Income Tax Appellate Tribunal - Ahmedabad
Sabarmati Gas Co.Ltd.,, Gandhinagar vs Department Of Income Tax on 2 March, 2016
IN THE INCOME TAX APPELLATE TRIBUNAL "D" BENCH,
AHMEDABAD
आयकर अपील य अ
धकरण, अहमदाबाद यायपीठ 'डी' अहमदाबाद
(BEFORE SHRI ANIL CHATURVEDI, A.M. & SHRI S. S. GODARA, J.M.)
( ी अ नल चतव
ु द , लेखा सद!य एवं ी एस.एस. गोदारा, या यक सद!य के सम' ।)
ITA Nos: 2956/Ahd/2010
(Assessment Year: 2007-08)
Deputy Commissioner of Income Vs. Sabarmati Gas Co. Ltd.
Tax, Gandhinagar Circle, GSPC Bhavan, 4th Floor, Sector-
Gandhinagar 11, Gandhinagar
(Appellant) (Respondent)
ITA Nos: 1301/Ahd/2012
&
1259/Ahd/2012
(Assessment Year: 2008-09)
Asstt. Commissioner of Income Tax, Vs. Sabarmati Gas Co. Ltd.
Gandhinagar Circle, Gandhinagar GSPC Bhavan, 4th Floor, Sector-
11, Gandhinagar 382011
&
Sabarmati Gas Co. Ltd. Vs. Deputy Commissioner of Income
th
GSPC Bhavan, 4 Floor, Sector-11, Tax, Gandhinagar Circle,
Gandhinagar 382011 Gandhinagar
PAN: AAKCS0110N
(Appellant) (Respondent)
राज व क ओर से/ By Revenue: Shri Vimalendu Verma, CIT D.R. with Shri
Anil Kumar Bhardwaj, Sr. D.R.
आवेदक क ओर से/ By Assessee: Shri S. N. Soparkar, A.R.
Date of hearing : 12 -02 -2016
Date of Pronouncement : 02 -03 -2016
2
ITA Nos .2956/Ahd/2010, 1301 &1259/Ahd/12 for A.Y. 2007-08 & 2008-09
(आदे श)/ORDER
PER ANIL CHATURVEDI, ACCOUNTANT MEMBER
These three appeals of which two are filed by Revenue and the other one by Assessee are against the order of CIT(A), Gandhinagar, dated 30.08.2010 for the assessment year 2007-08 and 17.03.2012 for A.Y. 2008-09.
We first proceed with A.Y. 2007-08.
2. The relevant facts as culled out from the materials on record are as under:
3. The Assessee is a joint venture company of Gujarat State Petroleum Corporation Ltd. and Bharat Petroleum Corporation Ltd. and is engaged in the business of supply of gas to industrial, domestic and commercial establishments and to automobile and other industrial sectors through the City Gas Distribution Network Systems. Assessee electronically filed its return of income for A.Y. 2007-08 on 10.10.2007 declaring total income of Rs.83,81,133/-. The case was selected for scrutiny and thereafter assessment was framed u/s.143(3) of the Act vide order dated 30.11.2009 and the total income was determined at Rs.6,73,46,290/-. Aggrieved by the order of A.O., assessee preferred appeal before the ld. CIT(A) who vide order dated 30.08.2010 (in Appeal No. CIT(A)/GNR/133/2009-10) granted partial relief to the assessee. Aggrieved by the order of ld. CIT(A), Revenue is now in appeal before us. The grounds raised by Revenue in ITA No.2956/Ahd/2010 reads as under:
"(1) The learned CIT(Appeals) has erred in law and on facts in deleting the addition made on account of initial connection charges of Rs.5,28,72,901/-.
(2) The learned CIT(Appeals) has erred in law and on facts in deleting the addition of Rs.15,97,186/-, made on account of estimating the value of Closing Stock of natural gas..3
ITA Nos .2956/Ahd/2010, 1301 &1259/Ahd/12 for A.Y. 2007-08 & 2008-09 (3) The learned CIT(Appeals) has erred in law and on facts in deleting the addition of Rs.44,95,071/-, made on account of disallowance of depreciation on meters, instruments etc."
4. First ground is with respect to deleting the addition made on account of initial connection charges of Rs.5,28,72,901/-.
4.1 On perusing the Profit & Loss Account and notes to financial statements, Assessing Officer noticed that assessee had installed certain meters and instruments at the sites of customers to provide the last point connectivity and had collected initial connection charges of Rs.5,28,72,901/- from customers towards the cost of such meters and instruments. He also noticed that it was netted off against Rs.4,76,62,071/- being the cost of meters and instruments which were in the process of being transferred to BPCL and which was shown under the head "current liabilities" and the balance amount of Rs.52,58,830/- was netted off from the cost of assets. The assessee was asked to show cause as to why the entire receipts on account of initial connection charges not be considered as income of the assessee to which assessee inter alia submitted that the meters and instruments were not sold to customers but were owned by the assessee and Rs.4,76,62,071/- was collected for and on behalf of the BPCL and till the transfer to BPCL, the aforesaid amount was shown as current liability in the assessee's books of accounts and therefore, it cannot be considered as income of assessee. With respect to the remaining amount of Rs.52,58,830/-, it was submitted that it was a capital receipt and was netted off against the value of plant and machinery. The submission of the assessee was not found acceptable to the A.O. in view of the fact that the buyers had paid non refundable initial connection charges and according to the A.O., meters and other equipments remained assessee's property, even after its installation. He was therefore of the view that the receipts in the form of initial connection charges that was collected by assessee were revenue receipts in the hands of assessee. He, accordingly, considered the aggregate amount of Rs.5,28,72,901/- as income of the assessee.
4ITA Nos .2956/Ahd/2010, 1301 &1259/Ahd/12 for A.Y. 2007-08 & 2008-09
5. Aggrieved by the order of Assessing Officer, Assessee carried the matter before the ld. CIT(A) who deleted the addition made by A.O. by holding as under:
"2.2. I have considered the assessment order as well as assessee's contentions. It is seen that total amount of Rs.5,28,72,901/- was collected as initial connection charges from customers towards cost of the meters and instruments. Out of this amount Rs.4,76,62,071/- have been collected on behalf of BPCL for the meters and instruments to be supplied by them and shown as current liabilities by the appellant. Balance amount of Rs.52,50,830/- has been netted out of off from the value of cost of plant and machineries. A.O. has held this amount of Rs.5,28,72,901/- as the taxable income holding that these are non-refundable initial connection charges for meters and equipments installed which remains property of the seller. The above conclusion of A.O. is not based on facts of the case because out of Rs. 5,28,72,901/-, Rs.4,76,22,071/- are initial connection charges collected on behalf of BPCL for the equipments to be installed and they have been rightly shown as the current liability in the assessee's case. This cannot be treated as income of the assessee in any case. As regarding the amount of Rs.52,50,830/- assessee has treated it as the capital receipt and has reduced the value of Plant & Machinery by this amount. This is appropriate as the said amount has been received towards the installation of pipeline, meters and equipments i.e. capital assets for supplying gas to the clients. This amount is on account of bringing into place the Plant & Machinery and appellant has already claimed the reduced depreciation to this extent. Such conclusion is duly supported by decision of Hon'ble Supreme Court in the case of Hoshiarpur Electric Supply Co. vs CIT 41 ITR 608 (SC) where the recoupment of expenditure for bringing into existence a capital asset has been held as capital in nature. This is further supported by the decisions in the cases of CIT vs Poona Electric Sup-ply Co., Ltd 14 ITR 622 (Bom) and Monghyr Electric Supply Co. Ltd vs CIT 26 ITR 15 (Patna).
Accordingly, this ground of appeal is allowed and the addition of Rs.5,28,72,901/- is deleted.
6. Aggrieved by the order of ld. CIT(A), Revenue is now in appeal before us.
6.1 Before us, ld. D.R. took us through the observations and finding of A.O. and supported his order. He further submitted that the case laws relied upon by the assessee before ld. CIT(A) are distinguishable on facts. Ld. A.R. on the other hand reiterated the submissions made before the A.O. and ld. CIT(A) and further submitted that of the total amount of Rs.5,28,72,901/- that was collected from the customers, Rs.4,76,22,071/- was collected for on behalf of the BPCL and was shown as current liability in the books of account and Rs.52,50,830/- that was collected on its own behalf was treated as capital receipts and was netted off against the value of plant and machinery. He further submitted that the amount which was collected on behalf of the assessee was reduced from the block of assets and it had claimed reduced depreciation 5 ITA Nos .2956/Ahd/2010, 1301 &1259/Ahd/12 for A.Y. 2007-08 & 2008-09 and on the amount that was collected on behalf of BPCL, assessee had not reduced the block of assets. He further placed reliance on the decisions cited by assessee before the ld. CIT(A) and, thus, supported the order of ld. CIT(A).
7. We have heard the rival submissions and perused the material on record. The issue in the present case is about the taxability of initial connection charges collected by the assessee. We find that ld. CIT(A) after having considered the submissions of the assessee, has given a finding that Rs.4.76 crores was initial connection charges collected on behalf of the BPCL for the equipments and was rightly shown as current liability by the assessee and could not be treated as income of the assessee and with respect to the balance amount of Rs.52,50,830/- he has given a finding that since the amount was received towards the installation of pipelines, meters and equipments which are assets of the assessee, the said amount was a capital receipt as it was for bringing in plant and machinery and assessee has claimed depreciation after reducing the aforesaid amount from the aggregate cost of assets. Before us, Revenue has not placed any material on record to controvert the finding of ld. CIT(A), nor has pointed out as to how the decisions relied upon by assessee would not be applicable to the present facts. In view of the aforesaid facts, we find no infirmity with the order of ld. CIT(A). Thus, this ground of Revenue is dismissed.
8. Second ground is with respect to estimating the value of closing stock of natural gas.
8.1 The A.O., on perusing the financial accounts, noticed that assessee has shown the closing stock of natural gas at Rs.Nil. The assessee was asked to explain as to why the quantity of gas in the pipelines be not considered as closing stock and added to the income of assessee, to which, assessee inter alia submitted that the quantity of sale of gas is more than the quantity of purchase of gas on account of measurement tolerances and hence, the question of closing stock does not arise. The submission of the assessee was not found acceptable to the A.O. A.O. held that the assessee did not 6 ITA Nos .2956/Ahd/2010, 1301 &1259/Ahd/12 for A.Y. 2007-08 & 2008-09 furnish the details of closing stock. A.O., thereafter, proceeded to estimate the value of closing stock, being the gas in pipeline at 1% of the total purchases and accordingly made an addition of Rs.15,97,186/-.
9. Aggrieved by the order of A.O., assessee carried the matter before the ld. CIT(A) who deleted the addition by holding as under:
"5.3 I have considered the assessment order as well as assessee's contentions. The observation of the AO is that assessee has not furnished the details of closing stock. While the appellant has submitted a copy of letter submitted to the AO on 10/11/2009 as mentioned above giving the details of purchases & sales and closing stock being Nil. In fact sales are much more than purchases as explained to A.O, (para. 5.2) and accepted by A.O. The appellant has explained that it is purchasing gas from GSPC, GSPC transmits gas from cross country pipeline laid by GSPL to various places in Gandhi nagar, Sabarkantha & Mehsana to which appellant caters to. The gas is purchased by it at "Delivery point" or Tap Off" The delivery point and purchase point are the same and it is a back to back arrangement for purchase by the appellant and sale to the customers. From the said delivery point gas is sold to the customers as per pre-determined agreement with the customers as per their requirements in industries/establishments. It has been stated that only that much quantity of gas is purchased as required by the customers. In fact assessee does not have any storage facility. The purchase and sale figures have been accepted by the A.O. as per explanation submitted by appellant where whole of purchases are stated to have been sold. It is seen that in the case of GSPC findings on similar issue are as under:
"6.6. The issue has been given due consideration. Firstly, there is the issue of consistency and the manner of recording of closing stock in the appellant's books. The appellant had followed a particular method in A.Y. 2005-06, which have not been objected to by the Assessing Officer. The present method followed is consistent with that and unless the method adopted for A.Y. 2005- 06 is changed, the value of opening and closing stock for the year cannot be arrived at and the result of the income cannot be found out. Further, what comes out clearly is that the gas in the pipelines does not belong to the assessee and the title of the gas passes from the seller to the appellant only at the "delivery point". In fact, at the same "delivery point" the assessee further transfers the title of the gas to the ultimate buyers. The billing both ways seems to be on the basis of measurement done at the "delivery point". Therefore, in the techno-commercial aspect of these transactions, the possibility of there being some gas belonging to the appellant in the pipelines, either of the supplier or the ultimate buyer, appears to be very low. In the face of this situation, the onus was on the Assessing Officer to disprove the stand taken by the assessee, both with respect to the method followed as also the quantum of the closing stock, which has not been done by him. The estimate made, I am afraid, is purely hypothetical and is not related either to technical or historical facts of the assessee."
From the facts of the case and decision on similar issue mentioned above, addition of Rs.15,98,186/- is deleted and this ground of appeal is allowed."
10. Aggrieved by the order of ld. CIT(A), Revenue is now in appeal before us.
7ITA Nos .2956/Ahd/2010, 1301 &1259/Ahd/12 for A.Y. 2007-08 & 2008-09 10.1 Before us, ld. D.R. supported the order of A.O. and further submitted that since the assessee did not furnish the details of closing stock, A.O. had no other alternative but to estimate the value of closing stock and in such circumstances, the estimation of stock was reasonable. He, thus, supported the order of A.O. Ld. A.R. on the other hand reiterated the submission made before the A.O. and ld. CIT(A) and further submitted that assessee is getting the gas purchases at a "delivery point" or "tap off"
and from the said "delivery point" or "tap off" point, the gas is sold to customers and that the delivery points and purchase points are same and therefore there is no question of closing stock. He further submitted that quantity of sale of gas is more than quantity of purchase of gas on account of measurement tolerance and hence, question of closing stock does not arise. He, thus, supported the order ld. CIT(A).
11. We have heard the rival submissions and perused the material on record. We find that ld. CIT(A) while deleting the addition has given a finding that assessee purchased gas from GSPC which is transmitted through pipelines and that gas is purchased by it at the "delivery point" or "tap off" point and it is same as the point at which it is sold to the customers and it is a back to back arrangement for purchase by the assessee and sale to its customers and the quantity purchased by assessee is same that is sold by assessee. Before us, Revenue has not placed any material on record to controvert the above findings of ld. CIT(A). In view of the aforesaid facts, we find no reason to interfere with the order of ld. CIT(A) and thus, this ground of Revenue is dismissed.
12. Ground no.3 is with respect to deleting the addition on account of depreciation on meters and instruments.
12.1 The A.O. on perusing the depreciation chart noticed that assessee has claimed depreciation of Rs.44,95,071/- on the plant and machinery. A.O. was of the view that since it is assessee's submission that it is not the owner of meters and instruments and 8 ITA Nos .2956/Ahd/2010, 1301 &1259/Ahd/12 for A.Y. 2007-08 & 2008-09 therefore, in the case of assessee, the basic requirement of ownership of assets for allowance of depreciation was not existing and therefore assessee was not eligible for depreciation. He, accordingly, denied the claim of depreciation of Rs.44,95,071/-.
13. Aggrieved by the order of A.O., assessee carried the matter before the ld. CIT(A) who deleted the addition by holding as under:
"6.3 I have considered the assessment order as well as assessee's contentions. The AO has disallowed depreciation of Rs,44,95,071/- holding that assessee is not the owner of the meters and instruments etc representing the Plant & Machinery. It is seen from records that appellant is the owner of the meters, instruments, Plant and Machinery and has shown the same in the books of accounts in Sch. 3 of the fixed assets to the Annual Reports, depreciation chart was duly filed with the return showing the value of Plant and Machinery of Rs.5,99,34,281/- on which depreciation of Rs.44,,95,071/- has been claimed after reducing the amount of initial connection charges of Rs.52,50,830/- recouped from the customers. The detailed chart of Plant and Machinery showing various items, sellers, purchase value was submitted to the AO vide assessee's letter dated 14/10/2009 which has not been disputed by A,O. In view of such detailed explanation and evidences submitted, there is no reason to disallow depreciation. Accordingly, the depreciation of Rs.44,95,071/- is allowed."
14. Aggrieved by the order of ld. CIT(A), Revenue is now in appeal before us.
14.1 Before us, ld. D.R. supported the order of A.O. Ld. A.R. on the other hand reiterated the submissions made before the A.O. and ld. CIT(A) and supported the order of ld. CIT(A).
15. We have heard the rival submissions and perused the material on record. We find that ld. CIT(A) while deleting the addition has given a finding that assessee is the owner of meters and instruments that has been shown as plant and machinery in the book of accounts and that assessee has claimed depreciation after reducing the amount of initial connection charges which has been collected from customers. He, therefore, held that assessee was eligible for depreciation. Before us, Revenue has not placed any material on record to controvert the above findings of ld. CIT(A). In view of the aforesaid facts, we find no reason to interfere with the order of ld. CIT(A) and thus, this ground of Revenue is dismissed.
9ITA Nos .2956/Ahd/2010, 1301 &1259/Ahd/12 for A.Y. 2007-08 & 2008-09
16. In the result, the appeal of the Revenue is dismissed.
We now proceed with the appeals for A.Y. 2008-09.
17. Assessee filed its return of income for A.Y. 2008-09 on 26.09.2008 declaring total income at Rs.5,03,57,400/-. The case was selected for scrutiny and thereafter assessment was framed u/s.143(3) of the Act vide order dated 23.12.2010 and the total income was determined at Rs.15,32,73,710/-. Aggrieved by the order of Assessing Officer, Assessee carried the matter before the ld. CIT(A) who vide order dated 17.03.2012 (in Appeal No. CIT(A)-GNR/228/2010-11) granted partial relief to the assessee. Aggrieved by the order of ld. CIT(A), Revenue and Assessee are now in appeal before us. The grounds raised by Revenue in ITA No.1301/Ahd/2012 reads as under:
"(1) The learned CIT(Appeals) has erred in law and on facts in deleting the addition made on account of initial connection charges of Rs.9,32,12,585/-.
(2) The learned CIT(Appeals) has erred in law and on facts in deleting the addition made by the AO in respect of Closing Stock of Rs.15,67,717/-."
17.1 As far as appeal of assessee in ITA No.1259/Ahd/2012 is concerned, before us, at the outset on pointing out that the grounds raised by the assessee are argumentative in nature and not inconsonance with Rule 8 of Income Tax (Appellate Tribunal), Rules, 1963, ld. A.R. submitted that the prayer raised in the grounds be considered to be the grounds of appeal. The effective prayers raised by the assessee in the grounds read as under:
"(i) The process of compression of natural gas for the use as a fuel be considered as "Manufacture"
(ii) The decision of the learned CIT(A) to uphold the decision of the learned A.O regarding disallowance of the additional depreciation Rs.80,87,323/- may kindly be deleted.
10ITA Nos .2956/Ahd/2010, 1301 &1259/Ahd/12 for A.Y. 2007-08 & 2008-09
(iii) The decision of the learned CIT(A) to uphold the decision of the learned A.O regarding addition of the liquidated damages Rs.48,689/- may kindly be deleted."
We first proceed with Revenue's appeal in ITA No.1301/Ahd/2012
18. Before us, at the outset, both the parties submitted that grounds raised in the present appeal of Revenue are identical to that of ground no.1 & 2 raised in Revenue's appeal in A.Y. 2007-08 and the submission made by them while arguing the appeal of Revenue for A.Y. 2007-08 are also applicable to the grounds raised in A.Y. 2008-09. In view of the aforesaid submissions made before us by both the parties, we for reasons as stated hereinabove while deciding the ground nos. 1 & 2 of Revenue's appeal for A.Y.2007-08 and for similar reasons dismiss the grounds of Revenue.
19. In the result, the appeal of the Revenue is dismissed.
We now proceed with assessee's appeal in ITA No. 1259/Ahd/2012
20. Ground nos. 1 & 2 are interconnected, which are with respect to not treating the process of compression of natural gas as manufacture.
20.1 On perusing the statement of depreciation, A.O. noticed that assessee has claimed additional depreciation at 20% amounting to Rs.80,87,323/-. A.O. was of the view that the necessary condition for claiming additional depreciation is that assessee should be engaged in manufacturing or production of any article or thing. According to the A.O., the assessee has claimed benefit of additional depreciation on the premises that the process of compression of natural gas amounts to manufacture. The A.O. was of the view that in the case of CNG, there was no consumption of any article to convert the natural gas into CNG and in the gas plants, natural gas was converted to CNG by pressing natural gas at a very high pressure. He was therefore of the view that the process of compression of natural gas cannot be considered as manufacturing 11 ITA Nos .2956/Ahd/2010, 1301 &1259/Ahd/12 for A.Y. 2007-08 & 2008-09 activity for the purpose of claiming additional depreciation u/s.32(iia) of the Act. He, accordingly, denied the claim of additional depreciation of Rs.80,87,323/-.
21. Aggrieved by the order of A.O., assessee carried the matter before the ld. CIT(A) who upheld the order of A.O. by observing as under:
"5.2 I have carefully gone through the facts of the case, the assessment order, the appellant contentions, the provisions of the act and the decided law on the issue. After thorough consideration the following pertinent observations are made:
a) Admittedly there is no change in the composition or properties of the gas when it is compressed. In fact, the gas is compressed only to facilitate its easy storage in larger quantities in smaller space and therefore easy transportation. In fact, the process is similar to air being compressed to fill in tubes/tyres of vehicles and it would be beyond imagination to say that it is undergoing manufacture.
b) Another important factor is that the gas is again decompressed before use by just passing through a nozzle.
The word 'manufacture' has various shades of meaning and ordinarily involves application of some labour, resulting in a final product, which is commercially different from the article to which the labour was applied. An article is said to be commercially different if it has 'distinct character, name and use after the process to which it is subjected'. This is not the case here. There is no commercially different use. Use is the same. Only density has changed for easy transportation and storage. All the process does not amount to manufacture/production. The Hon'ble Supreme Court in the case of Idandas v. Anant Ramchandra Phadke AIR 1982 SC 127, has laid down three tests as to what constitutes manufacture, they are - (i) a certain commodity should have been produced; (ii) the process of production must involve either labour or machinery; and (iii) the end product should have a distinct character, name and use. As per Black's Law Dictionary 'manufacture' is as follows:--
"The process of operation of making goods or any material produced by hand by machinery or by other agency. The production of articles for use from raw or prepared materials by giving such materials new forms, qualities, properties or combinations, whether by hand labour or machine."
According to the Webster's Dictionary, 'manufacture' means; '(a ) to make or fashion by hand or machinery, (b) to work into useful form, (c) to produce in a mechanical way, (d) to produce goods by hand or by industrial art or processes, etc.'. The Hon'ble Supreme Court held, approving the Dictionary meaning, 'manufacture' means 'work up materials into forms suitable for use'. The word 'material' does not necessarily mean the original raw material, for a finished article may have to go 12 ITA Nos .2956/Ahd/2010, 1301 &1259/Ahd/12 for A.Y. 2007-08 & 2008-09 through several manufacturing processes before it is fit and made ready for the market. What is itself a manufactured" commodity may constitute a 'material' for working it up into a different product. In the case of CIT v. Tata Locomotive & Engg. Co. Ltd. [1968] 68 ITR 325 (Bom.), the High Court held that the word 'manufacture' has wider and narrower connotation. The Hon'ble High Court 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. ..." (p. 325) The Hon'ble ITAT, Spl. Bench, Pune in the case of B. G. Chitale [116 TTJ (SB)658] has held that in the process of pasteurization, the milk passes through various stages of "processing'. Defective raw milk is eliminated, odour and smell test is carried out. The raw milk is passed through fine duplex filters again to remove the impurities. At the next stage, predetermined quantity of cow's milk is blended with buffalo's milk and pumped to a flow controller, maintaining constant flow through the pasteurizer. It is heated to 45°C and then goes to filtration stage. Then the milk enters hermetic cream separator, at' which stage the standardization of the fat content is done, i.e., a process of adjustment of fat content of milk by adding cream or skimmed milk so as to obtain appropriate specified constant fat content. The milk is again heated to 70.5°C and then it is cooled using glycol chiller to 1 degree C/2 degree C. In spite of all the process, the name 'milk' continues and it is treated as such in the market, though the natural ratio of components changes; it is used for the same purpose as it would have been used in its original stage itself. Mere value addition is not sufficient to treat it as a separate commodity. Such process has to be treated as an independent process eligible for the claim the assessee had made. [Para 17]. The ratio of the decision of this case of the Special Bench is squarely applicable as the use of the compressed gas (which again is decompressed) is essentially the same as before the so called process of compression.
The Hon'ble Special Bench of Calcutta ITAT in the case of Shaw Scott Distilleries 70TTJ (SB) 321 has decided that when Assessee used to purchase potable spirit and by processing it produced IMFLs like brandy, whisky and rum etc. by adding certain percentage of water, colour and essence ; then there is no difference between potable spirit and brandy or whisky. It also held that therefore, no distinct article or thing could be said have been produced by assessee as alcohol remained alcohol throughout processing stage till it was marketed. In the instant case even blending is not there.13
ITA Nos .2956/Ahd/2010, 1301 &1259/Ahd/12 for A.Y. 2007-08 & 2008-09 The Hon'ble jurisdictional ITAT, Ahmedabad A, Bench in the case of Aqua Minerals Pvt Ltd 96 ITD 417 has also adjudicated on similar principles. The gist of the decision is as follows:
"Manufacture is more comprehensive and extensive and every process or indeed even a series of processes, may not lead to manufacture. And it is only where a new and commercially distinct article, with an identity of its own, comes into existence, that 'manufacture' can be said to have taken place. The 'newness' or the 'distinctiveness' of the product that emerges, that informs, and, thus, defines manufacture, is not abstract, but one amenable to definitive tests in terms of the name, use and character of the end product, which together lead it to be recognized as such in the commercial circles. [Para 4] The law in the matter, thus, having been brought forth with sufficient clarity, what needs to be seen to decide the issue, was as to whether the end product, i.e. the treated water, which is a purified and demineralised (to the extent required) version of the normal tap water as supplied by the Municipal Corporation, can be said to have acquired the 'newness' or 'distinctiveness' to the degree where it is recognized as separate product from the raw/base material, in terms of its name, character and use, i.e., an identity of its own. Recognition has to be in the trade circles of the market where it is bought and sold. If the market perceives it as a new and distinct product, it has to be so recognized. Section 80-I, applies only where article or thing (not falling under the negative list) is manufactured' and 'produced' and not 'processed', which term, as would be evident, has a narrower connotation, and in which category the assessee's case, without doubt, falls. [Para 9.2] Though by the process to which water is subject, it is rendered free of impurities, minerals (present either free or in the form of their salts), and micro organisms and, thus, made more hygienic and suitable for human consumption yet despite this transformation, it remains only drinking water, i.e., what it was at the raw material stage. There can be no doubt that its name, character and use is only of drinking water and no more and the buying public, as well as those who deal in it, regard it as such. In fact, that is its USP, i.e., on the basis of which its sold and marketed - as a pure and, thus, safe, water for human consumption. The water 'consumed' in the process i.e., tap water, is also drinking water which satisfies the drinking needs of a large majority of our people, as indeed it has for the past many decades. As such, it is difficult to see low a new product has come into existence. It may be that the treated water as produced is a better or superior form of drinking water. But that would not alter the ratio afore stated, for that matter, a range of qualities for each product being sold in the market. But this would not make them, for that reason, to be recognized as separate (generic) products so that the market strives to attract customers by building a brand name/image around it on the strength of any of its distinctive or superior attributes"14
ITA Nos .2956/Ahd/2010, 1301 &1259/Ahd/12 for A.Y. 2007-08 & 2008-09 The present case is even more clearly not involves manufacture as composition doesn't change at all; whereas when even impurities, undesirable minerals etc., are removed in the above case; the product was held to be essentially the same even though a brand image was sought to be built for its superior attributes.
The appellant has relied on the definition of manufacture in the Central Excise Act. The Income-tax Act does not define manufacture to include 'Process' as done by the Central Excise Act, wherein it has been widened to even include processes incidental or ancillary to the completion of manufactured product. In fact the definition of manufacture as per the Central Excise has been further widened by specific goods as per the Schedule. Even certain packaging or repacking have been included. Therefore, the meaning of manufacture which has been specifically made broader for the specific purpose cannot be imported here. The Hon. Supreme Court in many cases including Idandas v. Anant Ramchandra Phadke AIR 1982 SC 127 discussed earlier and Sacs Eagles Chicory 255 ITR 178 has defined the term 'manufacture' in much specific connote than a mere process.
One more interesting aspect of this case is that the appellant itself has never claimed deduction u/s 80IB although it has been compressing gas for last many years knowing that it is not manufacturing anything."
Therefore, it is held that the mere process of compression employed by the appellant does not lead to manufacture. The decision of the AO in denying the claim of additional depreciation is therefore, upheld and the related ground of appeal and it sub-parts are dismissed.
22. Aggrieved by the order of ld. CIT(A), assessee is now in appeal before us.
22.1 Before us, ld. A.R. reiterated the submissions made before the A.O. and ld. CIT(A) and further submitted that the issue is now covered in favour of the assessee, in view of the decision of Co-ordinate Bench of Tribunal in case of GSPC Gas Company Ltd. vs. Jt. CIT in ITA No.3117/Ahd/2010 & Others, order dated 11.04.2014 and the decision of Mumbai Tribunal in case of Hindustan Petroleum Corpn. Ltd. vs. DCIT reported in [2012] 26 taxmann.com 220 (Mumbai). He also pointed to the relevant paras of the Tribunals' orders. He thus submitted that in view of aforesaid decisions, assessee had rightly claimed additional depreciation and 15 ITA Nos .2956/Ahd/2010, 1301 &1259/Ahd/12 for A.Y. 2007-08 & 2008-09 therefore same should be allowed to it. Ld. D.R. on the other hand supported the order of A.O. and ld. CIT(A).
23. We have heard the rival submissions and perused the material on record. The issue in the present case is as to whether the activity of compression of Gas to CNG amounts to manufacture for claiming additional depreciation u/s.32(iia) of the Act. We find that Co-ordinate Bench of Tribunal in case of GSPC Gas Company Ltd.(supra) on identical facts has decided the issue in favour of assessee by holding as under:
"16. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. We find that this issue is to be examined whether the assessee is entitled for additional depreciation claimed @ 20% on plant & machinery. Both the AO and ld.CIT(A) have rejected the claim on the basis that compression of conversion of PNG to CNG does not tantamount to manufacture, therefore, the assessee is not entitled for the additional depreciation claimed as there is only change of form but basic ingredients remain same.
16.1. The Hon'ble Apex Court in the case of rendered in the case of Income Tax Officer vs. Arihant Tiles & Marbles (P) Ltd. reported at (2010) 320 ITR 79 has held as under:-
"21. Before concluding, we would like to make one observation. If the contention of the Department is to be accepted, namely that the activity undertaken by the respondents herein is not a manufacture, then, it would have serious revenue consequences. As stated above, each of the respondents is paying excise duty, some of the respondents are job workers and the activity undertaken by them has been recognised by various Government authorities as manufacture. To say that the activity will not amount to manufacture or production under s. 80-IA will have disastrous consequences, particularly in view of the fact that the assessees in all the cases would plead that they were not liable to pay excise duty, sales-tax etc. because the activity did not constitute manufacture. Keeping in mind the above factors, we are of the view that in the present cases, the activity undertaken by each of the respondents constitutes manufacture or production and, therefore, they would be entitled to the benefit of s. 80-IA of the IT Act, 1961.
22. For the afore-stated reasons, civil appeals filed by the Department stand dismissed with no order as to costs."
16.2. Respectfully following the ratio laid down in the case of Income Tax Officer vs. Arihant Tiles & Marbles (P) Ltd. (supra), in our opinion, the authorities below were not justified in rejecting the claim of the assessee for additional depreciation. Thus, 16 ITA Nos .2956/Ahd/2010, 1301 &1259/Ahd/12 for A.Y. 2007-08 & 2008-09 the addition made in this regard is hereby deleted. Thus, ground No.2 of assessee's appeal is allowed."
We also find that the Co-ordinate Bench of Tribunal in the case of Hindustan Petroleum Corpn. Ltd. (supra) held the activity of process of bottling of LPG to be manufacturing. The relevant held portion of the order, as reported in (2012) 26 Taxmann.com 220 reads as under:
"HELD-I Activity of filling up cylinder with LPG • There is no dispute that the LPG produced in the refinery cannot be directly supplied to the consumer for domestic use because of various reasons of handling, storage and safety. LPG bottling or filling the gas in the cylinder is not a simple activity and cannot be performed under normal conditions. This is a highly technical and complex activity which requires precise functions of technically expert persons or machines. [Para 6] • Even prior to the process of filling the gas into cylinder, there are certain measures to ensure that the cylinder is entirely empty; without any air or other particles, dirt and grease or any other substance. In order to prepare the cylinder ready to fill up with the gas, the air inside the cylinder is removed by using vacuum pumps and then filled with a few grams of LPG. The cylinders will then be washed by medium pressure water jets to remove all the dirt and grease from the cylinder surface. The cylinders are then filled with LPG by automatic filling carousel. After filling the gas, the cylinder is checked for the correctness and to ensure that no cylinder is remained under filled or over filled. The cylinders are then sent for in-line test both for checking the valve bung leak and the body leaks. The defective cylinders are separated and sent for the valuation. All the good cylinders are then sent to hot air sealing unit where the cylinders are sealed with the PVC seal by hot crimpling. [Para 6.1] • Further, as per notification number 627 issued under section 80-IB, dated 4-8-1999, Gas distribution and bottling activities are treated as manufacture or producing industry. [Para 7.3] • As per the Gas Cylinders Rule, 2004, filling of cylinder with the compressed gas including transfer of compressed gas from one cylinder to other cylinder is treated as manufacture. Under Excise Act, compressed natural gas marketing is treated as manufacture. Though the Assistant Commissioner Central Excise vide his decision order dated 23-10-1998 has held the bottling of LPG cylinder as manufacture; however, in the absence of the status of the finality of the said order one cannot lay much reliance on the same. Bottling Plant of LPG is an essential process for rendering the product marketable and useable for the end consumer. [Para 7.4] 17 ITA Nos .2956/Ahd/2010, 1301 &1259/Ahd/12 for A.Y. 2007-08 & 2008-09 Word 'Production' as used in sections 80HH, 80-IA • It is to be noted that that the term used in the sections 80HH, 80-I/80-IA is manufacturing or production. It is settled proposition of law, that the word 'production' as used in these sections has a wider connotation in comparison to the word 'manufacture'. Thus, every manufacture can be characterized as production; but every production need not amount to manufacture. The activity, which brings the commercially new product into existence, constitutes production. [Para 7.5] • The process of bottling of LPG makes the LPG capable of being marketed and used by the individual consumers as a domestic kitchen fuel. As discussed earlier, the process by which the LPG is filled up in the cylinder makes it possible and viable commercial product. [Para 7.6] • In view of the above it has to be held that the bottling plant wherein the LPG is filled in the cylinders for domestic and non-domestic kitchen use involves various specialized process and therefore, it is an activity of manufacture/production. Accordingly, the assessee's claim for deduction has to be allowed. [Para 7.7]"
Before us, Revenue has not placed any contrary binding decision on record nor has pointed out as to how the ratio of aforesaid decisions of Co-ordinate Bench of Tribunal be not applicable to the present facts. In view of the aforesaid facts, and following the decisions of Co-ordinate Benches cited hereinabove, we direct the A.O. to allow the claim of additional depreciation of assessee. Thus, ground nos. 1 & 2 of assessee are allowed.
24. Ground no.3 is with respect to the addition of liquidated damages.
24.1 The A.O., on perusing the computation of income, noticed that amount of Rs.48,689/- which was received as liquidated damages from suppliers and vendors of machinery, as compensation for delay in delivering machinery, was considered as capital receipt by the assessee. A.O. was of the view that the receipts were of revenue in nature. He accordingly added the same to the income of assessee. Aggrieved by the order of A.O., assessee carried the matter before the ld. CIT(A) who upheld the order of A.O. and directed the A.O. to grant depreciation on the same by holding as under:
18ITA Nos .2956/Ahd/2010, 1301 &1259/Ahd/12 for A.Y. 2007-08 & 2008-09 "9.3 I have gone through the facts of the case and the decisions cited by the AO and the appellant. I am inclined to agree with the AO that the liquidated damages in this case are related to loss of profit. As in the case of Shri Digvijay Cement Co. Ltd as decided by the Hon'ble jurisdictional High Court, the loss compensated in this case apparently is related to loss of profit particularly because the delay in supplying accessories of machines already installed and running is also included. It is to be seen that the business was already running and it is not the case that new machinery would have resulted in commencement of production thereafter. With due respect it is submitted that the decision of the Hon'ble Gujarat High Court in the case of Saurashtra Cement (Supra) is distinguishable on facts. The compensation received is held to be revenue in nature and the decision of the AO is accordingly upheld. The appellant has reduced the compensation from the cost for working the depreciation.
The AO is directed to allow the enhanced depreciation by reversing this entry. The ground is decided as above."
25. Aggrieved by the order of ld. CIT(A), assessee is now in appeal before us.
26. Before us, ld. A.R. submitted that issue is covered in favour of the assessee by the decision of the Co-ordinate Bench of Tribunal in the case of GSPC (supra) wherein on identical facts the addition has been deleted. He pointed to the relevant paras of the order. He, thus, submitted that the addition be deleted. Ld. D.R., on the other hand, supported the orders of A.O. and ld. CIT(A).
27. We have heard the rival submissions and perused the material on record. The issue in the present case is the treatment to be given to the liquidated damages i.e. whether it is revenue receipt or capital receipt. It is an undisputed fact that liquidated damages were received by the assessee from the suppliers and vendors of machinery as compensation for delay in delivery of the machineries to the assessee. We find that on identical facts, the Co-ordinate Bench of Tribunal in the case of GSPC (supra) and after placing reliance on the various decisions cited therein, had deleted the addition by holding as under:
"23. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. We find that the AO has observed that the assessee has credited the liquidated damage of Rs.2,25,88,566/- However, in the computation of income, it has reduced this amount. The AO relied on the judgement of the Hon'ble Gujarat High Court rendered in the case of Shree Digvijay Cement Co.Ltd. vs. CIT(1982) 138 ITR 45 (Guj.) and the judgement of 19 ITA Nos .2956/Ahd/2010, 1301 &1259/Ahd/12 for A.Y. 2007-08 & 2008-09 Hon'ble Calcutta High Court rendered in the case of CIT vs. Rohtas Industries Ltd. (1981) 130 ITR 292 (Cal.). The AO has observed that on examination of the ledger account of liquidated damage income, these are receipts on various dates by the suppliers or vendors for delay in delivery of various types of machineries and accessories to the assessee. The Hon'ble High Court in the case of Shree Digvijay Cement Co.Ltd. vs. CIT (1982) 138 ITR 45 (Guj.) has held as under:-
"Held, that the actual cost or price of the machinery and compensation payable to the assessee-company were two different and distinct things. Compensation was paid to set off or reduce the loss which the assessee suffered as a result of delay in supply of machinery. It has nothing to do with the cost of machinery. Though adjusted against the cost of machinery, it was none the less compensation. The actual cost of machinery could not be reduced by Rs.5,72,216 and depreciation and development rebate had to be allowed on the entire cost of machinery as per the agreement."
23.1. The Hon'ble High Court of Calcutta in the case of CIT vs. Rohtas Industries Ltd. (1981) 130 ITR 292 (Cal.) has held as under:-
"Held, that no part of the actual cost of the machinery had been met by the German firm. The payment was compensation for low output because the machinery was defective. Furthermore, there was no reduction of the cost of the machinery already supplied and the amount which the assessee had received on account of low output had been treated as a revenue receipt and taxed as such. The amount of rebate recoverable from the foreign suppliers was not deductive in determining the actual cost of the machinery under s.43(1)."
23.2. However, the Hon'ble Supreme Court in the case of CIT vs. Sauarashtra Cement Ltd. (2010) 233 CTR 209:: (2010) 325 ITR 422(SC) has held as under:-
"13. We have considered the matter in the light of the aforenoted broad principle. It is clear from clause No. 6 of the agreement dt. 1st Sept., 1967, extracted above, that the liquidated damages were to be calculated at 0.5 per cent of the price of the respective machinery and equipment to which the items were delivered late, for each month of delay in delivery completion, without proof of the actual damages the assessee would have suffered on account of the delay. The delay in supply could be of the whole plant or a part thereof but the determination of damages was not based upon the calculation made in respect of loss of profit on account of supply of a particular part of the plant. It is evident that the damages to the assessee was directly and intimately linked with the procurement of a capital asset i.e. the cement plant, which would obviously lead to delay in coming into existence of the profit making apparatus, rather than a receipt in the course of profit earning process. Compensation paid for the delay in procurement of capital asset amounted to sterilization of the capital asset of the assessee as supplier had failed to supply the plant within time as stipulated in the agreement and clause No. 6 thereof 20 ITA Nos .2956/Ahd/2010, 1301 &1259/Ahd/12 for A.Y. 2007-08 & 2008-09 came into play. The afore-stated amount received by the assessee towards compensation for sterilization of the profit earning source, not in the ordinary course of their business, in our opinion, was a capital receipt in the hands of the assessee. We are, therefore, in agreement with the opinion recorded by the High Court on question Nos. (i) and (ii) extracted in para 1 (supra) and hold that the amount of Rs. 8,50,000 received by the assessee from the suppliers of the plant was in the nature of a capital receipt."
23.3. We find that the facts before the Hon'ble Apex Court were that the assessee engaged in the manufacture of cement, etc. entered into an agreement with M/s.Walchandnagar Industries Limited, Bombay for purchase of additional cement plant from them for a total consideration of Rs.1,70,00,000/-. As per the terms of contract, the amount of consideration was to be paid by the assessee in four installments. As per the clause in the agreement, in the event of delay caused in delivery of the machinery, the assessee was to be compensated at the rate of 0.5 per cent of the price of the respective portion of the machinery for delay of each month by way of liquidated damages by the supplier, without proof of actual loss. However, the total amount of damages was not to exceed 5 percent of the total price of the plant and machinery. The supplier defaulted and failed to supply the plant and machinery on the scheduled time and, therefore, as per the terms of contract, the assessee received an amount of Rs.8,50,000/- from the supplier by way of liquidated damages. During the course of assessment proceedings for the relevant assessment year, a question arose whether the said amount received by the assessee as damages was a capital or a revenue receipt. The AO negatived the claim of the assessee that the said amount should be treated as a capital receipt. Accordingly, he included the said amount in the total income of the assessee. Aggrieved, the assessee filed an appeal before the CIT(A), but without any success. The assessee carried the matter further in appeal to the Tribunal. Relying on the ratio of the decisions of this Court in CIT vs. Rai Bahadur Jairam Valji & Ors. (1959) 35 ITR 148 (SC) and Kettlewell Bullen & Co. Ltd. vs. CIT AIR 1965 SC 65, the Tribunal came to the conclusion that the said amount could not be treated as a revenue receipt. According to the Tribunal, the payment of liquidated damages to the assessee by the supplier was intimately linked with the supply of machinery i.e. a fixed asset on capital account, which could be said to be connected with the source of income or profit making apparatus rather than a receipt in course of profit earning process and, therefore, it could not be treated as part of receipt relating to a normal business activity of the assessee. The Tribunal also observed that the said receipt had no connection with loss or profit because the very source of income viz., the machinery was yet to be installed. Accordingly, the Tribunal allowed the appeal and deleted the addition made on this account. Being dissatisfied with the decision of the Tribunal, as stated above, at the instance of the Revenue, the Tribunal referred the aforenoted questions of law for the opinion of the High Court. The reference having been answered against the Revenue and in favour of the assessee.
23.4. In the present case also, the assessee has received liquidated damages on account of delay in supply of machinery. Therefore, respectfully following the ratio laid down by the Hon'ble Apex Court in the case of CIT vs. Sauarashtra Cement Ltd.
21ITA Nos .2956/Ahd/2010, 1301 &1259/Ahd/12 for A.Y. 2007-08 & 2008-09 (2010) 233 CTR 209:: (2010) 325 ITR 422(SC), we hereby direct the AO to delete the addition made in this regard. Thus, this ground of assessee's appeal is allowed."
28. In the present case, we are of the view that the facts of the present case are identical to that of GSPC Gas (supra). We, therefore, following the decision of Co- ordinate Bench in the case of GSPC (supra) direct that the addition made therein on account of liquidated damages received by the assessee from the suppliers of the equipments be deleted. Since, the addition itself is deleted, the question of granting depreciation on the amount as directed by ld. CIT(A) does not arise. We, therefore, direct the A.O. to delete the addition of liquidated damages and reverse the depreciation (as directed by ld. CIT(A)) if allowed to the assessee. Thus, this ground of assessee is allowed.
29. In the result, the appeal of Assessee is allowed.
30. In the result, Revenue's appeals in ITA Nos. 2956/Ahd/2010 & 1301/Ahd/2012 are dismissed and Assessee's appeal in ITA No.1259/Ahd/2012 is allowed.
Order pronounced in Open Court on 02 -03- 2016.
Sd/- Sd/-
(S. S. GODARA) (ANIL CHATURVEDI)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Ahmedabad: Dated. 02/03/2016
True Copy
S K Sinha
Copy of the Order forwarded to:-
1. The Appellant.
2. The Respondent.
3. The CIT (Appeals) -
4. The CIT concerned.
5. The DR., ITAT, Ahmedabad.
6. Guard File.
By ORDER
Deputy/Asstt.Registrar
ITAT,Ahmedabad