HOLDS ASSEMBLING AS ‘MANUFACTURE’ SINCE END PRODUCT IS COMMERCIALLY DISTINCT; ALLOWS SEC. 80-IC DEDUCTION

Contention of Assessee:

Following are the contentions of the Assessee stated hereunder:-

• The Assessee contended that it had complied with requirements by setting up of a new manufacturing industrial undertaking in UTK with new plant and machinery by ensuring that the value of old machinery does not exceed 20% of total investment in plant and machinery.
• The complete engine cooling system module manufactured at UTK is a result of multiple technical process undertaken to brought it into a commercially identifiable and distinct article other than input like radiator or intercooler. Hence, it will amount to manufacture.
• The Assessee contended that it is engaged in manufacturing of engine cooling system module and is entitled to exemption for excise duty. Hence, it is to be noted that unless it is a manufacturing unit and liable for excise duty, the exemption wouldn’t have been granted.
• The unit carried out value addition of approximately 35%-40% of the total cost, demonstrating genuine manufacturing activity.
• It further contended that since Ashok Layland setup new unit in UTK, to cater the customer and increase the capacity both in Chennai and UTK, assessee also set up new unit in UTK.
• Thus, only because customer and the product was same at both the places, would not automatically conclude that there was no manufacturing business.

Contention of Revenue:

Following are the contentions of the Revenue stated hereunder:-

• The raw materials are imported and locally procured to manufacture a radiator and other components at Chennai and this radiator along with other components procured locally were assembled at UTK and from there it is sold to Ashok Layland. Hence, UTK unit is only assembly unit and not a manufacturing unit.
• Assessee has split up its manufacturing process whereby core manufacturing process was carried out at Chennai plant and only assembly and fitting with other parts of components was carried out at UTK unit.
• The final product i.e., complete cooling system supplied from UTK was supplied to Ashok Layland from Chennai as well. Hence, since the product and customer were same, the splitting was done due to change of location of customer manufacturing unit and accordingly there is no addition to existing capacity of the assessee due to UTK unit.
• UTK unit is not taking any manufacturing activity as its input and output remained the same. Hence, only an assembly of a component cannot be termed as “Manufacture” or “Production”.
• Also, it was observed that out of entire manufacturing cycle from raw material to module carried out at Chennai was split and only the last stage of assembly was carried out at UTK which showed that it was splitting of business.
• Further it contented that assessee was using simple tools and machinery and therefore, it was not sufficient to demonstrate that any manufacturing activity was carried out at UTK unit.
• Further, the criteria adopted by the Excise Department to provide a certificate and declare it as manufacturing unit is different from that of from the criteria as mentioned in Income Tax act.
• Hence, as the condition laid down u/s 80-IC was not met, the assessee was disallowed to claim deduction u/s 80-IC.

Ruling:

The Hon’ble Tribunal has ruled in favour of the assessee by giving following observations stated hereunder:-

• The ITAT observed that the UTK unit was sourcing components from Chennai and the locally procured materials were used, processed and assembled into a commercially different and distinct product
• The ITAT further observed that without products acquired, processed and assembled at UTK unit, the final integrated module could not exist. Further, the final engine cooling module is not a radiator or an inter cooler, the lower authorities were unjustified in holding that the input and output remained same at UTK unit.
• It further observed that each product serves a different purpose and hence not only the contents of the products were different and distinct, but their commercial use and application was also independent from each other. Hence, the activity being carried out at UTK unit constitutes “Production” or “Manufacture” of an article or a thing in terms of section 80-IC(2)(a) of the Act.
• Further, to the contention of revenue that, assessee uses simple tools and machinery for processing, ITAT relied on the judgement in the case of CIT vs. Faith Biotech Pvt. Ltd. wherein it was held that even though the assessee carried out assembling of air purifiers by using simple tools and testing equipments, it will qualify as “Manufacture” and assessee will be entitled for deduction u/s 80-IC of the Act.
• Further, to be noted that the number of complete engine cooling system modules manufactured and sold at Chennai remained unaltered even after setting up a unit in UTK and also the units sold in UTK has increased over years. Therefore, as the owned installed capacity of Chennai unit and new installed capacity of UTK unit taken together suggest expansion of business, the lower authorities had erred in holding that UTK unit had been formed by splitting up of business already in existence.
• For the contention of the revenue that the crucial components were transferred from Chennai, ITAT held that only because critical components were being transferred by non eligible unit cannot be the basis to assume that the eligible unit was not engaged in manufacture or formed by splitting up.
• Hence, ITAT held that the lower authorities were unjustified in denying the benefit of deduction u/s 80-IC of the Act and directed the AO to allow the same and delete the impugned disallowance. Accordingly, the appeal of the assessee stands allowed for all the A.Ys.