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TMI Blog2019 (7) TMI 870X X X X Extracts X X X X X X X X Extracts X X X X ..... this MA qua ground number 2(a) to 2(c) filed by Revenue in memo of appeal filed with the tribunal in its appeal which was decided by tribunal vide its order dated 08.08.2018 in favour of Revenue. The controversy between rival parties arose as to whether assessee has set up its business or not during the year under consideration, which had a bearing on allowability of expenses to the tune of Rs. 2,10,11.032/- as claimed by assessee while computing income of the assessee for relevant AY under consideration before the Bench. The tribunal on appreciation of material on record gave finding of fact that business of the assessee was not set up during the year under consideration and consequently these expenses cannot be allowed as business expenses for year under consideration, vide appellate order dated 08.08.2018 passed by tribunal, which is produced hereunder: "11. We have considered rival contentions and perused the material on record including case laws cited by both the rival parties before us. The brief facts of the case are that the assessee company was incorporated on 5th April, 2010 with the main object of doing business of assembly, manufacture and supply of advance space, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... provisions of the 1961 Act while it is the say of the Revenue that no deduction of these personnel, administrative and office expenses can be allowed as business expenses as the business of the assessee has not yet been set up till the end of relevant previous year and these expenses being pre-operative expenses partake the character of capital expenditure which are not allowable as deduction while computing income of the assessee within the mandate of the 1961 Act. The details of said expenses are as under: S.No. Particulars Amount (Rs) Remarks 1 Personnel Expenses (a] Salaries and allowances 8138161 Salaries paid to employees (b) Contribution to provident fund and allied funds 177169 Company's share of contribution to provident fund (c) StatT welfare expenses 121849 Welfare expenses 2 Office and administrative expenses (a) Rent 1552580 Rent paid in respect of office in hengumpet. Hyderabad. (b) Electricity charges 185770 Electricity charges incurred tor begumpet. Hyderabad (c) Rates and taxes 104485 Taxes paid to government and local authorities. ROC Tiling fee (d) Legal and professiona ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and US $ 1,27,68,133/- respectively(pb/page 5) in favour of the assessee company. The copies of the said PO's were enclosed and are as part of paper book(pb/page 12 and 40). The assessee company instead of manufacturing the said tools and jigs itself initiated the tool/jigs manufactured/assembled by outsourcing the same to indigenous manufacturers and suppliers viz. TAL Manufacturing Solutions Limited, Tata Technologies Limited and Tata Consultancy Services Limited. The said sub-sub-contracts awarded by the assessee company to these three vendor companies are part of paper book filed by the assessee with the tribunal(pb /page 70-74). Lockheed Martin Aerostructure Corporation,USA shared necessary engineering drawings, drawings and specifications along with source book for manufacturing/assembling of tools/jigs, based on which assembly operation sheets are prepared. These assembly operation sheets are categorized in sub assembly, major assembly and final integration. These assembly operation sheets are required in assembly processes for Center Wing Box and Empennages. These assembly operation sheets acts as guide to staff for various operations involved in the assembly process and al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers with TAL Manufacturing Solutions Limited for manufacture, supply, installation and commissioning of tools required for both Center Wing Box and Empennage Structures on 28th February 2011 for 477.32 lakhs. Accordingly, the appellant paid an advance of Rs. 84.85 lakhs to TAL Manufacturing Solutions Limited on 7th March 2011 as per the PO terms to start the tool manufacturing activity [Refer Page No. 92 of Paper Book \ No.1]. (ii) Tool design and digitization of drawings is a part of tooling activity for both Center Wing Box and Empennage Structures and the appellant has placed orders for this activity on Tata Technologies Limited and Tata Consultancy Services Limited on 5th March, 2011[Refer Page Nos. 93 to 96 of Paper Book No.I]. Note: On 4lh May, 2011, the appellant has raised its first invoice against Center Wing Box Tooling for US$ 18,15,587.90. By end of March 2013, the appellant has completed tooling activity in Center Wing Box and invoiced to Lockheed Martin the agreed value as per PO [Refer Page No. 91 of Paper Book No.I]. 4. Manufacturing / Assembly: (a) Lockheed Martin has shared engineering drawings and specifications along with source book, based on which th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ness as the same related to profit earning process and not for acquisition of any asset. (e) The appellant had commenced the work for production of finished products. (f) Hence, the above factors clearly established that the appellant had set-up and commenced its business during the year. 6. Process flow chart is enclosed to explain the flow of activities carried out during the year ended 31st March, 2011" So, in nutshell what transpires in short is that the assessee company is a JV company formed by Tata Advanced Systems Limited and Lockheed Martin Aerostructure Corporation, USA, wherein Tata's hold 74% of equity capital while 26% is held by Lockheed Martin Aerostructure Corporation, USA. The JV agreement provided that the assessee company will assemble, manufacture and supply C130/130J aircraft structural articles i.e. center wing box and empennages to Lockheed Martin Aerostructure Corporation,USA and / or its affiliates. The manufacturing/assembly unit of the assessee company for manufacturing/assembly of center wing box and empennage for C130/C130J aircrafts was being set up at Hyderabad which did not become operational till the end of the previous year relevant to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ructure Corporation, USA instead of supplying some of the tools and jigs itself instead awarded the work to manufacture/assemble these tools and jigs to the assessee indigenously by way of sub-contract for which necessary designs and drawings were supplied by Lockheed Martin Aerostructure Corporation, USA. The ultimate responsibility for execution of the agreement for setting up manufacturing/assembly unit at Hyderabad rested with Lockheed Martin Aerostructure Corporation, USA under the main contract awarded by the assessee to Lockheed Martin Aerostructure Corporation, USA but certain portion of the contract within the main contract was carved out and assigned by Lockheed Martin Aerostructure Corporation, USA to assessee itself as sub-contract to manufacture these tools and jigs required for the project indigenously of course for which technical specification, designs and drawings were supplied by Lockheed Martin Aerostructure Corporation, USA and ultimate technical supervision and other responsibilities vested with Lockheed Martin Aerostructure Corporation, USA for successful implementation of supplies of tools and jigs for the project under implementation which were manufactured ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rabad under a sub-contract from Lockheed Martin Aerostructure Corporation, USA for which main contract was awarded by the assessee itself in favour of the same Lockheed Martin Aerostructure Corporation, USA wherein the assessee by getting some of the tools/jigs manufactured/ assembled by further sub-sub-contracting to TCS, Tata Technologies Limited and TAL Manufacturing Supplies Limited ever intended to enter into an business of manufacturing /assembly or supplies of tools and jigs rather its activities and efforts were all directed towards the business of setting up of manufacturing /assembly unit being set up at Hyderabad for manufacturing/assembly of center wing box and empennages for C130/C130J aircraft. Thus, we conclude that the assessee never intended to set up any business of manufacturing/assembly of tools and jigs required for supplies to be made to its assembly/manufacturing unit being set up at Hyderabad which was under implementation as at year end for which even trial run did not started by year end. The activities of supply of tools/jigs by the assessee as sub-contractor/vendor to Lockheed Martin Aerostructure Corporation, USA which was executed by assessee through s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r installed nor trial runs commenced. We have carefully gone through the case laws cited by learned counsel for the assessee and we have observed that those case laws were decided on their own factual matrix which has no applicability so far as peculiar factual matrix as is applicable to the assessee in the instant case. However, for the sake of completeness, we will now refer to all the case laws relied upon by the assessee : a) The decision of Hon'ble Bombay High Court in the case of Western India Vegetable Products Limited v. CIT reported in (1954) 26 ITR 151(Bom.). In this decision the Hon'ble High Court of the Bombay held that the previous year of the business will commence from setting up of business which is relevant for claiming deduction of expenses as business expenses. There is no dispute as to this proposition of law is concerned but in the instant case we have held that the assessee by taking sub-contract from Lockheed Martin, USA for indigenously manufacturing /assembling of tools and jigs to be ultimately supplied to itself to be used/consumed in its project for manufacturing/assembly of center wing boxes and empennages for C130/C130J aircraft had never intended to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubcontract from Lockheed Martin, USA which supplies are to be utilised/consumed by the assessee itself in its manufacturing/ assembly unit being set up at Hyderabad which was under implementation as at the year end and not even trial run commenced till the end of previous year. Thus, on that factual matrix it is held that the assessee never intended to set up any business for supply of tools and jigs for its own units as its efforts for supply of tools and jigs are directed towards setting up its own manufacturing/assembly units for manufacture and assembly of center wing boxes and empennages for C130/C130J aircraft and not for setting up manufacturing /assembly units for tools/jigs. d) The decision of Hon'ble Gujarat High Court in the case of CIT v. Saurashtra Cement & Chemical Industries Ltd.(1972) 91 ITR 170,(Guj. HC). In this case, the taxpayer was engaged in manufacture and sale of cement. The taxpayer obtained mining lease for quarrying limestone and started mining operations. The limestone was raw material for manufacturing of cement. It was held that this activity of extracting limestone by quarrying the leased land was necessary for the purposes of acquiring raw materi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... High Court in the case of Prem Conductors P. Ltd. v. CIT (1976) 108 ITR 654(Guj. HC). The strong reliance is placed by learned counsel for the assessee on this case. In this case the assessee took over running concern from its promoters. It was not a case of setting of new industrial undertaking. The taxpayer secured orders from Electricity Boards, purchased raw material etc to keep things ready for production once the machineries are installed etc.. Under these circumstances Hon'ble Gujarat High Court held that business shall be deemed to be set up and expenses allowable from date when orders were secured by the taxpayer although factory has not commenced production which shall be allowable. This case is distinguishable as the assessee although secured orders for center wing boxes and empennages for C130/C130J aircraft even prior to setting up of unit at Hyderabad for manufacturing/assembling of center wing boxes and empennages for C130/C130J but the difference is that the assessee has undertaken job of getting tools and jigs which were required in its unit under implementation at Hyderabad manufactured/assembled through sub-sub contractors namely TCS etc and we have held that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee, Ms. Aarti Vissanji that these two agreements were filed before learned Assessing Officer during the course of assessment proceedings as well before learned CIT(A) and are part of the record. It is also claimed by learned counsel for assessee that these two agreements were however not filed before the tribunal when appeal of the Revenue was heard before the Bench on 10.07.2018. Thus, it is submitted that these documents are not strictly additional evidences as these documents were very much before the lower authorities during assessment as well in first appellate proceedings before learned CIT(A) and are part of the record. On strength of these two aforesaid agreements namely JV agreement dated 07.05.2010 and Tooling agreements, contentions are now being made by learned counsel for assessee before the Bench that tribunal erred in holding that toolings are required to be capitalised in the books of accounts of the assessee. It is submitted that tools are supplied free of cost as well free of rent, by overseas JV partner as part of JV agreement in discharge of its contractual obligation under JV Agreement. The said toolings are required to be installed at assessee's manufacturing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r when it held that Lockheed Martin,USA is responsible for setting up and implementing the project for assembly and manufacturing of aircraft structures at Hyderabad. 2.4 Thus prayers are made to rectify these mistakes and allow these expenses of Rs. 2,10,11,032/- as revenue expenses so far as ground number 2(a) to 2(c) raised by Revenue in its appeal 2.5 The learned DR objected to MA filed by the assessee and submitted that well reasoned order is passed by tribunal wherein correct finding of facts are recorded by tribunal. The learned DR submitted that the assessee is seeking review of order passed by tribunal under the garb of rectification application filed vide this MA which is not permissible within mandate of Section 254(2) of the 1961 Act. The learned DR would contend that tribunal has limited powers u/s 254(2) of the 1961 Act. 3. We have considered rival contentions and perused the material on record. We have observed that tribunal has passed detailed order dated 08.08.2018 while adjudicating ground number 2(a) to (c) raised by Revenue in memo of appeal filed with tribunal. The conclusion arrived at by tribunal in the said order are reproduced/extracted above in this or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r entire manufacturing and assembly of aircraft structures viz. Lockheed Martin. The assessee also cannot enter into any other activities for expansion or diversification, other than set out in JV Agreement unless consented by Lockheed Martin. The permission to use trade mark and manufacturing license was granted by Lcokheed Martin in favour of assessee. The JV agreeemnt provide that Lockheed Martin shall provide master tooling to assessee as well certain additional tooling to be fabricated by assessee company, title/ownership to the said tooling shall remain with Lockheed Martin. Thus, it can be seen that Lockheed Martin has significant role and responsibilities viz assessee company as culled out from this JV agreement but stricto sense, it is Tata's and assessee company who were responsible for implementing manufacturing and assembly unit at Hyderabad. So far as finding of the tribunal that Lockheed Martin is responsible for setting up its Hyderabad unit stand corrected as it is the TATA's and assessee company who were in stricto sense responsible for the building and construction of the JVC facility which shall be in accordance with the design and specification agreed to in writ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to be the owner of these tools and will be dealt with in its books of accounts by Lockheed Martin. The assessee was to be provided with these tools by Lockheed Martin free of cost without any rent. The Lockheed Martin in order to provide these tools to assessee vide its contractual obligation, instead purchased these tools from assessee who inturn got it fabricated from TCS, Tata Technologies Limited and TAL Manufacturing Solutions Limited. Thus, the assessee in order to get these tools manufactured granted further sub-contract to TCS,TTL and TAL. Thus, to the extent the tribunal order dated 08.08.2018 held that these tools are to be capitalised in the books of accounts of the assessee is definitely an mistake which crept in the order dated 08.08.2018 dehors JV agreement and Tooling agreement now produced before the Bench in MA proceedings and we hold that this mistake where-ever it occurs in the appellate order dated 08.08.2018 passed by tribunal stands corrected, because these tools were the property of Lockheed Martin, USA and not the assessee and accordingly shall be accounted for in the books of accounts of Lockheed Martin. 3.3 The claim of the assessee that it raised first i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dings and the said mistakes are already rectified vide this MA order, as detailed above in this MA order. The tribunal order dated 08.08.2018 duly deliberated and dealt with supply orders and employment of personnel by assessee to arrive at its decision/conclusions, which are reproduced hereunder(page 25-26 of tribunal dated 08.08.2018): "The assessee claims that it kept highly technical and supervisory staff to oversee these activities including reviewing of assembly operation sheets supplied by Lockheed Martin Aerostructure Corporation, USA but in our considered view these are normal requirements in connection with setting up of manufacturing / assembly unit at Hyderabad for manufacturing/assembly of center wing box and empennages for C130/C130J aircraft, which is highly technical and complex activity requiring highly specialised technical staff. The activities of assembly and manufacturing of center wing box and empennages for C130/C130J aircraft being highly complex, technologically sophisticated activity involving guarded technology need highly specialised, experienced and technical personnels, and the assessee cannot afford to appoint necessary staff only after the unit bec ..... X X X X Extracts X X X X X X X X Extracts X X X X
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