2014 (2) TMI 605 - HC - Income Tax

Entitlement for benefit of Section 80IA of the Act Manufacture Activity OR not - Assembling the various parts - Whether the air-conditioning system or plant delivered constitute a separate and distinct product involving manufacturing or production and eligible for deduction Held that - It has an in-built capacity to manufacture ducting, erection of systems, providing electrical paneling controls, installations etc. it purchases air conditioners, blowers, freezers, Cooling equipment etc. - The case of the assessee is after purchasing these parts it manufacures an air-conditioning plant and delivers the same to his customers - after these parts are purchased they are transformed into an altogether new product - the assessee is entitled to the benefit as it satisfies the above requirement of the Section. The air-conditioners freezers, blowers which are purchased as raw materials for the said air condition plant are not processed - They are used as it is - No manufacturing activity takes place insofar as those items are concerned - They are installed as it is and only they are connected with these panels and ducting - Though the assessee calls it as an air-conditioning plant, the air-conditioners, which are purchased as raw material continues to perform the very same function after its installation - No new product comes into existence after the assessee purchases these goods - the authorities have called it as assembly and for the purpose of assembly, they may manufacture ducting and electrical panel controls and other installations - But merely because those anciliary goods are manufactured, it does not mean that the assessee is manufacturing air conditioning plant - the authorities were justified in declining to extend the benefit of Section 80IA to the assessee there was no error committed by the authorities in holding that the assessee is not involved in manufacturing or production and therefore is not entitled to benefit of tax deduction Decided against Assessee.

Summary

Issues Involved:
1. Whether the assessee's activities constitute "manufacture" under Section 80IA of the Income-tax Act, 1999.
2. Interpretation of the terms "manufacture" and "production" in the context of tax deduction eligibility.

Issue-wise Detailed Analysis:

1. Whether the assessee's activities constitute "manufacture" under Section 80IA of the Income-tax Act, 1999:

The assessee contended that it was engaged in the manufacture and installation of air-conditioning systems and plants for large business and industrial establishments. The process involved purchasing air-conditioning units, manufacturing ducting, erecting systems, and providing electrical paneling controls and installations. The Assessing Authority, however, viewed the assessee's activities as mere assembly of parts, not constituting manufacturing. Consequently, the assessee was deemed ineligible for the deduction under Section 80IA, which requires the entity to be engaged in manufacturing or producing an article or thing.

The Commissioner of Income-tax (Appeals) upheld this view, stating that the process of manufacture should result in a commercially different commodity with a distinct commercial identity. The Tribunal also agreed, emphasizing that the air-conditioning system installed by the assessee did not qualify as a new article or thing but was merely an assembly of pre-existing parts. The Tribunal referenced the Supreme Court judgment in N. C. Bhudaraja and Company (204 ITR 412), which supported the view that the assessee's activities did not amount to manufacturing.

2. Interpretation of the terms "manufacture" and "production" in the context of tax deduction eligibility:

The court examined the definitions and interpretations of "manufacture" and "production" as provided in various judicial pronouncements and legal dictionaries. The term "manufacture" implies a change, but not every change qualifies as manufacture. The change must result in a new and distinct article or thing, commercially recognized as different from the original commodity. The Supreme Court's interpretation in India Cine Agencies v. Commissioner of Income-Tax (308 ITR 98) and other cases was cited to elucidate that manufacture involves transforming raw materials into a new product with a distinct commercial identity.

The court noted that the assessee purchased air-conditioners, blowers, freezers, and other equipment, which were installed as they were, without undergoing any transformation or processing. The ducting and electrical panel controls manufactured by the assessee were ancillary and did not constitute the creation of a new product. Thus, the activities did not meet the criteria for "manufacture" or "production" under Section 80IA.

Conclusion:

The court concluded that the assessee's activities did not qualify as manufacturing or production. The air-conditioning systems installed were not new products but assemblies of pre-existing parts. Therefore, the assessee was not entitled to the tax deduction under Section 80IA. The substantial question of law was answered in favor of the Revenue and against the assessee. However, the court allowed the assessee the liberty to claim exemption for any portion of the activity involving genuine manufacturing, subject to the authority's consideration and appropriate orders.