Income Tax Appellate Tribunal - Chennai
International Flavours & Fragrances ... vs Dcitltu-2, Chennai on 27 April, 2023
आयकर अपीलीय अिधकरण 'डी' ायपीठ चे ई म।
IN THE INCOME TAX APPELLATE TRIBUNAL 'D' BENCH, CHENNAI माननीय ,ी महावीर िसं ह, उपा23 एवं माननीय ,ी मनोज कुमार अ8वाल ,ले खा सद; के सम3।
BEFORE HON'BLE SHRI MAHAVIR SINGH, VICE PRESIDENT AND HON'BLE SHRI MANOJ KUMAR AGGARWAL, AM आयकर अपील सं ./ IT(TP)A No.58/Chny/2018 ( िनधाCरण वषC / Assessment Year: 2014-15) International Flavours & Fragrances DCIT India Pvt. Ltd. बनाम/ Large Tax Payer Unit-2, 1-5, Seven Wells Street, Vs. Chennai.
St. Thomas Mount, Chennai - 600 016.
थायी ले खा सं ./जीआइ आर सं ./PAN/GIR No. AAACB-1376-K (अ पीलाथ /Appellant) : ( थ / Respondent) अपीलाथ की ओरसे / Appellant by : Shri P.J. Pardiwalla (Senior Counsel) & Shri Vikram Vijayaraghavan (Advocate) - Ld. ARs थ की ओरसे/Respondent by : Dr. S. Palanikumar (CIT) -Ld. DR सु नवाई की तारीख/Date of Hearing : 31-01-2023 घोषणा की तारीख /Date of Pronouncement : 27-04-2023 आदे श / O R D E R Manoj Kumar Aggarwal (Accountant Member)
1. Aforesaid appeal by assessee for Assessment Year (AY) 2014-15 arises out of final assessment order dated 26-09-2018 passed by Ld. Assessing Officer (AO) u/s 143(3) r.w.s. 144C(13) pursuant to the directions of Ld. Dispute Resolution Panel-2, Bengaluru (DRP) u/s 143(3) r.w.s. 144C(5) dated 18-09-2018. During the year, the assessee carried out certain international transactions with its Associated Enterprises (AE) which were subjected to determination of Arm's IT(TP)A No.58/Chny/2018 -2- Length Price (ALP) before Ld. Transfer Pricing Officer-2(1), Chennai (TPO) vide order dated 26-10-2017. Incorporating the proposed adjustment, draft assessment order was passed by Ld. AO on 28-12- 2017 which was subjected to assessee's objections before Ld. DRP. Subsequently, final assessment order was passed by Ld. AO pursuant to the directions of Ld. DRP confirming certain additions. Aggrieved, the assessee is in further appeal before us. The grounds raised by the assessee read as under: -
Part A - General Ground
1. Based on the facts and circumstances of the case, the Hon'ble Dispute Resolution Panel (Hon'ble DRP) has erred in law and facts, in passing a cryptic order i.e. mere acceptance of the orders of the lower authorities (learned Deputy Commissioner of Income-Tax, Transfer Pricing Officer - 2(1), Chennai (Ld. TPO)/ learned Deputy Commissioner of Income-Tax, Large Tax Payer Unit 2, Chennai (Ld. AO) without independent reasoning and findings. Accordingly, the directions passed by the Hon'ble DRP is bad in law and needs to be disregarded.
Part B - Grounds of objection pertaining to transfer pricing adjustment on payment of management service charges
1. The Hon'ble DRP/ Ld. AO/ Ld. TPO, have erred in law and in facts, by disregarding the arm's length analysis / economic analysis undertaken by the Appellant in accordance with the provisions of the Income-tax Act, 1961 (the Act) read with income tax Rules, 1962 (the Rules) and in not considering all the legal and factual submissions filed, thereby proposing an adjustment of INR9,88,26,319 in respect of the international transaction of payment of management service charges.
2. The Hon'ble DRP has erred in law and facts in confirming the action of the Ld. AO/ Ld. TPO in determining the ALP of payment of management service charge transaction (i.e. corporate and sale and marketing services) to be "NIL" on the basis of erroneous application of CUP method (i.e. no comparable uncontrolled transaction was brought on record), thus acting against the principles laid down under Section 92C (1) of the Act read with Rule 10B of the Rules for application of CUP method.
3. The Hon'ble DRP has erred in law and facts in confirming the action of the Ld. AO/ Ld. TPO in ignoring the Transactional Net Margin Method (TNMM) analysis undertaken by the Appellant by adopting combined transaction approach and considering the impugned international transaction as a separate transaction and hence conducted an inconsistent transfer pricing analysis without any appropriate basis.
4. The Hon'ble DRP/ Ld. AO/ Ld. TPO have erred in prejudicially concluding that the Appellant has derived 'no benefits' from services availed without appreciating the exhaustive evidences submitted by the Appellant. In doing so, the Hon'ble DRP/ Ld. AO/ Ld. TPO has neither made any sound reasons for IT(TP)A No.58/Chny/2018 -3- considering the evidences to be insufficient nor asked for any specific information required for substantiating the arm's length price.
5. Without prejudice to the combined transaction approach, the Hon'ble DRP has erred in law and facts in summarily confirming the action of the Ld. AO/ Ld.TPO without considering the economic analysis presented by the Appellant, wherein the management service charges has been separately benchmarked adopting TNMM methodology.
6. The Hon'ble DRP/ Ld. AO/ Ld. TPO have erred in law and facts, by questioning the commercial expediency of the transaction entered into by the Appellant without appreciating the business necessity of the services availed and has resorted to a predetermined approach which lacks any business/commercial merit.
Part C- Grounds with respect to disallowance of deduction claimed with respect to profits and gains from the undertaking set up in Jammu and Kashmir under section 801B(4) of the Act and disallowance of excess depreciation claimed with respect to UPS and electrical installations Disallowance of claim of deduction under section 801B of the Act. Specific Grounds
1. The Ld. AO/ Hon'ble DRP ought to have appreciated that the business carried out by the Appellant in the undertaking set up in Jammu & Kashmir (Jammu plant') would qualify as an 'eligible business' as per the provisions of section 801B of the Act and consequently, the profits and gains derived from the Jammu plant would be eligible for deduction under section 80IB of the Act.
2. The Ld. AO/ Hon'ble DRP failed to appreciate the fact that the business of the Appellant as carried out in the Jammu plant qualifies as 'manufacture' as defined in section 2(29BA) of the Act.
3. The Ld. AO/ Hon'ble DRP has erred in holding that the activity carried out in the Jammu plant by the Appellant does not result in a change in the character and the utilization of the raw materials used in manufacturing the final product.
4. The Ld. AO/ Hon'ble DRP has failed to consider the fact that the resultant product has undergone a physical change and represents a distinct product having different name, character and use as to that of the raw materials used.
5. The Ld. AO/ Hon'ble DRP has erred in considering that the final product as manufactured in the Jammu plant is not a commercially new commodity and that there is no transformation/ alteration of any kind that takes place in the process.
6. The Ld. AO/ Hon'ble DRP have erred in facts in holding that the end product in the case of liquid flavours can be separated back into the original form.
7. The Ld. AO/ Hon'ble DRP has erroneously concluded that the business carried out by Appellant in the Jammu plant does not amount to 'manufacturing' under the Act by relying on the report received from the ACIT, Circle-1 Jammu. Further, the Ld. AO/ Hon'ble DRP has erred in assuming that the presence of only blenders and vessels in the Jammu plant would lead to a conclusion that the activity carried out by the Appellant is not 'manufacturing'.
8. The Ld. AO/ Hon'ble DRP has erred in holding that the activities taking place in the Jammu plant were only trading in flavours.
9. The Ld. AO/ Hon'ble DRP has erred in concluding that the activities of the Jammu plant would amount as 'processing' and not 'manufacturing', without appreciating the fact that the resultant product is distinct in nature and not merely processed flavours.
IT(TP)A No.58/Chny/2018 -4-
10. Without prejudice to the above, the Ld. AO/ Hon'ble DRP ought to have appreciated that the claim of deduction under section 801B was analyzed in detail in the initial years of claim (.e. AY 2009-10 & AY 2010-11) and after being satisfied that the Appellant is engaged in manufacturing in Jammu and Kashmir, the Ld. AO allowed the deduction under section 80IB for these years. Having allowed the deduction under section 801B in the earlier year, the Ld. AO has erred in disallowing the same in the current year.
11. The Hon'ble DRP has failed to appreciate the fact that the activity carried out by the Appellant in the Jammu plant has remained the same since AY 2008-09 and has erred in holding that the facts can change every year, and in light of this, the Ld. AO can take a different view in subsequent years without being influenced by the stand taken in the earlier years.
12. Without prejudice to the above, the Ld. AO/ Hon'ble DRP has failed to appreciate that even if the activities carried out by the Appellant does not amount to 'manufacture', it will sufficiently amount to 'production'. Since section 801B of the Act uses not only the word 'manufacture' but also the word 'production', the Ld. AO ought to have allowed the deduction claimed under section 80lB of the Act.
13. Without prejudice to the above, the Ld. AO/ Hon'ble DRP has failed to appreciate that the Appellant has obtained Central Excise registration from the Central Excise Department recognizing the business of the Appellant as 'manufacturing' which evidences that the activity carried out by the Appellant in the Jammu plant is 'manufacturing'.
14. Without prejudice to the above, the Hon'ble DRP has failed to consider that the Appellant has obtained registrations/ approvals from other statutory authorities like the Directorate of Industries & Commerce, Pollution Control Board, VAT authorities and Central Sales Tax authorities which provide that the business of the Appellant is manufacture of flavours and fragrances. General Grounds
15. The Hon'ble DRP has failed to consider the submissions, information, documents and explanations supporting the contention of the Appellant that it is engaged in the business of 'manufacturing' in the Jammu plant.
16. The Hon'ble DRP has erroneously relied on the conclusion arrived at by the Ld. AO without independent examination of the submissions of the Appellant.
17. The Hon'ble DRP has failed to consider the principle laid down by the Hon'ble Jurisdictional High Court's recent decision in the case of DXN Herbal Manufacturing (India) Pvt Ltd.
18. The Hon'ble DRP has failed to consider the various judicial precedents relied on by the Appellant in support of its contention that the activity carried out by the Appellant in the Jammu plant would qualify as 'manufacturing' under the Act.
19. The Hon'ble DRP has erred in upholding the judicial precedents quoted by the Ld. AO which are clearly distinguishable in the facts of the present case and has not considered the submission of the Appellant explaining why the judicial precedents relied on by the Ld. AO is not applicable to the facts of the present case.
Grounds relating to depreciation on UPS
1. The Ld. AO/ Hon'ble DRP has erred in considering UPS as 'office equipment' eligible for depreciation at the rate of 15 percent as per Appendix I of the Income-tax Rules, 1962 ("the Rules').
IT(TP)A No.58/Chny/2018 -5-
2. The Ld. AO/ Hon'ble DRP ought to have appreciated that UPS forms part of the block of assets termed as Computers including computer software' and is eligible for depreciation at the rate of 60 percent as per Appendix I of the Rules.
3. The Ld. AO has erred in not considering the rectification petition that was filed by the Appellant under section 154 of the Act in relation to the double disallowance of depreciation by the Ld. AO for two (2) particular assets, the details of which have been explained in said rectification petition.
4. The Ld. AO has erroneously disallowed the excess depreciation claimed of two (2) particular assets by considering the same as forming part of the block of assets termed as 'Computers including Computer software', without considering that the excess depreciation of such assets have been already disallowed under the block of assets termed as 'Plant & Machinery'
5. The Ld. AO ought to have considered the directions of the Hon'ble DRP in relation to the duplication of disallowance detailed in the rectification petition filed before the Ld. AO, whereby the Hon'ble DRP has mentioned that where duplication of disallowance was found to be made, the same may be duly rectified by the Ld. AO.
6. The Hon'ble DRP ought to have considered the various judicial precedents that have been relied on by the Appellant in support of its contention that UPS would be eligible for depreciation at the rate of 60 percent as per Appendix \ of the Rules.
Grounds relating to depreciation on electrical installations
1. The Ld. AO/ Hon'ble DRP has erred in considering that the 'electrical installation' is eligible for depreciation at the rate of 10 percent as per Appendix I of the Rules.
2. The Ld. AO/ Hon'ble DRP ought to have appreciated that 'electrical installation' would be eligible for depreciation at the rate of 15 percent as per Appendix I of the Rules.
3. The Hon'ble DRP ought to have considered the various judicial precedents that have been relied on by the Appellant in support of its contention that 'electrical installation' would be eligible for depreciation at the rate of 15 percent as per Appendix I of the Rules.
Part D - Other grounds
1. The Ld. AO has erred in law and facts, in computing the assessable income, without factoring the above grounds and consequentially levied interest under sections 234B, 234C of the Act.
2. The Ld. AO has erred in law and facts by initiating penalty proceedings under section 271(1)(c) of the Act against the Appellant.
As is evident, four issues that fall for our consideration are - (i) Transfer Pricing (TP) Adjustment on account of management service charges paid by the assessee to its AE; (ii) Assessee's Claim of Deduction u/s 80IB(4); (iii) Depreciation on UPS; (iv) Depreciation on electrical installation.
IT(TP)A No.58/Chny/2018 -6- The grounds raised in Part-D are consequential grounds which do not require any specific adjudication on our part. The grounds raised in Part-A are general in nature.
2. The Ld. Sr. Counsel, Shri Percy J. Pardiwala, advanced arguments supporting the case of the assessee. The attention has been drawn to various documents as placed on record and reliance has been placed on various judicial pronouncements, the copies of which have been placed on record. The Ld. CIT-DR vehemently controverted the arguments and filed written submissions. Reliance has similarly been placed on various decisions, the copies of which have been placed on record. We have gone through the written submissions as well as the case laws as placed before us. Having considered rival submissions and after perusal of case records, our adjudication would be as under.
3. The assessee being resident corporate assessee is subsidiary of International Flavors and Fragrance Inc., USA (IFFI). The assessee is engaged in the business of manufacturing of flavours and fragrances at its plant situated at Chennai, Jammu and Chittoor. The assessee manufactures flavors and fragrances products for Indian as well as overseas markets by using speciality chemical products as raw material for its final manufactured products. The flavors business unit provide desired taste and smell to a broad range of products including soft drinks, confectioneries, dietary foods, snack foods, dairy products, pharmaceuticals and alcoholic beverages. The fragrance business unit produces fragrances which are used in wide variety of household products such as soaps, detergents, air fresheners, toiletries and incense sticks.
IT(TP)A No.58/Chny/2018 -7- Assessment Proceedings
4. Transfer Pricing (TP) Adjustment on account of management service charges paid by the assessee (Part B : Gr. Nos. 1 to 6) 4.1 The assessee carried out certain international transactions with its Associated Enterprises (AE) which are listed in para-4 of Ld. TPO's order. The same include purchase of raw material, sale of goods, payment of management service charges, service charges paid / received, commission paid / received etc. The assessee benchmarked these transactions on aggregate basis adopting Transactional Net Margin Method (TNMM) and did not offer any Transfer Pricing (TP) Adjustment in its TP study report. The assessee followed Comparable Uncontrolled Price (CUP) method to benchmark payment of royalty, purchase of capital assets and reimbursement of expenses etc. The main adjustment arose out of management charges paid by the assessee to its AE.
4.2 It transpired that the assessee paid management service charges aggregating to Rs.2004.83 Lacs pursuant to contractual terms to its ultimate parent AE i.e., M/s IFF USA. The same was questioned by Ld. TPO due to the fact that such charges were not paid in earlier years and profit margins were found to be higher in earlier years as tabulated in para 6.1 of Ld. TPO's order. The profit margin for AY 2011-12 were 23.10% which reduced to 15.98% in AY 2013-14 and finally to 13.22% in AY 2014-15.
4.3 The Ld. TPO opined that benchmarking on aggregation basis would be permitted only if the transactions were closely linked to each other. Since these transactions were not a particular class of transactions, the same would require separate benchmarking.
IT(TP)A No.58/Chny/2018 -8- Accordingly, Ld. TPO proceeded to benchmark the payment of management service charges by the assessee independently rejecting the assessee's plea that the management services were received for carrying out day-to-day operations and the same was closely linked to main international transactions.
4.4 These services were stated to be paid by the assessee to its AE on cost plus mark-up basis. The assessee received these services broadly in three areas i.e., management service, Information technology (IT) services and marketing services as tabulated below: -
No. Nature of Amount Paid Basis of Mark up %
Services (Rs.) Allocation
1. IT Services 1016.56 Lacs Head Counts 5.80%
2. Sales and 101.84 Lacs Sales Revenue 11.10%
Marketing Services
3. Management 886.41 Lacs Sales Revenue 15.70%
Service charges
4.5 The assessee furnished the methodology of identifying cost centres, identification of costs, mark up and allocation basis during proceedings before Ld. TPO. The mark up was stated to be undertaken on the basis of benchmarking report obtained by M/s IFF Inc. Regarding Sales and Marketing Support services, it was submitted that IFF Inc. has a team sitting in USA which constantly monitors and forecasts market trends of prices and cost of volatile products that form part of the group's finished goods. This helps in setting the prices and maintaining the margins irrespective of the change in prices. The Management Services Charges were in the nature of legal & regulatory, finance & treasury, procurement, QA & QC, supply chain management, manufacturing operations and human resources etc. The IT(TP)A No.58/Chny/2018 -9- assessee relied on sample copies of screenshots, emails, policies etc. as evidence for receipt of services.
4.6 The Ld. TPO, after evaluating the explanation and evidences furnished by the assessee, opined that the assessee could not conclusively prove the receipt of such services except for IT services. The need for soliciting such services were not substantiated and the benefit that accrued from such services was also not explained with reference to the structure of the assessee and the scale of expenditure excluding the one for which the payments were made by the assessee to its AE. The Ld. TPO held that the list of services includes every possible kind of management services. The onus was on assessee to demonstrate the fact of actual services received, the need for such services and whether such service demand payment as required under OECD guidelines.
4.7 The OECD guidelines on intra-group services, in Para 7.6, states that: -
Under the arm's length principle, the question whether an intra-group service has been rendered when an activity is performed for one or more group members by another group member should depend on whether the activity provides a respective group member with economic or social value to enhance its commercial position. This can be determined by considering whether an independent enterprise in comparable circumstances would have been willing to pay for the activity if performed for it by an independent enterprise or would have performed the activity in-house for itself. If the activity in not one for which the independent enterprise would have been willing to pay or perform for itself, the activity ordinarily should not be consisted as an intra-group service under the arm's length principle.
4.8 Accordingly, Ld. TPO benchmarked these services under Comparable Uncontrolled Price (CUP) method and proposed Arm's Length Price (ALP) of two services listed at serial nos. 2 & 3 as 'Nil'.
Reliance was placed on various judicial decisions which are IT(TP)A No.58/Chny/2018
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enumerated in para 9.4 of order. The same include the decision of Delhi Tribunal in Bombardier Transportation India Pvt. Ltd. Vs. DCIT (ITA No.1626/Del/2015) as well as in M/s Knorr-Bremse India Ltd. Vs. ACIT (27 Taxmann.com 16) and the decision of Bangalore Tribunal in Gemplus India Pvt. Ltd. Vs. ACIT (ITA N.352/Bang/2009) which upheld such determination by lower authorities. Finally, the ALP of services listed at serial nos. 2 and 3 was determined as 'Nil' and downward adjustment of Rs.988.26 Lacs was proposed which was incorporated in the draft assessment order.
4.9 The Ld. DRP endorsed the view of Ld. TPO by observing that the onus was on assessee to prove with evidence that it actually received services and also to provide the details as to how the management fees was computed. Aggrieved, the assessee is in further appeal before us.
Our findings and Adjudication
5. From the facts, it emerges that the assessee has carried out various transactions of raw material, sale of goods, payment of management service charges, service charges paid / received, commission paid / received etc. and benchmarked the same on aggregate basis under TNMM method. The margins of the assessee are stated to be higher than the comparable entities and accordingly, no adjustment has been offered by the assessee in its TP study report. However, Ld. TPO opined that aggregation approach would be permitted only if the transactions were closely linked to each other and the transactions belong to a particular class of transactions, which was not the case. Accordingly, Ld. TPO proceeded to benchmark the transactions of payment of management services separately under IT(TP)A No.58/Chny/2018
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CUP method. We concur with the observations of Ld. TPO that unless the transactions are closely linked to each other and the same belong to particular class of transactions, aggregation approach could be discarded and the transactions could be benchmarked separately. It could also be seen that the assessee has applied TNMM method for certain transactions, CUP method for another set of transactions and 'other method' for certain transactions. The same would show that all the transactions have not been benchmarked under one method by the assessee himself rather the assessee has applied more than one method to benchmark the various transactions in its TP study report. Therefore, Ld. TPO was quite justified in rejecting the aggregation approach and proceed to bench-mark the impugned transactions separately under CUP method. No fault could be found in the impugned order, to that extent. The corresponding grounds raised by the assessee stand rejected.
6. Proceeding further, it could be seen that the assessee has started paying management service charges to its ultimate parent company pursuant to a Corporate Service Agreement, a copy of which is on record. The terms of this agreement are effective from 01.04.2012 for a period of 3 years. As per the terms, service provider agrees to provide certain services to service recipient and the ambit of such services could be modified from time to time according to the needs and capacity of each party. The services were to be compensated at certain mark-up which are given in Schedule-2 of the agreement. The mark-ups are stated to be identified on the basis of benchmarking exercise undertaken by assessee's AE M/s IFF Inc. during earlier years. The assessee has obtained services broadly in three areas viz.
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IT Services, Sales & Marking services and Management services. The rendering of IT services has been accepted by Ld. TPO since the assessee could substantiate the receipt of services. However, the ALP of the other two services was taken to be 'Nil' on the ground that no evidence towards rendering of services were furnished, the need for soliciting such services were not substantiated and the benefit that accrued from such services was also not explained with reference to the structure of the assessee and the scale of expenditure excluding the one for which the payments were made by the assessee to its AE. It could be noted that the assessee is stated to have been availing similar services in the past but it has chosen not to pay for these services in earlier years.
7. Before us, the assessee has filed 4 volumes of the paper-book. The same, inter-alia, contain snapshots of emails, published material, various correspondences, copies of invoices to show that the services were actually received for which a payment was required to be made by the assessee. We have gone through the same. After perusal of the same, we find that most of these emails do not pertain to this year but pertain to other years. Secondly, these emails are very general in nature which does not demonstrate that the services rendered were of specialised nature which would require separate payment of that magnitude as done by the assessee. This fact is pertinent in the background of the fact that the assessee was availing such services in earlier years also but chose not to make separate payment in that respect in earlier years up-to AY 2011-12. The assessee has started making payment for such services only from AY 2013-14 pursuant to corporate service agreement, the nature of services remaining the IT(TP)A No.58/Chny/2018
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same. This is further fortified by the fact that the profitability of the assessee has reduced substantially from AY 2013-14 onwards which is evident from the following tabulation of Ld. TPO: -
No. Assessment Year Profit Margin (%)
1. 2011-12 23.10%
2. 2012-13 21.63%
3. 2013-14 15.98%
4. 2014-15 13.22%
It could clearly be seen that the profits of earlier years are significantly higher than the profit of the years in which the assessee has started paying management charges to its AE. There is no change in the nature of business of the assessee. The above facts clearly support the case of the revenue.
8. In this regard, the tabulation made by Ld. CIT-DR with respect to dates of e-mail as kept in the paper-book would also support the aforesaid conclusion: -
Paperbook 2 In paper Period/Month book Page No. and Year of mail E Mail correspondences raising an IT Ticket to the IT Service Desk and sorting the issue 389 to 394 August 2016 Mail correspondence evidencing the global contract entered by the group to realize cost H savings 480 to 481 May 2017 I Mail correspondence evidencing conducting the back-ground check of the suppliers 482 to 484 October 2015 Mail correspondences evidencing the support of IFF Inc. In screening the local vendors for J IFF India 564to 570 September 2015 Mail correspondence evidencing where IFF India leverages on the central procurement 0 team for purchase of Capex 611 to 616 July 2016 Email correspondence evidencing the sharing of guidelines from regional/corporate P relating to review process 617 March 2014 Email correspondences where IFF Inc. Interacts directly with the vendors negotiating the R credit terms 630 to 679 December 2014 Mail correspondences evidencing creation approval of vendors credit terms that are S 680 to 681 June 2015 divergent from IFF Group policy.
Email correspondences providing guidelines on procedures to be followed in relation to 708to 709
U July 2015
updated policies. `
Mail correspondence evidencing training conducted for Finance Personnel-Attached the training V 710 to 733 December 2014 material Mail correspondence evidencing training for improvement of process payments and Blocked November 2012 X 735 to 753 invoice procedures - Attached the presentation and December Z Mail correspondences evidencing sharing of guidelines for preparing the budges 761 to 767 August 2017 ad Email correspondence relating to the Training 773 to 776 November 2015 IT(TP)A No.58/Chny/2018
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Paper book 3 Mail correspondences sharing the review comments on tooling agreement and standard ag 805 to 806 May 2013 purchase agreement ai Mail correspondences evidencing the sharing of crisis contact details 892 to 893 June 2013 aj Mail correspondences sharing the training materials for management crisis plan 894 to 895 February 2013 Mail correspondence evidencing the setting up call for discussing on Quality improvements, am 989 March 2014 best practices and meeting the requirements of FSSC 22000 certification ap Mail correspondences evidencing the support received from the R&D team 998 February 2013 aq Mail correspondences/ calendar invites evidencing the conduct of the quality trainings. 999 to 1000 Date Mail correspondence indicating contamination and care to be-taken-in-elation to the at 1015 August 2017 certain material June 2015 and ax Mail correspondence explaining the best practices suggested by the regional manager 1049 to 1051 July 2015 Mail correspondences evidencing production being directed to another plant due to January 2017 az 1053 to 1056 capacity availability/ unavailability and May 2017 bh Mail correspondence of consumer feedback (consumer sensory survey) 1073 March 2012 Mail correspondence of visit made by employees of IFF Inc. in relation to the same. Along bi 1074 to 1075 March 2012 with their schedules Mail correspondence evidencing support from regional team on the technology used in bj 1077 to 1078 March 2013 the manufacturing the flavours and fragrances
9. We are of the considered opinion that the complete onus, in this regard, was on assessee to demonstrate that the actual services were rendered and received by it. The assessee, in our opinion, has failed to demonstrate the same. In such a scenario, the determination of ALP by Ld. TPO as 'Nil' could not be faulted with. On the given facts, Ld. TPO would be left with no option but to determine the ALP as 'Nil' since in the absence of receipt of services, there would be no necessity for the assessee to pay for such services and the question of application of any prescribed method to determine the ALP would not arise at all.
10. The Ld. Sr. Counsel has submitted that there was proper method of cost allocation which was based on sales and head-counts and the allocation was based on report of independent auditor as obtained by the overseas entity. However, this fact would not be of much relevance in the light of our finding that the assessee has failed to establish the receipt of the services which would justify revenue's stand that there was no need for the assessee to pay for such services.
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11. The aforesaid adjudication find support from the recent decision of co-ordinate bench of Delhi Tribunal in Akzo Noble India Ltd. vs. Addl. CIT (137 Taxmann.com 369 dated 28.02.2022). The facts in this decision are found to be quite similar. The assessee benchmarked the transactions on aggregate basis by applying TNMM method which was not disputed by Ld. TPO. However, Ld. TPO benchmarked administrative support services separately under CUP method. In support of services, the assessee furnished copy of agreement, cost allocation keys and other evidences to demonstrate that the services were actually rendered. The bench, considering the factual matrix, observed that the assessee failed to demonstrate the rendering of the services and accordingly, the action of lower authorities was confirmed. The assessee preferred further appeal before Hon'ble High Court of Delhi which stood dismissed by Hon'ble Court and the same is reported as 145 Taxmann.com 468 dated 27.09.2022. The Hon'ble Court observed the findings that the assessee failed to furnish evidences to demonstrate receipt of services. The Hon'ble Court further observed that every year is a separate unit which is governed by particular facts. The decision was evidence based and therefore, it was not to be interfered with. We find that this decision is squarely applicable to the facts of the present case.
12. The Ld. Sr. Counsel has referred to the decision of this bench to support the case of the assessee. We find that the decision in Howden Solyvent (India) Pvt. Ltd. vs. DCIT (ITA No.732/Chny/2015 dated 31.10.2022) as well as the decision in M/s Diab Core materials Pvt. Ltd. Vs. DCIT (ITA No.2176/Chny/2017 dated 18.05.2022) is fact / evidence-based decision and rendered on particular facts of those IT(TP)A No.58/Chny/2018
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cases wherein the assessee could demonstrate rendering / receipt of services which is not the case here. Therefore, these case laws as well as other case laws as placed on record do not apply to the facts of present case.
13. In the light of above stated facts and circumstances, the adjudication of lower authorities, on this issue, could not be faulted with. By confirming the same, we dismiss all the corresponding grounds raised by the assessee in Part-B.
14. Assessee's Claim of Deduction u/s 80IB(4) (Part C: Gr. Nos. 1 to 19) 14.1 The assessee claimed deduction u/s 80IB(4) for Rs.379.15 Lacs against profit earned out of Jammu & Kashmir Unit. A commission u/s 131(1)(d) was issued to ACIT, Jammu during the year 2014 for AY 2011-12 to examine the facts as applicable to claim so made by the assessee. The outcome of field enquiry, as enumerated by Ld. CIT- DR, in the written submissions, was as under: -
a. The ITI could found machinery and Plants like blender and air compressor that were old one transferred from Chennai and Chittoor to Jammu. b. The bills submitted in respect of those machineries could not be cross tallied or cross verified with actual fixed assets. c. No books of accounts were maintained in the factory premise and there were all maintained in Head Office, Chennai.
d. It was reported that they were in the process of grinding, blending, mixing natural ingredients like salt, onion powder, sugar and other ingredient to form mixed flavour in dry and liquid form.
e. In nutshell they were only mixing and blending different dry powder received from different vendor and packed them for other agencies like Pepsi and to be used by them as sprinkle powder. Hence, it is more of blending and mixing rather than anu manufacturing activity.
f. It was also reported that blender, storage tanks in the business premises were old and did not bear any manufacturing mark.
Upon perusal of report, it transpired that the assessee was carrying out the process of blending and mixing various natural ingredients to IT(TP)A No.58/Chny/2018
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prepare dry mix powders and liquid flavors. Since the activity carried out by the assessee was held to be not amounting to manufacture, the claim was disallowed for AY 2011-12. The Ld. AO proceeded to take the same view in this year. The assessee relied on the definition of manufacture u/s 2(29BA) as inserted by Finance Act, 2009 and submitted that in the present case, manufacturing of flavouring essence is carried out with average of twenty to thirty-five different raw materials which fall under several different central excise tariff headings and include natural essential oils, aromatic chemicals, preservatives etc. in specified proportions on the basis of a formula so that a completely new and distinct product with a different end-use emerges as the result of manufacture. Similarly, the manufacturing of mixed seasoning powders (dry mix powder) would be carried out in similar fashion.
14.2 The Ld. AO, relying on the report of ACIT, Jammu, observed that the assessee only had blenders and vessels in the unit which were used to mix these ingredients to prepare the end product. The final product was merely mix of flavors of different products which are combined together in specific ratio for the purpose of sale. In the present case, the raw material as well as the finished goods was consumable and both were flavors only and therefore, it could not be said that finished goods was new and distinct product. As per definition of manufacture u/s 2(29BA), the transformation in the article should result in different name, character and use. In the present case, mixing of raw materials does not change the character and end-use of the product. The Ld. AO also appreciated the production process as furnished by the assessee during assessment proceedings of AY IT(TP)A No.58/Chny/2018
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2012-13. It was noted that a customer would approach the assessee with specific request to produce the flavors and fragrances as per its requirements. The assessee would identify the different combinations and develop the final product which is to be approved by the customer. The customer may, in his own manufacturing facility, add additional ingredients to make more unique notes of flavors that would finally be sold. The production of such material in the form of essence either in liquid or in powder format is happening in places located in Chennai and other states. In this way, the activities taking place in Jammu Unit were found to be not manufacturing but only trading in flavors. The assessee was merely buying various edible flavors, mixing it and selling it in the market. The assessee simply mixes the various ingredients to bring in different tastes, colour and strength. The assessee was not in the manufacturing but it was only applying the process to make different flavors which are marketable. Blending of different flavors may on blending result in bringing into masala flavors of particular specification but it could not be held to involve the process of manufacture because the flavors, which is derived as a result of blending activity, could not be regarded as a commercially new commodity. What is produced as a result of blending is commercially the same product namely flavours though with different combinations than those which are blended and hence, it could not be said that any process of manufacture is involved in blending of seasoned flavors. Reliance was placed on various judicial decisions to support this view. 14.3 The Ld. AO opined that as per definition provided in Sec. 2(29BA), the manufacture should result into (i) transformation of the object or article or thing; (ii) bring into existence a new and distinct IT(TP)A No.58/Chny/2018
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object or article or thing; (iii) having a different name, character and use; (iv) should be a different chemical composition or integral structure.
14.4 In the present case, there was no transformation of the object. The raw material as well as finished product was flavors only. The assessee only adds certain chemicals to maintain longevity of the product and also to give some taste but there is no transformation of raw material into an entirely new and distinct product. In fact, there was no transformation of any kind. The plea that the mix flavors could not be separated back, was not acceptable since there was no alteration in any manner of the goods purchased by the assessee. The end product was not a new and distinct product. Therefore, relying on the view taken in AY 2011-12, the deduction as claimed by the assessee was denied.
14.5 The Ld. DRP concurred with the findings of Ld. AO against which the assessee is in further appeal before us. The Ld. DRP referred to the decision of Hon'ble Supreme Court in the case of Chowgule & Co. (P.) Ltd. (7 Taxman 71) as well as in Appejay (P) Ltd. Vs CIT (77 Taxman 208) which held that mixing of different varieties of tea would be processing only and no new article or thing would come into existence. Similarly, in the case of Pio Food Packers (1980 Taxmann.com 116), it was held that cutting of pineapple and selling them in sealed cans do not amount to manufacture. In the case of Indian Hotels Co. Ltd. Vs. ITO (112 Taxman 46), it was held that when food articles are prepared by cooking or by any other process from raw materials likes cereals, vegetables, meat etc., it would not amount to manufacture of new article or thing. In Chillies Exports IT(TP)A No.58/Chny/2018
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House Ltd. Vs CIT (225 ITR 814), it was held that processing of chillies by subjecting them to sorting, grading, clipping etc. would not amount to manufacture. Accordingly, the impugned deduction was denied to the assessee against which the assessee is in further appeal before us.
14.6 The Ld. Sr. Counsel has submitted that the impugned deduction has been allowed to the assessee in AYs 2009-10 & 2010-11 whereas it has been denied only in subsequent years. The Ld. Sr. Counsel further argued that the flavours manufactured by the assessee are clearly a different product which would require mixing of 25 to 30 different raw materials in different proportions. The raw material as well as finished product falls under different excise tariff headings. Similarly dry mix would be having 10 to 25 different ingredients / material falling under different excise tariff headings. The details of tariff heading of major raw material and finished products have been placed on page no.1672 of the paper book. The assessee also placed a note on manufacturing / blending of raw material which is kept on page no.1660 of paper-book. It was further submitted that the original ingredients could not be retraced and the final product would, in fact, be passing through different stages of manufacturing. Reliance has been placed on various judicial decisions including the decision of Hon'ble Madras High Court in CIT vs. Vinbros & Co. (177 Taxman 217; SLP dismissed by Hon'ble Supreme Court which is reported as 25 Taxmann.com 367); decision of Hon'ble Supreme Court in CIT vs Sesa Goa Ltd. (142 Taxman 16); decision of Hon'ble High Court of Karnataka in CIT vs. Darshak Ltd. (118 Taxman 863); decision of Hon'ble High Court of Delhi in CIT vs. Flakes-N-Flavourz (48 IT(TP)A No.58/Chny/2018
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Taxmann.com 90); decision of Cochin Tribunal in ACIT vs Navan M. Meeran (36 Taxmann.com 89); decision of Mumbai Tribunal in CIT vs Empire Spices & Foods Mumbai Ltd. (188 Taxman 36); decision of Kolkata Tribunal in Binay OPTO Electronics Pvt. Ltd. Vs ACIT (49 Taxmann.com 325).
14.7 The Ld. CIT-DR, on the other hand, submitted that the assessee was only blending and mixing various ingredients which do not amount to manufacture. The same was clear from the commission issued by the department on Jammu Unit wherein the assessee was having only the blenders and mixers only. The assessee was merely buying different flavors and mixing them as per the requirement of the customer. Such an activity could not be said to be amounting to manufacture. Reliance has been placed on the decision of Hon'ble Supreme Court in the case of India Hotels Co. Ltd. (supra). 14.8 The written submissions filed by Ld. CIT-DR, on this aspect, read as under: -
The appellant company claimed deduction of Rs.3,79,15,458 as deduction u/s 80IB of Jammu plant. A detailed order was passed by the AO by analyzing the facts and various judicial pronouncements and concluded that the appellant did not manufacture any article or thing as per section 80IB (4) of the IT Act. The AO held that they were only into processing. This conclusion was arrived on account of following facts:
1. Carrying out filed Enquiry: During the course of Assessment proceeding for AY 2011-12, field verification was carried out by issuing commission u/s131(l)(d) of the IT Act to ACIT- Circle (1), Jammu with a request to enquire the various aspects of the Jammu Plant. This enquiry report was received by the AO during the course of Assessment proceeding for AY 2011-12. It is placed in page no 1681 to 1684 of paper book 4 of the appellant. The outcome of field enquiry is as under:
a. The ITI could found machinery and plants like blender and air compressor that were old one transferred from Chennai and Chittoor to Jammu.
b. The bills submitted in respect of those machineries could not be cross tallied or cross verified with actual fixed assets. c. No books of account were maintained in the factory premise and they were all maintained in Head office, Chennai.
d. It was reported that they were in the process of grinding, blending, mixing IT(TP)A No.58/Chny/2018
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natural ingredients like salt, onion powder, sugar and other ingredient to form mixed flavour in dry and liquid form.
e. In nutshell they were only mixing and blending different dry powder received from different vendor and packed them for other agencies like Pepsi and to be used by them as sprinkle powder. Hence, it is more of blending and mixing rather any manufacturing activity. f. It was also reported that blender, storage tanks in the business premise were old one and did not bear any manufacturing mark.
2. This led to a conclusion that they used to blend some of the ingredients like salt onion powder sugar to form mixed flavour in dry as well as liquid formulations and it cannot be claimed as manufacture of Article or thing. The AO recorded the same fact in page No. 5 of the assessment order.
3. The AO had also recorded that during the course of assessment proceedings for AY 2012-13 the senior scientist of the appellant company was also examined to understand about the process.
4. After examination of the scientist, the AO concluded that a typical customer approaches the assessee with a specific request to produce the flavour and fragrance and as per the request they used to blend edible flavours. Such blending of different flavours as per AO was not manufacturing of article or thing as contemplated in sec 80IB of the IT Act.
5. Case laws: From page No. 8 to 13 various case laws were discussed by the AO. At page no.14 of the assessment order the AO has referred decision of Hon'ble SC in the case of Indian Hotels Company Limited vs ITO and concluded that food stuffs prepared by cooking or by any other process cannot be called as manufacture or production.
6. The appellant relied upon plethora of case laws in their paper book. However, the facts and circumstances in the case in hand and specific field enquiry carried out by the AO distinguished the facts unambiguously.
7. Analysis of paper book: During the course of hearing in ITAT, attention was brought to the notice of functional analysis of the appellant given in page no 1238 of the paper book 4 and demonstrated that IFFI obtains customer specifications and mixes appropriate quantities of base chemicals and such process cannot be amounting to manufacture. Attention was also drawn to page no. 1379 of paper book 4 and demonstrated that there was no Research and development expenditure directly incurred by Jammu plant in support of manufacturing activity.
8. Finding of DRP: DRP had examined this issue from page no. 8 and held that the company had only blenders and vessels used for mixing ingredients: It was also recorded by DRP that essential elements giving rise to various flavours are produced outside Jammu units in places like Chennai and Chittoor and their ingredients are mixed or blended in Jammu unit based on the requirement of the customer. DRP also recorded that essential flavours are not directly prepared by the assessee but they are purchased and used by mixing or blending. This process does not constitute manufacture or production of new article or thing as per sec 80IB In view of the above, it is evident that the appellant's unit at Jammu was not into manufacture of article or thing as contemplated in section 80IA(4). Hence it is prayed that the order of the AO may kindly be upheld.
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14.9 Having considered rival submissions and upon perusal of case records as well as case laws cited before us, our adjudication would be as under.
Our findings and Adjudication
15. We find that the assessee has established Jammu Unit in the year 2007 and started claiming impugned deduction from AY 2009-10 onwards. This deduction was claimed for AYs 2009-10 and 2010-11 and the same was allowed by revenue also. However, based on assessment of subsequent years and the in light of commission issued by the department, the case was reopened to deny the same. The assessee challenged the reopening on legal grounds before Hon'ble High Court of Madras vide WP Nos.309 & 44102 of 2016 & ors. dated 19.05.2020, a copy of which is on record. The Hon'ble Court considered the factual matrix as well as the reasons recorded by revenue to reopen the case. In para 17, it was observed that Chapter 21 of Central Excise Tariff Act, 1985 deal with miscellaneous edible preparations. The products falling under the aforesaid tariff labelling or relabelling of containers or repacking from bulk packs to retail packs or the adoption of any other treatment to render the product marketable to the customer would also amount to manufacture. Heading 2103 specifically deals with sauces and preparations and sub heading 2103 90 40 deals with mixed condiments and mixed seasoning. Similarly, Chapter-33 deal with essential oils etc. and sub-heading 3302 10 10 deals with synthetic flavouring essence. Based on these headings, it was categorically held in the end of para-20 that the activity undertaken by the petitioner amounts to manufacture. The reasons leading to reopening were discussed elaborately in para-23. The assessee IT(TP)A No.58/Chny/2018
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contended that the impugned activity under the Central Excise Act, 1944 has been accepted to be manufacturing activity and refunds were issued to the assessee under exemption notification under that Act and therefore, a different view could not be taken by revenue in the present proceedings. It was further noted in para-25 that the definition of manufacture u/s 2(29BA) was broader than the definition of manufacture in Sec. 2(f) of Central Excise Tariff Act, 1944. Further, the activity undertaken by the assessee was already deliberated upon during the course of assessment proceedings. The assessee, inter- alia, explained the process of manufacturing and also furnished details of plant and machinery installed in Jammu Plant along with the bills. On the basis of all these facts, it was held by Hon'ble Court that there was change of opinion and there was no jurisdiction to reopen the case. Finally, the observations made in para-33 read as under: -
33. Further the central excise department has also accepted the fact that the petitioner was engaged in the manufacture of excisable goods which were eligible for exemption under Notification No.56 of 2002-CE dated 14.11.2002 as amended by Notification No.34 of 2008-CE dated 10.06.2008, Therefore, a change of opinion based on report of Asst. Commissioner of Income Tax, Circle 1, Jammu under Section 131 of the Income Tax Act, 1961 cannot amount to failure on the part of the an assessee to truly and fully disclose information / documents required for the purpose of completing the assessments.
Accordingly, the reassessment proceedings on the issue of deduction u/s 80IB were set-aside. Thus, so far as the assessee is concerned, this issue has attained finality in assessee's favour for first two years.
16. The above stated fact that the excise department has accepted the fact that the petitioner was engaged in the manufacture of excisable goods which were eligible for exemption under different notifications under that Act, remains undisturbed before us. In other IT(TP)A No.58/Chny/2018
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words, it is accepted position before the Excise department that the various activities undertaken by the assessee would fall under different tariff headings and these activities would amount to manufacture. It was further held by Hon'ble Court that the definition provided u/s 2(29BA) was much broader. The aforesaid observations clearly support the case of the assessee that the assessee was engaged in manufacturing activity. The case law of Hon'ble High Court of Delhi in CIT vs. Flakes-N-Flavourz (48 Taxmann.com 90) as well as the decision of Kolkata Tribunal in Binay OPTO Electronics Pvt. Ltd. Vs ACIT (49 Taxmann.com 325) also support this proposition. The Kolkata Tribunal held that the fact that the Central Excise Department recognised assessee as manufacturer and collected excise duty, the claim of deduction u/s 80-IB was to be allowed. This decision has followed the decision of Hon'ble Supreme Court rendered in Ujagar Prints vs. UOI (179 ITR 317). Therefore, the case of the assessee has to succeed on this score only.
17. Proceeding further, the term 'manufacture' as defined in Sec.2(29BA) read as under:
"manufacture", with its grammatical variations, means a change in a non-living physical object or article or thing: --
(a) resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or
(b) bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure.' Thus, manufacture would essentially involve- (i) transformation of the object or article or thing; (ii) bring into existence a new and distinct object or article or thing; (iii) having a different name, character and IT(TP)A No.58/Chny/2018
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use; or (iv) bring into existence a new and distinct object or article or thing with a different chemical composition or integral structure. It could be seen that the assessee is manufacturing dry mix and liquid flavors at Jammu Unit. Both the processes involve mixing and blending of various raw materials which broadly include 10 to 25 different raw materials. A note on manufacturing process was furnished by the assessee before lower authorities which is kept on page nos. 1660 to 1666 of the paper-book. The manufacturing process of flavouring essence and mixed seasoning powders, inter-alia, consist of blending of various raw material. The activity would involve preparation of concentration which is mixed up with other ingredients in bulk volume. The mixture is then used for manufacturing of essence which passes through various production stages. The flavouring essences would also be made in emulsion form which is also manufactured in similar fashion. The dry-mix would be manufactured by mixing various spice extracts and spice powders with various additives and passes through various stages of blending. It is undisputed fact that the raw material could not be traced back from finished product. Considering the same, it could be concluded that there was transformation of raw material and a new product emerges which would have different use though chemical composition or integral structure may not have changed. The same is supported by the fact that the tariff heading for final product fall under different sub-heading than that of raw material under Central Excise Act. All these facts further support the case of the assessee.
18. The Hon'ble High Court of Madras in the case of CIT vs. Vinbros & Co. (177 Taxman 217) held that blending and bottling of Indian Manufactured Foreign Liquor (IMFL) would amount to manufacture for IT(TP)A No.58/Chny/2018
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claiming deduction u/s 80IB. The allegation of the revenue was that the assessee was merely into blending and bottling of various brands. The Tribunal relying upon various decisions allowed the claim of the assessee by observing that the raw material though not manufactured by the assessee yet there was nexus of process of blending to make it saleable commodity totally different from that of originally obtained. The Hon'ble Court concurred with the decision of the Tribunal. The Special Leave Petition filed by the department against this decision has been dismissed by Hon'ble Supreme Court which is reported as 25 Taxmann.com 367. This case law also consider the decision of Pio Food Packers (1980 Taxmann.com 116).
In the case of CIT vs. Darshak Ltd. (118 Taxman 863), Hon'ble High court of Karnataka has held that transforming plain glassware into decorative glass with a process which is irreversible and end product being different in character, the same would be entitled for deduction u/s 80I.
Similarly, Mumbai Tribunal in CIT vs Empire Spices & Foods Mumbai Ltd. (188 Taxman 36) held that the assessee engaged in business of producing masalas of different varieties from raw spices purchased from the market would be entitled for deduction u/s 80IB. This case law clearly supports the case of the assessee. Similar is the cited decision of Cochin Tribunal in ACIT vs Navan M. Meeran (36 Taxmann.com 89). All these binding decisions support the case of the assessee.
19. The Ld. CIT-DR has submitted that the commission issued by revenue revealed that there was old machinery which was transferred from Chennai and the bills for machinery were not tallied or cross-
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verified. Further, books of accounts were not maintained at factory premises. However, upon perusal of assessment order, we find that the whole case of revenue is that the activity carried out by the assessee would not amount to manufacture. We are of the considered opinion that the deduction could not be denied merely on the basis of suspicion without rendering any concrete finding in the assessment order. The plea that there was no research and development expenditure at Jammu Unit has no relevance in the context of present case since carrying out research activities is not essential ingredient of manufacturing. The finding of DRP that the essential elements giving rise to various flavours were produced outside Jammu units in places like Chennai and Chittoor and their ingredients are mixed or blended in Jammu unit based on the requirement of the customer and the same were not prepared directly but purchased by the assessee, would also not be of much relevance since nowhere it is a condition that the raw material should also be produced by the assessee before it could be said to be engaged in manufacturing.
20. The case law of Appejay (P) Ltd. Vs CIT (77 Taxman 208), as referred to in the assessment order, deal with mixing of different varieties of tea wherein raw material as well as end product remain the same. The decision of Indian Hotels Co. Ltd. Vs. ITO (112 Taxman
46) has been rendered in the context of Sec. 80J which enable an assessee to claim deduction from an industrial undertaking whereas the assessee was engaged in hotel business. In the context of Sec. 32A and Sec.80J, it was held by Hon'ble Court that the foodstuff prepared by cooking or by any other process from raw materials such as cereals, pulses, vegetables, meat or the like cannot be regarded as IT(TP)A No.58/Chny/2018
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commercially distinct commodity and it cannot be held that such foodstuff is manufactured or produced. However, in the present case, the assessee is mixing various raw materials to manufacture different commodity which fall under separate excise tariff heading. Therefore, these case laws are factually distinguishable.
21. Considering the entirety of facts and circumstances, the assessee would succeed on this issue and it was to be held that the assessee was eligible to claim impugned deduction. We order so.
22. Depreciation on UPS (Ground Nos.1 to 6) The assessee claimed higher depreciation of 60% on uninterrupted power supply (UPS) equipment. The Ld. AO, treating the same as Plant & Machinery, granted depreciation of 15% and added the differential of Rs.0.66 Lacs to the income of the assessee. The Ld. DRP directed Ld. AO to consider rectification application of the assessee and double disallowance as argued by the assessee was directed to be rectified. Pursuant to the same, Ld. AO re-worked excess depreciation to Rs.0.34 Lacs. We are of the opinion that UPS, if used along with computer system, would be integral part of computer system and would be eligible for same rate of depreciation as applicable to that block. If the UPS are used otherwise, the rate as applicable to electrical installations would apply. The Ld. AO is directed to rework the same accordingly. The corresponding grounds stand allowed for statistical purposes.
23. Depreciation on electrical installation (Ground Nos.1 to 3) The assessee claimed depreciation on electrical installations @15%. Treating the same as electrical fittings, Ld. AO allowed depreciation of 10% and added the differential depreciation of Rs.0.05 Lacs to the IT(TP)A No.58/Chny/2018
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income of the assessee. The Ld. DRP confirmed the same. We are of the view that electrical installations are part of electrical fittings and do not constitute Plant & Machinery. Therefore, the corresponding grounds raised by the assessee stand dismissed.
Conclusion
24. The appeal stands partly allowed in terms of our above order.
Order pronounced on 27th April, 2023
Sd/- Sd/-
(MAHAVIR SINGH) (MANOJ KUMAR AGGARWAL)
उपा23 /VICE PRESIDENT लेखासद; / ACCOUNTANT MEMBER
चे,ई / Chennai; िदनां क / Dated : 27-04-2023
EDN/-
आदे श की Wितिलिप अ 8े िषत/Copy of the Order forwarded to :
1. अपीलाथ /Appellant 2. यथ /Respondent 3. आयकर आयु त/CIT 4. वभागीय त न ध/DR
5. गाड फाईल/GF