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Income Tax Appellate Tribunal, ‘D’ BENCH, CHENNAI
Before: SHRI DUVVURU RL REDDY & SHRI S. JAYARAMAN
आदेश/ O R D E R
PER BENCH: The assessee filed these appeals against the orders of the Commissioner of Income Tax (Appeals)-VI, Chennai in ITA :-2-: to 1563, 2592 to 2594/Chny/2014 1662 & 1663/Chny/2016 & 178/Chny/2017 Nos.66,95, 96, 223 & 444/13-14/A-VI dated 28.02.2014 for the assessment years 2001-02, 2002-03, 2006-07 to 2008-09, ITA No.743, 742 & 741/13-14/A-VI dated 30.07.2014 for the for the assessment years 2003-04 to 2005-06 and the orders of the Commissioner of Income Tax (Appeals), Puducherry in ITA No.484/CIT(A)-PDY/2013-14 dated 18.03.2016, ITA No.16/CIT(A)- PDY/2014-15 dated 18.03.2016 and ITA No.001/CIT(A)-PDY/2015- 16 dated 11.11.2016 for the assessment years 2009-10, 2010-11 & 2011-12 respectively.
2. The main issue involved in these appeals are whether the assessee has set up a new unit or undertaking capable of producing entirely different products or articles from the existing unit and also as to whether the assessee is eligible for claim of deduction u/s 80lB in respect of profits declared in the returns of income filed by it. The issue started from the initial A.Y. i.e. 2001-02. Against the assessment order dated 29.03.2004, the assessee filed an appeal before the CIT(A) and the ld CIT(A) vide order in dismissed the appeal . On further appeal by the assessee, the Hon'ble ITAT vide its order in ITA No.2910/Mds/2005 dated 12.10.2007 has remitted back to the AO to consider the issue in :-3-: ITA No.1559 to 1563, 2592 to 2594/Chny/2014 1662 & 1663/Chny/2016 & 178/Chny/2017 de-novo. Subsequently, the AO denied the claim of deduction u/s 80IB noticing certain shortcomings in the quantum of the machinery purchased by the assesse and also holding that the assessee has not satisfied two major conditions as mentioned by the Supreme Court of India in the case of M/s Textile Machinery Corporation vs CIT 107 ITR 195 as under: 1. The manufacture of production or article or things by the so called new industrial undertaking with reference to the investment of substantial capital made in the so called new industrial undertaking.
2. The assessee company was not able to establish that the so called new industrial undertaking is a separate and distinct and identity when compared to the old industrial undertaking. "
2.1 Similar claims made by the assessee u/s 80IB were also disallowed by the AO for the A.Ys. 2002-03 to 2005-06, 2006-07, 2007-08, 2008-09, 2009 - 2010 & 2010-2011.
2.3 This Tribunal in ITA 1559/Mds/2014, dated 01.09.2016, directed the AO, inter-alia, to examine all the bills and vouchers and functions of each and every machinery and thereafter file a report before this Tribunal on or before 01.11.2016 after serving a copy of the same to the assessee. It made clear, in the remand proceeding, :-4-: to 1563, 2592 to 2594/Chny/2014 1662 & 1663/Chny/2016 & 178/Chny/2017 the assessing officer may also inspect the so called plant and machinery in person, in case, he doubts the existence of the plant and machinery, said to be purchased by the assessee. It is open to the assessee to file objection to the report filed by the assessing officer before this Tribunal. The AO filed his report on which the assessee has also filed its rejoinder. However, they have not addressed the specific issues as desired by the Hon’ble ITAT, therefore, they are not dealt here. Therefore, the appeal is heard on merit.
3. On the issue of disallowance U/s.80IB, the ld.AR submitted against the various findings recorded by the lower authorities issue- wise as under: 1. With regard to the finding that investment was not substantial, the ld.AR submitted that the issue of substantial investment is relevant to be examined when the undertaking manufactures same products as the old undertaking, so as to establish that the undertaking is a new and independent undertaking and not merely extension of the old undertaking formed by reconstruction.
In case, the new undertaking is engaged in manufacturing completely new range of products which the old undertaking was not manufacturing, then issue of substantial investment would not be :-5-: to 1563, 2592 to 2594/Chny/2014 1662 & 1663/Chny/2016 & 178/Chny/2017 relevant, as the new undertaking is per se an independent undertaking for the purpose of section 80IB of the Act.
Even otherwise, the courts have held in plethora of the judgements that for the purpose of allowance of deduction under 80lB of the Act (even in case of expansion of existing business) the condition of substantial investment in plant and machinery is required to be examined. In the present case, the Appellant invested INR 1,05,74,903 towards fixed assets for new Bussmann unit, out of which INR 60,86,552 were invested only towards Plant and machinery whereas the value of in the S&S unit was INR 34,97,597, which mean that the value new investment in new Plant and machinery was about 174% of the value of old machinery, which in fact depicts substantial investment (refer section 801C(8)(ix) of the Act which defines "Substantial expansion" to mean increase in the investment in the plant and machinery by at least fifty per cent of the book value of plant and machinery (before taking depreciation in any year), as on the first day of the previous year in which the substantial expansion is undertaken. Further, it is also relevant to point out that installed capacity was substantially increased which is evident from the year on year increase in turnover.
2. With regard to the finding that no new technology was employed and no new and different products was manufactured, the ld.AR submitted that :-6-: to 1563, 2592 to 2594/Chny/2014 1662 & 1663/Chny/2016 & 178/Chny/2017 New machinery worth INR 60.86 lakh was installed for manufacturing Bussmann range of fuses. Commissioning report was also furnished in the course of hearing. Further, the fact that the said new machinery was put to use by the Appellant during the relevant AY and the corresponding depreciation was claimed, and was never objected by the AO as well as CIT(A). The Bussmann range of fuses are manufactured with European specifications and they are significantly different from India. Copy of ASTA certificate issued in relation to first export was furnished in the course of hearing. Further, a technical write up of raw material requirement was also furnished. The products manufactured by the S&S unit were not in line with the specifications for the European markets and the same could not be exported or sold in such markets. The Appellant also submitted copy of certificate issued by the Chartered Engineer in Report No. 30 / 04- 05 dated March 3, 2005 and addendum thereto dated Jan 7, 2014. It is submitted that use of new technology in the new machinery is not a sine qua non for the new undertaking. The only condition required to be fulfilled is that the new unit is an independent and integrated undertaking with new machinery and not mere expansion of the existing business. In the present case, the end product manufactured by the new undertaking has altogether different quality standards, different market and different customers, thus it cannot be assailed that the new undertaking is mere an extension of the old undertaking. Particularly, when the old undertaking was not capable of effectively manufacturing the new product.
:-7-: to 1563, 2592 to 2594/Chny/2014 1662 & 1663/Chny/2016 & 178/Chny/2017
With regard to the finding that no separate books of accounts, the ld.AR submitted that maintenance of separate books of accounts is not an essential condition for availing the deduction under section 80- IB of the Act, during the AY 2001-02.
With regard to the finding that same employees were employed for manufacturing all products, the ld.AR submitted that the AO has alleged based on the statement taken from an employee of the maintenance department.
The AO made this statement without disclosing the identity / source of such information. Further, neither the qualification of the employee was disclosed (so as to understand whether the person was competent to make such statement), nor an opportunity to cross examine such employee was provided. The AO visited the premises of the Appellant in December 2008, i.e., during AY 2009-10, when the Appellant was not availing any deduction under section 80IB of the Act and therefore, it is not relevant whether or not the two units are separate or not, in AY 2009- 10. Further, it is also not clear whether enquiry undertaken by AO was from the employees who were employees during the AY 2001-02. In view of aforesaid infirmities, such statement is inadmissible and reliance on the same is contrary to principle of natural justice. No requirement to maintain separate muster roll for separate units for availing deduction under section 81B of the Act.
:-8-: to 1563, 2592 to 2594/Chny/2014 1662 & 1663/Chny/2016 & 178/Chny/2017 The statements / observations of the AO / CIT(A) are factually incorrect. There were separate employees for Bussmann Unit and S&S Unit.
5. With regard to the finding that no physical separation of the units, the ld.AR submitted that the evidences tendered by the Appellant, to demonstrate that the new undertaking is a physically separate and independent undertaking, have been wrongly rejected . The AO has erred in rejecting commission report prepared by the Appellant's engineers, without appreciating that there is no statutory requirement to obtain the commissioning report to be issued by an independent third party or a government agency. On one hand the AO / CIT(A) has not disputed allowance of depreciation on the said plant and machinery since they were setup and put to use during the relevant AY by the Appellant, on the other hand they are disputing the commissioning of the machinery, which is self-contradictory. Certificate issued by chartered engineers shows that the old machinery could not have been used to manufacture new products, however, the AO/CIT(A) have based on conjectures and surmises taken a view that the certificate read 'cannot be effectively used' meant that the machinery could have still have been used by the Appellant for manufacturing the new product though not effectively. Such interpretation is absurd and contrary to the spirit of section 80IB of the Act, since, even otherwise, there is no embargo in setting up a new undertaking to manufacture a new product which could have been manufactured by the old unit.
:-9-: to 1563, 2592 to 2594/Chny/2014 1662 & 1663/Chny/2016 & 178/Chny/2017 The CIT(A) also rejected the expert evidence, in the form of clarification issued by the Chartered Engineer, holding that such clarification was given without physical verification of machinery. Such an action of the CIT(A) is arbitrary and unreasonable, since the Chartered Engineer had undertaken a detailed verification at the time of issuing the certificate for the products, the processes employed and the machinery in question and hence, for the purpose of issuing another clarification for the same process and machinery a physical re-verification was not necessary.
With regard to the finding that no separate power connection, the ld.AR submitted that separate power connection is not a requirement under the law to avail deduction of section 80-IB of the Act. Even otherwise, a separate electricity connection was applied for by the Appellant however, the Electricity Department ("ED") had stated that a separate power connection was possible only after the augmentation of the Sadarapet sub-station which was beyond the control of the Appellant. Further the electricity department had given certain terms and conditions which were to be met before separate power connection was provided and the same were met with in due course of time and a new electricity connection was installed on January 23, 2002.
With regard to the finding that no commencement of new manufacturing activity, the ld.AR submitted that this is factually incorrect. The business of the Appellant had commenced in October :-10-: to 1563, 2592 to 2594/Chny/2014 1662 & 1663/Chny/2016 & 178/Chny/2017 2000 and the same has been demonstrated by the Appellant , however, the AO /CIT(A) did not appreciate the evidence furnished by the Appellant, and alleged that the date of commencement of operations has not been proved. The Appellate has manufactured and exported the Bussmann range of fuses during the relevant AY, the said manufacturing was undertaken by the new machinery setup in Bussmann unit. In view of this, the AO I CIT(A) have erred in concluding that the manufacturing activity of the Appellant has not commenced.
8. With regard to the finding that no separate stock registers, the ld.AR submitted that the Appellant furnished its Central Excise Return for October 2000 as well as print outs of the computer extracts of its daily stock register, which it maintains under the Central Excise Act, 1944. Moreover, it is submitted that maintenance of separate physical daily stock register is not a requirement under the law and the same cannot be a decisive factor whether a new undertaking has been set- up or not, particularly when the Appellant has furnished its central excise return to demonstrate that it manufactured the impugned product during the relevant period. and invited our attention to the materials placed in the Paper-book and relied on various case laws, in support of his contentions. Per contra, the ld.DR submitted that the material furnished by the assessee were thoroughly examined by the ld.CIT(A) and he has drawn correct conclusions. In this regard, he invited our attention to :-11-: to 1563, 2592 to 2594/Chny/2014 1662 & 1663/Chny/2016 & 178/Chny/2017 the relevant portion of orders of the ld.CIT(A) and supported the orders of lower authorities. In order to appreciate the issue in detail, the relevant portion of the order of the ld.CIT(A) is extracted as under:- “5.2 Denial of claim of deduction u/s 80IB of the IT Act for the A.Y. 2001- 02, 2002-03, 2006-07, 2007-08 & 2008-09 :
The main issue involved in this case is whether the appellant has set up a new unit or undertaking capable of producing entirely different products or articles from the existing unit and also as to whether the appellant is eligible for claim of deduction u/s 80IB in respect of profits declared in the return of income filed by it. The stand of the appellant as explained before the Hon'ble ITAT and before the AO are summarized as under:
During the period of assessment i.e. F. Y. 2000-01 relevant to A. Y. 2001-02, the assessee expanded its business to manufacture cooper bussmann range of fuses by investing around Rs.60 lakhs in the purchase of new plant & machinery for setting up the unit, for manufacturing the bussmann range and hired additional manpower for running the new unit.
The new unit represented a substantial expansion in the business of the assessee in a new market. The fuses manufactured by the new unit were sold exclusively to Cooper UK, for supplies to the European market. The new plant and processes were strengthened to meet the standards required by ASTA 20 fuse endorsement scheme by ASTA certification services and UL recognized mark. These are similar to the standards prescribed by Bussmann UK Units. These products were certified for balance sheet 88: 1998. But for these certification, it would not have been possible to expand to the new business in the European market.
:-12-: to 1563, 2592 to 2594/Chny/2014 1662 & 1663/Chny/2016 & 178/Chny/2017 None of the S&S range fuses were having the ASTA certification and were manufactured basically to IS 13703 with 151 mark which were not meeting European market requirement.
The manufacture of "Bussmann" range of fuses was made exclusively by using the new plant and machinery, which was installed in a physically separate area within the factory building. Both 5&5 unit and Bussmann unit were operating with separate sets of plant and machinery and each was capable of manufacturing the respective products.
None of the plant and machinery of the S&S unit was used for the manufacture of the Bussmann fuses. The list of plant and machinery mapped with the processes by both the units are enclosed.
The design / physical dimensions of the Bussmann fuse is entirely different from the S&S fuse. The technology / process involved in the manufacture of Bussmann fuse are also difference from that of S&S fuse.
S&S fuses continued to serve the Indian market with the existing customers and the Bussmann Unit supplied the new range of fuses. The list of existing products and customers of the S&S unit and Bussmann unit is enclosed.
Even after the setting up of the Bussmann unit, the business of the S&S unit was also carried on and continued to grow year-on-year, as evident from the following table tabulating the turnover of the Bussmann unit and the S&S unit over the years: AY AY AY AY AY Particulars 2001-02 2002-03 2003-04 2004-05 2005-06 New 4.55 crores 11.40 21.35 29.76 60.43 undertaking Existing 3.6 2.91 7.47 6.17 9.41 undertaking Thereafter, Hon'ble ITAT remitted back to the AO and the observation of the Hon'ble ITAT in para 2.6 of the order are as under:
:-13-: to 1563, 2592 to 2594/Chny/2014 1662 & 1663/Chny/2016 & 178/Chny/2017 " Upon a careful consideration of the issue we find that, it is the assessee's claim that it cannot be a ground that since the same article as of the old business is being produced, the assessee need to be denied the benefit of deduction. Similarly, if some of the staff members were common, it also need not be a bar. However, if some of the staff members were common, it also need not be a bar. However, in our opinion, first of all the basic criteria for claiming the benefit has to be satisfied. This, inter alia means, the new undertaking should have come up by substantial investment and as held by the Hon'ble Apex Court in the case of Textile Machinery Corporation vs. CIT 107 ITR 195, 'the new undertaking must be an integrated unit by itself wherein articles are produced'. In this case, the lower authorities are emphasizing that the new unit is not an integrated unit by itself capable of producing articles. However, we find that there is no finding regarding the date of production of the new article with reference to the new investment made. We further find that the learned counsel of the assessee has submitted a paper book wherein a certificate from the chartered engineer is annexed which certified that old machineries cannot be effectively utilized in the manufacturing activity of new product. This aspect has been examined on the basis of proper examination of the facts. Hence, in our opinion, the matter needs to be remitted back to the Assessing Officer to consider the issue de novo. The assessee should be given adequate opportunity of being heard. "
5.3 Subsequently, the A O denied the claim of deduction u/s 801B noticing certain shortcomings in the quantum of the machinery purchased by the appellant and also holding that the appellant has not satisfied two major conditions as mentioned by the Supreme Court of India in the case of M/s Textile Machinery Corporation vs CIT 107 ITR 195 as under:
The manufacture of production or article or things by the so called new industrial undertaking with reference to the investment of substantial capital made in the so called new industrial undertaking.
:-14-: to 1563, 2592 to 2594/Chny/2014 1662 & 1663/Chny/2016 & 178/Chny/2017
The assessee company was not able to establish that the so called new industrial undertaking is a separate and distinct and identity when compared to the old industrial undertaking. "
“5.4 I have considered the findings giving by the AO in the order of re-assessment and submissions made by the appellant carefully. The facts of the case are that the assessee company was incorporated on 24.09.1992 but the business activity of the company commenced only during the previous year relevant to the A.Y. 2000-01 and the assessee company acquired a division of another company known as M/s S & S Power Switch Gear Ltd.(M/s S&S PS Ltd.). As per the hive of agreement dated 17.12.1999 entered into the assessee company and M/s S&S PS Ltd., M/s S&S PS Ltd. transferred its low tension(fuse business) located at Pondicherry to the assessee company. As a result of hive of agreement, the assessee company acquired the following assets of M/s S&S PS Ltd. S.No. Name of the assets Amount 1 Land 3,971,000 2 Buildings 11,129,966 3 Plant & Machinery 3,497,597 4 Electrical installation 6,55,428 5 Tooling & Fixtures 14,81,288 6 Furniture & Fittings 26,01,128 7 Computers 7,33,193 8 Goodwill 8,60,19,764 Total 11,00,89,364 As a result of transfer, the shares of M/s S&S Low Tension Switch Gear Ltd. were transferred to Cooper Bussmann LLC on 20.01.2000. During the period August, 1999 to March, 2000, Cooper Bussmann LLC has infused funds amounting to Rs.12,55,67,120/-.
:-15-: to 1563, 2592 to 2594/Chny/2014 1662 & 1663/Chny/2016 & 178/Chny/2017 Out of the amounts infused, Rs.,11,83,20,000/- was utilized to pay the consideration to S&S Power Switch Gear Ltd. and the balance was utilised for the purchase of new plant and machinery to be used for the manufacture of bussmann range fuse and fuse fittings. The sales of S&S L T Fuse Division for the F.Y. ended 31.03.2000 was around Rs. 95,27,964/-. According to the company, it has purchased new plant & machinery for manufacture of bussmann range fuses & fuse fittings during the period July 2000 to November 2000 and also recruited new employees for manufacture of bussmann fuse and fittings for the period August 2000 to October 2000. It was the stand of the appellant that the area occupied by the new undertaking manufacturing bussmann range fuses and fuse fittings was around 5122 sq.ft. and it was explained that the new undertaking manufacturing the new bussmann range fuse & fuse fittings and S&S LT Fuse Division was demarcated by a wire mesh partition. Later on, i.e. on 22.11.2000, the name of the company was changed from S&S Low Tension Switch Gear Pvt. Ltd. to Cooper Bussmann India Pvt. Ltd. The sequence of the events was explained by the appellant vide his letter dated 20.12.2011 as under:
Sl.No. Date / Period Event / Activity 1 24.09.92 Date of incorporation of the SSP Industrial Investments Ltd. Subsequently, the name of the company was changed to S&S Low Tension Switchgear Ltd. (the company) 2 31.08.99 The manufacturing facility of S&S Low Tension Fuses(S&S LT fuses division) at Pondicherry was hived off to S&S Low Tension Switchgear Ltd. by S&S Power Switchgear Ltd. The area occupied by plant and stores of S&S LT fuses division was around 1280 sq.ft. 3 20.01.2000 The shares of S&S Low Tension Switchgear Ltd. was transferred to Cooper Bussmann LLC on 20/01/2000. 4 August 1999 to Cooper Bussman LLC has infused funds amounting March 2000 to Rs.12,55,67,120/-. Out of the amount infused Rs.11,83,20,000/- was utilized to pay the :-16-: to 1563, 2592 to 2594/Chny/2014 1662 & 1663/Chny/2016 & 178/Chny/2017 consideration to S&S Power Switchgear Ltd. and the balance was utilized for purchase of new plant & machinery to be used for manufacture of Bussmann range fuse & fuse fittings The sales of S&S LT fuse division for the financial year ended 31.03.2000 was around Rs.1,95,27,964/-. 5 July 2000 to The company has purchased new plant and November 2000 machinery for manufacture of Bussmann range fuse & fuse fittings 6 August 2000 to The company has recruited new employees for October 2000 manufacture of Bussmann range fuse & fuse fittings. 7 31.10.2000 The company has commenced the manufacture of Bussmann range fuses & fuse fittings. The area occupied by the new undertaking manufacturing Bussmann range fuses and fuse fittings was around 5.122 sq.ft. The new undertaking manufacturing Bussmann range fuse and fuse fittings and S&S LT fuses division was demarcated by a wire mesh partition. 8 22.11.2000 The name of the company was changed from S&S Low Tension Switchgear Pvt. Ltd. to Cooper Bussmann India Pvt. Ltd. 9 31.10.2001 The company has extended its building for manufacturing Bussmann range fuses and fuse fittings. The total area constructed was around 11,204 sq.ft. 10 12.07.2004 The company has constructed another new building for its EOU operations. The area of new EOU was around 16,528 sq.ft. 11 17.07.2004 Commencement of EOU operations 12 January 2009 to The assets of the S&S LT fuse division was sold to March 2009 third party vendors.
The main question is whether the appellant has merely expanded the manufacturing unit which was already existing unit, whether the products manufactured in the existing unit before A.Y. 2001-02 are the same as the products manufactured subsequently and also whether the :-17-: to 1563, 2592 to 2594/Chny/2014 1662 & 1663/Chny/2016 & 178/Chny/2017 new undertaking is an integrated unit by itself. The facts are discussed as under:
(a) quantum of investment after purchase : It is undisputed that during the period August, 1999 to March 2000, Cooper Bussmann LLC has infused funds amounting to Rs.12,55,67,120/-. Out of the amounts infused, Rs.11,83,20,000/- was utilized to pay the consideration to M/s S&S Power Switch Gear Ltd. and the balance was utilized for the purchase of new plant and machinery to be used for the manufacture of bussmann range fuse and fuse fittings. The quantum of the new investment made after paying to M/s. S&S Power Switch Gear Ltd., was very low as compared to initial investment in the acquisition of the Low Tension Division Unit of M/s S&S Power Switch Gear Ltd. t Pondicherry which is about 5.7%. The appellant has not made any significant investment in the plant & machinery during the assessment year 2001-02 other than the initial investment of Rs.60,00,000/-. Even for this stated investment of Rs.60 lakhs in plant & machinery, the appellant could not produce copies of invoices in respect of all the purchases. The appellant could produce only invoice copies to the extent of Rs.53,17,373/-. Hence, it can be construed that the appellant has invested in the plant & machinery to the tune of Rs.53,17,373/- only and not over the Rs.60 lakhs as claimed by the appellant. If this figure is taken, the percentage of the plant & machinery purchase vis- a-vis total investment after the purchase of the Low Tension Division Unit comes to about 4.23% only. According to the appellant, the turnover of the so called the new industrial undertaking increased from Rs 4.55 crores Rs.60.43 crores from A.Y2001-02 to A.Y. 2005-06 and the turnover of the existing undertaking increased from Rs.3.6 crores to Rs.9.1 crores from A.Y. 2001-02 to A.Y. 2005-06. This fact itself shows that the new investment of Rs.53.17 lakhs made by the appellant was in the normal course of business of expansion rather than the establishment of any new industrial undertaking.
(b) use of new technology & process involved & products manufactured: I have perused the copies of the invoices in respect of the new machineries purchased to the tune of Rs.53.17 lakhs. I have :-18-: to 1563, 2592 to 2594/Chny/2014 1662 & 1663/Chny/2016 & 178/Chny/2017 also perused the copies of the invoices in respect of manufacture of goods and articles. All the machineries were purchased in India only. It is evident from the copies of invoices that the new machineries purchased are not very different from the machineries which was already existing in the manufacturing process. No new technology was involved in these new machineries. Hence, the contention of the appellant that different types of machines were involved in the manufacture of Bussmann range of products which are meant for export purposes was not supported by any evidence. There was no upgradation in the quality of the products manufactured under the name of Bussmann fuses as compared to S&S products. The appellant has artificially divided the products manufactured for export products as Busmann fuses and for domestic products as S&S fuses. Naturally, products which are exported requires certification from foreign countries whereas the products which are sold in the domestic market require certification from domestic country. The appellant has distinguished the products manufactured for export purposes and for domestic purposes separately only as a marketing strategy. That itself does not mean that the appellant has established new undertaking for the purpose of export market.
(c) No separate books of accounts : The appellant has not maintained separate books of account in respect of the so called Bussmann Division. No separate balance sheet was also prepared in respect of Bussmann Fuse Division for all the years under appeal. The audit report in Form No.10CCB furnished by the AR of the appellant also confirms the fact of non maintenance of separate books of account in respect of so called Bussmann Fuse Division and S&S Division. On perusal of the audit report in Form No.10CCB for A.Y. 2005-06 & A.Y. 2006-07, it was noted that even the income from job work and sale of HRC fuses & components and interest income shown for the purpose of computation of profit of export division are allocated without any scientific data, self certified and the manufacturing expenses are also allocated on the basis of the ratio of the export sales to total sales. Same basis of accounting was adopted by the appellant :-19-: to 1563, 2592 to 2594/Chny/2014 1662 & 1663/Chny/2016 & 178/Chny/2017 for the A.Y. 2001-02 also. This itself prove that no separate industrial undertaking was established by the appellant.
(d) Same employees were employed for all the manufacture of all products: The appellant did not furnish any evidence to prove that the new employees recruited were employed throughout the year only for the purpose of products manufactured for export purposes. No evidence was furnished by producing muster roll register in respect of both the units separately. The non maintenance of separate wage registers in respect of the so called separate units go to prove that the appellant in fact did not establish new industrial undertaking for the purpose of export business.
(e) No physical separation of the units: The evidences produced before the undersigned reveal that the appellant manufactured goods of both for export purposes and domestic purposes in the same factory. No evidences were furnished to prove that the plant & machinery purchased were housed / installed in physically distinct areas. Revised building/machinery layout of drawing submitted for the approval of the Chief Inspector of Factories do not indicate the setting up of the new industrial unit. The quantum of investment made in the building during the A.Y. 2001-02 was only Rs.9,23,579/- as compared to the written down value of the building as on 01.04.2000 of Rs.1,11,29,966/-. No conclusive evidence was furnished to prove that new factory was constructed during the A.Y. 2001-02 with substantive investment and manufacturing took place in the newly constructed factory.
(f) No separate power connection: No evidence for separate power connection was made available to prove that new industrial undertaking was in fact started during the A.Y. 2001-02. The existing connection was used for running extra machines which was in the course of expansion of the already existing factory rather than the newly established unit.
:-20-: to 1563, 2592 to 2594/Chny/2014 1662 & 1663/Chny/2016 & 178/Chny/2017 (g) No commencement of the new manufacturing activity: No evidence was produced to prove that any new manufacturing activity took place during the A.Y. 2001-02. The so called invoice dated 21.07.2000 for import of raw material and the so called invoice for the export of products dated 31.10.2000 do not conclusively establish that the appellant has manufactured distinct products from the products which were already being manufactured.
(h) No Separate stock registers: Copy of the audit report produced before the undersigned did not indicate that separate daily stock registers were maintained for the so called new product produced or manufactured and the existing product being produced or manufactured. Mere identification of the products based on the export sales and domestic sales itself would not prove that the appellant has established new undertaking.
(i) Certificate from the chartered engineer: The certificate produced by the appellant dated 03.03.2005 stated that the machineries which are listed in Annexure 1 which was used in the plant prior of the acquisition of the plant by M/s Cooper Bussmann Pvt. India Ltd. cannot be effectively used in the manufacturing activities of the new Bussmann Range products, being manufactured by M/s Cooper Bussmann Pvt. India Ltd. to meet the required quality/safety standard specified for export by M/s Cooper Bussmann, UK. The chartered engineer used the word 'the old machineries cannot be effectively utilized' which itself means that old machineries can also be used in the manufacturing activities of the so called new products being manufactured though with a less effectiveness. The chartered engineer has not completely ruled out usage of the old machineries for the manufacture of the so called new products. Later on i.e. on 07.01.2014, the chartered engineer changed his stand without plausible reasons and also without any actual verification. It is to be seen that the appellant has sold entire old machineries during the financial year 2007-08. The appellant has shown the same as sale of scrap vide his invoice dated 09.01.2009. Then how come, the chartered engineer verify the old machinery on 07.01.2014 when that :-21-: to 1563, 2592 to 2594/Chny/2014 1662 & 1663/Chny/2016 & 178/Chny/2017 has already become scrap during the FY 2007-08 and also disposed on 09.01.2009. Therefore, the certificate given by the chartered engineer cannot be the basis for holding a view that old machines are not capable of manufacturing so called Bussmann range products and appellant has established entirely new industrial undertaking.
5.5 The burden is really upon the appellant to prove that the new undertaking which is capable of manufacturing new products with distinct characteristics has come into existence during the A.Y. 2001- 02 which is the initial year for the claim of deduction u/s 80 IB of the IT Act. In view of the discussion in the foregoing paras, I am of the considered view that no new undertaking has come up by substantial investment and also of the view that the so called new unit is not an integrated unit by itself. The subsequent purchase of the new machineries after the purchase of the old unit was done in the ordinary course of expansion of the business and not in the nature of new industrial undertaking within the meaning of the Sec.80IB of the IT Act. While doing so, the principle laid down by Supreme Court of India in the cases cited by the AO are fully applicable to hold that the appellant is not eligible for deduction u/s 80IB of the IT Act. Under the facts & circumstances of the case, all the grounds of appeal raised are rejected. Hence, the disallowance of claim of deduction made by AO are confirmed.”
3.1 We heard the rival submissions. It is clear from the order of the ld.CIT(A), extracted above, the ld.CIT(A) examined the issue in detail viz., the sequence of events and considered that the quantum of investment was to the tune of Rs.53,17,373/- only, which comes to about 4.23% only. Considering the turnover increase from Rs.4.45 crores to Rs.60.43 crores from assessment year 2001-02 to 2005-06 :-22-: to 1563, 2592 to 2594/Chny/2014 1662 & 1663/Chny/2016 & 178/Chny/2017 and the turnover of existing industrial undertaking increase from Rs.3.6 crores to Rs.9.1 crores for the corresponding period, the ld.CIT(A) has drawn the conclusion that the new investment of Rs.53.17 lakhs made by the assessee was in the normal course of business of expansion rather than the establishment of new industrial undertaking. After examining the invoices, the CIT(A) concluded that all the machineries were purchased in India and it is evident from the copies of invoices that the new machineries purchased are not different from the machineries which was already existing in the manufacturing process. Therefore, he concluded that no new technology was involved in these new machineries. The assessee’s contention that different types of machines are involved in the manufacture of Bussmann range of products which are meant for export purpose was not supported by any evidence. With regard to commencement of new manufacturing activity, the ld.CIT(A) held that the so called invoice dated 21.07.2000 for import of raw material and the so called invoice for the export of products dated 31.10.2000 do not conclusively establish that the appellant has manufactured distinct products from the products which were already being manufactured. With regard to the certificate produced by the assessee dated 03.03.2005, stating that the machineries which were :-23-: to 1563, 2592 to 2594/Chny/2014 1662 & 1663/Chny/2016 & 178/Chny/2017 listed in Annexure 1 which was used in the plant prior of the acquisition of the plant by M/s. Cooper Bussmann Pvt. India Ltd., to meet the required quality/safety standard specified for export by M/s. Cooper Bussmann, UK. However, later on i.e., on 07.01.2014, the chartered engineer changed his stand without plausible reasons and also without any actual verification. It is to be seen that the appellant has sold entire old machineries during the financial year 2007-08. The appellant has shown the same as sale of scrap vide his invoice dated 09.01.2009. Then how come, the chartered engineer verified the old machinery on 07.01.2014 when that has already become scrap during the FY 2007-08 and also disposed on 09.01.2009. Therefore, the ld.CIT(A) held that the certificate given by the chartered engineer cannot be the basis for holding a view that old machines are not capable of manufacturing so called Bussmann range products and appellant has established entirely new industrial undertaking. Thus, the only external evidence, filed by the assessee has become totally unreliable. Further, the ld.CIT(A) held that the assessee has not maintained separate books of accounts, it employed the same employees for manufacture of all products, there was no physical separation of units, separate power connection and separate stock registers, etc. On such findings, he has come to the :-24-: ITA No.1559 to 1563, 2592 to 2594/Chny/2014 1662 & 1663/Chny/2016 & 178/Chny/2017 conclusion, that no new undertaking has come up by substantial investment, the so called new unit is not an integrated unit by itself, the subsequent purchases of new machineries after the purchase of old unit was done in the ordinary course of expansion of the business and not in the nature of new industrial undertaking within the meaning of Section 80IB of the Act. On such cumulative findings, the assessee has not laid any fresh material to prove that the appellant has established a new undertaking which is capable of manufacturing new products with distinct characteristics has come into existence during the assessment year 2001-02 which is the initial year for the claim of deduction U/s.80IB. Therefore, we do not find any reason to interfere with the order of the ld.CIT(A) and hence, the corresponding grounds of the assessee are dismissed.
4. In the assessments made for assessment years 2008-09 and 2011-12, the AO disallowed the payments made to ASTA Beab Certification Service and China Inspection Company Ltd., as testing / certification fees, invoking provisions of Section 40(a)(i). On appeal, the ld.CIT(A) upheld.
:-25-: to 1563, 2592 to 2594/Chny/2014 1662 & 1663/Chny/2016 & 178/Chny/2017 4.1 In this regard, the ld.AR submitted that in order to meet certain quality standard and sell the “Bussmann” range of fuses in the overseas markets, the appellant was required to obtain a product certification, which it had obtained from ASTA and China Inspection Company Ltd. In this regard the ld.AR submitted that the provisions of 40(i)(a) are applicable in a case where tax is required to be deduction under Chapter XVII of the Act. It is settled law that tax is not required to be deducted from a payment made to non-resident, under section 195 of the Act, if such payment is not subject to tax in India. Thus, the issues which needs to be examined at the outset is whether the payments made to ASTA and China Inspection Company Ltd., which are non-resident, would be taxable in India under the Act as well as under the respective DTAA. Further, it was submitted that the impugned payments were made only towards product certification services, provided by such non-resident from overseas. They have no business connection in India and the said services were provided outside India and were related to export of goods. Therefore, such services were not taxable in India as they are neither managerial, technical or consultancy services. It is purely an audit work, which comes within the definition of professional services, however in the absence of business connection and the activity being :-26-: ITA No.1559 to 1563, 2592 to 2594/Chny/2014 1662 & 1663/Chny/2016 & 178/Chny/2017 carried out by them in India, the same would not be taxable in India. It was submitted that whole process of testing and certification is an automated process without having any human intervention. Therefore, the payment for said services does not qualify as fees for technical services. The foreign entity ASTA is performing services in the nature of product certification which does not make any technical knowledge, experience or skill to the assessee which could be utilized / applied by it independently. Therefore the above payments are not covered under FTS under the India UK DTAA. The ld.AR relied on the following case laws:- 1. Guy Carpenter & Co. Limited : [2012] 346 ITR 504 (Del) 2. CIT vs. De Beers India Mineral (P) Ltd : 346 ITR 467 (Kar) 3. ACIT vs. Vishwak Solutions (P) Ltd: [2015] 38 ITR (T) 522 (Mad)
4.2 Per contra, the ld.DR supported the orders of the lower authorities.
4.3 We heard the rival submissions and gone through the relevant material. Since the payment is towards certification, it is purely professional services and in the absence of any business connection and activity being carried out by ASTA and China Inspection :-27-: to 1563, 2592 to 2594/Chny/2014 1662 & 1663/Chny/2016 & 178/Chny/2017 Company Ltd., in India, the same is not taxable in India and hence, we find merit in the grounds of the assessee and hence allow the appeals.
Further, the ld.AR pleaded that the AO has not given the credit of advance tax and self-assessment tax amounting to Rs.16,02,767/- and Rs.1,41,80,738/- respectively for the assessment year 2008-09. The issue was raised before the CIT(A) vide ground No.6, however the ground has not been adjudicated. Therefore the assessee pleaded that AO may be directed to allow correct credit of taxes. We direct the AO to examine and allow the correct credit of taxes.
6. Further, the ld.AR pleaded that in the grounds of appeal filed for assessment year 2010-11, it raised a ground on incorrect computation of interest U/s.234B, which was not adjudicated by the ld.CIT(A). Therefore the assessee pleaded that AO may be directed to verify and recompute. We direct the AO to verify and recompute accordingly.
:-28-: to 1563, 2592 to 2594/Chny/2014 1662 & 1663/Chny/2016 & 178/Chny/2017 7. The issue in connection with computation of interest U/s.234B / 234C /234D being consequential, they are not dealt.
In the result, the assessee’s appeals for the assessment years 2001-02, 2002-03, 2003-04, 2004-05, 2005-06, 2006-07, 2007- 08 and 2009-10 are dismissed and the appeals for the assessment years 2008-09 and 2010-11 are partly allowed for statistical purpose and the appeal for the assessment year 2011-12 is allowed.
Order pronounced in the court on 1st November, 2019 at Chennai.