TMI Blog2014 (4) TMI 936X X X X Extracts X X X X X X X X Extracts X X X X ..... rated with the bottom plate) - These items are imported from Germany from M/s ContiTech Luftfedersysteme GmbH (Hannover, Germany) - Rest all other goods / raw materials required in the manufacturing process are procured from India and employed by the Appellant in the manufacturing process at the Paonta Sahib Unit - The description of manufacturing process amply proves that the imported material as well as local materials are used in a manufacturing process which results in a final product which is quite distinct from the components used, and has distinct usage too – thus, the order of the CIT(A) set aside and the Assessee was engaged in manufacturing of air spring assembly and is hence eligible for deduction u/s. 80IC for the manufacturing activity undertaken at its Paonta Sahib unit – Decided in favour of Assessee. - I.T.A. No. 2554/Del/2013 - - - Dated:- 6-12-2013 - R P Tolani And Shamim Yahya, JJ. For the Appellant : Dr Rakesh Gupta, Adv. For the Respondent : Shri Keyur Patel, DR ORDER:- PER : Shamim Yahya This is an appeal filed by the Assessee against the order of the Ld. CIT(A) dated 19.3.2013 and pertains to assessment year 2009-10. 2. The grounds r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ged in the manufacturing/ assembling of air spring and suspension system for railways only. 4.1 The assessee claimed deduction u/s. 80IB of 30% for Noida Unit and deduction u/s. 80IC of 100% for Ponta Sahib unit. The Assessing Officer referred to various expenses of all the units and observed that the expenses claimed in respect of Ponta Sahib unit are much less vis-a-vis the expense for Noida and Greater Noida units. Assessing Officer was of the opinion that even the total investment in fixed assets of Ponta Sahib unit was less and in which case the other two units should have shown higher productivity and returns. Assessing Officer also referred to the investment in plant and machinery in the units and the net profit margin thereof. Assessing Officer was not convinced by the explanation given by the assessee in the context of profitability of the units. Assessing Officer opined that the discrepancy could only be due to the fact that higher profit reflected for Ponta Sahib Unit was for claiming deduction under Chapter VI-A. 4.2 Further, the Assessing Officer referred to the contract awarded to the Ponta Sahib unit by the Ministry of Railways. Referring to the work award, Asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... goods being imported from Germany are referred to as air springs and so are the goods being sold to the railways. Even the machinery installed at the Paonta Sahib unit reflects the activity or the lack of it being undertaken at the unit. The total machinery installed worth Rs. 44 lacs is a mere eye wash to claim manufacturing activities at the Paonta Sahib unit premises. The nature of the employees, their qualification, the wages being paid to them, and the work assigned to each also show that the manufacturing activity claimed to be carried out Paonta Sahib unit is a mere eye wash. On the basis of the facts presented, the conclusion that inevitably follows is that the appellant company cannot be said to have undertaken business activities which amount to manufacture or production of an article different from the air spring manufactured by M/s Contitech and therefore does not merit requisite deduction under section 80-IC(2) of the Act. In light of the foregoing discussion and the given set of facts, the appellant company is not eligible for deduction under section 80IC of the Act, as it cannot be said to have manufactured or produced any article or a thing. The decision of the A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the assessee is manufacturing air spring assembly which is different from air spring imported by the assessee. Ld. Counsel of the assessee further pointed out that these purchase order clearly reflects the specific technical specifications to which the manufactured product has to conform to show that the air springs is different where as the assessee manufactures air springs assembly. Ld. Counsel of the assessee further referred to the Paper Book that bring out the technical specifications for the various variants of air springs assembly manufactured by the assessee for Indian Railways. Ld. Counsel further referred to the process flow chart in the paper book submitted for the air springs assembly manufactured by the assessee. Ld. Counsel of the asessee also referred to the cross sectional diagram of air springs assembly supplied to the Indian Railways to show that there are several parts of the assembly and it is not the air springs and conical springs alone. Furthermore, Ld. Counsel of the assessee further referred to the letter of approval issued by the Research Design and Standards Organization, copies of Central Excise invoices, assessment order passed by the District Taxatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 3rd year the Revenue cannot suddenly take up the ground that the assessee is not doing any manufacturing and therefore, is not entitled for deduction u/s. 80IC. The case laws discussed hereinbove amply support this proposition. 11. Apart from above, we find that on the merits also assessee has cogent case that assessee was manufacturing air spring assembly and supplying it to Indian Railways and it was not merely trading as alleged by the Revenue. 12. In this regard, we can gainfully refer to the provisions of section 80IC:- "[Special provisions in respect of certain undertakings or enterprises in certain special category States. 80-IC. (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 subsection (2), 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 from such profits and gains, as specified in sub-section (3). (2) This section applies to any undertaking or enterprise,- (a) which has begun or begins to manufacture or produce any article or thing, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2007, in any of the North-Eastern States. (3) The deduction referred to in sub-section (1) shall be- (i) in the case of any undertaking or enterprise referred to in sub-clauses (i) and (iii) of clause (a) or sub-clauses (i) and (iii) of clause (b), of sub-section (2), one hundred per cent of such profits and gains for ten assessment years commencing with the initial assessment year; (ii) in the case of any undertaking or enterprise referred to in sub-clause (ii) of clause (a) or sub-clause (ii) of clause (b), of sub-section (2), one hundred per cent of such profits and gains for five assessment years commencing with the initial assessment year and thereafter, twenty-five per cent (or thirty per cent where the assessee is a company) of the profits and gains. (4) This section applies to any undertaking or enterprise which fulfils all the following conditions, namely:- (i) it is not formed by splitting up, or the reconstruction, of a business already in existence : Provided that this condition shall not apply in respect of an undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... commences operation or completes substantial expansion; (vi) "Integrated Infrastructure Development Centre" means such centres, which the Board, may, by notification in the Official Gazette, specify in accordance with the scheme framed and notified by the Central Government; (vii) "North-Eastern States" means the States of Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland and Tripura; (viii) "Software Technology Park" means any park set up in accordance with the Software Technology Park Scheme notified by the Government of India in the Ministry of Commerce and Industry; (ix) "Substantial expansion" means increase in the investment in the plant and machinery by at least fifty per cent of the book value of plant and machinery (before taking depreciation in any year), as on the first day of the previous year in which the substantial expansion is undertaken; (x) "Theme Park" means such parks, which the Board, may, by notification in the Official Gazette, specify in accordance with the scheme framed and notified by the Central Government.]" 13. From the above, it is evident that deduction u/s. 80IC is granted particularly to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Supreme Court in Aditya Mills Ltd. vs. Union of India, AIR 1988 SC 2237, manufacture is complete as soon as the raw material undergoes some change and a new substance or article is brought into existence, having its own character and use. Kanataka High court in the case of C.I.T. vs. Darshak Ltd. 247 ITR 480 explained the word manufacture as under:- The word manufacture is to be understood in a wide sense. Manufacture would imply a change and a transformation. A new and different article must emerge having a distinct and different character and use." In C.I.T. vs. Premier Tobacco Packers P. Ltd. (2003) 284 ITR 222 (Mad.) it was held :- "The word manufacture has not been defined in the Income Tax Act. In the absence of a definition, the word manufacture has to be given a meaning as is understood in common parlance. It is to be understood as meaning the production of articles for use from raw or prepared materials by giving such materials new forms, qualities or combinations whether by hand or machines. If the change made in the article results in a new and different article then it would amount to manufacturing activity." In CIT vs. Jamal Photo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unting to manufacture of Air Spring System for Indian Railways. 3. The process was initiated with the floating of tenders by the Indian Railways for supply of Air Spring Systems towards fitment in the Railway coaches manufactured at the Integrated Coach Factory (ICF), Chennai. The Appellant bid for the tenders and was one of the parties who were awarded the tender for manufacture and supply of these Air Spring Systems. It must here be pointed out that as far as Indian Railways is concerned, Air Spring Assembly is a new suspension design working on compressed air for fitment in the existing bogies of Indian Railways. It caters to the increased payload demands and weight imbalances inherent to the existing coaches. 4. Pursuant to the award of tender, Purchase Orders were received by the Appellant towards the manufacture and supply of Air Spring Assemblies. Illustrative copies of these Purchase Orders are enclosed herewith as ANNEXURE - 2. These Purchase Orders clearly reflect that the purchases are being made by the Indian Railways against the specific technical specifications to which the manufactured product has to conform to. There are a number of these technical specifi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bH (Hannover, Germany). Rest all other goods / raw materials required in the manufacturing process are procured from India and employed by the Appellant in the manufacturing process at the Paonta Sahib Unit. For illustration, corrosion resistant steel / stainless steel; metal parts; nuts, screws and blots; etc. are procured by the Appellant and utilization for carrying out the manufacturing process at the Paonta Sahib Unit. Illustrative invoices of the imported goods and the raw materials procured locally are collectively enclosed herewith as ANNEXURE - 6 and ANNEXURE - 7 respectively. 8. Once the three components are manufactured / fabricated by the Appellant at the Paonta Sahib Unit, the Appellant further undertakes the assembly process of these three components in order to manufacture the air-spring assembly which has to be supplied to the Indian Railways. The manufacturing chart to this effect is enclosed herewith as ANNEXURE - 8 along with photographs. 9. All these raw materials are procured as per the specifications of the 'Research, Designs Standards Organization', of the Ministry of Railways, Government of India (RDSO) in terms of the tender awarded to the Appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facture of air-spring assemblies. 13. The Appellant submits that there is a vast difference between the imported items and the goods manufactured and supplied by the Appellant to the Indian Railways. Not only the Appellant undertakes substantial operations independent of the imported goods but also the imported items form only a part of the final product manufactured by the Appellant. This is evident from the following drawing of the final product which shows the location and positioning of the imported items; 14. It is submitted that the scope of supply for each air spring assembly covers the following items (as defined in Clause 4 on Page 6 of STR); S. No. Item Quantity 1 Air Spring (Rubber Bellow) 1 2 Top Interfacing Plate with Bolster, with Spigot 1 3 Sealing 0' Rings 2 4 Base Plate 1 5 Emergency Spring 1 6 High Tensile Hex Socket Head Screws with Spring Washers 4 Sets 15. In order to arrive at the air spring assembly to be supplied to the Indian Railways, the Appellant undertakes the follow ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to import it from Germany at the ICD Tughlakabad, New Delhi through Mumbai port and then transporting it to Himachal and then sending it back again to for the Chennai based coach factory of the Indian Railways, which defies logic especially for a Government undertaking like the Indian Railways. In any case, the Appellant undertakes, at its factory in the Paonta Sahib unit various activities which result into a new commodity implying thereby that the imported component are not as such supplied to the Indian Railways but are subjected to further manufacturing process before supply. In very brief the activities on these very imported components are as under; (i) The imported rubber bellow is worked upon to provide for enclosures on both sides to seal the open ends and pressurize the rubber bellow with air to be able to function as an Air spring. (ii) Likewise the emergency spring cannot function on its own. It has to be integrated into the Air Spring Assembly for working is no air (air deflated case). 16. Further, the weight of these two imported items i.e. Air Spring and Emergency Bumper is only 57 Kilograms (approx) as against the 156 Kilograms (approx) being the weig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... XURE-10. Central Excise Classification of manufactured products S. No. Finished Goods Central Excise Classification 1 Air Spring Assembly (C.K-106 ) 8607 99 10 2 Air Spring Assembly(180 KN) 8607 99 10 3 SR. Ring 8485 90 00 Illustrative central excise invoices to this effect are collectively enclosed herewith as ANNEXURE-11. 18. It is submitted that it is only because of the exemption from Central Excise duty (in terms of Notification No. 50/2003-CE for the State of Himachal Pradesh) that no Central Excise duty is paid on these products when they are manufactured at the Paonta Sahib Unit by the Appellant. 19. This fact of the Appellant undertaking manufacturing operations at the Paonta Sahib Unit is also certified by the Department of Excise and Taxation, State of Himachal Pradesh vide Certificate dated 24.07.2009 wherein this has been certified by the said Governmental Authority that the Appellant is an industrial unit doing manufacturing / assembling of air spring assembly and SR Rings. This certificate is enclosed herewith as ANNEXURE - 12. Further, even the A ..... X X X X Extracts X X X X X X X X Extracts X X X X
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