MIHIR ENGINEERS LTD. vs. JOINT COMMISSIONER OF INCOME TAX

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1 /feedback.html /library.html Ms. Sushma Chowla, J.M. : MIHIR ENGINEERS LTD. vs. JOINT COMMISSIONER OF INCOME TAX ITAT, MUMBAI D BENCH Pramod Kumar, A.M. & Ms. Sushma Chowla, J.M. ITA Nos to 1771/Mum/ th February, 2007 (2007) 112 TTJ (Mumbai) 940 : (2007) 109 ITD 349 : (2007) 14 SOT 523 Section 80-IA, Asst. Year , , Decision in favour of Revenue Counsel appeared : Farrokh Irani, for the Appellant : Shantam Bose, for the Respondent ORDER These three appeals filed by the assessee are against the separate orders of the CIT(A)-VII, Mumbai, all dt. 29th Dec., 2000 relating to asst. yrs to All the three appeals involving the same issue were heard together and are being disposed of by this consolidated order for the sake of convenience. The assessment order and the appellate order for asst. yr are dealt with the issue at length and accordingly, the said orders are referred for deciding the issue. 2. The assessee company had raised several grounds of appeal and during the course of appellate proceedings before the Tribunal had filed concise grounds of appeal. The assessee during the course of hearing had raised concise grounds of appeal, which are as under : "1. The CIT(A) erred in upholding the action of the AO of restricting the deduction to which the appellant was entitled under s. 80-IA of the IT Act to the sum or Rs. 6,76,642 - as against the sum of Rs. 47,66,512 - claimed by the appellant. 2. The CIT(A) s order of confirming the action of the AO of restricting the appellant s claim for a deduction under s. 80-IA of the Act to a sum of Rs. 6,76,642 is vitiated, inter alia, by : (i) A failure to consider the material and evidence on record. (ii) Its being based on conjectures and surmises. (iii) Its being contrary to the material and the evidence on record. (iv) The CIT(A) s wrongly attributing non-existent motives to the appellant. 3. The CIT(A) ought to have held that no interest was chargeable on the appellant under s. 234B or s. 234C of the Act and ought to have cancelled the same. The CIT(A) erred in holding that the issue of chargeability of interest under ss. 234B and 234C of the Act was not appealable and erred in not admitting the appellant s grounds of appeal challenging the legality of the levy of such interest. The CIT(A) ought to have cancelled the levy, upon the appellant, of interest under ss. 234B and 234C of the Act." During the asst. yr , the assessee had claimed the deduction under s. 80-IA of the IT Act at Rs. 47,66,512 and the AO had allowed the sum at Rs. 6,76,642 which was confirmed by the CIT(A). Similarly, the assessee had claimed deduction under s. 80-IA of the IT Act at Rs. 36,83,210 for asst. yr and Rs. 39,21,458 for asst. yr and against which the deductions allowed to the assessee were Rs. 6,91,676 and Rs. 8,92,897, respectively for the said assessment years. The first and second grounds of appeal raised by the assessee are /about.html Page 1 of 11 /contact.html

2 /feedback.html /library.html against the restrictions on deduction claimed by the assessee under s. 80-IA of the IT Act. The second issue raised by the assessee is against the chargeability of interest under ss. 234B and 234C of the IT Act. Shri Farrokh Irani, learned counsel appeared for the assessee, and Shri Shantam Bose, Departmental Representative appeared for the Revenue, and put forward their rival submissions. The facts of the case are that, the assessee company is engaged in the manufacturing of cooling towers. During the year under consideration the assessee company had claimed deduction under s. 80-IA of the IT Act on the total turnover of the manufacturing items during the year including sale of bought out components, installation charges, forwarding charges and service charges. The total turnover of the assessee for asst. yr was Rs. 5,19,45,440 (excluding sales-tax) and consisting of the undermentioned items : Cooling Towers Others Grand total (Rs.) (Rs.) Round Bottle CM. Type (Rs.) (Rs.) Manufactured items 30,87,365 1,00,04,249 1,30,91,614 Bought-out components 87,14,988 2,80,64,464 3,67,79,452 Installation charges 13,61,503 13,61,503 Forwarding charges 5,31,400 5,31,400 Service charges 1,81,471 1,81,471 1,18,02,353 3,80,68,713 20,74,374 5,19,45,440 The assessee had one unit at Odhav for manufacturing of certain components required for round bottle cooling towers. The said unit was closed down during 1992 and the plant and machinery including the moulds of the said unit were shifted to the new unit at Chhatral. The assessee company in order to revamp its business activities entered into collaboration agreement with Netherlands company and obtained technical know-how for making "cross flow" and "counter flow" cooling towers and thereby investing an amount of Rs lakhs in technical know-how. In order to set up the new manufacturing unit at Chhatral the assessee company acquired leasehold land for Rs lakhs and constructed factory building worth Rs lakhs and made an addition of Rs lakhs in the plant and machinery and Rs lakhs for aquiring the technical know-how during the financial year The assessee company started the business of supplying round bottle, cross flow and counter flow cooling towers. The plant and machinery and moulds from the Odhav unit were transferred to the new unit at Chhatral and as per the claim of the assessee the total extent of such items transferred was per cent of the total investment in new plant in terms of cost and 0.63 per cent in terms of WDV. Most of the employees of the old unit were also transferred to the new unit and certain new employees were also recruited. The modus operandi of the assessee company in carrying out of business is that on receipt of enquiries from the clients, it designs the cooling tower as per requirement of the customers and the quotations are forwarded to the clients along with detailed analysis of the said towers. On receipt of the orders from the customers the assessee company manufactures the basic component required for the said cooling tower in its unit and certain items/components like electric motors, fans, etc. as per specific requirements of cooling towers are purchased from the market. As claimed by the assessee, these items are tested and checked in the factory of the assessee company. The said components i.e. manufactured and bought out items are transferred to the site of the customers and two separate invoices are prepared, one for in-house manufactured components on which excise duty is paid and another for the bought out components and, accordingly, the sales are shown under the head Manufactured items and bought out components. The assembly of the unit and erection of the same is carried out at the customer s site and the assessee in addition raises the bill for installation charges, forwarding charges and service charges, which are further booked under the respective heads in the books of account. The cooling towers i.e., round bottle (RB), cross flow (XE) and counter flow (CM) or CM type (rectangle) can be assembled at the factory of the assessee but the same are assembled at the installation site as it is vulnerable to transit. The said tower is physically fixed to platform or building by bolts and the same can be easily removed and lifted and transported to a fresh site for fresh use. The AO while completing the assessment was of the view that the new unit set up by the assessee company manufactured the items required for XE and CM type cooling towers only and the machinery which had been shifted from the old unit manufactured the parts required for round bottle cooling towers. He was of the view that the moulds required for manufacturing the round bottle and CM/XE type cooling towers are independent and totally different but the assessee company started manufacturing, both under one roof for the sake of convenience. As the old equipment was acquired in the year 1985 and the new equipment was purchased in 1992, the AO held that the items, machinery shifted from the old unit are not eligible for deduction under s. 80IA of the Act as according to him by shifting the old equipment to the new place and keeping it along with other equipment did not /about.html Page 2 of 11 /contact.html

3 /feedback.html /library.html result in set up of new unit as far as old equipment is concerned. The assessee had already availed of all benefits /deductions while manufacturing items at old unit. Accordingly, the profits arising from the sale of items manufactured by the assessee for round bottle cooling towers were held to be not eligible for deduction under s. 80-IA of the Act. In addition the AO was of the view that bought out components purchased by the assessee from the market were never integrated at the assessee s factory into the cooling tower and tested. The AO accordingly was of the view that the assessee was not manufacturing the cooling tower but manufacturing only certain parts required for cooling towers and assembling the cooling tower at the clients place as per the requirement of the clients. Accordingly, the AO held that the profit earned by the assessee on the bought out components did not have any nexus with the manufacturing activity carried out by the assessee in its factory and the said profits cannot be treated as profits of industrial undertaking for the purpose of computing deduction under s. 80-IA of the Act. In respect of the forwarding charges, installation charges and service charges, the AO noted that the assessee had incurred expenditure on account of transport, labour charges, both for loading/unloading and assembling, which were not adjusted against the receipts. The AO was of the view that all these charges do not have any connection with the manufacturing activity of the assessee and accordingly, the profit earned by the assessee on the said charges was not eligible for deduction under s. 80-IA of the Act. The CIT(A) after analyzing the contentions of the learned Authorised Representative was of the view that the assessee company had shifted the equipment from the old unit at Odhav to the new unit at Chhatral and started producing the round bottle cooling towers. He was of the view that the unit producing round bottle cooling towers does not get integrated with the unit producing XM/XE type cooling towers and in any case the technical knowhow or the plant and machinery was not acquired for the purpose of manufacturing any items for round bottle cooling towers. The unit in whole i.e. lock, stock and barrel was shifted from the old unit at Odhav which was in existence for the past 8 years for which the assessee had already availed the benefit of deduction under s. 80-IA of the Act. Accordingly, the CIT(A) observed that the assessee was not entitled to any claim of deduction under s. 80-IA of the Act in respect of items manufactured for the round bottle cooling towers. Applying the ratio of the decision of the Hon ble apex Court in the case of Textile Machinery Corporation Ltd.. vs. CIT 1977 CTR (SC) 151 : (1977) 107 ITR 195 (SC), wherein it has been held that deduction under s. 80-IA of the Act can be allowed only when new integrated unit comes into being and insofar as the unit producing round bottle cooling tower was concerned, it is separate existing unit under the same roof. There is no question of allowing the benefit of deduction under s. 80-IA of the Act as the said unit has been in existence for more than 8 years. Only in respect of the unit producing the CM/XE type of cooling towers the assessee is entitled to the benefit of deduction under s. 80-IA of the Act which has been allowed by the AO. The CIT(A) was further of the view that the assessee company was not entitled to the claim of the deduction under s. 80-IA of the Act, in view of the s. 80-IA(2)(ii) which provided that in order to claim the deduction the industrial undertaking should not be formed by the transfer of machinery or plant previously used for any purpose to a new business. The Expln. 2 to s. 80-IA(2) of the Act under which the assessee company had taken the shelter is not applicable to the facts of the present case as the cost of the old equipment acquired in 1985 cannot be compared to the cost of equipment acquired in 1992, due to inflation. 10. The CIT(A) also confirmed the action of the AO in denying the benefit of deduction under s. 80IA of the Act, on the bought out components as according to him they have been straightaway purchased from the market and have not been tested in the factory as the assessee company does not have any testing machines apparatus in the factory. Applying the ratio of the Hon ble apex Court in the case of CIT vs. Sterling Foods (1999) 153 CTR (SC) 439 : (1999) 237 ITR 579 (SC), the CIT(A) confirmed the denial of deduction under s. 80-IA of the Act in respect of installation, forwarding and service charges as he was of the view that these receipts are not derived from "the business of the industrial undertaking". Reliance was also placed on the decision of the Hon ble jurisdictional High Court in the case of CIT vs. K.K. Doshi & Co. (2000) 163 CTR (Bom) 472 : (2000) 245 ITR 849 (Bom) by the CIT(A). The assessee is aggrieved by the order of the CIT(A) and hence this appeal. 11. The learned Authorised Representative for the assessee submitted that the issues for consideration before us were as under : (a) Allowability of deduction under s. 80-IA on the manufactured items for round bottle cooling towers. (b) Allowability of deduction under s. 80-IA of the Act on the bought out components used for the manufacturing of round bottle and CM/XE type cooling towers. (c) Allowability of deduction under s. 80-IA on /about.html Page 3 of 11 /contact.html

4 /feedback.html /library.html the installation charges, forwarding charges and service charges received from the clients to whom the said round bottle and CM/XE type cooling towers have been sold. The learned Authorised Representative for the assessee brought to our notice that looking at the voluminous nature of the cooling tower, assembly and erection of the said towers are carried out at the site of the customers. The cooling towers are manufactured as per the specific requirement of the clients who attach this as ancillary to their plants. The assessee company is manufacturing the said cooling towers as per the specific and direct requirement of the clients. In addition to the components manufactured at the unit of the assessee company, certain components were also purchased from the market which are tested and also the compatibility is checked with the manufactured items before the said components are transferred to the customer s site. The learned Authorised Representative further submitted that the observations of the CIT(A) in this respect are wrong, inter alia, by : (i) A failure to consider the material and evidence on record. (ii) Its being based on conjectures and surmises. (iii) Its being contrary to the material and the evidence on record. (iv) The CIT(A) s wrongly attributing non-existent motives to the appellant. 12. The learned Authorised Representative for the assessee relied on various judicial pronouncements and orders of the Tribunal which are being dealt with hereinunder. The learned Departmental Representative for the Revenue placing reliance on the orders of AO and CIT(A) argued that in order to claim the deduction under s. 80-IA of the IT Act, the situs of assembly is important. In the facts of the present case, the manufactured and bought out components are assembled at client s premises. The learned Departmental Representative further submitted that the said bought out components are not tested in the factory premises of the assessee and as such the assessee is not entitled to the claim of deduction under s. 80-IA of the IT Act. Reliance was placed on the decisions of Degremont India Ltd.. vs. Dy. CIT (1998) 60 TTJ 473 (Del) : (1996) 59 ITD 423 (Del), CIT vs. Minocha Bros. (P) Ltd. (1986) 52 CTR (Del) 346 : (1986) 160 ITR 134 (Del) and CIT vs. Shah Construction Co. Ltd. (1982) 30 CTR (Bom) 245 : (1983) 142 ITR 696 (Bom). The learned Departmental Representative further stated that the assessee has not paid any excise duty on the bought out components which further proves the claim of the assessee. The learned Authorised Representative in reply submitted that the observations of CIT(A) are wrong as the unit of the assessee is an integrated unit and the bought out components are tested in the factory premises. Reliance was placed in the case of Indocan Engineering Systems (P) Ltd. vs. Dy. CIT (1997) 60 ITD 649 (Pune) and Degremont India Ltd. s case (supra). With regard to the ground No. 2 in respect of charging of interest under s. 234B or 234C of the IT. Act, the learned Authorised Representative for the assessee fairly conceded that the same is consequential in view of the Special Bench decision of Delhi Tribunal in Motorola Inc. vs. Dy. CIT (2005) 96 TTJ 1 (Del)(SB) : (2005) 95 ITD 269 (Del)(SC). We have heard the rival submissions and perused the records. Various judicial pronouncements and orders of the Tribunal referred to by the learned Authorised Representative and learned Departmental Representative have also been considered. The assessee is in the business of manufacture of cooling towers for the past many years. Initially, the assessee was manufacturing round bottle cooling towers for which the factory was at Odhav. During the year ending March, 1992, the total turnover of the assessee was Rs crores wherein as per the significant accounting policies annexed at pp. 23 to 26 of the paper book, the assessee had manufactured 353 units of cooling towers spares during the asst. yr In the year ending march, 1992, the assessee company had entered into a technical collaboration agreement with Geakuhltur Mbau Ernest Kirchner, GMBH, Germany, for the induction of computerized technology to design the cooling towers. The managing director of the assessee company in his directors report at pp. 2 to 4 of the paper book has submitted that the know-how had been successfully transferred during the financial year and the manufacturing facilities at GIDC, Chhatral, were in the process of being set up with commercial production expected to commence w.e.f. 1st Aug., During the year ending March, 1992, the assessee had shown gross value of plant and machinery valued at Rs. 2,29,066 in its list of assets for the year ending 31st March, 1992 and had paid technical know-how fee of Rs. 19,99,050. For the year ending 31st March, 1993, the managing director of the assessee company in its directors report at page No. 29 of the paper book, had admitted that the company s expansion programme for the manufacture of CM and XE series cooling towers as per GEA Polacels design had been completed. It is further submitted by the managing director of the assessee company that the first cooling tower was delivered to M/s Dupell Laboratory, Aurangabad, in January, During the year ending March, 1993, the assessee had shown total turnover of Rs lakhs which included sale of 277 sets of cooling towers as incorporated in the /about.html Page 4 of 11 /contact.html

5 /feedback.html /library.html significant accounting policies at pp. 51 to 55 of the paper book. During the year ending March, 1993, the assessee had shown addition to leasehold land of Rs. 18,29,087, building account Rs. 46,78,712, plant and machinery Rs. 46,66,855, office equipment Rs. 1,91,587 and vehicles Rs. 2,88,715, as per list of assets at page No. 42 of the paper book. The first year of operation of the new plant was asst. yr During the year ending March, 1994, the assessee had shown turnover of Rs lakhs which in turn includes sale of 423 cooling tower sets along with sale of spares of Rs. 31,74,331, services of Rs. 10,85,883 and sale of trading items and components at Rs. NIL, the details of which are incorporated in the significant accounting policies at pp. 82 to 84 of the paper book. During the year ending March, 1994, there is marginal addition of plant and machinery, office equipment, furniture and fixture and addition of Rs. 2,22,616, in the vehicles account as reflected in the schedule of assets at p. 71 of the paper book. In the year ending 31st March, 1995, the total turnover was Rs lakhs, which includes sale of 534 sets of cooling towers, sale of spares of Rs. 35,77,990 and service charges of Rs. 1,43,878. During the year ending 31st March, 1995, the increase in building account is Rs. 9,24,883 and the deduction/adjustment in the leasehold land is Rs. 11,89,475, thereby balance of value of Rs. 6,66,612 against leasehold land. The said details are incorporated in the schedule of assets placed at p. 99 of the paper book. In the year ending 31st March, 1996, the total turnover of the assessee was Rs lakhs, which includes sales of 650 sets of cooling towers and Rs. 48,22,273 on account of sale of spares and Rs. 22,28,149 on account of service charges. During the year ending March, 1996, the assessee has sold the land at Odhav, where the assessee was initially manufacturing the round bottle type of cooling towers. During the year ending 31st March, 1996, there was an increase in building account of Rs. 64,618 and marginal addition in plant and machinery, office equipment and furniture and fixtures, along with the addition of Rs, 17,56,581 in the vehicles account. In the year ending 31st March, 1997, the total turnover was Rs lakhs which included the sale of 550 sets of components of cooling towers Rs. 47,59,022 on account of sale of spares and Rs. 20,74,374 on account of service charges, as per the details furnished in significant accounting policy attached at pp. 163 to 168 of the paper book. The managing director of the assessee company in his director s report annexed at page Nos. 141 and 142 of the paper book had admitted that there was a phase of economic slow down and accordingly, as far as the sale of components of cooling towers are concerned there was very stiff competition. Even our major competitors had to offer heavy discount. In the year ending 31st March, 1998, the assessee company had shown turnover of Rs lakhs which includes sale of 618 sets of FRP components cooling towers, Rs. 46,31,574 on account of sale of spares and Rs. 23,56,642 on account of sale of services as incorporated in significant accounting policies placed at pp. 194 to 197 of the paper book. The managing director in his directors report at pp. 170 and 171 of the paper book admitted that there was stiff competition in sale of components of cooling towers. During the preceding year ending March, 1997, there was marginal addition in the office equipment and vehicles account but during the year ending March, 1998, the assessee has shown addition to building account of Rs. 16,48,750 and addition of Rs. 17,655 (to) office equipment account and Rs. 5,43,975 for furniture and fixtures as incorporated in the schedule of assets at p. 183 of the paper book. The first year of start of operations was asst. yr The assessee is in appeal before us relating to asst. yrs to It is the claim of the assessee that the appeal for the asst. yr was decided first and the appeals for the asst. yrs , and are pending for disposal wherein the assessee has made a claim for deduction under s. 80-IA of the IT Act. The assessee has filed on record the copies of the orders of CIT(A) relating to asst. yrs and , wherein the claim of the issue with regard to deduction under s. 80-IA of the IT Act has been rejected because of the adjudication in appellate proceedings for the asst. yr The assessee entered into a collaboration agreement with GEA, Germany, for the acquisition of technical knowhow for engineering and making wet cooling towers. Necessary permission was sought from the Government of India, Ministry of Industry, Department of Industrial Development and the license agreement dt. 8th March, 1991 was entered into between the parties in March, 1991, copies of which are placed at pp. 210 to 225 of the paper book. Thereafter, the assessee entered into supplementary license agreements dt. 19th Nov., 1991 and 30th March, The permission was granted to the assessee by Ministry of Industry, Government of India, to enter into the technical collaboration for the manufacture of cooling towers. The assessee company in collaboration with GEA Polacel started manufacturing the cooling towers in counter flow and cross flow designs which in turn were designed and engineered on computer programmes from GEA, Germany, who also guarantee the performance. The assessee company is manufacturing three types of cooling towers; (a) XE series-cross flow type, (b) CM /about.html Page 5 of 11 /contact.html

6 /feedback.html /library.html series-counter flow types, and (c) RB series-round bottle series, as per the brochure of the assessee company, copy of which is placed at pp. 226 to 229 of the paper book. The XE series and CM series are manufactured in technical collaboration with GEA Polacel as mentioned at pp. 227 to 228 of the brochure of the assessee company. The RB series are manufactured by the assessee company and are called the Mihir ERP towers. The perusal of the details reflect that uptil October, 1992, the assessee was engaged in manufacturing of one type of cooling towers i.e., round bottle cooling towers, in its unit situated at Odhav. The assessee entered into collaboration agreement with GEA Polacel, wherein the technical know-how was obtained for the manufacture of cross flow and counter flow cooling towers. In order to expand its operations, the assessee acquired leasehold land for Rs lakhs at Chatral and constructed factory building investing thereon Rs lakhs. The assessee incurred an expenditure of Rs lakhs on the acquisition of know-how. The assessee company further claims to have invested Rs lakhs in the purchase of plant and machinery. On perusal of the details of addition to plant and machinery, the AO observed at p. 12 of his order, the assessee company made an investment of Rs lakhs in moulds, Rs lakhs on plant and machinery, Rs lakhs on electric installations and the balance included in Rs lakhs was on account of an addition by way of new vehicles, computers, air-conditioners, office equipment, etc. The assessee also shifted all its moulds and machineries from the old unit at Odhav, which were required for manufacturing the items, components required for assembling the round bottle cooling towers. The aim of the assessee was to manufacture both the round bottle cooling towers and CM/XE type cooling towers under one roof. The extent of value of plant and machinery transferred from Odhav to Chatral amounted to per cent of the total new plant in terms of cost and 0.63 per cent in terms of WDV as claimed by assessee in response to queries raised by the AO. The assessee further claims that most of the employees of Odhav unit were transferred to the new unit and certain new employees were also recorded. The assessee company sold the land at Odhav in asst. yr The modus operandi of the assessee company for the conduct of its business of supplying round bottle and counter flow/cross flow cooling towers is that on receipt of enquiries from the clients it designs the cooling towers required by the customers and submit quotations based on detailed analysis. On receipt of orders from the customers the assessee manufactures the basic components in its factory and purchase various items/components like electrical motors, fans, etc. from the market as per the specific requirements of the cooling towers. The assessee claims to have tested and checked the items so purchased from the market in the factory premises for their static plans, thickness, rotation, etc. All the components i.e., manufactured and bought out are transported to the customers site for which two separate invoices are prepared; (i) for in-house manufactured components and (ii) another for bought out components. The assessee prepares two separate vouchers as excise duty is leviable on the manufactured items and no excise duty is leviable on bought out components. The cooling tower is assembled and erected at the site of the customer. The assessee charges erection charges, service charges and forwarding charges for the services undertaken by him in connection with the transportation and erection of the cooling towers. The assessee has claimed deduction under s. 80-IA of the IT Act on the said cooling towers, some components for which are manufactured in the factory unit of the assessee company and the cooling tower is assembled and erected at the customer s site along with the bought out components used for the purpose. The process of manufacturing carried within the factory of the assessee company involves process of laying of fibre glass on the moulds and impregnation of it with polyester resin by means of brush/spray gues. The desired thickness is built by applying the various layers of fibre material. The main items required for manufacturing the components are moulds. The assessee while establishing its unit had invested a sum of Rs lakhs in the purchase of moulds and Rs. 1,50,033 in the purchase of new plant and machinery which consisted of all compressor, welding machine and separate gain, etc. In addition, the moulds and plant and machinery at Odhav unit were shifted to Chhatral unit by the assessee company. The manufacturing processes of cross flow and counter flow types of cooling towers are wet type of cooling towards manufactured in technical collaboration with GEA Polacel. The import of know-how and the establishment of the new unit was technically for the production of the XE series and CM series of cooling towers which as claimed by the assessee company are being manufactured in technical collaboration with GEA Polacel, whereas the round bottle cooling towers are being manufactured independent of the collaboration with GEA Polacel thereby using its old plant and machinery and moulds shifted from Odhav unit. The manufacturing process of components for round bottle cooling towers and counter flow/cross flow cooling towers are distinct and independent as the items manufactured by each type go to assemble different types of cooling towers. Same is corroborated by the fact that the assessee has entered into a /about.html Page 6 of 11 /contact.html

7 /feedback.html /library.html collaboration agreement with GEA Polacel for the manufacture of cross flow and counter flow type of cooling towers. The technical know-how has been obtained for the purpose of manufacture of components of cross flow and counter flow types of cooling towers for the purpose of which GEA Polacel stands guarantee. The assessee in order to consolidate its manufacturing activities under one roof had transferred the unit at Odhav manufacturing round bottle cooling towers in entirety to Chhatral unit. The manufacturing of components for round bottle cooling towers is an independent process which is not part and parcel of the collaboration with GEA Polacel. The assessee has already availed benefits under s. 80-IA of the IT Act in respect of its unit manufacturing round bottle cooling towers and there is no merit in its claim for claiming benefit of deduction under s. 82-IA of the Act in respect of components manufactured for round bottle cooling towers. The perusal of the facts of the case clearly reveal that the assessee has established a new unit for the manufacturing of components of XE series and CM series of cooling towers in colloboration with GEA Polacel, which is an independent unit. In respect of the manufacturing activities connected with components of RB series of cooling towers, the moulds and plant and machinery initially utilized for the purpose have been shifted from Odhav unit to Chhatral unit for the purpose of better control and management. The assessee is entitled to the claim of deduction under s. 80-IA of the Act in respect of components manufactured in respect of XE series and CM series of cooling towers. The assessee is not entitled to the benefit of deduction under s. 80-IA of the Act in respect of manufacture of components of RB series of cooling towers. The contention of the assessee is that it had shifted only 11 per cent of total value of plant and machinery from old unit to be part of the new unit has no relevance in view of our finding that the manufacture of components for RB series is independent of manufacture of components for XE and CM series. In the facts and circumstances of the case, we confirm the orders of AO and CIT(A) in denial of deduction under s. 80-IA of the Act in respect of components manufactured for round bottle (RB series) cooling towers. The second issue for our consideration is whether the assessee is entitled to the deduction under s. 80-IA of the IT Act on the profits on bought out components used for the manufacturing of round bottle and XE and CM series of cooling series. The manufacturing process of the assessee company is limited to the production of certain components required to be utilized for the erection of cooling towers. The assessee purchases certain items from the market, which in-turn are used for the manufacture of the cooling towers. The perusal of the purchase orders placed by different customers, copies of which have been filed on record revealed that the assessee was entrusted with the job of supply of cooling tower in its entirety which includes the components manufactured in the factory premises of the assessee and also certain other items bought directly from the market to be utilized for the manufacture of the cooling towers in entirety. Both the items, i.e., the manufactured components and bought out items were then carried over to the premises of the customers wherein the cooling tower was erected as per the requirements of the customers. The said exercise was undertaken by the assessee company at the site of the client because of the voluminous nature of the cooling tower manufactured by the assessee. The deduction under s. 80- IA of the Act is restricted to the profits and gains derived from the business of an industrial undertaking being an eligible business, subject to conditions enumerated in sub-s. (2) of s. 80-IA of the Act. The cl. (iii) of s. 80-IA(2) of the Act provides that for the eligibility of deduction, the industrial undertaking should manufacture or produce any article or thing, other than those specified in Eleventh Schedule. The deduction under s. 80-IA of the Act is limited to the items manufactured or produced by the assessee. The word manufacturing or production is not defined in the Act. The distinction of the word manufacturing or production was clarified by Hon ble Supreme Court in CIT vs. N.C. Budharaja & Co. & Anr., Etc., Etc. (1993) 114 CTR (SC) 420 : (1993) 204 ITR 412 (SC), wherein it has been held as under : "The word production has a wider connotation than the word manufacture. While every manufacture can be characterized as production, every production need not amount to manufacture. The test evolved for determining whether manufacture can be said to have been taken place is, whether the commodity which is subjected to the process of manufacturing can no longer be regarded as the original commodity but is recognized in the trade as a new and distinct commodity. 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 residual products which emerge in the course of manufacture of goods." 24. Further, it was held by the Hon ble Bombay High Court in CIT vs. Tata Locomotive & Engineering Co. Ltd. (1968) 68 ITR 325 (Bom), wherein it has been held as under : "The word manufacture has a wider and also a narrower connotation. In the wider sense it simply means to make, or fabricate or bring into existence an article or a product either by physical labour or by power; and the word manufacturer in ordinary parlance would mean a /about.html Page 7 of 11 /contact.html

8 /feedback.html /library.html person who makes, fabricates or brings into existence a product or an article by physical labour or power. The other shade of meaning, which is the narrower meaning, implies transforming raw materials into a commercial commodity or a finished product which has an entity by itself, but this does not necessarily mean that the materials with which the commodity is so manufactured must lose their identity. Thus, both the words manufacture and produce apply to the bringing into existence of something which is different from its components. Whether one takes into account the wider or narrower meaning of the word manufacture, assembling of automotive bus or truck chasis from imported parts in a knocked down condition, could give rise to an article which is totally different from the parts and could amount to manufacture. This is so even though the component parts from which the automotive chasis is made, retain their individual identity in the whole article which is thus manufactured or produced." 25. The requirement of law is manufacturing but the whole process may not be carried out by the assessee himself. The Chandigarh Bench of Tribunal in the case of Sond Bharat Pedals (India) vs. ITO (2004) 89 TTJ (Chd) 492 : (2003) 84 ITD 89 (Chd) held as under : "It is not necessary that the assessee should carry out all the manufacturing operations itself, in order to be entitled to benefit of deduction under s. 80-I. Such operations can be got done from outside agencies on payment of labour service charges. In fact, certificate issued by the Punjab Government showed that the assessee was registered as a small scale industrial unit and the trading account showed the assessee s sales of Rs lakhs for the year under consideration. Since the assessee was engaged in the business of manufacturing cycle pedals, it would be entitled to deduction under s. 80-I even though part of such operations was got done from outsiders. Thus, the assessee was engaged in the business of manufacturing bicycle pedals and, therefore, was an industrial undertaking entitled to deduction under s. 80-I." 26. The Delhi Bench of Tribunal in the case of Jackson Engineers (P) Ltd. vs. ITO (1989) 31 ITD 79 (Del) had held as under : "From the perusal of pictures given by the assessee in respect of diesel generator sets assembled or manufactured by the assessee it was clear that the same was named as Jackson. The said engines were required by large industrial houses for meeting their power requirements. The logo which was placed mainly on the engine was Jackson and the same was made in various kinds and ranges in 1,000 KVA. There was no controversy about the fact that there were as many components of the said machine. The perusal of list of salaries and workers also showed that the assessee was using different components which might not be technically speaking, raw material, but something between raw material and generating set. There was no controversy about the fact that the assessee purchases its alternators and engines separately from lead manufacturers. What the assessee assembled and manufactured through assembling was not the same name which was assigned to the parts. The engine made by the assessee was known as diesel generating set. With this process in view and there being a separate name in the market for what the assessee made the assessee could not be treated as non-industrial undertaking. Thus, the order of the CIT(A) was not justified in treating the assessee as the industrial undertaking." 27. The issue of purchasing different components, different equipments and spare parts from various concerns and their assembly, fabrication and erection into plant known as ETP was considered at length by Delhi Bench of Tribunal in Degremont India Ltd. vs. Dy. CIT (supra) and after deliberation at length on the facts, decision of apex Court in CIT vs. N.C. Budharaja & Co. & Anr., Etc., Etc. (supra) and various other judicial pronouncements of various Courts, it was held that the assessee was covered within the definition of manufacturing of an article or thing. The Delhi Bench of Tribunal in Degrernont India Ltd. s case (supra) had held as under : "It is apparent from a plain reading of the judgment of the Supreme Court in N.C. Budharaja & Co. s case (supra) that the various findings given related solely and exclusively to concerns engaged in the business of construction of dams and civil works. There was not a single word or whisper in the said judgment by which it could be inferred that an assessee engaged in the activities of designing, fabricating, erecting, supplying, installation and commissioning of a plant like the one supplied by the assessee could be covered by the aforesaid judgment. It is well-settled law that the judgment in each case has to be seen in the light of the facts of that case. A decision is to be understood in the context of the facts in which the decision is rendered. A case is precedent for what it explicitly decides and nothing more in the conditions of people, even the words occurring in a statute are required to be interpreted differently keeping in mind the context in which such expressions have been used in the relevant provisions of law. Therefore, the aforesaid judgment did not in any manner support the Revenue s contention. The provisions of s. 80-I are intended to provide an incentive for investment in certain desired sectors and promote industrialization in developing countries which has adopted the policy of liberalization." It was further held as under : "In the /about.html Page 8 of 11 /contact.html

9 /feedback.html /library.html instant case, the assessee was purchasing different components, different equipments and spare parts from various other parties and were assembling those components, equipments and accessories and thereby they were preparing, fabricating and erecting a plant which was known as ETP. The ultimate end product which was prepared as a result of assembling of various components with the constant application of technical know-how was the ETP. The ETP was obviously distinct and different plant than the various components, equipments, purchased or got manufactured according to the tailor-made requirement from the different suppliers. The activities carried out by the assessee were, therefore, clearly covered within the definition of manufacture of an article or thing. The assessee had undertaken to design, engineer, manufacture, supply, install and commission the ETP and also undertook to give performance test. The obligation of the assessee would come to a concluding stage only after successful commissioning of the plant. The various bills prepared by the assessee from time to time were merely a mode of payment during the currency of the long period of the carrying out of the entire work. It would be evident from the contract executed by the assessee with the parties that such mode of payment was mutually decided between the parties so that the assessee received the payments on pro rata basis with the progress of the work. Such an arrangement was quite usual and natural in cases of such turnkey project so that the supplier received the payment from time to time." 28. Further, the Ahmedabad Bench of Tribunal in the case of Enviro Central Associates vs. Asstt. CIT (1995) 78 Taxman 214 (Ahd)(Mag) had held as under : "In the instant case, the activities of the assessee firm were that of manufacturing or that of producing an article as they were constructing water, air pollution plants. Thus, the assessee firm was an industrial undertaking and was engaged in manufacturing or producing an article in the shape of air, water pollution control. That the assessee was manufacturing or producing the plant in backward area, was one of the requirements of the claim under s. 80HH. The contention of the assessee was that only per cent of the total receipt had been taken for deduction under s. 80HH as that work alone was done in backward area and it was not expected from the assessee to have its office or plant in backward area. The crux of the case law is that if an industrial undertaking begins to manufacture or produce outside in any backward area, it is entitled to deduction under s. 80HH. The assessee for, set up its own industrial undertaking at the site of its customers for whom water, air pollution control plant was manufactured and of the places which were falling under the backward area declared under the Act, then, naturally the assessee should be getting benefit of the same and the computation made by the assessee-firm of the same was correct one." 29. The objection of the learned Departmental Representative for the Revenue that situs of assembly is important, has been dealt with by the Pune Bench of Tribunal in Indocan Engineering Systems (P) Ltd. vs. Dy. CIT (supra). There is no merit in the contention of the learned Departmental Representative for the Revenue that main activity of the assessee is of erection at client s site. The end product is an integrated unit. The assessee is required by its clients to supply a cooling tower, parts of which are manufactured by assessee and certain parts/components are bought from outside. The end product is the cooling tower supplied to the client. The assessee in its quotation made to its client s requisitions, also guarantees the abovesaid equipment by way of warranty as incorporated in the quotation at p. 245 of the paper book. The warranty is against defect in materials and workmanship when erected and operated in a manner provided by us (the assessee). 30. The Pune Bench of Tribunal in Indocan Engg. Systems (P) Ltd. vs. Dy. CIT (supra) had held as under : "It has been held by the Supreme Court in the case of N.C. Budharaja & Co. & Anr. (1993) 114 CTR (SC) 420 : (1993) 204 ITR 412 (SC) : (1993) 70 Taxman 312 (SC), that an article or thing must be understood to be movable one. An article can be said to be a movable item only if it is capable of being moved from one place to another. The reasoning given by the CIT(A) was that where the plant is erected, it is embedded to the earth and, therefore, cannot be said to be a movable property. Merely because the plant is attached to earth by fixing the same on the foundation by nut and bolts, it cannot be said that it is embedded to the earth or it is attached to the earth. It cannot be disputed that such plant can be shifted from one place to another by unscrewing the same. Therefore, the assessee was engaged in the business of manufacturing and fabricating of plant which was an article or thing as mentioned in s. 80-I....Further, most of the work was done by the sub-contractors under the supervision of the employees of the assessee. Therefore, the question of showing power expenses did not arise. In this connection, it has been held in CIT vs. Neo Pharma (P) Ltd. (1982) 28 CTR (Bom) 223 : (1982) 137 ITR 879 (Bom) that where /about.html Page 9 of 11 /contact.html

10 /feedback.html /library.html the manufacturing activity has been carried on by another concern under the supervision of qualified staff of the assessee then such activity can be treated as activity of the assessee. On the basis of that decision it was to be held that the assessee had been carrying on manufacturing activity." 31. The deduction under s. 80-IA of the Act is available to an assessee whose gross total income includes profits and gains derived from an industrial undertaking as per stipulations in s. 80-IA(2), which, inter alia, requires the manufacturing or production of an article or thing not being any article or thing specified in Eleventh Schedule. In the instant case, before us, the assessee was manufacturing components of cooling towers in its factory unit at Chhatral, which in-turn were exigible to excise duty. The profits on sale of said components were entitled to deduction under s. 80-IA of the Act and as allowed by AO. The assessee in the present case was not in the business of sale of components of cooling towers, but the cooling tower as a whole as is evident from the enquiries of the client, quotations and performa invoice raised by the assessee. In the instant case, the assessee purchases various bought out components, which along with manufacturing components are assembled at the client s site and the cooling tower is erected. The ultimate product erected by the assessee was a cooling tower, which was a distinct product from the various components, bought from outside or manufactured by it. The aforesaid activities of the assessee were covered within the definition of manufacture of an article or thing. The assessee had undertaken the job of erecting a cooling tower as per the individual specification of the client, and after erection, the assessee guarantees the performance of the cooling tower as a whole and not that of manufactured items only. All the activities carried on by the assessee fall within the ambit of manufacture or production of an article or thing. The end product being the cooling tower, the assessee is entitled to claim deduction under s. 80-IA of the Act on the whole including profits on manufactured items and bought out components. As held by Tribunal in Sond Bharat Pedals (India) vs. ITO (supra), it is not necessary that the assessee should carry out all the manufacturing operations itself in order to be entitled to claim of deduction under s. 80-IA of the Act. The situs of assembly of end product being client s premises does not disentitle the assessee from its claim of deduction under s. 80-IA of the Act in respect of bought out components utilized for the erection of the said cooling towers. There is no merit in the contention of the learned Departmental Representative that excise duty is paid only on manufactured items. The levy of excise duty is governed by excise laws. There is no merit in denial of exemption under s. 80-IA of the IT Act on bought out items as the same are not subjected to excise duty. The assessee prepares two different bills, one for excisable manufactured items and other for bought out components, both of which are utilized for the erection of cooling tower. The assessee raises separate bills for transportation, erection and service charges. The profits on sale of the manufactured items and bought out components are eligible for deduction under s. 80-IA of the Act. Thus, after considering the entire relevant material and decisions of the various High Courts and Tribunals, we are of the view that the assessee is entitled to the benefit of deduction under s. 80-IA of the Act, both on the manufactured items and the bought outcomponents, used for the erection of cross flow (XE series) and counter flow (CM series) cooling towers. In view of the decision hereinabove that assessee is not entitled to any deduction under s. 80-IA of the Act on round bottle (RB) cooling towers, no deduction/benefit under s. 80-IA shall be allowed on bought out components used for erection of round bottle cooling towers. The AO is directed to allow the deduction under s. 80-IA of the IT Act only on profits on sale of cross flow (XE series) and counter flow (CM series) cooling towers. The next issue before us is whether assessee is entitled to deduction under s. 80-IA of the Act on the installation charges, forwarding charges and service charges received from the clients. The AO disallowed the claim of the assessee observing that all these charges have no connection with the manufacturing activities of the assessee. In the present case, the assessee is engaged in the manufacturing of cooling towers, which are manufactured as per the specific requirements of the clients, who in turn attach it to their industrial units. The cooling tower being voluminous, the erection of the same is carried out at the sites of the clients. The forwarding charges and installation charges are billed to the clients. The service charges are received from clients against services provided to them. The said charges are linked to the manufacturing activity carried on by the assessee. The said receipts are to be included in profits derived from manufacturing operations. Reliance is placed on the decision of Tribunal in the case of Dy. CIT vs. Unitherm Engineers (P) Ltd. (2004) 141 Taxman 38 (Mumbai)(Mag), which held as under : "Though the assessee was engaged in the manufacturing of goods the customers of the assessee requested it for erection, commissioning and installation of the furnace boiler, etc. After such installation and commissioning the regular service was also required, as per the warrantee clause in the orders received by the assessee. Service charges were an integral part of the sales price of the equipment. The ledger of the company /about.html Page 10 of 11 /contact.html