2013 (9) TMI 971 - HC - Income Tax

Disallowance of deduction u/s 80IC of the Income Tax Act - scope of the term manufacture - Assessee is engaged in the business of manufacture and service of communication and networking products, mainly to State Government and Central Government undertakings. It supplied communication device to TNEB and BSNL to the extent of Rs.37.62 crores, out of the total sale of Rs.52.61 crores - Assessee is stated to have purchased imported PCBs, RAMs, high and low transmission wireless adaptors, wireless antennae components, flash ram software, Red Hat Linux software and other networking components Held that - Using purchased components, the assessee redesigned, developed and manufactured a single product to suit the requirement of the project. As the end product was a distinct article and a marketable product, the assessee claimed deduction under Section 80 IC of the Income Tax Act. Under Section 2(29BA) of the Income Tax Act, under Finance (No.2) Act of 2009, with effect from 01.04.2009, the definition manufacture was inserted to mean, a change in a non-living physical object or article or thing resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure. Even though the said amendment would not be of relevance to the assessment year under consideration, namely, 2006-2007, yet, the intention of the Revenue being very clear on the scope of the expression manufacture , on the findings of fact that the various materials that had gone into making of the radio frequency identification device having thus undergone a change and that they had lost their original identity, therefore, deduction u/s 80IC allowed.

Summary

Issues:
Whether disallowance of deduction under Section 80 IC is to be allowed for the assessment year 2006-07 based on the manufacturing activities of the assessee.

Analysis:
1. Issue of Manufacturing Eligibility: The case involved the question of whether the assessee, engaged in the business of manufacturing and servicing communication products, was eligible for deduction under Section 80 IC of the Income Tax Act. The Assessing Officer contended that the assessee was only involved in assembling work and not manufacturing, thus challenging the eligibility for the deduction. The Commissioner of Income Tax (Appeals) examined the manufacturing process undertaken by the assessee, involving the procurement of raw materials, design, and production of a distinct product tailored to the specific requirements of customers like TNEB. The first Appellate Authority highlighted the transformation of raw materials into a new commercial product with its own unique characteristics, indicating a manufacturing process beyond mere assembly.

2. Application of Legal Precedents: The Commissioner of Income Tax (Appeals) relied on legal precedents such as the decision of the Apex Court in India Cine Agencies case and other relevant judgments to support the assessee's claim for deduction under Section 80 IC. These cases emphasized that activities resulting in the creation of new and distinct products, even through processes like conversion or customization, could qualify as manufacturing for tax benefits. The Commissioner found that the product developed by the assessee met the criteria of being a separate commodity with its own identity and utility, aligning with the interpretation of 'manufacture' under the Income Tax Act.

3. Judicial Interpretation and Tribunal Decision: The Income Tax Appellate Tribunal upheld the decision of the Commissioner of Income Tax (Appeals), dismissing the Revenue's appeal against allowing the deduction under Section 80 IC for the assessee. The Tribunal concurred with the findings that the manufacturing activities undertaken resulted in the creation of a unique product distinct from the raw materials used, supporting the eligibility for the tax deduction. The Tribunal's decision was based on the factual analysis of the manufacturing process and the characteristics of the final product, aligning with the legal interpretation of 'manufacture' and relevant precedents.

4. Court's Decision and Legal Interpretation: The High Court, in its judgment delivered by Chitra Venkataraman, rejected the Revenue's argument that mere assembly work could not constitute manufacturing for claiming deduction under Section 80 IC. The Court referenced the legislative definition of 'manufacture' introduced in the Income Tax Act, emphasizing the transformation of raw materials into a new and distinct product with altered characteristics and utility. The Court upheld the Tribunal's decision based on the factual findings that the manufactured item was significantly different from the inputs used, aligning with the legal understanding of manufacturing activities. By citing relevant legal precedents and legislative provisions, the Court affirmed the eligibility of the assessee for the deduction under Section 80 IC, dismissing the Revenue's appeal and concluding the case without costs.