2025 (9) TMI 1297 - AT - Income Tax

Deduction under section 80IE upheld for new manufacturing undertaking; no splitting up; related-party transactions at arm's length

Income Tax Officer-24 (1) (1), Mumbai. Versus Foce Industries, Mumbai

ITAT Mumbai dismissed the Revenue's appeal and upheld the CIT(A)'s allowance of deduction under section 80IE for profits of the Assam undertaking. The ... Eligibility to claim deduction u/s 80IE - profits derived from the undertaking of the assessee located in Assam - HELD THAT:- Though there was no transfer pricing study during the year under consideration, it is noticed that the Transfer pricing study has been conducted in the succeeding years and the transactions entered by the assessee with its associated enterprises were found to be at arms’ length. AO has relied upon certain information available in the Internet with regard to the location of the undertaking and also the sale prices of the products. There should not be any dispute that the information available in the internet is a generalized information and hence, it cannot be the sole basis to decide the issue before the AO. A triggering point to conduct further enquiries, but in this case, the AO did not conduct any further enquiries. The assessee has set up a new undertaking for manufacturing wrist watches, time pieces etc. Even though the AO has taken the view that it was a case of splitting up of the existing factory of the M/s HTCPL, it is seen that none of the machineries of M/s HTCPL were transferred to the new undertaking. Various case laws relied upon the assessee and Ld CIT(A) would show that the setting up of a new undertaking for manufacturing products that are already manufactured by the existing units cannot be considered as splitting up of the existing unit. CIT(A) has considered each of the deficiencies pointed out by the AO and gave a categorical finding that those defects are either misconstrued or are not relevant for granting deduction u/s 80IE of the Act and his decision was based on the factual aspects supported by the credible documents. Appeal filed by the Revenue is dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether the undertaking located in the North-Eastern State qualifies as a 'new industrial undertaking' eligible for deduction under section 80IE, having regard to commencement of manufacture, statutory registrations and licences. 2. Whether the undertaking is disqualified under the 'splitting-up or reconstruction' bar in section 80IE(3)(i) because it allegedly resulted from splitting the existing business of an associated enterprise. 3. Whether the unit can be held not to be a manufacturing unit because it operates from the ground floor of a residential building and the municipal trade licence records 'watch sale'. 4. Whether transactions of purchase and sale with associated enterprises, and the pricing of such transactions, disentitle the undertaking from deduction under section 80IE (i.e., whether the assessable profits are artificially inflated or not at arm's length). 5. Whether the Assessing Officer's reliance on generalized internet material (advertisements, online prices) without conducting further enquiries or gathering documentary evidence is sufficient to displace the assessee's documentary proof and deny the deduction. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Eligibility as a 'new industrial undertaking' under section 80IE Legal framework: Section 80IE grants deduction to profits of a 'new industrial undertaking' established in specified North-Eastern States, subject to conditions including commencement date, articles manufactured being eligible, and statutory compliance (registrations, audit, prescribed forms). Precedent treatment: Courts and Tribunals have required factual satisfaction of commencement and statutory compliance; documentary evidence from competent authorities carries significant weight. Interpretation and reasoning: The Tribunal examined documentary evidence furnished to tax authorities - DIC registration and manufacturing capacity certificate, municipal/trade licence, VAT/CST registration, pollution board declarations, excise registration, rent agreements, audit report in Form 10CCB, purchase and sale invoices and photographic evidence. These documents, together with renewals and subsequent assessments where the deduction was allowed, supported commencement of manufacturing before the statutory cut-off and fulfillment of statutory conditions. The Court regarded these approvals by government departments as credible evidence of an operative manufacturing unit and commencement of manufacture. Ratio vs. Obiter: Ratio - statutory registrations and contemporaneous governmental approvals are decisive in establishing commencement and eligibility under section 80IE where not rebutted by cogent contrary material. Obiter - none material beyond this factual application. Conclusion: The undertaking satisfies the statutory tests for a 'new industrial undertaking' and is eligible for deduction under section 80IE on these facts. Issue 2 - Whether undertaking was formed by 'splitting-up or reconstruction' (disqualification) Legal framework: Section 80IE excludes undertakings formed by splitting up or reconstruction of existing businesses. The legal test requires a factual breaking-up of the integrity of a previously existing business, transfer of assets or continuity sufficient to constitute reconstruction or splitting. Precedent treatment (followed): Decisions relied on by the assessee/Tribunal establish that a new undertaking, even if engaged in the same line of activity as an existing concern, is not necessarily a disqualification unless there is transfer of assets, breaking up of unity, or reconstruction/absorption that destroys the separate identity. Authorities hold that separate, independent, physically distinct units capable of operating on their own are not 'splitting-up'. Interpretation and reasoning: The Tribunal found no material or finding that plant and machinery or other assets were transferred from the existing enterprise to the new undertaking; no evidence that the unity and integrity of the older business was impaired; and no documentary or investigative support from the AO to substantiate the allegation of splitting. The Tribunal treated the mere similarity of products and common promoters/directors as insufficient to invoke the statutory bar in absence of asset transfer or other indicia of reconstruction. Ratio vs. Obiter: Ratio - formation of a separate entity manufacturing similar products by itself is not tantamount to 'splitting-up' unless there is demonstrable transfer/continuity of assets or a breaking-up of the older business's integrity. Obiter - commentary that absence of specific AO findings weakens any presumption of splitting-up. Conclusion: The undertaking was not formed by splitting-up or reconstruction and thus was not disqualified under section 80IE. Issue 3 - Nature of premises and municipal licence ('manufacture' vs 'sale') Legal framework: Eligibility depends on actual manufacture; municipal trade licences are permissive instruments and their stated trade description must be interpreted in context of municipal practice and other statutory approvals. Precedent treatment: Licensing language alone is not determinative; broader approvals and departmental recognitions may establish the nature of activity. Interpretation and reasoning: The Tribunal accepted that municipal trade licence wording 'watch sale' did not negate manufacture where other competent authorities (DIC, VAT/CST, excise, pollution board) had granted registrations/permissions for manufacturing and the lessor had given a declaration permitting manufacturing use of the premises. The Tribunal observed that trade licences cover permissible commercial activities generally and that contextual interpretation with corroborating licences is appropriate. The AO's reliance on an online advertisement and the licence wording, without further inquiries (e.g., notices under sections enabling verification), was insufficient to displace the documentary matrix proving manufacturing. Ratio vs. Obiter: Ratio - municipal trade licence wording alone, especially in absence of further enquiry or adverse findings, cannot be the sole basis to deny manufacturing status when corroborative governmental permissions and on-record evidence establish manufacture. Obiter - remarks on ground-floor commercial use being permissible. Conclusion: The premises, though in a residential building, legitimately housed a manufacturing unit and the municipal licence description did not negate manufacturing activity for section 80IE purposes. Issue 4 - Related-party transactions, pricing and alleged artificial profits Legal framework: Deductions are disallowed if profits are artificially inflated through non-arm's-length transactions; Transfer Pricing principles require transactions with associated enterprises to be at arm's length and are relevant to the genuineness of profits. Precedent treatment: Where subsequent Transfer Pricing studies and assessments corroborate arm's-length pricing and absence of upstream artificiality, earlier prima facie concerns may be mitigated. Interpretation and reasoning: The Tribunal noted that although no contemporaneous transfer pricing study existed for the year under consideration, subsequent years' transfer pricing analyses accepted the arm's-length nature of transactions. The AO produced no contemporaneous evidence showing manipulation of prices or artificial profit generation; online price comparisons and generalized internet material were held insufficient without focused enquiries. In absence of concrete AO findings or documentary contradiction, the Tribunal gave weight to the assessee's invoices, audit report and subsequent TP outcomes. Ratio vs. Obiter: Ratio - allegations of artificial pricing and related-party manipulation must be supported by tangible evidence; subsequent TP determinations and absence of AO enquiries weaken the case for denial. Obiter - guidance that internet data may be a trigger for enquiries but cannot substitute for primary evidence. Conclusion: No valid basis was shown to conclude that related-party dealings or pricing disentitled the undertaking from the section 80IE deduction on these facts. Issue 5 - Adequacy of AO's reliance on internet material and absence of further enquiries Legal framework: Assessing Officer may initiate enquiries and gather evidence; however, generalized internet information requires corroboration and proper verification before being used to reach adverse factual conclusions. Precedent treatment: Administrative reliance on internet material is permissible as a lead, but is not a substitute for primary evidence and investigative steps where documents on record show compliance. Interpretation and reasoning: The Tribunal criticized the AO's approach of relying on internet-sourced information (advertisements, online pricing) without issuing verification notices under relevant provisions or seeking confirmations from lessor and local authorities. The Tribunal held that internet information is generalized and can only trigger further inquiry; lacking such follow-up, the AO could not override statutory approvals and on-record evidence presented by the assessee. Ratio vs. Obiter: Ratio - an AO must undertake appropriate enquiries to verify internet-sourced material before drawing adverse conclusions against an assessee who has produced credible documentary approvals. Obiter - internet material as an investigatory lead. Conclusion: The AO's uncorroborated reliance on internet material was insufficient to displace the assessee's documentary evidence and could not justify denial of deduction. Overall Conclusion The Tribunal upheld the appellate authority's factual findings that the undertaking had legitimately commenced manufacturing, was not formed by splitting up or reconstruction, had adequate statutory approvals and documentary proof, and that allegations of related-party manipulation or internet-derived contradictions were not substantiated by evidentiary enquiries. The appellate order allowing deduction under section 80IE was found to be free of infirmity and the revenue's appeal was dismissed.