TMI Blog2019 (7) TMI 870X X X X Extracts X X X X X X X X Extracts X X X X ..... xtent 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. This MA is to be partly allowed so far as to correct mistake which crept in tribunal order dated 08.08.2018 which were owing to non production of JV agreement and Tooling agreement before the tribunal when the appeal was originally heard on 10.07.2018, which mistakes we dealt with as above and ordered for their correction but so far as ultimate decision/conclusions taken by tribunal vide order dated 08.08.2018 that the business of the assessee was not set up till the end of previous year and the assessee cannot be allowed deduction of ₹ 2,10,11,032/- as revenue expenses for the year under consideration ha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, aviation, homeland security and defence related technologies. The assessee entered into Joint Venture agreements with Lockheed Martin Aerostructure Corporation,USA a wholly owned subsidiary of Lockheed Martin Corporation of USA for the purpose of assembling, manufacturing and supplying of C130/C130J aircraft structural articles i.e. empennages and center wing box (finished products). The assessee is a J.V company formed by Tata Advanced Systems L ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ome 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o dispute so far as this factual matrix is concerned. The dispute arose because the assessee for its manufacturing/assembly unit which was being set up at Hyderabad for manufacturing/ assembly process for Center Wing Box and Empennages (finished products)) for C130/C130J aircrafts, required tools and jigs for this manufacturing/assembly unit which was being set up at Hyderabad. Since these tooling and jigs are required as part of the manufacturing/assembly unit being set up at Hyderabad by assessee, these toolings and jigs partake the character of capital goods. As per JV agreement between Lockheed Martin and the assessee company, tools and jigs required for production/assembly process were to be provided by Lockheed Martin Aerostructure Corporation, USA to the assessee (page 5/pb) as per clause 7 on page 4 of business plan, which business plans was submitted by the assessee before the authorities below. However, Lockheed Martin Aerostructure Corporation, USA suggested that these tools and jigs required for assembly/production process being set up at Hyderabad be built indigenously by the assessee company wherein sub-contract was awarded to the assessee company by Lockheed Martin A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re incurred, including preoperative expenses, of ₹ 150.28 lakhs as upto 31st March, 2011 was ₹ 765.26 Lakhs The construction work, including supervision of the project was outsourced. 2. Manpower: (a) Manpower recruitment started in August 2010 and as on March, 2011, Employee headcount was sixty one-majority of them having technical background / qualification . (b) Most of the employees were involved in the technical activity of review of Assembly Operation Sheets given by service providers and also detailed verification of tools provided by the suppliers. 3. Tooling: (a). Assembly process for finished products required tools and jigs. As a part of JV Agreement between Lockheed Martin and the appellant, tools /jigs required for production / assembly process were to be provided by Lockheed Martin to the appellant (Reference is drawn to Clause 7 on Page 4 of the Business Plan) [ Refer Page No. 33 of Paper Book No.I]. However, Lockheed Martin suggested to-build all the tools required for assembly / production process indigenously. Accordingly, Lockheed Martin issued Purchase Ord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a) The appellant has secured orders for supply of finished products by entering into Supply Agreement; (b) The appellant commenced following activities during the year: (i) Setting-up of the Project; (ii) Execution of PO's for Center Wing Box and Empennage Tooling, a revenue generating activity. . (iii) The employees were fully involved in detailed verification of the tools provided by the vendors. (iv) 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.; and (v) Review of Assembly Operation Sheets by the employees. Assembly Operation Sheets guides the employees for various operations involved in the assembly process and also acts as tracker for various functions involved in the process i.e. provides knowledge / technique of production. (b) Revenue expenses charged off to the Profit and Loss Account have no connection with the setting- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he one hand Lockheed Martin Aerostructure Corporation, USA was equity shareholder of assessee company infusing 26% capital and at same time was involved in setting up of manufacturing/assembly unit by the assessee for center wing box and empennages for C130/C130J aircraft and said Lockheed Martin Aerostructure Corporation, USA and/or its affiliates were also the customer for final product namely center wing box and empennages for C130/C130J aircraft manufactures/assembled by assessee. Thus, Lockheed Martin Aerostructure Corporation, USA and / or its affiliates were performing multiple roles at the same time so far as dealing with the assessee company are concerned viz. equity investors, participating in setting up of manufacturing / assembly unit for center wing box and empennages for C130/C130J aircraft for which technical knowhow was held by Lockheed Martin Aerostructure Corporation, USA and said company namely Lockheed Martin Aerostructure Corporation, USA was also buyer of the final product being center wing box and empennages for C130/C130J assembled/manufactured by the assessee in its unit at Hyderabad which was under the stage of implementation at the year end and production ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... re to be consumed/utilised by the assessee itself in its manufacturing/assembly unit being set up at Hyderabad further outsourced the said job of supplying tools and jigs to TCS, Tata Technologies Limited and TAL Manufacturing Supplies Limited for which supervision was done by the assessee under sub-contract awarded by Lockheed Martin Aerostructure Corporation, UAS for which final responsibility vested with Lockheed Martin Aerostructure Corporation, USA as main contractor/vendor while the assessee itself was responsible as subcontractor/vendor. The ultimately responsibility for complete execution of main contract remained with Lockheed Martin Aerostructure Corporation, USA w.r.t. setting up of manufacturing/assembly unit for the assessee company at Hyderabad while the assessee as sub-contractor/vendor become responsible for tools and jigs manufactured by it through TCS, TAL Manufacturing Solutions Limited and Tata Technologies Limited to the main vendor namely Lockheed Martin Aerostructure Corporation, USA. But the fact remained that these tools and jigs were to be used/consumed in the manufacturing/assembly unit being set up by the assessee at Hyderabad for manufacturing of center ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r-se to be categorised as separate business activity. 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 becomes operational as by the time unit goes into production, the assessee ought to have all specialised, trained, experience and technical staff with is ready and well versed/trained to handle actual manufacturing/assembly of center wing boxes and empennages for C130/C130 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in ITA no. 1306/Mum/2015 Ors. For AY 2012-13, vide consolidated order dated 08.02.2017. The assessee has relied upon this case and it contended that even when shopping mall was under construction, the expenses were allowed as business expenses. We are afraid that the assessee s counsel totally misconstrued the facts of that case. In that case, of which both of us were members of the Division Bench who passed the order, the taxpayer was engaged in development and sale of residential project as well construction of Mall. Since the residential project was for sale and activities started, the business was held to be set up. The Mall was being construuctd by the taxpayer for which direct costs were capitalised and indirect overheads were charged as Revenue expenses. On those factual matrix, the tribunal held that business was set up as the taxpayer was developing residential project for sale and it is not necessary that till Mall is constructed, the indirect cost representing by overheads also needed to be capitalised rather these indirect overhead costs were held to be Revenue expenses. Thus this case was decided on peculiar factual matrix prevailing on its own facts and has not re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vities should commence, then the business was deemed to be set up. It was held that with the commencement of first activity business was set up as it laid foundation for the second activity and commencement of second activity laid the foundation of third activity. But the instant case before us is distinguishable as the assessee never intended to set up business of manufacturing/assembly of tools and jigs required for setting up assessee s own unit at Hyderabad for manufacturing/assembly of center wing boxes and empennages for C130/C130J aircrafts. Even if the tools and jigs are required for the manufacturing and assembling of center wing boxes and empennages for C130/C130J aircrafts, the said activity for getting it manufactured/assembled through sub-sub contractors/vendors namely TCS etc by the assessee will not constitute setting up of a seperate business of manufacturing/assembling of tools and jigs as it is not the intentions of the assessee to set up the said business of manufacturing /assembling of tools and jigs and it happens so that the main contractor/vendor namely Lockheed Martin, USA to whom the assessee awarded contract, inter-alia for tools and jigs has sub-contracte ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raft wherein tools and jigs required for the manufacturing/assembling unit was got indigenously supplied by the assessee through sub-sub contractors namely TCS etc wherein the main contract was awarded by the assessee to Lockheed Martin, USA who subcontracted portion of the main contract towards supplying of tools and jigs for usage/consumption in its under implementation project at Hyderabad. This case thus is distinguishable as it was never the intention of the assessee to set up business of manufacturing of tools/jigs to be supplied for in house consumption in its under implementation unit for manufacturing/assembly of center wing boxes and empennages for C130/C130J aircrafts and the case relied upon by learned counsel for the assessee is not relevant for deciding dispute between rival parties Thus, based on our detailed reasoning and discussions as set out above, we do not find any merits in the contentions of the assessee and thus, the appellate order of learned CIT(A) is set aside and additions as were made by the AO are sustained with the conclusions and reasoning as are arrived at by us as above. The ground no 2(a) to 2(c) are allowed with above conclusio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raft structures. The agreement further provides that Lockheed Martin is procuring from assessee the fabrication of certain tooling for manufacturing of empennages and center wing beam structures for C-130 aircraft, instead of supplying it directly to assessee to fulfil its JV obligation under JV agreement. These tooling are loaned by Lockheed Martin to assessee without any rent and title of these toolings shall always remain with Lockheed Martin,USA. No lien shall be created by assessee on these toolings and these tools shall be returned to Lockheed Martin by assessee as and when directed by Lockheed Martin. The learned counsel for assessee submitted that it never intended to set up business of manufacturing of tools. 2.2 The learned Senior counsel for the assessee has stated that second mistake that crept in tribunal s order dated 08.08.2018 is as to the finding by tribunal as recorded in its order that overseas JV company is responsible for implementing the project. Our attention was drawn to JV agreement dated 07.05.2010, clause 13.5 which says that TATA and JVC i.e. assessee company shall be responsible for building and construction of JVC facility i.e. manufac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eements namely JV agreement dated 07.05.2010 and Tooling agreement were not earlier filed when the appeal was heard on 10.07.2018 but are now filed by assessee in this MA proceedings. These agreements are filed vide paper book /page 107208 which are placed in MA file. It is admitted position that productions has not commenced in its manufacturing and assembling unit which was being set up by assessee at Hyderabad, till the end of the previous yea relevant to impugned assessment year. The assessee has filed JV agreement dated 07.05.2010 between TATA Advanced Systems Limited, India and Lockheed Martin Aeroframe Corporation, USA. We have carefully perused the aforesaid JV agreement and tooling agreement. The said JV agreement dated 07.05.2010 envisages setting up of JV company in India, which was set up in India viz. assessee company, in pursuance to JV agreement. It is also mentioned in this agreement that there are some offset obligations on Lockheed Martin and in discharge of the same, exports made by assessee company shall be adjusted. The said Lockheed Martin is investing its capital in assessee company to the extent of 26% which can be later increased to 49% as and when law perm ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... significant role to play in assessee s business activities viz. Lockheed Martin, USA is a financial contributor to assessee holding 26% equity with rights to enhance it further to 49% whenever law permits, provision of technical assistance, trade mark, licenses and tools to the assessee. The said Lockheed Martin also have participation in the management through presence of its nominees on Board of Directors of assessee company. It is also a matter of record that the said Lockheed Martin is the sole buyer of assessee company s final products viz. aircraft structures. The assessee cannot diversify its business activities beyond JV agreement unless permitted by Lockheed Martin. The export of final products viz. aircraft structural to Lockheed Martin, USA shall be adjusted by Lockheed Martin against its offset obligation. 3.2 The tooling which are to be supplied by Lockheed Martin in discharge of its JV obligation was under instruction from Lockheed Martin is to be fabricated in India by assessee on behalf of Lockheed Martin, for setting up assessee s manufacturing and assembling unit at Hyderabad. These toolings will be provided free of cost as well free of rent by Lo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vity got completed by March 2013, cannot be the basis for holding that its business was set up in previous year ended 31.03.2011, as the manufacturing and assembling unit for aircraft structures at Hyderabad was not set up by end of previous year viz. 31.03.2011 and secondly it was held by tribunal vide order dated 08.08.2018 that tooling cannot be the business of the assessee as these tooling s are fabricated by assessee on behalf of Lockheed Martin who was obligated to provide tooling to assessee vide JV agreement, which toolings are to be installed at assessee s manufacturing and assembling unit at Hyderabad and the said tooling are required to commence assessee s business of manufacturing and assembling of aircraft structures, as is emanating from clauses of tooling agreement. The responsibility for supply of tooling is that of Lockheed Martin under JV agreement, to be installed at assessee s manufacturing and assembly unit at Hyderabad. Instead of supplying tooling directly, Lockheed Martin issued Purchase orders in favour of assessee for getting it fabricated locally in India, which was undertaken by assessee through TAL, TTL and TCS by sub-contracting job of fabricating tool ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to production, the assessee ought to have all specialised, trained, experience and technical staff with it ready and well versed/trained to handle actual manufacturing/assembly of center wing boxes and empennages for C130/C130J aircrafts. The appointing of technical and specialised staff prior to unit being installed and ready to commence production will not make the same as revenue expenses even though these technical and specialised staff were reviewing the assembly operation sheets for manufacturing/assembly of center wing boxes and empennages for C130/C130J aircraft for which order was already received by the assessee from Lockheed Martin Aerostructure Corporation, USA, as all these are preoperative expenses which needed to be capitalised as part of the cost of the project because there was no possibility of commencing production/manufacturing/assembly unless the unit is ready to commence production which in the instant case even by the year end unit was neither installed nor trial runs commenced . Thus, in our considered view, this MA is to be partly allowed so far as to correct mistake which crept in tribunal order dated 08.08.2018 which were owing to non pr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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