2014 (3) TMI 975 - AT - Income Tax

Eligibility of deduction u/s 80IB(5)(i)- whether the assessee is not involved in manufacturing or producing activity but is only carrying out the activity of assembling at its Silvassa Unit? - Held that - We are not inclined to interfere with the finding of CIT(A), who has allowed the claim of assessee u/s.80IB(5)(i) by holding that assembling of various components amounts to manufacturing. See case of Jackson Engineers 2009 (12) TMI 649 - Delhi High Court - Decided in favour of assesse. Artificial inflation of profit of Silvassa Unit in order to claim higher deduction - Held that - there is no concrete evidence that the assessee has shifted the profit of Chakan Unit to Silvassa Unit at such a magniture and hence, the addition sustained by CIT(A) could not be sustained, as such, at the same time, the objection of revenue authorities on this point cannot be rejected as in toto. Taking into all the facts and circumstances in to consideration, the deduction of claim u/s.80IB(5)(i) is restricted to 15% as against done by the CIT(A). As a result, this issue is partly allowed in favour of assesse.

Summary

Issues Involved:
1. Allowability of the claim of Rs. 1,31,38,957/- under Section 80IB(5)(i) of the IT Act.
2. Whether assembling activities qualify as manufacturing.
3. Impact of amendments to Sections 10A and 10B on the definition of manufacturing.
4. Applicability of the Calcutta High Court's decision in CIT Vs. Babcock & Wilcox of India Ltd.
5. Applicability of the Supreme Court's decision in CIT Vs. N.C. Budhiraja & Co.
6. Justification of applying the same Net Profit ratio for Silvassa and Chakan Units.
7. Principle of consistency in reopening assessments for previous years.

Detailed Analysis:

1. Allowability of the claim of Rs. 1,31,38,957/- under Section 80IB(5)(i) of the IT Act:
The revenue challenged the CIT(A)'s decision to allow the assessee's claim of Rs. 1,31,38,957/- under Section 80IB(5)(i), arguing that the assessee was merely assembling components rather than manufacturing. The Tribunal upheld the CIT(A)'s decision, referencing previous rulings in the assessee's favor for A.Y. 2007-08 and 2008-09. It was established that the assessee's activities, including the assembly of various parts to manufacture generator sets, qualified as manufacturing. The Tribunal cited decisions from the Bombay High Court and Delhi High Court, which recognized assembly as manufacturing, thus allowing the deduction under Section 80IB(5)(i).

2. Whether assembling activities qualify as manufacturing:
The Tribunal examined whether the assembly of generator sets constituted manufacturing. The assessee argued that the assembly process involved significant technical steps, transforming raw materials like engines and alternators into a new product with a distinct identity, i.e., generator sets. The Tribunal referred to the Bombay High Court's decision in Tata Locomotive and Engineering Company Ltd. and other cases, concluding that assembly activities do amount to manufacturing. Therefore, the assessee was entitled to the deduction under Section 80IB(5)(i).

3. Impact of amendments to Sections 10A and 10B on the definition of manufacturing:
The revenue contended that the deletion of the definition of manufacturing, which included assembling, from Sections 10A and 10B by the Finance Act, 2000, indicated that assembling activities should not qualify for benefits under Section 80IB. However, the Tribunal found that this amendment did not affect the interpretation of manufacturing under Section 80IB. The Tribunal upheld the CIT(A)'s decision, allowing the deduction.

4. Applicability of the Calcutta High Court's decision in CIT Vs. Babcock & Wilcox of India Ltd.:
The revenue cited the Calcutta High Court's decision, which held that assembling parts to erect a boiler did not constitute manufacturing. The Tribunal distinguished this case, noting that the issue in Babcock & Wilcox was not directly comparable to the assessee's activities. The Tribunal found that the assembly of generator sets involved a transformation into a new product, thus qualifying as manufacturing.

5. Applicability of the Supreme Court's decision in CIT Vs. N.C. Budhiraja & Co.:
The revenue also referenced the Supreme Court's decision, which analyzed the meaning of manufacturing. The Tribunal found that this case did not directly address the issue of assembly as manufacturing. Therefore, it did not affect the Tribunal's conclusion that the assessee's activities qualified as manufacturing.

6. Justification of applying the same Net Profit ratio for Silvassa and Chakan Units:
The revenue argued that the CIT(A) erred in applying the same Net Profit ratio for both units, as the assessee allegedly shifted profits to the Silvassa unit to claim higher deductions. The Tribunal examined the differences in profit ratios and the reasons provided by the assessee, including higher depreciation and manufacturing expenses at the Chakan unit. The Tribunal found no concrete evidence of profit shifting but acknowledged the revenue's concerns. It partially upheld the CIT(A)'s decision, restricting the deduction to 15% of the claimed amount.

7. Principle of consistency in reopening assessments for previous years:
The revenue contended that the CIT(A) failed to apply the principle of consistency, as the Assessing Officer had reopened assessments for A.Y. 2005-06 and 2006-07. The Tribunal did not find any specific arguments or evidence from the revenue to support this claim. Therefore, it upheld the CIT(A)'s decision.

Conclusion:
The Tribunal dismissed the revenue's appeal and partially allowed the assessee's appeal, upholding the CIT(A)'s decision to allow the deduction under Section 80IB(5)(i) but restricting it to 15% of the claimed amount. The Tribunal emphasized that the assembly of generator sets qualified as manufacturing and found no concrete evidence of profit shifting between units.