2018 (12) TMI 1568 - HC - Income Tax

Entitlement to relief u/s.80IB - Installation of the equipment is a part of manufacturing activity carried on by the Appellant - splitting of contract - Held that - In the instant case, the contract is for design, supply, installation and maintenance. Therefore, for the Assessing Officer to come to a conclusion that the design would fall within the category of manufacture and not supply and installation, in our considered view would be an incorrect way of interpreting the contract entered into between the two parties. The Assessing Officer did not have material to split up the contract into one or more parts. As examined the relevant documents which were placed before the CIT(A) and it appears from those documents that the contract is a very complex contract involving technical design and installation for a project and that is why, the contract has a component called design so the design has to be done for a customer to suit his parameters. Obviously, the product made by the appellant is not a product which available off the shelf . The product which is subject matter of consideration has been designed exclusively for the customers, which are Government of India Enterprises and the design is to suit the customers need and unless it is operational the product does not come into being. This is the correct manner the contract has to be interpreted and has rightly been interpreted by the CIT(A) as concluded that the activity of the assessee in designing, engineering and fabricating of the plant and systems in the contract with Indian Oil Corporation Ltd., Bharat Petroleum Corporation Ltd., Bongaigaon Refinery and Petro Chemicals Ltd., is manufacture of article or thing - Decided in favour of the assessee

Summary

Issues:
1. Interpretation of whether installation of equipment is part of manufacturing activity for claiming relief under section 80IB of the Income Tax Act.
2. Disagreement between Assessing Officer, Commissioner of Income Tax (Appeal), and Tribunal regarding the nature of the contract and its classification under manufacturing activity for tax deduction purposes.

Issue 1:
The primary issue in this case revolves around determining whether the installation of equipment by the assessee constitutes "manufacture" for the purpose of claiming relief under section 80IB of the Income Tax Act. The assessee argued that the installation of specialized gas filling, measuring, and weighing machines, which are usable only after installation and commissioning, is an integral part of their manufacturing activity. They contended that the act of installation completes the manufacturing process of the product, making it eligible for the tax deduction. However, the Assessing Officer disagreed, stating that the installation at the customer's site does not create a new product and, therefore, does not qualify as manufacturing. The Assessing Officer estimated charges related to installation separately, leading to a dispute over the eligibility of the deduction.

Issue 2:
The second issue arises from the conflicting interpretations of the contract by the Assessing Officer, Commissioner of Income Tax (Appeal), and Tribunal. The Commissioner of Income Tax (Appeal) allowed the appeal filed by the assessee after considering the complexity of the contract, which involved design, supply, installation, and maintenance. The Commissioner emphasized that the contract's technical design and installation components were interlinked and could not be dissected for tax assessment purposes. The Tribunal, however, reversed the Commissioner's decision based on the absence of specific documents regarding the composite nature of the contract. The High Court, upon review, found that the contract's design, engineering, and fabrication activities for government enterprises constituted the manufacture of an article or thing, aligning with the criteria under Section 80IA/80IB of the Act. The Court concluded that the Tribunal erred in overturning the Commissioner's well-considered decision, reinstating the Commissioner's order and ruling in favor of the assessee.

In conclusion, the judgment clarifies the interpretation of manufacturing activity concerning equipment installation for tax relief under section 80IB. It highlights the importance of considering the entire contract's complexity and interlinked components in determining eligibility for tax deductions, emphasizing the need for a holistic approach in assessing manufacturing activities for tax purposes.