2013 (11) TMI 69 - HC - Income Tax

Deduction u/s 80IA of the Income Tax Act - Whether coating with oxides of noble metals on titanium metal electrode/anode bringing about a change in its character and user for making it fit for use in the production of chlorine and caustic soda in an electrolytic process is manufacture or production of article or thing within the meaning of section 80-IA of the Income-tax Act, 1961 Held that - Once process undertaken by the assessee resulted in production of a useful commercial commodity the enquiry had to end there, and the assessee s claim allowed Reliance has been placed upon the judgment in the case of CIT v. Oracle Software India Ltd. 2010 (1) TMI 9 - SUPREME COURT OF INDIA , wherein the court was called upon to decide as to whether a process by which blank compact discs are transformed into loaded software would constitute manufacture in the context of section 80-I of the Income-tax Act. The court employed the test of fitness. In other words, to come to the conclusion whether the process employed constitutes manufacture one would have to ascertain the efficacy of the process in rendering the commodity or an article fit for use. The Tribunal had to employ the test of fitness in ascertaining whether the process employed by the assessee rendered the free issue material supplied to it (whether referred to as titanium substrates or a titanium metal anode), fit for use in the industry. In the present case, Tribunal lost sight of the fact that a distinct new product had come into existence after it was processed by the assessee. The fact that it had a single purchaser (i.e., UHDE/IPCL) for its coated titanium substrates ought not to have come in the way of the Tribunal allowing the deduction to the assessee. As noticed above, the test is that the transformed article should be marketable. In this case, there could not have been a better evidence of marketability than the assessee s agreement with UHDE Decided in favor of Assessee.

Issues Involved:
1. Whether coating with oxides of noble metals on titanium metal electrode/anode constitutes 'manufacture' or 'production' of 'article' or 'thing' under section 80-IA of the Income-tax Act, 1961.
2. Whether the Tribunal's conclusion that the coating process does not amount to 'manufacture' or 'production' is erroneous.

Detailed Analysis:

Issue 1: Coating Process as 'Manufacture' or 'Production'
The primary issue is whether the process of coating titanium metal electrodes/anodes with oxides of noble metals qualifies as 'manufacture' or 'production' under section 80-IA of the Income-tax Act, 1961. The appellant argued that this process results in a commercially distinct product, thereby constituting 'manufacture.' The Tribunal, however, held that the process does not create a new commercial commodity but merely enhances the original article's longevity and utility.

Facts and Arguments:
- The assessee applied for a license to manufacture coated metal electrodes and entered into an agreement with UHDE India Ltd. to coat titanium substrates, which were supplied free of cost.
- The assessee claimed a deduction under section 80-IA, which was denied by the Assessing Officer on the grounds that the coating process did not constitute 'manufacture.'
- The assessee argued that the process resulted in a new product, supported by expert opinions and industry standards.
- The Tribunal concluded that the process did not result in a new commercial commodity, relying on technical literature and the nature of the agreement with UHDE.

Court's Analysis:
- The court examined the process and the expert opinions, noting that the coating of titanium substrates with noble metals creates a product with distinct commercial utility, known as noble-metal coated titanium or dimensionally stable anodes.
- The court emphasized that the process transforms the original material into a new marketable product, which is recognized by the excise authorities and subjected to excise duty.
- The court referred to legal precedents, including Union of India v. Delhi Cloth and General Mills Co. Ltd., to establish that 'manufacture' implies a change resulting in a new article with a distinctive name, character, or use.
- The court also cited A.P. State Electricity Board v. Collector of Central Excise, highlighting that marketability, not actual marketing, is the key criterion for determining 'manufacture.'

Conclusion:
The court concluded that the process employed by the assessee results in the production of a new and distinct commercial commodity, thereby constituting 'manufacture' under section 80-IA. The court found that the Tribunal had erred in its conclusion by not considering the marketability and distinctiveness of the coated product.

Issue 2: Tribunal's Conclusion on 'Manufacture' or 'Production'
The second issue is whether the Tribunal's conclusion that the coating process does not amount to 'manufacture' or 'production' is erroneous.

Facts and Arguments:
- The Tribunal held that the process did not result in a new commercial commodity and that the coated titanium substrates required further fabrication to become useful.
- The assessee contended that the Tribunal ignored expert opinions and industry standards, which clearly indicated that the coated product was a new commercial commodity.
- The Department argued that the process was merely a job work and did not result in a new product.

Court's Analysis:
- The court criticized the Tribunal for not considering the expert opinions and the excise duty imposed on the coated product, which indicated its marketability and distinctiveness.
- The court noted that the Tribunal had applied the wrong test by focusing on whether the product required further fabrication rather than whether the process resulted in a new commercial commodity.
- The court referred to CIT v. Oracle Software India Ltd., which established that the test for 'manufacture' includes determining whether the process renders the article fit for use.

Conclusion:
The court found that the Tribunal's conclusion was flawed and misdirected, as it did not properly evaluate the evidence and applied the wrong test. The court held that the process undertaken by the assessee constituted 'manufacture' and allowed the deduction under section 80-IA.

Final Judgment:
The court answered both questions of law in favor of the assessee and against the Department, setting aside the impugned judgment. The parties were ordered to bear their own costs.

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