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TMI Blog2013 (11) TMI 69X X X X Extracts X X X X X X X X Extracts X X X X ..... acy 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. - ITA No. 24/1999 - - - Dated:- 4-2-2011 - MR SANJAY KISHAN KAUL AND MR RAJIV SHAKDHER, JJ. For the Appellant : Mr.C.S. Jain and Mr. G. Tushar Rao, Advocates For the Respondent : Ms. Prem Lata Bansal, Advocate ORDER Rajiv Shakdher J.- 1. This is an appeal preferred under section 260A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dertaken an obligation to supply coated titanium substrates to IPCL for the use in their chlorine-caustic soda plant. By virtue of this agreement, IPCL was to supply the titanium substrates through UHDE to the assessee free of cost, to enable the assessee to execute the job work, which entailed coating of, the titanium substrates, in terms of the specifications provided for in the aforementioned agreement. 2.3 Under the said agreement, the assessee was required to coat the titanium substrates numbering 1212 at a total cost of Rs. 6,42,84,480. The per square metre cost of coating titanium substrates was pegged at Rs. 19,500. Importantly, the cost agreed to did not include excise duty which was required to be reimbursed by UHDE. Furthermore, the assessee was also obliged to dispatch the coated titanium substrates to another company, i.e., one Alpha Label India Ltd. (hereinafter referred to as "Alpha") along with necessary documentation, which included, the excise gate pass ; so as to enable the said entity from claiming modvat credit in respect of the excise duty. Evidently, Alpha was required to undertake further fabrication work to manufacture "membrane cell elements". It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... processing of goods. 5. The Assessing Officer, however, rejected the contention of the assessee and proceeded to hold that the processing of goods could not be equated with manufacture and production of articles. In his view, chemical coating of titanium substrates did not result in it being transformed into an entirely new commercial commodity. Thus, the Assessing Officer concluded that processing in the instant case, did not partake of the attributes of manufacture or production of an article or thing as envisaged in section 80-IA of the Income-tax Act. 6. Aggrieved by the order the assessee preferred an appeal to the Commissioner of Income-tax (Appeals) (hereinafter referred to as "the CIT(A)"). The Commissioner of Income-tax (Appeals) sustained the order of the Assessing Officer. In arriving at his conclusion, the Commissioner of Income-tax (Appeals) placed reliance on the judgment of the Bombay High Court in the case of CIT v. Sterling Foods (Goa) [1995] 213 ITR 851 (Bom), even though the said decision pertained to the provisions of section 80HH of the Income-tax Act since it used the same expression "manufacture" or "production" of articles. 6.1 On facts, the Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sclosed that the coated titanium metal anodes had to be dispatched by it, for further fabrication, to one Alpha for the purposes of manufacturing membrane cell element. In the Tribunal's wisdom, this demonstrated that in order to convert a coated titanium metal anode into a "useful commercial commodity" it would require further processing. Consequently, the Tribunal repelled the contention of the assessee in regard to its claim for deduction under section 80-IA of the Income-tax Act. 8. The instant appeal impugns this very reasoning of the Tribunal. 8.1 In support of the appeal, arguments on behalf of the assessee were addressed by Mr. Jain, while in opposition Ms. Bansal appeared on behalf of the Department. 8.2 Mr Jain briefly reiterated the grounds taken before the authorities below and, in particular, stressed on the opinions rendered by the two experts, i.e., Dr. Mrs. K. Gadgil and Mr. M. K. Sarkar, professors with the Indian Institute of Technology, Delhi (in short, I. I. T. Delhi) to demonstrate that the process undertaken by the assessee actually resulted in production of an anode and, hence, a new article emerged contrary to what had been held by th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... try to manufacture coated titanium metal anodes. This licence was issued to the assessee on October 16, 1990 ; (ii) On February 26, 1993, the assessee had entered into an agreement with UHDE for coating titanium substrates. It is pertinent to note at this stage (as noticed above) that while the Department all along has contended that the titanium substrates are nothing but uncoated titanium metal anodes, the assessee, on the other hand, has taken the stand that titanium substrates are nothing but supports, which after coating are transformed into anodes ; (iii) the assessee was issued a registration certificate by the Excise Department on June 26, 1993, in respect of the process of coating it undertook qua the article it received from UHDE. We are consciously not using, at this juncture, either the expression "titanium substrate" or "titanium metal anode" as there is contest between the parties on this very aspect ; (iv) the assessee has in its invoices issued to UHDE sought recovery of both the charges towards coating of the article received as well as in respect of excise duty leviable on it. Towards excise duty the assessee has paid a sum of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I. T., Delhi, who, in their opinion had placed reliance on the relevant contents of the aforementioned Encyclopedia of Chemical Technology ; and, lastly, on invoices and excise gate passes ; to which reference is already made hereinabove by us. 11. With the aforesaid material on record let us examine what it briefly reveals : 11.1 A reading of the extracts from the Encyclopedia of Chemical Technology seems to suggest that in a chlor-alkali industry electrolytic process is inevitably used. An electrolytic process broadly involves de-composition of a liquid, which contains ions, by electrolysis. Electrolysis is nothing but de-composition of the substance by application of electric current. Therefore, what was crucial for IPCL, who happens to be manufacturer of chlorine-caustic soda that they had, for their purposes in place anodes, which allowed passage of electricity without building up non-corrodible oxide coating on the surface. 11.2 As is, therefore, evident that an anode is really one of the terminals through which electrons pass in an electrolytic process ; the other terminal is commonly referred to as a cathode. 11.3 The Tribunal upon reading ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... different product produced is borne out from the following extracts under the heading "ruthenium titanium oxides". "Scanning electron micrographs of ruthenium titanium oxide coatings show a characteristic microcracked surface (23). This cracking occurs early in the coating preparation, as solvent evaporates from the surface to form a gel of unreacted ruthenium and titanium compounds. As the coating is baked at higher temperatures, the cracks increase in size because of volume contraction of the gel. A fully baked anode coating has the appearance shown in figure I and a surface area factor of 180-230 times the geometrical area, as measured by BET (Brunauer-Emmett-Teller) nitrogen adsorption. This large surface area contributes to the low chlorine discharge potential of these types of coatings, providing a large number of catalytic sites for gas evolution while minimizing concentration polarization . . . Chlorine-Caustic. The widest application and most rapid acceptance of metal anodes has been in the chlorine-caustic industry, where ruthenium-titanium oxide DSA coatings are used. In the mid 1960s, chlorine producers were shifting worldwide to mercury cells to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or supporting the real anode which is noble, metal oxides. In summary, it can be stated that bare titanium metal is not an anode and, therefore, cannot be used as a metal anode for caustic soda-chlorine manufacture by electrolytic process. Whereas, mixed metal oxide coated titanium metal anode provides excellent conductivity, resistance to corrosion and dimential stability necessary for manufacture of caustic soda and chlorine by electrolytic process all over the world. Technology of coating composition and methods of manufacture of anodes, however, tend to get upgraded continuously through R D efforts of technology suppliers." (emphasis is ours) 11.7. A reading of the aforesaid opinion along with the extracts from the Encyclopedia quite clearly indicates that, according to the experts, titanium substrates is only used for the purpose of supporting production of a real anode, that is, a noble metal oxide. A bare titanium is not an anode. 11.8. It is important to bear in mind that the Department did not produce any material by way of affidavit of any chemical analyst or an expert in chemical technology to counter the view of professor, Mr. Sarkar and Dr. (Mrs.) K. Ga ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rinciple we intend to refer to the following two judgments. 12.3 First being : South Bihar Sugar Mills Ltd. v. Union of India [1968] 3 SCR 21. In South Bihar Sugar Mills' case (supra) (in which Delhi Cloth Mills (supra) was cited with approval) the Supreme Court, after analyzing the scientific evidence put forth both by the assessee and the Department came to the conclusion that, in manufacture of sugar, kiln gas was produced by the assessee, which was not carbon die oxide as known to the market and, hence, could not be made amenable to imposition of excise duty. The relevant observations is extracted hereinbelow : "16. The Act charges duty on manufacture of goods. The word 'manufacture' implies a change but every change in the raw material is not manufacture. There must be such a transformation that a new and different article must emerge having a distinctive name, character or use. The duty is levied on goods. As the Act does not define goods, the Legislature must be taken to have used that word in its ordinary dictionary meaning. The dictionary meaning is that to become goods it must be something which can ordinarily come to the market to be bought and sold and is k ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... material before the court was that the articles in question were not marketable and were not known to the market as such. The 'marketability' is thus essentially a question of fact to be decided on the facts of each case. There can be no generalization. The fact that the goods are not in fact marketed is of no relevance. So long as the goods are marketable, they are goods for the purposes of section 3. It is also not necessary that the goods in question should be generally available in the market. Even if the goods are available from only one source or from a specified market, it makes no difference so long as they are available for purchasers. Now, in the appeals before us, the fact that in Kerala these poles are manufactured by independent contractors who sell them to Kerala State Electricity Board itself shows that such poles do have a market. Even if there is only one purchaser of these articles, it must still be said that there is a market for these articles. The marketability of articles does not depend upon the number of purchasers nor is the market confined to the territorial limits of this country. The appellant's own case before the excise authorities and the CEGAT was th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion 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 relevant observations of the court in this regard are given in paragraphs 16 to 18 of the judgment. This judgment of the Supreme Court was followed in CIT v. Emptee Poly-Yarn P. Ltd. [2010] 320 ITR 665 (SC) ; [2010] 2 SCC 720. 14.1 In our view, 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. 14.2 The Tribunal's conclusion ; that the coated titanium substrates did not result in production of a distinct new article, based on the provisions of the agreement arrived at by the assessee with the UHDE which, required it to dispatch the processed titanium substrates to Alpha for further fabrication to manufacture membrane cell element is, in our view, flawed. The reason for this is : the Tribunal had to address the issue as to whether the process employed by the assessee resulted in manufacture of a distinct new ..... X X X X Extracts X X X X X X X X Extracts X X X X
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