IT APPEAL NOS. 401 & 437 (PN.) OF 2013
[ASSESSMENT YEAR 2009-10]

SHAILENDRA KUMAR YADAV, JUDICIAL MEMBER 
AND R.K. PANDA, ACCOUNTANT MEMBER

ORDER

Shailendra Kumar Yadav, Judicial Member - Both these cross appeals arising from the common order of Commissioner of Income Tax (Appeals)-V, [(in short CIT(A)] Pune dated 15.11.2012 pertain to the same assessee for A.Y. 2009-10. So these were heard together and are being disposed off by this consolidated order for the sake of convenience.

2. In ITA No.401/PN/2013, the revenue has filed the appeal on the following grounds:

3. In ITA No.437/PN/2013, the assessee has filed the appeal on the following grounds:

4. The first issue pertains to allowability of claim of Rs. 1,31,38,957/- u/s.80IB(5)(i) of I.T. Act. This issue has been decided in favour of assessee in assessee's own case for A.Y. 2007-08 and 2008-09 in ITA No.2056 & 2057/PN/2012, wherein it was decided by observing as under:

"4.2 After going through the rival submissions and material on record, we find that the assessee is engaged in the business of manufacturing generator sets under the brand name "Kala". The assessee company has two units at Chakan as stated above and one unit at Silvassa. The assessee company has claimed deduction in respect of Chakan and Silvassa units. The deduction available at Chakan Unit was at 30% of the profit while in respect of Silvassa Unit, the deduction was available at 100% of the profit of the unit.

4.3 Thus, the assessee company has claimed deduction in respect of profits for both units. The deduction claimed in respect of Silvassa Unit was of Rs.7,74,08,854/- for A.Y. 2007-08. The Assessing Officer had disallowed the claim of the deduction made by the assessee in respect of Silvassa unit because the assessee was not engaged in manufacturing of article in Silvassa unit, but he was simply assembling various components of gensets. According to the Assessing Officer, the assessee itself has admitted that it was engaged in the assembling with various parts, hence deduction u/s.80IB(5)(i) was not allowable to the assessee. The Assessing Officer has relied upon the decision of Calcutta High Court in the case of CIT v. Babcock and Wilcox of India Ltd. [2000] 241 ITR 583 in order to support his case that the deduction u/s.80IB(5)(i) was not available to a unit engaged in assembling of various parts. In appeal before CIT(A), the assessee has explained the various steps which were followed for manufacturing of gensets. The assessee pointed out that various items like engines, alternators, batteries, control panel, canopies, etc. are procured by the Silvassa unit. Thereafter, the technical team inspects the material received and only after thorough check up, the items are sent for manufacturing. The assessee further explained that the various engineers assemble the various parts and also they have to align the engine and the alternator. After final assembly, various tests like vibration tests, load test, noise test, etc. are carried out.

4.4 In this background, the stand of assessee has been that there is no dispute that it is engaged in assembly of various parts to manufacture genset. The issue is whether assembly amounts to manufacture. The Hon'ble Bombay High Court in the case of Tata Locomotive and Engineering Company Ltd. [(1968) 68 ITR 325 (Bom)] held that manufacture includes assembly of various parts. The assessee also placed reliance on the following decisions wherein it has been held that assembly amounts to manufacture -

4.5 The stand of the assessee has been that the raw materials were engine, batteries, canopies, alternators, etc. and the final product was generator set which was totally different product having a separate name and identity in the market. Accordingly, the assessee submitted that assembly amounts to manufacture and hence, the deduction should be allowed. The assessee has assembled gensets. According to him, the assessee is paying excise duty on the gensets manufactured. Secondly, he has also accepted that the final product i.e. generator set is a new product vis-a-vis the raw material used. Accordingly, he has accepted the claim of the assessee and has allowed the deduction. The Hon'ble Madras High Court in the case of Chiranjeevi Wind Energy Ltd.[2011-TIOL-91-HC-MAD-IT] has held that the assessee engaged in the activity of procuring different parts of windmills and thereafter, assembling them to form windmill was engaged in manufacturing activity. The relevant para of the decision is as under:

'The assessee was engaged in the activity of procuring different parts for assembling windmills. According to the appellant, since the assessee merely procured the different parts of the windmill and assembled the same, it could not amount to either 'manufacture' or 'production' of any article or thing, as spelt out in Section 80IB(2)(iii). Thus such contention was rejected by the Tribunal.

Having heard both the parties, the High Court held that:

The different parts procured by the assessee by themselves cannot be treated as windmill. Those different parts bear distinctive names and when assembled together, they get transformed into a final product, which is commercially known as a windmill. However, there can be no difficulty in holding that such an activity carried out by the assessee would amount to "manufacture" as well as "production" of a thing or article as set out in Section 80IB(2)(iii)."

4.6 The Hon'ble High Court of Delhi in the case ofJackson Engineers [(2012) 341 ITR 518 (Delhi)] has decided a similar issue. The relevant portion of the same is as under:

"Deduction under s. 80-IA- Manufacture or production- Assembling of diesel generating sets- Assembling of various components of diesel generating sets involves coupling and aligning the engine with the alternator- Chain pulley blocks are used to lift the engine and the alternator at the time of coupling, as these are very heavy components- After the coupling is done, the engine and the alternator are mounted on a base frame- Engine and the alternator are affixed to the base frame by means of nuts and bolts fitted in the grooves- Other components are fitted to complete the DG set- Function of the control panel is to indicate the voltage and the current that is generated- It is fitted with switches and instruments to regulate and control the power supply- Function of the battery is to provide the initial current required to start the engine and the function of the silencer is to diminish the sound of the DG set when it runs while the function of the radiator is to maintain the temperature of the DG set- Above components constitute the inputs in the manufacture of a diesel generating set- DG set is the final product which has a distinctive name, character and function different from each of the components- Therefore, the activity of assembling gensets from various components amounts to manufacture or production for the purpose of deduction under s. 80-IA."

As discussed above, the Hon'ble Bombay High Court in the case of Tata Locomotive and Engineering Company Ltd. (supra) has decided a similar issue in favour of assessee.

4.7 The decision of Calcutta High Court in the case of CITv. Babcock and Wilcox India Ltd. (supra) is not applicable to the facts of the present case. In said case, the assessee was engaged in the activity of erection of boilers as a sub contractor. It was held that such an activity of erection of boilers did not amount to manufacture. In the said case, the issue was whether assembly amounts to manufacture was not involved. Accordingly, the ratio ofBabcock and Wilcox India Ltd. (supra) is not applicable to the facts of the present case. In this background, we hold that CIT(A) was justified in allowing the claim of the assessee u/s.80IB(5)(i) by holding that assembling various components amounts to manufacturing. This reasoned factual and legal finding of CIT(A) on the issue needs no interference from our side. We uphold the same. Similar issue arose in ITA No.2057/PN/2012 for A.Y. 2008-09. Facts being similar, so following the same reasoning, we uphold the order of CIT(A) on the issue. Accordingly, we hold that grounds Nos.1-5 of revenue's appeal are dismissed. The other grounds raised by revenue are similar to that of issues raised in assessee's appeal which will be taken care in the assessee's appeal on the said issue.

4.8 As a result, both the revenue's appeals are dismissed.'

Nothing contrary has been brought to our knowledge on behalf of revenue. Facts being similar, so following the same reasoning, we are not inclined to interfere with the finding of CIT(A), who has allowed the claim of assessee u/s.80IB(5)(i) by holding that assembling of various components amounts to manufacturing. We uphold the same.

5. The next issue is with regard to artificial inflation of profit of Silvassa Unit in order to claim higher deduction. A similar issue arose in the assessee's own case in A.Y. 2007-08 in ITA No.1866 & 1867/PN/2012, wherein it was decided by us by observing as under:

"6.3 After going through the rival submissions and material on record, we find that according to the Assessing Officer, the profit of Silvassa unit was eligible for 100% deduction while profit of Chakan unit was eligible for deduction at 30%. According to the Assessing Officer, the assessee has shown higher profit in Silvassa unit. The Assessing Officer stated that net profit ratio of Chakan was 1.78% while that of Silvassa unit was 9.65%. The Assessing Officer further stated that the assessee has arranged his affairs in such a manner that higher profits are shifted to Silvassa unit.

6.4 The Assessing Officer has stated that Chakan unit has sold same type of canopy at lesser rates to Silvassa unit vis-a-vis the rate charged to other parties. According to him, the assessee had sold 25KVA canopy to Silvassa unit at Rs.52,300/- while the sale price to other parties was Rs.81,000/-. Similarly, the Assessing Officer has stated that there are comparable instances of 177 canopies and the benefit granted was calculated by him at Rs.53,85,100/- in respect of the 177 canopies as discussed above. The Chakan unit has sold 3141 canopies to Silvassa unit and a profit margin of Rs. 10,000/-was considered by him to have been the indirect benefit granted to the Silvassa unit. Thus, he has computed the indirect benefit by reducing 177 canopies for which direct evidence was available out of 3141 canopies sold during the year and has worked out the excess benefit granted to Silvassa unit at Rs.2,96,40,000/- as discussed above.

6.5 The assessee objected to the action of the Assessing Officer. He has stated that the price charged by Chakan unit was much higher than the price of the canopies purchased from third parties. The stand of the assessee has been that the comparable rates adopted by the Assessing Officer were not correct since the canopies sold to third parties i.e. Kirloskar Oil Engines Ltd. were having totally different features. The assessee also explained various reasons for which the net margin in the Chakan unit was lesser as compared to the net margin in Silvassa unit. In appeal, the CIT(A) held that the assessee was not able to substantiate the variation in the net profit margin between the two units. Accordingly, in para 24 of his order, the CIT(A) has held that the same net profit ratio should be considered for both the units and hence, he has calculated the excess profit loaded to Silvassa unit at Rs. 1,38,75,693/-. We find that main reason for making addition that there is difference in net profit ratio of both units. The allegation is that the canopy sold by Chakan unit to Silvassa unit were at much lesser rate as compared to charged to third parties. The stand of the assessee has been that he has sold 33 canopies to Kirloskar Oil Engines Ltd. Apart from this sale, the assessee has not sold to any other third party. In this regard, the contention of the assessee is that the canopies sold to Kirloskar were of totally different features. On page 57 of the paper book, the assessee has given the points of difference in respect of the canopies sold to the Silvassa unit and those sold to Kirloskar. From the above, we find that the canopies sold to Silvassa unit were semi finished while those sold to Kirloskar were fully finished canopies. Moreover, from the explanation of assessee, it is found that the specifications were also different. The noise levels were also different. The gauge of steel used in above two was different. The assessee also gave details of the difference in the cost of the manufacturing the canopies as enclosed on pages 91 & 92 of the Paper Book. Considering the different features and specifications in the canopies sold to Kirloskar, the assessee had charged higher rate to Kirloskar as evident from the detailed working of cost difference submitted by the assessee as discussed above. Considering the various differences between the canopies sold to Kirloskar and Silvassa unit, the comparison made by the Assessing Officer is not justified.

6.6 The assessee further has explained that it had purchased canopies from third parties. The relevant details are enclosed on page 127 of the Paper Book. As per the details, it was claimed that the rate charged by Chakan unit was much higher in respect of most of the canopies vis-a-vis the rate charged by third parties. This fact has not been disputed by the Assessing Officer. Accordingly, it was submitted that the price charged by Chakan unit was very reasonable and there was no indirect benefit transferred from Chakan unit to Silvassa unit.

6.7 Moreover, the assessee has explained the various reasons for higher net profit margin in Silvassa unit. Firstly, the assessee has maintained separate books of account for the Chakan unit and Silvassa units. The assessee had clarified that due to excess depreciation, excess employee and excessive manufacturing expenses, the profit margin of Chakan unit was low. It was further explained that in view of the guidelines issued by Central Pollution Control Board, certain specific directions for controlling noise levels were to be maintained. Hence, the D.G. sets could not be sold without canopies which act as a noise dampening agent. Hence, the assessee company started manufacturing canopies in Chakan unit. The lower authorities have not appreciated that the difference in depreciation was basically because substantial plant and machinery was pertaining to canopy manufacturing division. The relevant chart is enclosed on page 49 of the Paper Book. The higher employee and manufacturing expenses were because of the fact that the canopies were being manufactured in Chakan unit which was not the case in Silvassa unit. The chart giving the details of the profit earned by the two units as enclosed on page 146 of the Paper Book.

6.8 The Assessing Officer has invoked sub-section (10) of Section 80IA. In this regard, the stand of the assessee is that sub-section (10) is not applicable since it is applicable to the transactions between the assessee and third person. In this case before us, the transactions are between the two units of the assessee and if at all, any provision is to be applied i.e. sub-section (8) of section 80IA. As per the said section, if any goods are transferred to an eligible business from other business and the consideration of the goods transferred does not correspond to the market value then the Assessing Officer has the power to re-compute the price and disallow the deduction. For applying the provisions of sub-section (8), the Assessing Officer can make disallowance on concrete basis and not on presumptions and surmises. The Assessing Officer has not been able to point out that the market value of the canopies sold by Chakan unit to Silvassa unit was much higher. The assessee has clarified that the canopies sold to Kirloskar were not comparable to the canopies sold to Silvassa Unit. Secondly, he has considered an indirect benefit of Rs. 10,000/- for the canopies in respect of which no comparable price has been cited. Thus, this addition is not justified and method adopted by the Assessing Officer is not correct and the addition in question is on presumptions and surmises. The lower authorities have not properly appreciated the facts. They have not properly considered the various contentions raised on behalf of assessee for higher net profit margin in Silvassa unit. The assessee has given detailed charts given basis of allocation of common expenses to both the units. In respect of common expenses, the assessee has allocated most of the expenses on turnover basis.

There is no concrete evidence that the assessee had shifted the profits of Chakan unit to Silvassa unit at such magnitude and hence, the addition sustained by the CIT(A) cannot be sustained as such. At the same time objection of revenue authorities on this part cannot be rejected in total. Taking all facts and circumstances into consideration, the reduction of claim of deduction u/s.80IB(10) is restricted to 15% as against lower authorities in A.Y. 2007-08. Facts being similar in A.Y. 2008-09 on the issue of reduction of claimed deduction u/s.80IB(10). Following the same reasoning, the reduction of claim of deduction is reduced to 15% as against lower authorities. Accordingly, the assessee's appeal on this account is partly allowed. The Assessing Officer is directed to re-compute deduction u/s.80IB(10)."

6. Nothing contrary has been brought to our knowledge on behalf of revenue. Facts being similar, so following the same reasoning, we hold that there is no concrete evidence that the assessee has shifted the profit of Chakan Unit to Silvassa Unit at such a magniture and hence, the addition sustained by CIT(A) could not be sustained, as such, at the same time, the objection of revenue authorities on this point cannot be rejected as in toto. Taking into all the facts and circumstances in to consideration, the deduction of claim u/s.80IB(5)(i) is restricted to 15% as against done by the CIT(A). As a result, this issue is partly allowed.

7. In the result, the appeal of revenue is dismissed and that of appeal of assessee is partly allowed.