Asst. Commissioner of Income Tax, Circle-1, Goa V. M/s Marpol Pvt. Ltd., Goa

ITA 140/PAN/2014

• Counselvise Citation: [2014] 140 COUNSELVISE.COM (IT) 84824 (ITAT-PANAJI)
• Duration Of Justice: 8 month(s) 9 day(s)
• Appeal Type: Income Tax Appeal
• Pronouncement Date: 19-12-2014
• Appeal Filed By: Department
• Order Result: Partly Allowed
• Bench Allotted: DB
• Next Hearing Date: 09-12-2014
• Assessment Year: 2010-2011
• Appeal Filed On: 09-04-2014
• Result in Favour of: Partly Allowed
• Court: TRIBUNAL
• Department Lawyers: MANJUNATH I PUJAR
• Keywords: Business income; Depreciation
• Section: 80IB; 6

Judgement Text

IN THE INCOME TAX APPELLATE TRIBUNAL PANAJI BENCH, PANAJI BEFORE SHRI P.K. BANSAL, HONBLE ACCOUNTANT MEMBER AND SHRI D.T. GARASIA, HONBLE JUDICIAL MEMBER ITA NO. 140/PNJ/2014 : (ASST. YEAR : 2010 - 11) ASST. COMMISSIONER OF INCOME TAX, CIRCLE - 1, MARGAO, GOA (APPELLANT) VS. M/S. MARPOL PVT. LTD., PANANDIKAR CHAMBERS, 2 ND FLOOR, M.L. FURTADO ROAD, P.O NO. 700, MARGAO, GOA. (RESPONDENT) PAN : AACCM2018D ASSESSEE BY : NONE REVENUE BY : MANJUNATH I. PUJAR, DR DATE OF HEARING : 9/12/2014 DATE OF PRONOUNCEMENT : 19 /12/2014 O R D E R PER P.K. BANSAL 1. THIS APPEAL HAS BEEN FILED BY THE REVENUE AGAINST THE ORDER OF CIT(A) DT. 26.12.2013 BY TAKING THE FOLLOWING EFFECTIVE GROUNDS OF APPEAL : 2. WHETHER ON FACTS AND CIRCUMSTANCES OF THE CASE THE ID. CIT(A) - PANAJI, HAS ERRED IN DELETING THE ADDITION AMOUNTING TO RS. 14,53,165/ - , MADE BY THE AO BY DISALLOWING EXCESS 80 I B CLAIMED BY THE ASSESSEE ON UNIT - I I. 3. WHETHER ON FACTS AND CIRCUMSTANCES OF THE CASE THE LD. CIT(A) HAS ERRED IN DELET ING THE ADDITION AMOUNTING TO RS. 8,99,961/ - MADE BY THE AO BY DISALLOWING DEDUCTION U/S 80 I C CLAIMED BY THE ASSESSEE ON UNIT - III . 4. WHETHER ON FACTS AND CIRCUMSTANCES OF THE CASE THE L D. CIT(A) PANAJI HAS ERRED IN ALLOWING DEDUCTION U/S 80 I C CLAIMED BY THE ASSESSEE ON UNIT - I II ON THE GROUND THAT THE ACTIVITY UNDERTAKEN IS MANUFACTURING IN NATURE. 2. GROUND NOS. 1 & 5 SINCE GENERAL IN NATURE ARE NOT REPRODUCED. 2 ITA NO. 140/PNJ/2014 (A.Y : 2010 - 11) 3. GROUND NOS. 2 & 3 RELATE TO RE - COMPUTATION OF THE DEDUCTION CLAIMED BY THE ASSESSEE U/S 8 0IB IN RESPECT OF UNIT - II AND U/S 80IC IN RESPECT OF UNIT - III. SINCE COMMON ISSUE OF CLAIM OF DEDUCTION UNDER BOTH THESE SECTIONS IS INVOLVED, BOTH THESE GROUNDS ARE BEING DISPOSED OFF BY THIS COMMON ORDER. 4. THE BRIEF FACTS OF THE CASE ARE THAT THE A SSESSEE COMPANY HAS UNIT - I IN KAKODA INDUSTRIAL ESTATE, GOA STARTED IN THE YEAR 1985 WHICH PRODUCES POLYSTER RESIN AND POWDER COATING AND HAS A CURING AGENT MANUFACTURING FACILITY. IN THE YEAR 2001 - 02 THE ASSESSEE STARTED UNIT - II LOCATED IN THE SAME INDUS TRIAL ESTATE WHICH PRODUCES POWDER COATING USING THE RESIN PRODUCED FROM UNIT - I WHICH WAS ELIGIBLE FOR DEDUCTION U/S 80IB. SUBSEQUENTLY, THE ASSESSEE ESTABLISHED UNIT - III IN BADDI, HIMACHAL PRADESH WHICH WAS STARTED DURING THE PERIOD RELEVANT TO A.Y 2005 - 06. THE SAID UNIT HAS PULVERISING UNIT (GRINDING) PRODUCING POWDER COATING FROM FL AKES TRANSFERRED FROM UNIT - I & II. UNIT - III PURCHASES FLAKES FROM UNIT - I & II AND GRINDS IT AS POWDER. THE POWDER COATING IS USED TO PAINT AUTOMOBILES, CONSUMER DURABLES, OFFICE EQUIPMENT ETC. THE AO NOTED THAT THE UNIT - I HAS ALL THE FACILITIES FOR MANUFACTURING POWER COATING AND UNIT - II & III ARE DEPENDENT ON UNIT - I IN RESPECT OF RAW MATERIAL AND SEMI - FINISHED PRODUCTS. IT WAS NOTICED THAT FOLLOWING PROFIT HAS BEEN COMPU TED BY THE ASSESSEE IN RESPECT OF UNIT I, II AND III INCLUDING THE INTER SE TRANSFERS. UNIT SALES PROFIT AS PER COMPUTATION SHEET UNIT - I 46,59,57,245 1,18,43,391 (WHICH INCLUDE INTEREST INCOME OF RS. 11,23,062/ - ) UNIT - II 45,26,99,23 1 2,65,42,138 UNIT - III 3,74,98,386 40,59,216 TOTAL SALES 95,61,54,862 4 , 24 , 44 , 74 5 3 ITA NO. 140/PNJ/2014 (A.Y : 2010 - 11) 5. THE AO NOTED THAT UNIT - I HAS AROUND 2% PROFIT IF OTHER INCOME IS EXCLUDED, UNIT - II HAS AROUND 6% PROFIT WHILE UNIT - III HAS 11% PROFIT. T RANSPORTATION OF THE FLAKES IS DONE FROM GOA TO HIMACHAL PRADESH FOR UNIT - III FOR WHICH HUGE TRANSPORTATION COST HAS TO BE INCURRED. WHEN THE ASSESSEE WAS ASKED TO EXPLAIN THE REASON FOR SUCH HIGH PROFIT , IT WAS EXPLAINED THAT INTER - UNIT TRANSFERS ARE DONE AT RAW MATERIAL + MANUFACTURI NG OVERHEADS AND A PROFIT MARGIN OF 10% AS REQUIRED UNDER THE CENTRAL EXCISE ACT, 1944 FOR RAISING INVOICE. THE AO WAS NOT SATISFIED WITH THE EXPLANATION OF THE ASSESSEE AS INTER - UNIT TRANSFERS SHOULD HAVE BEEN DONE AT MARKET PRICE AS PER PROVISIONS OF SE C. 80A (6), 80IA(7) TO 80IA(12). AS PER PROVISIONS OF SEC. 80IA THE AO IS AUTHORISED TO COMPUTE PROFITS AND GAINS ON SUCH REASONABLE BASIS AS HE DEEMS IT. IN THE ABSENCE OF ANY SPECIFIC REASON, THE AO WORKED OUT THE AVERAGE PROFIT PERCENTAGE ON THE BASIS OF THE PROFIT AND T OTAL TURNOVER OF ALL THE THREE UNITS WHICH CAME TO 4.43%. ACCORDINGLY, HE RE - COMPUTED THE DEDUCTION BY WORKING OUT THE PROFIT OF UNIT - II & III BY APPLYING THE P ROFIT RATIO OF 4.43. THUS, THE EXCESS BENEFIT CLAIMED WAS DISALLOWED IN RESPECT OF UNIT - II & I II. 6. THE ASSESSEE WENT IN APPEAL BEFORE CIT(A). BEFORE CIT(A) THE ASSESSEE SUBMITTED THAT ONE OF THE BASIC REASONS FOR HIGHER GROSS PROFIT IN UNIT - II IS THAT THE REALI Z ABLE VALUE OF THE POWDER COATING IS MORE THAN THE REALIZABLE VALUE OF THE RESIN WH ICH IS MANUFACTURED IN UNIT - I AND TRANSFERRED TO UNIT - II & III FOR FURTHER PROCESSING. THE SECOND REASON WAS THAT THE PLANT AND MACHINERY OF UNIT - I WAS SET UP ABOUT 20 YEARS BACK CONSEQUENTLY THE MANUFACTURING COST OF UNIT - I IS ON HIGHER SCALE AND HENCE T HE PROFITABILITY OF UNIT - I IS LOWER AS COMPARED TO THE PROFITABILITY OF UNIT - II & III. THE ASSESSEE ALSO SUBMITTED COPY OF THE ASSESSMENT ORDER FOR A.Y 2008 - 09 WHEREIN THE AO HAS ACCEPTED THE PROFITABILITY DISCLOSED BY THE ASSESSEE IN RESPECT OF 80IB ELIG IBLE UNITS. CIT(A) ULTIMATELY HAS AGREED WITH THE COUNSEL OF THE ASSESSEE 4 ITA NO. 140/PNJ/2014 (A.Y : 2010 - 11) AND DIRECTED THE AO TO RE - COMPUTE THE PROFIT IN RESPECT OF UNIT - II BY APPLYING PROFIT RATE OF 5.5% AND IN RESPECT OF UNIT - III BY APPLYING PROFIT RATE OF 8%. THUS, DISALLOWANCE TO T HE EXTENT OF RS.4,82,004/ - AND RS.3,09,125/ - RESPECTIVELY WAS SUSTAINED. 7 . NONE APPEARED ON BEHALF OF THE ASSESSEE EVEN THOUGH THE CASE WAS ADJOURNED FROM TIME TO TIME. WE, THEREFORE, DECIDED TO DISPOSE OFF THE APPEAL AFTER HEARING THE LD. DR. WE NOT ED THAT THE ASSESSEE BEFORE THE CIT(A) HAS NOT DISPUTED THE POWER OF AO FOR RE - COMPUTATION OF PROFIT AND ALSO THE FACT THAT IN RESPECT OF INTER - UNIT TRANSFER, MARKET VALUE HAS TO BE TAKEN INTO ACCOUNT WHILE COMPUTING THE PROFIT OF ELIGIBLE UNIT AS HAS BEEN LAID DOWN U/S 80IA(7) TO (12). WE NOTED THAT THE ASSESSEE HAS TAKEN THE CONTENTION BEFORE CIT(A) THAT THE REALIZABLE VALUE OF THE POWDER COATING IS MORE THAN THE REALIZABLE VALUE OF THE RESIN BUT WE NOTED THAT IN RESPECT OF THIS CONTENTION, NO EVIDENCE O R MATERIAL HAS BEEN BROUGHT ON RECORD OR REFERRED TO B EFORE THE CIT(A). THE OTHER CONTENTION TAKEN BY THE ASSESSEE THAT THE PLANT AND MACHINERY OF UNIT - I WAS SET UP ABOUT 20 YEARS BACK AND IN RESPECT OF UNIT - I THE ASSESSEE HAD TO INCUR HIGH MAINTENANCE CO ST. CIT(A) SIMPLY RELIED ON THE SUBMISSION OF THE ASSESSEE. NO DATA IN RESPECT OF INCURRING OF THE HIGH MAINTENANCE COST HAS BEEN PROVIDED BY THE ASSESSEE. WE MAY ALSO MENTION THAT THE COST OF THE MACHINERY HAVE INCREASED AND THEREFORE IF THE MACHINERY IS ESTABLISHED AFTER MANY YEARS IN UNIT - II AND III, THE DEPRECIATION WILL BE MUCH HIGHER WHILE IN RESPECT OF UNIT - I THE DEPRECIATION WILL BE LOWER. CIT(A) HAS NOT APPRECIATED ALL THESE FACTS AND HAS SIMPLY ALLOWED THE RELIEF TO THE ASSESSEE ON THE BASIS O F THE SUBMISSION AND RATE OF PROFIT AS AGREED BY THE COUNSEL OF THE ASSESSEE. IN OUR OPINION, THE BASIS ADOPTED BY CIT(A) IS NOT CORRECT AND IN ACCORDANCE WITH LAW. WE, THEREFORE, SET ASIDE GROUND NOS. 2 & 3 AND RESTORE BOTH THESE ISSUES TO THE FILE OF C IT(A) AS, IN OUR OPINION, THE PROFIT SHOWN IN RESPECT OF UNIT - II & III ARE ABNORMALLY HIGH AS COMPARED TO THE PROFIT SHOWN BY THE 5 ITA NO. 140/PNJ/2014 (A.Y : 2010 - 11) ASSESSEE IN RESPECT OF UNIT - I. THIS IS A FACT THAT THE RAW MATERIAL IS BEING TRANSPORTED FROM GOA TO BADDI. THEREFORE, IN RE SPECT OF UNIT - III THE ASSESSEE IS BOUND TO INCUR HIGH FREIGHT CHARGES. WE, THEREFORE, SET ASIDE THE ORDER OF CIT(A) AND RESTORE THIS ISSUE TO THE FILE OF CIT(A) TO DECIDE THESE GROUNDS AFTER CONSIDERING ALL THE FACTS AND GETTING RELEVANT DATE AND ANALYSIN G THE SAME. 8. THE FOURTH GROUND RELATES TO THE ISSUE WHETHER UNIT - III ESTABLISHED BY THE ASSESSEE HAS UNDERTAKEN MANUFACTURING ACTIVITY OR NOT. THE AO WAS OF THE OPINION THAT THE ACTIVITY OF UNIT - III DOES NOT COME WITHIN THE PURVIEW OF MANUFACTURE. ACC ORDING TO HIM, THIS UNIT HAS SMALL GRINDING UNIT AND IS FULLY DEPENDENT ON UNIT - I & II FOR MANUFACTURE OF COATING POWDER. THE FINISHED PRODUCT OF FLAKES ARE TRANSFERRED TO UNIT - III WHICH ONLY GRINDS THEM INTO POWDER AND IT DOES NOT INVOLVE ANY MANUFACTURING ACTIVITY. THE ASSESSEE SUBMITTED THAT THE FLAKES ARE RAW MATERIAL AND NOT MARKETABLE IN THE PRESENT FORM. FUMED SILICA IS ADDED TO THE FLAKES TO ENSURE THAT THE MIXTURE REPELS MOISTURE. THE AO WAS NOT SATISFIED AND RELYING ON THE DECISION OF THE HON'BLE SUPREME COURT IN THE CASE OF SACS EAGLES CHICORI VS. CIT, 255 ITR 178 TOOK THE VIEW THAT THERE IS NO CHANGE EITHER IN THE FORM OR IN THE COMPOSITION OF THE COATING POWDER BEFORE AND AFTER GRINDING. HE TOOK THE VIEW THAT UNIT - III IS NOT ENGA GED IN MANUFACTURING ACTIVITY AND THEREFORE NOT ELIGIBLE FOR DEDUCTION U/S 80IC. 9. THE ASSESSEE WENT IN APPEAL BEFORE CIT(A). CIT(A) TOOK THE VIEW THAT THE UNIT IS ENGAGED IN MANUFACTURING ACTIVITY AND IS THEREFORE ELIGIBLE FOR DEDUCTION U/S 80IC BY HOLDING AS UNDER : I HAVE GONE THROUGH THE ASSESSMENT ORDER AND CONTENTION OF THE APPELLANT. THE A.O. HAS CONCLUDED THAT THE ACTIVITY OF THE APPELLANT CARRIED OUT AT ITS UNIT - I II LOCATED AT BADDI, HIMACHAL PRADESH, CAN NOT BE TREATED AS MANUFACTURING A CTIVITY IN TERMS OF DEFINITION OF THE WORD MANUFACTURE AS DEFINED UNDER SECTION 6 ITA NO. 140/PNJ/2014 (A.Y : 2010 - 11) 2(29)(BA) OF THE ACT. THIS IS BECAUSE IN AOS OPINION, THE RAW MATERIAL USED AND THE FINISHED PRODUCT ARE ONE AND THE SAME AND THEY ARE NEITHER DIFFERENT IN PHYSICAL APPEARAN CE OR CHEMICAL COMPOSITION. ON THE OTHER HAND THE APPELLANT HAS TRIED TO EXPLAIN THE MANUFACTURING PROCESS AND CONTE NDS THAT RAW MATERIAL AND FINISHED PRODUCT ARE TWO DIFFERENT THINGS THE RAW MATERIAL, WHICH ARE FLAKES CAN NOT BE MARKETED AS SUCH AND IN ORDER TO BECOME MARKETABLE IT HAS TO BE CONVERTED INTO COATING POWDER THROUGH A MANUFACTURING PROCESS WITH THE HELP OF MACHINE AND MAN POWER. BOTH, THE A.O. AND THE APPELLANT HAVE PLACED RELIANCE ON JUDICIAL PRONOUNCEMENTS, BUT, IN MY OPINION, IT IS A QUES TION OF FACTS, WHETHER CONVERSION OF FLAKES TO COATING POWDER SHALL AMOUNT TO MANUFACTURING OR NOT. IN THIS REGARD THE APPELLANT PRESENTED A FLOW - CHART DISPLAYING THE MANUFACTURING PROCESS. FLAKES ARE ADDED WITH FUMED SILICA TO REPEL MOISTURE. THEN THE PAR TICLE SIZE IS MAINTAINED AS PER REQUIREMENT. THE SEMI - FINISHED PRODUCT HAS TO PASS THROUGH POWDER SPRAY EQUIPMENT AND HOT AIR OVEN AND AT THE END, DEPENDING ON THE REQUIREMENT OF THE CUSTOMER FOR METALLIC OR MAT FINISH, ADEQUATE PIGMENTS ARE ADDED USING BLENDER. AND MOST IMPORTANTLY, THE A.O. HAS ALSO NOT DENIED THE FACT THAT THE RAW MATERIAL CAN NOT BE MARKETED INDEPENDENTLY AND THE FINISHED PRODUCT ONLY IS MARKETABLE AND THEREFORE IT CAN NOT BE SAID THAT THE RAW MATERIAL AND FINISHED PRODUCT ARE ONE AND THE SAME AND NO NEW ARTICLE OR THING HAS COME INTO EXISTENCE BECAUSE OF THE MANUFACTURING PROCESS. IN VIEW OF THE ABOVE DISCUSSION, IN MY OPINION, UNIT - I II OF THE APPELLANT, LOCATED AT BADDI IN HIMACHAL PRADESH, DOES UNDERTAKE MANUFACTURING ACTIVITY AND IS ELIGIBLE FOR DEDUCTION U/S 8 0 IC OF THE ACT . 10. NONE APPEARED ON BEHALF OF THE ASSESSEE. THE LD. DR EVEN THOUGH VEHEMENTLY RELIED ON THE ORDER OF THE AO BUT HE COULD NOT PLACE ANY EVIDENCE BEFORE US THAT THE RAW MATERIAL USED FOR UNIT - III AND FINISHE D PRODUCTS ARE NOT TWO DIFFERENT THINGS. THE RAW MATERIALS USED ARE FLAKES AND CANNOT BE MARKETED AS SUCH. FOR MAKING IT MARKETABLE IT HAS TO BE CONVERTED INTO COATING POWDER THROUGH MANUFACTURING PROCESS WITH THE HELP OF MACHINES AND MANPOWER. CIT(A) H AS EXHAUSTIVELY DEALT WITH THE MANUFACTURING PROCESS ADOPTED BY THE ASSESSEE ALONGWITH THE DEFINITION OF THE WORD MANUFACTURE AS GIVEN U/S 2(29)( BA ) OF THE INCOME TAX ACT. IN OUR OPINION, NO INTERFERENCE IS CALLED FOR IN THE ORDER OF CIT(A) IN THIS REGA RD AND WE, THEREFORE, CONFIRM THE ORDER OF CIT(A) BY HOLDING THAT UNIT - III OF THE ASSESSEE IS ENGAGED IN MANUFACTURING ACTIVITY. EVEN OTHERWISE ALSO, WE 7 ITA NO. 140/PNJ/2014 (A.Y : 2010 - 11) NOTED THAT THIS IS NOT THE FIRST YEAR FOR ELIGIBILITY OF THE CLAIM OF DEDUCTION BY THE ASSESSEE U/S 80 IC. THE CONDITION WHETHER THE ASSESSEE IS ENGAGED IN MANUFACTURING ACTIVITY OR NOT HAS TO BE DECIDED ONLY IN THE VERY FIRST YEAR WHEN THE ASSESSEE IS ELIGIBLE FOR THE CLAIM OF DEDUCTION U/S 80IC. IN VIEW OF THIS FACT, WE CONFIRM THE ORDER OF CIT(A) ON TH IS ISSUE. 11. IN THE RESULT, THE APPEAL FILED BY THE REVENUE IS PARTLY ALLOWED FOR STATISTICAL PURPOSE. 12. ORDER PRONOUNCED IN THE OPEN COURT ON 1 9 /12/2014. S D / - (D.T.GARASIA) JUDICIAL MEMBER S D / - (P.K. BANSAL) ACCOUNTANT MEMBER PLACE : PANAJI DATED : 1 9 /12/2014 *SSL* COPY TO : (1) APPELLANT (2) RESPONDENT (3) CIT CONCERNED (4) CIT(A) CONCERNED (5) D.R (6) GUARD FILE TRUE COPY, BY ORDER