Income Tax Appellate Tribunal - Delhi
Phoenix Lamps India Ltd, vs Assessee on 23 October, 2015
1 ITA No.390 &C.O21/Del/09
IN THE INCOME TAX APPELLATE TRIBUNAL
DELHI BENCH: 'F' NEW DELHI
BEFORE SHRI R. S. SYAL, ACCOUNTANT MEMBER
AND
SMT SUCHITRA KAMBLE, JUDICIAL MEMBER
I.T.A .No.-390/Del/2009
(ASSESSMENT YEAR-2004-05)
ACIT vs Phonix Lamps India Ltd.
Noida Range 59A, NSEZ, Phase II
Noida Noida
Gautam Budh Nagar
(APPELLANT) (Respondent)
C.O .No.-21/Del/2009
(ASSESSMENT YEAR-2004-05)
Phonix Lamps India Ltd. vs ACIT
59A, NSEZ, Phase II Noida Range
Noida Noida
Gautam Budh Nagar (Respondent)
(APPELLANT)
Appellant by Smt. Nandita Kanchan CIT
(DR)
Respondent by Sh. Shashwat Bajpai, Adv
Date of Hearing 09.10.2015
Date of Pronouncement 23 .10.2015
ORDER
PER SUCHITRA KAMBLE, JM
This appeal is filed by the Revenue against order dated 20/10/2008 passed by Ld. CIT(A), Ghaziabad.
2 ITA No.390 &C.O21/Del/092. The grounds of appeal are as follows:-
"1. The Ld. CIT(A) has erred in law and on facts by holding that the Uttranchal Unit of the assessee company is entitled to deduction u/s 80 IC of the Income Tax Act 1961 w.e.f A. Y 2005-06, being the initial assessment year of the purpose of 80 IC I.T. Act and not from the A.Y 2004-05, as held by the A.O, without appreciating the facts properly as brought out by the Assessing Officer in the assessment order.
2. The Ld. CIT(A) has erred in law and on facts in holding that the Uttranchal Unit of the assessee company is entitled to deduction u/s 80 HHC of the I.T Act, 1961 w.e.f A. Y 2005-06, being the initial assessment year for the purpose of 80 HHC and not from the assessment year 2004-05, as held by the A.O., without appreciating the facts properly as brought out by the Assessing Officer in the assessment order.
3. The order of the Ld. CIT(A) may be set-aside and the order of the A.O be restored."
3. The assessee company manufactures Compact Florescent Lamp (CF Lamps), Halogen Lamp, Metal Halide Lamps for which purpose it has three units. Unit-I was in NEPZ area and was claiming deduction u/s 10A of the Income Tax Act till financial year 2001-02. The second unit was outside the NEPZ area. The third unit was started during the Assessment Year 2003-04 at Dehradun. The assessee has claimed deduction u/s 80HHC on the basis that it is exporting CF Lamps to other countries. The gross profit ratio shown by the assessee for the assessment year 2004-05 is 29.39 % as against 32.67% in the immediately preceding year. The decrease in the gross profit ration has been explained by the assessee, to be 3 ITA No.390 &C.O21/Del/09 on account of fall in the value of dollar and the assessee explanation was accepted by the Assessing Officer. After examination and discussion with the assessee the following additions disallowances were made to the assessee's total income by the AO. During the year under consideration the assessee has started a new unit at Dehradun. This unit is located in the export proceeding zone in the state of Uttrakhand. Thus the special provision in respect of certain undertakings in certain special category states as laid down in Section 80IC of the Income Tax Act, 1961 were applicable to this area as per the Assessing Officer. However, the assessee company has not claimed that the unit is covered under Section 80IC of the Income Tax Act, 1961 for the year under consideration on the basis that in its accounts the assessee has shown that this unit is under trail run. For the purpose of convenience the relevant provisions of Section 80IC of the Income Tax Act, 1961 are reproduced as under:-
"Section 80IC of the Income Tax Act (8) (v) initial assessment year means the assessment year relevant to the previous year in which the undertaking of the enterprise begins to manufacture or produce articles or things, or commences operation or completes substantial expansion."
4. The assessee company has shown that the pre-operative expenditure in respect of its Dehradun Unit reopening for capitalization as the unit has been claimed to be under trial run. The details of such expenditure were shown in Schedule 19 of the accounts of the company. The same are as follows:
4 ITA No.390 &C.O21/Del/09Nature of expenses/income Amount
Cost of material consumed 3,98,74,811
Repair & Maintenance 8,17,879
Power & Fuel 18,36,446
Depreciation 6,66,805
Insurance Charges 71,313
Security Services 2,62,994
Salary & Wages 88,79,797
Contribution to Provident & 4,60,868
other funds.
Welfare Expenses 10,54,962
Printing and Stationery 2,05,193
Postage, Telephone & 2,66,606
Telegram
Rent 1,46,446
Conveyance & Travelling 12,10,613
Legal & Professional Charges 80,585
Misc. Expenses 3,91,229
Bank Charges 1,64,299
Interest on Term Loan 22,87,242
Interest Others 1,64,709
Freight & Insurance 4,37,159
SUB TOTAL 5,92,79,956
Less: Sales 3,13,26,073
Stock of Finished Goods 1,46,38,996
Exchange Variation 38,15,901
SUB TOTAL 4,97,80,970
TOTAL 94,98,966
5 ITA No.390 &C.O21/Del/09
5. This schedule shows that the assessee company has
purchased and consumes material consumed of Rs. 3,98,74,811/-. During the year, expenditure incurred on salary, wages, welfare and even on repair maintenance. The company from this unit has incurred sales amounting to Rs. 3,13,26,073/- and there is a stock of finished goods with the assessee company valued at Rs.1,46,38,996/-. Thus, even after showing a sale of Rs.3,13,26,073/- from the said company, the assessee company has claimed that the unit is under trial run. Vide notice dated 11/10/2006, the assessee company was asked why the year under consideration should not be taken as the initial assessment year for the purpose of Section 80IC of the Income Tax Act, 1961 in respect of unit located in Uttrakhand. Secondly, the company was asked why for the purpose of Section 80HHC of the Income Tax Act, 1961, the sales made by the assessee company from its Uttrakhand Unit not be included in the total turnover.
6. The assessee replied that the unit was only trial run and not had commercial production during the year, and therefore, the year under consideration should not be treated as first year of deduction Section 80IC (3) (ii) of the Income Tax Act, 1961. The assessee further submitted before the AO that the assessee was entitled to claim deduction for 100 percent of profit and gains for 5 6 ITA No.390 &C.O21/Del/09 assessment years commencing that the initial assessment year and thereafter 30%. The assessee company further submitted that commercial production of CF Lamps were not taken place in the year under consideration, but only trial production took place. The assessee further submitted that there was a huge wastage which caused a loss of Rs.90,98,986/- in the year of trial production i.e. A.Y 2004-05. The assessee submitted before the Assessing Officer that the trial production was made in the previous year relevant to A.Y 2004-05 was also evident from the extent of turnover which was only Rs.3,13.26 lacs in the trial run, which increased to Rs.5159.50 lacs and Rs.8988.40 lacs in subsequently next two financial years when commercial production commenced. To support this, the assessee company submitted a certificate for starting up commercial production from Chartered Engineer dated 4/4/2004 wherein in it was submitted that all Plants and Machineries finally covered by March 2004 and accordingly commercial production started w.e.f. 1st April 2004. In this certificate, there is no specific mention about how much quantity has been produced/manufactured from the Dehradun Unit and how much exact wastage took place. There was no record to show from the given documents that the first invoice was submitted prior to commercial production. The Assessing Officer while taking into consideration all these factors held that the initial assessment year for the purpose of Section 80IC of the Income Tax Act, 1961. The Assessing Officer has given detailed reasons which are reproduced hereinbelow:
7 ITA No.390 &C.O21/Del/09"The assesseee's contention in this regard is not accepted because
i) The initial assessment year for the purpose of Section 80IC has been defined in the Section itself in Sub-Section 8(5) as the initial assessment year means the assessment year relevant to the previous year in which the undertaking of the enterprise begins to manufacture or produce Articles or Things, or commences operation or completes substantial expansion.
ii) The assessee company from its Uttranchal Unit has shown substantial material consumption amounting to Rs.3.98 Crores and also substantial expense on Power and Fuel and also on wages. All these expenses are direct expenses which clearly show that manufacturing activity has been undertaken at this Unit.
iii) During the year under consideration, the assessee Company from its Uttranchal Unit undertaken sales of 3.13 Crores and also has stock of finished goods valued at 1`.46 Crores. This further strengthens the fact that not only manufacturing activity has been undertaken at the Unit but substantial sales have also been made from the Unit. It is important to note that the total turnover of the assessee company which was established about 12 years back is 165 Crores approximately, thus the sales from this small Unit over a very short period of time i.e over one to one and a half month is nearly 2% of the total turnover.
iv) For the purpose of undertaking these sales the assessee Company has not only issued proper bills but also paid the various applicable taxes before making these sales.
v) The fact that the cost of material consumed i.e 3.98 Crores is less than the total value of sales and the total stock of finished goods (3.13 Crores + 1.46 Crores= 4.49 Crores) further strengthens the case that it cannot be the case of 8 ITA No.390 &C.O21/Del/09 the assessee that the Unit is showing substantial wastage. The mere fact that the unit has some initial losses does not make the period as prior to commencement of production. Moreover the term used in the section is begins to manufacture and not commencement of commercial production. The two terms are clearly distinguishable and no sale can ever take place if a unit does not begin to manufacture. The stage at which a unit starts commercial production is later than the stage at which it begins to manufacture. Though in this case the quantum of sale and that too over a limited period of one to one and a half month shows that the unit has ever commenced commercial production.
vi) Points (ii) to (v) clearly reveal that the Unit has begin to manufacture and produce Article or Things. Therefore, there is no question that this year is not the initial assessment year for the Uttranchal Unit for the purpose of Section 80 IC.
vii) Thus it is held that assessment year 2004-05 is the initial assessment year for the Uttranchal Unit for the purpose of Section 80IC. Deduction under this section can now be claimed by the assessee Company for the remaining years as per provisions of the Section. Since assessment year 2004-05 is the initial assessment year for the Unit, therefore, the depreciation on the fixed assets would deems to have been allowed however the same would not be allowed to be adjusted against profit of the other Units in lieu of Sub-Section 80IC (7) as per which Sub-Section 5 of Section 80IA would apply to the eligible undertaking. Sub-section 80IA(5) clearly lays down that the profits and gains of the eligible Unit would be computed as if such eligible business were the only source of income of the assessee during the previous year relevant to the initial assessment year.
Thus holding of the Unit as covered u/s 80IC would have no impact on the taxable income for the year 9 ITA No.390 &C.O21/Del/09 under consideration but would effect the number of remaining years for which the Unit would be eligible to claim deduction u/s 80 IC."
7. The Assessing Officer held that the unit is covered under Section 80IC of the Income Tax Act, 1961 and would have no impact on the taxable income in the year under consideration but would have effect on the remaining year for which the unit would be eligible to claim deduction under Section 80IC of the Income Tax Act.
8. Aggrieved by the order of the Assessing Officer, the assessee filed appeal before the Ld. CIT(A). The Ld. CIT(A) while deciding in favour of the assessee hold that in the provisions under Section 80IC of the Income Tax Act,1961, the term used is 'any undertaking or enterprise which has begun or begins to manufacture or produce any article'. The term 'begins to manufacture' is required to be understood in the relevant context. Any production changed can be said to have commenced manufacturing only then, the production changed and optimize and establish and the production changed is able to sustain manufacturing in commercial since in the context of the provision manufacturing means production in a commercially sustainable production changed. While analyzing these premises the Ld. CIT(A) considered the relevant case law decided by Hon'ble Madras High Court (110 ITR 168) wherein it has been laid down that 'without applying this test by manufacturing the proto type, the assessee could not be said to have manufactured and article which was capable of being sold by the assessee in the context of 10 ITA No.390 &C.O21/Del/09 tax incentive, and article can be said to have manufactured only when it comes from commercially sustainable production changed and only at this stage article is capable of being sold. The Ld. CIT(A) further held that, in view of high percentage of wastage, the manufacturing in the period under consideration cannot be said to be able to sustained manufacturing in commercial sense. Therefore, the Ld. CIT(A) held that (i) the AO was not justified in holding that assessment year 2004-05 i.e. the year under consideration is, the initial assessment year for the Uttrakhand Unit for the purpose of Section 80IC of the Income Tax Act and (ii) the AO was also not justified in including the sale from this unit in its total turnover for the purpose of computation of deduction u/s 80HHC of the Income Tax Act, 1961. The AO was accordingly directed to give consequential relief.
9. The revenue filed the present appeal.
10. The DR submitted that there were only 9.41 lacs manufacturing units and the cost of manufacturing of per piece was Rs.30. The DR further submitted that the percentage of wastage during the trial production was as follows:-
Assessment Year Wastage (Percentage)
2005-06 21.35
2006-07 16.05
2007-08 13.64
11 ITA No.390 &C.O21/Del/09
11. The DR made a submission that the assessee company's activity was not at all a trial, but the sale proceeds shows that there was simultaneous manufacturing/commercial activities which yielded 3.7 crores for the present assessment year. The paper book which was submitted by the assessee, wherein the audit annual report though mentioned that competition of net profit includes trial run production of 91.41 lacs, but there was no bifurcation given as to how much wastage was incurred during trial production. As per the assessee, the trial run was started on December 2003. The DR submitted that the assessee's submissions that the wastage is of far more then the actual production should not be taken into consideration. As the same will not be a criteria for deciding whether the commencement of commercial activity took place in any financial year/assessment year. Once the sales took place then, it amounts to manufacturing/commercial activities and it cannot be termed as trial production. Therefore, Section 80IC of the Income Tax Act has bearing in the present case. The DR submitted that the turnover chart given by the assessee company was misleading as the production was only for 3 months period. The production continuously increased, so the assessee's contention that there was a technical defect and because of which there was lot of wastage does not sustain. The DR further submitted that the invoice submitted before the authorities and before this Tribunal has not mentioned that these are the trial productions. Submissions of details in respect of Excise and Customs authorities does not amount to any finding that there was 12 ITA No.390 &C.O21/Del/09 no sale prior to commercial productions. The sale totally reflected in the books of accounts and Section 80IC of the Income Tax Act, thus is attracted in the present case.
12. The AR submitted that for the 3 months there was manufacturing but it cannot be termed as commercial production because it amounts to trial production. The AR submitted that the Ld. CIT(A) has properly given the finding. The AR pointed out in paper book which was submitted by him the relevant pages (Pg Nos. 156,157,159 & 160) wherein the defects in respect of CFL Lamps was pointed out and submitted that the machinery and the trial run production took place during the period December 2003 up till January 2004. The assessee also submitted that because of these defects, there was more than 30% wastage and the loss was incurred due to the same. To take benefit of his submissions as relates to the non-application of Section 80IC of the Income Tax Act, the AR submitted that the wastage value during the present assessment year was too high and this amounts to trial production. In fact, as per asssessee, the commercial production started after January 2004 and thus the same could not be treated as commercial production for the period 2004-05 in respect of December 2003 till January 2004. To support this, the AR has submitted various charts along with invoices. The assessee also submitted various case laws on the issue that the trial production 13 ITA No.390 &C.O21/Del/09 cannot be treated as commercial production. The case laws submitted by the AR as follows:
1. Orient Cosmetics Ltd. Vs. DCIT [2000] 74 ITD 135 (Mad)
2. Metropolitan Springs Pvt. Ltd.Vs. CIT[1981]132 ITR 893 (Bom)
3. Madras Machine Tools Manufacturers Ltd Vs. CIT[1975]98 ITR119 (Mad)
4. Addl. CIT Vs. Southern Structural Ltd. [1977]110 ITR 164 (Mad)
5. CIT Vs. Hindustan Antibiotics Ltd.[1974]93 ITR 548 (Bom)
6. Hero Honda Motors Ltd. Vs. Jt. CIT [2006] 103 ITD 157 (Del)
7. Western India Vegetable Products Ltd. Vs. CIT [1954] 26 ITR 151 (Bom)
8. CIT Vs. Ennore Foundries Ltd. [1985] 21 Taxman 349 (Mad)
9. CIT Vs. Webbing & Belting Factory Ltd [1968] 68 ITR 186
13. All the present case laws which were submitted by the assessee are on the basic premise that the trial production cannot be taken into account as commercial production.
14. The DR submitted that the case of CIT Vs. Hindustan Antibiotics Ltd. [1974] 93 ITR 548 (Bom) was on intermediate 14 ITA No.390 &C.O21/Del/09 product and not similar to the assessee's case. Case of Orient Cosmetics Ltd. Vs. DCIT [2000] 74 ITD 135 (Mad), the DR submitted that there was no manufacturing or sale or purchase in that particular case and that view cannot be taken in this case as it is totally on the different footings. The case of Metropolitan Springs Pvt. Ltd Vs. CIT[1981]132 ITR 893 (Bom) is related to the trial production, first wherein trial production has been dealt with testing and sampling. But in present case there was no testing or sampling on record to show that this amounts to trial production. In the case of Madras Machine Tools Manufacturers Ltd. Vs. CIT [1975] 98 ITR 119 (Mad), the DR submitted that the wastage was too small and that cannot be the criteria in the present case. In the case of Addl. CIT VS. Southern Structural's Ltd. [1977] 110 ITR 164 (Mad), there was a proto type production and, therefore, this will also not be applicable. In the case of Hero Honda Motors Ltd. Vs. Jt. CIT [2006] 103 ITD 157 (Del), the assessee company which took benefit of Section 80 HHC as relates to deduction was taken into consideration in respect of the first sale and its relevant year. The DR submitted the case law of CIT vs. Nestor Pharmaceuticals Ltd. (2010) 322 ITR 631 wherein, it was held that trial production is different from commercial production. In this case, the Hon'ble Delhi High Court held that "the assessee had sold one Water Cooler and one Air Condition before April 1998. Thus, the stage of trial production had been crossed over and the assessee had come out with the final saleable product which was in fact sold as well. The quantum of commercial sale would be immaterial. With sale of 15 ITA No.390 &C.O21/Del/09 those articles marketable quality was established, more particularly when assessee failed to show that the dealer returned those goods on the ground that there was any defect in the Water Cooler or air- condition produced and sold by the assessee to the dealer. Things would have been different, if that had happened." The DR further submitted that this case law clearly states that the wastage is not a whole and sole criteria for a trial production. The improvements made by the assessee during the year that would have come under the purview of trial production but it fails further test of trial, when it has become an eligible product and actual sale took place. The purchasers had not returned the articles which are defective and the same cannot be termed as trial production.
15. We have perused all the records and heard submissions made by both the parties. Section 80IC (8)(v) of the Income Tax Act reads as under:-
" Section 80IC (8)(v) "Initial assessment year" means the assessment year relevant to the previous year in which the undertaking or the enterprise begins to manufacture or produce articles or things, or commences operation or completes substantial expansion;"
From the meaning of 'Initial assessment year' it can be seen that whenever any undertaking or the enterprise begins its commercial manufacturing and production of articles it comes under the purview of Section 80IC of the Income Tax Act, 1961. Though, the assessee company has shown the pre-operative expenditure in respected of its Dehradun Unit & claimed that it was under trial 16 ITA No.390 &C.O21/Del/09 run and there was no commercial production took place during the year, but the facts are different altogether. In fact, the assessee since the beginning of the said unit/plant was taking purchase orders from various parties and complying with the said purchase orders in the usual manner and there was no defect or complaint made by the purchasers at any point of time. The parties whom the assessee supplied continuously were, Bajaj Electricals (34 invoices during the period between 22.12.2003 to 29.03.2004), Suraj Motor Company (11 invoices during the period between 03.01.2004 to 22.03.2014), Integrated Resources (10 invoices during the period between 03.01.2004 to 17.03.2014) Suraj Motor Company (8 invoices during the period between 03.01.2004 to 30.03.2004), Surya Sales and various other parties. These details were submitted before the Tribunal during the course of the argument by the AR. The assessee was having regular transactions since December, 2003 to March 2004 and in fact it shows from the records that they were having large quantity of orders from these purchasers. Stage of trial production is only preparatory in nature and a product has to go through many process as well as trial and error before it is given a final sheet. Such product is also offered to the market with a view to deciding their acceptability in the market and on the basis of feed back from the market. In the present case, though the assessee has claimed that it commenced commercial production in March, 2004, but in reality the commercial production started since the initial set up of the Unit. The invoices submitted by the assessee were also not given the clear picture as to when the first invoice was 17 ITA No.390 &C.O21/Del/09 return back on the reason of not as per the requirement of the customers. In fact, ledger which were given by the assessee for the period 1st April 2003 to 31 March, 2004 clearly shows that there was a continuous transaction/sale to various companies and those companies were repeatedly giving orders to the assessee company. So this cannot be termed as a trial production when there is a continuous sale to a particular company for example in the assessee's case there was 34 transactions/invoices mentioned in the ledger to Bajaj Electricals Ltd. for the period 22nd December 2003 till 24th February 2004 and there was no specific mention that the product/CF Lamps which were sold to Bajaj Electricals were of defective or of any sort of wastage to the assessee company. Thus, the benefit of trial production cannot be claimed by the assessee company and Section 80IC is clearly attracted in case of assessee company. Secondly, the huge wastage will also be not a criteria for determining for non-applicability of 80IC of the Income Tax Act in assessee's case. The wastage was not particularly higher than the actual saleable production of the assessee company. The Hon'ble Delhi High Court held that the provisions of I.T Act use the word 'manufacture' trial production is not regarded as beginning to manufacture or to produce articles because of the reason that the assessee has to produce trial production to verify whether it can be use ultimately in the manufacture of the final article. These are, therefore, trial runs the article is tested to find out as to whether it can be launched as a final product in the market or not. Therefore, with mere trial production the manufacture for the purpose of 18 ITA No.390 &C.O21/Del/09 marketing the goods has not started with starts only with commercial production namely to the satisfaction of manufacturer has been brought into existence and is now fit for marketing. Thus, the Delhi High Court in case of CIT vs. Nestor Pharmaceuticals (2010) 322 ITR 631 clearly mentioned the difference between trial production and commercial production. The instance of the sale along with the documentary evidence clearly shows in the present case that, though the assessee is claiming the activity of Dehradun Unit as a trial production, the same is not at all a trial production but the commercial production from December 2003 onwards. Selling the product to particular parties continuously also shows that it is a commercial production and not of a trial production. The case laws submitted by the assessee are on different footings and was rightly distinguished by the DR. Thus, the first ground of the Revenue is sustained and the Ld. CIT(A)'s order is set aside to that effect. As relates to the second ground, the same is consequential and the AO is directed to determine the deduction u/s 80HHC of the Income Tax Act, 1961 for the A.Y 2004-05.
16. In result, appeal of the Revenue is allowed.
17. C.O is not pressed by the assessee, hence dismissed.
The order is pronounced in the open court on 23rd of October, 2015.
Sd/- Sd/-
(R.S. SYAL) (SUCHITRA KAMBLE)
ACCOUNTANT MEMBER JUDICIAL MEMBER
Dated: 23/10/2015
19 ITA No.390 &C.O21/Del/09
R. Naheed*
Copy forwarded to:
1. Appellant
2. Respondent
3. CIT
4. CIT(Appeals)
5. DR: ITAT
ASSISTANT REGISTRAR
ITAT NEW DELHI
Date
1. Draft dictated on 12.10.2015 PS
2. Draft placed before author 13.10.2015 PS
3. Draft proposed & placed before JM/AM
the second member 15.10.2015
4. Draft discussed/approved by JM/AM
Second Member.
5. Approved Draft comes to the PS/PS
Sr.PS/PS 23.10.2015
6. Kept for pronouncement on PS
7. File sent to the Bench Clerk 23.10.2015 PS
8. Date on which file goes to the AR
9. Date on which file goes to the
Head Clerk.
10. Date of dispatch of Order.