Manufacture or production: assembly producing a commercially distinct module qualifies as eligible for Section 80-IC deduction.

Whether an industrial unit qualifies for deduction under Section 80-IC turned on whether its activities amounted to 'manufacture' or 'production' and whether the unit resulted from splitting-up/reconstruction. The unit's processing, calibration, assembly and testing produced a commercially distinct integrated engine cooling module with substantial value addition and multiple technical stages, satisfying 'manufacture/production' under Section 80-IC(2)(a); inter-unit transfers showed no pricing infirmity. Evidence of increased capacity and continued output established expansion rather than splitting-up, so Section 80-IC(4)(i) was not breached. Consequence: the unit met conditions for the Section 80-IC deduction and disallowances were deleted.

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Issues: (i) Whether the Uttarakhand unit (UTK Unit) of the assessee qualified as an eligible industrial undertaking under Section 80-IC(2)(a) of the Income-tax Act, 1961 by undertaking 'manufacture' or 'production' of an integrated engine cooling system module; (ii) Whether the UTK Unit was formed by splitting-up or reconstruction of the existing business contrary to Section 80-IC(4)(i) of the Income-tax Act, 1961.

Issue (i): Whether the UTK Unit's activities of processing, calibrating, assembling and testing components into an integrated engine cooling system module amount to 'manufacture' or 'production' for the purposes of Section 80-IC(2)(a) of the Income-tax Act, 1961.

Analysis: The UTK Unit procured critical components from the Chennai unit and locally sourced parts which were calibrated, processed, assembled and tested using plant and machinery to produce an integrated engine cooling system module that is commercially identified as a distinct product from radiators or inter-coolers. There is substantial value addition (approx. 33%-36% in representative schedules) and the production process involves multiple technical stages. Applicable precedent treats production broadly and holds that assembly/processes producing a commercially distinct article satisfy 'production'/'manufacture'. Inter-unit transfers were not shown to be non-arm's-length and statutory safeguards (Section 80-IA(8)/(10) references) were available and not rebutted.

Conclusion: The UTK Unit's activities constitute 'manufacture' or 'production' within the meaning of Section 80-IC(2)(a) of the Income-tax Act, 1961, and therefore the unit qualifies as an eligible undertaking for deduction under Section 80-IC.

Issue (ii): Whether the UTK Unit was formed by splitting-up or reconstruction of the existing Chennai business contrary to Section 80-IC(4)(i) of the Income-tax Act, 1961.

Analysis: Splitting-up implies the old and new units together are doing what the old unit alone previously did without expansion. Evidence shows that installed capacity and supplies indicate overall expansion to meet increased demand created by the customer's new facility, and Chennai unit's output did not decline after UTK was set up. The UTK Unit performed substantial additional operations and value addition rather than merely passing through components. Transfers between units lacked any shown pricing infirmity.

Conclusion: The UTK Unit was not formed by splitting-up or reconstruction of the existing business; it constituted an expansion and thus met the requirement of Section 80-IC(4)(i) of the Income-tax Act, 1961.

Final Conclusion: On the issues decided, the eligible UTK Unit satisfied conditions of Sections 80-IC(2)(a) and 80-IC(4)(i) of the Income-tax Act, 1961; the deduction claimed under Section 80-IC for the specified assessment years is allowable and the disallowances are to be deleted.

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