2021 (5) TMI 152 - AT - Income Tax

Additional depreciation u/s 32(1)(iiia) - whether the process of blending of butane and propane which is carried out in scientific manner, with use and aid of sophisticated plant and machinery and whether the transformation brought about an entirely new product in the name of LPG and whether such activity is a manufacturing activity so that the assessee is eligible to claim additional depreciation u/s 32(1)(iiia)? - HELD THAT - As decided in 2017 (8) TMI 197 - SUPREME COURT Hindustan Petroleum Corpn. Ltd. process of bottling of gas into cylinders for domestic use by complex technical process undertaken in plant with machinery amounts to production or manufacture of gas cylinders for purposes of deduction under sections 80-I, 80-IA and 80HH. In M/s. Indian Oil Petronas Pvt. Ltd. 2019 (4) TMI 1285 - ITAT KOLKATA in the process of blending of butane propane which is carried out in scientific manner with use and aid of sophisticated plant machinery, transformation is brought about and entirely new product by the name LPG is obtained. The said object or product i.e. LPG is known to the trade and commerce by its separate distinctive commercial name and it has a different character and its end use is also different. Accordingly provisions of Section 2(29BA) of the Act and also the ratios laid down by the Supreme Court in several decisions, we have no hesitation in holding that the assessee was engaged in manufacture or production of an article or thing and therefore it was eligible for claiming additional depreciation u/s 32(1 )(iia) - Decided against revenue. TDS u/s 195A - dividend distributed to non-resident shareholders - HELD THAT - In the instant case, the incidence of tax on dividend income is borne by the company paying dividend income by virtue of statute and not by way of any agreement and as such, the rigor of section 195A of the Act would not be applicable. In any event, it may be stated that even if the payment is to be grossed up, yet the rate specified in DTAA (if more favourable) would be applicable to gross up the said payment. Thus, in conclusion, it may be stated that the rate of tax payable on dividend distributed to non-resident shareholders would depend upon the relevant Article of the DTAA entered into between India and the country to which the non-resident belongs, subject to the fulfilment of the conditions stated. The Hon ble Delhi High Court in the case of Pr. CIT v Maruti Suzuki Limited 2019 (12) TMI 1080 - DELHI HIGH COURT held that the Hon ble Tribunal is within its power to admit the additional ground in respect of claim of refund of tax paid in excess, by following provision of section 115-O of the Act instead of the relevant Article of the applicable DTAA. Thus the relevant Article of the DTAA have to be examined, we are setting aside this matter to the file of the AO for fresh adjudication in accordance with law after admitting this claim of the assessee. The AO shall consider this claim of the assessee and dispose off the case in accordance with law.

Summary

Issues Involved:
1. Whether the process of blending butane and propane to produce LPG constitutes a manufacturing activity eligible for additional depreciation under Section 32(1)(iia) of the Income Tax Act, 1961.
2. Whether the assessee is entitled to claim deductions for Cess paid in FY 2012-13.
3. Whether the tax on dividends paid to non-resident shareholders should be computed at the rate prescribed in the Double Taxation Avoidance Agreement (DTAA) between India and Malaysia.

Issue-wise Detailed Analysis:

1. Manufacturing Activity and Additional Depreciation:
The primary issue is whether the blending of butane and propane to produce LPG qualifies as a manufacturing activity, thus making the assessee eligible for additional depreciation under Section 32(1)(iia) of the Income Tax Act, 1961. The Tribunal referred to the Supreme Court's decision in the case of Commissioner of Income-tax-1, Mumbai vs. Hindustan Petroleum Corporation Ltd., where it was held that the process of bottling gas into cylinders amounts to production or manufacture. The Tribunal also cited its own previous decision in the case of D.C.I.T, Cir-10(1), Kolkata vs. M/s. Indian Oil Petronas Pvt. Ltd., which supported the view that the process of blending butane and propane to produce LPG is a manufacturing activity. The Tribunal noted that the process involves scientific methods and sophisticated machinery, resulting in a new product with distinct commercial uses. Consequently, the Tribunal upheld the CIT(A)'s order, confirming that the assessee's activity qualifies as manufacturing, making them eligible for additional depreciation under Section 32(1)(iia).

2. Deduction for Cess Paid:
The assessee filed Cross Objections seeking a deduction for Cess paid in FY 2012-13. The Tribunal condoned the delay in filing the Cross Objections, recognizing that the issues raised were legal in nature and became apparent to the assessee following recent judicial decisions. The Tribunal admitted the additional grounds, emphasizing that legal claims can be made at any stage of proceedings to ensure the correct determination of taxable income.

3. Tax on Dividends to Non-Resident Shareholders:
The assessee argued that the tax on dividends paid to non-resident shareholders should be computed at the rate prescribed in the DTAA between India and Malaysia, rather than the rate specified in Section 115-O of the Income Tax Act. The Tribunal examined the provisions of Section 195 and Section 2(37A) of the Act, which state that tax should be deducted at the rates specified in the Act or the DTAA, whichever is more beneficial to the assessee. The Tribunal referred to the Supreme Court's decision in Tata Tea Limited, which held that dividend income is taxable in the hands of the shareholders, and the incidence of tax is shifted to the company for administrative convenience. The Tribunal concluded that the rate specified in the DTAA should apply, provided the non-resident shareholder does not have a Permanent Establishment in India. The Tribunal set aside the matter to the AO for fresh adjudication, directing the AO to verify the applicability of the DTAA rate and dispose of the case in accordance with the law.

Conclusion:
The Tribunal upheld the CIT(A)'s order regarding the manufacturing activity and additional depreciation. It admitted the assessee's Cross Objections on the deduction for Cess and the tax rate on dividends, setting aside these matters to the AO for fresh adjudication. The Cross Objections were allowed for statistical purposes.