Income Tax Appellate Tribunal - Chandigarh
Jaiswal Metals Pvt. Ltd., Yamunanagar vs Jcit, Yamunanagar on 16 February, 2017
IN THE INCOME TAX APPELLATE TRIBUNAL
DIVISION BENCH, CHANDIGARH
BEFORE SHRI BHAVNESH SAINI, JUDICIAL MEMBER
AND MS. ANNAPURNA GUPTA, ACCOUNTANT MEMBER
ITA No.576 & 577/Chd/2016
(Assessment Years : 2010-11 & 2011-12)
M/s Jaiswal Metals Pvt. Ltd., Vs. The J.C.I.T.,
Durga Garden, Jagadhri, Yamuna Nagar Range,
Ymuna Nagar. Yamuna Nagar.
PAN: AAACJ3896N
(Appellant) (Respondent)
Appellant by : Shri Tej Mohan Singh
Respondent by : Shri Sushil Kumar, CIT DR
Date of hearing : 15.02.2017
Date of Pronouncement : 16.02.2017
O R D E R
PER ANNAPURNA GUPTA, A.M. :
Both the above appeals have been filed by the same assessee against separate orders of Commissioner of Income Tax (Appeals), Panchkula both dated 18.04.2016 and relating to A.Ys 2010-11 & 2011-12. Since the issue involved in both the appeals is common, the same were heard together and are being disposed of by this common order.
2. For the sake of convenience we shall be discussing the facts in ITA No. 576/Chandigarh/2016. 2 ITA No. 576/Chandigarh/2016:
3. The assessee in the present appeal has raised the following grounds:
"1. That the Ld. Commissioner of Income Tax (Appeals) has erred in law as well as on facts in upholding the addition of Rs.4,26,970/- made by disallowing the deduction u/s 80IC on sale of products got manufactured from others through job work in utter disregard of the explanations rendered which is illegal, arbitrary and unjustified.
2. That the order of the Ld. Commissioner of Income Tax(Appeals) is erroneous, arbitrary, opposed to law and facts of the case and is, thus, untenable."
4. Brief facts relating to the issue raised in appeal is that during assessment proceedings the AO noted that the gross total income declared by the assessee for the year included profit and gains of Rs.1,51,36,157/- from its industrial undertaking at Kala Amb,Himachal Pradesh. Against the said profit, the assessee had claimed deduction of Rs.1,19,24,801/-under section 80 IC of the Act. The AO observed that the assessee was in the business of manufacturing stainless steel flats(hereinafter referred to as SS Flats) and that during the course of manufacturing the same, the stainless steel ingots produced by the assessee at its factory premises were sent to its associate company, Nahan Ferro Alloys & Chemicals Private Limited (NEA), for getting rolled into stainless steel flats on job work basis. The AO further noted that 3 the stainless steel flats were received back at the assessee's factory premises for cutting and then were sold in the market. The AO found that the deduction included the profit and gains related to conversion of steel ingots into steel flats on job work basis by the associate company. He therefore raised the query that according to the provisions of section 80 IC only the profit and gains of manufacturing activity undertaken by the assessee itself can be considered for deduction. The assessee replied that in view of economic viability of the process and volume available in-house, the part process of manufacturing had been outsourced. The assessee submitted that no part of expenses incurred by the assessee on job work could legally be disallowed. After considering the assessee's reply, the AO held that the profits and gains of the manufacturing activity as undertaken by the assessee company itself can only be considered as eligible for deduction under section 80 IC. The AO held that the profit of outsourced process was to be reduced and computed the same by applying a rate of 3.81% to the total job work charges paid/payable to Nahan Ferro Alloys and Chemicals Private Limited of Rs. 1,12,06,584 .Accordingly Rs.4,26,970/-was considered as the profit and gains of the assessee not eligible for deduction under section 80IC of the Act and was added to the income of the assessee.
5. Aggrieved by the same the assessee filed an appeal before the Ld. CIT (Appeals) and argued that the 4 disallowance of deduction made by the AO was incorrect since there was no specific requirement under section 80IC of the Act of having the whole manufacturing process in-house, that the assessee had been continuing in the likewise fashion for the last many years and had been allowed the deduction without any restriction by the predecessors in earlier years and further that the assessee had to outsource the work on account of its inability to put up the required manufacturing facilities because of huge capital cost and non-availability of sufficient material to run such facilities at optimum level. Ld. CIT (appeal) considered the assessees submissions and after elaborating and referring to the provisions of section 80IC of the Act, held that the claim of deduction under section 80IC had to be considered in view of the applicable subsections of 80 IA as specified by 80IC(7) of the Act. Thereafter Ld. CIT(Appeals) referred to para 49 of CBDT Circular No. 7/2003 dated 5/9/2003, which constituted the explanatory notes of Finance Act 2003 through which the deduction under section 80IC of the Income Tax Act was introduced in the statute and stated that the intent of providing deduction was to encourage manufacturing activity by an undertaking in specified areas for overall economic development of the area. Ld. CIT (Appeals) thereafter stated that the assessee without making investment in setting up manufacturing facility could not claim benefit of section 80IC. Ld. CIT (Appeals) further held that the argument that section 80IC does not specify 5 any requirement of having the whole manufacturing process in-house is against the intent of the provisions of section 80IC since it provides deduction on account of manufacture or production of any specified article of thing. Ld. CIT (Appeals) further held that the conversion of ingots into flats is the major process in the manufacturing for which the appellant had no direct or indirect control or any input. Thereafter, referring to sub- section (10) of section 80IA of the Act Ld. CIT (Appeals) held that the AO was correct in denying deduction under section 80IC on the profit component of the manufacturing process of conversion of stainless steel ingots into stainless steel flats which manufacturing activity was not carried out by the assessee but by its associate concern. Thus the Ld. CIT (appeal) dismissed the assessee's appeal on this ground.
6. Aggrieved by the same, the assessee filed the present appeal before us.
7. Before us Ld. Counsel for the assessee reiterated the arguments made before the lower authorities and stated that for the purpose of claiming deduction under section 80IC there is no specific requirement of the assessee itself carrying out the entire manufacturing activity. Ld. Counsel for the assessee relied upon the decision of the Mumbai bench of the ITAT in the case of P.L Patel vs. I ncome Ta x Offi cer in I TA No. 65/Mumbai /2005 reported i n 142 TTJ 57 ( Mum) and fur ther 6 on the decision of the jurisdictional High Court in the case of Commissioner of Income Tax vs Metalman Auto Pvt. Ltd.(2011) 52 DTR 385 (P&H) in support of its above contention.
8. Ld.DR on the other hand relied on the order of the CIT (Appeals) and drew our attention to the observation of the Ld CIT (Appeals) that the job work charges paid by the assessee of Rs.1,16,23,023/-was a substantial amount in the entire process of conversion of stainless steel ingots to stainless steel flats, which proved that a major chunk of the manufacturing process was not being carried out by the assessee and in view of the intention of the legislature in introducing section 80IC as brought out by the Ld. CIT(Appeals), the AO had rightly denied deduction to the extent of profits attributable to the job work undertaken by the assessees associate company.
9. We have heard the contentions of both the parties and perused the orders of the authorities below as also the documents and case laws relied upon by them.
10. The undisputed facts arising in the present case are that the assessee is a manufacturer of stainless steel Flats, which activity it carries out in its undertaking at Kala Amb, Himachal Pradesh and which it commenced on 16.6.2005. The allowability of the assessee to claim deduction u/s 80IC is not in dispute and as also the fact 7 that the assessee has been claiming the same since 2006- 07 when it commenced its manufacturing activity. The impugned year is 6th year of commencement of manufacturing activity. The process to manufacture stainless steel flats includes the following:
i) Conversion of SS/MS scrap to molten mass
ii) Pouring of molten mass into moulds to obtain SS ingot.
iii) Annealing of ingots in a furnace and rolling to obtain SS flats.
iv) Grinding, trimming and end cutting to make saleable SS flats.
11. Admittedly and undisputedly all the above processes are carried out in the undertaking of the assessee at Kala Amb except the process at Sr.No.3 being annealing/conversion of ingots to SS flats, which is carried out in another company M/s Nahan Ferro Alloys & Chemicals Private Limited.
12. The case of the Revenue is that the profits relating to this outsourced process are not eligible for deduction u/s 80IC to the assessee for the reason :
a) This activity was not undertaken by the assessee.
b) The unit which undertakes this activity is also located in section 80IC specified area and must have also claimed deduction on the profits earned on conversion of ingot to flats and;
c) In view of the provisions of section 80IA(10), which become applicable in the present case in view of the provisions of section 80IC(7) of the 8 Act, the Assessing Officer is empowered to compute reasonable profits and gains from business transaction between the eligible and other unit which are so arranged.
13. The Ld. counsel for the assessee, on the other hand, contended that for the purpose of claiming deduction u/s 80IC there is no requirement under the Act for carrying out the entire manufacturing activity by the claimant assessee and there is no provision under the Act for allocating profits to outsourced activities and denying deduction on the same.
14. Evidently the issue before us relates to the quantum of deduction u/s 80IC qua manufacturing carried out by the assessee. The relevant provision of section 80IC allowing deduction to entities carrying out manufacturing activity reads as under:
80IC (2) This section applies to any undertaking or enterprise,--
(a ) which has begun or begins to manufacture or produce any article or thing, not being any article or thing specified in the Thirteenth Schedule, or which manufactures or produces any article or thing, not being any article or thing specified in the Thirteenth Schedule and undertakes substantial expansion during the period beginning--
(i) on the 23rd day of December, 2002 and ending before the 1st day of April, 2012, in any Export Processing Zone or Integrated Infrastructure Development Centre or Industrial Growth Centre or Industrial Estate or Industrial Park or Software Technology Park or Industrial Area or Theme Park, as notified by the Board in accordance with the scheme framed and notified by the Central Government in this regard, in the State of Sikkim;
or 9
(ii) on the 7th day of January, 2003 and ending before the 1st day of April, 2012, in any Export Processing Zone or Integrated Infrastructure Development Centre or Industrial Growth Centre or Industrial Estate or Industrial Park or Software Technology Park or Industrial Area or Theme Park, as notified by the Board in accordance with the scheme framed and notified by the Central Government in this regard, in the State of Himachal Pradesh or the State of Uttaranchal; or
(iii) on the 24th day of December, 1997 and ending before the 1st day of April, 2007, in any Export Processing Zone or Integrated Infrastructure Development Centre or Industrial Growth Centre or Industrial Estate or Industrial Park or Software Techno-logy Park or Industrial Area or Theme Park, as notified by the Board in accordance with the scheme framed and notified by the Central Government in this regard, in any of the North-Eastern States;
(b ) which has begun or begins to manufacture or produce any article or thing, specified in the Fourteenth Schedule or commences any operation specified in that Schedule, or which manufactures or produces any article or thing, specified in the Fourteenth Schedule or commences any operation specified in that Schedule and undertakes substantial expansion during the period beginning--
(i) on the 23rd day of December, 2002 and ending before the 1st day of April, 2012, in the State of Sikkim; or
(ii) on the 7th day of January, 2003 and ending before the 1st day of April, 2012, in the State of Himachal Pradesh or the State of Uttaranchal; or
(iii) on the 24th day of December, 1997 and ending before the 1st day of April, 2007, in any of the North-Eastern States.
15. Clearly the section mandates that undertakings or enterprises eligible for deduction are those which "manufacture" any article or thing.
16. It is the scope and extent of this manufacturing activity vis-a-vis the assessee and its correlation with the 10 quantum of deduction, which is the issue in dispute in the present appeal, giving rise to the following question which needs to be addressed by us:
" wh e t h e r d e d u c t i o n u / s 8 0 I C i s t o b e a l l o we d only on prof its vis a vis the manuf acturing activity carried out by the assessee, Alternatively, If a part of the manuf acturing activity is outsourced ,does it tantamount to the assessee not carrying out "manuf acturing".
17. We find that Courts in a number of cases have been seized with the issue of allowability of deduction u/s 80I/IB, which grant deduction of profits derived from manufacturing any article or thing, when the assessee outsourced part or whole of the manufacturing process. After considering the facts of each case, the courts ruled that it is not essential for the assessee to carry out the entire manufacturing activity itself, for the purpose of claiming deduction on the profits earned thereon and even if a part of the activity is outsourced or for that matter even if the whole manufacturing activity is outsourced, but carried on under the supervision and control of the assessee, it would still tantamount to manufacturing being carried out by the assessee itself, making it eligible to claim deduction of profits earned thereon. 11
18. In the case of Add.CIT Vs. A. Mukherjee & Co. (P) Ltd., 113 ITR 718,(Cal) the Hon'ble High Court upheld the findings of the Tribunal which were as follows :
"T he assessee is a publisher of books. The assessee' job is to get the manuscript f or publication, hit upon a suitable f ormat f or the b o o k , g e t i t p r i n t e d a s p e r i t s r e q u i r e me n t s u n d e r i t s s u p e r v i s i o n , g e t t h e b o o k b o u n d af t e r s u i t a b l e changes and then put out the publication f or sale. In all these activities, the assessee has to play an active role by co-ordinating its activities in a business-like manner. All these activities dovetail into one another and the stage f rom the acquisition of the manuscript right up to the publication is one integrated activity wh i c h tantamounts to a manuf acturing or processing a c t i v i t y i n t h e l i g h t o f t h e p r i n c i p l e s l a i d d o wn b y the Gujarat High Court in the case of Ajay Printery P.Ltd. [1965] 58 ITR 811 and by the Madras High Court in the case of M.R. Gopal [ 1 9 6 5 ] 5 8 IT R 5 9 8 a s s t a t e d a b o v e . I t i s n o d o u b t true that the assessee does not have its o wn p r i n t i n g p r e s s . T h a t , h o we v e r , r e a l l y d o e s n o t make any mater ial d if f erence. The assessee's activity cannot be called purely a trading activity. A t r a d e r me r e l y p u r c h a s e s t h e g o o d s wh i c h h a v e a l r e a d y b e e n m a n u f a c t u r e d b y o t h e r s a n d t h e n s e l l s t h e m. In this case, the assessee g e t s t h e b o o k s p r i n t e d t o s u i t i t s r e q u i r e me n t s and under its active supervision and guidance. E v e n af t e r t h e p r i n t i n g i s o v e r , t h e a s s e s s e e h a s to get the books bound wh i c h involves a considerable amount of processing. In other wo r d s it purchases paper and other printing materials and ultimately manuf actures or 12 processes publications for sale. The business that the assessee is doing can, theref ore, be c a l l e d a m a n u f ac t u r e a c t i v i t y . "
The High Court upheld the findings as follows:
"The f indings of the Tribunal in our opinion c o n c l u s i v e l y s h o w t h a t t h e a s s e s s e e wa s c a r r y i n g on the activity of manuf acturing and also of p r o c e s s i n g o f B o o k s wh i c h a r e a l s o G o o d s "
19. In the case of CIT Vs. Neo Pharma P. Ltd., 137 ITR 879 (Bom) on the question before the Court, whether the assessee company was a manufacturing company, entitled to rebate at high rate, The Hon'ble Court held as follows :
"In the present case, although the plant and machinery employed for the purpose of manuf acture belonged to P h a r me d and the s e r v i c e s o f c e r t a i n e m p l o y e e s t o P h a r me d we r e also utilised in that process, the manuf acturing a c t i v i t y wa s r e a l l y t h a t o f t h e a s s e s s e e . I t wa s t h e a s s e s s e e wh i c h p a i d t h e h i r e c h a r g e s f o r t h e machinery and the plant. It was the assessee wh i c h purchased the raw materials and the packing materials. The e mployees of P h a r me d carried out the manuf acture of drugs and pharmaceuticals under the direct technical s u p e r v i s i o n o f th e e x p e r t s t af f e m p l o y e d b y t h e a s s e s s e e a n d t h e p r o d u c t s m a n u f a c t u r e d we r e o f the quality prescribed by the assessee. The risk f o r t h e e n t i r e o p e r a t i o n wa s t h a t o f t h e a s s e s s e e . I n v i e w o f t h i s , we f a i l t o s e e h o w i t c a n b e s a i d t h a t i t wa s n o t t h e a s s e s s e e b u t P h a r me d wh i c h 13 manuf actured the said drugs and pharmaceuticals, the goods in question."
20. In the case of CIT Vs. Indian Resins & Polymers (1998) 235 ITR 5 (Ker), the assessee was engaged in business of export of cashew kernels and shell oil. The assessee purchased cashewnuts and entrusted to a third party for processing. Similarly' roasting and dehusking of cashew kernels was got done from a third party under assessee's own supervision. On these facts, it was held that assessee was an industrial undertaking entitled to special deductions under section 80HH.
21. In the case of CIT Vs. Anglo French Drug Co. (Eastern) Ltd. (1991) 191 ITR 92 (Bom), the Hon'ble Bombay High Court has held that it is not necessary that the manuf acturing activity should undertaken by the assessee itself . T he assessee can employ ano ther co mp any to man uf acture goods under its supervis ion and c o n t r o l a n d t h e a s s e s s e e wa s h e l d t o b e a n i n d u s t r i a l undertaking.
22. All the above decisions were relied upon by the Mumbai Bench of the I.T.A.T. in the case of P.L. Patel Vs. ITO (supra), relied upon by the Ld. A.R. before us, and it was held in that case by the Tribunal, that it is not necessary that the assessee should carry out all the manufacturing operations itself to be entitled for benefits of deduction u/s 80I.
14
23. Applying the above legal proposition to the facts in the present case we find that the assessee is a manufacturer of SS flats and all the process involved in manufacturing of SS flats were carried out at the assessee's premises/undertaking at Kala Amb, except for conversion of ingots into flats which the assessee outsourced to another company i.e. Nahan Ferro Alloys & Chemicals Private Limited, since it did not have the required infrastructure for the same. Undeniably all the activities undertaken in the order stated above resulted in the manufacture of SS Flats and thus constitute one integrated activity which tantamounts to manufacturing activity. Though the assessee does not carry out one process involved in the entire process of manufacturing, but the assessee also cannot be termed carrying out trading activity. Undeniably, the final product manufactured i.e. SS flats, was manufactured by the assessee itself for sale in the market and the process outsourced to Nahan Ferro Alloys & Chemicals Private Limited was as per its specification and requirement since it is not denied that the risk associated with the sale of the final product was with the assessee and the assessee was responsible for the sale of the same. Further, we find, that it is not the Revenues case that the outsourced activity was not under the supervision and control of the assessee. Therefore, clearly, the entire manufacturing activity of SS flats was under the supervision and control of the assessee itself and took 15 place either in its own premises or was outsourced as per its own specification. Therefore, in view of the decisions of various High Courts on the issue, it can be said without any hesitation that it was the assessee who was indulging in the manufacturing of SS flats. We may add that it is not the case of the Revenue that the assessee was buying SS flats from an outside party and then selling it. Therefore, for the aforesaid reasons, we hold that the assessee undertook the manufacturing of SS flats and was entitled to claim deduction on entire profits earned from the same.
24. We may add that the section does not qualify the word "manufacture" by preceding it with the word "wholly" or any such adjective. A bare reading of the provisions of section 80IC of the Act reveals that the only condition required for claiming deduction is that the eligible undertaking should be involved in manufacturing activity. Therefore, the meaning and purport of section would have to be gathered from a literal interpretation of the same, which is the basic rule of interpretation, and there is no reason to read more than what is stated in the section or go to the intent behind introducing the section when there is no ambiguity in the same. The Hon,ble Apex Court in the case of Padmasundara Rao (Decd.) & Others Vs. State of Tamil Nadu & Others held as follows:
"The court cannot read anything into
statutory provision wh i c h is plain and
16
unambiguous. A statute is the edict of the
Legislature. T he language e mployed in a statu te
is the determinative f actor of legislative intent. T he f irst and primary rule of construction is th at the intention of the legislation must be f ound in t h e wo r d s u s e d b y t h e L e g i s l a t u r e i t s e l f .
The court only interprets the law and cannot legislate. If a provis ion of law is misused and s u b j e c t e d t o t h e a b u s e o f t h e p r o v e s o f l a w, i t i s for the Legislature t o a me n d , mo d i f y o r r e p e a l i t , i f d e e me d n e c e s s a r y . Legislative casus omissus cannot be supplied by judicial interpretative process."
25. For the above stated reason, the assessee was only required to "manufacture" SS Flats to be eligible to claim deduction u/s 80IC,which since we have already held so above,the assessee was entitled to claim deduction of entire profits earned on the same u/s 80IC of the Act. For the said reason also we are not in agreement with the contention of the Ld. DR that the profits should be apportioned to different activities involved in manufacturing of a product and deduction u/s 80IC thereafter be restricted to profits on manufacturing carried out by the assessee only
26. It is pertinent to point out that while allowing deduction on part of the profits earned by the assessee, the Revenue admits that the assessee is involved in manufacturing activity. Also admittedly the assessee has been allowed deduction of entire profits in earlier years 17 in identical set of facts. The Ld.DR has not controverted this fact contended by the Ld Counsel for the assessee. Therefore also there is no reason to restrict the deduction to the extent of manufacturing activity carried out by the assessee in the impugned year.
27. Ld.DR has also relied upon the findings of the Ld. CIT (Appeals), who we find has applied the provisions of section 80 IA(10) to the facts of the case and stated that since the job work was got done by the assessee through its associate concern, the provisions of 80 IA(10) were attracted in the present case and in view of the same he denied deduction of profits to the extent of work got done through the associate concern.
28. This interpretation of the provisions of section 80IA(10), we hold, is grossly incorrect. Section 80IA(10) deals with the situation where by virtue of the arrangement in business transactions by the appellant with any other person for any reason provides more than the ordinary profit which might be expected to arise from the eligible business of the appellant. In such circumstances the assessing officer has been given the power to estimate the reasonable profits in such cases and allow deduction to that extent only. The provision of section 80IA (10) is to check the tendency of eligible units to inflate their profits by entering into transactions with related concerns or closely connected concerns in such a manner so as to resort to showing unreasonably higher 18 profits in their own businesses and claim hundred percent deduction of the same under the provisions of the Act. In the present circumstance we find that the case is exactly the opposite. The Ld. CIT (Appeals) we find has stated that by getting the work done by its associate concern a part of the profits have been siphoned off to the associate concern which may also have claimed deduction under section 80IC on the same. Having said so it is evident that in the case of the assessee the profits have been reduced to that extent. The profits having been reduced to that extent, being the finding of the CIT (Appeals) in the present case, section 80IA(10) has no applicability at all since as stated above it applies to cases where the profits appear to be inflated on account of transactions entered into with an associate concern. Even otherwise for the applicability of section 80IA(10) it has to be demonstrated that there was an arrangement between the two parties which resulted in the inflation of profits in the case of the assessee. In the absence of both the conditions specified under section 80IA(10) we hold that the said provision of has been incorrectly applied by the Ld. CIT(Appeals) to the facts of the case and the addition made by applying the same is therefore grossly incorrect.
29. In view of the above, we hold that the manufacturing of SS Flats was carried out by the assessee and thus it was entitled to claim deduction of entire profits earned on the same u/s 80IC of the Act. We, 19 therefore, delete the disallowance of deduction of Rs.4,26,970/- on account of the manufacturing process outsourced by the assessee .
30. The appeal of the assessee, therefore, stands allowed.
ITA No.577/Chd/2016:
31. It is relevant to observe here that the facts and circumstances of this appeal are similar to the facts and circumstances in ITA No.576/Chd/2016 and the findings given in ITA No.576/Chd/2016 shall apply to this appeal also with equal force.
32. The appeal of the assessee is allowed.
33. In the result both the appeals of the assessee are allowed.
Order pronounced in the open court.
Sd/- Sd/-
(BHAVNESH SAINI) (ANNAPURNA GUPTA)
JUDICIAL MEMBER ACCOUNTANT MEMBER
Dated : 16 t h February, 2017
*Rati*
Copy to:
1. The Appellant
2. The Respondent
3. The CIT(A)
4. The CIT
5. The DR
Assistant Registrar,