Showing posts with label Section 80IA. Show all posts
Showing posts with label Section 80IA. Show all posts

Thursday, September 22, 2011

ITR (TRIB) Volume 11 : Part 5 Issue dated : 26-09-2011, SUBJECT INDEX

ITR'S TRIBUNAL TAX REPORTS (ITR (TRIB))
Volume 11 : Part 5 (Issue dated : 26-09-2011)
SUBJECT INDEX TO CASES REPORTED IN THIS PART

->> Charitable purposes --Registration--Society running educational institutions--No proof that funds applied for non-charitable or religious purposes--Direction to grant to retrospective registration--Income-tax Act, 1961, s. 12AA-- Karandhai Tamil Sangam v. CIT (Chennai) . . . 430

->> Charitable trust --Registration--Denial of registration as activities confined to one religion--Finding that activities not only religious but also charitable--Assessee to be given status of religious and charitable trust--Income-tax Act, 1961, s. 12A-- Kasyapa Veda Research Foundation v. CIT (Cochin) . . . 468

->> Company --Computation of profits under section 115JB--Provision for bad debts--Amount to be added to book profits--Income-tax Act, 1961, s. 115JB-- Magnum Power Generation Ltd. v . Deputy CIT (Delhi) . . . 493

->> Income from house property --Business income--Income from property or business income--Assessee constructing residential units and dealing in them--Amount received on lease of some units--Not from business--Income from property--Income-tax Act, 1961, ss. 22, 28-- Roma Builders P. Ltd. v. Joint CIT (Mumbai) . . . 503

->> Income from undisclosed sources --Survey in premises of assessee--Defects in books of account--No nexus between un-accounted profit earned and investment made in properties outside books of account--Set off allowed--Amounts to reducing additional income declared by assessee--Set off not justified--Income-tax Act, 1961-- V. R. Textiles v. Joint CIT (Ahmedabad) . . . 476

->> Income-tax survey --Accounting--Rejection of books of account--Defects in books of account--Entire undisclosed sales cannot be treated as profit of assessee--Commissioner (Appeals) applying gross profit rate--Proper--Income-tax Act, 1961, s. 145-- V. R. Textiles v. Joint CIT (Ahmedabad) . . . 476

->> Industrial undertaking --Generation and supply of power--Amount received from sale of scrap and writing back of credit balances--No finding whether credit balances related to business and whether scrap was generated by industrial undertaking--Matter remanded--Income-tax Act, 1961, s. 80-IA-- Magnum Power Generation Ltd. v. Deputy CIT (Delhi) . . . 493

->> ----Generation and supply of power--Special deduction under section 80-IA--Agreement for supply of power--Agreement providing that if power not required compensation charges to be paid--Amount received for deemed generation of power--Entitled to special deduction under section 80-IA--Income-tax Act, 1961, s. 80-IA-- Magnum Power Generation Ltd. v. Deputy CIT (Delhi) . . . 493

->> Non-resident --Advance tax--Interest--Not payable where entire income liable to deduction of tax at source--Income-tax Act, 1961, ss. 195, 234B-- Samsung Heavy Industries Co. Ltd. v. Addl. DIT (International Taxation) (Delhi) . . . 513

->> ----Taxability in India--Turnkey project in India--Permanent establishment--Project office in Mumbai involved in activities of project from commencement--Contract indivisible--No material to show project office concerned only with activities outside India--Mode of accounting of expenses of project office not decisive--Mumbai office constituted permanent establishment--Ad hoc attribution of percentage of income to permanent establishment not permissible--Matter remanded for determination on basis of material --Income-tax Act, 1961, s. 144C--Double Taxation Avoidance Agreement between India and Korea, art. 5-- Samsung Heavy Industries Co. Ltd. v. Addl. DIT (International Taxation) (Delhi) . . . 513

->> Penalty --Concealment of income--Discrepancy in accounts--Amount surrendered because auditors raided and books of account could not be produced--Explanation of assessee reasonable--Penalty cannot be levied--Income-tax Act, 1961, s. 271(1)(c)-- ITO v. Dr. V . Muralikrishnan (Chennai) . . . 443

->> Perquisites --Employees stock option--Equity warrant certificates--Not by themselves securities but merely granting option to obtain shares--Date of exercise of option is date of acquisition of shares not date of certificate--Warrrant issued in February 1999 and assessee exercising option in April 1999--Perquisites arise and taxable in financial year 1999-2000 relevant to assessment year 2000-01--Income-tax Act, 1961, s. 17(2)(iiia) -- Deputy CIT v. Vijay Gopal Jindal (Delhi) . . . 451

->> Reassessment --Notice--Notice after four years--Validity--No failure to disclose material facts necessary for assessment--Returns accompanied by audited accounts--Special deduction under section 80HHC allowed after considering material on record--Reassessment proceedings after four years to reduce special deduction--Barred by limitation--Income-tax Act, 1961, ss. 80HHC, 147, 148-- Deputy CIT v. Purolator India Ltd. (Delhi) . . . 434


SECTIONWISE INDEX TO CASES REPORTED IN THIS PART

->> Double Taxation Avoidance Agreement between India and Korea :

art. 5 --Non-resident--Taxability in India--Turnkey project in India--Permanent establishment--Project office in Mumbai involved in activities of project from commencement--Contract indivisible--No material to show project office concerned only with activities outside India--Mode of accounting of expenses of project office not decisive--Mumbai office constituted permanent establishment--Ad hoc attribution of percentage of income to permanent establishment not permissible--Matter remanded for determination on basis of material-- Samsung Heavy Industries Co. Ltd. v. Addl. DIT (International Taxation) (Delhi) . . . 513
Income-tax Act, 1961 :
->> S. 12A --Charitable trust--Registration--Denial of registration as activities confined to one religion--Finding that activities not only religious but also charitable--Assessee to be given status of religious and charitable trust-- Kasyapa Veda Research Foundation v. CIT (Cochin) . . . 468

->> S. 12AA --Charitable purposes--Registration--Society running educational institutions--No proof that funds applied for non-charitable or religious purposes--Direction to grant to retrospective registration-- Karandhai Tamil Sangam v. CIT (Chennai) . . . 430

->> S. 17(2)(iiia) --Perquisites--Employees stock option--Equity warrant certificates--Not by themselves securities but merely granting option to obtain shares--Date of exercise of option is date of acquisition of shares not date of certificate--Warrrant issued in February 1999 and assessee exercising option in April 1999--Perquisites arise and taxable in financial year 1999-2000 relevant to assessment year 2000-01-- Deputy CIT v. Vijay Gopal Jindal (Delhi) . . . 451

->> S. 22 --Income from house property--Business income--Income from property or business income--Assessee constructing residential units and dealing in them--Amount received on lease of some units--Not from business--Income from property-- Roma Builders P. Ltd. v. Joint CIT (Mumbai) . . . 503

->> S. 28 --Income from house property--Business income--Income from property or business income--Assessee constructing residential units and dealing in them--Amount received on lease of some units--Not from business--Income from property-- Roma Builders P. Ltd. v. Joint CIT (Mumbai) . . . 503

->> S. 80-IA --Industrial undertaking--Generation and supply of power--Amount received from sale of scrap and writing back of credit balances--No finding whether credit balances related to business and whether scrap was generated by industrial undertaking--Matter remanded-- Magnum Power Generation Ltd. v. Deputy CIT (Delhi) . . . 493

->> ----Industrial undertaking--Generation and supply of power--Special deduction under section 80-IA--Agreement for supply of power--Agreement providing that if power not required compensation charges to be paid--Amount received for deemed generation of power--Entitled to special deduction under section 80-IA-- Magnum Power Generation Ltd. v. Deputy CIT (Delhi) . . . 493

->> S. 80HHC --Reassessment--Notice--Notice after four years--Validity--No failure to disclose material facts necessary for assessment--Returns accompanied by audited accounts--Special deduction under section 80HHC allowed after considering material on record--Reassessment proceedings after four years to reduce special deduction--Barred by limitation-- Deputy CIT v. Purolator India Ltd. (Delhi) . . . 434

->> S. 115JB --Company--Computation of profits under section 115JB--Provision for bad debts--Amount to be added to book profits-- Magnum Power Generation Ltd. v. Deputy CIT (Delhi) . . . 493

->> S. 144C --Non-resident--Taxability in India--Turnkey project in India--Permanent establishment--Project office in Mumbai involved in activities of project from commencement--Contract indivisible--No material to show project office concerned only with activities outside India--Mode of accounting of expenses of project office not decisive--Mumbai office constituted permanent establishment--Ad hoc attribution of percentage of income to permanent establishment not permissible--Matter remanded for determination on basis of material-- Samsung Heavy Industries Co. Ltd. v. Addl. DIT (International Taxation) (Delhi) . . . 513

->> S. 145 --Income-tax survey--Accounting--Rejection of books of account--Defects in books of account--Entire undisclosed sales cannot be treated as profit of assessee--Commissioner (Appeals) applying gross profit rate--Proper-- V. R. Textiles v. Joint CIT (Ahmedabad) . . . 476

->> S. 147 --Reassessment--Notice--Notice after four years--Validity--No failure to disclose material facts necessary for assessment--Returns accompanied by audited accounts--Special deduction under section 80HHC allowed after considering material on record--Reassessment proceedings after four years to reduce special deduction--Barred by limitation-- Deputy CIT v. Purolator India Ltd. (Delhi) . . . 434

->> S. 148 --Reassessment--Notice--Notice after four years--Validity--No failure to disclose material facts necessary for assessment--Returns accompanied by audited accounts--Special deduction under section 80HHC allowed after considering material on record--Reassessment proceedings after four years to reduce special deduction--Barred by limitation-- Deputy CIT v. Purolator India Ltd. (Delhi) . . . 434

->> S. 195 --Non-resident--Advance tax--Interest--Not payable where entire income liable to deduction of tax at source-- Samsung Heavy Industries Co. Ltd. v. Addl. DIT (International Taxation) (Delhi) . . . 513

->> S. 234B --Non-resident--Advance tax--Interest--Not payable where entire income liable to deduction of tax at source-- Samsung Heavy Industries Co. Ltd. v. Addl. DIT (International Taxation) (Delhi) . . . 513

->> S. 271(1)(c) --Penalty--Concealment of income--Discrepancy in accounts--Amount surrendered because auditors raided and books of account could not be produced--Explanation of assessee reasonable--Penalty cannot be levied-- ITO v. Dr. V. Muralikrishnan (Chennai) . . . 443


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Friday, September 9, 2011

Brought forward unabsorbed losses and deficiencies of earlier years are to

Brought forward unabsorbed losses and deficiencies of earlier years are to be adjusted first against current year's profits and gains of an industrial undertaking before granting of deduction under sections 80-I and 80HH - [2011] 11 taxmann.com 260 (All.)

Sunday, August 28, 2011

JV execute works awarded by State Govt, "a" not entitled for ded 80IA(4)

Whether, when two partners of JV execute works awarded by State Govt, assessee is even then not entitled to avail benefits of Sec 80IA(4) as contract was awarded to JV, an independent legal entity - NO, assessee is eligible: ITAT

THE question before the Bench is - Whether when, for all practical purposes, the two partners of a JV execute the infrastructural work awarded by the State Government, even then the assessee, one of the partners, is not entitled to avail the benefits of Sec 80IA(4) as the contract was awarded to the JV, an independent legal entity. And the verdict goes in favour of assessee.

Facts of the case

Assessee, a company, formed a joint venture named "Navayuga Transtoy (JV)" which bid for the contract. The Irrigation Department of Andhra Pradesh awarded the contract to the JV. As per the terms of the JV, the assessee was to execute 40% of the work in Navayuga, the other constituent partner was to execute 60% of the works. Assessee was to execute work worth Rs. 265.80 crores, out of which works valued at Rs.18.12 crores were executed during the A.Y. 2006-07. Both the partners raised bills on JV for quantity of work as certified by technical consultant appointed by the State Government. In turn, the JV raised a consolidated bill on the Irrigation Department without making any additions. Payments were made to the JV, which shared the payment in accordance with the bills raised by each partner. JV filed its return without claiming any deduction u/s 80IA(4).

Assessee also formed a consortium along with one M/s `CT' Moscow, with an understanding that the assessee would execute 100% of the works which were awarded to the consortium. Assessee executed works valued worth Rs.31.09 crores and claimed deduction u/s 80IA(4) on the profits derived out of the aforesaid works. AO disallowed the claim stating that the work was not awarded to the assessee.

In appeal before CIT (A), the assessee contended that the JV or the consortium was formed only with an object to obtain a contract from the Government but in fact the work was executed by the constituents of the JV i.e. the assessee and the other constituent. Deduction was to be allowed to those enterprises, which were engaged in the business of developing, maintaining and operating any infrastructure facility. Therefore, the assessee was entitled for deductions on profit earned from the aforesaid activities. However, CIT (A) confirmed the dis-allowance made by the AO.

Before ITAT, the assessee contended that the JV or the consortium had not offered any income/profit out of the work contract awarded to it and also did not claim any deduction u/s 80IA of the Act. Deduction u/s 80IA was to be allowed to those enterprises which were carrying on the business of developing, maintaining and operating any infrastructure facility. It was agreed at the time of formation of JV that whatever work was awarded to it, it would be executed by its constituents and they would be solely responsible for the responsibilities and liabilities of the execution of the work.

Revenue contended that the work contract was awarded to the joint venture and not to the assessees. The Bills were raised by the joint venture and payments were also made to the joint venture by the Government bodies. Therefore, in all respects, the work contract was executed by the joint venture and not by the assessees. Joint venture was an independent identity and was assessable to tax. It was totally irrelevant whether joint venture claimed any deduction u/s 80IA or not. Non-claim of deduction u/s 80IA by the joint venture would not make the assessee entitled to claim deduction u/s 80IA for the work executed by him.

After hearing both the parties, the ITAT held that,

++ undisputedly the joint venture or the consortium was formed only to obtain the contract from the Government bodies. At the time of execution of the joint venture or the consortium, it has been made clear that work/project awarded to the joint venture would be executed by the joint venturers or the constituents. As per mutually agreed terms and conditions between them, it was also agreed that each party shall be responsible for the provisions of without limitation on resources required for the purpose of fulfillment of the scope and also solely responsible for the performance of its scope of work and shall bear all technical, commercial and facing risk involved in performing its scope of work. It was also agreed that none of the party shall assign its rights and obligations to any other party without written consent of other party. It is evidently clear that the joint venture and the consortium was formed only with an object to bid contract. Once the project or contract is awarded to the joint venture or the consortium, it is to be executed by its constituents or the joint ventures in a ratio agreed upon by the parties. The assessee was entitled to execute the 40% of total work awarded to the joint venture and in case of a consortium it was agreed that the entire work is to be executed by the assessee itself. Therefore for all practical purposes, it was the assessee who executed the work contract or the project awarded to the joint venture. No doubt the joint venture is an independent identity and has filed its return of income and was also assessed to tax but it did not offer any profit or income earned on this project/works awarded to it nor did he claim any exemption/deduction u/s 80IA(4) of the Act. These facts clearly indicates that the joint venture was only a de-jure contractor but in fact the assessee was a de-facto contractor;

++ the benefit of exemption/deduction is to be allowed to any enterprise carrying on business of developing or operating and maintaining or developing, operating, maintaining any infrastructure facility subject to fulfillment of certain conditions. One of the condition is that the enterprise should be owned by a company registered in India or by a consortium of such companies or any other body established or constituted under any center or any state Act. The other condition is that it has entered into an agreement with the Central Government or a State Government or local authorities or any other statutory body for developing, operating and maintaining or developing, operating & maintaining a new infrastructure facility;

++ there is no dispute with regard to the fulfillment of other requisite conditions. The dispute was only raised that the contract was awarded only to the joint venture and not to the assessee and therefore assessee is not entitled for deduction. The benefit of deductions is to be given to an enterprise which carry on the aforesaid classified business. The legislature have also used the word consortium of such companies, meaning thereby the legislature was aware about the object of formation of consortium and joint ventures. Generally the joint ventures or consortiums are formed to obtain a contract from the Government body for its execution by its constituents. If the constituents do not want to execute the work, there was no need to form a consortium. Therefore, mere formation of consortium for obtaining a contract should not debar the enterprises who in fact carried on the aforesaid classified business from claiming the deduction or exemption u/s 80IA(4). The joint venture or the consortium was only a paper entity and has not executed any contract by itself. They have also not offered any income out of the work executed by its constituents, nor did they claim any deductions u/s 80IA(4). Therefore, in all practical purposes, the contract was awarded to the constituents of the joint venturers through joint venture and the work was executed by them. As per provisions of section 80IA(4), the benefit of deduction under this section is to be given only to the enterprise which carried on the classified business. Therefore, in the light of this legal proposition, the assessee is entitled for the deductions u/s 80IA(4) on the profit earned from the execution of the work awarded to JV and consortium.
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Saturday, August 20, 2011

An income, so as to be characterized as 'derived from' an undertaking u/s 80-IA,

An income, so as to be characterized as `derived from' an undertaking u/s 80-IA, should directly result from it; it should be "generation of profits (operational profits)" of eligible undertaking

In order to be covered within the expression "derived from" it is sine qua non that the relation between the income and source must be that of the first degree
Where the relation between income and source slips from first to second degree, income stands excluded from the scope of expression "derived from" and may fall within the purview of "attributable to"


[2010] 6 taxmann.com 88 (Mum. - ITAT)

ITAT MUMBAI BENCHES, `E', MUMBAI

ITO

v.

E. A. Infrastructure Operations Pvt. Ltd.

ITA Nos. 887 & 4555/Mum/2008

July 9, 2010

FACTS
The only issue projected through the solitary ground in assessment years 2004-05, 2005-06 and the first ground in assessment year 2006-07 is against the direction of the learned CIT(A) for allowing deduction u/s.80-IA(4) in respect of compensatory payment received by the undertaking. This issue has been discussed at length in the assessment order for assessment year 2004-05, which are taking up on representative basis. The factual matrix of this ground is that the assessee was awarded the project for Biomedical Waste Treatment ("BMW" for short) at G.T.B. Hospital on BOOT basis by the Municipal Corporation of Greater Mumbai ("MCGM" for short). The assessee claimed deduction u/s.80-IA of the Income-tax Act, 1961, similar to that claimed in earlier years. The entire profit of the business amounting to Rs.1,47,25,111 was claimed as deductible. The Assessing Officer sent a letter dated 14-8-2006 to the Director (ES&P), MCGM requesting to furnish certain information. In reply, the Chief Engineer (Solid Waste Management) replied vide letter dated 29-8-2006 stating that the assessee was awarded contract to set up the requisite BMW facility like incinerator and autoclave system at Sewree in the premises of G.T.B. Hospital of MCGM on Built, Own, Operate & Transfer (BOOT) basis. As per the terms of contract MCGM was to make payment towards the weight of BMW treated at their plant with minimum guaranteed charge for 5000 kg. which included 3500 kg. of non-anatomical waste (treated by autoclave) and 1500 kg. of anatomical waste (burnt by incinerator). The rate agreed for the above guaranteed load was Rs.10.50 per kg. with fixed escalation of 10% compounded annually effective after 24 months from the date of submission of bid (November, 1999) till the plant is handed over to MCGM after the completion of BOOT period. It was further informed by the Chief Engineer that work order to assessee was issued in 2000 and the plant started its operation in November, 2001. From the reply submitted by the Chief Engineer, the Assessing Officer noted that the assessee was not getting the payments for actual work carried out of treatment of BMW only but also against the guaranteed supply of BMW for treatment. Information was called from Municipal Corporation about the actual BMW treated by the assessee, which has been tabulated on pages 4 and 5 of the assessment order. It was noted by the Assessing Officer that the assessee was entitled to deduction for a sum of Rs.40,46,173 for the actual work done by it towards treatment of anatomical waste, whereas the assessee was actually paid a sum of Rs.57,91,200. Similarly for non-anatomical waste treatment, the assessee was entitled to deduction for a sum of Rs. 47,90,112 whereas the actual payment was made to it to the tune of Rs.1,35,12,800. The total excess amount received by the assessee came to Rs.1,04,67,715, representing difference between the minimum guaranteed work and actual work carried on. On being show caused as to why deduction u/s.80-IA(4) be not denied on such excess amount, the assessee furnished its reply which has been reproduced on pages 5 to 8 of the assessment order. The Assessing Officer noted that section 80-IA(1) talks of deduction for profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (4). Relying on some judgments including that of the Hon'ble Supreme Court in Pandian Chemicals Ltd. Vs. CIT [(2003) 262 ITR 278 (SC)], the Assessing Officer noted that the deduction is available in respect of profits and gain derived from business as referred to in sub-section (4). Since the expression "derived from" has a narrower meaning than the expression "attributable to", the Assessing Officer opined that the excess receipts could not be considered as derived from the eligible business. He, therefore, excluded the excess receipt of Rs.1.04 crore from the eligible profit for deduction u/s.80-IA(4) in assessment year 2004-05. In the same manner he did not allow deduction u/s.80-IA(4) in the other two assessment years under consideration amounting to Rs.1,55,19,246 for assessment year 2005-06 and Rs.88,84,565 for assessment year 2006-07. The learned CIT(A) concurred with the submission advanced on behalf of the assessee and held that the entire minimum guaranteed charges received by the assessee were eligible for deduction u/s.80-IA. The Revenue is in appeal against such order.

HELD
On going through the principle laid down in above judicial pronouncements, it is manifest that the expression "derived from" is constricted in its ambit when considered in juxtaposition to the expression "attributable to". In order to be covered within the former expression it is sine qua non that the relation between the income and source must be that of the first degree. In other words, income must directly spring from the source, which is subject-matter of consideration in the language of section. Where the relation between income and source slips from first to second degree, income stands excluded from the scope of expression "derived from" and may fall within the purview of "attributable to". Consequently an income, so as to be characterized as `derived from' an undertaking, should directly result from it. To put it simply, it should be "generation of profits (operational profits)" [as held in Liberty India (supra)] of the eligible undertaking. If however the income has got some indirect or remote relation with the industrial undertaking but does not spring from it, the same cannot be held to be derived from it.

The entire receipt, whether on account of actual treatment (4000 kgs) or notional treatment (1000 kgs.) of BMW, has direct relation with the eligible enterprise. There is no trace of the source of income from 1000 kgs. of BMW without the eligible undertaking. It is but for such undertaking alone that there is a receipt on account of 1000 kgs. Relation between the income from the notional treatment of BMW with the undertaking is direct, as it is so in the case of actual treatment of BMW. Since the very source of such income is from undertaking, which is otherwise eligible for deduction u/s.80-IA, it falls beyond our comprehension as to how deduction could be denied on receipts towards such notional treatment of BMW.

The payment in respect of notional treatment of BMW is not flowing from any different scheme or any other provisions of the Act. The entire receipt of 5000 kgs is flowing from the contract entered into by the assessee with MCGM. Whole of the amount is operational income, be it from actual or notional operation of undertaking. As the relation between income from notional operation and undertaking is direct and not indirect or remote, by no standard can it be viewed as anything other than not derived from the eligible undertaking. Under such circumstances we hold that the learned CIT(A) has taken an unimpeachable view. The same is, therefore, upheld.

ORDER


Per R.S.Syal, AM :

These three appeals by the Revenue arise out of the orders passed by the Commissioner of Income-tax (Appeals) in relation to the assessment years 2004-2005, 2005-2006 and 2006-2007. Since one issue raised in these three appeals is common, we are, therefore, proceeding to dispose them off by this consolidated order for the sake of convenience.

2. The only issue projected through the solitary ground in assessment years 2004-2005, 2005-2006 and the first ground in assessment year 2006-2007 is against the direction of the learned CIT(A) for allowing deduction u/s.80-IA(4) in respect of compensatory payment received by the undertaking. This issue has been discussed at length in the assessment order for assessment year 2004-2005, which are taking up on representative basis. The factual matrix of this ground is that the assessee was awarded the project for Biomedical Waste Treatment ("BMW" for short) at G.T.B. Hospital on BOOT basis by the Municipal Corporation of Greater Mumbai ("MCGM" for short). The assessee claimed deduction u/s.80-IA of the Income-tax Act, 1961, similar to that claimed in earlier years. The entire profit of the business amounting to Rs.1,47,25,111 was claimed as deductible. The Assessing Officer sent a letter dated 14.8.2006 to the Director (ES&P), MCGM requesting to furnish certain information. In reply, the Chief Engineer (Solid Waste Management) replied vide letter dated 29.8.2006 stating that the assessee was awarded contract to set up the requisite BMW facility like incinerator and autoclave system at Sewree in the premises of G.T.B. hospital of MCGM on Built, Own, Operate & Transfer (BOOT) basis. As per the terms of contract MCGM was to make payment towards the weight of BMW treated at their plant with minimum guaranteed charge for 5000 kg. which included 3500 kg. of non-anatomical waste (treated by autoclave) and 1500 kg. of anatomical waste (burnt by incinerator). The rate agreed for the above guaranteed load was Rs.10.50 per kg. with fixed escalation of 10% compounded annually effective after 24 months from the date of submission of bid (November 1999) till the plant is handed over to MCGM after the completion of BOOT period. It was further informed by the Chief Engineer that work order to assessee was issued in 2000 and the plant started its operation in November 2001. From the reply submitted by the Chief Engineer, the Assessing Officer noted that the assessee was not getting the payments for actual work carried out of treatment of BMW only but also against the guaranteed supply of BMW for treatment. Information was called from Municipal Corporation about the actual BMW treated by the assessee, which has been tabulated on pages 4 and 5 of the assessment order. It was noted by the A.O. that the assessee was entitled to deduction for a sum of Rs.40,46,173 for the actual work done by it towards treatment of anatomical waste, whereas the assessee was actually paid a sum of Rs.57,91,200. Similarly for non-anatomical waste treatment, the assessee was entitled to deduction for a sum of Rs.47,90,112 whereas the actual payment was made to it to the tune of Rs.1,35,12,800. The total excess amount received by the assessee came to Rs.1,04,67,715, representing difference between the minimum guaranteed work and actual work carried on. On being show caused as to why deduction u/s.80-IA(4) be not denied on such excess amount, the assessee furnished its reply which has been reproduced on pages 5 to 8 of the assessment order. The Assessing Officer noted that section 80-IA(1) talks of deduction for profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (4). Relying on some judgements including that of the Hon'ble Supreme Court in Pandian Chemicals Ltd. Vs. CIT [(2003) 262 ITR 278 (SC)], the Assessing Officer noted that the deduction is available in respect of profits and gain derived from business as referred to in sub-section (4). Since the expression "derived from" has a narrower meaning than the expression "attributable to", the Assessing Officer opined that the excess receipts could not be considered as derived from the eligible business. He, therefore, excluded the excess receipt of Rs.1.04 crore from the eligible profit for deduction u/s.80-IA(4) in assessment year 2004-2005. In the same manner he did not allow deduction u/s.80-IA(4) in the other two assessment years under consideration amounting to Rs.1,55,19,246 for assessment year 2005-2006 and Rs.88,84,565 for assessment year 2006-2007. The learned CIT(A) concurred with the submission advanced on behalf of the assessee and held that the entire minimum guaranteed charges received by the assessee were eligible for deduction u/s.80-IA. The Revenue is in appeal against such order.

3. Before us the learned Departmental Representative contended that the ld. first appellate authority was not justified in granting deduction on the excess amount which was not derived from the eligible business. He argued that the use of expression "derived from" in the language of section 80IA shows that the income must directly result from the eligible business and hence it should have a direct nexus with the eligible business. He made up the case that since the excess receipts was not derived from the eligible business, the deduction ought not to have been allowed. In support of the contention that excess realization on account of guaranteed clause of contract could not be treated as derived from the eligible business, he relied on the judgement of the Hon'ble Supreme Court in the case of Liberty India Vs. CIT [(2009) 317 ITR 218 (SC)] and that of the Hon'ble Madhya Pradesh High Court in CIT Vs. Alpine Solvex Ltd. [(2005) 276 ITR 92 (MP)].

4. In the opposition the learned A.R. supported the impugned order. His submissions were the reiteration of the reasoning adopted by the ld. CIT(A) in accepting the assessee's case. To bolster his submission that deduction was rightly

allowed on the excess realization, he relied on several judgements including Fenner (India) Ltd. Vs. CIT (No.2) [(2000) 241 ITR 803 (Mad.)] and CIT Vs. Ratnagiri District Central Co-operative Bank Ltd. [(2002) 254 ITR 697 (Bom.)] for bringing home the point that excess receipt was very much profit derived from the eligible business and hence the learned CIT(A) was justified in allowing the deduction. On a specific query, he admitted that there was no direct precedent available on the issue.

5. We have heard the rival submissions in the light of material placed on record and precedents relied upon. It is an admitted position that the issue involved in this batch of appeals is virgin inasmuch as there is no direct precedent available on it in the public domain. There is no dispute on the fact that the assessee has, otherwise, satisfied other necessary conditions entitling it to deduction u/s.80-IA(4). The controversy centers around only on the amount which was received by the assessee representing the excess amount over and above the actual work done up to the minimum guaranteed amount in respect of treatment of BMW pursuant to contract with MCGM assuring minimum 5000 kg. of BMW load. It has not been controverted that in the earlier year the assessee claimed deduction on the entire minimum guaranteed amount including such excess realization, which was promptly allowed by the Assessing Officer without any fuss. Without any difference in the facts of this year via-a-vis the earlier year, the principle of consistency should have come to play inhibiting the AO from going ahead with this disallowance. Be that as it may we will decide the issue on merits as well.

6. In the instant years the contention of the Revenue is that the excess realization over and above the actual work done should not be considered as eligible for deduction u/s.80-IA(4). Before we proceed to examine and evaluate the rival contentions, it will be befitting to note down the provisions of section 80-IA(1) as under:-

"80-IA(1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (4) (such business being hereinafter referred to as the eligible business), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction of an amount equal to hundred per cent of the profits and gains derived from such business for ten consecutive assessment years."

7. On circumspection of this provision it is discernible that deduction u/s 80IA is allowable to an enterprise on the profits and gains derived from the eligible business. The case of the Revenue is that the excess amount of realization on account of guarantee clause of the contract cannot be held as profit derived from the eligible business. The point of debate is the interpretation of the expression "derived from" such business, which has been used in this section. In contrast to that, some provisions employ the expression "attributable to". It is fairly settled that ambit of the expression "derived from" is much narrower than `attributable to'. In order to be covered within its purview, there must be a direct nexus between two ends preceded and succeeded by this expression. Such nexus should be of first degree. On the other hand the expression `attributable to' has a wider scope and brings within its fold not only the items having direct nexus of one with the other but also having indirect nexus. In the case of CIT vs. Sterling Foods [(1999) 237 ITR 579 (S.C.)] it has been held that the sale consideration of import entitlements would not be held to constitute profits and gains derived from assessee's industrial undertaking for the purpose of computing deduction under section 80HH as the source of import entitlements was the export promotion scheme of the Central Government and not the industrial undertaking. Similarly in the case of Pandian Chemicals Ltd. vs. CIT [(2003) 262 ITR 278 (S.C.)] their Lordships did not accept the argument on behalf of the assessee that the interest earned by the industrial undertaking on deposits with the Electricity Board qualified for relief under section 80HH for the reason that section 80HH contains the words `derived from'. It was observed that though electricity may be required for the purposes of industrial undertaking but the deposit required for the purpose of supply of electricity was a step away from the business of the industrial undertaking and hence the interest on the deposits could not be said to flow directly from the industrial undertaking itself. It was emphasized that the words "derived from" must be understood as something which has direct or immediate nexus with the assessee's industrial undertaking. However, where the words "attributable to" have been used, the Courts have held that if the income is related to the industrial undertaking, even though not directly emanating there from, it would still fall within the scope of this expression. In the case of Ashok Leyland vs. CIT [(1997) 224 ITR 122 (S.C.)] the Hon'ble Supreme Court held that the assessee engaged in manufacturing and sale of trucks in collaboration with a foreign company importing spare parts and selling it to the purchasers of the trucks when such purchaser found it difficult to get them in the initial years of production, profits and gains from the sale of such spare parts was `attributable to' the priority industry carried on by the assessee as the same was intimately connected with the main activity of priority industry.

8. Let us examine the facts of Liberty India (supra), which is trump card case of the learned Departmental Representative. In that case the assessee owned a small scale industrial undertaking engaged in manufacturing of fabrics. Deduction u/s.80-IB was claimed on the increased profits of Rs.22.70 lakhs as profits of the industrial undertaking on account of DEPB and duty draw back credited to the profit and loss account. The Assessing Officer denied deduction on the ground that the said two benefits constituted export incentives and hence did not represent profits derived from industrial undertaking. The Hon'ble High Court, relying on the judgement in the case of CIT vs. Sterling Foods [(1999) 237 ITR 579 (S.C.)], held that the assessee failed to prove the nexus between duty draw back / DEPB benefit and industrial undertaking. When the matter came up before the Hon'ble Apex Court, it was held that DEPB and duty drawback are incentive profits which flow from the schemes framed by the Central Government u/s.75 of the Customs Act, 1962, hence, such incentive profits are not profits derived from the eligible business but belong to the category of ancillary profits of such undertaking and, therefore, they do not form part of net profit of industrial undertaking for the purposes of deduction u/s.80-IA or 80-IB. The Hon'ble Supreme Court illuminated on the scope of the expression "derived from" by reiterating that it is narrower in connotation as compared to the words "attributable to". In this case, it has been thus held that: "What attracts the incentives under section 80-IA / 80-IB is the generation of profits (operational profits)".

9. On going through the principle laid down in above judicial pronouncements, it is manifest that the expression "derived from" is constricted in its ambit when considered in juxtaposition to the expression "attributable to". In order to be covered within the former expression it is sine qua non that the relation between the income and source must be that of the first degree. In other words, income must directly spring from the source, which is subject matter of consideration in the language of section. Where the relation between income and source slips from first to second degree, income stands excluded from the scope of expression "derived from" and may fall within the purview of "attributable to". Consequently an income, so as to be characterized as `derived from' an undertaking, should directly result from it. To put it simply, it should be "generation of profits (operational profits)" [as held in Liberty India(supra)] of the eligible undertaking. If however the income has got some indirect or remote relation with the industrial undertaking but does not spring from it, the same cannot be held to be derived from it.

10. With this background in mind, we now advert to the facts of the instant case. The assessee set up the project for BMW treatment, income from which is otherwise eligible for deduction u/s.80-IA. The project was awarded by MCGM for treatment of BMW on BOOT basis. As per terms of contract, the assessee was to treat BMW at the specified rate. It was subject to minimum guarantee of treating BMW for 5000 kgs. Minimum guarantee here means that if assessee gets more than 5000 kgs of bio medical waste for treatment, it would get the amount at the rate specified for such quantity actually treated. If, however the assessee gets lower quantity of bio medical waste for treatment, then it would be entitled to such minimum receipt. It has been accepted by the A.O. in the former case, that the assessee is entitled to deduction u/s.80-IA(4) on the full amount as such income is derived from the operation of infrastructure project. The problem is only in the latter case, that is, where the quantity of BMW available for treatment is less than 5000 kgs., and the assessee has got receipts from MCGM at the rate specified for 5000 kgs. of BMW. For the sake of proper understanding, we are splitting this 5000 kgs. into two parts viz., 4000 kgs. actually treated by the assessee and 1000 kgs. which are not treated but payment is made as per agreement with MCGM. Deduction has been negatived by the AO on the income from receipts towards 1000 kgs. by assigning the reason that it can not be held as derived from the eligible undertaking.

11. We are not convinced with the view point of the AO. The entire receipt, whether on account of actual treatment (4000 kgs) or notional treatment (1000 kgs) of BMW, has direct relation with the eligible enterprise. There is no trace of the source of income from 1000 kgs. of BMW without the eligible undertaking. It is but for such undertaking alone that there is a receipt on account of 1000 kgs. Relation between the income from the notional treatment of BMW with the undertaking is direct, as it is so in the case of actual treatment of BMW. Since the very source of such income is from undertaking, which is otherwise eligible for deduction u/s.80-IA, it falls beyond our comprehension as to how deduction could be denied on receipts towards such notional treatment of BMW.

12. We have noted from the case of Liberty India (supra) that the dispute in that case was towards duty draw back / DEPB incentives which the assessee claimed to have derived from the eligible business. The Hon'ble Supreme Court noted that these incentive flow from the scheme framed by the Central Government u/s.75 of the Customs Act, 1962, hence, the incentive profits are not profits derived from eligible business u/s.80-IB. Coming back to the facts of our case we note that the payment in respect of notional treatment of BMW is not flowing from any different scheme or any other provisions of the Act. The entire receipt of 5000 kgs is flowing from the contract entered into by the assessee with MCGM. Whole of the amount is operational income, be it from actual or notional operation of undertaking. As the relation between income from notional operation and

undertaking is direct and not indirect or remote, by no standard can it be viewed as anything other than not derived from the eligible undertaking. Under such circumstances we hold that the learned CIT(A) has taken an unimpeachable view. The same is, therefore, upheld.

13. The only other ground in appeal for assessment year 2006-2007 is against the deletion of addition of Rs.7,50,000 made by the AO u/s 41(1) of the Act. Factual scenario of this ground is that the assessee included a sum of Rs.7,50,000 in the list of sundry creditors shown as payable to M/s.PHE Consultants, Mumbai. The assessee was called upon to submit details in this regard. On the perusal of such details it was noticed by the A.O. that this amount was outstanding since accounting year 2001-2002. The assessee claimed that there was some dispute with M/s.PHE Consultants which was not yet settled and hence the amount was outstanding. Information u/s.133(6) was called for from M/s PHE Consultants, who stated as under:-

"We worked as Consultant to EA Infrastructure Operation Pvt. Ltd. during the FY 99-2000 when EA infrastructure Operations Pvt. Ltd. was setting up a Bio Medical Waste Treatment plant at GTB Hospital, Mumbai for MCGM. The consultation fee of Rs.750000/- was agreed to be paid to us. However, dispute regarding the extent of services provided and fees payable arose between EA Infrastructure having disputed the consultation work and did not shown any amount as due from EA Infrastructure Operations P.Ltd. till date, the dispute is still not settled. We therefore, do not have any ledger account in the name of EA Infrastructure Operations Pvt. Ltd. in our books of accounts."

14. In the light of this reply of PHE Consultants, the Assessing Officer made addition of Rs.7,50,000 u/s 41(1) of the Act as in his opinion the amount was no more payable by the assessee. The learned CIT(A) overturned the assessment order on this point and ordered for the deletion of this addition.

15. After considering the rival submissions and perusing the relevant material on record we find that the assessee availed some consultation from M/s PHE Consultants in the previous year relevant to the assessment year 2002-2003 for which a sum of Rs.7.50 lakhs was credited to their account. The assessment year under consideration is 2006-2007 and the amount has been continuously shown as liability by the assessee. However, letter from M/s PHE Consultants clarified the position that some dispute arose between the assessee and them, which was not settled and consequently they squared up assessee's account in their books by showing Nil balance. From here it is obvious that it is a case of remission or cessassion of trading liability by M/s PHE Consultants in favour of the assessee. Both the authorities below have recorded a categorical finding that the said sum of Rs.7.50 lakhs was claimed by the assessee as an expenditure in assessment year 2002-2003. On a pertinent query from the bench, the learned A.R. admitted that till date the said amount of Rs.7.50 lakhs has not been paid. In view of these facts it becomes patent that the provisions of section 41(1) are rightly attracted here inasmuch as the assessee claimed deduction for the same in an earlier year and subsequently the amount ceased to be payable as is manifest from the information supplied by M/s PHE Consultants who erased the amount due from assessee by showing Nil balance as recoverable. In our considered opinion the learned CIT(A) was not justified in deleting this addition. We, therefore, set aside the impugned order on this issue and restore the action of the Assessing Officer.

16. In the result, appeals for assessment years 2004-2005 and 2005-2006 are dismissed and that of assessment year 2006-2007 is partly allowed.

Order pronounced on this 9th day of July, 2010.

Wednesday, February 16, 2011

Sec 80 I , coating of wire NOT manufacturing

Income-tax : Process of coating with oxides of Noble Metals on Titanium Metal Electrode / Anode bringing about a change in its character and user for making it fit for use in production of chlorine and caustic soda in an electrolytic process is "manufacture" or "production" of "article" or "thing" within meaning of section 80-IA.

    l  The conclusion drawn by the Tribunal that by coating electrode or titanium anodes the assessee was not "manufacturing" or "producing" an "article" or "thing" within the meaning of section 80-IA(2) was erroneous, being contrary to mandatory provision of section 80-IA and contrary to and inconsistent with the evidence on record.

 

[2011] 9 taxmann.com 234 (Delhi)

HIGH COURT OF DELHI

Titanor Components Ltd.

v.

CIT

SANJAY KISHAN KAUL & RAJIV SHAKDHER, JJ.

ITA NO. 24/1999

FEBRUARY 4, 2011

 

JUDGMENT

 

Rajiv Shakdher, J

1. This is an appeal preferred under section 260A of the Income Tax Act, 1961 (hereinafter referred to as 'IT Act') by the assessee against the judgment of the Income Tax Appellate Tribunal (hereinafter referred to as the 'Tribunal') dated 24.04.1999 passed in ITA No. 2079/D/98 pertaining to assessment year 1994-95.

1.1 The appellant is aggrieved by the impugned judgment inasmuch as it has resulted in denial of deduction claimed by the assessee under the provisions of section 80IA of the IT. Act. The captioned appeal against the impugned judgment was admitted on 18.08.2000. By this order, the following questions of law were framed :-

"(i). Whether coating with oxides of Noble Metals on Titanium Metal Electrode / Anode bringing about a change in its character and user for making it fit for use in the production of chlorine and caustic soda in an electrolytic process is "manufacture" or "production" of "article" or "thing" within the meaning of section 80-IA of the Income Tax Act, 1961?

(ii). Whether the conclusion, drawn by the Income Tax Appellate Tribunal that by coating electrode or titanium anodes the appellant was not "manufacturing" or "producing" an "article" or "thing" within the meaning of section 80IA(2) of the Income Tax Act, 1961, is erroneous being -

  (a)  Contrary to mandatory provision of section 80IA;

  (b)  Contrary to and inconsistent with the evidence on record?"

2. The brief facts which have led to the present appeal are as follows:

2.1 The assessee applied to the Government of India through Ministry of Industry, Department of Industrial Development for a licence to set up a plant to manufacture coated metal electrodes at Kundaim Industrial Area in north Goa. The assessee was issued a licence on 16.10.1990. The assessee also applied for and was issued a registration certificate by the Excise Department vide letter dated 26.06.1993. In the interregnum, i.e., on 26.02.1993 the assessee had entered into an agreement (in short 'agreement') with a company by the name of M/s UHDE India Limited (hereinafter referred to as 'UHDE') for coating titanium substrates. This contract was evidently executed between the assessee and UHDE with the knowledge of another company by the name of Indian Petro Chemicals Corporation Ltd. (hereinafter referred to as 'IPCL').

2.2 It appears that UHDE had undertaken an obligation to supply coated titanium substrates to IPCL for the use in their chlorine-caustic soda plant. By virtue of this agreement IPCL was to supply the titanium substrates through UHDE to the assessee free of cost, to enable the assessee to execute the job work, which entailed coating of, the titanium substrates, in terms of the specifications provided for in the aforementioned agreement.

2.3 Under the said agreement the assessee was required to coat the titanium substrates numbering 1212 at a total cost of Rs 6,42,84,480/-. The per square metre cost of coating titanium substrates was pegged at Rs 19,500/-. Importantly, the cost agreed to did not include excise duty which was required to be reimbursed by UHDE. Furthermore, the assessee was also obliged to dispatch the coated titanium substrates to another company, i.e., one Alpha Label India Ltd (hereinafter referred to as 'Alpha') alongwith necessary documentation, which included, the excise gate pass; so as to enable the said entity from claiming MOD VAT credit in respect of the excise duty. Evidently, Alpha was required to undertake further fabrication work to manufacture "membrane cell elements". It is not disputed that the assessee executed the contract arrived at between itself and UHDE.

3. With this background the assessee filed its return for the relevant assessment year, i.e., 1994-95. The assessee's return was a loss return which, pegged the loss at Rs 1,28,71,873/-. During the course of assessment, the assessing officer noted that the assessee had claimed a deduction under the provisions of section 80IA of the IT. Act amounting to Rs 2,62,20,996/- against a gross total income of Rs 1,33,49,093/-.

3.1 It is pertinent to note that the assessee avers in the appeal that the claim for deduction under section 80IA of the IT Act was evidently reduced to a sum of Rs 1,46,24,648/- and furthermore, the overall deduction under section 80IA of the IT. Act would be limited to the gross total income under section 80A(2) of the IT. Act.

4. The assessing officer was evidently of the view that the deduction under section 80IA of the IT. Act was not available to the assessee as the "process" whereby, the titanium substrates were coated by the assessee did not constitute "manufacture" within the meaning of the said provision. The assessee, however, on its part attempted to furnish an explanation vide letters dated 28.02.1997 and 07.03.1997.

4.1 Briefly, the assessee attempted to explain that titanium substrates were received by it through UHDE as free issue material which, the assessee was required to coat with chemicals (Noble Metal Oxide), as per the specifications contained in its agreement with the UHDE. For its efforts the assessee had received consideration, as stipulated in the aforementioned agreement against an expenditure of Rs 1,67,80,525/- incurred by it towards raw material consisting of Noble Metals, such as, ruthenium and iridium. In addition the assessee claimed it had paid excise duty to the tune of Rs 1,60,45,945/-.

4.2 The sum and substance of the explanation furnished by the assessee was that a commercially distinct product had come into existence after it was processed by the assessee.

4.3 Before the assessing officer reliance was placed on the provisions of section 80IA and, in particular, sub-section 2(iii) read with sub-section 12(b) and, the explanation to section 33B to contend that the word "manufacture" in section 80IA necessarily would include processing of goods.

5. The assessing officer, however, rejected the contention of the assessee and proceeded to hold that the processing of goods could not be equated with manufacture and production of articles. In his view, chemical coating of titanium substrates did not result in it being transformed into an entirely new commercial commodity. Thus, the assessing officer concluded that processing in the instant case, did not partake the attributes of manufacture or production of an article or thing as envisaged in section 80IA of the I.T. Act.

6. Aggrieved by the order the assessee preferred an appeal to the Commissioner of Income Tax (Appeal) [hereinafter referred to as 'CIT(A)']. The CIT(A) sustained the order of the assessing officer. In arriving at his conclusion, the CIT(A) placed reliance on the judgment of the Bombay High Court in the case of CIT v. Sterling Foods (Goa) 213 ITR 851, even though the said decision pertained to the provisions of section 80HH of the IT. Act, since it used the same expression 'manufacture' or 'production' of articles.

6.1 On facts, the CIT(A) more or less replicated the view of the assessing officer by holding that coating of titanium substrates by the assessee did not result in its conversion into an entirely new commodity. The underlying theme of CIT(A)'s order is that titanium substrates and titanium anodes are one and the same thing; therefore, all that the assessee did was to coat the said articles with noble metal oxides which, according to the CIT(A), did not result in emergence of an entirely new commodity.

7. The assessee being aggrieved preferred an appeal to the Tribunal. The Tribunal sustained the view of the authorities below.

7.1 The thrust of the Tribunal's view appears to be that the expression used by the assessee in its agreement with UHDE to describe the articles received, i.e., titanium substrates (which, as noticed above, were free issue material supplied for the purposes of coating them with noble metal oxides) was a "misnomer". For this purpose, the Tribunal relied upon the observations set out in the encyclopedia of chemical technology authored evidently by Kirk and Other (volume 15 at pages 172-183).

7.2 In other words, the Tribunal was of the view that what the assessee was receiving under its agreement with UDHE as free issue material was nothing but uncoated titanium metal anodes which on receipt were subjected to a process of coating by the assessee. In the opinion of the Tribunal the process of coating carried out by the assessee only enhanced the "longevity" and the "utility" of the original article by making it resistant to corrosion and, increasing its "conductivity" and "dimensional stability". In sum and substance the Tribunal concluded that a distinct commercial commodity did not emerge by virtue of the process employed by the assessee on the original article. According to the Tribunal, what the assessee received were titanium electrodes. These were, as per the Tribunal, nothing but titanium metal anodes; which remained unaltered in its character even after the conclusion of the process of coating. The discussion in this regard is found in paragraphs 22 and 24 of the impugned judgment of the Tribunal.

7.3 The Tribunal went on to support the aforementioned analysis by adverting to the fact that the assessee's agreement with UHDE disclosed that the coated titanium metal anodes had to be dispatched by it, for further fabrication, to one Alpha for the purposes of manufacturing membrane cell element. In the Tribunal's wisdom, this demonstrated that in order to convert a coated titanium metal anode into a "useful commercial commodity" it would require further processing. Consequently, the Tribunal repelled the contention of the assessee in regard to its claim for deduction under section 80IA of the IT. Act.

8. The instant appeal impugns this very reasoning of the Tribunal.

8.1 In support of the appeal, arguments on behalf of the assessee were addressed by Mr. Jain, while in opposition Ms Bansal appeared on behalf of the department.

8.2 Mr Jain briefly reiterated the grounds taken before the authorities below and, in particular, stressed on the opinions rendered by two experts, i.e., Dr. (Mrs.) K. Gadgil and Mr M.K. Sarkar, professors with the Indian Institute of Technology, Delhi (in short, I.I.T. Delhi) to demonstrate that the process undertaken by the assessee actually resulted in production of an anode and hence, a new article emerged contrary to what had been held by the authorities below. Mr Jain submitted that the test for ascertaining as to whether a new article was produced was: as had been settled by courts in several decisions rendered in the past; the coming into existence of a new marketable commodity. It was contended, the fact that this article had been subjected to a process which resulted in manufacture, and that the manufactured article was marketable was apparent on perusal of the material placed on record, i.e., invoices, excise gate passes and the agreement entered into by it with UHDE as also the opinion of the experts. In support of his submissions the learned counsel relied upon the following : CIT v. Oracle Software India ltd. (2010) 2 SCC 677; Vijay Ship Breaking Corpn. & Ors. v. CIT (2008) 14 DTR (SC) 74; CIT v. Tamil Nadu Heat Treatment and Fetting Services (P.) Ltd. (1999) 238 ITR 529; CIT v. Laxmi Art Studio (2001) 249 ITR 710; and CIT v. Emptee Poly-Yarn Private Limited (2010) 2 SCC 720.

9. As against this, Ms Bansal largely relied upon the judgment of the Tribunal and the authorities below. In particular, Ms Bansal stressed upon the fact that what the assessee had undertaken was job work and, in lieu thereof, the consideration received was nothing but job work charges. The learned counsel contended that the findings of fact returned by the Tribunal and the authorities below, clearly demonstrated that no new commodity had came into existence as contended by the assessee. In support of this submission she laid great stress on the observations made by the Tribunal in paragraph 25 of its judgment (which have already been noticed by us hereinabove) to the effect that the coated titanium substrates required further fabrication and, for this purpose they had to be dispatched under the agreement with UHDE by the assessee to one Alpha. The learned counsel in support of her contentions relied upon the judgment in the case of Bhagat Construction Co. Pvt Ltd. v. CIT (1998) 232 ITR 722.

10. We have heard the learned counsel for the parties and perused the judgment and orders of the authorities below, including the material placed before us.

10.1 On consideration of the material, in our view the following facts have emerged :

   (i)  the assessee had applied for a licence to set up an industry to manufacture coated titanium metal anodes. This licence was issued to the assessee on 16.10.1990;

  (ii)  On 26.02.1993 the assessee had entered into an agreement with UHDE for coating titanium substrates. It is pertinent to note at this stage (as noticed above) that while the department all along has contended that the titanium substrates are nothing but uncoated titanium metal anodes, the assessee on the other hand has taken the stand that titanium substrates are nothing but supports, which after coating are transformed into anodes;

(iii)  the assessee was issued a registration certificate by the Excise Department on 26.06.1993 in respect of the process of coating it undertook qua the article it received from UDHE. We are consciously not using, at this juncture, either the expression titanium substrate or titanium metal anode as there is contest between the parties on this very aspect;

(iv)  the assessee has in its invoices issued to UHDE sought recovery of both, the charges towards coating of the article received as well as in respect of excise duty leviable on it. Towards excise duty the assessee has paid a sum of Rs 1,60,45,945/-. There is no dispute raised before us with regard to production of invoices and the relevant gate passes before the assessing officer for scrutiny;

  (v)  In terms of the agreement arrived at between the assessee and UHDE the coated articles were sent to an entity by the name of Alpha for further fabrication to manufacture membrane cell elements;

(vi)  the assessee had placed before the authorities below, a flow chart with respect to the process employed in converting the article received from UDHE into a finished product. For the sake of convenience the same is extracted hereinbelow:


(vii)  the assessee had supported its contention made to the effect that, the process undertaken by it involved a transformation of the original material into a distinctly new marketable product, by relying upon the following material: extracts from the encyclopedia of chemical technology authored by Kirk and Othmer (volume 15 page 172-183); the opinion of professors Dr. (Mrs) K. Gadgil and Mr Sarkar of I.I.T., Delhi, who, in their opinion had placed reliance on relevant contents of the aforementioned encyclopedia of chemical technology; and lastly on invoices and excise gate passes; to which reference is already made hereinabove by us.

11. With aforesaid material on record let us examine what it briefly reveals :-

11.1 A reading of the extracts from the encyclopedia of chemical technology seems to suggest that in a chlor-alkali industry electrolytic process is inevitably used. An electrolytic process broadly involves de-composition of a liquid, which contains ions, by electrolysis. Electrolysis is nothing but de-composition of the substance by application of electric current. Therefore, what was crucial for IPCL, who happens to be manufacturer of Chlorine-Caustic Soda that they had, for their purposes in place anodes, which allowed passage of electricity without building up non-corrodible oxide coating on the surface.

11.2 As is therefore evident that an anode is really one of the terminals through which electrons pass in an electrolytic process; the other terminal is commonly referred to as a cathode.

11.3 The Tribunal upon reading the following passage came to the conclusion that what was supplied to the assessee was nothing but an uncoated anode. For the sake of convenience the passages are extracted hereinbelow:

"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 characteristic quickly were recognized to be of value for electrochemical systems. Titanium as an anode does not pass current satisfactorily because of the build up of noncorrodible oxide coatings on the surface, but with the addition of a noncorrodible metal coating, a useful anode can be produced. Extensive research work culminated in the filing of patents in 1957 in the Netherlands 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, ruthenium 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."

11.4 A perusal of a further extract from the very same encyclopedia of chemical technology would show that a commercially distinct product, which is ubiquitously described as precious metal anode or noble metal coated titanium or dimensionally stable anodes etc., come into existence. The relevant extract from the said encyclopedia succeeding the extract set out hereinabove reads as follows :-

"A Second group of patents (10-12) covers platinum and mixtures of platinum-iridium deposited thermally or electrolytically on the titanium substrate. Such anodes have their main application in cathodic protection and the production of sodium chlorate.

These composite anodes, with titanium as the base metal, have been described variously as precious metal anodes (PMA), noble-metal coated titanium (NMT), dimensionally stable anodes (DSA), and platinized titanium anodes (PTA)."

11.5 The fact that there is a distinct different product produced is borne out from the following extracts under the heading "ruthenium titanium oxides".

"Scanning electron micrographs of ruthenium titanium oxide coatings show a characteristic microcracked surface (23). This cracking occurs early in the coating preparation, as solvent evaporates from the surface to form a gel of unreacted ruthenium and titanium compounds. As the coating is baked at higher temperatures, the cracks increase in size because of volume contraction of the gel. A fully baked anode coating has the appearance shown in Figure I and a surface area factor of 180-230 times the geometrical area, as measured by BET (Brunauer-Emmett-Teller) nitrogen adsorption. This large surface area contributes to the low chlorine discharge potential of these types of coatings, providing a large number of catalytic sites for gas evolution while minimizing concentration polarization…….

Chlorine-Caustic. The widest application and most rapid acceptance of metal anodes has been in the chlorine-caustic industry, where ruthenium-titanium oxide DSA coatings are used. In the mid 1960s, chlorine producers were shifting worldwide to mercury cells to take advantage of the high current densities attainable. For this reason, and because of more favourable economics, the DSA initially was first operated commercially in mercury cells. Anode structures were designed to replace graphite anodes and conversion could be completed without modification of the cells (see Alkali and chlorine products)." (emphasis is ours)

11.6 Prof. Dr. (Mrs.) K. Gadgil and Mr Sarkar of the IIT, Delhi while relying upon the said encyclopedia opined as follows:

"In manufacture of caustic soda-chlorine by electrolytic process, the positive terminal Anode should have the property that it should facilitate liberation of chlorine and suppress production of Oxygen from the aquous electrolyte (sodium chloride solution). This requires operations at a very low current density with high resistance to oxidation corrosion).

Pure titanium metal cannot be used because of quick coverage of surface by non-conducting Titanium dioxide which increases the resistance and voltage quickly to a level where high amount of oxygen is produced, besides reducing conducting surface area in a very short time. Bare Titanium is not a Anode. Consequently industrial chlorine cannot be produced. Best solution to this problem was found by coating the surface of Titanium with Noble metal oxides (which are conducting) in particular, Ruthenium oxide with or without other noble metals, such as Iridium.

Coated Titanium Metal Anodes are manufactured by coating of Titanium substrate with solution of mixed metal oxides, followed by drying and controlled baking, with strict process control. The formulae of coating solutions and process of their manufacture are closely guarded secrets of Technology suppliers.

It has been found that such coated metal titanium anodes have micro-cracked surfaces having internal surface area around 200 times that of geometrical surface, with high amount of conductivity even in presence of Titanium oxides. Through these micro-cracks high rate of chlorine release is facilitated. IN ABSENCE OF THE NOBLE METAL OXIDE COATING, THE CURRENT WILL FACE ENORMOUS RESISTANCE TO PASS THROUGH THE BASE TITANIUM SURFACE DUE TO THE FORMATION OF TITANIUM OXIDE FILM AND ELECTROLYSIS DOES NOT TAKE PLACE TO PRODUCE INDUSTRIAL CHLORINE....

TITANIUM ONLY ACTS AS A SUBSTRATE (SUPPORT) FOR SUPPORTING THE REAL ANODE WHICH IS NOBLE, METAL OXIDES

In summary, it can be stated that bare titanium metal is not an Anode and therefore, cannot be used as a Metal Anode for caustic soda — chlorine manufacture by electrolytic process. Whereas, mixed metal oxide coated titanium metal Anode provides excellent conductivity, resistance to corrosion and dimential stability necessary for manufacture of caustic soda and chlorine by electrolytic process all over the world. Technology of coating composition and methods of manufacture of anodes, however, tend to get upgraded continuously through R&D efforts of Technology suppliers." (emphasis is ours)

11.7 A reading of the aforesaid opinion alongwith the extracts from the encyclopedia quite clearly indicates that, according to the experts, titanium substrates is only used for the purpose of supporting production of a real anode, that is, a noble metal oxide. A bare titanium is not an anode.

11.8 It is important to bear in mind that the department did not produce any material by way of affidavit of any chemical analyst or an expert in chemical technology to counter the view of professor Mr. Sarkar and Dr. (Mrs.) K. Gadgil. The authorities below had donned upon themselves the role of an expert by reading an extract in a manner which perhaps suited their conclusion.

11.9 In our view such an approach is flawed; while sitting as an adjudicator, courts have to base at times, their decision; on material produced before it on an issue which requires expert input - therefore its decision not to accept material placed before it should ordinarily also be based on a similarly persuasive evidence, unless the material placed before it is completely unreliable. As noted above, the department did not adduce any evidence in support of its contention, which was contrary to that raised by the assessee.

12. What lends credence to the submissions made on behalf of the assessee which is that, coating of titanium substrates leads to emergence of a distinct product, is the fact that the process undertaken by the assessee has been subjected to excise duty by another statutory authority of the State. This crucial aspect of the matter we find has not been adverted to by any of the authorities below including the Tribunal even though the material as well as submission with regard to this aspect was squarely putforth by the assessee.

12.1 It is trite law that only that process is recognized as constituting manufacture which results in emergence of a distinct article on being subjected to either treatment, or labour or even manipulation, [see UOI v. Delhi Cloth & General Mills (1963) Supp (1) SCR 586]. The Supreme Court in the aforementioned case while, quoting from the Permanent Edition Of Words And Phrases Vol. 26 cited with approval the following passage:

"Manufacture implies a change, but every change is not manufacture and yet every change of an article is the result of treatment, labour and manipulation. But something more is necessary and there must be transformation; a new and different article must emerge having a distinctive name, character or use."

12.2 But for the purposes of imposition of excise duty it is not enough that manufacture takes place, it should result in production of an article which is marketable though not necessarily marketed. This aspect of the matter has been dealt with by the Supreme Court in several decisions. We do not wish to burden the judgment with all those cases; however only to highlight the contours of this principle we intend to refer to the following two judgments.

12.3 First being: South Bihar Sugar Mills Ltd. v. UOI & Ors. (1968) 3 SCR 21. In South Bihar Sugar Mills (supra) case [in which Delhi Cloth Mills (Supra) was cited with approval] the Supreme Court after analyzing the scientific evidence put forth both by the assessee and the department came to the conclusion that, in manufacture of sugar, kiln gas was produced by the assessee, which was not carbon die oxide as known to the market and hence, could not be made amenable to imposition of excise duty. The relevant observations is extracted hereinbelow:

"16. The Act charges duty on manufacture of goods. The word 'manufacture' implies a change but every change in the raw material is not manufacture. There must be such a transformation that a new and different article must emerge having a distinctive name, character or use. They duty is levied on goods. As the act does not define goods, the legislature must be taken to have used that word in its ordinary, dictionary meaning. The dictionary meaning is that to become goods it must be something which can ordinarily come to the market to be bought and sold and is known to the market. That it would be such an article which would attract the Act was brought out in Union of India v. Delhi Cloth & General Mills Ltd. [1963] Suppl. 1 SCR 586...."

12.4 The second being: A.P. State Electricity Board v. Collector of Central Excise (1994) 2 SCC 428. In this case once again the Supreme Court was called upon to adjudicate as to whether pre-stressed cement concrete poles manufactured by Andhra Pradesh State Electricity Board (APSEB) were goods within the meaning of section 3 of the Central Excise Act Sale Act, 1994. The Supreme Court after examining a number of judgments including the judgments in the case of Delhi Cloth Mills (supra) and South Bihar Sugar Mills (supra) came to the conclusion that what was necessary for imposition of excise duty was for the emergence of marketable goods. It was argued on behalf of the assessee that pre-stressed cement concrete poles manufactured by them were not goods inasmuch as they were not marketable since they were manufactured for a captive purchaser. The court after analyzing its own precedents opined that: whether or not the goods were in fact marketed was of no relevance; what was essential was that goods were marketable. Marketability being essentially a question of fact it would have to be decided as an issue of fact in each case. Even if goods were available only from one source or from a specified market it made no difference so long as they were available to the purchaser. Marketability was not dependent upon whether or not a number of purchasers available for the goods in issue; a single purchaser would suffice. Relevant observations in this regard are contained in paragraph 10 of the judgment which are extracted hereinbelow for the sake of convenience:

"10. It would be evident from the facts and ratio of the above decisions that the goods in each case were found to be not marketable. Whether it is refined oil (non-deodorised) concerned in Delhi Cloth and General Mills or kiln gas in South Bihar Sugar Mills or aluminium cans with rough uneven surface in Union Carbide or PVC films in Bhor Industries or hydrolysate in Ambalal Sarabhai the finding in each case on the basis of the material before the Court was that the articles in question were not marketable and were not known to the market as such. The 'marketability' is thus essentially a question of fact to be decided on the facts of each case. There can be no generalization. The fact that the goods are not in fact marketed is of no relevance. So long as the goods are marketable, they are goods for the purposes of section 3. IT is also not necessary that the goods in question should be generally available in the market. Even if the goods are available from only one source or from a specified market, it makes no difference so long as they are available for purchasers. Now, in the appeals before us, the fact that in Kerala these poles are manufactured by independent contractors who sell them to Kerala State Electricity Board itself shows that such poles do have a market. Even if there is only one purchaser of these articles, it must still be said that there is a market for these articles. The marketability of articles does not depend upon the number of purchasers nor is the market confined to the territorial limits of this country. The appellant's own case before the excise authorities and the CEGAT was that these poles are manufactured by independent contractors from whom it purchased them. This plea itself- though not pressed before us - is adequate to demolish the case of the appellant." (emphasis is ours)

13. As in the Central Excise and Salt Act, 1944, in the IT. Act there is no definition of the word manufacture. The expression industrial undertaking, however, has been defined inter alia in the explanation to section 33B of the IT. Act as any undertaking which is mainly engaged in the manufacture or processing of goods. The Tribunal in this case has, returned a finding to the effect that the assessee has been treated as an industrial undertaking by the relevant authorities. However, after accepting that the assessee is an industrial undertaking; (and there being no dispute that the only activity in which the assessee is engaged in is: coating titanium substrates with noble metal oxides) - the Tribunal, curiously, went on to say that what was produced was not a distinct article ignoring the evidence on record.

13.1 This apart, the Tribunal while rejecting the contention of the assessee in paragraph 26 of the impugned judgment observed that the assessee had not placed on record material to show that after coating the article in issue it became a "saleable" article and hence, a different commodity.

13.2 In our view the Tribunal lost sight of the fact that a distinct new product had come into existence after it was processed by the assessee. The fact that it had a single purchaser, (i.e., UHDE/IPCL) for its coated titanium substrates ought not to have come in the way of Tribunal allowing the deduction to the assessee. As noticed above the test is that the transformed article should be marketable. In this case there could not have been a better evidence of marketability than the assessee's agreement with UHDE.

14. The Supreme Court, as a matter of fact has, in a recent judgment entitled CIT v. Oracle Software India Limited (2010) 2 SCC 677 further refined the test as to what constitute a manufacturing process. In this case the Court was called upon to decide as to whether a process by which blank compact discs are transformed into loaded software would constitute manufacture in context of section 801 of the IT. Act. The Court employed the test of fitness. In other words, to come to the conclusion whether the process employed constitutes manufacture one would have to ascertain the efficacy of the process in rendering the commodity or an article fit for use. The relevant observations of the court in this regard are given in paragraphs 16 to 18 of the judgment. This judgment of the Supreme Court was followed in CIT v. Emptee Poly-Yarn Private Limited (2010) 2 SCC 720.

14.1 In our view the Tribunal had to employ the test of fitness in ascertaining whether the process employed by the assessee rendered the free issue material supplied to it (whether referred to as titanium substrates or a titanium metal anode), fit for use in the industry.

14.2 The Tribunal's conclusion; that the coated titanium substrates did not result in production of a distinct new article, based on provisions of the agreement arrived at by the assessee with the UHDE which, required it to dispatch the processed titanium substrates to Alpha for further fabrication to manufacture membrane cell element is, in our view, flawed. The reason for this is: the Tribunal had to address the issue as to whether the process employed by the assessee resulted in manufacture of a distinct new article. If it did, it mattered little that the said product could be further worked upon to manufacture membrane cell element. This line of inquiry and the resultant conclusion, without relevant material to support it: was, according to us, misdirected. In our opinion the Tribunal employed the wrong test. Once the Tribunal found as a fact that the process undertaken by the assessee resulted in production of a "useful commercial commodity" the enquiry had to end there, and the assessee's claim allowed.

15. The judgment cited by Ms Bansal, i.e., Bhagat Construction (supra) has no applicability. In the said case the assessee before the court impugned the order of the Tribunal before it whereby, its claim of investment allowance in respect of equipment used for quarrying and stabilizing electricity was denied. The court sustained the contention of the department on the ground that the assessee was not an industrial undertaking. The reason for coming to this conclusion was that it had been found as a matter of fact that the assessee's main business was civil engineering works and not to manufacture any intermediary products. In the course of carrying out civil engineering works it had quarried certain material which were mainly stones and the said material had been used for the said purpose. The court was of the view that, since in the course of its main activity, which was, as indicated above, civil work certain by-product had been produced, which was consumed, it would not enable the assessee to claim investment allowance on the ground that it was engaged in carrying out an industrial activity. The court held that the assessee was not a manufacturer of any article or thing but, as a matter of fact was a consumer of by-product, produced, and therefore, the machinery in issue was not amenable to investment allowance. In our view, the case is completely distinguishable on facts and hence, not applicable.

16. For the reasons given above, both questions of law are answered in favour of the assessee and against the department. Consequently, the impugned judgment is set aside. However, in the circumstances parties shall bear their own cost.



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