DCIT -1(3)(2), MUMBAI vs. TATA LOCKHEED MARTINAEROSTRUCTURES LTD., HYDERABAD

PER RAMIT KOCHAR, Accountant Member

2. The grounds of appeal

raised by the Revenue in the memo of appeal filed with the Income-Tax Appellate Tribunal, Mumbai (hereinafter called “the tribunal”) read as under:- “1.(a) "Whether on the facts and circumstances of the case and on law, the Ld. CIT(A) erred in not accepting the disallowance u/s 14A r.w. Rule 8D amounting to Rs.39,84,218/- made by the AO and directing to reduce it to Rs.22,37,456/- by taking 20% of the exempt income as ad- hoc allowance u/s 14A. 1.(b) "Whether on the facts and in the circumstances of the case and in law, the Id.CIT(A) erred in making ad-hoc estimation of disallowance u/s 14A and directing the AO to disallow 20% of the exempt income and thereby failing to appreciate that once the principle of the expenditure incurred for earning tax free income is accepted, then the disallowance u/s 14A is necessarily required to be computed by the methodology provided by Rule 8D." 2.(a) "Whether on the facts and in the circumstances of the case and in law, the ld.CIT(A) erred in allowing deduction of an amount of Rs.2,10,11,032/- which has been disallowed by the AO as pre- operative expenditure. 2.(b) "Whether on the facts and in the circumstances of the case and in law, the ld.CIT(A) erred in holding that the business of the assessee has commenced during the previous year and overruling the findings of the AO that the activities of the assessee were at pre-operative stage. 2.(c) "Whether on the facts and in the circumstances of the case and in law, the ld.CIT(A) erred in holding that the business of the assessee has commenced during the previous year even though the AO had recorded the finding that the first sale was effected on 04/05/2011 and there was no revenue earned during the previous year relevant to A.Y. 2011- 12 for which the impugned expenses had been claimed." The appellant craves leave to add to, amend or withdraw the aforesaid ground of appeal”.

3. The brief facts of the case are that assessee company was incorporated on 5th April, 2010 with the main object of doing business of assembly, manufacture and supply of advance space, aviation, homeland security and defence related technologies. The assessee entered into Joint Venture agreements with Lockheed Martin Aerostructure Corporation , a wholly owned subsidiary of Lockheed Martin Corporation of USA for the purpose of assembling, manufacturing and supplying of C130/C130J aircraft structural articles i.e. empennages and center wing box (finished products). The assessee is a J.V company formed by Tata Advances System Ltd. and Lockheed Martin Aerostructure Corporation, USA wherein Tata‟s 2 hold 74% and Lockheed Martin Aerostructure Corporation, USA holds 26% of the equity of the assessee company. The assessee company is setting up manufacturing unit at Adibatla Village, Hyderabad to assemble, manufacture and supply to Lockheed Martin Aerostructure Corporation, USA and/or its affiliates of C-130/C130J aircraft structural articles consisting of empennages and center wing box. The aforesaid project for setting up manufacturing unit at Hyderabad is under construction up to the end of the financial year .

4. The first issue raised by the Revenue in this appeal is vide grounds of appeal number 1(a) and 1(b) in the memo of appeal filed with the tribunal which concerns itself with disallowance of expenses to the tune of Rs. 39,84,218/- u/s. 14A of the 1961 Act read with Rule 8D of the Income-tax Rules, 1962 by the AO vide assessment order dated 07-02-2014 passed u/s 143(3) of the 1961 Act while part relief was granted by learned CIT(A) , vide appellate order dated 29.01.2016.. The assessee had received dividend income Rs. 1,11,87,282/- which was claimed as an exempt income u/s 10(34) of the 1961 Act. The AO invoked provision of Section 14A r.w.r. 8D of the 1962 Rules and asked assessee to explain why the disallowance of expenditure incurred in relation to earning of an exempt income be not made. The assessee submitted before the AO during assessment proceedings conducted u/s 143(3) r.w.s. 143(2) of the 1961 Act that expenses were incurred wholly and exclusively for the purposes of business of the assessee. It was also submitted by the assessee before the AO that total expenses of Rs. 3,38,41,890/- were incurred while expenses amounting of Rs. 1,28,62,629/- were voluntarily disallowed in the computation of income filed with Revenue while rest of the expenses to the tune of Rs. 2,10,11,032/- were revenue expenses incurred wholly and exclusively for the purposes of business of the assessee which ought to be allowed as deduction while computing income within the provisions of the 1961 Act. It was submitted that these expenses have direct nexus with the business of the assessee company and these expenses have not been incurred in relation to holding of investments in shares, the income whereof being exempt from the tax. The AO rejected the contentions of the assessee and observed that that assessee has not attributed any expenses which have been incurred to earn exempt income and some expenses must necessarily had to be incurred to earn an exempt income , which needed to be disallowed keeping in view mandate of provisions of Section 14A of the 1961 Act. The AO observed that these investments decisions are very complex in nature and require lot of market research, day to day analysis of market trends etc. w.r.t. acquisition , retention and sale of shares at the most appropriate time which definitely involved expenses . The AO observed that since the assessee has not disallowed the expenses incurred in relation to earning of an exempt income, mechanism has been laid down under provision of Section 14A of the 1961 Act for computing expenditure incurred in relation to the earning of the exempt income which expenses needed to be disallowed. The AO relied upon decisions of Hon‟ble Bombay High Court in the case of Godrej & Boyce Manufacturing Company Limited v. DCIT reported in 234 CTR 1 (Bom) and decision of Special Bench of ITAT,Delhi in the case of Cheminvest Limited v. ITO reported in 317 ITR 86(AT). The AO invoked provisions of section 14A of the 1961 Act r.w.r. 8D of the 1962 Rules , wherein AO disallowed expenses of Rs. 39,84,218/- under Rule 8D(2)(iii) of the 1962 Rules r.w.s. 14A of the 1961 Act, being 0.5% of the average investments held by the assessee vide assessment order dated 07.02.2014 passed by the AO u/s 143(3) of the 1961 Act , as detailed hereunder:-

Sr.No Particulars Amount 1. The amount of expenditure directly relating to income which does not form part of total income - Rule 8D(2)(i) [Demat Charges]

2. Expenditure by way of interest during the previous year which is not directly attributable to any particular income or receipt an amount computed in accordance with the following formula, namely:

A X B A=0 C B=796843641 C= A=The amount of expenditure by way of interest other than amount of interest included in clause (i) incurred during the previous year. B= the average of value of investment, income from which does not or shall not form part of the total income, as appearing in the balance sheet of the assessee on the first day and the last day of the previous year C= the average of total assets as appearing in the balance sheet of the assessee, on the first day and the last day of the previous year -Rule 8D(2}(ii) 3. i. Average value of investments- Opening balance of investments + Closing balance of investments / 2 NIL + 1593687282 = Rs 796843641 2 - 8D (2)(iii) ii. Disallowance An amount equal to one half per cent of the average of the value of investment income from which does not or shall not form part of the total income as appearing in the balance sheet of the assessee on the first day and the last day of the previous year. 39,84,218 iii. 0.5% of Rs 796843641/- 4. Total disallowance 39,84,218

5. Aggrieved by the assessment order dated 07.02.2014 passed by the AO u/s 143(3), the assessee filed first appeal with learned CIT(A) . The assessee submitted before learned CIT(A) that it received dividend income of Rs. 1,11,87,282/- which was claimed as an exempt income u/s. 10(34) of the 1961 Act. The assessee submitted that it received share application money of Rs. 165.74 crores from its J.V. partners which was temporarily deployed by making investments of Rs. 165 crores in the units of Tata Liquid Super High Investment fund on 21.02.2011 , from which dividend income of Rs.1.12 crores was received . It was submitted that the assessee redeemed investment of Rs. 6.75 crores during the year, while investments of Rs. 159.37 crores was held as at year end. It was submitted that dividend received by it was re-invested in Mutual funds. The learned CIT(A) considered the submissions of the assessee and upheld the disallowance of expenditure u/s 14A of the 1961 Act to the tune of Rs. 22,37,456/- towards administrative expenses being 20% of exempt income instead of Rs. 39,84,218/- as was disallowance by the AO i.e. part relief was allowed by learned CIT(A) , by holding as under vide appellate order dated 29.01.2016 as under:-

“ 6.1 The appellant has further submitted that it has not incurred expenditure for the purpose of making investments in the units of mutual funds and holding thereof as of the year end. The appellant is of the view that AO should not invoke section 14A and Rule 8D for making any disallowance as no expenditure was incurred for the investments in mutual funds. I have carefully considered the rival submissions. The appellant had acquired funds from share capital which were not immediately been required to utilize for the business purposes; therefore, it had invested in the mutual funds. The investment in any of the portfolio is not a suo-moto process and it requires skilled/professional manpower and subordinate human resources in decision making process. Therefore, administrative expenses are required to be incurred for such decision making process. Though the appellant has not shown any expenditure towards administrative expenses incurred for the investment in mutual funds, however such indivisible expenses are bound to be incurred on such investments. For the fairness and justification 20% of the exempt income is disallowed towards the administrative expenses. Therefore, disallowance of Rs. 22,37,456/- is disallowed towards administrative expenses instead of Rs. 39,84,218/-. Hence, Ground No. 1 is partly allowed.”

Ld. AR submitted that the assessee had not incurred expenditure for the purpose of making investment in the units of mutual funds and holding thereof as the year end. It was also submitted that AO should not have invoked the provisions of section 14A and rule 8D for making any disallowance as no expenditure was incurred for the investments in mutual funds. Ld. AR further submitted that the assessee had acquired funds from share capital which was not immediately required to utilize for the business purposes, therefore, it had invested in the mutual funds. Ld. AR further submitted that the AO had not recorded any satisfaction as to the correctness of the claim of the assessee having regard to the account of assessee. The Ld. AR also relied upon the following judgments :- (a) CIT v. Hero Management Service Limited (2014) 360 ITR 68 (Delhi High Court) (b) CIT v. Printers House Private Ltd. (2010) 188 Taxman 70 (Delhi High Court) (c) Swapna Murarka vs. ACIT [2015] 58 taxmann.com 369 (Mumbai - Tribunal)

(d) CIT v. Walfort Share and Stock Brokers Private Limited (2009) 310 ITR 421 (Bom) [Affirmed in 326 ITR I (SC)] (e) CIT v. Reliance Industries Ltd. 339 ITR 632 (Bom) (f) CIT v. Metalman Auto P. Ltd. (2011) 336 ITR 434 (P&H) (g) CIT v. Hero Cycles Ltd. (2010) 323 ITR 518 (P&H) (h) CIT v. Winsome Textile Industries Ltd. 319 ITR 204 (P&H) (i) Godrej & Boyce Manufacturing Co Ltd, 328 ITR 81 (Bombay High Court) (j) Wimco Seedlings Ltd. v. DCIT (2007) 107 ITD 267 (Del) (TM) (k) Relaxo Footwears Ltd.,V. ACIT (2012) 50 SOT 102 (DEL); (I) Chanakya International Pvt. Ltd.v. ACIT (2013) 36 CCH 032 (Mum); (m) Justice Ram P Bharucha v. Addl. CIT (2012) 53 SOT 192.

"(2) The Assessing Officer shall determine the amount of expenditure incurred in relation to such income which does not form part of the total income under this Act in accordance with such method as may be prescribed, f the Assessing Officer, having regard to the accounts of the assessee, is not satisfied with the correctness of the claim of the assessee in respect of such in relation to income which does not form part of the total income under this Act."

Further the Mumbai Tribunal has also in the case of M/s Auchtel Products Ltd. (2012) 52 SOT 39 has held that no disallowance can be made by the AO without recording a satisfaction that the explanation given by the assessee is not proper. The operative para is reproduced below. “ 15. A bare perusal of the above provisions indicates that the AO shall determine the amount disallowable as per Rule 8D, if he, "is not satisfied with the correctness of the claim of the assessee" in respect of such expenditure in relation to exempt income. Even if the assessee claims that no expenditure was incurred in respect of exempt income, the AO is supposed to follow the mandate of Rule 8D if he is not satisfied with the correctness of the assessee's claim. To put it simply, the further disallowance u/s.14A is called for when the AO is not satisfied with the assessee's claim of having incurred no expenditure or some amount of expenditure in relation to exempt income. Satisfaction of the AO as to the incorrect claim made by the assessee in this regard is sine qua non for invoking the applicability of Rule 8D. Such satisfaction can be reached and recorded only when the claim of the assessee is verified. If the assessee proves before the AO that it incurred a particular expenditure in respect of earning the exempt income and the AO gets satisfied, then there is no requirement to still proceed with the computation of amount disallowable as per Rule 8D. From the assessment order, it is observed that the AO simply kept the assessee's submissions on record without appreciating as to whether these were correct or not. He proceeded on the premise as if the disallowance as per Rule 8D is automatic irrespective of the genuineness of the assessee's claim in respect of expenses incurred in relation to exempt income. It is an incorrect course adopted by the AO. The correct sequence, in our considered opinion, for making any disallowance u/s. 14A is to, firstly, examine the assessee's claim of having incurred some expenditure or no expenditure' in relation to exempt income. If the AO gets satisfied with the same, then there is no need to compute disallowance as per Rule 8D. It is only when the AO is not satisfied with the correctness of the claim of the assessee in respect of such expenditure or no expenditure having been incurred in relation to exempt income, that the mandate of Rule 8D will operate. In the instant case, the authorities below have directly gone to the second stage of computing disallowance u/s. 14A as per Rule 8D without rendering any opinion on the correctness or otherwise of the assessee claim in this regard. We, therefore, set aside the impugned order on this issue and restore the matter to the file of AO to recompute disallowance, if any, in accordance with our above observations after duly examining the assessee’s claim in this regard.”

6. Considering the facts and circumstances of the case we find that the AO has not recorded its satisfaction by giving specific reasons as to the correctness of the claim of the assessee having regard to the accounts of the assessee. The Ld. CIT(A) while partly allowing this ground had estimated the administrative expenses and restricted the disallowance of Rs. 22,37,456/-.

Be that as it may, since the AO has not recorded its satisfaction by giving specific reasons as to the correctness of the claim of the assessee, therefore, we set aside the order of Ld. CIT(A) and remit the matter back to the file of AO with a direction to verify regarding the claim of assessee that no expenses were incurred for earning the exempt income, having regard to the accounts of the assessee. The AO shall also verify any other claim if so raised by the assessee, and thereafter pass afresh order of assessment. It is needless here to mention that before passing the order of assessment, the AO shall provide sufficient opportunity of hearing to the assessee. Before parting, we may make it clear that our decision to restore the matter back to the file of AO shall in no way be construed as having any reflection or expression on the merits of the dispute, which shall be adjudicated by the AO independently in accordance with law. Resultantly, this ground is allowed for statistical purposes.”

Thus , keeping in view aforesaid decision for AY 2011-12 itself, the end of justice will be met in the instant appeal if the issue concerning disallowance of expenditure u/s 14A of the 1961 Act is set aside and restored back to the file of the AO for fresh adjudication of the issue denovo in accordance with the direction given by the tribunal in for AY 2011- 12 in assessee‟s appeal vide tribunals order dated 12.01.2018, which order of the tribunal for AY 2011-12 itself is reproduced above . We do not find any reasons to deviate from the aforesaid orders of the tribunal. These grounds of appeal bearing no 1(a) and 1(b) are, thus, allowed for statistical purposes as indicated above with similar directions as were given by tribunal in ITA no. 2144/Mum/2016 vide orders dated 12.01.2018. We order accordingly.

7. Now we come to second issue in Revenue‟s appeal vide ground no. 2(a) to (c) filed with memo of appeal filed with the tribunal. The assessee claimed Rs. 2,10,11,032/- as revenue expenses as deduction from income in the return of income filed with Revenue. The AO observed that the assessee is at pre-operative stage and the production had not yet commenced even till the end of the previous year. The AO also observed that no sales were booked during the year. The AO observed that these are pre- operative expenses which are capital in nature and cannot be allowed as Revenue expenses. The assessee was asked to explain the same and the assessee submitted as under:-

“6.1. The assessee vide its written submission dated 25.12.2013 submitted as under:- From the above facts, it will be observed as under:- (a) The assessee company has secured orders for supply of furnished products by entering into supply agreement. (b) The assessee company commenced following activities during the year: (i) Setting up of the project (ii) Execution of PO's for the center wing box and empennage tooling, a revenue generating activity. (iii) The employees were fully involved in detailed verification of the tools provided by the vendors. (iv) On 4th may 2011 the assessee company has raised its first invoice center wing box tooling for US$ 18,15,587.90. By end of march 2013, the assessee company has completed tooling activity in centre wing box and invoiced to Lockheed Martin the agreed value as per PO and (v) Review of assembly operation sheets by the employees. Assembly operation sheet guides the employees for various operations involved in the assembly process and also acts as tracker for various functions involved in the process i.e. provides knowledge/technique of production. (c) Revenue expenses charged off to the Profit and Loss Account have no connection with the setting-up of the Project but had direct nexus/ connection with execution of PO's for tooling and production of finished goods, being both revenue generating activities.

(d) It had started the activity of planning the production of center wing box and empennage (finished products) by making the employees go through the steps involved in assembling the finished products (i.e. review of Assembly Operation Sheets), being an essential activity for carrying on the business of the assessee company. (e) The expenditure which has been incurred during the year is for the activities as mentioned in para No. (b)(ii) to (v) which related to the carrying on or conduct of the business as the same related to profit earning process and not for acquisition of any asset. (f) The assessee company had commenced the work for production of finished products. (g) Hence, the above factors clearly establish that the assessee company has commenced its business during the year and hence, revenue expenses amounting to Rs 2,10,11,032/- have been rightly claimed as an allowable deduction."

5757293 (d) Legal and professional charges Fees paid for management consultancy, legal consultancy, chartered accountant services, company secretary services etc. d. The assessee is involved in the business of assembly, manufacture and supply of advanced space, 4405805 (e) Travelling and conveyance Travelling expenses, boarding & L expenses lodging expenses of employees on official tours. o c 124879 (f) Communication expenses Telephone, mobile and k internet charges h e Audit fees 75000 Statutory audit fee (g) e d Business promotion expenses 43644 (h) Expenses incurred towards business promotion etc. M 221104 (i) Printing and stationery Printing and stationery a expenses incurred. r t Miscellaneous expenses 103242 (j) Membership and subscription charges and office expenses. i n 21011032 C o rporation, USA for thd. The assessee is involved in the business of assembly, manufacture and supply of advanced space, aviation, homeland security and defense related technologies. In furtherance thereof, it has entered into Joint Venture(JV) agreement with Lockheed Martin Areostrcuture Corporation (Lockheed Martin) a wholly owned subsidiary of Lockheed Martin Corporation, USA for the purpose of assembling, manufacturing and supplying of C130/C130J aircraft structural articles i.e. empennages and center wing box (finished products).

6.3 This activity is highly specialised and requires highly technical skill, machinery and raw material.

6.4 The above facts clearly reveal that no manufacturing activity was carried out by the assessee and it is merely at pre-operative stage . Hence , the expenses are treated as pre-operative and treated as capital in nature . Since, Rs. 39,84,218/- has been disallowed and treated as capital in nature. The disallowance on this score works out to Rs. 1,70,26,814/-“

Thus, the AO concluded that no manufacturing activity was carried out by the assessee during the entire previous year relevant to impugned assessment year under consideration and the assessee is merely at a pre- operative stage which led the AO to hold that the expenses are pre-operative expenses being capital in nature which cannot be allowed as Revenue expenses and hence the same were disallowed by the AO while framing assessment vide assessment order dated 07.02.2014 passed u/s 143(3) of the 1961 Act.

“7.1 On the other hand the appellant submitted that it has debited Rs. 3.38 Crore in the P&L A/c out of which it has already disallowed Rs. 1.29 Crore as pre-operative expenses and disallowed in the computation of income; as expenses incurred towards share application expenses etc. The remaining Rs. 2.10 Crore are the expenses of revenue nature which is allowable as business expenses. The appellant submitted that the company has acquired purchase order on 18.02.2011 and TAMAL has acquired orders on 28.02.2011. The company has started the digitized process on 05.03.2011 and raised invoice on 05.05.2011. The appellant has submitted that for commencement of business the company had appointed the various technical and non-technical staff, acquired software and created infrastructure for the operation of business and it is incorrect to say that the business was not commenced during the previous year relevant to the AY 2011-12. The appellant has already capitalized the pre- operative expenses and there is nothing left which is to be capitalized further whatever expenses debited in the P&L A/c are very much revenue in nature and the accounts are duly audited. 7.2 I have carefully considered the rival submissions and the facts of the case. The details submitted revealed that the company has started its business during the previous year and whatever expenses related to pre-operative expenses; the appellant has already disallowed in its computation of income and whatever expenses debited to the P & L A/c are very much revenue in nature , hence same are allowable as business expenditure. Therefore, the entire expenses disallowed by the AO are not sustainable. Therefore, Ground No. 2 is allowed.”

The learned DR opened the arguments and brought to our notice assessment order dated 07.02.2014 passed by the AO u/s 143(3) of the 1961 Act. It was submitted by learned DR that business of the assessee has not commenced even till the end of the previous year under consideration as the assessee was still in pre-operative stage as the manufacturing unit to be set up at Hyderabad was still under implementation which did not commence production. Our attention was drawn to provisions of Section 3 of the 1961 Act to contend that since no business of the assessee commenced even as at the end of the previous year , the expenses cannot be allowed as deduction as Revenue expenses while computing income chargeable to income-tax within provisions of the 1961 Act. Our attention was also drawn to page 83- 85 of paper book filed by the assessee with the tribunal wherein detailed note is placed as to the nature of activities carried on by the assessee company. Thus, reliance was placed by learned DR on the assessment order framed by the AO u/s 143(3) and non commencement of production by the manufacturing unit being set up by the assessee at Hyderabad to make his point as to non allowability of expenses as Revenue expenses while computing income chargeable to income-tax.

The Ld. AR on the other hand vehemently and strenuously argued that business of the assessee was in fact set-up by the end of the previous year and the assessee is entitled for claiming expenses to the tune of Rs. 2,10,11,032/- as revenue expenses . Our attention was drawn to page no.7 of the paper book wherein written submissions dated 25.12.2013 as were submitted before the AO during assessment proceedings u/s 143(3) r.w.s. 143(2) are placed to contend that assessee was executing purchase order for the Center Wing Box and Empennage tooling , a revenue generating activity. Our attention was drawn to Provisions of Section 3 of Act and it was submitted that all the expenses which are incurred post-setting up of the business are to be allowed as business expenses which is mandate of Section 3 of the 1961 Act and commencement of business has no relevance . Our attention was also drawn to page no. 83 to 85 of the paper book wherein detailed nature of activities carried out by the assessee during the year ended 31st March, 2011 were detailed. The said note on activities were submitted by the assessee vide written submissions dated 22-12-2015 filed by the assessee before learned CIT(A) . Our attention was also drawn to page no 70 of the paper book wherein purchase order dated 28.02.2011 raised in favour of M/s. Tal Manufacturing Solutions Ltd. by the assessee namely M/s Tata Aerostructue Ltd. is placed . The learned counsel for the assessee submitted that the assessee company is in fact earlier known as „Tata Aerostructures Ltd.‟ and consequent to name change , the assessee is now known as „Tata Lockheed Martin Aerostructures Limited‟ . It was submitted by learned counsel for the assessee that assessee received order dated 18-2- 2011 from Lockheed Martin Aeronautics, USA (PB/page 12) and consequently the assessee placed orders on Tal Manufacturing Solutions Ltd. dated 28-2-2011(pb/page 70) , Tata Consultancy Services Limited dated 05-03-2011 (pb/page 71) and Tata Technologies Limited dated 05-03-2011 (pb/page 72-73) to sub-contract to these vendors in order to execute the orders received by the assessee from Lockheed Martin Aeronautics, USA . Our attention was also drawn to page no. 40 of the paper book wherein the purchase order dated 18.02.2011 for USD 12,768,133/- in favour of assessee issued by Lockheed Martine Aerostructure , USA is placed. Our attention was also drawn to page no. 75 of the paper book wherein the assessee has invoiced material worth USD 181,55,87.90 for Center Wing Beam Tooling vide invoice dated 04.05.2011 is placed, wherein the assessee is shown as exporter of the material while buyer is stated to be Lockheed Martin Aeronautics, USA and the consignee of the material is shown to be assessee itself . It is pertinent to mention that in the said invoice so far as port of loading and port of discharge as well final destination is shown to be not applicable and the consignee is assessee itself. Our attention was also drawn to page no. 84 of the paper book to contend that assessee has set up the business and hence assessee was entitled for expenses as revenue expenses . It was submitted that the assessee is engaged in execution of purchase orders for Center Wing Box and empennages for C130/C130J aircraft to contend that it is a revenue generating activity. Our attention was also drawn to page no. 77 to 78 of the paper book wherein purchase orders dated 05-03-2011 issued by assessee in favour of Tata Consultancies Services Limited and Tata Technologies Limited for center wing box is placed. Our attention was also drawn to page no. 86 of the paper book where the flow charts of processes for assembly operations , tools for center wing box activity carried during the year ended 31st March, 2011 is placed. The assessee relied on the decision of Hon‟ble Bombay High Court in the case of Western India Vegetable Products Limited v. CIT reported in (1954) 26 ITR 151(Bom.) . The assessee also relied upon decision of ITAT, Mumbai in the case of Hagwoods Commercial Developers P. Ltd. & Orss in & Ors. for AY 2012-13 , vide consolidated order dated 08.02.2017 , wherein both of us were the members of the Division Bench who passed the aforesaid consolidated order dated 08.02.2017. Reliance was also placed by learned counsel for the assessee onto the decision of ITAT, Mumbai in the case of ACIT v. Reliance Defence & Offshore Engineering Co. Ltd. in and ITA no. 372/Mum/2015 for AY 2008-09 & 2009-10, vide consolidated order dated 31.08.2017. It was submitted by learned counsel for the assessee that tools were acquired by the assessee from Lockheed Martin Aeronautics , USA which was manufactured indigenously by said Lockheed Martin Aeronautics, USA wherein the order in turn for indigenous manufacturing of tools was placed by said Lockheed Martin Aeronautics , USA by sub-contracting in favour of the assessee, while assessee in turn placed sub-sub contracts with TCS, Tata Technologies Limited etc to get the manufacturing of tools done indigenously . The main contract was firstly awarded by assessee in favour of Lockheed Martin Aerostructure Corporation, USA and thereafter sub- contract and sub-sub contract followed. It was submitted that even where the activities are preparatory in nature to the attainment of main activities, it can be considered that the business was set up. The assessee also relied on the decision of Hon‟ble Gujarat High Court in the case of CIT v. Saurashtra Cement & Chemical Industries Ltd.(1972) 91 ITR 170,(Guj. HC) . The assessee also relied on the decision of Hon‟ble Bombay High Court in the case of CIT v. Ralliwolf Limited (1978) 121 ITR 262(Bom. HC). It was submitted by learned counsel for the assessee that the assessee received orders from Lockheed Martin Aeronautics , USA for manufacturing tools indigenously for the assembly unit being set up by the assessee at Hyderabad and the business was set up when the said orders were received for execution by the assessee. The assessee counsel strongly relied on the decision of Hon‟ble Gujarat High Court in the case of Prem Conductors P. Ltd. v. CIT (1976) 108 ITR 654(Guj. HC).

The Ld. DR in rejoinder submitted that setting up of the business and commencement of the business are one and the same thing within meaning of Section 3 of the 1961 Act and no distinction can be drawn . It was vehemently and strongly argued by learned DR that the assessee is not entitled for relief by way of allowability of expenses as revenue expenses as is claimed by the assessee , thus prayers are made to uphold assessment order of learned AO and to set aside appellate order of learned CIT(A).

Thus, in nut-shell both learned AR and learned DR has made very strenuous contentions strongly arguing that the appeal be decided in their favour based on factual matrix of the case and legal propositions as are contained in statute and judicial precedents. We place on record our appreciation for both the counsel for their sincere efforts in arguing their case before us on this issue.

4405805 (e) Travelling and conveyance Travelling expenses, boarding & expenses lodging expenses of employees on official tours. 124879 (f) Communication expenses Telephone, mobile and internet charges Audit fees 75000 Statutory audit fee (g) Business promotion expenses 43644 (h) Expenses incurred towards business promotion etc. 221104 (i) Printing and stationery Printing and stationery expenses incurred. Miscellaneous expenses 103242 (j) Membership and subscription charges and office expenses. 21011032 It happened so that the assessee was setting up manufacturing/assembly unit at Hyderabad for manufacturing/assembly of center wing boxes and empennages for C130/C130J aircraft which undisputedly was not set up till the end of the relevant previous year under construction . There is no dispute so far as this factual matrix is concerned. The dispute arose because the assessee for its manufacturing/assembly unit which was being set up at Hyderabad for manufacturing/ assembly process for Center Wing Box and Empennages (finished products) ) for C130/C130J aircrafts, required tools and jigs for this manufacturing/assembly unit which was being set up at Hyderabad. Since these tooling and jigs are required as part of the manufacturing/assembly unit being set up at Hyderabad by assessee, these toolings and jigs partake the character of capital goods. As per JV agreement between Lockheed Martin and the assessee company, tools and jigs required for production/assembly process were to be provided by Lockheed Martin Aerostructure Corporation, USA to the assessee (page 5/pb) as per clause 7 on page 4 of business plan, which business plans was submitted by the assessee before the authorities below. However, Lockheed Martin Aerostructure Corporation , USA suggested that these tools and jigs required for assembly/production process being set up at Hyderabad be built indigenously by the assessee company wherein sub-contract was awarded to the assessee company by Lockheed Martin Aerostructure Corporation, USA. Accordingly Lockheed Martin Aerostructure Corporation , USA issued Purchase Orders for Center Wing Box and Empennage Tooling on 18th February 2011 for US$ 25,93,697/- and US $ 1,27,68,133/- respectively(pb/page 5) in favour of the assessee company . The copies of the said PO‟s were enclosed and are as part of paper book(pb/page 12 and 40). The assessee company instead of manufacturing the said tools and jigs itself initiated the tool/jigs manufactured/assembled by outsourcing the same to indigenous manufacturers and suppliers viz. TAL Manufacturing Solutions Limited, Tata Technologies Limited and Tata Consultancy Services Limited. The said sub-sub-contracts awarded by the assessee company to these three vendor companies are part of paper book filed by the assessee with the tribunal(pb /page 70-74). Lockheed Martin Aerostructure Corporation,USA shared necessary engineering drawings , drawings and specifications along with source book for manufacturing/assembling of tools/jigs, based on which assembly operation sheets are prepared. These assembly operation sheets are categorized in sub assembly, major assembly and final integration. These assembly operation sheets are required in assembly processes for Center Wing Box and Empennages . These assembly operation sheets acts as guide to staff for various operations involved in the assembly process and also acts as tracker for various functions involved in a process. The assessee company placed orders with TCS and Tata Technologies Limited on 5th March 2011 , for development of assembly operations sheets and the said assembly operations sheets were reviewd by the employees of the assessee company. These operational details are extracted from written submissions filed before the authorities below(pb/page 1-6) . The written submissions with respect to nature of activities carried on by the assessee. which were submitted by the assessee before learned CIT(A) vide submissions dated 22.12.2015 (page 79/pb) as Annexure B (page 83/pb) is reproduced here under:-

“ Annexure "B" Tata Lockheed Martin Aerostructures Limited Nature of activities carried out by the appellant during the year ended 31st March, 2011 1. Facility: Land was acquired and construction work of the project was started. The total amount of capital expenditure incurred, including pre-operative expenses, of Rs. 150.28 lakhs as upto 31st March, 2011 was Rs. 765.26 Lakhs The construction work, including supervision of the project was outsourced.

5. From the above facts, it is observed as under:- . (a) The appellant has secured orders for supply of finished products by entering into Supply Agreement; (b) The appellant commenced following activities during the year: (i) Setting-up of the Project; (ii) Execution of PO's for for Center Wing Box and Empennage Tooling, a revenue generating activity. " . (iii) The employees were fully involved in detailed verification of the tools provided by the vendors. (iv) On 4lh May, 2011, the appellant has raised its first invoice against Center Wing Box Tooling for US$ 18,15,587.90. By end of March 2013, the appellant has completed tooling activity in Center Wing Box and invoiced to Lockheed Martin the agreed value as per PO.; and (v) Review of Assembly Operation Sheets by the employees. Assembly Operation Sheets guides the employees for various operations involved in the assembly process and also acts as tracker for various functions involved in the process i.e. provides knowledge / technique of production. (b) Revenue expenses charged off to the Profit and Loss Account have no connection with the setting-up-of the Project but had direct nexus / connection with execution of PO's for tooling and production of finished goods, being both revenue generating activities; (c) It had started the activity of planning the production of finished products by making the employees go' through the steps involved in assembling the finished products (i.e. review of Assembly Operation Sheets), being an essential activity for carrying on the business of the appellant. (d) The expenditure which was incurred during the year is for the activities as mentioned in Para No. (b)* (ii) to (v) which related to the carrying on or conduct of the business as the same related to profit earning process and not for acquisition of any asset.

(e) The appellant had commenced the work for production of finished products. (f) Hence, the above factors clearly established that the appellant had set-up and commenced its business during the year. 6. Process flow chart is enclosed to explain the flow of activities carried out during the year ended 31st March, 2011”

So , in nutshell what transpires in short is that the assessee company is a JV company formed by Tata Advanced Systems Limited and Lockheed Martin Aerostructure Corporation, USA, wherein Tata‟s hold 74% of equity capital while 26% is held by Lockheed Martin Aerostructure Corporation, USA. The JV agreement provided that the assessee company will assemble, manufacture and supply C130/130J aircraft structural articles i.e.center wing box and empennages to Lockheed Martin Aerostructure Corporation,USA and / or its affiliates. The manufacturing/assembly unit of the assessee company for manufacturing/assembly of center wing box and empennage for C130/C130J aircrafts was being set up at Hyderabad which did not become operational till the end of the previous year relevant to the impugned assessment year. The item to be assembled/manufactured namely center wing box and empennages for C130/C130J aircraft being highly specialised, technical , complex and guarded technology, the Lockheed Martin Aerostructure Corporation ,USA was to undertake the job of implementing the project vide agreement entered into with the assessee which , inter-alia, provided for supply of engineering designs, drawings, tools , jigs , technical knowhow etc. . Thus, on the one hand Lockheed Martin Aerostructure Corporation, USA was equity shareholder of assessee company infusing 26% capital and at same time was involved in setting up of manufacturing/assembly unit by the assessee for center wing box and empennages for C130/C130J aircraft and said Lockheed Martin Aerostructure Corporation, USA and/or its affiliates were also the customer for final product namely center wing box and empennages for C130/C130J aircraft manufactures/assembled by assessee. Thus, Lockheed Martin Aerostructure Corporation, USA and / or its affiliates were performing multiple roles at the same time so far as dealing with the assessee company are concerned viz. equity investors, participating in setting up of manufacturing / assembly unit for center wing box and empennages for C130/C130J aircraft for which technical knowhow was held by Lockheed Martin Aerostructure Corporation, USA and said company namely Lockheed Martin Aerostructure Corporation, USA was also buyer of the final product being center wing box and empennages for C130/C130J assembled/manufactured by the assessee in its unit at Hyderabad which was under the stage of implementation at the year end and production could not be commenced by the end of the previous year and not even trial runs started. The said Lockheed Martin Aerostructure Corporation, USA now under an obligation to supply technical know how, drawings, engineering designs etc to the assessee for setting up its assembly/manufacturing unit for center wing box and empennages for C130/C130J aircraft was also,inter- alia, required to supply tools and jigs. These tools and jigs being supplied at the time of or before setting up of the project are part of capital assets which needs to be capitalised. The said Lockheed Martin Aerostructure Corporation, USA who was , inter-alia, under an obligation to supply engineering designs, drawings, tools , jigs etc. but Lockheed Martin Aerostructure Corporation , USA instead of supplying some of the tools and jigs itself instead awarded the work to manufacture/assemble these tools and jigs to the assessee indigenously by way of sub-contract for which necessary designs and drawings were supplied by Lockheed Martin Aerostructure Corporation, USA. The ultimate responsibility for execution of the agreement for setting up manufacturing/assembly unit at Hyderabad rested with Lockheed Martin Aerostructure Corporation, USA under the main contract awarded by the assessee to Lockheed Martin Aerostructure Corporation, USA but certain portion of the contract within the main contract was carved out and assigned by Lockheed Martin Aerostructure Corporation, USA to assessee itself as sub-contract to manufacture these tools and jigs required for the project indigenously of course for which technical specification, designs and drawings were supplied by Lockheed Martin Aerostructure Corporation, USA and ultimate technical supervision and other responsibilities vested with Lockheed Martin Aerostructure Corporation, USA for successful implementation of supplies of tools and jigs for the project under implementation which were manufactured indigenously by assessee through sub-sub contractors/ vendors namely TCS etc. appointed by the assessee to supply to its own assembly/manufacturing unit being set up at Hyderabad which had not become operational even by year end and not even trial runs started by the end of the relevant previous year.

The assessee on its part on receipt of the said sub-contract from Lockheed Martin Aerostructure Corporation,USA for supplying some of the tools and jigs which were to be consumed/utilised by the assessee itself in its manufacturing/assembly unit being set up at Hyderabad further outsourced the said job of supplying tools and jigs to TCS, Tata Technologies Limited and TAL Manufacturing Supplies Limited for which supervision was done by the assessee under sub-contract awarded by Lockheed Martin Aerostructure Corporation , UAS for which final responsibility vested with Lockheed Martin Aerostructure Corporation, USA as main contractor/vendor while the assessee itself was responsible as sub-contractor/vendor. The ultimately responsibility for complete execution of main contract remained with Lockheed Martin Aerostructure Corporation, USA w.r.t. setting up of manufacturing/assembly unit for the assessee company at Hyderabad while the assessee as sub-contractor/vendor become responsible for tools and jigs manufactured by it through TCS, TAL Manufacturing Solutions Limited and Tata Technologies Limited to the main vendor namely Lockheed Martin Aerostructure Corporation, USA. But the fact remained that these tools and jigs were to be used/consumed in the manufacturing/assembly unit being set up by the assessee at Hyderabad for manufacturing of center wing box and empennages for C130/C130J aircrafts which project was under implementation as at the end of the relevant previous year . In nutshell the activities of the assessee for manufacturing of tools and jigs indigenously under sub-contract from Lockheed Martin Aerostructure Corporation, USA are directed towards setting up of the main assembly/manufacturing unit for manufacture/assembly of center wing box and empennages for C130/C130J aircraft at Hyderabad for which main contract was awarded by the assessee in favour of the same Lockheed Martin Aerostructure Corporation, USA. Under these circumstances, can it be said that the assessee company who participated in the setting up of its own manufacturing/assembly unit at Hyderabad under a sub-contract from Lockheed Martin Aerostructure Corporation, USA for which main contract was awarded by the assessee itself in favour of the same Lockheed Martin Aerostructure Corporation , USA wherein the assessee by getting some of the tools/jigs manufactured/ assembled by further sub-sub-contracting to TCS, Tata Technologies Limited and TAL Manufacturing Supplies Limited ever intended to enter into an business of manufacturing /assembly or supplies of tools and jigs rather its activities and efforts were all directed towards the business of setting up of manufacturing /assembly unit being set up at Hyderabad for manufacturing/assembly of center wing box and empennages for C130/C130J aircraft. Thus, we conclude that the assessee never intended to set up any business of manufacturing/assembly of tools and jigs required for supplies to be made to its assembly/manufacturing unit being set up at Hyderabad which was under implementation as at year end for which even trial run did not started by year end. The activities of supply of tools/jigs by the assessee as sub-contractor/vendor to Lockheed Martin Aerostructure Corporation, USA which was executed by assessee through sub-sub contractors/vendors namely TCS etc for ultimate supply of tools/jigs to the assessee itself to be used for its manufacturing/assembly unit at Hyderabad which was under implementation at the year end were all inextricably linked to the assessee‟s main activity of setting up of manufacturing /assembly unit at Hyderabad for manufacture / assembly of center wing box and empennages for C130/C130J aircraft and which in itself is not an independent activity per-se to be categorised as separate business activity. The assessee claims that it kept highly technical and supervisory staff to oversee these activities including reviewing of assembly operation sheets supplied by Lockheed Martin Aerostructure Corporation, USA but in our considered view these are normal requirements in connection with setting up of manufacturing / assembly unit at Hyderabad for manufacturing/assembly of center wing box and empennages for C130/C130J aircraft , which is highly technical and complex activity requiring highly specialised technical staff. The activities of assembly and manufacturing of center wing box and empennages for C130/C130J aircraft being highly complex , technologically sophisticated activity involving guarded technology need highly specialised , experienced and technical personnels , and the assessee cannot afford to appoint necessary staff only after the unit becomes operational as by the time unit goes into production , the assessee ought to have all specialised, trained, experience and technical staff with it ready and well versed/trained to handle actual manufacturing/assembly of center wing boxes and empennages for C130/C130J aircrafts. The appointing of technical and specialised staff prior to unit being installed and ready to commence production will not make the same as revenue expenses even though these technical and specialised staff were reviewing the assembly operation sheets for manufacturing/assembly of center wing boxes and empennages for C130/C130J aircraft for which order was already received by the assessee from Lockheed Martin Aerostructure Corporation, USA, as all these are pre- operative expenses which needed to be capitalised as part of the cost of the project because there was no possibility of commencing production/manufacturing/assembly unless the unit is ready to commence production which in the instant case even by the year end unit was neither installed nor trial runs commenced. We have carefully gone through the case laws cited by learned counsel for the assessee and we have observed that those case laws were decided on their own factual matrix which has no applicability so far as peculiar factual matrix as is applicable to the assessee in the instant case . However, for the sake of completeness , we will now refer to all the case laws relied upon by the assessee : a) The decision of Hon‟ble Bombay High Court in the case of Western India Vegetable Products Limited v. CIT reported in (1954) 26 ITR 151(Bom.) . In this decision the Hon‟ble High Court of the Bombay held that the previous year of the business will commence from setting up of business which is relevant for claiming deduction of expenses as business expenses. There is no dispute as to this proposition of law is concerned but in the instant case we have held that the assessee by taking sub-contract from Lockheed Martin, USA for indigenously manufacturing /assembling of tools and jigs to be ultimately supplied to itself to be used/consumed in its project for manufacturing/assembly of center wing boxes and empennages for C130/C130J aircraft had never intended to set up business of assembling/manufacturing of tools and jigs which ultimately it sub-sub contracted to TCS etc. as the business it intended to set up was for manufacturing /assembling of center wing boxes and empennages for C130/C130J aircraft at Hyderabad which was not ready to commence production even by year end. b) The decision of ITAT, Mumbai in the case of Hagwoods Commercial Developers P. Ltd. & Orss in & Ors. for AY 2012-13 , vide consolidated order dated 08.02.2017. The assessee has relied upon this case and it contended that even when shopping mall was under construction , the expenses were allowed as business expenses. We are afraid that the assessee‟s counsel totally misconstrued the facts of that case . In that case , of which both of us were members of the Division Bench who passed the order, the taxpayer was engaged in development and sale of residential project as well construction of Mall. Since the residential project was for sale and activities started, the business was held to be set up. The Mall was being construuctd by the taxpayer for which direct costs were capitalised and indirect overheads were charged as Revenue expenses. On those factual matrix, the tribunal held that business was set up as the taxpayer was developing residential project for sale and it is not necessary that till Mall is constructed , the indirect cost representing by overheads also needed to be capitalised rather these indirect overhead costs were held to be Revenue expenses. Thus this case was decided on peculiar factual matrix prevailing on its own facts and has not relevant to the instant case before us. c) The decision of ITAT, Mumbai in the case of ACIT v. Reliance Defence & Offshore Engineering Co. Ltd. in and ITA no. 372/Mum/2015 for AY 2008-09 & 2009-10, vide consolidated order dated 31.08.2017. In this case the taxpayer was engaged in the business of development of ship building and ship repairing yard. The taxpayer received orders and advance payments for supplies of ship building for which the taxpayer purchased steel for ship building . Various activities started towards ship building and on those factual matrix , it was held that the assessee has set up the business and expenses were allowed. But in the instant case before us, it is observed that the assessee is to indigenously supply tools and jigs under a sub- contract from Lockheed Martin, USA which supplies are to be utilised/consumed by the assessee itself in its manufacturing/ assembly unit being set up at Hyderabad which was under implementation as at the year end and not even trial run commenced till the end of previous year. Thus, on that factual matrix it is held that the assessee never intended to set up any business for supply of tools and jigs for its own units as its efforts for supply of tools and jigs are directed towards setting up its own manufacturing/assembly units for manufacture and assembly of center wing boxes and empennages for C130/C130J aircraft and not for setting up manufacturing /assembly units for tools/jigs. d) The decision of Hon‟ble Gujarat High Court in the case of CIT v. Saurashtra Cement & Chemical Industries Ltd.(1972) 91 ITR 170,(Guj. HC) . In this case , the taxpayer was engaged in manufacture and sale of cement. The taxpayer obtained mining lease for quarrying limestone and started mining operations. The limestone was raw material for manufacturing of cement. It was held that this activity of extracting limestone by quarrying the leased land was necessary for the purposes of acquiring raw material to be utilised in manufacturing of cement.The second activity constituted the activity of manufacturing of cement by user of plant and machinery set up for that purpose and the third category consisted of selling manufactured cement. All these three activities constituted business of the taxpayer. It was held that it is not necessary that all the three activities should commence , then the business was deemed to be set up. It was held that with the commencement of first activity business was set up as it laid foundation for the second activity and commencement of second activity laid the foundation of third activity. But the instant case before us is distinguishable as the assessee never intended to set up business of manufacturing/assembly of tools and jigs required for setting up assessee‟s own unit at Hyderabad for manufacturing/assembly of center wing boxes and empennages for C130/C130J aircrafts. Even if the tools and jigs are required for the manufacturing and assembling of center wing boxes and empennages for C130/C130J aircrafts, the said activity for getting it manufactured/assembled through sub-sub contractors/vendors namely TCS etc by the assessee will not constitute setting up of a seperate business of manufacturing/assembling of tools and jigs as it is not the intentions of the assessee to set up the said business of manufacturing /assembling of tools and jigs and it happens so that the main contractor/vendor namely Lockheed Martin, USA to whom the assessee awarded contract , inter-alia for tools and jigs has sub-contracted the work of supply of tools and jigs to the assessee back to be manufactured/assembled indigenously, which work/contract was further sub-sub contracted by the assessee to TCS etc. . Thus, it is clear there was never an intention on part of the assessee to set up this business of manufacturing tools and jigs. e) The decision of Hon‟ble Bombay High Court in the case of CIT v. Ralliwolf Limited (1978) 121 ITR 262(Bom. HC). In this case, Hon‟ble Court distinguished between set up of business and commencement of business and held that expenses shall be allowable from the date business is set up. This case we are afraid is of no help to the assessee as in the instant case before us , we have held that the assessee never intended to set up business of manufacturing/assembling of tools and jigs. f) The decision of Hon‟ble Gujarat High Court in the case of Prem Conductors P. Ltd. v. CIT (1976) 108 ITR 654(Guj. HC). The strong reliance is placed by learned counsel for the assessee on this case. In this case the assessee took over running concern from its promoters. It was not a case of setting of new industrial undertaking. The taxpayer secured orders from Electricity Boards, purchased raw material etc to keep things ready for production once the machineries are installed etc. . Under these circumstances Hon'ble Gujarat High Court held that business shall be deemed to be set up and expenses allowable from date when orders were secured by the taxpayer although factory has not commenced production which shall be allowable. This case is distinguishable as the assessee although secured orders for center wing boxes and empennages for C130/C130J aircraft even prior to setting up of unit at Hyderabad for manufacturing/assembling of center wing boxes and empennages for C130/C130J but the difference is that the assessee has undertaken job of getting tools and jigs which were required in its unit under implementation at Hyderabad manufactured/assembled through sub-sub contractors namely TCS etc and we have held that it could not be intention of the assessee to set up business of manufacturing/ assembly of tools and jigs. The assessee in the instant case did not purchase any raw material etc rather it was implementing setting up of unit for manufacturing / assembling of center wing box and empennages for C130/C130J aircraft wherein tools and jigs required for the manufacturing/assembling unit was got indigenously supplied by the assessee through sub-sub contractors namely TCS etc wherein the main contract was awarded by the assessee to Lockheed Martin, USA who subcontracted portion of the main contract towards supplying of tools and jigs for usage/consumption in its under implementation project at Hyderabad. This case thus is distinguishable as it was never the intention of the assessee to set up business of manufacturing of tools/jigs to be supplied for in house consumption in its under implementation unit for manufacturing/assembly of center wing boxes and empennages for C130/C130J aircrafts and the case relied upon by learned counsel for the assessee is not relevant for deciding dispute between rival parties Thus, based on our detailed reasoning and discussions as set out above, we do not find any merits in the contentions of the assessee and thus, the appellate order of learned CIT(A) is set aside and additions as were made by the AO are sustained with the conclusions and reasoning as are arrived at by us as above. The ground no 2(a) to 2(c) are allowed with above conclusions and reasoning as set out in our order. We order accordingly.

order pronounced in the open court on 08.08.2018 आदेश की घोषणा खुऱे न्यायाऱय में ददनांकः 08.08.2018 को की गई ।