Income Tax Appellate Tribunal - Delhi
Resistoflex Dynamics (P) Ltd., New ... vs Assessee on 19 March, 2013
I.T.A. NO. 2554/DEL/2013
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH "F", NEW DELHI
BEFORE SHRI R.P. TOLANI, JUDICIAL MEMBER
AND
SHRI SHAMIM YAHYA, ACCOUNTANT MEMBER
I.T.A. No. 2554/Del/2013
A.Y. : 2009-10
M/s Resistoflex vs. Dy. Commissioner of
Dynamics (P) Ltd., Income Tax, Circle-
C/0 RRA Taxindia, 15(1),
D-28, South Extension, New Delhi
Part-I,
New Delhi -110049
(PAN: AACCR 3766 P)
(APPELLANT) (RESPONDENT)
Assessee by : Dr. Rakesh Gupta, Advocate
Department by : Sh. Keyur Patel. D.R.
ORDER
PER SHAMIM YAHYA: AM This is an appeal filed by the Assessee against the order of the Ld. CIT(A) dated 19.3.2013 and pertains to assessment year 2009-10..
2. The grounds raised read as under:-
"1. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the disallowance of deduction u/s. 80IC in respect of the profits derived from Paonta Sahib unit of the appellant on the basis that the appellant's said undertaking is not manufacturing article or thing.1
I.T.A. NO. 2554/DEL/2013
2. That in any view of the matter and in any case, the action of Ld. CIT(A) in confirming the disallowance of deduction u/s. 80IC in respect of the profits derived from Paonta Sahib unit is bad in law and against the facts and circumstances of the case.
3. That having regard to the facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in confirming the disallowance of Rs. 44,865/- u/s. 14A by invoking the provisions of Rule 8D of Income Tax Rules, 1962.
4. That in any view of the matter and in any case, the action of ld. CIT(A) in confirming the disallowance of Rs. 44,865/- u/s. 14a by invoking the provisions of Rule 8D of Income Tax Rules, 1962 is bad in law and against the facts and circumstances of the case.
5. That having regard to facts and circumstances of the case, Ld. CIT(A) has erred in law and on facts in passing the impugned order contrary to law and facts and without providing adequate opportunity and without considering the principles of natural justice.
6. That the appellant craves the lave to add, modify, amend or delete any of the grounds of appeal at the time of hearing and all the above grounds are without prejudice to each other.
3. Apropos issue of disallowance u/s. 14A, Ld. Counsel of the assessee submitted that he shall not be pressing the grounds raised in Ground No. 3 & 4 of the Grounds of Appeal. Accordingly, we dismiss these grounds raised by the assessee.
2I.T.A. NO. 2554/DEL/2013 3.1 Further Ld. Counsel of the assessee submitted that only effective ground in this case is that Ld. CIT(A) erred in confirming the disallowance of deduction u/s. 80IC in respect of profit derived from Poanta Sahib Unit.
4. In this case assessee company has three units as under:-
- Unit - I at Noida, which is engaged in the manufacturing / assembling of air spring and suspension system of industrial segments only.
- Unit - II at Greater Noida, which is engaged in the manufacturing of air springs for automotive segment and;
- Unit -III at Paonta Sahib, which is engaged in the manufacturing/ assembling of air spring and suspension system for railways only.
4.1 The assessee claimed deduction u/s. 80IB of 30% for Noida Unit and deduction u/s. 80IC of 100% for Ponta Sahib unit. The Assessing Officer referred to various expenses of all the units and observed that the expenses claimed in respect of Ponta Sahib unit are much less vis-a-vis the expense for Noida and Greater Noida units. Assessing Officer was of the opinion that even the total investment in fixed assets of Ponta Sahib unit was less and in which case the other two units should have shown higher productivity and returns. Assessing Officer also referred to the investment in plant and machinery in the units and the net profit margin thereof.
Assessing Officer was not convinced by the explanation given by the assessee in the context of profitability of the units. Assessing Officer opined that the discrepancy could only be due to the fact that higher profit reflected for Ponta Sahib Unit was for claiming deduction under Chapter VI-A. 4.2 Further, the Assessing Officer referred to the contract awarded to the Ponta Sahib unit by the Ministry of Railways. Referring to the 3 I.T.A. NO. 2554/DEL/2013 work award, Assessing Officer held that the work award was for supply of 'air springs' manufactured by M/s Conty Tech, Germany. Hence, Assessing Officer observed that it is clear that assessee company was not manufacturing air springs and emergency bumper as claimed by the assessee company. He observed that the assessee has been specifically given the direction to provide the air springs and bumber duly manufactured by M/s Contitech/Germany. Assessing Officer further referred to the heavy expenses being incurred on freight and cartage. From the above, the Assessing Officer inferred that no manufacturing activity is being carried out by Ponta Sahib unit which can be claimed as eligible for deduction u/s. 80IC. Accordingly, Assessing Officer disallowed the claim of the assessee for deduction u/s. 80IC.
5. Before the Ld. CIT(A) assessee claimed that it undertook various operations in the nature of assembly, fastening, fabricating, testing etc. towards emergence of the final product and new product is formed by the activities under taken by the assessee. It was submitted that assembly in this case amounts to manufacturing. Assessee further submitted detailed submissions and flow process to justify that actual manufacturing activity was being carried out at the Ponta Sahib Unit. It was claimed that rubber parts were imported from Germany and the metal parts were manufactured at the Ponta Sahib Unit. Assessee further submitted that since the final product is different from the product imported by it. It is eligible for the requisite deduction u/s. 80IC of the Act. It was emphasized that the industrial activities carried out by the assessee tantamount to manufacturing or production of article or things.
4I.T.A. NO. 2554/DEL/2013 5.1 However, Ld. CIT(A) did not accept the above contention. In this regard, Ld. CIT(A) referred to the provisions of section 80IC. He also referred to the several cases laws in this regard. Ld. CIT(A) concluded as under:-
"Applying the above tests, if the present case is analyzed, it emerges that in case of the appellant, the original article i.e. air springs, as the photographs furnished indicate, do not undergo a substantial change and a commercially different product with distinctive name, character and use does not come in to existence. Even the metal attachments are being manufactured at the Noida units from where they are being transported to a Paonta Sahib Unit. The goods being imported from Germany are referred to as 'air springs' and so are the goods being sold to the railways. Even the machinery installed at the Paonta Sahib unit reflects the activity or the lack of it being undertaken at the unit. The total machinery installed worth Rs. 44 lacs is a mere eye wash to claim manufacturing activities at the Paonta Sahib unit premises. The nature of the employees, their qualification, the wages being paid to them, and the work assigned to each also show that the manufacturing activity claimed to be carried out Paonta Sahib unit is a mere eye wash. On the basis of the facts presented, the conclusion that inevitably follows is that the appellant company cannot be said to have undertaken business activities which amount to manufacture or production of an article different from the air spring manufactured by M/s Contitech and therefore does not merit requisite deduction under section 80-IC(2) of the Act. In light of the 5 I.T.A. NO. 2554/DEL/2013 foregoing discussion and the given set of facts, the appellant company is not eligible for deduction under section 80IC of the Act, as it cannot be said to have manufactured or produced any article or a thing. The decision of the AO is, therefore, confirmed."
6. Against the above order the Assessee is in appeal before us.
7. We have heard both the counsel and perused the records. Ld. Counsel of the assessee submitted that the assessee in fact is engaged in manufacturing of 'air springs assembly and other metal parts' which are supplied to Indian Railways in its Ponta Sahib Unit. The profit derived from this unit which is located in Ponta Sahib, Himachal Pradesh qualified for deduction u/s. 80IC not only in the year under appeal, but since earlier years i.e. in the assessment year 2007-08. Ld. Counsel further submitted that the assessment order for assessment year 2007-08 was passed u/s. 143(3) of the I.T. Act and deduction u/s. 80IC was allowed. This claim for deduction u/s. 80IC was also made for assessment year 2008-09 and was also allowed. Therefore, the Ld. Counsel of the assessee submitted that there is no justification for denying this deduction in the year under appeal when the facts are being identical. Ld. Counsel of the assessee in this regard referred to the following decision for the proposition that deduction if allowed in initial years cannot be denied in subsequent years.
"Subhash Chandra Sehgal vs. DCIT 1126/Del/2008 dated 27.2.2009 (Page 127) 88 ITD 313 (Chd.) (3rd member) Deduction under s. 80J - Allowability - claim allowed in earlier years - Once the claim for deduction under section 80J has been allowed to the assessee in first year by 6 I.T.A. NO. 2554/DEL/2013 the Tribunal and also for subsequent two years, such deduction is allowable for subsequent assessment year falling within the period of five years - CIT vs. Modi Industries Ltd. 48 DTR 364 (Delhi)."
8. Furthermore, Ld. Counsel of the assessee submitted that principle of consistency has been emphasized in the following case laws :-
i) 245 ITR 490 (Del.)
ii) 193 ITR 321 (SC)
iii) CIT vs. Excel Industries Ltd. passed by the Hon'ble
Apex Court in Civil Appeal No. 125 of 2013 dated 08.10.2013.
8.1 Without prejudice to the above, Ld. Counsel of the assessee made further submissions for the proposition that assessee was manufacturing the air springs assembly and was not into trading of air springs as alleged by the Assessing Officer. In this regard, ld. Counsel of the assessee referred to the purchase order received by the assessee for the manufacturing and supply of air springs assembly, to show that the assessee is manufacturing air spring assembly which is different from air spring imported by the assessee. Ld. Counsel of the assessee further pointed out that these purchase order clearly reflects the specific technical specifications to which the manufactured product has to conform to show that the air springs is different where as the assessee manufactures air springs assembly. Ld. Counsel of the assessee further referred to the Paper Book that bring out the technical specifications for the various variants of air springs assembly manufactured by the assessee for Indian Railways. Ld. Counsel further referred to the process flow 7 I.T.A. NO. 2554/DEL/2013 chart in the paper book submitted for the air springs assembly manufactured by the assessee. Ld. Counsel of the asessee also referred to the cross sectional diagram of air springs assembly supplied to the Indian Railways to show that there are several parts of the assembly and it is not the air springs and conical springs alone. Furthermore, Ld. Counsel of the assessee further referred to the letter of approval issued by the Research & Design and Standards Organization, copies of Central Excise invoices, assessment order passed by the District Taxation Officer, copy of registration certificate issued by the Excise and Taxation Department to buttress the proposition that the assessee was a manufacturer and was engaged in manufacturing.
8.2 Ld. Counsel for the assessee further referred to the observations of the Assessing Officer where Assessing Officer has made adverse observations regarding the expenditure incurred by the assessee and the profitability shown. The Ld. Counsel submitted that Assessing Officer totally erred in his approach and has not been able to appreciate the facts of the case properly.
8.3 Ld. D.R. on the other hand relied upon the orders of the Assessing Officer and Ld. CIT(A).
9. We have carefully considered the submissions and perused the records. At the outset, we note that this is not the first year of assessee's claim for deduction u/s. 80IC for its Ponta Sahib Unit. It is infact the 3rd year. In the earlier assessment years 2007-08 & 2008-09, the assessee had been duly granted deduction u/s. 80IC. The assessment order for the assessment year 2007-08 shows that the deduction u/s. 80IC has been allowed even in assessment u/s. 143(3) of the Act.
8I.T.A. NO. 2554/DEL/2013 9.1 In this regard, the decision referred by the Ld. Counsel of the assessee in C.I.T. vs. Modi Industries (Supra) is germane. In this case, the deduction was with respect to section 80J. It was observed that the claim was allowed in the earlier years. Hence, it was held that once the claim for deduction u/s 80J has been allowed to the assessee in the first year by the tribunal and also for the subsequent two years, such deduction was allowable in the subsequent assessment years within the period of 5 years.
9.2 Further the Hon'ble Apex Court in the case of C.I.T. vs. Excel Industries Ltd. (Supra) has reiterated the exposition given by the Apex Court in the case of Radha Soami Satsang 193 ITR 321 and Parshuram Poultry Works 106 ITR 1. It was held that as in several assessment years the revenue accepted the order of the tribunal in favour of the assessee and did not pursue the matter any further, it cannot be allowed to flip flop on the issue and it ought let the matter rest rather than spend the tax payers money in pursuing litigation for the sake of it.
10. In our considered opinion, as discussed above the assessee has been granted deduction u/s. 80IC in earlier years and that also in assessment u/s. 143(3) of the Act. Now in the 3rd year the Revenue cannot suddenly take up the ground that the assessee is not doing any manufacturing and therefore, is not entitled for deduction u/s. 80IC. The case laws discussed hereinbove amply support this proposition.
11. Apart from above, we find that on the merits also assessee has cogent case that assessee was manufacturing air spring assembly and supplying it to Indian Railways and it was not merely trading as alleged by the Revenue.
9I.T.A. NO. 2554/DEL/2013
12. In this regard, we can gainfully refer to the provisions of section 80IC:-
"[Special provisions in respect of certain undertakings or enterprises in certain special category States.
80-IC. (1) Where the gross total income of an assessee includes any profits and gains derived by an undertaking or an enterprise from any business referred to in sub- section (2), there shall, in accordance with and subject to the provisions of this section, be allowed, in computing the total income of the assessee, a deduction from such profits and gains, as specified in sub-section (3).
(2) This section applies to any undertaking or enterprise,--
(a) which has begun or begins to manufacture or produce any article or thing, not being any article or thing specified in the Thirteenth Schedule, or which manufactures or produces any article or thing, not being any article or thing specified in the Thirteenth Schedule and undertakes substantial expansion during the period beginning--
(i) on the 23rd day of December, 2002 and ending before the 1st day of April, [2007], in any Export Processing Zone or Integrated Infrastructure Development Centre or Industrial Growth Centre or Industrial Estate or Industrial Park or Software Technology Park or Industrial Area or Theme Park, as notified by the Board in accordance with the scheme framed and notified by the Central Government in this regard, in the State of Sikkim; or
(ii) on the 7th day of January, 2003 and ending before the 1st day of April, 2012, in any Export Processing Zone or Integrated Infrastructure Development Centre or Industrial Growth Centre or Industrial Estate or Industrial Park or Software Technology Park or Industrial Area or Theme Park, as notified by the Board in accordance with the scheme framed and notified by the Central Government in this regard, in the State of Himachal Pradesh or the State of Uttaranchal; or
(iii) on the 24th day of December, 1997 and ending before the 1st day of April, 2007, in any Export Processing Zone or Integrated Infrastructure Development Centre or Industrial Growth Centre or Industrial Estate or Industrial Park or Software Technology Park or Industrial Area or Theme Park, as notified by the Board in accordance with the scheme framed and notified by the Central Government in this regard, in any of the North-Eastern States;
(b) which has begun or begins to manufacture or produce any article or thing, specified in the Fourteenth Schedule or commences any operation specified in that Schedule, or which manufactures or produces any article or thing, specified in the Fourteenth Schedule or commences any operation specified in that Schedule and undertakes substantial expansion during the period beginning--
(i) on the 23rd day of December, 2002 and ending before the 1st day of April, [2007], in the State of Sikkim; or 10 I.T.A. NO. 2554/DEL/2013
(ii) on the 7th day of January, 2003 and ending before the 1st day of April, 2012, in the State of Himachal Pradesh or the State of Uttaranchal; or
(iii) on the 24th day of December, 1997 and ending before the 1st day of April, 2007, in any of the North-Eastern States.
(3) The deduction referred to in sub-section (1) shall be--
(i) in the case of any undertaking or enterprise referred to in sub-clauses (i) and (iii) of clause (a) or sub-clauses (i) and (iii) of clause (b), of sub-section (2), one hundred per cent of such profits and gains for ten assessment years commencing with the initial assessment year;
(ii) in the case of any undertaking or enterprise referred to in sub-clause (ii) of clause (a) or sub-clause (ii) of clause (b), of sub-section (2), one hundred per cent of such profits and gains for five assessment years commencing with the initial assessment year and thereafter, twenty-five per cent (or thirty per cent where the assessee is a company) of the profits and gains.
(4) This section applies to any undertaking or enterprise which fulfils all the following conditions, namely:--
(i) it is not formed by splitting up, or the reconstruction, of a business already in existence :
Provided that this condition shall not apply in respect of an undertaking which is formed as a result of the re-establishment, reconstruction or revival by the assessee of the business of any such undertaking as is referred to in section 33B, in the circumstances and within the period specified in that section;
(ii) it is not formed by the transfer to a new business of machinery or plant previously used for any purpose.
Explanation.--The provisions of Explanations 1 and 2 to sub-section (3) of section 80-IA shall apply for the purposes of clause (ii) of this sub-section as they apply for the purposes of clause (ii) of that sub-section.
(5) Notwithstanding anything contained in any other provision of this Act, in computing the total income of the assessee, no deduction shall be allowed under any other section contained in Chapter VIA or in section 10A or section 10B, in relation to the profits and gains of the undertaking or enterprise.
(6) Notwithstanding anything contained in this Act, no deduction shall be allowed to any undertaking or enterprise under this section, where the total period of deduction inclusive of the period of deduction under this section, or under the second proviso to sub-section (4) of section 80-IB or under section 10C, as the case may be, exceeds ten assessment years.
(7) The provisions contained in sub-section (5) and sub-sections (7) to (12) of section 80-IA shall, so far as may be, apply to the eligible undertaking or enterprise under this section.
11I.T.A. NO. 2554/DEL/2013 (8) For the purposes of this section,--
(i) "Industrial Area" means such areas, which the Board, may, by notification in the Official Gazette, specify in accordance with the scheme framed and notified by the Central Government;
(ii) "Industrial Estate" means such estates, which the Board, may, by notification in the Official Gazette, specify in accordance with the scheme framed and notified by the Central Government;
(iii) "Industrial Growth Centre" means such centres, which the Board, may, by notification in the Official Gazette, specify in accordance with the scheme framed and notified by the Central Government;
(iv) "Industrial Park" means such parks, which the Board, may, by notification in the Official Gazette, specify in accordance with the scheme framed and notified by the Central Government;
(v) "Initial assessment year" means the assessment year relevant to the previous year in which the undertaking or the enterprise begins to manufacture or produce articles or things, or commences operation or completes substantial expansion;
(vi) "Integrated Infrastructure Development Centre" means such centres, which the Board, may, by notification in the Official Gazette, specify in accordance with the scheme framed and notified by the Central Government;
(vii) "North-Eastern States" means the States of Arunachal Pradesh, Assam, Manipur, Meghalaya, Mizoram, Nagaland and Tripura;
(viii) "Software Technology Park" means any park set up in accordance with the Software Technology Park Scheme notified by the Government of India in the Ministry of Commerce and Industry;
(ix) "Substantial expansion" means increase in the investment in the plant and machinery by at least fifty per cent of the book value of plant and machinery (before taking depreciation in any year), as on the first day of the previous year in which the substantial expansion is undertaken;
(x) "Theme Park" means such parks, which the Board, may, by notification in the Official Gazette, specify in accordance with the scheme framed and notified by the Central Government.]"
13. From the above, it is evident that deduction u/s. 80IC is granted particularly to undertaking/enterprise referred to in either clause (a) or clause (b) of sub-section (2), to claim relief u/s. 80IC, the said undertaking/ enterprise must manufacture or produce an 12 I.T.A. NO. 2554/DEL/2013 article or thing. What the terms "to manufacture or produce any article or thing" signifies has not been specifically defined in the Act. However, reference in this regard can be made to several case laws on this issue.
"Deputy CST vs. PIO Food Packers (1980) 46 STC 63, 65 There are several criteria for determining whether a commodity is consumed in the manufacture of another. The generally prevalent test is whether the article produced in the trade, by those who deal in it, as distinct in identity from the commodity involved in its manufacture. Commonly, manufacture is the end result of one or more processes through which the original commodity is made to pass. The nature and extent of processing may vary from one case to another, and indeed there may be several stages of processing and perhaps a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. But it is only when the change, or a series of changes, take the commodity to the point where commercially it can no longer be regarded as the original commodity but instead is recognized as a new and distinct article that a manufacture can be said to take place."
Similarly, the Apex Court in the case of C.I.T. vs. NC Bhudhiraja, 204 ITR 413 (SC), has held as under:-
The test for determining whether manufacture can be said to have taken place is whether the commodity which is subjected to the process of manufacture can no longer be regarded as the original commodity but is recognised in the trade as a new and distinct commodity."13
I.T.A. NO. 2554/DEL/2013 In the case of Aspinwall and Co. Ltd. vs. CIT 251 ITR 323 (SC), the following observations at P. 327 are also important:-
The world "manufacture" has not been defined in the Act, in the absence of a definition of the word "manufacture" it has to be given a meaning as is common parlance. It is to be understood as meaning the production of articles for use from raw or prepared material by giving such materials new forms, qualities or combinations whether by hand labour or machines. If the change made in the article results in a new and different article then it would amount to a manufacturing activity.
As observed by the Supreme Court in Aditya Mills Ltd. vs. Union of India, AIR 1988 SC 2237, manufacture is complete as soon as the raw material undergoes some change and a new substance or article is brought into existence, having its own character and use.
Kanataka High court in the case of C.I.T. vs. Darshak Ltd. 247 ITR 480 explained the word 'manufacture' as under:-
The word manufacture is to be understood in a wide sense. Manufacture would imply a change and a transformation. A new and different article must emerge having a distinct and different character and use."
In C.I.T. vs. Premier Tobacco Packers P. Ltd. (2003) 284 ITR 222 (Mad.) it was held :-
"The word manufacture has not been defined in the Income Tax Act. In the absence of a definition, the word manufacture has to be given a meaning as is understood in common parlance. It is to be understood as meaning the production of articles 14 I.T.A. NO. 2554/DEL/2013 for use from raw or prepared materials by giving such materials new forms, qualities or combinations whether by hand or machines. If the change made in the article results in a new and different article then it would amount to manufacturing activity."
In CIT vs. Jamal Photo Industries (I) Pvt. Ltd. 285 ITR 209 (Mad.) it was held:-
The expression manufacture involves the concept of changes effected to the basic raw material resulting in the emergence of, or transformation into, a new commercial commodity. But it is not necessary that the original articles or material should have lost its identity completely. All that is required is to find out whether as a result of the operation in question, a different commodity has been produced having its own name, identity or end use."
14. Thus, from the above, it is evident that essence of manufacturing is that what is made shall be a different thing from that out of which it is made despite the original material not losing its identity completely. Manufacturing process postulates some change in the shape of new things with a distinct name, character or use. In the present case, assessee has made elaborate submissions in the paper book to justify that assessee is engaged in the manufacture or production of article or thing. In this regard, Ld. Counsel of the assessee has made elaborate submissions alongwith Paper Book, Annexures, Diagrams process chart and photogprah. Following submissions extracted from the paper book submitted by the Ld. Counsel of the assessee can be gainfully referred:-
15I.T.A. NO. 2554/DEL/2013 "A. THE APPELLANT IS INDEED ENGAGED IN MANUFACTURE.
1. Besides the objection as to the inter se profitability percentage of the three units, main finding of the Ld. Assessing Officer is that the Appellant is not undertaking manufacture at the Paonta Sahib Unit and therefore the claim for exemption under Section 80IC is not proper. The Appellant submits that this finding of the Ld. Assessing Officer is grossly inaccurate, contrary to the factual position as certified by various Governmental authorities and is based upon an incorrect appraisal of the work order placed upon the Appellant by Indian Railways in terms of which the Appellant is undertaking the manufacturing activity at the Paonta Sahib Unit.
2. The Appellant submits that the activity undertaken by the Appellant at the Paonta Sahib Unit indeed amounts to manufacture of Air Spring System for Indian Railways and thus the claim for exemption under Section 80IC is well founded. The Appellant is sequentially explaining in the following paragraphs the manner in which the activities are undertaken at the Paonta Sahib Unit amounting to manufacture of Air Spring System for Indian Railways.
3. The process was initiated with the floating of tenders by the Indian Railways for supply of Air Spring Systems towards fitment in the Railway coaches manufactured at the Integrated Coach Factory (ICF), Chennai. The Appellant bid for the tenders and was one of the parties who were awarded the tender for manufacture and supply of these Air Spring Systems. It must here be 16 I.T.A. NO. 2554/DEL/2013 pointed out that as far as Indian Railways is concerned, Air Spring Assembly is a new suspension design working on compressed air for fitment in the existing bogies of Indian Railways. It caters to the increased payload demands and weight imbalances inherent to the existing coaches.
4. Pursuant to the award of tender, Purchase Orders were received by the Appellant towards the manufacture and supply of Air Spring Assemblies. Illustrative copies of these Purchase Orders are enclosed herewith as ANNEXURE - 2..
These Purchase Orders clearly reflect that the purchases are being made by the Indian Railways against the specific technical specifications to which the manufactured product has to conform to. There are a number of these technical specifications depending upon the various variants of the Air Springs (in view of the different types of railways coaches manufactured at the ICF, Chennai) and are collectively enclosed herewith as ANNEXURE- 3 .
5. One of the common features underlying these technical specifications is that the air springs have to be manufactured by employing only the specified items in the manufacturing process. An understanding of the manufacturing process undertaken by the Appellant along with an appreciation of the role of the technical specifications of raw materials is relevant in determining the claim of 'manufacture'. Therefore these processes are explained in some detail.
6. Air Spring Assembly consists of a flexible Rubber Bellow whose open ends are pressed onto the sealing surfaces of 17 I.T.A. NO. 2554/DEL/2013 the top mounting plate and base plate to allow the required air pressure to develop in the Air Spring Assembly without leaking (like in tubeless tyres). It also consists of an Emergency Spring Bumper, which is integrated in the Air Spring Assembly to ensure the train continues to run in emergency conditions when air is deflated. The application specific Metal Parts are essential to allow air pressurization of the Air Spring Assembly and to serve as an interface for fitment on the rail vehicle. A copy of the cross-sectional view is also enclosed herewith as ANNEXURE - 4. In a typical air spring manufactured by the Appellant for the Indian Railways, there are three main components; (a) air spring - top plate; (b) sliding plate; and (c) emergency spring and bottom plate. Certain manufacturing processes are undertaken in order to manufacture these three components themselves and thereafter these three components are further submitted to manufacturing processes in order to finally arrive at the air springs which are supplied to the Indian Railways.
Copies of the above manufacturing process for the components are also collectively enclosed herewith as ANNEXURE - 5.
7. In the above charts it may be noted that out of the various activities undertaken and the raw materials employed in order to manufacture these components the Appellant imports (a) air spring component (fitted in the top plate) and (b) emergency air spring component (fitted in the emergency spring and calibrated with the bottom plate). These items are 18 I.T.A. NO. 2554/DEL/2013 imported from Germany from M/s ContiTech Luftfedersysteme GmbH (Hannover, Germany). Rest all other goods / raw materials required in the manufacturing process are procured from India and employed by the Appellant in the manufacturing process at the Paonta Sahib Unit. For illustration, corrosion resistant steel / stainless steel; metal parts; nuts, screws and blots; etc. are procured by the Appellant and utilization for carrying out the manufacturing process at the Paonta Sahib Unit. Illustrative invoices of the imported goods and the raw materials procured locally are collectively enclosed herewith as ANNEXURE - 6 and ANNEXURE - 7 respectively.
8. Once the three components are manufactured / fabricated by the Appellant at the Paonta Sahib Unit, the Appellant further undertakes the assembly process of these three components in order to manufacture the air-spring assembly which has to be supplied to the Indian Railways. The manufacturing chart to this effect is enclosed herewith as ANNEXURE - 8 along with photographs.
9. All these raw materials are procured as per the specifications of the 'Research, Designs & Standards Organization', of the Ministry of Railways, Government of India (RDSO) in terms of the tender awarded to the Appellant and the Purchase Orders. This is evident from a bare perusal of the Purchase Orders which specify that 19 I.T.A. NO. 2554/DEL/2013 the supplies shall be as per RDSO Specifications. Air Spring Assembly is governed by 'Schedule of Technical Requirements' (STR) issued in September 2007 by RDSO.
10. The Appellant submits that it is mandatory for a supplier (for Indian Railways) to register with RDSO and comply with the requirements of STR (in terms of Clause 5). The suppliers should be ISO approved and use components strictly as specified in STR/drawing approved by RDSO and maintain strict control of dimensions of components and assembled product. The Appellant is accredited to ISO 9001:2008 by an independent agency for design, manufacture and marketing of Air Springs.
11. The Appellant submitted the technical specifications of the product manufactured by M/s ContiTech Luftfedersysteme GmbH (Hannover, Germany) and sought the permission of the RDSO for employing the products manufactured by the said German party for manufacturing air spring assemblies. The RDSO examined in detail these specifications and thereafter approved the same vide letter No. SV AS Contitech dated 21.10.2008 addressed to the Appellant wherein the specification of product manufactured by the said German party was approved to be employed for manufacturing air spring assemblies. Similar letters of approval of the design and technical specification of the products manufactured by the 20 I.T.A. NO. 2554/DEL/2013 said German party were issued subsequently by the RDSO to the Appellant and these are collectively enclosed herewith as ANNEXURE - 9.
12. In this regard, the Appellant submits that in terms of the RDSO Specifications / instructions the 'air bellow' and 'emergency springs' were required to be imported from the said German party. The Appellant submits that while there is no doubt that the 'air bellow' and 'emergency springs' were imported by the Appellant but it is incorrect to hold, as was done by the Ld. Assessing Officer, that it is these same 'air bellow' and 'emergency springs' which have been supplied by the Appellant to the Indian Railways.
On the contrary the correct factual position, as reflected in terms of the charts above, is that these air below and emergency springs are only one of the raw materials employed by the appellant in carrying out the manufacturing activity at their Paonta Sahib Unit for the manufacture of air-spring assemblies.
13. The Appellant submits that there is a vast difference between the imported items and the goods manufactured and supplied by the Appellant to the Indian Railways. Not only the Appellant undertakes substantial operations independent of the imported goods but also the imported items form only a part of the final product manufactured by the Appellant. This is evident from the following drawing of the final product which shows 21 I.T.A. NO. 2554/DEL/2013 the location and positioning of the imported items;
14. It is submitted that the scope of supply for each air spring assembly covers the following items (as defined in Clause 4 on Page 6 of STR);
S. No. Item Quantity 1 Air Spring (Rubber Bellow) 1 2 Top Interfacing Plate with Bolster, 1 with Spigot 3 Sealing 0' Rings 2 4 Base Plate 1 5 Emergency Spring 1 6 High Tensile Hex Socket Head Screws 4 Sets with Spring Washers
15. In order to arrive at the air spring assembly to be supplied to the Indian Railways, the Appellant undertakes the following; • In accordance with the registration and approval of RDSO, Air Spring Assembly is manufactured by the Appellant with Air Spring (Rubber Bellow) and Emergency Spring (Bumper) (SI. No. 1 & 5 above) duly imported from the said German party. • All the metal parts are fabricated in the Paonta Sahib Works.
This includes Top Interfacing Plate with Bolster, with Spigot and Base Plate (S. No. 2 & 4 above) and other essential items (Sliding Plate). Sealing O' Rings and High Tensile Screws with Washers (SI. No. 3 & 6 above) are bought out items. • It has to be noted that the profile of the Top Plate and base plate must perfectly match with the profile of the Air Bellow seating area to avoid any leakage during service. This is 22 I.T.A. NO. 2554/DEL/2013 ensured by precise machining, grinding and calibrating the conical sealing area of each and every metal part to suit the corresponding mating area of the Bellow on a one to one basis. Further, the Appellant ensures that the spigot in the top plate interfaces with the matching air supply hole in bogie bolster and the bottom fixing plate is fabricated to suit the fixing arrangement in the Bogie frame.
• The Metal Parts and Nylon Sliding plates fabricated at the Unit are combined with the Imported Rubber Bellows and Emergency Springs (after machining) and 'O' Rings, fasteners are procured to manufacture a completely new and distinct article namely 'Air Spring Assembly" with new and specific characteristics of pressure, load, movement capabilities and fitment dimensions as per specifications of Indian Railways for use in the Rail Coaches produced by them. 25. In the context of the finding of the Ld. Assessing Officer that the Appellant is not manufacturing the air spring but the same are manufactured by the German party, the Appellant submits that the conclusion of the Ld. Assessing Officer if taken to the logical end would imply that the Appellant is a mere trader in air springs, which is not true. The Appellant only imports from the said German party the components of the Air spring assembly and does not in any merely supply these air-springs to the Indian Railways. If that had been the situation then the Indian Railways would in any case have procured / imported these components directly from the said German party for the Chennai based coach factory of the Indian Railways instead of requiring the Appellant to import it from Germany at the ICD Tughlakabad, New Delhi through Mumbai port and then transporting it to Himachal and then sending it back again to for the Chennai based coach factory of the Indian Railways, which defies logic especially for 23 I.T.A. NO. 2554/DEL/2013 a Government undertaking like the Indian Railways. In any case, the Appellant undertakes, at its factory in the Paonta Sahib unit various activities which result into a new commodity implying thereby that the imported component are not as such supplied to the Indian Railways but are subjected to further manufacturing process before supply. In very brief the activities on these very imported components are as under;
(i) The imported rubber bellow is worked upon to provide for enclosures on both sides to seal the open ends and pressurize the rubber bellow with air to be able to function as an Air spring.
(ii) Likewise the emergency spring cannot function on its own. It has to be integrated into the Air Spring Assembly for working is no air (air deflated case).
16. Further, the weight of these two imported items i.e. Air Spring and Emergency Bumper is only 57 Kilograms (approx) as against the 156 Kilograms (approx) being the weight of the manufactured Air Spring Assembly.
17. The appellant further submits that they undertake various operations in the nature of assembling, fastening, fabricating, testing, etc. towards the emergence of the final product and a new product is formed by the activities undertaken by the appellant. Even under Central Excise Law, wherein central excise duty is levied on activity of manufacture or production, these activities are considered as amounting to different products. This is evident from their respective Central Excise Classification, which is as under:-
Central Excise Classification of raw materials S.No Raw Usage Central excise Remarks . material classification Rubber Component parts 24 I.T.A. NO. 2554/DEL/2013 of air spring assembly Imported from
1. Air Spring Air spring 4016 99 90 Conitech, (Rubber Germany bellow) Layer Emergency 4016 99 91 spring/ spring conical spring
2. Corrosion Top plate 7208 51 10 resistant with spigot steel plats MS plates / bottom iron plats fixing plate
3. Steel Base plate 7207 11 20 forgings
4. SS flats Sliding 7211 14 10 plates
5. Sliding Sliding 5010 52 2 Plates (PA6) Plates
6. Silicon Lubrication Grease of sliding plate
7. Welding rod Fabrication 8311 10 00 of metal parts and air spring assembly.
8 Fasteners Supplied for
Allen CSK, fixing Air
Bolt, Nut, Spring
Washers Assembley
to Rail
Coach
9 Wooden Packing
Boxes,
Plastic
25
I.T.A. NO. 2554/DEL/2013
Sheets, Jute
Cloth,
Hession
Cloth, M.S.
Patti
10 Tee Consumable
pol,
Clot
h
11 Red Paint, Painting of
Red Oxide
metal parts
Primer,
Thinner, MT
oil, Turpine
oil
12 Cutting Fabrication
Wheel
of metal
parts
13 Drill Bits, Fabrication
Locktite
of metal
parts
14 Cathodes & Plasma
anodes
cutting
consumable
Illustrative central excise invoices to this effect are collectively enclosed herewith as ANNEXURE- 1 0 .
Central Excise Classification of manufactured products S. Finished Goods Central Excise Classification No 1 Air Spring Assembly 8607 99 10 (C.K-106 ) 2 Air Spring 8607 99 10 Assembly(180 KN) 3 SR. Ring 8485 90 00 Illustrative central excise invoices to this effect are collectively enclosed herewith as ANNEXURE- 1 1 .
26I.T.A. NO. 2554/DEL/2013
28. It is submitted that it is only because of the exemption from Central Excise duty (in terms of Notification No. 50/2003-CE for the State of Himachal Pradesh) that no Central Excise duty is paid on these products when they are manufactured at the Paonta Sahib Unit by the Appellant.
19. This fact of the Appellant undertaking manufacturing operations at the Paonta Sahib Unit is also certified by the Department of Excise and Taxation, State of Himachal Pradesh vide Certificate dated 24.07.2009 wherein this has been certified by the said Governmental Authority that the Appellant is an industrial unit doing manufacturing / assembling of air spring assembly and SR Rings. This certificate is enclosed herewith as ANNEXURE - 12. Further, even the Assessment Order (for accounting period 200708 and 2008-09 which covers the assessment year in question) passed by the District Taxation Officer dated 14.12.2011 clearly notes and concludes that the Appellant is engaged in undertaking manufacture and sale of air spring assembly. This Order is enclosed herewith as ANNEXURE - 13. Further, the Paonta Sahib Unit has been registered with the following government authorities, after their due checks and verifications, for the manufacture of Air Springs Assembly;
- Department of Industries (Single Window Clearance Agency) mentioning the manufacturing activity capital investment & employment details. The said agency also issued regarding assessment of production capacity.
- Central Excise Office, Pantha Ghati Shimla (HP).
- Labour Department (HP) and Inspectorate of Factories (HP).
- Employees State Insurance Corporation (ESIC), Parwanoo (HP).
- HP State Environment Protection & Pollution Control Board.
- Directorate of Fire Services (HP), Shimla-2.
27I.T.A. NO. 2554/DEL/2013
- Himachal Pradesh State Electricity Board permission to install DG set.
20 . The Appellant therefore submits that there is overwhelming evidence that the Appellant is engaged in undertaking manufacturing activity at the Paonta Sahib Unit and thus the Ld. Assessing Officer was in gross error to conclude that the Appellant was not undertaking any manufacturing activity.
21. It is further submitted that the Ld. Assessing Officer has erred in applying the correct legal position to the factual position of the instant case.
22. The Appellant submits that the activities undertaken by the assessee on a raw material result in the transformation of the article or thing into a new and distinct object or article or thing having a different name, character and use and bring into existence of a new and distinct article or thing."
15. From the above, it is amply clear that the assessee is engaged in manufacture and production of an article or thing named air spring assembly. The assessee imports (a) air spring component (fitted in the top plate) and (b) emergency air spring component (fitted in the emergency spring and calibrated with the bottom plate). These items are imported from Germany from M/s ContiTech Luftfedersysteme GmbH (Hannover, Germany). Rest all other goods / raw materials required in the manufacturing process are procured from India and employed by the Appellant in the manufacturing process at the Paonta Sahib Unit.
16. The description of manufacturing process above amply proves that the imported material as well as local materials are used in a manufacturing process which results in a final product which is quite distinct from the components used, and has distinct usage too.
28I.T.A. NO. 2554/DEL/2013
17. In the background of the aforesaid discussions and precedents, we set aside the orders of the authorities below and hold that the assessee was engaged in manufacturing of air spring assembly and is hence eligible for deduction u/s. 80IC for the manufacturing activity undertaken at its Paonta Sahib unit.
18. In the result, the appeal filed by the Assessee is partly allowed.
Order pronounced in the open court on 06/12/2013.
Sd/- Sd/-
[R.P. TOLANI] [SHAMIM YAHYA]
JUDICIAL MEMBER ACCOUNTANT MEMBER
Date 06/12/2013
"SRBHATNAGAR"
Copy forwarded to: -
1. Appellant 2. Respondent 3. CIT 4. CIT (A)
5. DR, ITAT
TRUE COPY
By Order,
Assistant Registrar,
ITAT, Delhi Benches
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I.T.A. NO. 2554/DEL/2013
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