Income Tax Appellate Tribunal - Amritsar
Saraf Electricals (P) Ltd. vs Asstt. Cit on 28 February, 2001
Equivalent citations: (2004)89TTJ(ASR)761
ORDER
N. K. SAIN, A.M. These are the appeals filed by the assessee against the order of the CIT, Patiala, dated 20-2-1998 and Commissioner (Appeals), Bhatinda, dated 10-3-2000, for the assessment year 1993-94.
2. In both the appeals, the issue involved is common, having identical facts and the appeals were heard together, so these are being disposed of by this consolidated order for the sake of convenience.
ITA No. 203/Asr/19983. The assessee has raised following grounds in this appeal "1. The learned Commissioner has erred in holding that the assessee was provided with damaged transformers.
2. The learned Commissioner has erred in not appreciating the fact that only core and tank had been supplied to the appellant by the Punjab State Electricity Board and that the process involved was the same as in the manufacturing of new transformers.
3. The learned Commissioner has erred in directing for disallowance of deduction under is. 80HH and 80-I."
3.1 The facts of the case in brief are that the assessee was engaged in the manufacturing and sale of electric transformers which were supplied by it to different State Electricity Boards. During the year under consideration, the assessee undertook to repair some old damaged transformers of electricity boards and claimed the rebate under sections 80HH and 80-I on the net income declared at Rs. 4,44,321. The assessing officer passed order under section 143(3) on 15-3-1996 and allowed the claim of the assessee. The learned CIT noticed that the claim of the assessee was not admissible as the repair work did not amount to manufacture and accordingly proceedings under section 263 were initiated. The assessee filed written reply before the CIT justifying its claim of deduction under sections 80HH and 80-I. The main thrust of the assessee was that it was a manufacturing concern and that the repair undertaken by it also involved the same processes as was required for manufacturing the transformers and for this, the assessee relied upon the terms and conditions entered into by it with the respective State Electricity Boards which inter alia, provided that :
"The repair work shall involve opening of transformer cover, detanking core and coil assembly at PSEB premises for taking only tank and core to the works of the repairing firm returning of all old HV/LV leg coils and all other parts except tank and core before taking the same to the works for repairs."
3.2 The assessee was required to file the detail of its manufacturing activities as well as repair jobs undertaken by it. The following details were submitted PS.
(a) Transformer sales 1,02,41,495.68
(b) Scrap sales 75,656.25
(c) Repair jobs 87,19,078.33
(d) Labour charges 14,41,656.00 2,08,77,886.26 The Commissioner observed in his impugned order at para 4.1 which is reproduced as under :
'A.1 From the above terms and conditions, it is very clear that the assessee was provided with "damaged transformers" and it was required to disassemble these at the premises of the electricity board and return the burnt/damaged parts to the electricity board and to take away the structure of the transformer for repair at its own premises. The jobs undertaken by the assessee at its premises as per terms and conditions with State Electricity Boards, a copy of which was filed by the assessee, included replacement of windings and other transformer parts, cleaning dust and dirt and fixing the new parts as per specifications and to charge its labour charges for such services. The transformers has two basic parts namely laminated core and fabricated oil tanks which stood about 80 per cent of the weight of the transformer excluding the weight of oil. These parts always remain the property of the PSEB and the assessee is simply to fix the coils, etc. as per , specification. No new manufacturing is done by the assessee. The shape and size of the raw material used by the assessee is not changed in this process which is very material in a manufacturing concern. From the raw material used by the assessee, no new end-product comes out as the assessee simply fixes the new parts in place of damaged parts in the transformer and charges its labour alongwith the cost of the parts. The emphasis placed by the assessee on the excise duty on replacement of parts is of no help to it as the excise duty is charged at different stages differently as per policy of the excise duty. For example, till recently the excise duty was also being charged on trading of iron and steel and the traders were also covered under Excise Duty Act. In view of these facts, the assessee is not entitled for deduction under sections 80HH and 80-I in respect of the repair work undertaken by it on behalf of the State Electricity Boards as no new endproduct comes out of the processes undertaken by the assessee as it simply undertakes repair work and supplies the spareparts. No manufacturing activities are involved in this process."
It was further observed by the learned CIT that from the figures submitted by the assessee, it was clear that even deduction claimed by assessee in its return of income at Rs. 1,99,944 and allowed by the department was also not correct. The repair work and labour charges thereon and scrap sales under no stretch of imagination can be termed as manufacturing activities. The learned CIT further observed that the bills issued by the assessee also clearly indicated the amount of sales and excise duty in respect of repaired transformers and at the end of the bill, labour charges had been shown, which clearly established that the assessee was not manufacturing but was simply selling the coils, material and transformer oils on which excise duty and labour were charged separately in the bills. Accordingly, the CIT considered the order passed by the assessing officer on 15-3-1996, not only erroneous but also prejudicial to the interests of the revenue and set aside the order passed by the assessing officer, under the provisions of section 263 of the Income Tax Act, 1961.
3.3 Being aggrieved, the assessee is in appeal. The learned authorised representative submitted before us that the main business of the assessee is manufacturing of transformers and the view to disallow the deduction is actually without appreciating the true germane facts in the light of perspective. Denial of allowable deductions due to nomenclature or nicety of English word repair', either written in account books or in sale bills would be most unjustified,, Difference between the two mechanical processes required at the time of manufacture of new electric transformers on the one hand and the repaired one's on the other hand is very thin. The activities for repairs should not be interpreted with in a technical narrow compass but should be viewed, considered and understood in the real context in which they are carried out. Step by step mechanical activities and processes for both types of works are in itself a proof that accomplishment either of the two is not possible without, the full aid/use of the plant and machinery. The learned authorised representative reiterated the explanation given before the CIT that, same type of raw material is required for both the processes, i.e., for manufacture of new transformers as well as for repairs of old damaged transformers. The detail of the raw material is following :
S. No. Particulars
1.
Lamination (in coiled form)
2. Core lamination (Strip)
3. Cotton tape and PVC (without adhesive)
4. Terminal ends
5. Insulation material
6. Transformer oil
7. Casting material for CT's
8. Steel sheets for manufacturing of CT/PT unit
9. Epoxy bushings
10. Aluminium wire and strip."
The learned authorised representative emphasised that it can safely be admitted that no perfect job under both processes either for the manufacture of brand new transformers or repairs of the old ones without the actual use of the same plant and machinery is possible under any circumstances.
The learned authorised representative further clarified that the so-called repair is in fact manufacture of new transformers. The technical specification provide that the petitioner is entitled to take tank and core only to its works, and the repair work shall involve opening of transformer cover, detanking core and coil assembly at PSEB premises for taking only tank and core to the work of the repairing firm, returning of all old HMV leg coils and all other parts except tank and core before taking the same to the works for repairs. Regarding replacement of parts, it was submitted that it would involve replacement/assembly of parts such as HV/LV limb, coils, bushings, gaskets, synthetic rubber washers'for bushing assemblies breather, oil level gauge, oil drain and filter valve, covering bolts, plugs, top cover plates, caps, screws, transformer oil, etc., fitting, fixing and making connections complete in all respects. It was further clarified that the distribution transformers are manufactured by assembling of parts, i.e., steel fabricated body, lamination core, HT/LT aluminium copper wire/strips, coils, fabrication of angles and channels, brass fittings, bushings, insulation material, connecting wires/strips, ceramic insulation, painting of body (inside and outside), baking of assembled transformers in the furnace, transformed oil dehydration. The transformers are further tested as per the specifications of the electricity boards. In manufacturing of a new transformer most of the components/parts manufactured by the assessee are purchased from outside suppliers. During the repair of PSEB transformers the process is the same like manufacturing of a new transformer and the job is done as per contract with the electricity board. In this case, tank bodies and core lamination are supplied by the PSEBas per their contract. The learned authorised representative vehemently argued that the manufacture process involved in both the cases are the same as per chart showing process involved, raw material used and machinery used are also similar in the manufacturing process of new transformers as well as repairing of transformers.
It is also submitted that the PSEB writes 'repair' of old transformers for their own internal record purpose while practically they supply us only tank, body and core lamination and not a complete damaged/repairable transformer. Both the tank body and core lamination supplied by the PSEB are to be processed and assembled as in the case of new tank bodies and core lamination used in the manufacturing of new transformers and this fact established that any item produced by assembling of certain parts and components is manufacturing activity and not the repairing. The learned authorised representative further relied on the following case laws :
(1) CIT v. Ashok Leyland Ltd. (1981) 130 ITR 900 (Mad) (2) C1T v. Wheels India Ltd. (1983) 141 ITR 745 (Mad) (3) CIT v. Buckau Wolf New India Engineering Works Ltd. (1984)150 ITR180 (Bom) (4) Cambay Electric Supply Industrial Co. v. CIT (1978) 113 ITR 84 (SC) (5) English Electric Co. of India Ltd. v. CIT (1987) 168 ITR 513 (Mad) (6) CIT v. Sterling Foods (1999) 237 ITR 579 (SC).
3.4 In his rival submissions, the learned Departmental Representative relied on the order of the Commissioner and also submitted that the income derived from job work is not eligible for the deduction under sections 80HH and 80-I Hence, the learned Commissioner rightly directed the assessing officer not to allow the claim of the assessee. He also relied upon the following case laws:
(1) B.S. Bajaj & Sons v. CIT (1996) 222 ITR 418 (P&H) (2) CIT v. Lucky Minera 1 (P) Ltd. (1997) 226 ITR 245 (Raj) (3) Indian Poultry v. CIT (1998) 230 ITR 909 (MP).
4. We have heard both the parties at length and also gone through the material available on the records along with various case laws cited by both the parties. It appears that the dispute relates to the manufacturing process and as per CIT the job work, the repairing work of the transformers did not amount to the manufacture and accordingly the benefit under sections 80HH and 80-I is not available to the assessee. The expression 'industrial undertaking' is not fined in the Act. It would, therefore, be open to look for the meaning of is expression by referring to its definition in sister legislation, and failing that to adopt a common parlance meaning. It is undisputed fact that the process involved in the manufacturing of the transformers and repairing of the transformers involved similar activities. Both the activities are performed by the assessee by using the similar type of machinery and manufacturing process is also similar in making the new transformers as well as repairing of the transformers. Nomenclature cannot change the nature of the activity. In the instant case, similar mechanical process was required at the time of manufacture of new electric transformer and also for repairing of old transformers. The only difference was that while repairing the old transformers, the PSEB supplied only tank body and core lamination and both the bank body and core lamination were to be processed and assembled as was done in the case of new tank bodies, and core lamination used in the manufacturing of new transformers. Considering this aspect, we are of the considered view that there was no difference in making the new transformers as well as repairing of old transformers as far as the manufacturing process is concerned. Hence the benefit under section 80HH cannot be denied which is available to the new industrial undertaking. The case laws relied upon by the learned Departmental Representative are on the different facts, as in the case of B.S. Bajaj & Sons v. CIT (supra), the issue involved was related to the conversion of timber into rafters but in the instant case there is no such fact.
In the case of CIT v. Lucky Mineral (P) Ltd. (supra), the activities under consideration were related to the excavating limestone and marble boulders and cutting the boulders into slabs, with the aid of machinery and the original commodity retained a continuing substantial identity. Hence deduction under section 80HH was not allowed but in the instant case, the facts are different because transformers are manufactured by assembling of parts, fabrication of angles and channels, fittings connecting wire strips, etc. Similarly, another case relied upon by the learned Departmental Representative is also distinguishable in the case of Indian Poultry v. CIT (supra). The issue involved related to the rearing of chicks which did not amount to manufacture, hence the assessee was not an industrial undertaking. But in the instant case, the activities of the assessee were of manufacturing. On the other hand, the Hon'ble Bombay High Court in the case of CIT v. Buckau Wolf New India v. Engineering Works Ltd. (supra) held that :
"Section 80-I uses the words "attributable to," which had been deltberately used by the legislature. The words are of wider import than the expression "derived from", and the legislature intended to cover receipts from sources other than the actual conduct of the business. Section 80-I envisaged relief beind granted in all cases where there was some direct nexus between the inconle and the priority industry. Since the manufacture of machinery by the assessee was a' priority indugtry, the carrying out of repairs of machinery manufactred and sold by the assessee was an activity which had a direct nexus to the priority industry and the income derived therefrom must be held to be attributate to the priority industry. The income derived from interest paid by the buyers of machinery manufactured by the assessee on deferred payment also had a direct nexus to the assessee's priority industry and was attributable to it. The facility of after-sales repairs and of deferred payment were inducements offered to the intending purchasers and were intimately linked to the assessee's priority industry. "
Therefore, the assessee was entitled to deduction under section 80-I in respect of such income."
In the case of Cambay Electric Supply Industrial Co. Ltd. v. CIT (supra), the observations of the Hon'ble Supreme Court were as under:
"The legislature has deliberately used the expression "attributable to", having a wider import than the expression "derived from", thereby intending to cover receipts from sources other than the actual conduct of the business of the specified industry."
The Hon'ble Kerala High Court in the case of CIT v. A.M. Moosa (1999) 237 ITR 867 (Ker), observed that :
"In order to claim special deduction under sections 80-J and 80HH of the Income Tax Act, 1961, the profits should be relatable to an industrial undertaking and there has to be material to show that it is derived from the business activity relatable to such industrial undertaking. Profit or gain can be said to have been derived from an activity carried on by a person only if the said activity is an immediate and effective source of the said profit or gain."
Similarly the observations of the Hon'ble Kerala High Court in the case of CIT v. Forbes Ewart & Mggis (P) Ltd. (1999) 238 ITR 762 (Ker), were following:
"The assessee had a rubber mixing mill at which was used for grinding masticating and mixing rubber for others on job work basis with raw materials supplied by tyre manufacturers. The assessee claimed investment allowance under section 32A of the Income Tax Act, 1961, in respect of the above mentioned machinery. The assessing authority rejected the claim for the reason that since the assessee was using the machinery for job work, it could not be said that the assessee was engaged in the production or manufacture of any article or thing and, therefore, it was not entitled for any investment allowance on the plant and machinery installed in the rubber mixing mill. On appeal the Commissioner (Appeals) allowed, the claim of the assessee, for investment allowance and the Tribunal affirmed the view taken by the Commissioner (Appeals). On a reference by the department:
Held, that the rubber compound manufactured by the assessee was a final product as far as the assessee was concerned and merely because the above compound was used for the, manufacture of tyres, etc.; the assessee could not be denied the claim under section 32A. "
In view of the aforesaid discussions, the ratio of the case laws reported at (1999) 237 1TR 867, (1999) 238 ITR 762 (Ker) and (1984) 150 ITR 180 (Bom) (supra) are squarely applicable in the case of the assessee. Hence, we are of the considered view that there was no justification on the part of the CIT in setting aside the order of the assessing officer, dated 15-3-1996 and directing that the assessee was not entitled for any deduction under sections 80HH and 80-1 of the Income Tax Act, 1961. So we set aside the order of the CIT and direct the assessing officer to allow deduction under sections 80HH and 80-I as per law which is available to the assessee because we have already held that the activity of job work was also the same as that of manufacturing the new transformers.
5. ITA No. 261/Asr/2OOO,. Asst. yr. 1993-94 In the first ground of this appeal, the assessee contended that the learned Commissioner (Appeals) erred in holding that the receipt from the repair of old transformers are not the part of the profits and gains derived from the industrial undertaking.
5.1 This issue we have already decided in ITA No. 203/Asr/1998 and directed the assessing officer to consider the income from repair of old transformers as profits and gains derived from an industrial undertaking. Hence, this ground of appeal is allowed,
6. Ground No. 2 is also related to the receipts from the repair of old transformers. The directions given in aforesaid ground No. 1 should be followed for computing deduction under sections 80HH and 80-I.
7. Ground No. 3 is general in nature which does not require any comment.
8. In the result, both the appeals of the assessee are allowed as indicated above.