Judgment:
1. These three appeals filed by the assessee arc against the separate orders of the CIT(A) VII, Mumbai all dated 29.12.2000 relating to Assessment Years 1996-97 to 1998-99. All the three appeals involving the same issue were heard together and are being disposed off by this consolidated order for the sake of convenience. The assessment order and the appellate order for Assessment Year 1997-98 dealt with the issue at length and accordingly, the said orders arc referred for deciding the issue 2. The assessee company had raised several grounds of appeal and during the course of appellate proceedings before the Tribunal had filed concise grounds of appeal. The assessee during the course of hearing had raised concise grounds of appeal, which are as under: 1. The CIT (A) erred in upholding the action of the A.O. of restricting the deduction to which the Appellant was entitled under Section 80-IA of the I.T. Act to the sum of Rs,6. 76.642 - as against the sum of Rs. 47.66.512 - claimed by the Appellant.
2. The CIT (A) 's order of confirming the action of the A.O. of restricting the Appellant's claim for a deduction under Section 80-1A of the Act to a sum of Rs. 6.76.642 - is vitiated inter-alia by: (iv) The CIT (A) 's wrongly attributing non-existent motives to the Appellant 3. The CIT (A) ought to have held that no interest was chargeable on the Appellant under Section 234B or Section 234C of the Act and ought to have cancelled the same.
4. The CIT (A) erred in holding that the issue of chargeability of interest under Section 234B and 234C of the Act was not appealable and erred in not admitting the Appellant's Grounds of Appeal challenging the legality of the levy of such interest.
5. The CIT (A) ought to have cancelled the levy, upon the Appellant, of interest under Sections 234B and 234C of the Act.
3. During the Assessment Year 1996-97 the assesse had claimed the deduction Under Section 80IA of the Income tax Act at Rs. 47,66,512/- and the Assessing Officer had allowed the sum at Rs. 6,76,642/-which was confirmed by the CIT(A). Similarly the assessee had claimed deduction Under Section 80IA of the Income tax Act at Rs. 36,83,210/- for Assessment Year 1997-98 and Rs. 39,21,458/- for Assessment Year 1998-99 and against which the deduction allowed to the assessee were Rs. 6,91,676/- and Rs. 8,92,897/- respectively for the said assessment years. The first and second grounds of appeal raised by the assessee are against the restrictions on deduction claimed by the assessee Under Section 80IA of the Income tax Act. The second issue raised by the assessee is against the chargeability of interest Under Section 234B and 234C of the Income tax Act 4. Shri Farrokh Irani, learned Counsel appeared for the assessee and Shri Shantam Bose, Departmental Representative appeared for the revenue and put forward their rival submissions.
5. The facts of the case are that, the assesses company is engaged in the manufacturing of cooling towers. During the year under consideration the assessee company had claimed deduction Under Section 80IA of the Income tax Act on the total turnover of the manufacturing items during the year including sale of bought out components, installation charges, forwarding charges and service charges. The total turnover of the assessee for Assessment Year 1997-98 was Rs. 5,19,45,440/- (excluding sales tax) and consisting of the under mentioned items:________________________________________________________________________________ Cooling Towers Others (Rs) Grand total (Rs)________________________________________________________________________________ Round Bottle(Rs) C.M. Type(Rs)________________________________________________________________________________Manufactured Items 30,87,365 1,00,04,249 __ 1,30,91,614________________________________________________________________________________Bought-out components 87,14,988 2,80,64,464 __ 3,67,79,452________________________________________________________________________________Installation Charges __ __ 13,61,503 13,61,503________________________________________________________________________________Forwarding Charges __ __ 5,31,400 5,31,400________________________________________________________________________________Service Charges __ __ 1,81,471 1,81,471________________________________________________________________________________ 1,18,02,353 3,80,68,713 20,74,374 5,19,45,440 6. The assessee had one unit at Odhav for manufacturing of certain compoents required for "round bottle cooling towers". The said unit was closed down during 1992 and the plant and machinery including the moulds of the said unit were shifted to the new unit at Chhatral The assessee company in order to revamp its business activities entered into collaboration agreement with Netherlands Company and obtained technical Know how for making "cross flow" and "counter flow" cooling towers and thereby investing an amount of Rs. 19.32 lakhs in technical know-how. In order to set up the new manufacturing unit at Chhatral the assessee company acquired lease hold land for Rs 6.39 lakhs and constructed factory building worth Rs. 46.79 lakhs and made an addition of Rs. 47.67 lakhs in the plant and machinery and Rs. 19.32 lakhs for acquiring the technical know how during the financial year 1991-92. The assessee company started the business of supplying round bottle, cross flow and counter flow cooling towers. The plant and machinery and moulds from the Odhav unit were transferred to the new unit at Chhatral and as per the claim of the assessee the total extent of such items transferred was 11.60% of the total investment in new plant in terms of cost and 0.63% in terms of WDV. Most of the employees of the old unit were also transferred to the new unit and certain new employees were also recruited.
7. The modus operandi of the assessee company in carrying out of business is that on receipt of enquiries from the clients, it designs the cooling tower as per requirement of the customers and the quotations are forwarded to the clients alongwith detailed analysis of the said towers. On receipt of the orders from the customers the assessee company manufactures the basic component required for the said cooling tower in its unit and certain items/components like electric motors, fans etc. as per specific requirements of cooling towers are purchased from the market As claimed by the assessee, these items are tested and checked in the factory of the assessee company. The said components i.e. manufactured and bought out to the site of the customers and two separate invoices arc prepared, one for in house manufactured components on which excise duty is paid and another for the bought out components and accordingly, the sales are shown under the head manufactured items and bought out components. The assembly of the unit and erection of the same is carried out at the customer's site and the assessee in addition raises the bill for installation charges, forwarding charges and service charges which are further booked under the respective heads in the books of account. The cooling towers i.e.
Round Bottle (RB), Cross Flow (XE) and Counter Flow (CM) or CM type (rectangle) can be assembled at the factory of the assessee but the same are assembled at the installation site as it is vulnerable to transit. The said tower is physically fixed to platform or building by bolts and the same can be easily removed and lifted and transported to a fresh site for fresh use.
8. The Assessing Officer while completing the assessment was of the view that the new unit set up by the assessee company manufactured the items required for XE and CM type cooling towers only and the machinery which had been shifted from the old unit manufactured the parts required for round bottle cooling towers. He was of the view that the moulds required for manufacturing the round bottle and CM/XE type cooling towers are independent and totally different but the assessee company started manufacturing both under one roof for the sake of convenience As the old equipment was acquired in the year 1985 and the new equipment was purchased in 1992, the Assessing Officer held that the items, machinery shifted from the old unit are not eligible for deduction Under Section 801A of the Act as according to him by shifting the old equipment to the new place and keeping it alongwith other equipment did not result in set up of new unit as far as old equipment is concerned. The assessee had already availed of all benefits / deductions while manufacturing items at old unit. Accordingly the profits arising from the sale of items manufactured by the assessee for round bottle cooling towers were held to be not eligible for deduction Under Section 80IA of the Act. In addition the Assessing Officer was of the view that bought out components purchased by the assessee from the market were never integrated at the assesee's factory into the cooling tower and tested. The Assessing Officer accordingly was of the view that the assessee was not but manufacturing only certain parts required for cooling towers and assembling the cooling tower at the clients place as per the requirement of the clients. Accordingly, the Assessing Officer held that the profit earned by the assessee on the bought out components did not have any nexus with the manufacturing activity carried out by the assessee in its factory and the said profits cannot be treated as profits of industrial undertaking for the purpose of computing deduction Under Section 80IA of the Act. In respect of the forwarding charges, installation charges and service charges the Assessing Officer noted that the assessee had incurred expenditure on account of transport, labour charges both for loading / unloading and assembling, which were not adjusted against the receipts. The Assessing Officer was of the view that all these charges do not have any connection with the manufacturing activity of the assessee and accordingly, the profit earned by the assessee on the said charges was not eligible for deduction Under Section 80IA of the Act.
9. The CIT(A) after analyzing the contentions of the learned Authorised Representative was of the view that the assessee company had shifted the equipment from the old unit at Odhav to the new unit at Chhatral_ and started producing the round bottle cooling towers. He was of the view that the unit producing round bottle cooling towers do not get integrated with the unit producing CM/XE type cooling towers and in any case the technical know how or the plant and machinery was not acquired for the purpose of manufacturing any items for round bottle cooling towers. The unit in whole i.e. lock, stock and barrel was shifted from the old unit at Odhav which was in existence for the past 8 years for which the assessee had already availed the benefit of deduction Under Section 801A of the Act. Accordingly, the CIT(A) observed that the assessee was not entitled to any claim of deduction Under Section 80IA of the Act in respect of items manufactured for the round bottle cooling towers. Applying the ratio of the decision of the Hon'ble Apex Court in the case of Textiles Machinery Corporation Ltd. reported in 107 ITR. 195, wherein it has been held that deduction Under Section 80IA of the Act can be allowed only when new integrated unit comes into being and in so far as the unit producing round bottle cooling tower was concerned, it is separate existing unit under the same roof. There is no question of allowing the benefit of deduction under Section 80-IA of the Act as the said unit has been in existence for more than 8 years. Only in respect of the unit producing the CM/XE type: of cooling towers the assessee is entitled to the benefit of deduction Under Section 80IA of the Act which has been allowed by the Assessing Officer. The CIT(A) further was of the view that the assessee company was not entitled to the claim of the deduction Under Section 80IA of the Act, in view of the Section 80IA(2)(ii) which provided that in order to claim the deduction the industrial undertaking should not be formed by the transfer of machinery or plant previously used for any purpose to a new business. The explanation 2 to Section 80-IA (2) of the Act under which the assessee company had taken the shelter is not applicable to the facts of the present case as the cost of the old equipment acquired in 1985 cannot be compared to the cost of equipment acquired in 1992, due to inflation.
10. The CIT(A) also confirmed the action of the Assessing Officer in denying the benefit of deduction Under Section 80IA of the Act, on the bought out components as according to him they have been straight away purchased from the market and have not been tested in the factory as the assessee company do not have any testing machines apparatus in the factory. Applying the ratio of the Hon'ble Apex Court in the case of Sterling Foods Ltd. reported in 237 ITR 579 the CIT(A) confirmed the denial of deduction under Section 80IA of the Act in respect of Installation, forwarding and service charges as he was of the view that these receipts are not derived from "the business of the industrial undertaking". Reliance was also placed on the decision of the Hon'ble Jurisdictional High Court in the case of K.K.Doshi reported in 245 ITR 849 by the CIT (A). The assessee is aggrieved by the order of the CIT(A) and hence this appeal 11. The learned Authorised Representative for the assessee submitted that the issues for consideration before us were as under.- a) Allowability of deduction Under Section 80IA on the manufactured item for round bottle cooling b) Allowability of deduction Under Section 80IA of the Act on the bought out Components used for the manufecturing of round bottle and CM/XE type cooling towers.
c) Allowability of deduction Under Section 80IA on the installation charge, for charges and service charges received from the clients to whom the said round bottle and CM/XE type cooling towers have been sold.The Learned AR for the assessee brought to our notice that looking at the voluminous nature of the cooling tower, assembly and erection of the said towers are carried out at the site of the customers. The cooling towers are manufactured as per the specifie requirement of the clients who attach this as ancillary to their plants. The assessee company is manufacturing the said cooling towers as per the specific and direct requirement of the clients. In addition to the components manufactured at the unit of the assessee company, certain components were also purchased from the market which are tested and also the compatibility is checked with the manufactured items before the said components are transferred to the customer's site. The learned Authorised Representative further submitted that the observations of the CIT(A) in this respect are wrong inter alia by: (iv) The CIT (A) s wrongly attributing non-existent motives to the Appellant.
12. The Learned AR for the assessee relied on various judicial pronouncements and orders of the Tribunal which are being dealt with hereinunder. The learned DR for the revenue placing reliance on the order of Assessing Officer and CIT (A) argued that in order to claim the deduction under Section 80-IA of the I.T.Act, the situs of assembly is important. In the facts of the present case, the manufactured and bought out components are assembled at clients premises. The learned DR further submitted that the said bought out components are not tested in the factory premises of the assessee and as such the assessee is not entitled to the claim of deduction under Section 80-IA of the I.T. Act.
Reliance was placed on the decision of Degremont India Ltd., v. DCIT 59 ITD 423 (Del.), CIT v. Minocha Brothers Pvt. Ltd. 160 ITR 134 (Del.) & (IT v. Shah Construction Co. Ltd. 142 ITR 695 (Bom.). The learned DR further stated that the assessee has not paid any excise duty on the bought out components which further proves the claim of the assessee.
The learned AR in reply submitted that the observations of CIT (A) arc wrong as the unit of the assessee is an integrated unit and the bought out components are tested in the factory premises. Reliance was placed in the case of Indocan Engg. Systems (P) Ltd., v. DCIT 60 ITD 649) and Degremont India Ltd. v. DCIT (supra) 13. With regard to the ground No. 2 in respect of charging of interest under Section 234B or 234C of the I.T.Aact, the Learned AR for the assessee fairly conceded that the same is consequential, in view of the Special Bench decision of Delhi Tribunal in Motorola Inc v. DCIT 14. We have heard the rival submissions and perused the records.
Various judicial pronouncements and orders of the Tribunal referred to by the learned AR and learned DR have also been considered. The assessee is in the business of manufacture of cooling towers for the past many years. Initially, the assessee was manufacturing round bottle cooling towers for which the factory was at Odhav. During the year ending March, 1992, the total turnover of the assessee was Rs 232.54 Crores wherein as per the significant accounting policies annexted at page 23 to 26 of the paper book, the assessee had manufactured 353 units of cooling towers spares during the Assessment Year 1992-93. In the year ending March, 1992, the assessee company had entered into a technical collaboration agreement with geakuhltur mbau ernest kirchner, gmb H Germany for the induction of computerized technology to design the Cooling towers. The Managing Director of the assessee company in his Directors Report at pages 2 to 4 of the paper book have submitted that the know-how had been successfully transferred during the Financial Year 1991-92 and the manufacturing facilities at GIDC, Chhatral were in the process of being set up with commercial production expected to commence with effect from 01.08.1992. During the year ending March, 1992, the assessee had shown gross value of plant and machinery, valued at Rs. 2,29,066/- in its list of assets for the year ending 31.03.1992 and had paid technical know-how fee of Rs. 19,99,050/- for the year ending 31.03.1993, the Managing Director of the assessee company in its Director's Report at page No. 29 of the paper book, had admitted that the company's expansion programme for the manufacture of CM and XE series cooling towers as per GEA Polacels design had been completed It is further submitted by the Managing Director of the assessee company that the first cooling tower was delivered to M/s.Dupell Laboratory, Aurangabad in January, 1993. During the year ending March, 1993, the assessee had shown total turnover of Rs. 350.11 Lakhs which included sale of 277 sets of cooling towers as incorporated in the significant accounting policies at pages 51 to 55 of the paper book. During the year ending March, 1993, the assessee had shown addition to leasehold land of Rs. 18,29,087/- building account Rs. 46,78,712/- Plant and machinery Rs. 46,66,855/- office equipment Rs. 1,91,587/- and vehicles Rs. 2,88,715/-, as per list of assets at page No. 42 of the paper book. The first year of operation of the new plant was Assessment Year 1993-94. During the year ending March, 1994 the assessee had shown turnover of Rs 329.82 Lakhs which in-turn includes sale of 423 cooling tower sets along with sale of spares of Rs. 31,74,331/-, Services of Rs. 10,85,883/- and sale of trading items and components at Rs. NIL. The details of which are incorporated in the significant accounting policies at pages 82 to 84 of the paper book.
During the year ending March, 1994, there is marginal addition of plant and machinery, office equipment, furniture and fixture and addition of Rs. 2,22,616/-, in the vehicles account as reflected in the schedule of assets at page 71 of the paper book. In the year ending 31 03.1995, the total turnover was Rs. 445.76 Lakhs, which includes sale of 534 sets of cooling towers, sale of spares of Rs. 35,77,990/- and service charges of Rs. 14,3,878/-. During the year ending 31.03.1995, the increase in building account is Rs. 9,24,883/- and the deduction / adjustment in the leasehold land is Rs. 11,89,475/ thereby balance of value of Rs 6,66,612/- against leasehold land. The said details are incorporated in the schedule of assets placed at page 99 of the paper book. In the year ending 31.03.1996, the total turnover of the assessee was Rs. 626.01 Lakhs, which includes sales of 650 sets of cooling towers and Rs. 48,22,273/- on account of sale of spares and Rs. 22,28,149/- on account of service charges. During the year ending March, 1996, the assessee has sold the land at Odhav, where the assessee was initially manufacturing the round bottle type of cooling towers. During the year ending 31.03.1996, there was an increase in building account of Rs. 6,46,18/- and marginal addition in plant and machinery, office equipment and furniture & fixtures, along with the addition of Rs. 17,56,581/- in the vehicles account. In the year ending 31.03.1997, the total turnover was Rs 519 45 Lakhs which included the sale of 550 sets of components of cooling towers Rs. 47,59,022/- on account of sale of spares and Rs. 20,74,374/- on account of service charges, as per the details furnished in significant accounting policy attached at pages 163 to 168 of the paper book The Managing Director of the assessee company in his Director's Report annexed at page No 141 to 142 of the paper book had admitted that there was a phase of economic slow down and accordingly as far as the sale of components of cooling towers are concerned there was very stiff competition liven our major competitors had to offer heavy discount' In the year ending 31.03.1998, the assessee company had shown turnover of Rs. 590.35 Lakhs which included sale of 618 sets of 1-RP components cooling towers, Rs. 46,31,574/- on account of sale of spares and Rs. 23,56,642/- on account of sale of services as incorporated in significant accounting policies placed at pages 194 to 197 of the paper book The Managing Director in his Director's Report at page 170 to 171 of the paper book admitted that there was stiff compettion in sale of components of cooling towers' During the preceding year ending March, 1997 and there was marginal addition in the office equipment and vehicles account but during the year ending March, 1998, the assessee has shown addition to building account of Rs 16,48,750/- and addition of Rs. 17,655/- office equipment account and Rs. 5,43,975/- furniture and fixtures as incorporated in the schedule of assets at page 183 of the paper book.
15. The first year of start of operations was Assessment Year 1993-94 The assessee is in appeal before us relating to Assessment Years 1996-97 to 1998-99. It is the claim of the assessee that the appeal for the Assessment Year 1997-98 was decided first and the appeals for the Assessment Year 1991-94. 1994-95 & 1995-96 arc pending for disposal wherein the assessee has made a claim for deduction under Section 80-IA of the I.T. Act. The assessee has filed on record the copies of the orders of CIT (A) relating to Assessment Years 1993-94 & 1994-95, wherein the claim of the issue with regard to deduction under Section 80-1A of the IT Act has been rejected because of the adjudication in appellate proceedings for the Assessment Year 1997-98 16. The assessee entered into a collaboration agreement with GEA Germany for the acquisition of technical know-how for engineering and making wet cooling towers. Necessary permission was sought from the Government of India, Ministry of Industry, Department of Industrial Development and the License agreement dated 08.03.1991 was entered into between the parties in March, 1991, copies of which is placed at pages 210 to 225 of the paper book. Thereafter the assessee entered into supplementary license agreement dated 19.11.1991 and 30.03.1992. The permission was granted to the assessee by Ministry of Industry, Government of India to enter into the technical collaboration for the manufacture of cooling towers. The assessee company in collaboration with GEA Polacel started manufacturing the cooling towers in counter flow and cross flow designs which in-turn were designed and engineered on computer programs from GEA Germany, who also guarantee the performance. The assessee company is manufacturing three types of cooling towers; a) XE series - Cross flow type , b) CM series -counter flow types and c) RB series - Round bottle series, as per the brochure of the assessee company, copy of which is placed at pages 226 to 229 of the paper book. The XE series and CM series are manufactured in technical collaboration with GEA Polacel as mentioned at pages 227 to 228 of the brochure of the assessee company. The RB series are manufactured by the assessee company and are called the Mihir ERP towers.
17. The perusal of the details reflect that uptil October, 1992, the assessee was enagaged in manufacturing of one type of cooling towers i.e., round bottle cooling towers, in its unit situated at Odhav. The assessee entered into collaboration agreement with GEA Polacel wherein the technical know-how was obtained for the manufacture of cross flow and counter flow cooling towers. In order to expand its operations, the assessee acquired leasehold land for Rs 6.39 Lakhs at Chattral and constructed factory building investing thereon Rs. 46.79 Lakhs. The assessee incurred an expenditure of Rs. 19.90 Lakhs on the acquisition of know-how. The assessee company further claims to have invested Rs. 47.67 Lakhs in the purchase of plant and machinery.
18. On perusal of the details of addition to plant and machinery, the Assessing Officer observed at page 12 of his order, the assessee company made an investment of Rs. 17.21 Lakhs in moulds, Rs. 1.50 Lakhs on plant and machinery, Rs. 1.06 Lakhs on electric installations and the balance included in Rs. 47.67 Lakhs was on account of an addition by way of new vehicles, computers, air-conditioners, office equipment etc. The assessee also shifted all its moulds and machineries from the old unit at Odhav, which were required for manufacturing the items, components required for assembling the round bottle cooling towers. The aim of the assessee was to manufacture both the round bottle cooling towers and CM/XE type cooling towers under one roof The extent of value of plant and machinery transferred from Odhav to Chattral amounted to 11.60% of the total new plant in terms of cost and 0.63% in terms of WDV as claimed by assessee in response to queries raised by the Assessing Officer The assessce further claims that most of the employees of Odhav unit were transferred to the new unit and certain new employees were also recorded The assessee company sold the land at Odhav in Assessment Year 1996-97 19. The modus operandi of the assessee company for the conduct of its business of supplying round bottle and counter flow/cross flow cooling towers is that on receipt of enquiries from the clients it designs the cooling towers required by the customers and submit quotations based on detailed analysis. On receipt of orders from the customers the assessee manufactures the basic components in its factory and purchase various items / components like electrical motors, fans etc from the market as per the specific requirements of the cooling towers. The assessee claims to have tested and checked the items so purchased from the market in the factory premises for their static plans, thickness, rotation etc. All the components i.e., manufactured and bought out are transported to the customers site for which two separate invoices are prepared; i) for in-house manufactured components and ii) another for bought out components. The assessee prepares two separate vouchers as excise duty is leviable on the manufactured items and no excise duty is leviable on bought out components. The cooling towers is assembled and erected at the site of the customer. The assessee charges erection charges, service charges and forwarding charges for the services undertaken by him in connection with the transportation and erection of the cooling towers. The assessee has claimed deduction under Section 80-1A of the I.T.Act on the said cooling towers, some components for which are manufactured in the factory unit of the assessee company and the cooling tower is assembled and erected at the customers site along with the bought out components used for the purpose.
20. The process of manufacturing carried within the factory of the assessee company involves process of laying of fibre glass on the moulds and impregnation it with polyester resin by means of brush / spray gues. The desired thickness is built by applying the various layers of fibre material. The main items required for manufacturing the components are moulds. The assessee while establishing its unit had invested a sum of Rs 17.21 Lakhs in the purchase of moulds and Rs. 1,50,033/- in the purchase of new plant and machinery which consisted of an compressor, welding machine and separate gain etc. In addition, the moulds and plant and machinery at Odhav unit were shifted to Chattral unit by the assessee company.
21. The manufacturing process of cross flow and counter flow type of cooling towers are wet type of cooling towers manufactured in technical collaboration with GEA Polacel. The import of know-how and the establishment of the new unit was technically for the production of the XE series and CM series of cooling towers which as claimed by the assessee company are being manufactured in technical collaboration with GEA Polacel, whereas the round bottle cooling towers arc being manufactured independent of the collaboration with GEA Polacel thereby using its old plant and machinery and moulds shifted from Odhav unit.
The manufacturing process of components for round bottle cooling towers and counter flow / cross flow cooling towers are distinct and independent as the items manufactured by each type go to assemble different types of cooling towers Same is colloborated by the fact that the assessee has entered into a collaboration agreement with GEA Polacel for the manufacture of cross flow and counter flow type of cooling towers. The technical know-how has been obtained for the purpose of manufacture of components of cross flow and counter flow type of cooling towers for the purpose of which GEA Polacel stands guarantee. The assessee in order to consolidate its manufacturing activities under one roof had transferred the unit at Odhav manufacturing round bottle cooling towers in entirety to Chattral unit.
The manufacturing of components for round bottle cooling towers is an independent process which is not part and parcel of the collaboration with GEA Polacel. The assessee has already availed benefits under Section 80-IA of the IT Act in respect of its unit manufacturing round bottle cooling towers and there, is no merit in its claim for claiming benefit of deduction under Section 80-IA of the Act in respect of components manufactured for round bottle cooling towers. The perusal of the facts of the case clearly reveal that the assessee has established a new unit for the manufacturing of components of XE series and CM series of cooling towerers in collaboration with GHA Polacel, which is an independent unit. In respect of the manufacturing activities connected with components of RB series of cooling Towers, the moulds and plant and machinery initially utilized for the purpose have been shifted from Odhav unit to Chattral unit for the purpose of better control and management. The assessee is entitled to the claim of deduction under Section 80-IA of the Act in respect of components manufactured in respect of XE series and CM series of cooling towers.
The assessee is not entitled to the benefit of deduction under Section 80-IA of the Act in respect of manufacture of components of RB series of cooling towers. The contention of the assessee is that it had shifted only 11% of total value of plant and machinery from old unit to be part of the new unit has no relevance in view of our finding that the manufacture of components for RB series is independent of manufacture of components for XE and CM series In the facts and circumstances of the case, we confirm the order of Assessing Officer and (IT (A) in denial of deduction under Section 80-IA of the Act in respect of components manufactured for Round Bottle (RB Series) Cooling Towers.
22. The second issue for our consideration is whether the assessee is entitled to the deduction : under Section 80-IA of the I.T .Act on the profits on bought out components used for the manufacturing of round bottle and XE and CM series of cooling series. The manufacturing process of the assessee company is limited to the production of certain components required to be utilized for the erection of cooling towers.
The assessee purchases certain items from the market, which in-turn are used for the manufacture of the cooling towers. The perusal of the purchase orders placed by different customers, copies of which have been filed on record revealed that the assessee was entrusted with the job of supply of cooling tower in its entirety which include the components manufactured in the factory premises of the assessee and also certain other items bought directly from the market to be utilized for the manufacture of the cooling towers in entirely Both the items, i.e., the manufactured components and bought out items were then carried over to the premises of the customers wherein the cooling tower was erected as per the requirements of the customers. The said exercise was undertaken by the assessee company at the site of the client because of the voluminous nature of the cooling tower manufactured by the assessee.
23. The deduction under Section 80-IA of the Act is restricted to the Profits and Gains derived from the Business of an Industrial undertaking being an eligible business, subject to conditions enumerated in Sub-section (2) of Section 80-IA of the Act. The Clause (iii) to Section 80-IA (2) of the Act provides that for the eligibility of deduction, the Industrial Undertaking should manufacture or produce any article or thing other than those specified in Eleventh Schedule.
The deduction under Section 80-IA of the Act is limited to the items manufactured or produced by the assessee. The word manufacturing or production is not defined in the Act. The distinction of the word manufacturing or 'production' was clarified by Hon'ble Supreme Court in N.C. Budharaj & Co. 204 ITR 412 wherein it has been held as under: The word 'production' has a wider connotation than the word 'manufacture' While every manufacture can be characterized as production, every production need not amount to manufacture. The test evolved for determining whether manufacture can be said to have been taken place is, whether the commodity which is subjected to the process of manufacturing can no longer be regarded as the original commodity but is recognized in the trade as a new and distinct commodity.
The word 'production' or 'produce' when used in juxtaposition with the word 'manufacture ' lakes in bringing into existence new goods by a process which may or may not amount to manufacture. It also takes in all the by products, intermediate products and residual products which emerge in the course of manufacture of goods.
24. Further it was held by the Hon'ble Bombay High Court in CIT v. Tata Locmotive & Eve & Engg. Co. Ltd. 68 ITR 325, wherein it has been held as under: The word 'manufacture' has a wider and also a narrower connotation.
In the wider sense it simply means to make, or fabricate or bring into existence an article or a product either by physical labour or by power, and the word 'manufacturer' in ordinary parlance would mean a person who makes, fabricates or brings into existence a product or an article by physical labour or power. The other shade of meaning, which is the narrower meaning, implies transforming raw materials into a commercial commodity or a finished product which has an entity by itself but this does not necessarily mean that the materials with which the commodity is so manufactured must lose their identity. Thus, both the words 'manufacture' and 'produce' apply to the bringing into existence of something which is different from its components. Whether one takes into account the wider or narrower meaning of the word 'manufacture ', assembling of automotive bus or truck chasis from imported parts in a 'knocked down' condition, could give rise to an article which is totally different from the parts and could amount to manufacture. This is so even though the component parts from which the automotive chasis is made, retain their individual identity in the whole article which is thus manufactured or produced.
25. The requirement of law is manufacturing but the whole process may not be carried out the assessee himself. The Chandigarh Bench of Tribunal in the case of Sond Rharat Pedals (India) v. Income Fax Officer 84 ITD 89 had held as under: It is not necessary that the assessee should carry out all the manufacturing operations itself in order to be entitled to benefit of deduction under Section 80-I. Such operations can be got done from outside agencies on payment of labour service charges. In fact certificate issued by the Punjab Government showed that the assessee was registered as a small scale industrial unit and the trading account showed the assessee's safes of Rs. 45.98 lakhs for the year under consideration. Since the assessee was engaged in the business of manufacturing cycle pedals, if would be entitled to deduction under Section 80-I even though part of such operations was got done from outsiders. Thus, the assessee was engaged in the business of manufacturing bicycle pedals and, therefore, was an industrial undertaking entitled to deduction under Section 80-1.Jackson Engineers (P) Ltd v. ITO From the perusal of pictures given by the assessee in respect of diesel generateor sets assembled or manufactured by the assessee it was clear that the same was named as 'Jackson'. The said engines were required by large industrial house for meeting their power requirements. The logo which was placed mainly on the engine was 'Jackson' and the same were made in various kinds and ranges in 1000KVA. There was no controversy about the fact that there were as many components of the said machine. The perusal of list of salaries and workers also showed that the assessee was using different components which might not be technically speaking, raw material, but something between raw material and generating set. There was no controversy about the fact that the assessee purchases its alternators and engines separately from lead manufacturers. What the assessee assembled and manufactured through assembling was not the same name which was assigned to the parts. The engine made by the assessee was known as diesel generating set. With this process in view and there being a separate name in the market for what the assessee made the assessee could not be treated as non industrial undertaking. Thus the order of the Commissioner (Appeals) was not justified in treating the assessee as the Industrial undertaking.
27. The issue of purchasing different components, different equipments and spare parts from various concerns and their assembly, fabrication and erection into plant known as ETP was considered at length by Delhi Bench of Tribunal in Degremont India Ltd v. DCIT 59 ITD 423 and after deliberation at length on the facts, decision of Apex Court in N.C.Budharaja & Co. 204 ITR 412 and various other judicial pronouncements of various courts, it was held that the assessee was covered within the definition of manufacture. The Delhi Bench of Tribunal in Degremont India Ltd. v. DC IT (supra) had held as under: It is apparent from a plain reading of the judgment of (he Supreme Court in N.C. Budharaja & Co.'s case (Supra) that the various finding given related solely and exclusively to concerns engaged in the business of construction of dams and civil works. There was not a single word or whisper in the said judgment by which it could be inferred that an assessee engaged in the activities of designing, fabricating, erecting, supplying, installation and commissioning of a plant like the one supplied by the assessee could be covered by the aforesaid judgment. It is well settled law that the judgment in each case has to be seen in the light of the facts of that case. A decision is to be understood in the context of the facts in which the decision is rendered. A case is precedent for what it explicitly decides and nothing more in the conditions of people, even the words occurring in a statute are required to he interpreted differently keeping in min the context in which such expressions have been used in the relevant provisions of law. Therefore, the aforesaid judgment did not in any manner support the revenue's contention. The provisions of Section 80-I are intended to provide an incentive for investment in certain desired sectors and promote industrialization in developing countries which has adopted the policy of liberalization.
In the instant case, the assessee was purchasing different components, different equipments and spare parts from various other parties and were assembling those components, equipments and accessories and thereby they were preparing fabricating and erecting a plant which was known as ETP. The ultimate end product which was prepared as a result of assembling of various components with the constant application of technical know-how was the ETP The ETP was obviously distinct and different plant than the various components, equipments, purchased or got manufactured according to the tailor made requirement from the different suppliers. The activities carried out by the assessee were, therefore, clearly covered within the definition of manufacture of an article or thing.
The assessee had undertaken to design, engineer, manufacture, supply, install and commission the ETP and also undertook to give performance test. The obligation of the assessee would come to a concluding stage only after successful commissioning of the plant.
The various hills prepared by the assessee from time to time was merely a mode of payment during the currency of the long period of the carrying out of the entire work. It would be evident from the contract executed by the assessee with the parties that such mode of payment was mutually decided between the panics so that the assessee received the payments on pro rata basis with the progress of the work. Such an arrangement was quite usual and natural in cases of such turn key project so that the supplier received the payment from time to time.
28. Further, the Ahmedabad Bench of Tribunal in the case of Enviro Central Associates v. ACIT 78 Taxman 214 had held as under: In the instant case, the activities of the assessee firm were that of manufacturing or that of producing an article as they were constructing water air pollution plants. Thus, the assessee firm was an industrial undertaking and was engaged in manufacturing or producing an article in the shape of air, water pollution control.
That the assessee was manufacturing or producing the plant in backward area, was one of the requirements of the claim under Section 80HH. The contention of the assessee was that only 11.45 percent of the total receipt had been taken for deduction under Section 80HH as that work alone was done in backward area and it was not expected from the assessee to have its office or plant in backward area. The crux of the case laws is that if an industrial undertaking begins to manufacture or produce outside in any backward area, it is entitled to deduction under Section 80HH. The assessee for, set up its own industrial undertaking at the site of its customers for whom water air pollution control plant was manufactured and of the places which were falling under the backward area declared under the Act, then, naturally the assessee should be getting benefit of the same and the computation made by the assessee firm of the same was correct one.
29. The objection of the learned DR. for the revenue that situs of assembly is important, has been dealt with by the Pune Bench of Tribunal in Indocan Engineering Systems (P) Ltd. v. DCIT 60 ITD 649.
There is no merit in the contention of the learned DR for the Revenue that main activity of the assessee is of erection at client's site. The end product is an integrated unit. The assessee is required by its clients to supply a cooling Tower, parts of which are manufactured by assessee and certain parts/components are bought from outside. The end product is the cooling Tower supplied to the client. The assessee in its Quotation made to its client's requisitions, also Guarantees the above said equipment by way of Warranty as incorporated in the Quotation at page 245 of the paper book. The Warranty is against defect in materials and workmanship when erected and operated in a manner provided by us (the assessee)" 30. The Pune Bench of Tribunal in Indocan Engineering Systems (P) Ltd. v. DCIC 60 TTI 649 had held as under: It has been held by the Supreme Court in the case of CIT v. N.C. Budharaja & Co. (1993) 204 ITR 412/70 Taxman 312, that an article or thing must be understood to be movable one. An article can be said to be a movable item only if it is capable of being moved from one place to another. The reasoning given by the Commissioner (Appeals) was that where the plant is erected, it is embedded to the earth and, therefore, can not be said to be a movable property. Merely because the plant is attached to earth by fixing the same on the foundation by nut and bolts, it can not be said that it is embedded to the earth or it is attached to the earth. It can not be disputed that such plant can be shifted from one place to another by unscrewing the same. Therefore, the assessee was engaged in the business of manufacturing and fabricating of plant which was an article or thing as mentioned in Section 80-I. Further, most of the work was done by the sub contractors under the supervision of the employees of the assessee. Therefore, the question of showing power expenses did not arise. In this connection, it has been held in CIT b. Neo Pharma (P) Ltd. (1982) 137 ITR 879 (Bom.) that where the manufacturing activity has been carried on by another concern under the supervision of qualified staff of the assessee then such activity can be treated as activity of the assessee. On the basis of that decision it was to be held that the assessee had been carrying on manufacturing activity.
31. The deduction under Section 80-IA of the Act is available to an assessee whose gross total income includes profits and gains derived from an industrial undertaking as per stipulations in Section 80-IA (2), which inter alia requires the manufacturing or production of an article or thing, not being any article or thing specified in Eleventh Schedule. In the instant case before us, the asscssee was manufacturing components of cooling towers in its factory unit at Chattral, which in-turn were exigible to ExciscDuty. The profits on sale of said components were entitled to deduction under Section 80-IA of the Act and as allowed by Assessing Officer. The assessce in the present case was not in the business of sale of components of cooling towers, but the cooling tower as a whole, as is evident from the enquiries of the client, Quotations and Performa Invoice raised by the assessce. In the instant case, the assessee purchase various bought out components, which along with manufacturing components are assembled at the clients sire and the cooling tower is erected. The ultimate product erected by the assessee was a cooling tower, which was a distinct product from the various components, bought from outside or manufactured by it. The aforesaid activities of the assessee were covered within the definition of manufacture of an 'article' or 'thing' The asscssee had undertaken the job of erecting a cooling tower as per the individual specification of the client, and alter erection, the assessee guarantees the performance of the cooling tower as a whole and not that of manufactured items only All the activities carried on by the assessee fall within the ambit of manufacture' or 'production' of an article or thing. The end product being the cooling tower, the assessce is entitled to claim of deduction under Section 80-IA of the Act on the whole including profits on manufactured items and bought out components As held by Tribunal in Sond Bharat Pedals (India) v. ITO 84 ITD 89, it is not necessary that the assessee should carry out all the manufacturing operations itself in order to be entitled to claim of deduction under Section 80-IA of the Act. The situs of assembly of end product being client's premises does not disentitle the assessee from its claim of deduction under Section 80-1A of the Act in respect of bought out components utilized for the erection of the said cooling towers. There is no merit in the contention of the learned 1)R that excise duty is paid only on manufactured items. The levy of Excise Duty is governed by Excise Laws. There is no merit in denial of exemption under Section 80-IA of the I.T.Act on bought out items as the same are not subjected to Excise Duty. The assessee prepares two different bills; one for excisable manufactures items and other for bought out components, both of which are utilized for the erection of cooling tower. The assessee raises separate bills for transportation, erection and service charges. The profits on sale of the manufactured items and bought out components arc eligible for deduction under Section 80-1A of the Act.
32. Thus, after considering the entire relevant material and decisions of the various High Courts and Tribunal, we are of the view that the assessee is entitled to the benefit of deduction under Section 80-IA of the Act both on the manufactured items and the Bought out components, used for the erection of cross flow (XV series) and counter flow (CM series) cooling towers. In view of our decision hereinabove that assessee is not entitled to any deduction under Section 80-1A of the Act on Round Bottle (RB) Cooling lowers, no deduction/benefit under Section 80-IA shall be allowed on bought out components used for erection of Round Bottle cooling lowers. The Assessing Officer is directed to allow the deduction under Section 8-IA of the I.T.Act only on profits on sale of cross flow (XV. series) and counter flow (CM series) cooling towers.
33. The next issue before us is whether assessee is entitled to deduction under Section 80-IA of the Act on the installation charges, forwarding charges and services charges received from the clients. The Assessing Officer disallowed the claim of the assessee observing that all these charges have no connection with the manufacturing activities of the assessee In the present case, the assessee is engaged in the manufacturing of cooling Towers, which are manufactured as per the specific requirements of the clients, who in turn attach it to their Industrial units. The cooling tower being voluminous, the erection of the same is carried out at the sites of the clients. The forwarding charges and installation charges are billed to the clients. The service charges are received from clients against services provided to them.
The said charges arc linked to the manufacturing activity carried on by the assessee. The said receipts are to be included in Profits derived from manufacturing operations.
34. Reliance is placed on the decision of Tribunal in the case of DCIT v. Unithern Engineers (P) L.td. 1141 Taxman 38 (Tax Mag.) (Mumbai Bench)|, which held as under: Though the assessee was engaged in the manufacturing of goods the customers of the assessee requested it for erection, commissioning and installation of the furnace boiler. etc. Acter such installation and commissioning the regular service was also required, as per the warrantee clause in the orders received by the assessee. Service charges were an integral part of the sales price of the equipment.
The ledger of the company contained only one account 'sales and service '. The service charges were bifurcated, as being in the nature of labour charges and they were not subjected to sales tax or excise duty. That being so. they were nothing but part of the sales.
Hence they could not be segregated from the manufacturing activity.
35. Their Lordships of Hon'ble Bombay High Court in CIT v.International Data Management Ltd. 261 ITR 177 had held as under: That the assessee derived income as it rendered service and maintenance facility to its clients for which it charges service and maintenance charges. There/ore, there was a direct nexus between the receipts from rendering services and maintenance facility to its clients and lease rent and the main business activity of the assessee 36. The assessee had also incurred certain expenditure on transportation and also on installation by way of payment to Contractor and any expenditure linked to providing the services shall be debited to the Gross Receipts received from clients. The assessee shall be entitled to the benefit of deduction under Section 80-IA of the Act only on net receipts from installation, forwarding and services charges. The Assessing Officer is directed to recompute the deduction under Section 80-IA of the Act, as per directions in the paras hereinabove.
37. The second issue in ground Nos. 3, 4 & 5 of the appeal raised by the assessee is dismissed in view of the decision of Special Bench in Lalsons Enterprises (89 ITD 25), wherein it has been held that charging of interest under Section 234B & 234C of the Act are in consequential nature.
38. In the result, the appeals of the assessee being ITA Nos. 1769 to 1771/Mum/2001 are partly allowed