TaxTMI 
TaxTMI 
2011 (5) TMI 322
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.... in the light of facts and circumstances of these cases, first of all to succinctly narrate the genesis of instant prolonged tax dispute between the Revenue and the assessee. 3. The Assessee, HLS India Ltd. (Currently known as HLS Asia Ltd.) is an oilfield services company, which provides petro-physical & completion solutions and services to its clients for the exploration and production of Hydrocarbons. On 04.05.1988 the assessee company entered into a contract with Oil India Limited (In short OIL) to provide ―wire-line logging‖ and ―perforation services‖ to the OIL. A similar contract was also entered into with the ONGC on 11.01.1989 In its Income Tax Returns filed for the assessment years we are concerned with, following claims were made by the assessee (only those claims which are subject matters of this litigation):- A. Claim under section 32A of the Act- Investment allowance on New Plant and Machinery installed by the assessee in pursuant to aforesaid contracts. [Claims made in the assessment years 1989-90 & 90-91] B. Claim of deduction on ―profit and gains‖ under section 80-IA (from AY 1991-92 to 1999-00) and ....
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....any article or thing. On appeal ITAT, following its own decision dated 23.09.99 restored the matter back to the desk of AO. Since then, this cat and mouse game is on between the revenue authorities and the assessee and this issue has been a part of almost every appeal listed before us in the instant batch of appeals. 6. Regarding the claim of the assessee for higher depreciation on equipments used below the earth surface @ 100 % under Rule 5, appendix I, Part 1, III (ix) of the Income Tax Rules, 1962, the AO, from the very first assessment year i.e. 1989-90, was of the view that the same is available to a ―mineral oil concern‖ only and the activities of the assessee do not make it a mineral oil concern. This view of the revenue was reversed by the CIT(A) but on appeal, though the ITAT vide its order dated 10.08.1998 pertaining to assessment years 1989-90 and 1990-91 gave an in principle approval but the matter was restored back to the table of AO to verify as to whether the nature of the operations of these equipments is similar to those used by state run oil production companies. Subsequently, though OIL, an oil PSU certified the similarity of the equipments ....
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....f March, 1976, by an assessee engaged in the business of operation of ships or aircraft; (b) any new machinery or plant installed after the 31st day of March, 1976,- (i) for the purposes of business of generation or distribution of electricity or any other form of power; or (ii) in a small-scale industrial undertaking for the purposes of business of manufacture or production of any article or thing; or 10. One of the main conditions under this provision, as applicable to a new industrial undertaking, is that the unit must be engaged in manufacturing or production of an article or a thing. Similarly, under section 80-IA deduction is allowed on profits and gains derived from an industrial undertaking. Though the word ‗Industrial Undertaking' has been used many times in the Act but it has not been defined in various incentive provisions. It is only in S. 33B of the Act, that the definition of ‗industrial undertaking' has been given by way of Explanation. In this Explanation, the definition of industrial undertaking has been given as akin to ‗industrial company' which also includes processing. However, this definition is applicable only in the context of S. ....
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....order of the AO and held that the assessee was an industrial undertaking within the meaning of s. 2(7)(c) of Finance Act 1981, and it was manufacturing within the meaning sub- section (2) of S. 32A of the Act. When the issue came before the ITAT, by way of an appeal filed by the revenue against the aforesaid order of the CIT(A), the ITAT vide its order dated 10/08/1998 upheld the order of the CIT(A). The relevant para of this order is as under: ―We heard the parties at length and have perused the paper book filed before us. We find that the assessee-company derives its income from wire-line logging and perforation activities for exploration of oil. Wire-line logging is the standard process used to evaluate oil wells both at exploratory and development stage. The aforesaid perforating services are used at the development stage as an essential step in the actual recovery of oil specialised high technology electronic-cum-mechanic equipment is used for data collection. These specialised high-tech equipments termed as logging tools are sensitive sensor-electromechanical system working in hostile environment of extreme pressure and temperature. The data collected by these....
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....sfied. 14. Hence comes this appeal to us on this issue. 15. Ld counsel for the respondent assessee Mr. Ajay Vohra has submitted before us that the assessee is an industrial undertaking engaged in the business of retrieving and producing valuable information in respect of the sub-terranean of the oil fields of mineral oil concern. He has fervently pleaded that the printed logs and statements being final product of data processing amounts to manufacturing of an article or a thing to satisfy the statutory requirement in regards to the concerned claims made by the assessee. In order to fortify his case, a plethora of judicial decisions have been cited before us by the Ld. counsel for the assessee to support the contention that the "activity carried on by the assessee with respect of collecting and transmitting of data amounted to manufacturing and producing of an article or thing". During the course of arguments, a specifically emphasized limb of his argument has been the analogy between the production of logs by using wireline logging equipments on the one hand and the production of X-Ray and ultrasound report sheets using X-Ray and Ultrasound machines on the other....
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....ic basis and even for the purposes of installation, certain special conditions have to be provided in the form of air-conditioning or a particular temperature. The purposes for which such machines, which can be described as computers, are used are well-known and, in highly scientifically developed systems, they have their own role to play and they cannot be equated with office appliances which would be of a much simpler nature. The Court held that in view of the varied functions which the "system" is capable of performing, data processing machines cannot be classified as "office appliances" and are eligible for allowance of development rebate under section 33(1) of the Act. 18. In the case of Datacons (P) Ltd. (supra) the assessee was carrying on the activity of processing data furnished by its customers by using IBM Unit Record Machine Computers. The question before the Karnataka High Court was whether the Appellate Tribunal was correct in law in treating the assessee either as a manufacturer of goods or as engaged in the processing of goods within the meaning of section 2(7)(c) of the Finance (No. 2) Act, 1977. The Court observed that the term "industrial company" has b....
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.... any Article or thing not being an Article or thing specified in the list in the Eleventh Schedule. There is no dispute that "data-processing" or "computer" is not mentioned, in the Eleventh Schedule. If, as held by the Division Bench in Peerless Consultancy Services (Pvt.) Ltd., the assessee-company is an industrial company, there is no reason why such a company will not be entitled to the benefit of the investment allowance. Investment allowance will not be admissible in respect of office appliances. In our view, having regard to the nature and function of the computer and the data-processing system, it cannot be said that they are office appliances. An industrial company is a company engaged in the manufacture or processing of goods. "Data-processing" means the converting of raw data to machine-readable form and its subsequent processing (as storing, updating, combining, rearranging or printing out) by a computer. "Computer" means "one that computes; specifically a programmable electronic device that can store, retrieve, and process data". There cannot be any doubt that raw data cannot be equated with the result derived. It is different in form and substance. 26. We are, ther....
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.... different from that, out of which it is made in the sense that the thing produced is by itself a commercial commodity capable of being sold or supplied. The material from which thing or article is produced or manufactured may necessarily lose its identity or may become transformed into the basic or essential properties. 15. The manufacture implies a change but every change is not manufacture, yet every change of an article is the result of treatment, labour and manipulation. Naturally, manufacture is the end result of one or more processes through which the original commodities are made to pass. Whatever may the operation, it is the effect of the operation on the commodity that is material for the purpose of determining whether the operation constitutes such a process, which will be part of manufacture. The test to determine whether a particular activity amounts to manufacture or not is : Does new and different goods emerge having distinctive name, use and character. The moment there is transformation into a new commodity commercially known as a distinct and separate commodity having its own character, use and name, whether be it the result of one process or several processes m....
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....d law laid down by the various High Courts including this court and the views expressed by the Apex Court while dealing with such contentions. The Authorities relied upon by the parties 18. The Apex Court in CIT v. N.C. Budharaja & Co. (supra) observed : "The word production has a wider connotation than the word 'manufacture. While every manufacture can be characterised as production, every production need not amount to manufacture . . . ." It was further observed : ".......... 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 . . . . ." Then it was observed : "The expressions manufacture and produce are normally associated with movables articles and goods, big and small but they are never employed to denote the construction activity of the nature involved in the construction of a dam . . . . . . . . ." The Supreme Court also expressed the view that the expressions used in the relevant clause of section 32A must be understood in its normal connotation and according to commercial usage. Viewed from that standpoint and the legislative history of th....
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....stomers and the data is processed to get necessary information, computation and statements as outputs. These computers cannot be compared to calculators. Today in matters of investments and security transactions, banks have a front office and back office. Today, under customer services, the banks render several services including providing information to customers on the basis of which the customers would make investments. All this is based on the print outs which constitute information, computations and statements. In the circumstances, we are of the view that all the three conditions of section 32A(2)(b)(iii) are satisfied. Our view is supported by the judgment of the Madras High Court in the case of CIT v. Comp-Help Services (P.) Ltd. [2001] 246 ITR 722 as also by the judgment of the Kerala High Court in the case of CIT v. Computerised Accounting and Management Service Pvt. Ltd. [1999] 235 ITR 502. We do not find any merit in the argument of the Department that these two judgments do not apply because, in those cases, the assessee was in the business of data processing. The nature of the services rendered by the bank to its customers does involve the work of data processing. It ....
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....judicial pronouncements noted above, one of the tests would be as to whether the article produced is regarded in trade, by those who deal in it as distinct in identity from the commodity involved in its manufacture. Though the said article might have undergone a degree of processing, if it retains its original identity, then it would not be within the meaning of ‗manufactured'. 24. The expression ‗Manufacture' implies a change, but every change is not a manufacture and yet every change in an article is the result of treatment, labour and manipulation. But something more is necessary. There must be transformation; a new and different article must emerge, having a distinctive name, character or use. It would depend upon the facts and circumstances of each case .............. 25. In a recent case titled CIT Vs. Oracle Software India Ltd. the Apex Court held that the duplication of master media, as imported by Indian subsidiary from the parent company in USA, on CDs for the purpose of commercial selling of the software in India amounts to ―manufacturing‖ for the purpose of section 80-IA of the IT Act, 1961 in the light of duplication process ....
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.... clear from the aforesaid judicial authorities that in order to find out whether any particular business activity amounts to ―manufacturing‖ or ―production‖ for the purpose of various tax incentives under IT Act, each case is required to be examined in the light of facts and circumstances of that very case. The most important aspect of this exercise should be the analysis of the process involved in the impugned activity and an enquiry into the nature of transformation that the product has undergone to find out whether it is distinct in identity from the raw commodity involved in its manufacture. 27. In the instant case, production of log by way of wireline logging is the concerned activity. We are given to understand by the learned counsel for the assessee that wireline logging assists the mineral oil concerns primarily to ascertain as to whether there is any gas or oil in the well, and if there is such presence, then its availability at what depth and the quantity of such reserves, and whether such gas or oil can be extracted. This is usually done through electrical, acoustic radio-active and electromagnetic analysis of the properties of rocks. Th....
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....claimed as a separate industrial undertaking. The facilities provided by the assessee for each such base comprise establishment of laboratory workshop, tools calibration facilities, establishment of computer centre, accounts administration/ operation office, godown, stores, communication and transport facilities, special protective storage for radio-active material and residence for personnel. 30. After referring to various activities undertaken at a specific unit, Mr. Vohra, learned counsel for the assessee pleaded that the logs generated by it are ―an article or a thing‖ and the process of generating the same amounts to manufacturing/ production. To counter the submissions of the assessee, Ms. Bansal, learned senior counsel for the revenue has submitted that geo-physical and petro-chemical properties of the rocks is like information taped into rocks and what assessee is doing is just retrieving the same and printing it on the paper or on other formats. Ms. Bansal, however did not controvert all that was submitted and explained by Mr. Vohra as noted by us in the preceding paragraphs (27, 28 & 29). 31. Having analyzed the submissions of learned couns....
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....ments on the one hand and the production of X-Ray and ultrasound report sheets using X-Ray and Ultrasound machines on the other hand which have been held to be eligible for investment allowance under section 32A in various judicial pronouncements. Aforesaid second limb of the argument of Mr. Vohra is of vital importance because the AO itself, while framing the assessment order dated 23.03.1995 for the assessment year 1992-93 had relied upon the same analogy to come to sharply opposite conclusions. The same can be reproduced as under: ―Can we say X-Ray machine is manufacturing X-Ray? Obviously no. Because it is only taking the information of the human body and by radiation having a graph on an X-Ray. But, it is not manufacturing X-Ray.‖ 33. Various High courts of India have held that X-Ray machine is qualified for investment allowance under section 32A. In the case of Commissioner of Income-tax Vs. Dr. S. Surender Reddy [243 ITR 110 (AP)] the Andhra Pradesh High Court has categorically observed as under: ―9. Next comes the equipment used for purposes of X-ray. By putting the X-ray film in to the X-ray machine a different article is prod....
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....ce in exploration does not make the assessee a mineral oil concern. Therefore AO was categorical in its finding that 100% depreciation under aforesaid provision is available to the mineral oil concerns only, and the assessee not being a mineral oil concern, cannot be given benefit of the aforesaid statutory provision. Similar claim was made by the assessee for the assessment year 1990-91. However, this time again the AO was consistent in denying the benefit to the assessee. 37. The CIT (A), while hearing the appeal preferred by the assessee for both the assessment years 1989-90 & 1990-91, reversed the order of the AO vide its order dated 25.05.1992 on the ground that the depreciation is admissible to the owner of the machinery and the rate of depreciation would go by the nature of its employment in a mineral oil concern. Thus, the CIT (A) came to the conclusion that for allowance of depreciation at the rate of 100% for the use of machinery in mineral oil concern it is not necessary that the owner should be a mineral oil concern. If the machinery is used in the mineral oil concern below the ground, the 100% rate of depreciation is admissible thereon to the owner of the mac....
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....a different manner and under different circumstances, then the normal depreciation has to be allowed. The AO is directed to re-examine this aspect and decide the claim in accordance with law, after giving full opportunity to the assessee to substantiate the claim. The order of the CIT (A) on this point is accordingly set aside.‖ 39. Thus, the ball was again in the court of AO. Meanwhile, not only the assessee but the AO himself, contacted the OIL to confirm as to whether the wire logging & perforation equipments/tools used by the assessee are similar to those equipments owned and used by the state owned oil giant. The OIL not only confirmed to the similarity of the high-tech equipments/tools but it also clarified that these equipments are meant only for use in underground oil field operations. The relevant portion of the letter dated 13th November 1998 as issued by the OIL to the assessee in this regard can be reproduced as under: ―M/S HLS India Limited 6, Local shopping Centre Madangir, New Delhi - 110 062 Sir, We refer to your letter dated 6.11.1998 requesting us to clarify the points regarding depreciation on wireline....
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....stricted the relief at 20%. 41. Aforesaid approach of the AO came up before the CIT(A) for consideration while the proceedings in respect of the assessee's own case for the assessment year 1997-98 were on before it. The CIT (A) vide its order dated 24.10.2000 held that the AO could not disregard the certificate as well as the written reply issued by OIL, which is the best authority on the point. Accordingly, the CIT(A) allowed the claim of depreciation at 100% under Item III(B) (ix)(b) in Appendix-I to the Income Tax Rules, 1962. The relevant portion from the order of CIT (A) can be reproduced as under: ―10. Having referred the matter to M/S Oil India Ltd. for determining whether the nature of the operation and nature of machinery deployed by the appellant and the public sector concern are similar, it was not correct on the part of the AO to reject categorically the opinion given by Oil India on the ground that they are partly correct. The only reasons for discrediting this opinion is that in the case of ONGC the equipments are permanently installed in the oil well whereas in the case of the appellant the equipments are mobile and are shifted from one well....
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....a leasing company which leased out high-tech plant, machinery and equipment for performing the contract work on behalf of the mineral concerns. However, this issue is no more resintegra in view of the decision of the Supreme Court in the case of CIT Vs. Shaan Finance Pvt. Ltd. 231 ITR 308 wherein it was held that leasing and finance company is entitled to investment allowance u/s 32A in respect of hiring of machinery for manufacture by third party. On the same analogy, the plant and machinery and equipments used by the assessee for carrying out the contract with Oil India Ltd. and ONGC cannot be denied depreciation on the reasoning that it was carrying out the business of other concerns and not its own business. 8. With regard to the question regarding grant of higher deprecation as concerns and not on the plant and machinery etc. used in the business, the argument of the learned D.R. cannot be accepted. Depreciation is the measure of the effective life of an asset owing to use or obsolete during the given period. The object of providing for deprecation is to spread the expenditure incurred on the asset over its effective life time and the amount written off during an accounting....
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....in the year 2005 only [listed before us as ITA 194/2005]. It is not hard to understand that filing of the appeal, though at a delayed stage of the case, against the original order of the ITAT is an act of prudence on the part of the Department. The reason being is that had not there been this appeal against the order dated 10.10.98 as passed by the ITAT, it would have been taken by assessee as acceptance of the approach, as adopted by the ITAT, on the part of the revenue that if the public Oil giants are able to give a technical certificate to the assessee regarding the similarity of the equipments and the nature of operations then the matter would become a subject of technical interpretation of the real world operations of the equipments in question rather a question which is to be determined by way of giving judicial interpretation to the statutory provisions and in case if the certification thing comes in favour of the assessee then the entire genesis of the arguments as build by the revenue in order to push forward its case, would start crumbling on its feet. 45. This takes us to the order of the ITAT dated 10.10.98 to revert the matter back to the table of the AO to ....
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....ess or profession. This provision reads as under: Depreciation. 32. (1)[In respect of depreciation of- (i) buildings, machinery , plant or furniture, being tangible assets; (ii) know-how, patents, copyrights, trademarks, licenses, franchises or any other business or commercial rights of similar nature, being intangible assets acquired on or after the 1st day of April, 1998, owned , wholly or partly, by the assessee and used for the purposes of the business or profession, the following deductions shall be allowed-] [(i) in the case of assets of an undertaking engaged in generation or generation and distribution of power, such percentage on the actual cost thereof to the assessee as may be prescribed ;] (ii) [in the case of any block of assets, such percentage on the written down value thereof as may be prescribed:] 47. Rule 5 of the IT Rules, 1962 provides that the depreciation allowable under s. 32(1)(ii) of the Act in respect of any block of assets shall be calculated at the percentages specified in the II column of the table of rates of depreciation in Appendix I to the Rules, on the written down value of such block of assets as are used for the purp....