DCIT, CHANDIGARH vs. M/S SPRAY ENGINEERING DEVICES LTD., CHANDIGARH

Per Sanjay Garg, Judicial Member:

The present appeals have been preferred by the Department for

different assessment years against the separate orders of the

Commissioner of Income Tax [hereinafter referred to as CIT(A)]-1,

Chandigarh dated 19.01.2015, 28.01.2015 & 29.02.2016 respectively.

ITA Nos. 367 & 368/Chd/2015 & 487/Chd/2016- M/s Spray Engineering Devices Ltd, Chandigarh 2

in all the appeals, hence, these appeals have been heard together and

are being disposed of by this common order. For the sake of

convenience, ITA No.368/Chd/2015 for assessment year 2010-11 is

taken as the lead case, wherein the following grounds have been

taken by the Department.

3 None has come present on behalf of the assessee. We have

heard the Ld. DR and proceed to dispose of the appeals.

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adjustments can be made to the book profits as determined u/s 115JB

in respect of disallowance u/s 14A read with Rule 8(D) computed as

per normal provisions of the Act.

issue has been decided by the CIT(A) while relying upon the

decision of this Tribunal in the own case of the assessee for

assessment years 2006-07 and 2008-09 vide common order dated

22.6.2012, holding that the adjustment cannot be made in respect of

disallowance u/s 14A read with Rule 8(D) computed under the

normal provisions while assessing the income of the assessee under

the MAT provisions of section 115JB of the Income-tax Act, 1961 (in

short 'the Act'). The issue has now been decided in favour of the

assessee by the Special Bench of the Tribunal in the case of ‘ACIT v

Vireet Industries Pvt Ltd.’ 165 ITD 27 (Delhi)(SB). No contrary

decision has been cited by the Ld. DR. We, therefore, do not find any

reason to interfere with the order of the CIT(A) on this issue.

CIT(A) in allowing the claim of the assessee u/s 80IB and 80IC of

the Act on the profits from annual maintenance charges and

consultancy charges by holding the same as income derived from

manufacturing activity of the assessee.

So far as the issue relating to allowability of the profits from

annual maintenance charges is concerned, the Ld. CIT(A) has

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allowed the claim by relying upon the decision of the Tribunal dated

22.6.2012 (supra) in the own case of the assessee for earlier

assessment years. We have also gone through the decision of the

Tribunal (supra) on this issue. The relevant discussion on this issue

is found in paras 50 to 53 of the order of the Tribunal, which for the

sake of convenience are reproduced as under:-

“50. The issue raised in ground No.3 is against non-allowance of deduction under section 80IB/80IC of the Act on AMC charges. Under the provisions of section 80IC of the Act deduction is allowable against the profits and gains derived by an undertaking or an enterprise from any business referred to in sub-section (2) of section 80IC of the Act, which talks of manufacturing or production of any article or thing, not being any article or things specified in Thirteenth Schedule and where the assessee undertakes substantial expansion during the period specified thereunder section 2(a) to section 80IC of the Act and under section 2(b) refers to manufacture or production of any article or thing specified in Fourteenth Schedule or commencing any operation specified in that Schedule between the period enumerated thereunder. Implication of section is that the profits and gains which are eligible for deduction under section 80IC of the Act should be derived from the manufacturing or production activity carried on by the assessee. 51. Now coming to the facts of the present case, the explanation of the assessee vis-a-vis the AMC charges received by it is as under: “With regard to the above we would like to bring to your notice that we are providing customized cooling and condensing systems to the sugar systems to the sugar systems based on our own assessment of the clients’ specific needs. Client needs are based on the sizes of the sugar mill and the type of the existing equipment of the sugar mill. We also provide automation of the above said equipments based on the client needs. Further the smooth running of the automation units the AMC of these units is provided to us. AMC contract normally covers the keep up of the equipments and all damages occurred in the routine operation.”

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The Ld. DR could not bring to our knowledge any contrary 8.

decision on this issue, hence, we do not find any reason to interfere

with the order of the CIT(A), so far as the claim of deduction u/s

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80IB and 80IC in respect of annual maintenance charges is

concerned.

However, in respect of consultancy charges, the Ld. DR has

invited our attention to page 3 (para 6.1.1) of the order of the CIT(A)

wherein it has been stated that the Ld. Counsel for the assessee had

not pressed this issue relating to deduction in respect of consultancy

charges. Since this issue relating to the allowability of deduction u/s

80IB and 80IC in respect of consultancy charges had already been

decided against the assessee, the Department has not left with any

grievance on this issue. This issue perhaps has been wrongly taken

by the Department and the same is accordingly dismissed.

the CIT(A) in deleting the addition made by the Assessing officer on

profits from sale of components bought from outside holding that

the same was not allowable u/s 80IB and 80IC of the Act. This issue

has also been decided by the CIT(A) by following the decision of the

Tribunal dated 22.6.2012 (supra) in the case of the assessee. We

have gone through the order of the Tribunal (supra), the relevant

issue has been discussed at paras 58 to 65 of the order, which for the

sake of convenience are reproduced as under:-

“58. The issue raised vide ground No.5 is against non-allowance of deduction under section 80IB/80IC of the Act on the alleged profits on sale of components of system. 59. The brief facts relating to the issue are that the assessee was engaged in manufacturing machinery for sugar industry as well as cooling and condensing system. The assessee claimed that it was carrying on the activities which were of manufacturing in nature. The Assessing Officer from the details furnished by the assessee noted that the assessee was not manufacturing all the items, it was supplying to the

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customers. Some particular items were being purchased from the market and many times were directly delivered to the customers by the supplier and some times of the said machinery/items were sent alongwith the machinery manufactured by it. The Assessing Officer referred to the voltage stabilizers, motors, pumps, switch gear, control valve, cable, etc.. The assessee was requisitioned to furnish copies of its contract with the customers or the purchase orders placed by the customers and to explain how the profits on the said items not manufactured by it, were eligible for deduction under section 80IB/80IC of the Act. Copy of purchase order is enclosed as Annexure A-7 of the order. The Assessing Officer was of the view that the assessee is just a supplier of some major parts of the cooling and condensing system or sugar industry machinery which go into making of a complete cooling and condensing system or sugar industry machinery. Civil work is an important ingredient of the system as without proper foundation no such installation of heavy machinery is possible but the assessee is not into doing the said work. The contract is normally for supply of such manufactured components as well as the other bought out things and the assessee enters into a civil contract for the same. So claim of the assessee that it is claiming deduction for manufacture of sugar industry machinery or cooling systems is not correct. The Assessing Officer thus held that the assessee was not entitled to the benefit of deduction u/s 80IB/80IC on such items, which have been traded by it and were not the integral part of the goods manufactured by it. The Assessing Officer, however, was of the view that the benefit of certain items were to be allowed to the assessee, i.e. nuts or bolts or sheets purchased by it. From the perusal of the Profit & Loss Account the purchase price of the traded goods was Rs.6.12 crores and in views of the net profit rate of the assessee being approximately 14.9%, gross profit rate being approximately 48.13%, the profits earned on the traded goods was estimated at 15%. Thus sum of Rs.1,08,12,103/- was considered as profit from trading activity on which deduction under section 80IB/80IC of the Act was not granted. 60. The CIT (Appeals) upheld the order of the Assessing Officer. Reliance was placed on the ratio laid down by the Hon'ble Punjab & Haryana High Court in M/s Arisudana Spinning Mills Ltd. in ITA No.278 of 2007 placed as Annexure A-2 to the appellate order. 61. The learned A.R. for the assessee placed reliance on the ratio laid down in Mihir Engineers Ltd. Vs. JCIT [112 TTJ (Mum) 940]. The relevant facts relating to the issue as brought out by the assessee before the CIT (Appeals) and as reproduced under para 89 at page 47 of the appellate order are as under: “The appellant is engaged in the supply of complete assembly of the cooling and condensing systems which consists of both the

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manufactured as well as bought out items. The contract with the customer is to make the entire assembly available in running mode at the site of the sugar plant. Thee are certain components without which the system cannot be operated, however, those components are not manufactured by the appellant company. Hence, these components are procured from the suppliers and for purely commercial reasons, some times these components are directly delivered at the site of the customers, However, since the supply of these components forms an integral part of the entire assembly of the cooling and condensing system, it is respectfully submitted that the entire income earned from the cooling and condensing system constitutes the profit delivered from the industrial undertaking and hence, eligible for deduction under sections 80IB and 80IC of the Act.”

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said to have been taken place is, whether the commodity which is subjected to the process of manufacturing can no longer be regarded as the original commodity but is recognized in the trade as a new and distinct commodity. The word ‘production’ or ‘produce’ when used in juxtaposition with the word ‘manufacture’ takes in bringing into existence new goods by a process which may or may not amount to manufacture. It also takes in all the by-products, intermediate products and residual products which emerge in the course of manufacture of goods." 24. Further it was held by the Hon’ble Bombay High Court in CIT v. Tata Locomotive & Engg. Co. Ltd. [1968] 68 ITR 325, wherein it has been held as under : "The word ‘manufacture’ has a wider and also a narrower connotation. In the wider sense it simply means to make, or fabricate or bring into existence an article or a product either by physical labour or by power, and the word ‘manufacturer’ in ordinary parlance would mean a person who makes, fabricates or brings into existence a product or an article by physical labour or power. The other shade of meaning, which is the narrower meaning, implies transforming raw materials into a commercial commodity or a finished product which has an entity by itself, but this does not necessarily mean that the materials with which the commodity is so manufactured must lose their identity. Thus, both the words ‘manufacture’ and ‘produce’ apply to the bringing into existence of something which is different from its components. Whether one takes into account the wider or narrower meaning of the word ‘manufacture’, assembling of automotive bus or truck chasis from imported parts in a ‘knocked down’ condition, could give rise to an article which is totally different from the parts and could amount to manufacture. This is so even though the component parts from which the automotive chasis is made, retain their individual identity in the whole article which is thus manufactured or produced." 25. The requirement of law is manufacturing but the whole process may not be carried out the assessee himself. The Chandigarh Bench of Tribunal in the case of Sond Bharat Pedals (India) v. ITO [2003] 84 ITD 89 had held as under :— "It is not necessary that the assessee should carry out all the manufacturing operations itself, in order to be entitled to benefit of deduction under section 80-I. Such operations can be got done from outside agencies on payment of labour service charges. In fact certificate issued by the Punjab Government showed that the assessee was registered as a small scale industrial unit and the trading account showed the assessee’s sales of Rs. 45.98 lakhs

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for the year under consideration. Since the assessee was engaged in the business of manufacturing cycle pedals, it would be entitled to deduction under section 80-I even though part of such operations was got done from outsiders. Thus, the assessee was engaged in the business of manufacturing bicycle pedals and, therefore, was an industrial undertaking entitled to deduction under section 80-I." 26. The Delhi Bench of Tribunal in the case of Jackson Engineers (P.) Ltd. v. ITO [1989] 31 ITD 79 had held as under : "From the perusal of pictures given by the assessee in respect of diesel generator sets assembled or manufactured by the assessee it was clear that the same was named as ‘Jackson’. The said engines were required by large industrial house for meeting their power requirements. The logo which was placed mainly on the engine was ‘Jackson’ and the same were made in various kinds and ranges in 1000KVA. There was no controversy about the fact that there were as many components of the said machine. The perusal of list of salaries and workers also showed that the assessee was using different components which might not be technically speaking, raw material, but something between raw material and generating set. There was no controversy about the fact that the assessee purchases its alternators and engines separately from lead manufacturers. What the assessee assembled and manufactured through assembling was not the same name which was assigned to the parts. The engine made by the assessee was known as diesel generating set. With this process in view and there being a separate name in the market for what the assessee made the assessee could not be treated as non-industrial undertaking. Thus the order of the Commissioner (Appeals) was not justified in treating the assessee as the industrial undertaking." 27. The issue of purchasing different components, different equipments and spare parts from various concerns and their assembly, fabrication and erection into plant known as ETP was considered at length by Delhi Bench of Tribunal in Degremont India Ltd. v. Dy. CIT [1996] 59 ITD 423 and after deliberation at length on the facts, decision of Apex Court in CIT v. N.C. Budharaja & Co. [1993] 204 ITR 4121 and various other judicial pronouncements of various courts, it was held that the assessee was covered within the definition of manufacturing of an article or thing. The Delhi Bench of Tribunal in Degremont India Ltd.’s case (supra) had held as under : "It is apparent from a plain reading of the judgment of the Supreme Court in N.C. Budharaja & Co.’s case (supra) that the various findings given related solely and exclusively to concerns

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engaged in the business of construction of dams and civil works. There was not a single word or whisper in the said judgment by which it could be inferred that an assessee engaged in the activities of designing, fabricating, erecting, supplying, installation and commissioning of a plant like the one supplied by the assessee could be covered by the aforesaid judgment. It is well-settled law that the judgment in each case has to be seen in the light of the facts of that case. A decision is to be understood in the context of the facts in which the decision is rendered. A case is precedent for what it explicitly decides and nothing more in the conditions of people, even the words occurring in a statute are required to be interpreted differently keeping in mind the context in which such expressions have been used in the relevant provisions of law. Therefore, the aforesaid judgment did not in any manner support the revenue’s contention. The provisions of section 80-I are intended to provide an incentive for investment in certain desired sectors and promote industrialization in developing countries which has adopted the policy of liberalization." It was further held as under : "In the instant case, the assessee was purchasing different components, different equipments and spare parts from various other parties and were assembling those components, equipments and accessories and thereby they were preparing fabricating and erecting a plant which was known as ETP. The ultimate end product which was prepared as a result of assembling of various components with the constant application of technical know-how was the ETP. The ETP was obvi-ously distinct and different plant than the various components, equip- ments, purchased or got manufactured according to the tailor made requirement from the different suppliers. The activities carried out by the assessee were, therefore, clearly covered within the definition of manufacture of an article or thing. The assessee had undertaken to design, engineer, manufacture, supply, install and commission the ETP and also undertook to give performance test. The obligation of the assessee would come to a concluding stage only after successful commissioning of the plant. The various bills prepared by the assessee from time to time was merely a mode of payment during the currency of the long period of the carrying out of the entire work. It would be evident from the contract executed by the assessee with the parties that such mode of payment was mutually decided between the parties so that the assessee received the payments on pro rata basis with the progress of the work. Such an arrangement was

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quite usual and natural in cases of such turn-key project so that the supplier received the payment from time to time." 28. Further, the Ahmedabad Bench of Tribunal in the case of Enviro Central Associates v. Asstt. CIT [1995] 78 Taxman 214 (Mag.) had held as under : "In the instant case, the activities of the assessee-firm were that of manufacturing or that of producing an article as they were constructing water air pollution plants. Thus, the assessee-firm was an industrial undertaking and was engaged in manufacturing or producing an article in the shape of air, water pollution control. That the assessee was manufacturing or producing the plant in backward area, was one of the requirements of the claim under section 80HH. The contention of the assessee was that only 11.45 per cent of the total receipt had been taken for deduction under section 80HH as that work alone was done in backward area and it was not expected from the assessee to have its office or plant in backward area. The crux of the case laws is that if an industrial undertaking begins to manufacture or produce outside in any backward area, it is entitled to deduction under section 80HH. The assessee for, set up its own industrial undertaking at the site of its customers for whom water air pollution control plant was manufactured and of the places which were falling under the backward area declared under the Act, then, naturally the assessee should be getting benefit of the same and the computation made by the assessee- firm of the same was correct one." 29. The objection of the learned DR for the revenue that situs of assembly is important, has been dealt with by the Pune Bench of Tribunal in Indocan Engg. Systems (P.) Ltd. v. Dy. CIT [1997] 60 ITD 649. There is no merit in the contention of the learned DR for the revenue that main activity of the assessee is of erection at client’s site. The end-product is an integrated unit. The assessee is required by its clients to supply a cooling tower, parts of which are manufactured by assessee and certain parts/components are bought from outside. The end-product is the cooling tower supplied to the client. The assessee in its Quotation made to its client’s requisitions, also Guarantees the above-said equipment by way of Warranty as incorporated in the Quotation at page 245 of the paper book. The Warranty is against defect in materials and workmanship when erected and operated in a manner provided by us (the assessee). 30. The Pune Bench of Tribunal in Indocan Engg. Systems (P.) Ltd. v. Dy. CIT [1997] 60 ITD 649 had held as under : "It has been held by the Supreme Court in the case of CIT v. N.C. Budharaja & Co. [1993] 204 ITR 412 / 70 Taxman 312 , that an

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article or thing must be understood to be movable one. An article can be said to be a movable item only if it is capable of being moved from one place to another. The reasoning given by the Commissioner (Appeals) was that where the plant is erected, it is embedded to the earth and, therefore, cannot be said to be a movable property. Merely because the plant is attached to earth by fixing the same on the foundation by nut and bolts, it cannot be said that it is embedded to the earth or it is attached to the earth. It cannot be disputed that such plant can be shifted from one place to another by unscrewing the same. Therefore, the assessee was engaged in the business of manufacturing and fabricating of plant which was an article or thing as mentioned in section 80-I. ....Further, most of the work was done by the sub-contractors under the supervision of the employees of the assessee. Therefore, the question of showing power expenses did not arise. In this connection, it has been held in CIT v. Neo Pharma (P.) Ltd. [1982] 137 ITR 879 (Bom.) that where the manufacturing activity has been carried on by another concern under the supervision of qualified staff of the assessee then such activity can be treated as activity of the assessee. On the basis of that decision it was to be held that the assessee had been carrying on manufacturing activity."

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aforesaid activities of the assessee were covered within the definition of manufacture of an ‘article’ or ‘thing’. The assessee had undertaken the job of erecting a cooling tower as per the individual specification of the client, and after erection, the assessee guarantees the performance of the cooling tower as a whole and not that of manufactured items only. All the activities carried on by the assessee fall within the ambit of ‘manufacture’ or ‘production’ of an article or thing. The end-product being the cooling tower, the assessee is entitled to claim of deduction under section 80-IA of the Act on the whole including profits on manufactured items and bought out components. As held by Tribunal in Sond Bharat Pedals (India) v. ITO [2003] 84 ITD 89 (Chd.), it is not necessary that the assessee should carry out all the manufacturing operations itself in order to be entitled to claim of deduction under section 80-IA of the Act. The situs of assembly of end-product being client’s premises does not disentitle the assessee from its claim of deduction under section 80-IA of the Act in respect of bought out components utilized for the erection of the said cooling towers. There is no merit in the contention of the learned DR that excise duty is paid only on manufactured items. The levy of Excise Duty is governed by Excise Laws. There is no merit in denial of exemption under section 80-IA of the IT Act on bought out items as the same are not subjected to Excise Duty. The assessee prepares two different bills, one for excisable manufactures items and other for bought out components, both of which are utilized for the erection of cooling tower. The assessee raises separate bills for transportation, erection and service charges. The profits on sale of the manufactured items and bought out components are eligible for deduction under section 80-IA of the Act. 32. Thus, after considering the entire relevant material and decisions of the various High Courts and Tribunal, we are of the view that the assessee is entitled to the benefit of deduction under section 80-IA of the Act both on the manufactured items and the bought out components, used for the erection of cross flow (XE series) and counter flow (CM series) cooling towers. In view of the decision hereinabove that assessee is not entitled to any deduction under section 80-IA of the Act on Round Bottle (RB) Cooling Towers, no deduction/benefit under section 80-IA shall be allowed on bought out components used for erection of Round Bottle Cooling Towers. The Assessing Officer is directed to allow the deduction under section 80-IA of the I.T. Act only on profits on sale of cross flow (XE series) and counter flow (CM series) cooling towers.

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Ld. DR, hence, we do not find any reason to interfere with the order

of the CIT(A) on this issue also.

In view of the above, the appeal of the Revenue is hereby

dismissed.

ITA No. 369/Chd/2015 (AY 2011-12)

have been taken for assessment year 2010-11. Though the Ld. DR

has submitted that there are certain clerical mistakes in writing the

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figures of the amounts involved in the grounds of appeal, however,

the issues raised therein are identical, as in assessment year 2010-11.

dated 22.6.2012 (supra) in the case of the assessee and also in view

of the observations made by us while deciding the appeal for

assessment year 2010-11, we do not find any infirmity in the order of

the CIT(A) and this appeal is also accordingly dismissed.

ITA No. 487/Chd/2017

Revenue in this appeal has taken the following grounds of appeal:- 1. On the facts & in the circumstances of the case and in law, the Ld.CIT(A) has erred in allowing appeal of the assessee without appreciating the facts of the case.

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as per provisions of section 115(JB)(2) explanation l(f).

8(D) of the Act. This issue has been discussed by the CIT(A) in the

impugned order in para 6 of the order. The Ld. CIT(A) has deleted

the addition made by Assessing officer while relying upon the

decision of the Tribunal dated 22.6.2012 (supra) in the own case of

the assessee for assessment year 2008-09, wherein the Ld. CIT(A)

has also reproduced the relevant part of the order of the Tribunal in

the impugned order, which for the sake of reference is reproduced as

under:-

“6. Ground of appeal No. 2. Brief facts of the case on this issue are that the appellant firm has invested in long term unquoted equity share of group companies / sister concerns amounting to Rs. 3,57,50,000/-. The Assessing officer disallowed proportionate interest expenditure amounting to Rs. 83,89,610/- u/s 14A of the Income-tax Act, 1961 (hereby referred to as ‘Act’) r/w Rule 8D of the Income Tax Rules, 1962 invoking judgement in the case of CIT Vs. Abhishek industries Ltd (286 ITR 1) 6.1 it is submitted by the appellant during the present proceedings that the identical issue is decided in favour of the appellant by Ld. ITAT in appellant’s own case for the assessment year 2008-09 in ITA No. 1021/Chd/2011 dated 22.6.2012. 6.2 I have considered the submissions of the appellant and perused the relevant order of Ld. ITAT in appellant’s own case in assessment year 2008-09. The relevant portion of the order is reproduced as below:-

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“The issue in ground No.1 raised by the assessee is against disallowance made u/s 14A of the Act. In line with our decision to ground No.1 raised by the assessee in assessment year 2006-07 the facts being identical; we allow the claim of the assessee. The only rider is that though provisions of Rule 8E are applicable, but in view of the fact situation of the case no disallowance is warranted as the advances are for business purposes and no dividend income has been received Ground No.1 raised by the assessee is thus allowed.”

6.3 By respectfully following the decision of Ld. ITAT, Chandigarh dated 22.6.2012 (supra), the addition of Rs. 83,89,610/- u/s 14A is deleted in the relevant assessment year also. Ground of appeal No.2 is allowed.”

consideration are identical. Since the issue is squarely covered in

favour of the assessee in the own case of the assessee, which has

been rightly followed by the Ld. CIT(A), hence, we do not find any

justification for interfering with the order of the CIT(A). In view of

this, there is no merit in the ground No.2 of the appeal and the same

is accordingly dismissed.

with Rule 8D into the assessed income of the assessee under the

MAT provisions of section 115JB of the Act. As discussed above,

while deciding the identical issue for earlier assessment years 2010-

11 and 2012-13, since now the issue is covered by the decision of the

Special Bench of the Tribunal in the case of ‘ACIT v Vireet

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Industries Pvt Ltd.’ 165 ITD 27 (Delhi)(SB), we do not find any infirmity in the order of the CIT(A) on this issue also.

Sd/- Sd/- (B.R.R.KUMAR) (SANJAY GARG) ACCOUNTANT MEMBER JUDICIAL MEMBER Dated : 03.04.2018 Rkk Copy to: • The Appellant • The Respondent • The CIT • The CIT(A) • The DR