Income Tax Appellate Tribunal - Chandigarh
Bnal Prefabs (P) Ltd., Chandigarh vs Department Of Income Tax on 17 April, 2012
IN THE INCOME TAX APPELLATE TRIBUNAL
CHANDIGARH BENCH 'A', CHANDIGARH
BEFORE SHR I T.R. SOOD, ACCOUNTANT MEMBER
AND Ms. SUSHMA CHOWLA, JUDICIAL MEMBER
ITA No.1273/Chd/2010
(Assessment Year : 2006-07)
Bnal Prefab Pvt. Ltd., Vs. The Addl. C.I.T.,
S.R.No.19, Sector 7, Range 1,
Chandigarh. Chandigarh.
PAN: AAACB7859D
And
ITA No.1361/Chd/2010
(Assessment Year : 2006-07)
The D.C.I.T., Vs. Bnal Prefab Pvt. Ltd.
Circle 1(1), S.R.No.19, Sector 7,
Chandigarh. Chandigarh.
PAN: AAACB7859D
(Appellant) (Respondent)
Assessee by : Shri Vineet Krishan
Shri Arvinder Singh
Department by : Shri Akhilesh Gupta, DR
Date of hearing : 17.04.2012
Date of Pronouncement : 27.06.2012
ORDER
PER SUSHMA CHOWLA, J.M, :
These cross appeals filed by the assessee and the Revenue are against the order of the Commissioner of Income-tax (Appeals), C h a n d i g a r h d a t e d 3 0 . 0 7 . 2 0 1 0 r e l a t i n g t o a s s e s s m e n t ye a r 2 0 0 6 - 0 7 a g a i n s t the order passed u/s 143(3) of the Income Tax Act, 1961.
2. Both these appeals by the assessee and the Revenue were heard together and are being disposed off by this consolidated order for the sake of convenience.
2ITA No.1273/Chd/2010(Assessee's Appeal)
3. Ground No.1 raised by the assessee being general is dismissed.
4. Ground No.2 raised by the assessee is against addition of Rs.47,302/- was not pressed by the assessee and hence the same is dismissed as not pressed.
5. Ground No.4 raised by the assessee reads as under:
" 4. That in the facts and circumstances of the case, the Id. Commissioner of Income Tax (Appeals) gravelly erred in sustaining the addition of Rs.50,642/- made by the Assessing Officer in respect of Baddi Unit on account of payment to Rattan by invoking the provisions of Section 40{a)(ia"
6. The issue raised vide ground No.4 is against the addition made on a c c o u n t o f p a ym e n t t o o n e S h r i R a t t a n , w i t h o u t d e d u c t i o n o f t a x a t source and consequently the invoking of provisions of section 40a(ia) of the Act. The learned A.R. for the assessee fairly admitted that out of the erection charges no tax was deducted at source and consequently the said amount is to be disallowed in view of the provisions of section 40a(ia) of the Act. It was further pointed out b y the learned A.R. for the assessee that deduction under section 80IC of the Act is to be allowed on revised profits of the business being the eligible profits entitled to deduction under section 80IC of the Act. Reliance was placed on S.B. Builders & Developers Vs. ITO [50 DTR 299 (Mumbai Bench)].
7. The learned D.R. for the Revenue placed reliance on the observations of CIT (Appeals) in para 37 at page 27 of the appellate order.
8. We have heard the rival contentions and perused the record. D u r i n g t h e ye a r u n d e r c o n s i d e r a t i o n t h e a s s e s s e e h a d c r e d i t e d t h e account of contractor Shri Rattan by sum of Rs.50,642/- on 31.3.2006 in 3 B a d d i u n i t . N o t a x w a s d e d u c t e d a t s o u r c e o u t o f t h e s a i d p a ym e n t u n d e r section 194C of the Act and consequently the provisions of section 40a(ia) of the Act are admittedly attracted in the case. However, from the perusal of the order of the CIT (Appeals) i.e para 36 at page 27 of the appellate order we find that there is a mention of small amount being paid in cash and balance amount being paid through cheque. In case a m o u n t h a s b e e n p a i d a s o n t h e c l o s e o f t h e ye a r , n o d i s a l l o w a n c e i s warranted under section 40 a(ia) of the Act in view of the ratio laid down b y the Special Bench of Vishakhapatnam Tribunal in ACIT Vs. M e r i l yn Shipping & Transports reported in [140 TTJ 1(SB)(Vishakhapatnam)]. H o w e v e r , i n c a s e t h e s a i d p a ym e n t h a s b e e n m a d e a f t e r t h e c l o s e o f t h e ye a r t h e n t h e s a i d a m o u n t i s d i s a l l o w a b l e i n view of the provisions of section 40a(ia) of the Act and as held by the Special Bench of Vishakhapatnam Tribunal in ACIT Vs. M e r i l yn Shipping & Transports reported in [140 TTJ 1(SB)(Vishakhapatnam)] (supra). Further, where the amount is disallowed, the said is added back to the profits of the business and the assessee is entitled to the claim of deduction under section 80IC of the Act on the said profits being eligible profits for claiming the said deduction. In view thereof, we remit the issue back to the file of the Assessing Officer to decide the same in line with our direction after due verification. Reasonable opportunity of hearing shall be afforded to the assessee. Ground No.4 raised by the assessee is allowed for statistical purposes.
9. Ground No.3, 5 to 7 raised by the assessee read as under:
3. That in the facts and circumstances of the case, the Id.
Commissioner of Income Tax (Appeals) gravelly erred in upholding the action of the Id. Assessing Officer, who restricted the deduction under Section 80IC at Rs. 1,22,43573/- as against the deduction allowable at Rs.1,74,08,870/-.
5. That in the facts and circumstances of the case, the Id. 4 Commissioner of Income Tax (Appeals) gravelly erred in upholding the action of the Id. Assessing Officer in taking the ratio of 59.32% : 40.6 % in respect of expenses as against the 56% : 44% adopted by the assessee in respect of Baddi and Chandigarh Unit respectively and^ thus erred in making an addition of Rs. 6,05,658/-.
6. That in the facts and circumstances of the case, the Id. Commissioner of Income Tax (Appeals) gravelly erred in upholding the action of the Id. Assessing Officer in treating a sum of Rs.1,12,44,060/- as sale and as trading receipts, which in fact are manufacturing expenses and estimating the trading profit of Rs.22,79,170/-bydisallowing deduction under Section 80IC.
7. That in the facts and circumstances of the case, the Id. Commissioner of Income Tax (Appeals) gravelly erred in upholding the action of the Id. Assessing Officer, who in respect of civil works executed in Baddi Units had erred in estimating the net profit of 33.53% and working out the net profit of Rs. 12,65,558/-."
10. T h e b r i e f f a c t s r e l a t i n g t o t h e i s s u e a r e t h a t d u r i n g t h e ye a r u n d e r c o n s i d e r a t i o n t h e a s s e s s e e i s c a r r yi n g o n i t s a c t i v i t i e s w i t h h e a d o f f i c e at Chandigarh unit and branch office at Baddi unit. The assessee had shown receipts on account of activities related to prefabricated structure as well as some civil work carried out during the ye a r under consideration. The assessee had claimed profits of the Baddi unit as eligible for deduction under section 80IC of the Act at Rs.1,63,93,955/-. The assessee had maintained separate books of account for the Chandigarh unit and the Baddi unit. The Assessing Officer, however, noted that large amount of administrative and financial expenses were debited in the books of the Chandigarh unit, which was also the head office of the assessee. The assessee had apportioned percentage of some of these expenses in certain ratio between the Chandigarh unit and the Baddi unit. The Assessing Officer asked the assessee to furnish the basis thereof and justify the said apportionment. The second issue raised by the Assessing Officer was that the profits of the Baddi unit included certain profits on account of various civil work executed by the assessee and how the same were eligible for deduction under section 80IC of the Act. The assessee was also asked to establish that its 5 activities amounted to manufacture or production of articles or things making it eligible for deduction under section 80IC of the Act. During the course of assessment proceedings the assessee furnished different replies, reworked the ratio of the disallowance of certain expenses debited to the Chandigarh unit to be considered for working out the eligible profits of Baddi unit. In the computation of income the assessee had allocated 53.77% of some specific expenses debited to Chandigarh unit to the Baddi unit, which figure was later revised by the assessee to ratio of 55.97% : 49.03 (Baddi unit : Chandigarh), which details are enclosed at Annexure A-2 to the assessment order. Consequently the assessee admitted that the additional expenses to the extent of Rs.4,03,445/- should have been allocated to the Baddi unit and thus deduction under section 80IC of the Act was to be scaled down. The Assessing Officer at page 14 of the assessment order compared the sales of both the units i.e. the Chandigarh unit and Baddi unit and was of the view that the excise duty which is charged for the manufacturing at Chandigarh unit had to be excluded from the sales turnover for the purposes of computing the ratio of turnover between the Chandigarh unit and Baddi unit and computed the ratio at 59.32% : 40.68% (Baddi :
Chandigarh). By this exercise the additional expenses to be allocated to Baddi unit came to Rs.2,02,213/- and the claim of deduction under section 80IC of the Act was reduced to this extent and the tax able income to the Chandigarh unit was enhanced to the extent of Rs.6,05,658/-.
11. The Assessing Officer further considered second aspect of deduction under section 80IC of the Act i.e. though the assessee had carried out civil construction work at Jaipur under Baddi unit but the profits of the same were included in the eligible profits for claiming 6 deduction under section 80IC of the Act. The assessee during the course of assessment proceedings admitted that sum of Rs.37,74,330/- on account of civil works, erection charges etc. had nothing to do with the manufacturing activities, as noted by the Assessing Officer in para 9.4 at page 15 of the assessment order. The Assessing Officer requisitioned the assessee to furnish the details attributable to such receipts by way of civil work, erection charges, etc. In the absence of any satisfactory reply and after going through the books of account of the assessee found that the assessee had debited and transferred the expenses of Jaipur unit to the Baddi unit as on 31.3.2006, totaling Rs.25,28,772/-. The said expenditure was held to be in relation to its works contract work and consequently profits from the same were computed at Rs.12,65,558/-, which gave profit ratio of 33.53% over the total turnover of civil contract work. The assessee had declared profits @ 24.85% in Chandigarh unit on the civil work carried out in the areas Uri and Jammu & Kashmir. The profits of Jaipur unit were thus found to be reasonable in comparison to the rates declared at Chandigarh unit and consequently the claim of deduction under section 80IC of the Act of the Baddi unit was reduced by sum or Rs.12,65,558/-.
12. The third issue raised by the Assessing Officer was in relation as to how the activities carried out by the assessee were manufacturing activities and not construction activities. The reply of the assessee in this regard is reproduced under paras 9.7 and 9.8 at pages 18 to 21 of the assessment order. The Assessing Officer vide paras 9.9 to 9.11 at pages 21 to 23 of the assessment order deliberated upon the issue and was of the view that the activities of the assessee could not be entirel y treated as that of manufacturing or producing of articles or things as it included trading of the goods as well. The explanation of the assessee is at page 7 24 of the assessment order in which it explained that it was manufacturing prefabricated structure but was also purchasing certain components i.e. primer, paints, brush, etc. from the market and was delivering the same. The articles which were manufactured by it had to be transported to far flung and remote areas and said structures were sent alongwith nuts and bolts and paints and said spares were claimed to be integral part of manufacturing activities. The Assessing Officer noted that the total sales of Baddi unit were Rs.9.58 crores and approximate percentage of bought out items was 2.25% which works out to Rs.24,35,050/-. The Assessing Officer however, rejected the plea of the assessee that only 2.45% of the total sale value constituted trading items. The Assessing Officer vide para 9.13 estimated the value of items enlisted in the chart at Rs.1.12 crores being total trading sales turnover. The profits @ 20.27% on the said turnover worked out to Rs.22,79,170/- and the same was treated as trading profits on which deduction under section 80IC of the Act was not allowable.
13. The CIT (Appeals) upheld the order of the Assessing Officer.
14. The assessee is in appeal against the order of CIT (Appeals). The learned A.R. for the assessee pointed out that in respect of allocation of expenses between Chandigarh unit and Baddi unit the claim of deduction under section 80IC of the Act was reduced on two account i.e. exclusion of excise duty and reallocation of expenses. The learned A.R. for the assessee fairl y admitted that no deduction under section 80IC of the Act was allowable on the profits earned on civil works at Jaipur. However, rate and percentage applied for computing the expenditure at Jaipur unit was excessive.
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15. In respect of the third issue raised i.e. trading or manufacturing activity carried on by the assessee, it was explained by the learned A.R. for the assessee that it was engaged in the manufacturing of prefabricated sheds/shelters for Indian Arm y which was used for various purposes. The said items were manufactured and put together at unit of the assessee and the said structure was disengaged for the transportation to far away places. The learned A.R. for the assessee pointed out that the Assessing Officer had enlisted certain items and had estimated its sale price by holding that the assessee was trading in the said items. However, the assessee was charging for the whole packages and not separately for different items. Further paints was also supplied for painting the sheds at the respective places not for selling it item-wise. Reliance was placed on the ratio laid down in M/s Claas India Ltd. Vs. ACIT [8 DTR 347 (Delhi Bench)].
16. We have heard the rival contentions and perused the record. The assessee is engaged in the business of steel fabrication and manufacturing of prefabricated structure which were mainly supplied to the Defence and Paramilitary Organization. The assessee has its units at both Chandigarh and Baddi. The profits of the Baddi unit are eligible for deduction under section 80IC of the Act. The assessee had claimed the total profits earned by it at Baddi unit to be eligible for deduction under section 80IC of the Act. However, during the course of assessment proceedings the said deduction claimed under section 80IC of the Act was restricted partially on account of three components :
I. Allocation of expenses between the Chandigarh and Baddi Units (claim under section 80IC reduced b y Rs.605658/-).
II. Profit earned from civil works contract (claim reduced by Rs.1265558/-) 9 III. Trading vs. Manufacturing activities. Total trading sales turnover of Rs.11244060/-. Profit at 20.27% applied.
Therefore, deduction not allowed on Rs.2279170/-.
17. In respect of allocation of expenses between Chandigarh unit and Baddi unit where the claim of deduction under section 80IC of the Act was reduced by Rs.6,05,658/-, the plea of the assessee in this regard was that initially it had allocated 53.77% on some specific expenses, debited to the Chandigarh unit to be relatable to the Baddi unit and worked out the profits of the Baddi unit. However, during the course of assessment proceedings the assessee on its own motion reworked ratio of 55.97% :
49:03% i.e. (Baddi : Chandigarh). The said allocation is as per Annexure A-2 of the assessment order. As per the said allocation the assessee itself admitted that the additional expenses to the extent of Rs.4,03,445/- had to be allocated to the Baddi unit.
18. The second aspect of allocation was the working of the net sales turnover. The turnover of the Chandigarh unit was reworked by excluding excise duty from the sales and consequently had resulted in reworking of the ratio between Chandigarh unit and Baddi unit, and consequentl y deduction under section 80IC of the Act was reduced by Rs.2,02,213/-. In view of the admission of the assessee during the assessment proceedings as evidenced by the recalculation of the allocation of the ratio between Baddi unit and Chandigarh unit as per Annexure A-2 to the assessment order, addition to the extent of Rs.4,03,445/- is upheld. Further allocation of Rs.2,02,213/- to the Baddi unit on account of exclusion of excise duty from the sales turnover of Chandigarh unit for computing percentage ratio is also upheld. C o n s e q u e n t l y, t h e d e d u c t i o n u n d e r s e c t i o n 8 0 I C o f t h e A c t b e i n g r e d u c e d to the extent of Rs.6,05,658/- is upheld.
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19. The second related issue of computation of deduction under section 80IC of the Act is profits on civil works contract carried out at J aipur. The Assessing Officer vide paras 9.5 to 9.6 had computed the profits of Jaipur unit of the works contract at Rs.12,65,558/-. A d m i t t e d l y, t h e assessee is not entitled to deduction under section 80IC of the Act on the profits arising on civil contract work carried out by the assessee. However, in order to adjudicate the issue by following the principles of natural justice, we are of the view that the said computation of profits from civil works needs to be relooked by the Assessing Officer by considering actual expenditure of the said contract work. A c c o r d i n g l y, we remit this limited issue back to the file of the Assessing Officer to determine the profits from work contract by examining the issue de-novo after affording reasonable opportunity of hearing to the assessee.
20. The third component of disallowance of deduction under section 80IC of the Act worked out by the Assessing Officer was on account of the assessee being in both manufacturing and trading activities in the supply of prefabricated sheets to its customers. The claim of the assessee was that it was engaged in the manufacturing activities at Baddi unit wherein it obtains the order from the Defence with specifications and then manufactures the same as per the specifications of the customers. The product manufactured by the assessee was inspected by the representatives of DGS&D or DGQA or Ministry of Defence, for quality assurance before dispatch. The units of the assessee were registered with DGS&D and DGQA and Ministry of Defence. The assessee had elaborately explained its manufacturing activities stage- wise as reproduced by the Assessing Officer at pages 19 to 21 of the assessment order. The explanation of the assessee was that it was s u p p l yi n g p r e f a b r i c a t e d s h e l t e r s t o t h e A r m y A u t h o r i t i e s i n w h o l e a n d 11 manufacturing activities of cutting the steel pipes of the required size and its welding, grinding. painting and finishing was being carried out at Baddi unit. Certain bought out items which were essential parts of the prefabricated structure were supplied alongwith prefabricated shelters. The Assessing Officer at page 27 of the assessment order have enlisted the bought out items which as per the Assessing Officer were being traded in by the assessee. The estimated value of the said items was computed at Rs.1.12 crores by the Assessing Officer as per the list at page 28 of the assessment order on which profits @ 20.7% was worked out at Rs.22,79,170/-.
21. The second plea of the assessee was that certain paints were being supplied alongwith manufactured items by the assessee, against which assessee claims that final coat of paints was not put on the sheds as the said items were being transported for a long distance and only on being erected the paints were put by the army itself and the said items were not sold by the assessee, but were part of the contract deal of supply of the manufactured items. We find merit in the plea of the assessee that the assessee was engaged in the business of manufacturing of prefabricated sheets/cabins as per order received from the Ministry of Defence. The said items were being manufactured at the specification of the customers and certain items were not manufactured by it, were put together for supply the complete unit. The claim of the assessee was that it was entitled to claim of deduction under section 80IC of the Act on such bought out components. The issue of claim of deduction under section 80IC of the Act on such bought out items arose before the M u m b a i B e n c h o f t h e T r i b u n a l i n Mihir Engineers Ltd. Vs. JCIT [112 TTJ (Mum) 940].
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22. Th e M u m b a i B e n c h o f t h e T r i b u n a l i n M i h i r E n g i n e e r s L t d . ( s u p r a ) vide paras 23 to 30 held as under:
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 CIT v. N.C. Budharaja & Co. [1993] 204 ITR 4121 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' takes 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 Locomotive & Engg. Co. Ltd. [1968] 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 Bharat Pedals (India) v. ITO [2003] 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 13 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 sales of Rs. 45.98 lakhs for the year under consideration. Since the assessee was engaged in the business of manufacturing cycle pedals, it 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-I."
26. The Delhi Bench of Tribunal in the case of Jackson Engineers (P.) Ltd. v. ITO [1989] 31 ITD 79 had held as under :
"From the perusal of pictures given by the assessee in respect of diesel generator 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. Dy. CIT [1996] 59 ITD 423 and after deliberation at length on the facts, decision of Apex Court in CIT v. N.C. Budharaja & Co. [1993] 204 ITR 4121 and various other judicial pronouncements of various courts, it was held that the assessee was covered within the definition of manufacturing of an article or thing. The Delhi Bench of Tribunal in Degremont India Ltd.'s case (supra) had held as under :
"It is apparent from a plain reading of the judgment of the Supreme Court in N.C. Budharaja & Co.'s case (supra) that the various findings 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 be interpreted differently keeping in mind 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 14 in certain desired sectors and promote industrialization in developing countries which has adopted the policy of liberalization."
It was further held as under :
"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 obvi-ously distinct and different plant than the various components, equip- ments, 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 bills 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 parties 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. Asstt. CIT [1995] 78 Taxman 214 (Mag.) 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 per cent 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 Engg. Systems (P.) Ltd. v. Dy. CIT [1997] 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 15 in materials and workmanship when erected and operated in a manner provided by us (the assessee).
30. The Pune Bench of Tribunal in Indocan Engg. Systems (P.) Ltd. v. Dy. CIT [1997] 60 ITD 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, cannot 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 cannot be said that it is embedded to the earth or it is attached to the earth. It cannot 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 v. 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."
23. In respect of the deduction claimed under section 80IA of the Act on bought out components the Tribunal held as under:
"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 assessee was manufacturing components of cooling towers in its factory unit at Chhatral, which in-turn were exigible to Excise Duty. 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 assessee 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 assessee. In the instant case, the assessee purchases various bought out components, which along with manufacturing components are assembled at the client's site 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 assessee had undertaken the job of erecting a cooling tower as per the individual specification of the client, and after 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 assessee 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 16 Bharat Pedals (India) v. ITO [2003] 84 ITD 89 (Chd.), 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-IA 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 DR 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 IT 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 are eligible for deduction under section 80-IA 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 (XE series) and counter flow (CM series) cooling towers. In view of the decision hereinabove that assessee is not entitled to any deduction under section 80-IA of the Act on Round Bottle (RB) Cooling Towers, no deduction/benefit under section 80-IA shall be allowed on bought out components used for erection of Round Bottle Cooling Towers. The Assessing Officer is directed to allow the deduction under section 80-IA of the I.T. Act only on profits on sale of cross flow (XE series) and counter flow (CM series) cooling towers.
24. We find that the issue raised before us is identical to the issue arising before the Mumbai Bench of the Tribunal in Mihir Engineers Ltd. Vs. JCIT (supra) which in turn was followed b y the Chandigarh Bench of the Tribunal in ACIT Vs. Spray Engineering Devices Ltd. in ITA No.701, 6 4 6 / C h d / 2 0 0 9 a n d I T A N o . 1 0 2 1 / C h d / 2 0 1 1 r e l a t i n g t o a s s e s s m e n t ye a r s 2006-07 and 2008-09, date of order 22.6.2012. Following the same we hold that the assessee is entitled to benefit of claim of deduction on the said bought out items and there is no need to rework the deduction under section 80IC of the Act. Reversing the order of CIT (Appeals) we direct the Assessing Officer to allow the claim of the assessee in respect of deduction under section 80IC of the Act on such bought out components. Ground Nos. 3, 5 to 7 raised by the assessee are partly allowed.
25. Ground Nos. 8 to 11 raised by the assessee being general are dismissed.
17ITA No.1361/Chd/2010 (Revenue's appeal)
25. Ground No.1 raised by the Revenue reads as under:
"1. As per the facts and circumstances of the case and the provisions of law, the CIT (A) has erred in deleting the addition of Rs. 24,981/- u/s 36(l)(va) of the Income Tax Act,1961 made by Assessing Officer «n the ground that the assessee company has failed to deposit the amounts on or before the due date.
26. The issue in ground No.1 raised by the Revenue is against the d i s a l l o w a n c e o n a c c o u n t o f e m p l o ye e s s h a r e o f P F b e i n g n o t d e p o s i t e d within the prescribed limits. The claim of the assessee was that it had deposited the same within the grace period or before the due date of filing the return of income. We find that the issue in the present ground o f a p p e a l i s c o v e r e d b y t h e r a t i o l a i d d o w n b y t h e P u n j a b & H a r ya n a High Court in CIT Vs. M/s Nuchem Ltd. in ITA No.323 of 2009 and following the same we uphold the order of CIT (Appeals) and dismiss ground No.1 raised by the Revenue.
27. Ground Nos. 2 to 7 raised by the Revenue read as under:
2. On the facts and in the circumstances of the case and as per provisions of law Ld.CIT (A) has erred in allowing the relief to the assessee on the additions of Rs.2,98,555/-made by the Assessing Officer in Chandigarh Unit on accountofpaymentoRs.2.98,555/-
made to Everest Industries by invoking the provisionsofsection40(a)(ia)of the Income Tax Act.
3. On the facts and in the circumstances of the case and as per provisions o flaw Ld. CIT(A) has erred in allowing the relief to the assessee on the additions of Rs.2,98,555/- made by the Assessing Officer in Chandigarh Unit on account of payment of Rs.2.98,555/- made to Everest Industries by invoking the provisions of section 40 (a) (ia) of the Income Tax Act.
4. On the facts and in the circumstances of the case ad as per 18 provisions of law Ld.CIT (A) has erred in allowing the relief to the assessee on the additions of Rs.16,53,036/- made by the Assessing Officer on freight payments (each payment to a truck owner being less than Rs. 20,000/-) by invoking the provisions of section 40(a)(ia) of the Income Tax Act.
5. On the facts and in the circumstances of the case and as per provisions of law Ld.CIT() has erred in allowing the relief to the assessee on the addition Rs.1,29,270/-inBaddiUnit in account of expenses of freight by invoking the provisions of section 40 (a)(ia).
6. Whether on facts and in the circumstances of the case and as per provisions of law Ld.CIT(A) was right in law in deleting the disallowances made under section 40a(ia) of the Income Tax Act in view of the amended provisions of Sec 194C3(i) of the Income Tax Act.
7. Whether on facts and in the circumstances of the case and as per provisions of law the goods supplied by the supplier not being inclusive of freight and therefore the freight charges charged separately by the supplier fall under the provisions of section 194C of the Income Tax Act. 1961."
28. The issues raised by the Revenue in ground Nos. 2 to 7 are against the various disallowances made by invoking the provisions of section 40a(ia) of the Act. The plea of the assessee in this regard was two folds that; a) Disallowance under section 40a(ia) of the Act is to be made onl y on such amounts which are payable on the close of the financial year and; b) in any case where any disallowance is made under section 40a(ia) of the Act, the profits of the business have to be increased by such amount for computing deduction under section 80IC of the Act. We find merits in both the pleas of the assessee that in view of the ratio laid down b y the Special Bench of Vishakhapatnam Tribunal in ACIT Vs. M e r i l yn S h i p p i n g & T r a n s p o r t s ( s u p r a ) , p r o v i s i o n s o f s e c t i o n 4 0 a ( i a ) o f the Act for disallowance of expenses are to be invoked only in such 19 c a s e s w h e r e t h e a m o u n t i s p a ya b l e a s o n t h e c l o s e o f t h e f i n a n c i a l ye a r , a n d n o t a x h a s b e e n d e d u c t e d o u t o f s u c h p a ym e n t s . However, in case any such amount is disallowed in view of the provisions of section 40a(ia) of the Act, profits eligible for deduction under section 80IC of the Act have to be reworked by adding the said disallowance to the profits of the business. In order to adjudicate the issue, as the relevant details are not available on record, we remit the issue back to the file of the Assessing Officer to decide the same in line with our observations, after affording reasonable opportunity of hearing to the assessee. Ground Nos.2 to 7 raised by the Revenue are allowed for statistical purposes.
29. Ground Nos. 8 and 9 being general are dismissed.
30. In the result, the appeal of the assessee is allowed and the appeal of the Revenue is partly allowed.
Order Pronounced in the Open Court on 27th day of June, 2012.
Sd/- Sd/-
(T.R.SOOD) (SUSHMA CHOWLA)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated : 27th June, 2012
*Rati*
Copy to: The Appellant/The Respondent/The CIT(A)/The CIT/The DR.
Assistant Registrar, ITAT, Chandigarh 20