Koolnest Pvt. Ltd. V. The Dy.Commissioner of Income-tax, Central Circle \\u2013 2(2)

ITA/733/2007

AI Insights

M/s. Koolnest Pvt. Ltd. appealed against the orders of the Income Tax authorities, which denied them the benefits under Section 80IA of the Income Tax Act, 1961. The Tribunal and the lower authorities concluded that the assessee was involved only in assembling and installing air-conditioning systems rather than manufacturing them. The High Court examined whether the activities of the assessee constituted 'manufacture' or 'production' under the Act. After reviewing various judicial precedents and definitions of 'manufacture' and 'production', the court agreed with the Tribunal's decision, stating that the assessee did not create a new and distinct product but merely assembled existing products.

• Counselvise Citation: [2013] 140 COUNSELVISE.COM (IT) 794232 (HC-KARNATAKA)
• Appeal Type: Others
• Pronouncement Date: 17-12-2013
• Assessment Year: misc
• Other Referred Cases: N.C.Bhudaraja and Company vs. 204 ITR 412, India Cine Agencies V/s. Commissioner of Income-Tax (2009) 308 ITR 98 (SC), Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes), Ernakulam v. M/s. Coco Fibres (1992 Supp. (1) SCC 290), Collector of Central Excise, Jaipur v. Rajasthan State Chemical Works, Deedwana, Rajasthan (1991 (4) SCC 473), M/s. Saraswati Sugar Mills and others v. Haryana State Board and others (1992 (1) SCC 418), Ujagar Prints v. Union of India (1989 (3) SCC 488), Empire Industries Ltd. v. Union of India (1985 (3) SCC 314), Kores India Ltd., Chennai v. Commissioner of Central Excise, Chennai (2005 (1) SCC 385), Commissioner of Income Tax v. Sesa Goa Ltd. (2004 (271) ITR 331), Chrestian Mica Industries Ltd. v. State of Bihar [1961] 12 STC 150, Commissioner of Income Tax v. Venkateswara Hatcheries (P) Ltd. (1999 (3) SCC 632), Commissioner of Income Tax, Orissa and Ors. v. M/s N.C. Budharaja and Company and Ors. (1994 Supp 1 SCC 280), Moti - Laminates Pvt. Ltd. and Anr. v. Collector of Central Excise, Ahmedabad (1995 (3) SCC 23)
• Laws Referred To: Income Tax Act, 1961
• Result in Favour of: Revenue
• Court: HIGH COURT
• Department Lawyers: INDRAKUMAR
• Assessee Lawyers: A SHANKAR; M LAVA
• Keywords: Air Conditioning system; Assembly; Manufacture; Section 80IA; Tax Deduction
• Section: 80IA; 260A

Judgement Text

" ® IN THE HIGH COURT OF KARNATAKA AT BANGALORE DATED THIS THE 17th DAY OF DECEMBER 2013 PRESENT THE HON’BLE MR. JUSTICE N.KUMAR AND THE HON’BLE MRS. JUSTICE RATHNAKALA I.T.A. NO.733/2007 BETWEEN : M/s.Koolnest Pvt. Ltd., Represented by its Executive Director Sri.Javeed, No.81, 6th Cross, Victoria Layout, Bangalore. ...APPELLANT (By Sri.A.Shankar & Sri.M.Lava, Advs.) AND : The Dy.Commissioner of Income-tax, Central Circle – 2(2), C.R.Bulding Annexe, Queens Road, Bangalore – 1. …RESPONDENT (By Sri.Indrakumar, Sr. Adv.) . . . . This I.T.A. is filed under Section 260A of the Income Tax Act, 1961 praying to (i) formulate the substantial questions of law stated therein, (ii) allow the appeal and set-aside the order passed by the Income Tax Appellate Tribunal in I.T.A. No.143/Bang/2006 - 2 - dated 06.07.2007 (Annexure `A’) in the interest of justice and equity. This I.T.A. coming on for hearing, this day, N.Kumar J., delivered the following: JUDGMENT This appeal is preferred by the assessee challenging the order passed by the Tribunal holding that assessee is only assembling the various parts and is installing the system and no manufacture is involved and therefore, he is not entitled to the benefit of Section 80IA. 2. The case of the assssee is, it is engaged in the manufacture and installation of air-conditioning system and plants for large business and industrial establishments. According to it, the process of manufacture involves purchase of air-conditioning system and units of large capacities, manufacturing the ducting, erection of system, providing electrical paneling controls and installations. It was claimed that such activities constituted activity of manufacture. The Assessing Authority was of the view that as per the - 3 - requirements of various companies, the assessee installs the air-conditions systems. It purchases required air-conditioners and the electrical panels and installs them as per the requirement of the customers. The nature of activity carried on by the assessee is that of assembling various air-conditioners with the ducts and providing the electrical connection. It is merely in the nature of assembling parts and therefore, it cannot be treated as manufacturing activity. Therefore, the Assessing Authority held that the assessee is not entitled to deduction under Section 80IA as the assessee is not engaged in the manufacture of any article or thing. 3. Aggrieved by the said order, the assessee preferred an appeal to the Commissioner of Income-tax (Appeals). The Commissioner was of the view that the word manufacture has not been defined in the Act. Therefore, the word is to be understood on the basis of the observation made in this regard in various judicial pronouncements. The process of manufacture should result in a commercially different commodities/different - 4 - article with a different commercial identity, when compared with the input that are subjected to manufacturing process. In the instant case, the assessee is installing air-conditioning system as per the requirements of various companies. It is not the case of the assessee that it has manufactured the air- conditioning system and intalled the same. Therefore it dismissed the appeal. 4. Aggrieved by the said order, the assessee preferred an appeal to the Tribunal. The Tribunal after taking note of the various judgments relied upon came to the conclusion that an Industrial undertaking will be entitled to deduction under Section 80IA, in case it is manufacturing or producing an article or thing. Therefore, the Tribunal framed the question to the effect, “whether the air-conditioning system can be called an article or thing?” Keeping in view the judgment of the Apex Court in the case of N.C.Bhudaraja and Company reported in 204 ITR 412, it held that the assessee is only engaged in assembling the various parts. The only manufacturing - 5 - activity, if any, carried out by the assessee is in respect of the ducting system manufactured by it and installed. The air-conditioning system is not different from the air- conditioners. Through this system, air-conditioners is installed at one point and the benefit of air-conditioning is communicated to the desired rooms/halls. In a case where the assessee installs a pipe line to carry water from the storage tank to the overhead tank through motor, can it be said that the assessee is engaged in the manufacturing of an article or thing. Perhaps the answer is no. Therefore, the word manufacture is to be understood in the same commercial sense, as it is understood by the prudent business man and therefore, it was of the view that the assessee is only assembling the various parts and is installing a system. Therefore it dismissed the appeal. Aggrieved by the said orders, the assessee is in appeal. 5. The following substantial question of law arises for our consideration in this appeal: Whether in the facts and circumstances of the case, the air-conditioning system or plant - 6 - delivered by the assessee to its customers constitute a separate and distinct product involving manufacturing or production and hence, eligible for deduction under the Income-tax Act, 1999? 6. The assessement year relevant to this case is assessment year 2000-2001. The present Section 80IA was substituted by Finance Act, 1999. It came into effect from 01.04.2000. Therefore, the law prior to the substitution is, what is applicable and not the substituted Section. Sub-Section (4) of Section 80IA earlier read as under: (4) This section applies to – (i) ………….. (ii) …………. (iii) any undertaking which develops, develops and operates or maintains and operates an industrial park or special economic zone notified by the Central Government in accordance with the scheme framed and notified by that Government for the period beginning on the 1st day of April, 1997 and ending on the 31st day of March, 2006: - 7 - Provided that in a case where an undertaking develops an industrial park on or after the 1st day of April, 1999 or a special economic zone on or after the 1st day of April, 2001 and transfers the operation and maintenance of such industrial park or such special economic zone, as the case may be, to another undertaking (hereafter in this section referred to as the transferee undertaking), the deduction under sub-section (1) shall be allowed to such transferee undertaking for the remaining period in the ten consecutive assessment years as if the operation and maintenance were not so transferred to the transferee undertaking: Provided further that in the case of any undertaking which develops, develops and operates or maintains and operates an industrial park, the provisions of this clause shall have effect as if for the figures, letters and words “31st day of March, 2006”, the figures, letters and words “31st day of March, 2011 had been substituted. 7. Therefore, to be eligible to the benefit of Section 80IA, the Industrial undertaking should fulfill the condition namely that it manufactures or produce any - 8 - article or thing, and not being any article or that specified. The Apex Court had an occasion to consider Section 80IA along with Section 32AB and Section 80HH and in particular the words `manufacture’ and `produce’. In the case of India Cine Agencies V/s. Commissioner of Income-Tax reported in (2009) 308 ITR 98 (SC). After reviewing the entire case law, the Apex Court held as under: “As noted above, the core issue is whether activity undertaken was manufacture or production. In Black's Law Dictionary, (5th Edition), the word `manufacture' has been defined as, “the process or operation of making goods or any material produced by hand, by machinery or by other agency; by the hand, by machinery, or by art. The production of articles for use from raw or prepared materials by giving such materials new forms, qualities, properties or combinations, whether by hand labour or machine”. Thus by process of manufacture something is produced and brought into existence which is different from that, out of which it is made in the sense that the thing produced is by itself a commercial - 9 - commodity capable of being sold or supplied. The material from which the thing or product is manufactured may necessarily lose its identity or may become transformed into the basic or essential properties. (See Deputy Commissioner of Sales Tax (Law), Board of Revenue (Taxes), Ernakulam v. M/s. Coco Fibres (1992 Supp. (1) SCC 290). Manufacture implies a change but every change is not manufacture, yet every change of an article is the result of treatment, labour and manipulation. Naturally, manufacture is the end result of one or more processes through which the original commodities are made to pass. The nature and extent of processing may vary from one class to another. There may be several stages of processing, a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. Whenever a commodity undergoes a change as a result of some operation performed on it or in regard to it, such operation would amount to processing of the commodity. But it is only when the change or a series of changes takes the commodity to the point where commercially it can no longer be regarded as the original commodity but - 10 - instead is recognized as a new and distinct article that a manufacture can be said to take place. Process in manufacture or in relation to manufacture implies not only the production but also various stages through which the raw material is subjected to change by different operations. It is the cumulative effect of the various processes to which the raw material is subjected to that the manufactured product emerges. Therefore, each step towards such production would be a process in relation to the manufacture. Where any particular process is so integrally connected with the ultimate production of goods that but for that process processing of goods would be impossible or commercially inexpedient, that process is one in relation to the manufacture. (See Collector of Central Excise, Jaipur v. Rajasthan State Chemical Works, Deedwana, Rajasthan (1991 (4) SCC 473). `Manufacture' is a transformation of an article, which is commercially different from the one, which is converted. The essence of manufacture is the change of one object to another for the purpose of making it marketable. The essential point thus is that, in manufacture something is brought into - 11 - existence, which is different from that, which originally existed in the sense that the thing produced is by itself a commercially different commodity whereas in the case of processing it is not necessary to produce a commercially different article. (See M/s. Saraswati Sugar Mills and others v. Haryana State Board and others (1992 (1) SCC 418). The prevalent and generally accepted test to ascertain that there is `manufacture' is whether the change or the series of changes brought about by the application of processes take the commodity to the point where, commercially, it can no longer be regarded as the original commodity but is, instead, recognized as a distinct and new article that has emerged as a result of the process. There might be borderline cases where either conclusion with equal justification can be reached. Insistence on any sharp or intrinsic distinction between `processing and manufacture', results in an oversimplification of both and tends to blur their interdependence. (See Ujagar Prints v. Union of India (1989 (3) SCC 488). To put it differently, the test to determine whether a particular activity - 12 - amounts to `manufacture' or not is: Does a new and different good emerge having distinctive name, use and character. The moment there is transformation into a new commodity commercially known as a distinct and separate commodity having its own character, use and name, whether be it the result of one process or several processes `manufacture' takes place and liability to duty is attracted. Etymologically the word `manufacture' properly construed would doubtless cover the transformation. It is the transformation of a matter into something else and that something else is a question of degree, whether that something else is a different commercial commodity having its distinct character, use and name and commercially known as such from that point of view, is a question depending upon the facts and circumstances of the case. (See Empire Industries Ltd. v. Union of India (1985 (3) SCC 314). The aforesaid aspects were highlighted in Kores India Ltd., Chennai v. Commissioner of Central Excise, Chennai (2005 (1) SCC 385) in the background of Central Excise Act, 1944 (in short the `Excise Act') and Central Excise Rules, 1944 (in short the `Excise Rules') and - 13 - Central Excise Tariff Act, 1985 (in short the `Tariff Act'). The stand of the revenue was that it amounted to & “manufacture”, contrary to what has been pleaded in these cases. This Court held that it amounted to manufacture. The matter can be looked at from another angle. In Commissioner of Income Tax v. Sesa Goa Ltd. (2004 (271) ITR 331) this Court considered the meaning of word `production'. The issue in that case was whether the extraction and processing of iron ore amounted to manufacture or not in view of the various processes involved and the various processes would involve production within the meaning of Section 32A of the Act. It was inter alia observed as under: There is no dispute that the plant in respect of which the assessee claimed deduction was owned by it and was installed after March 31, 1976, in the assessee's industrial undertaking for excavating, mining and processing mineral ore. Mineral ore is not excluded by the Eleventh Schedule. The only question is whether such business is one of manufacture or production of ore. -The issue had arisen before different High Courts over a period of time. The High Courts have held that the - 14 - activity amounted to & “production”; and answered the issue in question in favour of the assessee. The High Court of Andhra Pradesh did so in CIT v. Singareni Collieries Co. Ltd. [1996) 221 ITR 48, the Calcutta High Court in Khalsa Brothers v. CIT [1996] 217 TTR 185 and CIT v. Mercantile Construction Co. [1994] 74 Taxman 41 (Cal) and the Delhi High Court in CIT v. Univmine (P.) Ltd, [1993] 202 ITR. The Revenue has not questioned any of these decisions, at least not successfully, and the position of law, therefore, was taken as settled. The reasoning given by the High Court, in the decisions noted by us earlier, is, in our opinion, unimpeachable. This court had, as early as in 1961, in Chrestian Mica Industries Ltd. v. State of Bihar [1961] 12 STC 150, defined the word & “Production” albeit, in connection with the Bihar Sales Tax Act, 1947. The definition was adopted from the meaning ascribed to the word in the Oxford English Dictionary as meaning amongst other things that which is produced; a thing that results from any action, process or effort, a product; a product of human activity or effort;. From the wide definition of the word “production”, it has to follow that mining - 15 - activity for the purpose of production of mineral ores would come within the ambit of the word & “production” since ore is “a thing”, which is the result of human activity or effort. It has also been held by this court in CIT v. N.C. Budharaja and Co. [1993] 204 ITR 412 that the word “production” is much wider than the word & “manufacture”. It was said The word `production' has a wider connotation than the word `manufacture'. While every manufacture can be characterised as production, every production need not amount to manufacture . The word 'production' or 'produce' when used in juxtaposition with the word 'manufacture' takes in bringing into existence new goods by a process which may or may not amount to manufacture. It also takes in all the by- products, intermediate products and reside rodeos which emerge in the course of manufacture of goods. In “Words and Phrases” 2nd Edn. by Justice R. P. Sethi the expressions `produce' and `production' are described as under: In Webster's New International Dictionary, the word “produce” means something that is brought forth either - 16 - naturally or as a result of effort and work; a result produced. In Black's Law Dictionary, the meaning of the word `produce' is to `bring into view or notice; to bring to surface'. A reading of the aforesaid dictionary meanings of the word `produce' does indicate that if a living creature is brought forth, it can be said that it is produced. (See Commissioner of Income Tax v. Venkateswara Hatcheries (P) Ltd. (1999 (3) SCC 632), Commissioner of Income Tax, Orissa and Ors. v. M/s N.C. Budharaja and Company and Ors. (1994 Supp 1 SCC 280). Production or produce- The word `production' or `produce' when used in juxtaposition with the word `manufacture' takes in bringing into existence new goods by a process, which may or may not amount to manufacture. It also takes in all the byproducts, intermediate products and residual products, which emerge in the course of manufacture of goods. The expressions `manufacture' and `produce' are normally associated with movables articles and goods, big and small but they are never employed to denote the construction activity of the nature involved in the construction of a dam or for that matter a bridge, a road and a building. (See Moti - 17 - Laminates Pvt. Ltd. and Anr. v. Collector of Central Excise, Ahmedabad (1995 (3) SCC 23). In Advanced Law Lexicon, 3rd Edn. by P. Ramanatha Aiyar, the expressions `production' and `manufacture' are described as under: ;'Production' with its grammatical variations and cognate expressions; includes- (i) packing, labeling, relabelling of containers. (ii) re-packing from bulk packages to retail packages, and (iii) the adoption of any other method to render the product marketable. `Production' in relation to a feature film, includes any of the activities in respect of the making thereof. (Cine Workers and Cinema Theatre Workers (Regulations of Employment) Act (50 of 1981) S.2(i). The word `production' may designate as well a thing produced as the operation of producing; (as) production of commodities or the production of a witness. `Manufacture' includes any art, process or manner of producing, preparing or making an - 18 - article and also any article prepared or produced by manufacture. (Patent and Designs Act (2 of 1911), S.2(10). `Manufacture' includes any process- (i) incidental or ancillary to the completion of a manufactured product; and (ii) which is specified in relation to any goods in the section or Chapter notes of the First Schedule to the Central Excise Tariff Act, 1985 (5 of 1986) as amounting to manufacture, or, and the word `manufacturer' shall be constructed accordingly and shall include not only a person who employs hired labour in the production or manufacture of excisable goods but also any person who engages in their production or manufacturer on his own account. (iii) which is specified in relation to any goods by the Central Government by notification in the Official Gazette as amounting to manufacture. (Central Excise Act (1 of 1944) S.2(f)) 8. From the aforesaid definition of the word “manufacture”, it implies a change but every change is - 19 - not manufacture, yet every change of an article is the result of treatment, labour. Naturally, manufacture is the end result of one or more processes through which the original commodities are made to pass. The nature and extent of processing may vary from one case to another. There may be several stages of processing, a different kind of processing at each stage. With each process suffered, the original commodity experiences a change. Whenever a commodity undergoes a change as a result of some operation performed on it or in regard to it, such operation would amount to processing of the commodity. The process in manufacture or in relation to manufacture implies not only the production but also various stages through which the raw material is subjected to change by different operations. It is the cumulative effect of the various processes to which the raw material is subjected that the manufactured product emerges. `Manufacture’ is a transformation of an article, which is commercially different from the one, which is conferred. The essence of manufacture is the change of one object to another for the purpose of - 20 - making it marketable. The essential point thus is that in manufacture something is brought into existence, which is different from that which originally existed in the sense that the thing produced is by itself a commercially different commodity whereas in the case of processing it is not necessary to produce a commercially different article. The moment there is transformation into a new commodity commercially known as a distinct and separate commodity having its own character, use and name, whether it be the result of one process or several processes “manufacture” takes place and liability to duty is attracted. Etymologically the word `manufacture’ properly construed would doubtless cover the transformation. 9. The word `production’ has a wider connotation than the word `manufacture’. While every manufacture can be characterized as production, every production does not amount to manufacture. In fact subsequently, the word manufacture has also been defined in the Income-tax Act under Section 2(29BA)as under - 21 - \"manufacture\", with its grammatical variations, means a change in a non-living physical object or article or thing,— (a) resulting in transformation of the object or article or thing into a new and distinct object or article or thing having a different name, character and use; or (b) bringing into existence of a new and distinct object or article or thing with a different chemical composition or integral structure. 10. Viewed from this background in the instant case, the assessee claims that it is in the business of manufacture and installation of air-conditioning systems and plants for large business and industrial establishments. For the said purpose, it has an in-built capacity to manufacture ducting, erection of systems, providing electrical paneling controls, installations etc. However, it purchases air conditioners, blowers, freezers, Cooling equipment etc. The case of the assessee is after purchasing these parts it manufacures an air-conditioning plant and delivers the same to his customers. Therefore, after these parts are purchased - 22 - they are transformed into an altogether new product and therefore, the assessee is entitled to the benefit as it satisfies the above requirement of the Section. 11. From the aforesaid facts, it is not in dispute that the assessee is not in the manufacture of air- conditioners, blowers or coolers and freezers. All of them are purchased. Thereafter, keeping in mind, the requirement of the customers, they are all installed at the customer’s place and to make it functional and use ducting electrical panel controls and other installations. The air-conditioners freezers, blowers which are purchased as raw materials for the said air condition plant are not processed. They are used as it is. No manufacturing activity takes place insofar as those items are concerned. They are installed as it is and only they are connected with these panels and ducting. Though the assessee calls it as an air-conditioning plant, the air-conditioners, which are purchased as raw material continues to perform the very same function after its installation. The case laws relied on by the appellant on TV, diesel generating set, etc., are - 23 - distinguishable on facts. No new product comes into existence after the assessee purchases these goods. Therefore, rightly, the authorities have called it as assembly and for the purpose of assembly, they may manufacture ducting and electrical panel controls and other installations. But merely because those anciliary goods are manufactured, it does not mean that the assessee is manufacturing air conditioning plant. Therefore, the authorities were justified in declining to extend the benefit of Section 80IA to the assessee. The Tribunal has observed that the assessee manufactures these ducts. If really in order to set up an air- conditioning plant apart from goods, which is purchased in the market, if any manufacturing activity takes place like ducts, panels, etc., it is open to the assessee to produce material to show the manufacturing activity and then claim the exemption provided under Section 80IA. The assessee has not put forth any such claim. Therefore, the authorities have not considered the same. - 24 - 12. In that view of the matter, on the facts of the case, we do not find any error committed by the authorities in holding that the assessee is not involved in manufacturing or production and therefore is not entitled to benefit of tax deduction. Therefore, the substantial question of law framed is answered in favour of the Revenue and against the assessee. However, liberty is reserved to the assessee to put forth a claim for exemption, if any portion of the activity which resulted in the plant being commissioned involves manufacturing activity. Notwithstanding the disposal of the appeal, the authority shall consider such claim and pass appropriate orders. Sd/- JUDGE Sd/- JUDGE SPS "