Income Tax Appellate Tribunal - Delhi
Indraprastha Gas Ltd., New Delhi vs Addl.Cit, Special Range- 4 , New Delhi on 5 January, 2021
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH 'C', NEW DELHI
Before Sh. Amit Shukla, Judicial Member
Dr. B. R. R. Kumar, Accountant Member
(Through Video Conferencing)
ITA No. 6489/Del/2017 : Asstt. Year : 2013-14
Indraprastha Gas Ltd., Vs Addl. CIT,
Plot No. 4, IGL Bhawan, Special Range-4,
Sector-9, R.K. Puram, New Delhi
New Delhi-110022
(APPELLANT) (RESPONDENT)
PAN No. AAACI5076R
Assessee by : Sh. Rajat Jain, CA
Revenue by : Sh. Gaurav Dudeja, Sr. DR
Date of Hearing: 09.11.2020 Date of Pronouncement: 05.01.2021
ORDER
Per Dr. B. R. R. Kumar, Accountant Member:
The present appeal has been filed by the assesse e against the order of the ld. CIT(A)-35, New Delhi dated 28.08.2017.
2. Following grounds have been raised by the assessee:
"1. On the facts and circumstances of the case, order passed by the Ld. Commissioner of Income Tax (Appeals) is bad in law.
2. On the facts and circumstances of the case and in law the Ld. Commissio ner of Income Tax (Appeals) has erred in confirming the disallowance of the additional depreciation claimed by the Appellant Company u/s 32(1)(iia) of the Income Tax Act, 1961, amo unting to Rs.8,23,15,761/-.2 ITA No. 6489/Del/2017
Indraprastha Gas Ltd.
3. On the facts and circumstances of the case and in law the Ld. Commissio ner of Income Tax (Appeals) has erred in not dropping the penalty proceedings initiated by the Ld. Assessing Office r under section 271(1)(c) of the Income Tax Act, 1961."
3. Indraprastha Gas Limited (IGL) is a joint venture of GAIL India Ltd., the largest Natural Gas transmission company in India and Bharat Petroleum Corporatio n Limite d (BPCL), one of the leading oil refining and marketing co mpany in India and government of NCT of Delhi. T he company is currently engaged in the business in the Delhi-NCR region including Noida, Greater Noida, Ghaziabad and Rewari.
4. IGL is a City Gas Distribution Company (CGD) which is engaged in the business of selling and distribution of Natural Gas to be used as industrial and household fuel in Commercial and Domestic sector respectively. Further IGL is also engaged in the manufacturing and selling of Compressed Natural Gas (CNG) which is used as a fuel to be used for running Automobiles.
5. The AO has held that the process of delivery of CNG to automo biles at the CNG filling centres does no t amo unt to manufacture or production or an article or thing which is mandatory requirement for claiming additional depredatio n u/s 32 (1)(iia) of the Income Tax Act. T herefo re, the AO held that the assessee company is not entitled for additional depreciation as claimed in the return of income and acco rdingly an amount of Rs. 8 ,23,15,761/- was added back to the total income of the assessee.
6. The ld. CIT (A) confirmed the additio n holding that the company is not into manufacturing or production of CNG.
3 ITA No. 6489/Del/2017Indraprastha Gas Ltd.
7. Aggrieve d the assessee filed appeal be fo re us.
8. The ld. AR argued that IGL o btained certificate from Central Excise Department and also paying Central Excise duty which can be verified from P&L account. By the virtue of payment of Central Excise duty, he argued that it can be conveniently proved that the assessee is into manufacturing activity. He further relied on the tax audit report and argued that the additional depre ciation has been rightly charged on compressors, dispensers, gas gen-se ts, cascades, PRV Mass flow meters which are installed at CNG stations and are used in the manufacturing process. He explained the process which is as unde r:
1. Metering skid - Filters are used to clean he avy dust particles coming along with the gas s that we can provide clean fuel to our custo mers. Pressure regulating valves are also used this skid to reduce incoming pressure within safe limits.
2. Compressor - It' s a three stage reciprocating compressor which is used to process this gas from ~18 bar to ~250 bar.
This is a three stage process in which gas is compressed different stages-
a. First stage - ~ 18 bar to ~ 55 bar b. Second stage - ~ 55 bar to ~ 120 bar c. Third stage -~1 20 bar to ~250 bar.
First stage is double acting while second and third stage is single acting. Each stage consists of spring loaded suction and discharge valves. Safety valves, pressure and temperatures sensors, gas & flame detectors are installed to ensure safe compression of gas.
4 ITA No. 6489/Del/2017Indraprastha Gas Ltd.
Further temperature increases whenever we compress the gas thus after every compression gas enters air cooler which cools the gas, using forced / induced draught fans, so that it can be compressed without much loss of energy in subsequent stages.
Inlet gas consists of oil particles; along with this separate lubricatio n system is there to lubricate various parts of system. Oil se parato rs installed at each stage to remove oil particles added during compression process.
After cooling of gas moisture get conde nsed and to remove this condensate filtering system are there .
All above-mentioned proce ss are monitored & controlled through automated digitally controlled systems.
Priority panels are installed in every compressing unit to automatically route the gas to dispensing units base d on gas requirement.
This is a complete integrated infrastructure comprisi ng of pipe line network, compressor, dispensers and cascades to converts Natural gas into fuel. Natural gas as such cannot be used as commercial viable option for use as a fuel in automobile this CNG is a completely differe ntly product from natural gas."
9. The ld. AR relied on the order of the Hon'ble High Court of Allahabad in the case Central UP Gas Ltd. Vs DCIT in ITA 224 of 2014.
5 ITA No. 6489/Del/2017Indraprastha Gas Ltd.
10. The ld. DR Gaurav Dudeja, elabo rately argued the case to prove that the assessee is not into manufacturing and hence not eligible fo r claim of additio nal depreciation. He has referred the audit report and the financials of the assessee company to buttress his arguments. He argued that the Memorandum and Articles of Association of the assessee company outlines the objects to be pursued by the company and the main object as per Memorandum and Articles of Association is "to carry on all or any of the businesses of storage, suppliers, distributors, sellers and dealers in natural gas and its derivatives includes LP G, CNG, PROPANE and any conventional and non-conventional type of e nergy. Memorandum and Articles of Associatio ns clearly indicates that the asse ssee company is not in the supplying and distribution business and not in the business of manufacturing or producing CNG.
11. Regarding the argume nt of the assessee, that it has obtaine d certificate from Central Excise Department and excise duty is leviable only when a perso n is engaged in manufacturing activitie s, the ld. DR rebutted that this argument of the assessee is not acceptable because the Income Tax Act and Central Excise Act operate in diffe rent domains and the meaning of the term 'manufacture' is different for bo th of these Acts.
12. As pe r section 2(f) of Ce ntral Excise Act, 1944 (CEA), 'manufacture' includes any process,
(i) Incidental or ancillary to the completion of a manufactured product AND
(ii) Which is specified in relation to any goods in the section o r chapter notes of the 1st Schedule to the 6 ITA No. 6489/Del/2017 Indraprastha Gas Ltd.
Central Excise Tariff Act, 1985 (CETA), as amounting to manufacture (deemed manufacture) OR
(iii) Which in relation to goods specified in 3rd Sche dule of CETA involves packing or re packing of such goods in a unit container or labeling or re-labeling of containers including declaration or alteration of retail sale price on it or adoption of any other treatment on the goo ds to render the product marketable to the consume r (deemed manufacture).
13. However, the definition of the term 'manufacture' as per Income Tax Act, 1961 as provided in Se ction 2(29BA) is as unde r:
"manufacture", with its grammatical variations, means a change in a non-living physical object or article or thing,--
(a) resulting in transformation of the o bject o r article or thing into a new and distinct obje ct or article or thing having a diffe rent name, character and use; or
(b) bringing into existence of a ne w and distinct object o r article or thing with a different chemical composition o r integral structure;
These two definitions clearly suggest that the meaning of term 'manufacture' is differe nt for Income Tax Act and for Ce ntral Excise Act and a pe rson considered as manufacturer for the purposes of Central excise Act may not be necessarily considered manufacturer for Income Tax Act. Therefore, merely because the assessee company is registered with the Central 7 ITA No. 6489/Del/2017 Indraprastha Gas Ltd.
Excise Department and paying excise duty does not mean that it is manufacturing an article or thing for the purposes of Income Tax Act. Therefore, this argument of the assessee is not acceptable ."
14. Regarding the argument of the audit report, the ld. DR submitted that the audit report cannot be basis for claim of additional depreciation but the additional depreciation has to be accorded only in the case, the assessee is eligible to claim the benefit u/s 32(1)(iia).
15. The ld. DR argued that the me aning of term 'manufacture or production o f an article or thing' has been a subject matter of discussion of various Courts and T ribunal an there is no universal definition. Ld. DR further argued that the definition of term, ' manufacture' was introduced in the Income Tax Act w.e .f. 1.4.2009 the refore law has changed since AY 2007-08 and the claim of the assessee needs to be examined in view of amended law. The ld. DR has also relied on the following case laws to drive home the point that every activity cannot be treated as manufacturing process:
i. Cutting and polishing of uncut raw diamonds - Does not amo unt to manufacturing as polished diamond is not a new article or thing [CIT Vs Gem India Mfg. Co (SC) 249 ITR 307] ii. Conve rsion of large mass o f quartz into smaller dimensions No manufacturing activity involved as no thing is consumed in the process. [ACIT Vs G.T.C. Ente rprises (ITAT, Chennai) 87 ITD 188] 8 ITA No. 6489/Del/2017 Indraprastha Gas Ltd.
iii. Roasting and grinding of chicory roots into chicory powder No manufacturing activity involved. [Sacs Eagles Chicory Vs CIT (SC) 255 ITR 178].
iv. Chilly & Chilly products are essentially same commodity -
No manufacturing activity involved. [Nampudhiris Pickle Industries (Ker) 1993 KLJ (Tax cases) 198] v. Breaking of big boulders into small sto nes o r bajri - No manufacturing activity involved since no new and distinct commodity came into existence. [IT O Vs Jitendra Stone Crushing Co. (ITAT, Chd.) 105 ITD 52] vi. Conve rsion of spirit into IMFL - Assessee processing raw alcohol (potable spirit) and selling the same as whisky, brandy and rum with different brand names - It purchases potable spirit from distilleries which is already manufactured and does not require any further manufacturing - Only some processing is re quired to produce brandy, whisky, rum etc. by adding some wate r, colour, essence etc. - There is only degree of reduction of alcohol content and there is no essential diffe rence between the potable spirit and the bottled IMFL - Activity does not amount to manufacturing. [Shaw Scott Distilleries (P) Ltd. Vs ACIT (ITAT, SB-Cal) 76 ITD 89] vii. Electroplating - Not manufacture / production of article or thing since the original commodi ty still remains the same with the wo rd "coated" added to it - It is only done to prevent it from rusting and no new goods were produced.9 ITA No. 6489/Del/2017
Indraprastha Gas Ltd.
viii. CIT Vs Hindustan Metal Refining Works (P ) Ltd. (Cal) 128 ITR 472 Titanor Compone nts Ltd Vs DCIT (ITAT, Del) 72 ITD 514 ix. Filling of mushroom powder in gelatine capsules to make it fit for marketing - No manufacturing or production of any commercially distinct commodity [DXN Herbal Mfg. (India) (P.) Ltd. Vs ITO (ITAT, Chennai) 1 10 ITD 99] x. Purchased seeds from agriculturists and sold them after processing - No manufacturing activity involved. [ITO Vs Daftri Agro (ITAT, Hyd.) 135 TT J 729; 130 ITD 496].
xi. Peeling & Freezing of Shrimps / processing of fish - No manufacturing - activi ty involved since there is no essential differe nce between raw shrimps and prawns and processed or frozen shrimps and prawns.
xii. CIT Vs Relish Foods (SC) 237ITR 59 xiii. Golden Hind Shipping (India) P. Ltd. Vs CIT (Del) 240 ITR 324 CIT Vs Poyilakada Fisheries P. Ltd. (Ke r) 240 ITR 445 xiv. CIT Vs Sterling Foods (Bom) 213 ITR 851 xv. CIT Vs George Maijo (Mad) 250 ITR 440
16. Further, the ld. DR argue d that the activity of the assessee is only of compressing the natural gas. In fact, as stated by the assessee, the natural gas which reached to CNG stations is already compressed to a pre ssure 18 to 26 bar and it is compressed up to 250 bar in three stages. Besides this, the gas is being filtered before its compression. And, in the whole process, the input and output remains same i.e. natural gas as the compression-pro cess not change characteristics of natural 10 ITA No. 6489/Del/2017 Indraprastha Gas Ltd.
gas. Further, he argued that the natural gas be fo re compression and after compression remains a fuel in the form o f natural gas.
17. On going through the audit report, he argued that there has been no manufacturing expenses and even by going through the closing stock, there is no ne w product which can be said to have been manufacture d by the asse ssee company. He also distinguish that the case of HPCL, the co mpany was into bottling of cylinders whereas the assessee is not into such activity except dispe nsing of the natural gas to the automobile vehicles.
18. The ld. DR has succinctly argued pertaining to what consists o f manufacturing with reference to the Income Tax Act. He has taken us through the de finition of manufacturing and the exemption allowed for manufacturing under diffe rence provisions of the Act to prove the point that the manufacturing is not a ubiquitous de finition as far as Inco me Tax Act is concerned. He argued that similar activity of production is "considered" as "manufacturing" in certain areas and allowed deductions whereas the similar product produced is "not treated" as "manufacturing" for the purpose of deduction in other areas. He referre d to various schedules relevant to deductions unde r Chapter VI-A to prove that manufacturing unde r Income Tax prevails is diffe rent from the provisions of Central Excise.
19. Heard the arguments of bo th the parties and perused the material available on reco rd.
20. While appreciating the argume nts of both the counsels, namely Sh. Gaurav Dudeja and Sh. Rajat Jain, we hold that we 11 ITA No. 6489/Del/2017 Indraprastha Gas Ltd.
are guided by the order of the Hon'ble High Court of Judicature at Allahabad in the case Central UP Gas Ltd. Vs DCIT in IT A No. 224 of 2014 dated 08.12.2016. For the sake of ready reference, the order of the Hon'ble High Court detailing the issue is reproduce d as under:
"Hon'b le Bharati Sapru,J.
Hon'ble Vinod Kumar Misra,J Heard Shri Ud it Chand ra, learned coun sel fo r the appel lant an d Sh ri Manish Goyal, learned counsel fo r the departmen t.
Th is app eal has been filed b y th e assessee u nder Secti on 26 0A of th e In come Tax Act, 1961 again st th e order passed by the Trib unal dated 13.06 .2014 for the assessmen t year 20 08-09. The question of law sough t to be answered is as under:
"Wheth er the comp ressed natural gas p roduced by the ap pellant, h avin g differen t name, character and use from n atural gas can be said to be covered by the ph rase manufacture o r pro ductio n?"
Th e facts of the case are that the appellant procures gas from GAIL Ind ian Limited and compresses it th ro ugh the comp ressor fo r the manu facture o f compressed n atural gas (CNG), whi ch i s subsequ ently sol d to the cu stomers, as fuel for vehicles.
Th e natural gas purch ased by th e app ellant from GAIL India Limited is either sold through app ellan t-company's own pipelin es to factories and household etc. which sale i s made as p iped natural gas (PNG) sale. Th e appellant also manufactures comp ressed natural gas (CNG) from the natu ral g as received by it from GAIL India Limited , which is sold from th e ven ding station(s) as a fuel for running of vehicles.
Th e natural gas is supplied by GAIL India Limited throu gh pip elines whi ch are connected wi th the compressor with suctio n pressu re of 14 Bar to 22 Bar an d the discharge pressu re of 255 Bar, which are install ed at CNG station s an d is dispensed in the vehicle at a maximu m pressure of 20 0 Bar th ro ugh the disp ense conn ected to the comp ressor.
12 ITA No. 6489/Del/2017Indraprastha Gas Ltd.
Th e safe comp ression and dispensing system during process of manufacturing o f co mpressed natu ral gas (CNG), all th e compressors are filled with a cl ose circuit typ e cooling system and also safety valve at each stage. Th e compressed n atural gas (CNG) man ufacturing premises are designed and based on the basis of specificati on p ro vided under the Oil Indu stry and Safety Directo rate and the Gas C ylind er Rules, 2004.
Th e manufacturing, storage and dispensing of compressed natu ral g as (C NG) can only b e started after the grant of license by th e Petroleum E xplo sive Safety Organization.
Th e Rule 2(viii) of the Gas Cyli nder Rules, 20 04 defines, comp ressed natural g as' as mixture of hydro carbon gases an d fib ers con sisting mainly o f Methan e in gaseous form which has b een co mpressed for use as automotive fuel. Fu rther, Rul e 2(xxxii) defines 'man ufactu re of g as' as filling o f cylinder with any compressed gas and also includ es transfer of compressed gas from one cylinder to an y other cylind er.
Th e app ellan t-comp any is registered under the Central Excise Act as a 'manufacture of CNG.' In the certificate ob tained from the Cen tral Excise Authorities, it is clearly mentioned that the appellant is a manufacturer of excisabl e goods. Furth er, the appellan t comp any i s regu larly paying Excise Duty on the manufacturing of comp ressed natu ral gas (CNG). The app ellan t d oes not manufacture an ything b esides CNG from PNG.
Th e circu lar dated 16 .10.200 8 h ad also been issued under the Central Excise Act wherein it is clearly mention ed that comp ressed natural g as (CNG) is a fu el manufactured prod uct, therefore, excise du ty i s leviable o n the prod uction of CNG.
Th e trade tax au thorities h ave also p assed an order in the case o f the appellant comp any, in which it has b een held that co nversion of natural gas in to CNG amounts to manufacture. The schedule IV, Entry 8 of the U.P. Val ue Add ed Tax Act imposes the tax on natural gas other th an comp ressed natural gas (CNG) @ 5% and 21% when so ld to registered and unreg istered dealers; while compressed natu ral gas (CNG) is covered by Schedu le V of the U.P. Value Add ed Tax Act. Thus, the natural g as and comp ressed natural gas (CNG) are two d ifferent products, being taxable at different rates of tax un der the U.P. Val ue Add ed Tax Act.
13 ITA No. 6489/Del/2017Indraprastha Gas Ltd.
It is further stated that in the man ufactu ri ng p ro cess of CNG, th ere is a loss of 2-3% of n atural gas and even the selling prices of both the p ro ducts are d ifferent. Piped natu ral Gas (PNG) is so ld at the rate of Rs.26/- per kg while the selli ng price of compressed natural gas (CNG) i s Rs.35/- p er kg.
Th e Tribunal has come to the conclusion th at the comp ression of natural gas into co mpressed natu ral gas do es no t result in bring ing into existence in a new prod uct an d the activity of co mpressin g th e n atural into comp ressed natural gas would not amou nt to manufacture or production. The Tribunal records in parag raph 5 as hereunder:
"We have considered the rival submissions, perused the material availabl e on record and gone through the orders of the authorities below and the judgment cited b y learn ed A.R. of the assessee. We find that it is noted by CIT (A) on page No.6 of his o rd er th at th e assessee's activity of conversion of natu ral g as to co mpressed natural gas does no t amount to bringing out a new and distinct object or article or thing h avin g differen t character, use or chemical co mpo sition. In the light of th ese findings of CIT (A), now we examine the ju dgment of Hon'ble High Cou rt rend ered in the case of Commission er of Income-tax Vs. Hindustan Petroleum Corpo ration Ltd. (Supra) cited b y learned A.R. of the assessee. In th is case, th e issue b efore the Hon 'ble High Court was that as to whether th e acti vity of the assessee of bo ttli ng LPG gas amounts to p ro ducti on or manufacturing activity fo r the p urpose of deduction under Section 80HHC and 80-IA of the Inco me Tax Act, 19 61. Hon'bl e Bomb ay High Court has given a find ing that the process of bo ttli ng liq uified petroleum g as into cylind ers makes th e g as marketable on execution of the process and therefore, follo ws that a new product comes into existen ce. We also find on page 2 of the o rd er, it is no ted by CIT(A) that it was submitted by learn ed counsel for the assessee b efore him that th e assessee co mpany bu ys natural gas fro m GAIL and such natural gas is th en sold throug h co mpany's own pipelines to facto ri es and ho usehold etc which sale is name as Pipes Natural Gas (PNG) sale or the natural g as received from GAIL i s converted into comp ressed natu ral gas (CNG) which is so ld as CNG from the vending station s as a fuel fo r running of vehicles etc. From these facts, it comes ou t that natural gas is saleab le o therwise also through pip elines and it is 14 ITA No. 6489/Del/2017 Indraprastha Gas Ltd.
no t a fact th at the natu ral gas is mad e saleable on ly by convertin g th e same into CNG whereas in the case of LPG, the same is no t saleable unless it is bo ttled and th erefore, bo ttling of LPG into cylinders makes LPC saleable is not otherwise saleable. There i s difference in the facts, In our considered opinion, the judgment of Ho n'ble Bombay High Cou rt is not ap plicable in the facts of the present case. Sin ce comp ression of natu ral g as in to C NG do es no t result into bringing into existen ce any n ew p roduct, in our considered opinion, this activity is n either manufacture no r produ ction and hence, no interference is called for in the order of CIT (A) on this issue. Accordingly, grou nd No.1 of th e assessee is rejected." From a reading of the facts ab ove and the Tribu nal's order and o ther material on record, i t comes to th e fore th at n atural gas wh ich comes through pipelin es in its natu ral form cannot be u sed for the same purpo ses as compressed n atural gas that is to be used as automobile fuel. Th e appellan t on the other hand contend s th at it is man ufactu red compressed natural gas which is u sed fo r the automobil e fuel, which is p repared b y a process of manufacture, b y which the natural gas i s put through a pl ant/machinery for compression and wh en the comp ressed gas comes out in its new form it is u sed for the automobile fuel. After und ergoing the pro cess of comp ression, natural gas acq uires a new form by th e name of compressed natural gas. It h as a distinct use as au to mob ile fuel an d a d istinct commercial n ame. The provisio ns of Section 2 (29BA) defines 'manufacture' as hereunder: "(29BA)- manufactu re with its grammatical variations, mean s a ch ange in a non-living physical object or arti cle or thi ng- (a) resulting in transfo rmation of the ob ject or article or thing into a new and distinct ob ject or article or thing having a differen t name, character and used; or (b) bringing into existence of a n ew and disti nct ob ject o r article or thing with a differen t chemical composition or integral stru cture;" L earned counsel for the ap pellant has placed rel iance on the judgments of the Apex Court in the case o f Income Tax Officer Vs. Ari hant Til es and Marb les P. LTD. reported in 2010 3 20 ITR 79 (SC) in suppo rt of h is case. On the face of it, it appears that comp ressed natu ral gas is a commodity h avin g a distinct n ame, character and u se and therefo re, the test to determine wh ether 'manu facture' has taken place i s satisfied. Without undergoing the process o f compression natu ral g as in its o rig inal form canno t be u sed as fuel for the automobile ind ustry. It is only u pon undergoing the process of co mpressi on, it is converted in to compressed natu ral gas whi ch is a commodity, to be used as a fuel for the automobile in dustry. Th e Tribun al has failed to discuss 15 ITA No. 6489/Del/2017 Indraprastha Gas Ltd.
this aspect of the matter comp letely an d h as ignored the material placed b y th e appellan t on record whereby i t has sough t to show that the entire process by which natural gas is compressed and having been comp ressed acquires a new and changed n ame of comp ressed natural gas acquires a n ew use and a distinct commercial id entity. Having heard learned counsel for both sid es, we are satisfied that compressed natural gas in its compressed form has a distinct iden tity an d charac ter an d use. It is settled law of the Apex Court as well as of th is Cou rt that when a commodity acquires a d istinct name, u se and commercial identity, it would acquire the trait of 'manufacture'. In view of abo ve, the question is answered in favour of the assessee an d against the department. The ap peal is acco rd ingly allowed.
Order Date :- 8 .12.2016
pks (Vinod Kumar Mi sra, J.)
(Bharati S apru, J.)
21. Respectfully following the above judgment of the Hon'ble High Court, the appe al of the assessee is hereby allowed.
22. In the result, the appeal of the assessee is allowed. Order Pronounced in the Open Court on 05 /01/2021.
Sd/- Sd/-
(Amit Shukla) (Dr. B. R. R. Kumar)
Judicial Member Accountant Member
Dated: 05/01/2021
*Subodh*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
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ASSISTANT REGISTRAR