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TMI Blog2016 (4) TMI 379X X X X Extracts X X X X X X X X Extracts X X X X ..... f natural gas - Held that:- We find that ld. CIT(A) while deleting the addition has given a finding that assessee purchased gas from GSPC which is transmitted through pipelines and that gas is purchased by it at the “delivery point” or “tap off” point and it is same as the point at which it is sold to the customers and it is a back to back arrangement for purchase by the assessee and sale to its customers and the quantity purchased by assessee is same that is sold by assessee. Before us, Revenue has not placed any material on record to controvert the above findings of ld. CIT(A)- Decided against revenue Addition on account of depreciation on meters and instruments - Held that:- CIT(A) while deleting the addition has given a finding that assessee is the owner of meters and instruments that has been shown as plant and machinery in the book of accounts and that assessee has claimed depreciation after reducing the amount of initial connection charges which has been collected from customers. He, therefore, held that assessee was eligible for depreciation. Before us, Revenue has not placed any material on record to controvert the above findings of ld. CIT(A). In view of the aforesaid ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng total income of ₹ 83,81,133/-. The case was selected for scrutiny and thereafter assessment was framed u/s.143(3) of the Act vide order dated 30.11.2009 and the total income was determined at ₹ 6,73,46,290/-. Aggrieved by the order of A.O., assessee preferred appeal before the ld. CIT(A) who vide order dated 30.08.2010 (in Appeal No. CIT(A)/GNR/133/2009-10) granted partial relief to the assessee. Aggrieved by the order of ld. CIT(A), Revenue is now in appeal before us. The grounds raised by Revenue in ITA No.2956/Ahd/2010 reads as under: (1) The learned CIT(Appeals) has erred in law and on facts in deleting the addition made on account of initial connection charges of ₹ 5,28,72,901/-. (2) The learned CIT(Appeals) has erred in law and on facts in deleting the addition of ₹ 15,97,186/-, made on account of estimating the value of Closing Stock of natural gas.. (3) The learned CIT(Appeals) has erred in law and on facts in deleting the addition of ₹ 44,95,071/-, made on account of disallowance of depreciation on meters, instruments etc. 4. First ground is with respect to deleting the addition made on account of initial connection c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ected on behalf of BPCL for the meters and instruments to be supplied by them and shown as current liabilities by the appellant. Balance amount of ₹ 52,50,830/- has been netted out of off from the value of cost of plant and machineries. A.O. has held this amount of ₹ 5,28,72,901/- as the taxable income holding that these are non-refundable initial connection charges for meters and equipments installed which remains property of the seller. The above conclusion of A.O. is not based on facts of the case because out of ₹ 5,28,72,901/-, ₹ 4,76,22,071/- are initial connection charges collected on behalf of BPCL for the equipments to be installed and they have been rightly shown as the current liability in the assessee's case. This cannot be treated as income of the assessee in any case. As regarding the amount of ₹ 52,50,830/- assessee has treated it as the capital receipt and has reduced the value of Plant Machinery by this amount. This is appropriate as the said amount has been received towards the installation of pipeline, meters and equipments i.e. capital assets for supplying gas to the clients. This amount is on account of bringing into place the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that since the amount was received towards the installation of pipelines, meters and equipments which are assets of the assessee, the said amount was a capital receipt as it was for bringing in plant and machinery and assessee has claimed depreciation after reducing the aforesaid amount from the aggregate cost of assets. Before us, Revenue has not placed any material on record to controvert the finding of ld. CIT(A), nor has pointed out as to how the decisions relied upon by assessee would not be applicable to the present facts. In view of the aforesaid facts, we find no infirmity with the order of ld. CIT(A). Thus, this ground of Revenue is dismissed. 8. Second ground is with respect to estimating the value of closing stock of natural gas. 8.1 The A.O., on perusing the financial accounts, noticed that assessee has shown the closing stock of natural gas at Rs.Nil. The assessee was asked to explain as to why the quantity of gas in the pipelines be not considered as closing stock and added to the income of assessee, to which, assessee inter alia submitted that the quantity of sale of gas is more than the quantity of purchase of gas on account of measurement tolerances and hence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd the result of the income cannot be found out. Further, what comes out clearly is that the gas in the pipelines does not belong to the assessee and the title of the gas passes from the seller to the appellant only at the delivery point . In fact, at the same delivery point the assessee further transfers the title of the gas to the ultimate buyers. The billing both ways seems to be on the basis of measurement done at the delivery point . Therefore, in the techno-commercial aspect of these transactions, the possibility of there being some gas belonging to the appellant in the pipelines, either of the supplier or the ultimate buyer, appears to be very low. In the face of this situation, the onus was on the Assessing Officer to disprove the stand taken by the assessee, both with respect to the method followed as also the quantum of the closing stock, which has not been done by him. The estimate made, I am afraid, is purely hypothetical and is not related either to technical or historical facts of the assessee. From the facts of the case and decision on similar issue mentioned above, addition of ₹ 15,98,186/- is deleted and this ground of appeal is allowed. 10. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ₹ 44,95,071/-. 13. Aggrieved by the order of A.O., assessee carried the matter before the ld. CIT(A) who deleted the addition by holding as under: 6.3 I have considered the assessment order as well as assessee's contentions. The AO has disallowed depreciation of Rs,44,95,071/- holding that assessee is not the owner of the meters and instruments etc representing the Plant Machinery. It is seen from records that appellant is the owner of the meters, instruments, Plant and Machinery and has shown the same in the books of accounts in Sch. 3 of the fixed assets to the Annual Reports, depreciation chart was duly filed with the return showing the value of Plant and Machinery of ₹ 5,99,34,281/- on which depreciation of ₹ 44,,95,071/- has been claimed after reducing the amount of initial connection charges of ₹ 52,50,830/- recouped from the customers. The detailed chart of Plant and Machinery showing various items, sellers, purchase value was submitted to the AO vide assessee's letter dated 14/10/2009 which has not been disputed by A,O. In view of such detailed explanation and evidences submitted, there is no reason to disallow depreciation. Accord ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... te Tribunal), Rules, 1963, ld. A.R. submitted that the prayer raised in the grounds be considered to be the grounds of appeal. The effective prayers raised by the assessee in the grounds read as under: (i) The process of compression of natural gas for the use as a fuel be considered as Manufacture (ii) The decision of the learned CIT(A) to uphold the decision of the learned A.O regarding disallowance of the additional depreciation ₹ 80,87,323/- may kindly be deleted. (iii) The decision of the learned CIT(A) to uphold the decision of the learned A.O regarding addition of the liquidated damages ₹ 48,689/- may kindly be deleted. We first proceed with Revenue s appeal in ITA No.1301/Ahd/2012 18. Before us, at the outset, both the parties submitted that grounds raised in the present appeal of Revenue are identical to that of ground no.1 2 raised in Revenue s appeal in A.Y. 2007-08 and the submission made by them while arguing the appeal of Revenue for A.Y. 2007-08 are also applicable to the grounds raised in A.Y. 2008-09. In view of the aforesaid submissions made before us by both the parties, we for reasons as stated hereinabove while deci ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d ordinarily involves application of some labour, resulting in a final product, which is commercially different from the article to which the labour was applied. An article is said to be commercially different if it has 'distinct character, name and use after the process to which it is subjected'. This is not the case here. There is no commercially different use. Use is the same. Only density has changed for easy transportation and storage. All the process does not amount to manufacture/production. The Hon'ble Supreme Court in the case of Idandas v. Anant Ramchandra Phadke AIR 1982 SC 127, has laid down three tests as to what constitutes manufacture, they are - (i) a certain commodity should have been produced; (ii) the process of production must involve either labour or machinery; and (iii) the end product should have a distinct character, name and use. As per Black's Law Dictionary manufacture' is as follows:- The process of operation of making goods or any material produced by hand by machinery or by other agency. The production of articles for use from raw or prepared materials by giving such materials new forms, qualities, properties or combinations ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . It is heated to 45 C and then goes to filtration stage. Then the milk enters hermetic cream separator, at' which stage the standardization of the fat content is done, i.e., a process of adjustment of fat content of milk by adding cream or skimmed milk so as to obtain appropriate specified constant fat content. The milk is again heated to 70.5 C and then it is cooled using glycol chiller to 1 degree C/2 degree C. In spite of all the process, the name 'milk' continues and it is treated as such in the market, though the natural ratio of components changes; it is used for the same purpose as it would have been used in its original stage itself. Mere value addition is not sufficient to treat it as a separate commodity. Such process has to be treated as an independent process eligible for the claim the assessee had made. [Para 17]. The ratio of the decision of this case of the Special Bench is squarely applicable as the use of the compressed gas (which again is decompressed) is essentially the same as before the so called process of compression. The Hon'ble Special Bench of Calcutta ITAT in the case of Shaw Scott Distilleries 70TTJ (SB) 321 has decided that when A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s rendered free of impurities, minerals (present either free or in the form of their salts), and micro organisms and, thus, made more hygienic and suitable for human consumption yet despite this transformation, it remains only drinking water, i.e., what it was at the raw material stage. There can be no doubt that its name, character and use is only of drinking water and no more and the buying public, as well as those who deal in it, regard it as such. In fact, that is its USP, i.e., on the basis of which its sold and marketed - as a pure and, thus, safe, water for human consumption. The water 'consumed' in the process i.e., tap water, is also drinking water which satisfies the drinking needs of a large majority of our people, as indeed it has for the past many decades. As such, it is difficult to see low a new product has come into existence. It may be that the treated water as produced is a better or superior form of drinking water. But that would not alter the ratio afore stated, for that matter, a range of qualities for each product being sold in the market. But this would not make them, for that reason, to be recognized as separate (generic) products so that the market ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he relevant paras of the Tribunals orders. He thus submitted that in view of aforesaid decisions, assessee had rightly claimed additional depreciation and therefore same should be allowed to it. Ld. D.R. on the other hand supported the order of A.O. and ld. CIT(A). 23. We have heard the rival submissions and perused the material on record. The issue in the present case is as to whether the activity of compression of Gas to CNG amounts to manufacture for claiming additional depreciation u/s.32(iia) of the Act. We find that Co-ordinate Bench of Tribunal in case of GSPC Gas Company Ltd.(supra) on identical facts has decided the issue in favour of assessee by holding as under: 16. We have heard the rival submissions, perused the material available on record and gone through the orders of the authorities below. We find that this issue is to be examined whether the assessee is entitled for additional depreciation claimed @ 20% on plant machinery. Both the AO and ld.CIT(A) have rejected the claim on the basis that compression of conversion of PNG to CNG does not tantamount to manufacture, therefore, the assessee is not entitled for the additional depreciation claimed as there i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... der normal conditions. This is a highly technical and complex activity which requires precise functions of technically expert persons or machines. [Para 6] Even prior to the process of filling the gas into cylinder, there are certain measures to ensure that the cylinder is entirely empty; without any air or other particles, dirt and grease or any other substance. In order to prepare the cylinder ready to fill up with the gas, the air inside the cylinder is removed by using vacuum pumps and then filled with a few grams of LPG. The cylinders will then be washed by medium pressure water jets to remove all the dirt and grease from the cylinder surface. The cylinders are then filled with LPG by automatic filling carousel. After filling the gas, the cylinder is checked for the correctness and to ensure that no cylinder is remained under filled or over filled. The cylinders are then sent for in-line test both for checking the valve bung leak and the body leaks. The defective cylinders are separated and sent for the valuation. All the good cylinders are then sent to hot air sealing unit where the cylinders are sealed with the PVC seal by hot crimpling. [Para 6.1] Further, as per noti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lowed. 24. Ground no.3 is with respect to the addition of liquidated damages. 24.1 The A.O., on perusing the computation of income, noticed that amount of ₹ 48,689/- which was received as liquidated damages from suppliers and vendors of machinery, as compensation for delay in delivering machinery, was considered as capital receipt by the assessee. A.O. was of the view that the receipts were of revenue in nature. He accordingly added the same to the income of assessee. Aggrieved by the order of A.O., assessee carried the matter before the ld. CIT(A) who upheld the order of A.O. and directed the A.O. to grant depreciation on the same by holding as under: 9.3 I have gone through the facts of the case and the decisions cited by the AO and the appellant. I am inclined to agree with the AO that the liquidated damages in this case are related to loss of profit. As in the case of Shri Digvijay Cement Co. Ltd as decided by the Hon'ble jurisdictional High Court, the loss compensated in this case apparently is related to loss of profit particularly because the delay in supplying accessories of machines already installed and running is also included. It is to be seen that ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ncome, these are receipts on various dates by the suppliers or vendors for delay in delivery of various types of machineries and accessories to the assessee. The Hon'ble High Court in the case of Shree Digvijay Cement Co.Ltd. vs. CIT (1982) 138 ITR 45 (Guj.) has held as under:- Held, that the actual cost or price of the machinery and compensation payable to the assessee-company were two different and distinct things. Compensation was paid to set off or reduce the loss which the assessee suffered as a result of delay in supply of machinery. It has nothing to do with the cost of machinery. Though adjusted against the cost of machinery, it was none the less compensation. The actual cost of machinery could not be reduced by ₹ 5,72,216 and depreciation and development rebate had to be allowed on the entire cost of machinery as per the agreement. 23.1. The Hon'ble High Court of Calcutta in the case of CIT vs. Rohtas Industries Ltd. (1981) 130 ITR 292 (Cal.) has held as under:- Held, that no part of the actual cost of the machinery had been met by the German firm. The payment was compensation for low output because the machinery was defective. Furthermor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etc. entered into an agreement with M/s.Walchandnagar Industries Limited, Bombay for purchase of additional cement plant from them for a total consideration of ₹ 1,70,00,000/-. As per the terms of contract, the amount of consideration was to be paid by the assessee in four installments. As per the clause in the agreement, in the event of delay caused in delivery of the machinery, the assessee was to be compensated at the rate of 0.5 per cent of the price of the respective portion of the machinery for delay of each month by way of liquidated damages by the supplier, without proof of actual loss. However, the total amount of damages was not to exceed 5 percent of the total price of the plant and machinery. The supplier defaulted and failed to supply the plant and machinery on the scheduled time and, therefore, as per the terms of contract, the assessee received an amount of ₹ 8,50,000/- from the supplier by way of liquidated damages. During the course of assessment proceedings for the relevant assessment year, a question arose whether the said amount received by the assessee as damages was a capital or a revenue receipt. The AO negatived the claim of the assessee that the ..... X X X X Extracts X X X X X X X X Extracts X X X X
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