M/S. BHARAT PETROLEUM CORPN. LTD.,MUMBAI vs. ADDL.C IT. RG. - 2(1), MUMBAI

ORDER �ी अ�मत शु�ला,�या. स:- PER AMIT SHUKLA, J. M.: The aforesaid appeal has been filed by the assessee against impugned order dated 17.03.2005 passed by CIT(A)-2, Mumbai for the quantum of assessment passed under section 143(3) for the assessment year 2001-02. In the grounds of appeal

, following grounds have been raised:-

2 भारत पै�ो�लयम काप�रेशन �ल�मटेड Bharat Petroleum Corporation Ltd ITA Nos. : 4286/Mum/2005 1961 (“the Act”) on LPG Plants, on the ground that the activity of filling the gas into the cylinders does not constitute manufacturing and the LPG bottling Plants are part of the refining activities and cannot be considered as independent industrial undertakings to be eligible for the deductions under section 80IB of the Act.

2. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in rejecting the claim of the Appellant for the deduction under Section 80IB of the Act on its Special Cut Naptha (SCN) plant and C3C4 plant, on the ground that the separate working of profit of the plants were not furnished by the appellants.

3. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in rejecting the claim of the Appellant for deduction of expenditure made towards Long Term Settlement Arrears relating to clerical staff/workers.

4. On the facts and in the circumstances of the case and in law, the learned CIT(A) erred in rejecting the contention of the appellant that no expenditure has been incurred for earning the exempt income”.

3. On the issue raised in ground No.1, Mr. J D Mistry submitted that this precise matter is covered by the decision of Hon’ble Bombay High Court in the case of Bharat Petroleum Corporation Ltd. (BPCL) and also in the case of Hindustan Petroleum Corporation Ltd. (HPCL). The copy of the High Court

3 भारत पै�ो�लयम काप�रेशन �ल�मटेड Bharat Petroleum Corporation Ltd ITA Nos. : 4286/Mum/2005 decisions along with the respective Tribunal orders were filed before us, in separate compilation.

Detail of Plants Amount in Rs. Uran LPG Plant (PhaseII) u/s 80IB 1,56,17,431 Hariyala LPG Plant u/s 80IB 39,36,329 Udaipur LPG Plant u/s 80IB 33,66,612 Sultanpur LPG Plant u/s 80IB 17,53,745 2,46,74,117 In support of the claim, the assessee has filed detailed submission and referred to various decisions which have been incorporated by the AO from pages 4 to 7 of the assessment order. The Ld. AO held that activity of filing gas into the cylinders does not constitute manufacturing and that LPG bottling Plants are part of refining activities only. The Ld. CIT(A) too following the earlier decision of the CIT(A) for AYs 1996-97 to AY 2001-02 decided this issue against the assessee.

3) The grievance of the revenue is that the aforesaid activity would not amount to manufacturing/production activity and for that purpose reliance is placed on the judgment of the Gujarat High Court dated 20/1/1993 in the matter of State of Gujarat v. Kosan Gas Co. (Sales Tax Matter) where activity of bottling the gas was not considered as manufacturing activity under the Gujarat Sales Tax Act, 1969.

4) Since the Tribunal in the impugned order has relied upon the decision of this Court and the consequent order of the Electricity Ombudsman to hold that the activity of bottling LPG is a very specialized process and the same is considered to be an activity of manufacture. The Tribunal in the impugned order had observed to the effect that the word used in Section 80HH, 80I/80IA of the Act is manufacturing or production. Therefore, every activity which bring into existence a new product would constitute production. The impugned order records a finding of fact that the process of bottling the LPG Gas into cylinder makes the same marketable on execution of 5 भारत पै�ो�लयम काप�रेशन �ल�मटेड Bharat Petroleum Corporation Ltd ITA Nos. : 4286/Mum/2005 the process. It therefore follows that a new product comes into existence. The fact that the decision of this Court in HPL (supra) and the Gujarat High Court dated 6/5/2010 are rendered keeping in view of the fact that Gas Cylinder Rules 1984 which were not in force during the relevant assessment year would not in any way detract from the fining of fact arrived at by the Tribunal. In these circumstances, as the Tribunal has rendered a finding of fact and placed reliance upon the decision of this Court and also Gujarat High Court dated 6/5/2010, we see no reason to entertain the proposed question of law”.

Again, similar ratio has been reiterated in the case of BPCL in Income-tax Appeal No. 612 of 2001 vide judgment and order dated 3rd May, 2013 wherein, on the following question of law:- “i) Whether on the facts and circumstances of the case, the Tribunal erred in law in holding that Appellant was not entitled to deduction under Sections 80HH and 80I/80IA of the Income Tax Act, 1961 in respect of its LPG Bottling Plants?”

The High Court followed its earlier aforesaid decision in the following manner:-

“2. At the hearing of these appeals out attention has been invited by the learned counsel for the parties to the judgment dated 7 March 2013 of a Division Bench to which one of us (M.S. Sanklecha, J.) was a party in Income Tax Appeal Lodging No.2131 of 2012 and connected appeals. The identical question centers around the basic dispute in whether activity of bottling LPG as amounts to production or manufacturing activity of bottling LPG Gas amounts to production or manufacturing activity for the purpose of deduction under section 80HH, 80i and 80IA of the Income

6 भारत पै�ो�लयम काप�रेशन �ल�मटेड Bharat Petroleum Corporation Ltd ITA Nos. : 4286/Mum/2005 Tax act, 1961. This Court gave following finding in the above judgment dated 7 March, 2013:- “Since the Tribunal in the impugned order has relied upon the decision of this Court and the consequent order of the Electricity Ombudsman to hold that the activity of bottling LPG Gas is a very specialized process and the same is considered to be an activity of manufacture. The Tribunal in the impugned order had observed to the effect that the word used in Section 80HH, 80I/80IA of the Act is manufacturing or production. The term production is wider than the word manufacture. Therefore, every activity which bring into existence a new product would constitute production. The impugned order records a finding of fact that the process of bottling the LPG Gas into cylinder makes the same marketable on execution of the process. It therefore follows that a new product comes into existence.”

For giving the above finding this Court also relied upon the decision of this Court in Writ Petition No.9455 of 2011 in the matter of M/s.Hindustan Petroleum Corporation Ltd. v. Maharashtra State Electricity Distribution Co. Ltd. and Ors and also a decision dated 6 May 2010 of the Gujarat High Court in Bharat Petroleum Corporation Ltd. vs. State of Gujarat & Ors holding that bottling LPG Gas is manufacturing activity.

Thus, in view of the aforesaid binding judicial precedence, we decide this issue in favour of the assessee. Accordingly, we hold that assessee is entitled for claim of deduction under section 80IB in respect of LGP bottling Plants.

“7.4 The assessee company was asked to justify as to how they are eligible for deduction u/s 80IB for the above said units. The assessee vide their letter dtd. 05.09.2003 filed their submissions as under:- (a) Oil industry is working under the Administered Pricing Mechanism (APM), wherein the Oil Marketing margins and Refining Companies are entitled to fixed margins. For each of the oil company, marketing margins have been fixed on the basis of moderated costs incurred by them plus 12% post tax return on capital comprised of assets and working capital. To ensure uniform selling prices in the market, a uniform amount towards marketing margins (being a weighted average of the industry) is included in the price built up. In addition to the above there is a compensation built in the retention price towards storage and working loss under the head “specific costs”. The specifics are allowed to the industry uniformly on normative basis and not on retention basis. (b) Products manufactured by the Refinery are sold either directly to the customers (industrial) or to the public in general through Retail Outlets and distributors. In case of retail outlets, the oil marketing companies have to provide various assets like land, buildings, pumps and tanks to dealers appointed by Ministry of Petroleum and Natural Gas (MOP & NG) on account of the peculiar nature of products and careful handling required for the products which has to be supervised by the oil companies on continuous basis. The above said facilities and the expenses incurred are built into a compensation given to 8 भारत पै�ो�लयम काप�रेशन �ल�मटेड Bharat Petroleum Corporation Ltd ITA Nos. : 4286/Mum/2005 each oil company based on a periodical audit of their books by Oil Coordination Committee (OCC). These are called retention margins. These margins are averaged and built into the selling price and excess/other collections (which is monitored by the MOP & NG) is adjusted through the pool account mechanism controlled by OCC. (c) Thus no oil company makes any surplus income other than its retention margins fixed by MOP & NG. Vice-versa, any excess expenditure in the business is compensated through this mechanism”.

7.5 The assessee company has also contended that there is no requirement in the Income-tax Act for maintaining separate account for claiming deduction under section 80IB. They have stated that a profit from SCN Plant have been worked on the import parity principle in respect of raw material/field cost, refinery overheads and realization on sales based on actual”.

However, the Ld. AO denied the assessee’s claim mainly on the ground that, assessee had failed to furnish the working of separate profit of the industrial undertaking and that the deduction was claimed on the basis of pro-rata rate of the profits of the units worked out in proportion of the capital employed in such units to the capital of the assessee. The AO held that, such a profit of the industrial unit has not been correctly computed. The Ld. CIT(A) too has upheld the action of the AO that a profit from SCN Plant C3 & C4 is in accordance with the provisions of the law.

8. Ld. DR on the other hand, strongly relied upon the order of the AO and submitted that, in case the matter is being set aside then it should be decided afresh and in accordance with the law.

Cost of the Projects x Business Profit X 30% Opening Gross Block of the Corporation The assessee has also given working of the computation of deduction on the basis of the same formula. Once on a particular formula, a deduction has been allowed then same should have been uniformly followed for the last year also. Accordingly, we direct the AO to examine the working of the assessee corporation

10 भारत पै�ो�लयम काप�रेशन �ल�मटेड Bharat Petroleum Corporation Ltd ITA Nos. : 4286/Mum/2005 and work out the allowable deduction under section 80IA to the assessee. Thus, ground no. 2 is partly allowed for statistical purposes.