u/s. 80-IB of the act.
No comments:
Post a Comment
Note: Only a member of this blog may post a comment.