2022 (11) TMI 896 - SC - Income Tax

Deduction u/s 80-IB - Proof of assessee manufactures or produces any article or thing specified in the list in the Eleventh Schedule of the IT Act - process for end product - as submitted assessee is manufacturing polyurethane foam, which is ultimately used as automobile seat - as per AO nature of the business of the assessee is manufacturer of polyurethane foam seats which falls under entry 25 to the Eleventh Schedule of the IT Act and therefore the assessee shall not be entitled to deduction under Section 80-IB - as per assessee different sizes of polyurethane foam are used as automobile seats and therefore the end product can be said to be the automobile seat which is different than the polyurethane foam HELD THAT - The assessee is manufacturing polyurethane foam and supplying the same in different sizes/designs to the assembly operator, which ultimately is being used for car seats. The assessee is not undertaking any further process for end product, namely, car seats. The polyurethane foam which is supplied in different designs/sizes is being used as ingredient by others, namely, assembly operators for the car seats. Merely because the assessee is using the chemicals and ultimately what is manufactured is polyurethane foam and the same is used by assembly operators after the process of moulding as car seats, it cannot be said that the end product manufactured by the assessee is car seats/automobile seats. There must be a further process to be undertaken by the very assessee in manufacturing of the car seats. No further process seems to have been undertaken by the assessee except supplying/selling the polyurethane foam in different sizes/designs/shapes which may be ultimately used for end product by others as car seats/automobile seats. When the articles/goods which are manufactured by the assessee, namely, polyurethane foam is an article classifiable in the Eleventh Schedule (entry 25), considering Section 80IB(2)(iii), the assessee shall not be entitled to the benefit under Section 80-IB - The High Court has rightly held so and has rightly set aside the order passed by the ITAT and has rightly restored the order passed by the assessing officer denying the deduction/benefit claimed under Section 80-IB - We are in complete agreement with the view taken by the High Court and that of the assessing officer, confirmed by the CIT(Appeals). - Decided against assessee.

Summary

Issues:
1. Eligibility for deduction under Section 80-IB of the Income Tax Act.

Analysis:

Issue 1: Eligibility for deduction under Section 80-IB of the Income Tax Act

The case involved a dispute regarding the eligibility of the assessee for claiming a deduction under Section 80-IB of the Income Tax Act. The assessee, a manufacturer of polyurethane foam used in automobile seats, claimed the deduction, which was disallowed by the assessing officer based on the classification of the business under the Eleventh Schedule of the IT Act. The assessing officer contended that the nature of the business fell under the specified entry, making the assessee ineligible for the deduction. The CIT(A) upheld this decision, stating that the chemicals used in manufacturing were basic ingredients of polyurethane foam, falling within the Eleventh Schedule. However, the ITAT allowed the appeal, emphasizing that the final product was automobile seats, not polyurethane foam, and thus, the deduction was permissible. The High Court overturned the ITAT's decision, ruling that the assessee's product was indeed polyurethane foam falling under the specified entry, hence denying the deduction.

The assessee argued that the final product sold was automobile seats, distinct from polyurethane foam, making them eligible for the deduction. They highlighted that orders were received and sales tax paid for automobile seats, not foam. Additionally, they referenced a CEGAT order classifying the product differently for excise duty. The ITAT's detailed analysis of the manufacturing process supported the assessee's claim that the final product was car seats, not foam. They contended that once a distinct commercial commodity emerged, it ceased to be classified as the raw material. The assessee also pointed out the specific entry in the Eleventh Schedule, which did not cover the final product of automobile seats.

On the other hand, the revenue argued that the assessee primarily manufactured and sold polyurethane foam, which was used as an ingredient by assembly operators to create car seats. They emphasized that the assessee did not undertake further processes to manufacture car seats directly. The High Court's observation that the assessee's product was polyurethane foam used in making car seats supported the revenue's stance that the deduction was not applicable.

Ultimately, the Supreme Court upheld the High Court's decision, agreeing that the assessee's product, polyurethane foam falling under the Eleventh Schedule, made them ineligible for the Section 80-IB deduction. The Court concurred that the assessee did not undertake the necessary processes to manufacture car seats directly, thereby dismissing the appeal.