Blending Butane and Propane Held Manufacturing, Allowing Additional Depreciation; Tax Gross-Up Under Section 195A Sent Back per DTAA

ITAT held that the assessee's activity of blending butane and propane using sophisticated plant and machinery results in manufacture/production of a distinct commercial product, LPG, within the meaning of section 2(29BA. Consequently, the assessee is eligible for additional depreciation under section 32(1)(iia), and the Revenue's appeal on this issue was dismissed. On the issue of tax on dividend distributed to non-resident shareholders, ITAT held that section 195A was inapplicable since the tax incidence arises by statute, and the applicable tax rate must be determined under the relevant DTAA article, if more beneficial. Accepting the assessee's additional ground, ITAT remanded this issue to the AO for fresh adjudication in accordance with law.

---

---

Issues Involved:
1. Whether the process of blending butane and propane to produce LPG constitutes a manufacturing activity eligible for additional depreciation under Section 32(1)(iia) of the Income Tax Act, 1961.
2. Whether the assessee is entitled to claim deductions for Cess paid in FY 2012-13.
3. Whether the tax on dividends paid to non-resident shareholders should be computed at the rate prescribed in the Double Taxation Avoidance Agreement (DTAA) between India and Malaysia.

Issue-wise Detailed Analysis:

1. Manufacturing Activity and Additional Depreciation:
The primary issue is whether the blending of butane and propane to produce LPG qualifies as a manufacturing activity, thus making the assessee eligible for additional depreciation under Section 32(1)(iia) of the Income Tax Act, 1961. The Tribunal referred to the Supreme Court's decision in the case of Commissioner of Income-tax-1, Mumbai vs. Hindustan Petroleum Corporation Ltd., where it was held that the process of bottling gas into cylinders amounts to production or manufacture. The Tribunal also cited its own previous decision in the case of D.C.I.T, Cir-10(1), Kolkata vs. M/s. Indian Oil Petronas Pvt. Ltd., which supported the view that the process of blending butane and propane to produce LPG is a manufacturing activity. The Tribunal noted that the process involves scientific methods and sophisticated machinery, resulting in a new product with distinct commercial uses. Consequently, the Tribunal upheld the CIT(A)'s order, confirming that the assessee's activity qualifies as manufacturing, making them eligible for additional depreciation under Section 32(1)(iia).

2. Deduction for Cess Paid:
The assessee filed Cross Objections seeking a deduction for Cess paid in FY 2012-13. The Tribunal condoned the delay in filing the Cross Objections, recognizing that the issues raised were legal in nature and became apparent to the assessee following recent judicial decisions. The Tribunal admitted the additional grounds, emphasizing that legal claims can be made at any stage of proceedings to ensure the correct determination of taxable income.

3. Tax on Dividends to Non-Resident Shareholders:
The assessee argued that the tax on dividends paid to non-resident shareholders should be computed at the rate prescribed in the DTAA between India and Malaysia, rather than the rate specified in Section 115-O of the Income Tax Act. The Tribunal examined the provisions of Section 195 and Section 2(37A) of the Act, which state that tax should be deducted at the rates specified in the Act or the DTAA, whichever is more beneficial to the assessee. The Tribunal referred to the Supreme Court's decision in Tata Tea Limited, which held that dividend income is taxable in the hands of the shareholders, and the incidence of tax is shifted to the company for administrative convenience. The Tribunal concluded that the rate specified in the DTAA should apply, provided the non-resident shareholder does not have a Permanent Establishment in India. The Tribunal set aside the matter to the AO for fresh adjudication, directing the AO to verify the applicability of the DTAA rate and dispose of the case in accordance with the law.

Conclusion:
The Tribunal upheld the CIT(A)'s order regarding the manufacturing activity and additional depreciation. It admitted the assessee's Cross Objections on the deduction for Cess and the tax rate on dividends, setting aside these matters to the AO for fresh adjudication. The Cross Objections were allowed for statistical purposes.

---